[JPRT 114-1-16]
[From the U.S. Government Publishing Office]
[JOINT COMMITTEE PRINT]
GENERAL EXPLANATION OF
TAX LEGISLATION ENACTED IN 2015
----------
Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
MARCH 2016
----------
U.S. GOVERNMENT PRINTING OFFICE
98-305 WASHINGTON : 2016 JCS-1-16
JOINT COMMITTEE ON TAXATION
114th Congress, 2nd Session
------
SENATE HOUSE
ORRIN G. HATCH, Utah, KEVIN BRADY, Texas,
Chairman Vice Chairman
CHUCK GRASSLEY, Iowa SAM JOHNSON, Texas
MIKE CRAPO, Idaho DEVIN NUNES, California
RON WYDEN, Oregon SANDER M. LEVIN, Michigan
DEBBIE STABENOW, Michigan CHARLES B. RANGEL, New York
Thomas A. Barthold, Chief of Staff
Bernard A. Schmitt, Deputy Chief of Staff
SUMMARY CONTENTS
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Page
Part One: Slain Officer Family Support Act of 2015 (Public Law
114-7)......................................................... 3
Part Two: Medicare Access and Chip Reauthorization Act of 2015
(Public Law 114-10)............................................ 5
Part Three: Don't Tax Our Fallen Public Safety Heroes Act (Public
Law 114-14).................................................... 7
Part Four: Highway and Transportation Funding Act of 2015 (Public
Law 114-21).................................................... 9
Part Five: Defending Public Safety Employees' Retirement Act
(Public Law 114-26)............................................ 10
Part Six: Trade Preferences Extension Act of 2015 (Public Law
114-27)........................................................ 12
Part Seven: Surface Transportation and Veterans Health Care
Choice Improvement Act of 2015 (Public Law 114-41)............. 24
Part Eight: Airport and Airway Extension Act of 2015 (Public Law
114-55)........................................................ 42
Part Nine: Surface Transportation Extension Act of 2015 (Public
Law 114-73).................................................... 44
Part Ten: Bipartisan Budget Act of 2015 (Public Law 114-74)...... 45
Part Eleven: Surface Transportation Extension Act of 2015, Part
II (Public Law 114-87)......................................... 85
Part Twelve: Fixing America's Surface Transportation Act (``Fast
Act'') (Public Law 114-94)..................................... 86
Part Thirteen: Consolidated Appropriations Act, 2016 (Public Law
114-113)....................................................... 99
C O N T E N T S
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Page
INTRODUCTION..................................................... 1
Part One: Slain Officer Family Support Act of 2015 (Public Law
114-7)......................................................... 3
A. Acceleration of Income Tax Benefits for Charitable
Cash Contributions for Relief of the Families of
New York Police Department Detectives Wenjian Liu
and Rafael Ramos (sec. 2 of the Act)............... 3
Part Two: Medicare Access and Chip Reauthorization Act of 2015
(Public Law 114-10)............................................ 5
A. Increase Continuous Levy Authority on Payments to
Medicare Providers and Suppliers (sec. 413 of the
Act and sec. 6331(h) of the Code).................. 5
Part Three: Don't Tax Our Fallen Public Safety Heroes Act (Public
Law 114-14).................................................... 7
A. Exclusion of Certain Compensation Received by
Public Safety Officers and Their Dependents (sec. 2
of the Act and sec. 104(a) of the Code)............ 7
Part Four: Highway and Transportation Funding Act of 2015 (Public
Law 114-21).................................................... 9
A. Extension of Highway Trust Fund Expenditure
Authority (sec. 2001 of the Act and secs. 9503,
9504, and 9508 of the Code)........................ 9
Part Five: Defending Public Safety Employees' Retirement Act
(Public Law 114-26)............................................ 10
A. Early Retirement Distributions to Federal Law
Enforcement Officers, Firefighters, and Air Traffic
Controllers in Governmental Plans (sec. 2 of the
Act and sec. 72(t) of the Code).................... 10
Part Six: Trade Preferences Extension Act of 2015 (Public Law
114-27)........................................................ 12
TITLE IV--EXTENSION OF TRADE ADJUSTMENT ASSISTANCE............... 12
A. Extension and Modification of Health Coverage Tax
Credit (sec. 407 of the Act and sec. 35 of the
Code).............................................. 12
TITLE VIII--OFFSETS.............................................. 17
A. Time for Payment of Corporate Estimated Taxes (sec.
803 of the Act and sec. 6655 of the Code).......... 17
B. Payee Statement Required to Claim Certain Education
Tax Benefits (sec. 804 of the Act and secs. 25A and
222 of the Code)................................... 18
C. Special Rule for Educational Institutions Unable to
Collect Taxpayer Identification Numbers of
Individuals with Respect to Higher Education
Tuition and Related Expenses (sec. 805 of the Act
and sec. 6724 of the Code)......................... 18
D. Increase Penalty for Failure to File Information
Returns and Payee Statements (sec. 806 of the Act
and secs. 6721 and 6722 of the Code)............... 19
E. Child Tax Credit Not Refundable For Taxpayers
Electing To Exclude Foreign Earned Income From Tax
(sec. 807 of the Act and sec. 24 of the Code)...... 21
Part Seven: Surface Transportation and Veterans Health Care
Choice Improvement Act of 2015 (Public Law 114-41)............. 24
TITLE II--REVENUE PROVISIONS..................................... 24
A. Extension of Highway Trust Fund Expenditure
Authority (sec. 2001 of the Act and secs. 9503,
9504, and 9308 of the Code)........................ 24
B. Funding of Highway Trust Fund (sec. 2002 of the Act
and sec. 9503(f) of the Code)...................... 24
C. Modification of Mortgage Reporting Requirements
(sec. 2003 of the Act and sec. 6050H of the Code).. 25
D. Consistent Basis Reporting between Estate and
Person Acquiring Property from Decedent (sec. 2004
of the Act and secs. 1014 and 6035 of the Code).... 26
E. Clarification of 6-Year Statute of Limitations in
Case of Overstatement of Basis (sec. 2005 of Act
and sec. 6501 of the Code)......................... 28
F. Tax Return Due Date Simplification (sec. 2006 of
the Act and secs. 6071, 6072, and 6081 of the Code) 30
G. Transfers of Excess Pension Assets to Retiree
Health Accounts (sec. 2007 of the Act and sec. 420
of the Code)....................................... 34
H. Equalization of Highway Trust Fund Excise Taxes on
Liquefied Natural Gas, Liquefied Petroleum Gas, and
Compressed Natural Gas (sec. 2008 of the Act and
sec. 4041 of the Code)............................. 35
TITLE IV--VETERANS PROVISIONS.................................... 37
A. Exemption in Determination of Employer Health
Insurance Mandate (sec. 4007(a) of the Act and sec.
4980H of the Code)................................. 37
B. Eligibility for Health Savings Account Not Affected
by Receipt of Medical Care for a Service-Connected
Disability (sec. 4007(b) of the Act and sec. 223 of
the Code).......................................... 40
Part Eight: Airport and Airway Extension Act of 2015 (Public Law
114-55)........................................................ 42
A. Extension of Spending Authority and Taxes Funding
Airport and Airway Trust Fund (secs. 201 and 202 of
the Act and secs. 4083, 4801, 4261, 4271, and 9502
of the Code)....................................... 42
Part Nine: Surface Transportation Extension Act of 2015 (Public
Law 114-73).................................................... 44
A. Extension of Highway Trust Fund Expenditure
Authority (sec. 2001 of the Act and secs. 9503,
9504, and 9508 of the Code)........................ 44
Part Ten: Bipartisan Budget Act of 2015 (Public Law 114-74)...... 45
TITLE V--PENSIONS................................................ 45
A. Mortality Tables and Extension of Current Funding
Stabilization Percentages to 2018, 2019, and 2020
(secs. 503-504 of the Act, sec. 430 of the Code,
and secs. 101(f) and 303 of ERISA)................. 45
TITLE XI--REVENUE PROVISIONS RELATED TO TAX COMPLIANCE........... 51
A. Partnership Audits and Adjustments (sec. 1101 of
the Act and secs. 6221-6241 of the Code)........... 51
B. Partnership Interests Created by Gift (sec. 1102 of
the Act and secs. 704(e) and 761(b) of the Code)... 83
Part Eleven: Surface Transportation Extension Act of 2015, Part
II (Public Law 114-87)......................................... 85
A. Extension of Highway Trust Fund Expenditure
Authority (sec. 2001 of the Act and secs. 9503,
9504, and 9508 of the Code)........................ 85
Part Twelve: Fixing America's Surface Transportation act (``FAST
ACT'') (Public Law 114-94)..................................... 86
Division C--Finance.............................................. 86
TITLE XXXI--HIGHWAY TRUST FUND AND RELATED TAXES................. 86
A. Extension of Highway Trust Fund Expenditure
Authority (secs. 31101 of the Act and secs. 9503,
9504, and 9508 of the Code)........................ 86
B. Extension of Highway-Related Taxes (sec. 31102 of
the Act and secs. 4041, 4051, 4071, 4081, 4221,
4481, 4483, and 6412 of the Code).................. 87
C. Additional Transfers to the Highway Trust Fund
(sec. 31201 of the Act and sec. 9503 of the Code).. 88
D. Transfer to Highway Trust Fund of Certain Motor
Vehicle Safety Penalties (sec. 31202 of the Act and
sec. 9503 of the Code)............................. 90
E. Appropriation From Leaking Underground Storage Tank
Trust Fund (sec. 31203 of the Act and secs. 9503
and 9508 of the Code).............................. 90
TITLE XXXII--OFFSETS............................................. 91
A. Revocation or Denial of Passport in Case of Certain
Unpaid Taxes (sec. 32101 of the Act and secs. 6320,
6331, 7345 and 6103(k)(11) of the Code)............ 91
B. Reform of Rules Related to Qualified Tax Collection
Contracts, and Special Compliance Personnel Program
(secs. 32102-32103 of the Act and sec. 6306 of the
Code).............................................. 93
C. Repeal of Modification of Automatic Extension of
Return Due Date for Certain Employee Benefit Plans
(sec. 32104 of the Act and secs. 6058 and 6059 of
the Code).......................................... 96
Part Thirteen: Consolidated Appropriations Act, 2016 (Public Law
114-113)....................................................... 99
Division P--Tax-Related Provisions............................... 99
A. High Cost Employer-Sponsored Health Coverage Excise
Tax (secs. 101-103 of the Act and sec. 4980I of the
Code).............................................. 99
B. Annual Fee on Health Insurance Providers (sec. 201
of the Act and sec. 9010 of the Patient Protection
and Affordable Care Act)........................... 102
C. Miscellaneous Provisions........................... 103
1. Extension and phaseout of credits with respect
to facilities producing electricity from wind
(secs. 301-302 of the Act and secs. 45 and 48
of the Code)................................... 103
2. Modification of energy investment credit (sec.
303 of the Act and sec. 48 of the Code)........ 104
3. Credit for residential energy efficient
property (section 304 of the Act and 25D of the
Code).......................................... 107
4. Treatment of transportation costs of
independent refiners (sec. 305 of the Act and
sec. 199 of the Code).......................... 108
Division Q--Protecting Americans From Tax Hikes Act of 2015...... 110
TITLE I--EXTENDERS............................................... 110
A. Permanent Extensions............................... 110
1. Reduced earnings threshold for additional child
tax credit made permanent (sec. 101 of the Act
and sec. 24 of the Code)....................... 110
2. American opportunity tax credit made permanent
(sec. 102 of the Act and sec. 25A of the Code). 112
3. Modification of the earned income tax credit
made permanent (sec. 103 of the Act and sec. 32
of the Code)................................... 114
4. Extension and modification of deduction for
certain expenses of elementary and secondary
school teachers (sec. 104 of the Act and sec.
62(a)(2)(D) of the Code)....................... 117
5. Extension of parity for exclusion from income
for employer-provided mass transit and parking
benefits (sec. 105 of the Act and 132(f) of the
Code).......................................... 118
6. Deduction for State and local sales taxes (sec.
106 of the Act and sec. 164 of the Code)....... 119
7. Special rule for qualified conservation
contributions made permanent (sec. 111 of the
Act and sec. 170(b) of the Code)............... 121
8. Tax-free distributions from individual
retirement plans for charitable purposes (sec.
112 of the Act and sec. 408(d)(8) of the Code). 124
9. Extension and expansion of charitable deduction
for contributions of food inventory (sec. 113
of the Act and sec. 170 of the Code)........... 128
10. Extension of modification of tax treatment of
certain payments to controlling exempt
organizations (sec. 114 of the Act and sec. 512
of the Code)................................... 131
11. Extension of basis adjustment to stock of S
corporations making charitable contributions of
property (sec. 115 of the Act and sec. 1367 of
the Code)...................................... 132
12. Extension and modification of research credit
(sec. 121 of the Act and secs. 38 and 41 and
new sec. 3111(f) of the Code).................. 133
13. Extension and modification of employer wage
credit for employees who are active duty
members of the uniformed services (sec. 122 of
the Act and sec. 45P of the Code).............. 139
14. Extension of 15-year straight-line cost
recovery for qualified leasehold improvements,
qualified restaurant buildings and
improvements, and qualified retail improvements
(sec. 123 of the Act and sec. 168 of the Code). 140
15. Extension and modification of increased
expensing limitations and treatment of certain
real property as section 179 property (sec. 124
of the Act and sec. 179 of the Code)........... 143
16. Extension of treatment of certain dividends of
regulated investment companies (sec. 125 of the
Act and sec. 871(k) of the Code)............... 145
17. Extension of exclusion of 100 percent of gain
on certain small business stock (sec. 126 of
the Act and sec. 1202 of the Code)............. 146
18. Extension of reduction in S corporation
recognition period for built-in gains tax (sec.
127 of the Act and sec. 1374 of the Code)...... 147
19. Extension of subpart F exception for active
financing income (sec. 128 of the Act and secs.
953 and 954 of the Code)....................... 150
20. Extension of temporary minimum low-income
housing tax credit rate for non-Federally
subsidized buildings (sec. 131 of the Act and
sec. 42 of the Code)........................... 152
21. Extension of military housing allowance
exclusion for determining whether a tenant in
certain counties is low-income (sec. 132 of the
Act and secs. 42 and 142 of the Code).......... 153
22. Extension of RIC qualified investment entity
treatment under FIRPTA (sec. 133 of the Act and
secs. 897 and 1445 of the Code)................ 155
B. Extensions Through 2019............................ 156
1. Extension of new markets tax credit (sec. 141
of the Act and sec. 45D of the Code)........... 156
2. Extension and modification of work opportunity
tax credit (sec. 142 of the Act and secs. 51
and 52 of the Code)............................ 158
3. Extension and modification of bonus
depreciation (sec. 143 of the Act and sec.
168(k) of the Code)............................ 164
4. Extension of look-through treatment of payments
between related controlled foreign corporations
under foreign personal holding company rules
(sec. 144 of the Act and sec. 954(c)(6) of the
Code).......................................... 171
C. Extensions Through 2016............................ 172
1. Extension and modification of exclusion from
gross income of discharges of acquisition
indebtedness on principal residences (sec. 151
of the Act and sec. 108 of the Code)........... 172
2. Extension of mortgage insurance premiums
treated as qualified residence interest (sec.
152 of the Act and sec. 163 of the Code)....... 174
3. Extension of above-the-line deduction for
qualified tuition and related expenses (sec.
153 of the Act and sec. 222 of the Code)....... 175
4. Extension of Indian employment tax credit (sec.
161 of the Act and sec. 45A of the Code)....... 177
5. Extension and modification of railroad track
maintenance credit (sec. 162 of the Act and
sec. 45G of the Code).......................... 178
6. Extension of mine rescue team training credit
(sec. 163 of the Act and sec. 45N of the Code). 179
7. Extension of qualified zone academy bonds (sec.
164 of the Act and sec. 54E of the Code)....... 180
8. Extension of classification of certain race
horses as three-year property (sec. 165 of the
Act and sec. 168 of the Code).................. 182
9. Extension of seven-year recovery period for
motorsports entertainment complexes (sec. 166
of the Act and sec. 168 of the Code)........... 183
10. Extension and modification of accelerated
depreciation for business property on an Indian
reservation (sec. 167 of the Act and sec.
168(j) of the Code)............................ 184
11. Extension of election to expense mine safety
equipment (sec. 168 of the Act and sec. 179E of
the Code)...................................... 185
12. Extension of special expensing rules for
certain film and television productions;
special expensing for live theatrical
productions (sec. 169 of the Act and sec. 181
of the Code)................................... 186
13. Extension of deduction allowable with respect
to income attributable to domestic production
activities in Puerto Rico (sec. 170 of the Act
and sec. 199 of the Code)...................... 188
14. Extension and modification of empowerment zone
tax incentives (sec. 171 of the Act and secs.
1391 and 1394 of the Code)..................... 189
15. Extension of temporary increase in limit on
cover over of rum excise taxes to Puerto Rico
and the Virgin Islands (sec. 172 of the Act and
sec. 7652(f) of the Code)...................... 195
16. Extension of American Samoa economic
development credit (sec. 173 of the Act and
sec. 119 of Pub. L. No. 109-432)............... 196
17. Suspension of medical device excise tax (sec.
174 of the Act and sec. 4191 of the Code)...... 198
18. Extension and modification of credit for
nonbusiness energy property (sec. 181 of the
Act and sec. 25C of the Code).................. 200
19. Extension of credit for alternative fuel
vehicle refueling property (sec. 182 of the Act
and section 30C of the Code)................... 202
20. Extension of credit for electric motorcycles
(sec. 183 of the Act and sec. 30D of the Code). 203
21. Extension of second generation biofuel producer
credit (sec. 184 of the Act and sec. 40(b)(6)
of the Code)................................... 203
22. Extension of biodiesel and renewable diesel
incentives (sec. 185 of the Act and sec. 40A of
the Code)...................................... 204
23. Extension of credit for the production of
Indian coal facilities (sec. 186 of the Act and
sec. 45 of the Code)........................... 207
24. Extension of credits with respect to facilities
producing energy from certain renewable
resources (sec. 187 of the Act and secs. 45 and
48 of the Code)................................ 208
25. Extension of credit for energy-efficient new
homes (sec. 188 of the Act and sec. 45L of the
Code).......................................... 209
26. Extension of special allowance for second
generation biofuel plant property (sec. 189 of
the Act and sec. 168(l) of the Code)........... 210
27. Extension of energy efficient commercial
buildings deduction (sec. 190 of the Act and
sec. 179D of the Code)......................... 211
28. Extension of special rule for sales or
dispositions to implement FERC or State
electric restructuring policy for qualified
electric utilities (sec. 191 of the Act and
sec. 451(i) of the Code)....................... 213
29. Extension of excise tax credits and payment
provisions relating to alternative fuel (sec.
192 of the Act and secs. 6426 and 6427 of the
Code).......................................... 215
30. Extension of credit for fuel cell vehicles
(sec. 193 of the Act and sec. 30B of the Code). 216
TITLE II--PROGRAM INTEGRITY...................................... 217
1. Modification of filing dates of returns and
statements relating to employee wage
information and nonemployee compensation to
improve compliance (sec. 201 of the Act and
secs. 6071 and 6402 of the Code)............... 217
2. Safe harbor for de minimis errors on
information returns, payee statements, and
withholding (sec. 202 of the Act and secs. 6721
and 6722 of the Code).......................... 220
3. Requirements for the issuance of ITINs (sec.
203 of the Act and sec. 6109 of the Code)...... 222
4. Prevention of retroactive claims of earned
income credit, child tax credit, and American
Opportunity Tax Credit (secs. 204, 205, and 206
of the Act and secs. 24, 25A and 32 of the
Code).......................................... 225
5. Procedures to reduce improper claims (sec. 207
of the Act and secs. 24, 25A, 32, and 6695 of
the Code)...................................... 227
6. Restrictions on taxpayers who improperly
claimed credits in prior year (sec. 208 of the
Act and secs. 24, 25A and 6213 of the Code).... 231
7. Treatment of credits for purposes of certain
penalties (sec. 209 of the Act and secs. 6664
and 6676 of the Code).......................... 235
8. Increase the penalty applicable to paid tax
preparers who engage in willful or reckless
conduct (sec. 210 of the Act and sec. 6694 of
the Code)...................................... 237
9. Employer identification number required for
American opportunity tax credit (sec. 211 of
the Act and secs. 25A and 6050S of the Code)... 238
10. Higher education information reporting only to
include qualified tuition and related expenses
actually paid (sec. 212 of the Act and sec.
6050S of the Code)............................. 239
TITLE III--MISCELLANEOUS PROVISIONS.............................. 240
A. Family Tax Relief.................................. 240
1. Exclusion for amounts received under the work
colleges program (sec. 301 of the Act and sec.
117 of the Code)............................... 240
2. Modification of rules relating to section 529
programs (sec. 302 of the Act and sec. 529 of
the Code)...................................... 241
3. Modification to qualified ABLE programs (sec.
303 of the Act and sec. 529A of the Code)...... 244
4. Exclusion from gross income of certain amounts
received by wrongly incarcerated individuals
(sec. 304 of the Act and new sec. 139F of the
Code).......................................... 248
5. Clarification of special rule for certain
governmental plans (sec. 305 of the Act and
sec. 105(j) of the Code)....................... 249
6. Rollovers permitted from other retirement plans
into SIMPLE retirement accounts (sec. 306 of
the Act and sec. 408(p)(1)(B) of the Code)..... 250
7. Technical amendment relating to rollover of
certain airline payment amounts (sec. 307 of
the Act and sec. 1106 of the FAA Modernization
and Reform Act of 2012)........................ 252
8. Treatment of early retirement distributions for
nuclear materials couriers, United States
Capitol Police, Supreme Court Police, and
diplomatic security special agents (sec. 308 of
the Act and sec. 72(t) of the Code)............ 255
9. Prevention of extension of tax collection
period for members of the Armed Forces who are
hospitalized as a result of combat zone
injuries (sec. 309 of the Act and secs. 6502
and 7508(e) of the Code)....................... 256
B. Real Estate Investment Trusts...................... 257
1. Restriction on tax-free spinoffs involving
REITs (sec. 311 of the Act and secs. 355 and
856 of the Code)............................... 262
2. Reduction in percentage limitation on assets of
REIT which may be taxable REIT subsidiaries
(sec. 312 of the Act and sec. 856 of the Code). 265
3. Prohibited transaction safe harbors (sec. 313
of the Act and sec. 857 of the Code)........... 265
4. Repeal of preferential dividend rule for
publicly offered REITS; authority for
alternative remedies to address certain REIT
distribution failures (secs. 314 and 315 of the
Act and sec. 562 of the Code).................. 267
5. Limitations on designation of dividends by
REITs (sec. 316 of the Act and sec. 857 of the
Code).......................................... 267
6. Debt instruments of publicly offered REITs and
mortgages treated as real estate assets (sec.
317 of the Act and sec. 856 of the Code)....... 269
7. Asset and income test clarification regarding
ancillary personal property (sec. 318 of the
Act and sec. 856 of the Code).................. 270
8. Hedging provisions (sec. 319 of the Act and
sec. 857 of the Code).......................... 271
9. Modification of REIT earnings and profits
calculation to avoid duplicate taxation (sec.
320 of the Act and secs. 562 and 857 of the
Code).......................................... 273
10. Treatment of certain services provided by
taxable REIT subsidiaries (sec. 321 of the Act
and sec. 857 of the Code)...................... 274
11. Exception from FIRPTA for certain stock of
REITs; exception for interests held by foreign
retirement and pension funds (secs. 322 and 323
of the Act and secs. 897 and 1445 of the Code). 277
12. Increase in rate of withholding of tax on
dispositions of United States real property
interests (sec. 324 of the Act and sec. 1445 of
the Code)...................................... 284
13. Interests in RICs and REITs not excluded from
definition of United States real property
interests (sec. 325 of the Act and sec. 897 of
the Code)...................................... 285
14. Dividends derived from RICs and REITs
ineligible for deduction for United States
source portion of dividends from certain
foreign corporations (sec. 326 of the Act and
sec. 245 of the Code).......................... 286
C. Additional Provisions.............................. 287
1. Provide special rules concerning charitable
contributions to, and public charity status of,
agricultural research organizations (sec. 331
of the Act and secs. 170(b) and 501(h) of the
Code).......................................... 287
2. Remove bonding requirements for certain
taxpayers subject to Federal excise taxes on
distilled spirits, wine, and beer (sec. 332 of
the Act and secs. 5061(d), 5173(a), 5351, 5401
and 5551 of the Code).......................... 290
3. Modification to alternative tax for certain
small insurance companies (sec. 333 of the Act
and sec. 831(b) of the Code)................... 291
4. Treatment of timber gains (sec. 334 of the Act
and sec. 1201 of the Code)..................... 294
5. Modification of definition of hard cider (sec.
335 of the Act and sec. 5041 of the Code)...... 295
6. Church plan clarification (sec. 336 of the Act
and sec. 414 of the Code)...................... 296
D. Revenue Provisions................................. 305
1. Updated ASHRAE standards for energy efficient
commercial buildings deduction (sec. 341 of the
Act and sec. 179D of the Code)................. 305
2. Excise tax equivalency for liquefied petroleum
gas and liquefied natural gas (sec. 342 of the
Act and sec. 6426 of the Code)................. 307
3. Exclusion from gross income of certain clean
coal power grants (sec. 343 of the Act)........ 308
4. Clarification of valuation rule for early
termination of certain charitable remainder
unitrusts (sec. 344 of the Act and sec. 664(e)
of the Code)................................... 309
5. Prevention of transfer of certain losses from
tax indifferent parties (sec. 345 of the Act
and sec. 267 of the Code)...................... 311
6. Treatment of certain persons as employers with
respect to motion picture projects (sec. 346 of
the Act and new sec. 3512 of the Code)......... 313
TITLE IV--TAX ADMINISTRATION..................................... 316
A. Internal Revenue Service Reforms................... 316
1. Duty to ensure that Internal Revenue Service
employees are familiar with and act in
accordance with certain taxpayer rights (sec.
401 of Act and sec. 7803 of the Code).......... 316
2. Prohibition of use of personal e-mail for
official government business (sec. 402 of the
Act)........................................... 317
3. Release of information regarding the status of
certain investigations (sec. 403 of the Act and
sec. 6103 of the Code)......................... 318
4. Require the Secretary of the Treasury to
describe administrative appeals procedures
relating to adverse determinations of tax-
exempt status of certain organizations (sec.
404 of the Act and sec. 7123 of the Code)...... 320
5. Require section 501(c)(4) organizations to
provide notice of formation (sec. 405 of the
Act, secs. 6033 and 6652 of the Code, and new
sec. 506 of the Code).......................... 325
6. Declaratory judgments for section 501(c)(4) and
other exempt organizations (sec. 406 of the Act
and sec. 7428 of the Code)..................... 330
7. Termination of employment of Internal Revenue
Service employees for taking official actions
for political purposes (sec. 407 of the Act and
sec. 1203(b) of the Internal Revenue Service
Restructuring and Reform Act of 1998).......... 331
8. Gift tax not to apply to gifts made to certain
exempt organizations (sec. 408 of the Act and
sec. 2501(a) of the Code)...................... 333
9. Extend the Internal Revenue Service authority
to require a truncated Social Security Number
(``SS'') on Form W-2 (sec. 409 of the Act and
sec. 6051 of the Code)......................... 335
10. Clarification of enrolled agent credentials
(sec. 410 of the Act).......................... 336
11. Partnership audit rules (sec. 411 of the Act
and secs. 6225, 6226, 6234, 6235, and 6031 of
the Code)...................................... 336
B. United States Tax Court............................. 340
1. Filing period for interest abatement cases
(sec. 421 of the Act and sec. 6404 of the Code) 340
2. Small tax case election for interest abatement
cases (sec. 422 of the Act and secs. 6404 and
7463 of the Code).............................. 341
3. Venue for appeal of spousal relief and
collection cases (sec. 423 of the Act and sec.
7482 of the Code).............................. 342
4. Suspension of running of period for filing
petition of spousal relief and collection cases
(sec. 424 of the Act and secs. 6015 and 6330 of
the Code)...................................... 342
5. Application of Federal rules of evidence (sec.
425 of the Act and sec. 7453 of the Code)...... 343
6. Judicial conduct and disability procedures
(sec. 431 of the Act and new sec. 7466 of the
Code).......................................... 344
7. Administration, judicial conference, and fees
(sec. 432 of the Act; Code sec. 7473 and new
secs. 7470 and 7470A of the Code).............. 345
8. Clarification relating to the United States Tax
Court (sec. 441 of the Act and sec. 7441 of the
Code).......................................... 346
Appendix: Estimated Budget Effects of Tax Legislation Enacted in
2015........................................................... 349
INTRODUCTION
This document,\1\ prepared by the staff of the Joint
Committee on Taxation in consultation with the staffs of the
House Committee on Ways and Means and the Senate Committee on
Finance, provides an explanation of tax legislation enacted in
2015. The explanation follows the chronological order of the
tax legislation as signed into law.
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\1\ This document may be cited as follows: Joint Committee on
Taxation, General Explanation of Tax Legislation Enacted in 2015 (JCS-
1-16), March 2016.
---------------------------------------------------------------------------
For each provision, the document includes a description of
present law, explanation of the provision, and effective date.
Present law describes the law in effect immediately prior to
enactment and does not reflect changes to the law made by the
provision or by subsequent legislation. In a case where a
Committee report accompanies a bill, this document is based on
the language of the report. For a bill with no Committee report
but with a contemporaneous technical explanation prepared and
published by the staff of the Joint Committee on Taxation, this
document is based on the language of the explanation.
Section references are to the Internal Revenue Code of
1986, as amended, unless otherwise indicated.
Part One is an explanation of the provisions of the Slain
Officer Family Support Act of 2015 (Pub. L. No. 114-7).
Part Two is an explanation of the revenue provision of the
Medicare Access and Chip Reauthorization Act of 2015 (Pub. L.
No. 114-10).
Part Three is an explanation of the Don't Tax Our Fallen
Public Safety Heroes Act (Pub. L. No. 114-14).
Part Four is an explanation of the revenue provisions of
the Highway and Transportation Funding Act of 2015 (Pub. L. No.
114-21).
Part Five is an explanation of the Defending Public Safety
Employees' Retirement Act (Pub. L. No. 114-26).
Part Six is an explanation of the revenue provisions of the
Trade Preferences Extension Act of 2015 (Pub. L. No. 114-27).
Part Seven is an explanation of the revenue provisions of
the Surface Transportation and Veterans Health Care Choice
Improvement Act of 2015 (Pub. L. No. 114-41).
Part Eight is an explanation of the revenue provisions of
the Airport and Airway Extension Act of 2015 (Pub. L. No. 114-
55).
Part Nine is an explanation of the revenue provisions of
the Surface Transportation Extension Act of 2015 (Pub. L. No.
114-73).
Part Ten is an explanation of the revenue provisions of the
Bipartisan Budget Act of 2015 (Pub. L. No. 114-74).
Part Eleven is an explanation of the revenue provisions of
the Surface Transportation Extension Act of 2015, Part II (Pub.
L. No. 114-87).
Part Twelve is an explanation of the revenue provisions of
Fixing America's Surface Transportation Act (``FAST Act'')
(Pub. L. No. 114-94).
Part Thirteen is an explanation of the revenue provisions
of the Consolidated Appropriations Act, 2016 (Pub. L. No. 114-
113).
The Appendix provides the estimated budget effects of tax
legislation enacted in 2015.
The first footnote in each Part gives the legislative
history of the Act explained in that Part.
PART ONE: SLAIN OFFICER FAMILY SUPPORT ACT OF 2015
(PUBLIC LAW 114-7) \2\
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\2\ H.R. 1527. The House passed H.R. 1527 on March 25, 2015. The
Senate passed the bill without amendment on March 27, 2015. The
President signed the bill on April 1, 2015.
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A. Acceleration of Income Tax Benefits for Charitable Cash
Contributions for Relief of the Families of New York Police Department
Detectives Wenjian Liu and Rafael Ramos (sec. 2 of the Act)
Present Law
Tax exemption for charitable organizations
Organizations described in section 501(c)(3) (generally,
charitable organizations) are exempt from Federal income
taxation under section 501(a). A section 501(c)(3) organization
must be organized and operated exclusively for exempt purposes,
and no part of the net earnings of such an organization may
inure to the benefit of any private shareholder or individual.
An organization is not organized or operated exclusively for
one or more exempt purposes unless the organization serves a
public rather than a private interest. Thus, an organization
described in section 501(c)(3) generally must serve a
charitable class of persons that is indefinite or of sufficient
size.
Deduction for charitable contributions
In general, under present law, taxpayers may claim an
income tax deduction for charitable contributions. The
charitable deduction generally is available for the taxable
year in which the contribution is made. The tax benefit of a
charitable contribution, however, often is not realized until
the following calendar year when the tax return is filed.
A donor who claims a charitable deduction for a
contribution of money, regardless of amount, must maintain as a
record of the contribution a bank record or a written
communication from the donee showing the name of the donee
organization, the date of the contribution, and the amount of
the contribution.\3\ In addition to the foregoing recordkeeping
requirements, substantiation requirements apply in the case of
charitable contributions with a value of $250 or more.\4\ No
charitable deduction is allowed for any contribution of $250 or
more unless the taxpayer substantiates the contribution by a
contemporaneous written acknowledgment of the contribution by
the donee organization.
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\3\ Sec. 170(f)(17).
\4\ Sec. 170(f)(8).
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Explanation of Provision
Acceleration of donor's tax benefit for charitable contribution
The provision permits a taxpayer to treat a charitable
contribution of cash made between January 1, 2015, and April
15, 2015, as a contribution made on December 31, 2014, if such
contribution was for the relief of the families of slain New
York Police Department detectives Wenjian Liu and Rafael Ramos.
Thus, the effect of the provision is to give a calendar-year
taxpayer who makes charitable contributions of cash for the
relief of such detectives' families between January 1, 2015,
and April 15, 2015, the opportunity to accelerate the tax
benefit. Under the provision, such a taxpayer may realize the
tax benefit of the contribution by taking a deduction on the
taxpayer's 2014 income tax return.
The provision clarifies the recordkeeping requirement for
monetary contributions eligible for the accelerated income tax
benefits described above. With respect to such contributions, a
telephone bill will satisfy the recordkeeping requirement if it
shows the name of the donee organization, the date of the
contribution, and the amount of the contribution. Thus, for
example, in the case of a charitable contribution made by text
message and chargeable to a telephone or wireless account, a
bill from the telecommunications company containing the
relevant information will satisfy the recordkeeping
requirement.
The provision also clarifies that a contribution described
in the provision that is made on or after December 20, 2014,
will not fail to qualify for a charitable deduction, or for the
acceleration of the deduction under the provision, merely
because the contribution is for the exclusive benefit of the
families of the slain detectives.
Payment by organization treated as related to organization's exempt
purpose
Under the provision, certain payments are treated as: (1)
related to the purpose or function constituting the basis for
the organization's exempt status; and (2) are not treated as
inuring to the benefit of any private individual, if the
payments are made in good faith using a reasonable and
objective formula that is consistently applied. Such payments
include payments made: (1) on or after December 20, 2014, and
on or before October 15, 2015; (2) to the spouse or any
dependent (as defined in section 152 of the Code) of slain New
York Police Department detectives Wenjian Liu or Rafael Ramos;
and (3) by an organization that is exempt from tax under
section 501(a) (determined without regard to such payments).
Effective Date
The provision is effective on the date of enactment (April
1, 2015).
PART TWO: MEDICARE ACCESS AND CHIP REAUTHORIZATION ACT OF 2015 (PUBLIC
LAW 114-10) \5\
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\5\ H.R. 2. The House passed H.R. 2 on March 26, 2015. The Senate
passed the bill without amendment on April 14, 2015. The President
signed the bill on April 16, 2015.
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A. Increase Continuous Levy Authority on Payments to Medicare Providers
and Suppliers (sec. 413 of the Act and sec. 6331(h) of the Code)
Present Law
In general
Levy is the administrative authority of the IRS to seize a
taxpayer's property, or rights to property, to pay the
taxpayer's tax liability.\6\ Generally, the IRS is entitled to
seize a taxpayer's property by levy if a Federal tax lien has
attached to such property,\7\ the property is not exempt from
levy,\8\ and the IRS has provided both notice of intention to
levy \9\ and notice of the right to an administrative hearing
(the notice is referred to as a ``collections due process
notice'' or ``CDP notice'' and the hearing is referred to as
the ``CDP hearing'') \10\ at least 30 days before the levy is
made. A levy on salary or wages generally is continuously in
effect until released.\11\ A Federal tax lien arises
automatically when: (1) a tax assessment has been made; (2) the
taxpayer has been given notice of the assessment stating the
amount and demanding payment; and (3) the taxpayer has failed
to pay the amount assessed within 10 days after the notice and
demand.\12\
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\6\ Sec. 6331(a). Levy specifically refers to the legal process by
which the IRS orders a third party to turn over property in its
possession that belongs to the delinquent taxpayer named in a notice of
levy.
\7\ Ibid.
\8\ Sec. 6334.
\9\ Sec. 6331(d).
\10\ Sec. 6330. The notice and the hearing are referred to
collectively as the CDP requirements.
\11\ Secs. 6331(e) and 6343.
\12\ Sec. 6321.
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The notice of intent to levy is not required if the
Secretary finds that collection would be jeopardized by delay.
The standard for determining whether jeopardy exists is similar
to the standard applicable when determining whether assessment
of tax without following the normal deficiency procedures is
permitted.\13\
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\13\ Secs. 6331(d)(3) and 6861.
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The CDP notice (and pre-levy CDP hearing) is not required
if: (1) the Secretary finds that collection would be
jeopardized by delay; (2) the Secretary has served a levy on a
State to collect a Federal tax liability from a State tax
refund; (3) the taxpayer subject to the levy requested a CDP
hearing with respect to unpaid employment taxes arising in the
two-year period before the beginning of the taxable period with
respect to which the employment tax levy is served; or (4) the
Secretary has served a Federal contractor levy. In each of
these four cases, however, the taxpayer is provided an
opportunity for a hearing within a reasonable period of time
after the levy.\14\
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\14\ Sec. 6330(f).
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Federal payment levy program
To help the IRS collect taxes more effectively, the
Taxpayer Relief Act of 1997 \15\ authorized the establishment
of the Federal Payment Levy Program (``FPLP''), which allows
the IRS to continuously levy up to 15 percent of certain
``specified payments'' by the Federal government if the payees
are delinquent on their tax obligations. With respect to
payments to vendors of goods, services, or property sold or
leased to the Federal government, the continuous levy may be up
to 100 percent of each payment.\16\ For payments to Medicare
providers and suppliers, the levy is up to 15 percent for
payments made within 180 days after December 19, 2014. For
payments made after that date, the levy is up to 30
percent.\17\
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\15\ Pub. L. No. 105-34.
\16\ Sec. 6331(h)(3).
\17\ Pub. L. No. 113-295, Division B.
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Under FPLP, the IRS matches its accounts receivable records
with Federal payment records maintained by Treasury's Bureau of
Fiscal Service (``BFS''), such as certain Social Security
benefit and Federal wage records. When these records match, the
delinquent taxpayer is provided both the notice of intention to
levy and the CDP notice. If the taxpayer does not respond after
30 days, the IRS can instruct BFS to levy the taxpayer's
Federal payments. Subsequent payments are continuously levied
until such time that the tax debt is paid or the IRS releases
the levy.
Explanation of Provision
The present limitation of 30 percent of certain specified
payments is increased to 100 percent.
Effective Date
The provision is effective for payments made after 180 days
after the date of enactment (April 16, 2015).
PART THREE: DON'T TAX OUR FALLEN PUBLIC SAFETY HEROES ACT (PUBLIC LAW
114-14) \18\
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\18\ H.R. 606. The House passed H.R. 606 on May 12, 2015. The
Senate passed the bill without amendment on May 14, 2015. The President
signed the bill on May 22, 2015.
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A. Exclusion of Certain Compensation Received by Public Safety Officers
and Their Dependents (sec. 2 of the Act and sec. 104(a) of the Code)
Present Law
Amounts received under a workmen's compensation act as
compensation for personal injuries or sickness are excluded
from gross income.\19\ This exclusion applies to amounts
received by an employee under a workmen's compensation act, or
under a statute in the nature of a workmen's compensation act
that provides compensation to employees for personal injuries
or sickness incurred in the course of employment, as well as to
compensation paid under a workmen's compensation act to the
survivor or survivors of a deceased employee.\20\
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\19\ Sec. 104(a)(1).
\20\ Treas. Reg. sec. 1.104-1(b).
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Under the Omnibus Crime Control and Safe Streets Act of
1968, if the Bureau of Justice Assistance (``BJA''), an agency
of the U.S. Department of Justice, determines that a public
safety officer has died as the direct and proximate result of a
personal injury sustained in the line of duty, the BJA will pay
a monetary benefit to surviving family members or other
beneficiary (``public safety officer survivor's benefit'').\21\
In addition, if the BJA determines that a public safety officer
has become permanently and totally disabled as the direct and
proximate result of a personal injury sustained in the line of
duty, the BJA will pay a monetary benefit to the public safety
officer (``public safety officer disability benefit'').\22\
---------------------------------------------------------------------------
\21\ 42 U.S.C. sec. 3796(a).
\22\ 42 U.S.C. sec. 3796(b).
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With respect to payments made by the Law Enforcement
Assistance Administration (a previous agency of the U.S.
Department of Justice) under the Public Safety Officers'
Benefits Act of 1976 to a surviving dependent of a public
safety officer who died as the direct and proximate result of a
personal injury sustained in the line of duty, the Internal
Revenue Service has ruled that the payments are made under a
statute in the nature of a workmen's compensation act and are
thus excluded from gross income.\23\
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\23\ Rev. Rul. 77-235, 1977-2 C.B. 45.
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Explanation of Provision
The provision amends the Code to provide a specific
exclusion from gross income for amounts paid (1) by the BJA as
a public safety officer survivor's benefit or public safety
officer disability benefit, or (2) under a State program that
provides monetary compensation for surviving dependents of a
public safety officer who has died as the direct and proximate
result of a personal injury sustained in the line of duty,
except that the exclusion does not apply to any amounts that
would have been payable if the death of the public safety
officer had occurred other than as the direct and proximate
result of a personal injury sustained in the line of duty.
Effective Date
The provision is effective on the date of enactment (May
22, 2015).
PART FOUR: HIGHWAY AND TRANSPORTATION FUNDING ACT OF 2015 (PUBLIC LAW
114-21) \24\
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\24\ H. R. 2353. The House passed H. R. 2353 on May 19, 2015. The
bill passed the Senate without amendment on May 23, 2015. The President
signed the bill on May 29, 2015.
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A. Extension of Highway Trust Fund Expenditure Authority (sec. 2001 of
the Act and secs. 9503, 9504, and 9508 of the Code)
Present Law
Under present law, the Internal Revenue Code (sec. 9503)
authorizes expenditures (subject to appropriations) to be made
from the Highway Trust Fund (and Sport Fish Restoration and
Boating Trust Fund and Leaking Underground Storage Tank Trust
Fund) through May 31, 2015, for purposes provided in specified
authorizing legislation as in effect on the date of enactment.
Explanation of Provision
This provision extends the authority to make expenditures
(subject to appropriations) from the Highway Trust Fund (and
Sport Fish Restoration and Boating Trust Fund and Leaking
Underground Storage Tank Trust Fund) through July 31, 2015.
Effective Date
The provision is effective on date of enactment (May 29,
2015).
PART FIVE: DEFENDING PUBLIC SAFETY EMPLOYEES' RETIREMENT ACT (PUBLIC
LAW 114-26) \25\
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\25\ H.R. 2146. The House passed H.R. 2146 on May 12, 2015. The
Senate passed the bill with an amendment on June 4, 2015. The House
passed the bill with a further amendment on June 18, 2015. The Senate
agreed to the House amendment on June 24, 2015. The President signed
the bill on June 29, 2015.
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A. Early Retirement Distributions to Federal Law Enforcement Officers,
Firefighters, and Air Traffic Controllers in Governmental Plans (sec. 2
of the Act and sec. 72(t) of the Code)
Present Law
An individual who receives a distribution from a qualified
retirement plan before age 59\1/2\, death, or disability is
subject to a 10-percent early withdrawal tax on the amount
includible in income unless an exception to the tax
applies.\26\ Among other exceptions, the early distribution tax
does not apply to distributions made to an employee who
separates from service after age 55 (the ``separation from
service'' exception), or to distributions that are part of a
series of substantially equal periodic payments made for the
life, or life expectancy, of the employee or the joint lives,
or life expectancies, of the employee and his or her
beneficiary (the ``equal periodic payments'' exception).\27\
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\26\ Sec. 72(t).
\27\ Sec. 72(t)(2)(iv) and (v). Section 72(t)(4) provides a
recapture rule under which, in general, if the series of payments
eligible for the equal periodic payments exception is modified within
five years of the first payment or before age 59\1/2\, an additional
tax applies equal to the early withdrawal tax that would have applied
in the absence of the exception.
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Under a special rule for qualified public safety employees,
the separation from service exception applies to distributions
from a governmental defined benefit pension plan if the
employee separates from service after age 50 (rather than age
55). A qualified public safety employee is an employee of a
State or political subdivision of a State if the employee
provides police protection, firefighting services, or emergency
medical services for any area within the jurisdiction of such
State or political subdivision.
Explanation of Provision \28\
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\28\ See Part Thirteen, Division Q, Title III, Item A.8 for an
explanation of a related amendment.
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The provision revises the special rule for applying the
separation from service exception to qualified public safety
employees.\29\ First, the definition of qualified public safety
employee is expanded to include Federal law enforcement
officers, Federal customs and border protection officers,
Federal firefighters, and air traffic controllers.\30\ In
addition, the special rule is extended to distributions from
governmental defined contribution plans (rather than just
governmental defined benefit plans).\31\
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\29\ This provision also allows a qualified public safety employee
to modify a series of payments to which the equal periodic payments
exception has applied without being subject to the recapture rule
described above.
\30\ These positions are defined by reference to the provisions of
the Civil Service Retirement System and the Federal Employees
Retirement System.
\31\ Under section 7701(j), the Federal Thrift Savings plan is
treated as a qualified defined contribution plan.
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Effective Date
The provision is effective for distributions after December
31, 2015.
PART SIX: TRADE PREFERENCES EXTENSION ACT OF 2015 (PUBLIC LAW 114-27)
\32\
---------------------------------------------------------------------------
\32\ H.R. 1295. The House Committee on Ways and Means reported H.R.
1295 on April 13, 2015 (H.R. Rep. No. 114-71). The House passed the
bill on April 15, 2015. The Senate passed the bill with an amendment on
May 14, 2015. The House agreed to an amendment to the Senate amendment
on June 11, 2015. The Senate concurred in the House amendment with a
further amendment on June 24, 2015. The House agreed to the Senate
amendment on June 25, 2015. The President signed the bill on June 29,
2015. In addition, the House Committee on Ways and Means reported H.R.
1892 (Trade Adjustment Assistance Reauthorization Act of 2015) on May
8, 2015 (H.R. Rep. No. 114-108) and the Senate Committee on Finance
reported S. 1268 (An Original Bill to Extend the Trade Adjustment
Assistance Program, and for Other Purposes) on May 12, 2015 (S. Rep.
No. 114-44).
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TITLE IV--EXTENSION OF TRADE ADJUSTMENT ASSISTANCE
A. Extension and Modification of Health Coverage Tax Credit (sec. 407
of the Act and sec. 35 of the Code)
Present Law
Health Coverage Tax Credit
Eligible coverage months
In the case of an eligible individual, a refundable tax
credit is provided for 72.5 percent of the individual's
premiums for qualified health insurance of the individual and
qualifying family members for each eligible coverage month
beginning in the taxable year.\33\ The credit is commonly
referred to as the health coverage tax credit (``HCTC''). The
credit is available only with respect to amounts paid by the
individual for the qualified health insurance.
---------------------------------------------------------------------------
\33\ Qualifying family members are the individual's spouse and any
dependent for whom the individual is entitled to claim a dependency
exemption. Any individual who has certain specified coverage is not a
qualifying family member.
---------------------------------------------------------------------------
Eligibility for the credit is determined on a monthly
basis. In general, an eligible coverage month is any month if
(1) the month begins before January 1, 2014, and (2) as of the
first day of the month, the individual is an eligible
individual, is covered by qualified health insurance, the
premium for which is paid by the individual, does not have
other specified coverage, and is not imprisoned under Federal,
State, or local authority. In the case of a joint return, the
eligibility requirements are met if at least one spouse
satisfies the requirements.
Eligible individuals
An eligible individual is an individual who is (1) an
eligible Trade Adjustment Assistance (``TAA'') recipient, (2)
an eligible alternative TAA recipient or an eligible
reemployment TAA recipient, or (3) an eligible Pension Benefit
Guaranty Corporation (``PBGC'') pension recipient. In general,
an individual is an eligible TAA recipient for a month if the
individual (1) receives for any day of the month a trade
readjustment allowance under the Trade Act of 1974 or would be
eligible to receive such an allowance but for the requirement
that the individual exhaust unemployment benefits before being
eligible to receive an allowance and (2) with respect to such
allowance, is covered under a required certification. An
individual is an eligible alternative TAA recipient or an
eligible reemployment TAA recipient for a month if the
individual participates in a certain program under the Trade
Act of 1974 and receives a related benefit for the month.
Generally, an individual is an eligible PBGC pension recipient
for any month if the individual (1) is age 55 or over as of the
first day of the month and (2) receives a benefit for the
month, any portion of which is paid by the PBGC. A person who
may be claimed as a dependent on another person's tax return is
not an eligible individual. In addition, an otherwise eligible
individual is not eligible for the credit for a month if, as of
the first day of the month, the individual has certain
specified coverage, such as certain employer-provided coverage
or coverage under certain governmental health programs.
Qualified health insurance
Qualified health insurance eligible for the credit is: (1)
coverage under a COBRA continuation provision; \34\ (2) State-
based continuation coverage provided by the State under a State
law that requires such coverage; (3) coverage offered through a
qualified State high risk pool; (4) coverage under a health
insurance program offered to State employees or a comparable
program; (5) coverage through an arrangement entered into by a
State and a group health plan, an issuer of health insurance
coverage, an administrator, or an employer; (6) coverage
offered through a State arrangement with a private sector
health care coverage purchasing pool; (7) coverage under a
State-operated health plan that does not receive any Federal
financial participation; (8) coverage under a group health plan
that is available through the employment of the eligible
individual's spouse; (9) coverage under individual health
insurance \35\ if the eligible individual was covered under
individual health insurance during the entire 30-day period
that ends on the date the individual became separated from the
employment which qualified the individual for the TAA
allowance, the benefit for an eligible alternative TAA
recipient or an eligible reemployment TAA recipient, or a
pension benefit from the PBGC, whichever applies (``30-day
requirement''); and (10) coverage under an employee benefit
plan funded by a voluntary employee beneficiary association
(``VEBA'') \36\ established pursuant to an order of a
bankruptcy court (or by agreement with an authorized
representative).\37\
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\34\ COBRA continuation provision is defined by section 9832(d)(1).
\35\ For this purpose, ``individual health insurance'' means any
insurance that constitutes medical care offered to individuals other
than in connection with a group health plan. Such term does not include
Federal- or State-based health insurance coverage.
\36\ See section 501(c)(9) for the definition of a VEBA.
\37\ See 11 U.S.C. sec. 1114.
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Qualified health insurance does not include any State-based
coverage (i.e., coverage described in (2)-(7) in the preceding
paragraph) unless the State has elected to have such coverage
treated as qualified health insurance and such coverage meets
certain consumer-protection requirements.\38\ Such State
coverage must provide that each qualifying individual is
guaranteed enrollment if the individual pays the premium for
enrollment or provides a qualified health insurance costs
eligibility certificate and pays the remainder of the premium.
In addition, the State-based coverage cannot impose any pre-
existing condition limitation with respect to qualifying
individuals. State-based coverage cannot require a qualifying
individual to pay a premium or contribution that is greater
than the premium or contribution for a similarly situated
individual who is not a qualified individual. Finally, benefits
under the State-based coverage must be the same as (or
substantially similar to) benefits provided to similarly
situated individuals who are not qualifying individuals.
---------------------------------------------------------------------------
\38\ For guidance on how a State elects a health program to be
qualified health insurance for purposes of the credit, see Rev. Proc.
2004-12, 2004-1 C.B. 528.
---------------------------------------------------------------------------
A qualifying individual for this purpose is an eligible
individual who seeks to enroll in the State-based coverage and
who has aggregate periods of creditable coverage \39\ of three
months or longer, does not have other specified coverage, and
is not imprisoned. However, State-based coverage that satisfies
any or all of the consumer-protection requirements for State-
based coverage with respect to all eligible individuals is also
qualified health insurance for purposes of HCTC.\40\
---------------------------------------------------------------------------
\39\ Creditable coverage is determined under section 9801(c).
\40\ See Q&A-10 of Notice 2005-50, 2005-2 C.B. 14.
---------------------------------------------------------------------------
Qualified health insurance does not include coverage under
a flexible spending or similar arrangement or any insurance if
substantially all of the coverage is for excepted benefits.
Advance payment of HCTC
The credit is available on an advance payment basis by
means of payments by the Department of the Treasury
(``Treasury'') once a qualified health insurance costs credit
eligibility certificate is in effect.\41\ In some cases,
Treasury may also make retroactive payments on behalf of a
certified individual for qualified health insurance coverage
for eligible coverage months occurring before the first month
for which an advance payment is otherwise made on behalf of the
individual. With respect to any taxable year, the amount which
is allowed as HCTC for an eligible individual for a taxable
year is reduced (but not below zero) by the aggregate amount of
advance HCTC payments on behalf of the eligible individual for
months beginning in the taxable year.
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\41\ Sec. 7527.
---------------------------------------------------------------------------
Premium assistance credit
For taxable years ending after December 31, 2013, a
refundable tax credit (the ``premium assistance credit'') is
provided for eligible individuals and families who purchase
health insurance through an American Health Benefit
Exchange.\42\ The premium assistance credit, which is
refundable and payable in advance directly to the insurer,
subsidizes the purchase of certain health insurance plans
through an American Health Benefit Exchange.
---------------------------------------------------------------------------
\42\ Sec. 36B.
---------------------------------------------------------------------------
The premium assistance credit is available for individuals
(single or joint filers) with household incomes between 100 and
400 percent of the Federal poverty level (``FPL'') for the
family size involved who are not eligible for certain other
health insurance. The premium assistance credit amount is
generally the lower of (1) the premium for the qualified health
plan in which the individual or family enrolls, and (2) the
premium for the second lowest cost silver plan \43\ in the
rating area where the individual resides, reduced by the
individual's or family's share of premiums.
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\43\ A qualified health plan is categorized by level (bronze,
silver, gold or platinum), depending on its actuarial value, that is,
the percentage of the plan's share of the total costs of benefits under
the plan. A silver level plan must have an actuarial value of 70
percent.
---------------------------------------------------------------------------
If the premium assistance credit received through advance
payment exceeds the amount of premium assistance credit to
which the taxpayer is entitled for the taxable year, the
liability for the overpayment must be reflected on the
taxpayer's income tax return for the taxable year, subject to a
limitation on the amount of such liability. For taxpayers with
household income below 400 percent of FPL, the liability for
the overpayment for a taxable year is limited to a specific
dollar amount which varies depending on the taxpayer's
household income as a percentage of FPL.
Explanation of Provision
Extension of HCTC
The provision amends the definition of eligible coverage
month for HCTC purposes to include months beginning before
January 1, 2020, if the requirements for an eligible coverage
month are otherwise met.\44\
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\44\ Title IV of the Act also provides for extension to June 30,
2021, of certain expired provisions of the Trade Act of 1974, Pub. L.
No. 93-618, as amended, including provisions related to individuals
eligible for trade adjustment assistance.
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Election of HCTC
In order to coordinate eligibility for the premium
assistance credit with eligibility for HCTC, under the
provision, to be eligible for the HCTC for any eligible
coverage month during a taxable year, the eligible individual
must elect the HCTC. Further, except as the Secretary of
Treasury may provide, the election applies for that coverage
month and all subsequent eligible coverage months during the
taxable year, must be made no later than the due date, with any
extension, for filing his or her income tax return for the
year, and is irrevocable. Further, the period for assessing any
deficiency attributable to the election (or revocation of the
election, if permitted) does not expire before one year after
the date on which the Secretary of Treasury is notified of the
election (or revocation). The taxpayer is not entitled to the
premium assistance credit for any coverage month for which the
individual elects the HCTC.
Qualified health insurance
The provision eliminates the 30-day requirement as a
requirement for individual health insurance to be qualified
health insurance for purposes of the HCTC, but the provision
adds a requirement that the individual health insurance not be
purchased through an American Health Benefit Exchange. The
provision otherwise extends pre-2014 law for qualified health
insurance, including the rules for State-based coverage, and
the treatment of COBRA continuation coverage and coverage under
certain VEBAs as qualified health insurance.
Advance payment
In the case of an eligible individual on whose behalf
advance HCTC payment or advance premium assistance payment is
made for months occurring during a taxable year and who
subsequently elects HCTC for any eligible months,\45\ the
individual's income tax liability is increased by the amount of
the advance payment, but then offset by the amount of the HCTC
allowed to the individual.\46\ If the individual on whose
behalf the advance HCTC payment is made does not elect HCTC but
instead claims the premium assistance credit for any coverage
months, the increase in tax liability equal to the advance
payment is offset by the amount of the allowable premium
assistance credit, and any remaining tax liability attributable
to the advance payment (and advance premium assistance payment,
if any) is limited in the same way as if the advance HCTC
payment had instead been advance premium assistance payment.
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\45\ Receipt of advance HCTC payments during a year does not in
itself constitute an election of the HCTC for the year.
\46\ If a premium assistance credit is also allowed to the
individual for months before the first month for which the HCTC is
elected, the amount of the individual's allowed premium assistance
credit is also taken into account in applying the offset.
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Under the provision, the Secretary of Treasury is directed
to establish, no later than one year after date of enactment of
the provision, a new program for making advance HCTC payments
to providers of insurance on behalf of enrolled eligible
individuals. The program shall only provide retroactive
payments for coverage months occurring after the end of such
one year period.
Agency outreach
The Secretaries of the Treasury, Health and Human Services,
and Labor and the Director of the PBGC are directed to carry
out programs of public outreach, including on the Internet, to
inform potential HCTC-eligible individuals of the extension of
HCTC availability and the availability of the election to claim
such credit retroactively for coverage months beginning after
December 31, 2013.
Effective Date
The provision is generally effective for coverage months in
taxable years beginning after December 31, 2013. For any
taxable year beginning after December 31, 2013, and before the
date of enactment (June 29, 2015), the election to claim the
HCTC may be made any time on or after the date of enactment and
before the expiration of the 3-year period of limitation with
respect to such taxable year \47\ and may be made on an amended
income tax return. The requirement that, in order to be
qualified health insurance, individual health insurance not be
purchased through an American Health Benefit Exchange is
effective for coverage months in taxable years beginning after
December 31, 2015.
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\47\ Sec. 6511(a).
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TITLE VIII--OFFSETS
A. Time for Payment of Corporate Estimated Taxes (sec. 803 of the Act
and sec. 6655 of the Code)
Present Law
In general, corporations are required to make quarterly
estimated tax payments of their income tax liability.\48\ For a
corporation whose taxable year is a calendar year, these
estimated tax payments must be made by April 15, June 15,
September 15, and December 15. The amount of any required
estimated payment is 25 percent of the required annual
payment.\49\ The required annual payment is 100 percent of the
tax liability for the taxable year or the preceding taxable
year. The option to use the preceding taxable year is not
available if the preceding taxable year was not a 12-month
taxable year or the corporation did not file a return in the
preceding taxable year showing a liability for tax. Further, in
the case of a corporation with taxable income of at least $1
million in any of the three immediately preceding taxable
years, the option to use the preceding taxable year is only
available for the first installment of such corporation's
taxable year.\50\ In addition, in the case of a corporation
with assets of at least $1 billion (determined as of the end of
the preceding taxable year), the installment due in July,
August or September of 2017, is increased to 100.25 percent of
the payment otherwise due.\51\ For each of the periods
affected, the next required installment is reduced accordingly
(i.e., the payment due in October, November, or December of
2017 is reduced by the amount that the prior payment was
increased).
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\48\ Sec. 6655.
\49\ Sec. 6655(d)(1).
\50\ Sec. 6655(d)(2) and (g)(2).
\51\ African Growth and Opportunity Amendments, Pub. L. No. 112-
163, sec. 4.
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Explanation of Provision
In the case of a corporation with assets of at least $1
billion (determined as of the end of the preceding taxable
year), the provision increases the amount of the required
installment of estimated tax otherwise due in July, August, or
September of 2020 by 8 percent of that amount (determined
without regard to any increase in such amount not contained in
the Internal Revenue Code) (i.e., the installment due in July,
August or September of 2020, is increased to 108 percent of the
payment otherwise due). The next required installment is
reduced accordingly (i.e., the payment due in October,
November, or December of 2020 is reduced by the amount that the
prior payment was increased).
Effective Date
The provision is effective on the date of enactment (June
29, 2015).
B. Payee Statement Required to Claim Certain Education Tax Benefits
(sec. 804 of the Act and secs. 25A and 222 of the Code)
Present Law \52\
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\52\ This description of present law does not incorporate changes
made to the tuition reporting requirements in the ``Protecting
Americans From Tax Hikes Act of 2015,'' Pub. L. No. 114-113. See Part
Thirteen, Division Q, Title II, item 10.
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The Code contains provisions providing for either a credit
against tax or an above-the-line deduction for certain amounts
paid for qualified tuition and related expenses.\53\
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\53\ Secs. 25A and 222. For a detailed description of these
provisions, see description of the ``Protecting Americans From Tax
Hikes Act of 2015,'' Pub. L. No. 114-113, secs. 102 and 153, infra.
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Under section 6050S of the Code, eligible educational
institutions that enroll individuals for any academic period
are required to furnish, both to the IRS and to the student, an
information return known as Form 1098-T. Among the information
the educational institution is required to remit is (i) either
the aggregate amount of payments received, or the aggregate
amount billed, for qualified tuition with respect to the
student to whom the Form 1098-T pertains; and (ii) the
aggregate amount of grants received by such individual for
payment of costs of attendance that are administered and
processed by the institution during the calendar year.
Explanation of Provision
Under the provision, except as provided by the Secretary,
no taxpayer may claim the credits for qualified tuition and
related expenses, or the deduction for qualified tuition and
fees, unless the taxpayer receives a statement required under
section 6050S of the Code (the Form 1098-T), containing both
the identifying information of the taxpayer (including the
taxpayer's taxpayer identification number) as well information
related to the calculation of the relevant credits and
deduction.\54\ In the case of a taxpayer who claims the credit
or deduction with respect to an eligible student who is a
dependent, the eligible student's receipt of the Form 1098-T
will suffice for purposes of this requirement.
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\54\ This information is required under section 6050S(b)(2)(B). The
requirement to report tuition amounts either billed or paid under
section 6050S(b)(2)(B)(i) was subsequently modified as a result of
changes made to the tuition reporting requirements in the ``Protecting
Americans From Tax Hikes Act of 2015,'' Pub. L. No. 114-113, described
infra. That modification required that institutions report only amounts
paid, rather than amounts billed.
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Effective Date
The provision is effective for taxable years beginning
after the date of enactment (June 29, 2015).
C. Special Rule for Educational Institutions Unable to Collect Taxpayer
Identification Numbers of Individuals with Respect to Higher Education
Tuition and Related Expenses (sec. 805 of the Act and sec. 6724 of the
Code)
Present Law
Eligible educational institutions that enroll individuals
for any academic period are required to furnish, both to the
IRS and to the student, an information return known as Form
1098-T.\55\ Among the information the educational institution
is required to remit is the taxpayer identification number
(``TIN'') of the student to whom the form relates.\56\
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\55\ Sec. 6050S.
\56\ Sec. 6050S(b)(2)(A); Treas. Reg. sec. 1.6050S-1(b)(2)(ii)(A).
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A penalty under section 6721 or 6722 of the Code may apply
to a payee that fails to include the information required on
the Form 1098-T.\57\ The Treasury regulations provide for a
waiver of the section 6721 and 6722 penalties in the case of
institutions that fail to include a correct TIN of the student.
Such institutions will not be liable for these penalties if the
failure to include the correct TIN was due to reasonable
cause.\58\ Reasonable cause may be established if the failure
arose from events beyond the institution's control, such as
failure of the student to furnish a TIN. However, the
regulations require that the institution establish that it
acted in a ``responsible manner'' both before and after the
failure. The Treasury regulations set out detailed guidelines
regarding the solicitation of TINs by the institution for
purposes of making this determination.
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\57\ Treas. Reg. sec. 1.6050S-3(f)(1), (2). The section 6721
penalty is applicable to information returns (i.e., statements required
to be remitted to the IRS under section 6050S), while the section 6722
penalty is applicable to payee statements (i.e., statements required to
be remitted to the taxpayer under section 6050S).
\58\ Treas. Reg. sec. 1.6050S-3(f)(3).
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Explanation of Provision
Under the provision, no penalty shall be imposed on an
eligible educational institution under sections 6721 or 6722
solely by reason of failing to provide a correct TIN of an
individual as required under section 6050S, if such institution
makes, at the time of the filing of the Form 1098-T, a true and
accurate certification under penalties of perjury that it has
complied with standards promulgated by the Secretary for
obtaining such individual's TIN.
Effective Date
The provision is effective for returns required to be made,
and statements required to be furnished, after December 31,
2015.
D. Increase Penalty for Failure to File Information Returns and Payee
Statements (sec. 806 of the Act and secs. 6721 and 6722 of the Code)
Present Law
Failure to comply with the information reporting
requirements of the Code results in penalties, which may
include a penalty for failure to file the information
return,\59\ to furnish payee statements,\60\ or to comply with
other various reporting requirements.\61\ No penalty is imposed
if the failure is due to reasonable cause.\62\
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\59\ Sec. 6721.
\60\ Sec. 6722.
\61\ Sec. 6723. The penalty for failure to comply timely with a
specified information reporting requirement is $50 per failure, not to
exceed $100,000 per calendar year.
\62\ Sec. 6724.
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Any person who is required to file an information return,
or furnish a payee statement, but who fails to do so on or
before the prescribed due date, is subject to a penalty that
varies based on when, if at all, the information return is
filed. Both the failure to file and failure to furnish
penalties are adjusted annually to account for inflation.
If a person files an information return after the
prescribed filing date but on or before the date that is 30
days after the prescribed filing date, the amount of the
penalty is $30 per return (``first-tier penalty''), with a
maximum penalty of $250,000 per calendar year. If a person
files an information return after the date that is 30 days
after the prescribed filing date but on or before August 1, the
amount of the penalty is $60 per return (``second-tier
penalty''), with a maximum penalty of $500,000 per calendar
year. If an information return is not filed on or before August
1 of any year, the amount of the penalty is $100 per return
(``third-tier penalty''), with a maximum penalty of $1,500,000
per calendar year. If a failure to file is due to intentional
disregard of a filing requirement, the minimum penalty for each
failure is $250, with no calendar year limit.
Lower maximum levels for this failure to file correct
information return penalty apply to small businesses. Small
businesses are defined as firms having average annual gross
receipts for the most recent three taxable years that do not
exceed $5 million. The maximum penalties for small businesses
are: $75,000 (instead of $250,000) if the failures are
corrected on or before 30 days after the prescribed filing
date; $200,000 (instead of $500,000) if the failures are
corrected on or before August 1; and $500,000 (instead of
$1,500,000) if the failures are not corrected on or before
August 1.
Any person who is required to furnish a payee statement who
fails to do so on or before the prescribed filing date is
subject to a penalty that varies based on when, if at all, the
payee statement is furnished, similar to the penalty for filing
an information return discussed above. A first-tier penalty is
$30, subject to a maximum of $250,000, a second-tier penalty is
$60 per statement, up to $500,000, and a third-tier penalty is
$100, up to a maximum of $1,500,000. Lower maximum levels for
this failure to furnish correct payee statement penalty apply
to small businesses. For purposes of the penalty, small
businesses are firms having average annual gross receipts for
the most recent three taxable years that do not exceed $5
million. The maximum penalties for small businesses are:
$75,000 (instead of $250,000) if the failures are corrected on
or before 30 days after the prescribed filing date; $200,000
(instead of $500,000) if the failures are corrected on or
before August 1; and $500,000 (instead of $1,500,000) if the
failures are not corrected on or before August 1.
In cases in which the failure to file an information return
or to furnish the correct payee statement is due to intentional
disregard, the minimum penalty for each failure is $250, with
no calendar year limit. No distinction is made between small
businesses and other persons required to report.
Explanation of Provision
The provision increases the penalties to the following
amounts for information returns or payee statements due after
December 31, 2015. The first-tier penalty is $50 per return,
with a maximum penalty of $500,000 per calendar year. The
second-tier penalty increases to $100 per return, with a
maximum penalty of $1,500,000 per calendar year. The third-tier
penalty increases to $250 per return, with a maximum penalty of
$3,000,000 per calendar year.
The provision also increases the lower maximum levels
applicable to small businesses, as follows. The maximum
penalties for small businesses are: $175,000 if the failures
are corrected on or before 30 days after the prescribed filing
date; $500,000 if the failures are corrected on or before
August 1; and $1,000,000 if the failures are not corrected on
or before August 1.
For failures or misstatements due to intentional disregard,
the penalty per return or statement increases to $500, with no
calendar year limit. As with present law, there is no
distinction between small businesses and other persons required
to report in such cases.
Effective Date
The provision applies to information returns required to be
filed and payee statements required to be furnished after
December 31, 2015.
E. Child Tax Credit Not Refundable For Taxpayers Electing To Exclude
Foreign Earned Income From Tax (sec. 807 of the Act and sec. 24 of the
Code)
Present Law \63\
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\63\ This description of present law does not incorporate changes
made to the child tax credit in the ``Protecting Americans From Tax
Hikes Act of 2015,'' Pub. L. No. 114-113. See Part Thirteen, Division
Q, Title I, item A.1.
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Child tax credit
An individual may claim a tax credit for each qualifying
child under the age of 17. The amount of the credit per child
is $1,000.\64\ A child who is not a citizen, national, or
resident of the United States cannot be a qualifying child.\65\
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\64\ Sec. 24(a).
\65\ Sec. 24(c).
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The aggregate amount of child credits that may be claimed
is phased out for individuals with income over certain
threshold amounts. Specifically, the otherwise allowable child
tax credit is reduced by $50 for each $1,000 (or fraction
thereof) of modified adjusted gross income over $75,000 for
single individuals or heads of households, $110,000 for married
individuals filing joint returns, and $55,000 for married
individuals filing separate returns. For purposes of this
limitation, modified adjusted gross income includes certain
otherwise excludable income earned by U.S. citizens or
residents living abroad or in certain U.S. territories,
described below.\66\
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\66\ Sec. 24(b).
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The credit is allowable against both the regular tax and
against the alternative minimum tax (``AMT''). In addition, a
taxpayer is allowed an ``additional child tax credit'' which is
refundable to the extent the credit exceeds the taxpayer's
income tax (reduced by nonrefundable credits).\67\ The
additional child tax credit is equal to 15 percent of earned
income in excess of a threshold dollar amount (the ``earned
income'' formula).\68\ The threshold dollar amount is $3,000
for taxable years beginning before 2018 ($10,000 indexed for
inflation since 2001 for taxable years beginning after 2017).
For purposes of determining the additional child credit, earned
income includes only earned income that is taken into account
in determining taxable income. As a result, a citizen living
abroad who earns more than the maximum section 911 exclusion
(discussed below) will have residual earnings taken into
account in determining taxable income, and thus will
potentially be eligible for the additional child credit. For
example, a married couple with earnings of $113,800 in 2015
would have earnings that exceeded the maximum section 911
exclusion by $13,000, or $10,000 in excess of the additional
child credit refundability threshold of $3,000. If they had two
qualifying children, the family would be potentially eligible
for child credits of $1,800 ($200 of the otherwise allowed
child credits is lost due to the income based phase-out of the
child credit). The couple faces no U.S. regular income tax
liability on the $13,000 against which to claim the credit.
However, the couple is eligible for refundable child credits of
$1,500 (15 percent of $10,000). In contrast to this couple, a
couple earning less than the maximum section 911 exclusion and
who claimed the exclusion would have no earnings taken into
account in determining taxable income, and thus would not be
eligible for the additional child credit. Thus certain higher
income citizens working abroad face lower U.S. tax liabilities
than lower income citizens working abroad.
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\67\ Secs. 24(d) and 6401(b).
\68\ Sec. 24(d)(1)(B)(i).
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Families with three or more children may determine the
additional child tax credit using the ``alternative formula,''
if this results in a larger credit than determined under the
earned income formula. Under the alternative formula, the
additional child tax credit equals the amount by which the
taxpayer's social security taxes exceed the taxpayer's earned
income tax credit (``EITC'').
Earned income is defined as the sum of wages, salaries,
tips, and other taxable employee compensation plus net self-
employment earnings. Combat pay is treated as earned income
taken into account in determining taxable income, regardless of
whether it is excluded from gross income for other purposes.
Foreign earned income exclusion
A U.S. citizen or resident living abroad may be eligible to
elect to exclude from U.S. taxable income certain foreign
earned income and foreign housing costs.\69\ This exclusion
applies regardless of whether any foreign tax is paid on the
foreign earned income or housing costs. To qualify for these
exclusions, an individual (a ``qualified individual'') must
have his or her tax home in a foreign country and must be
either (1) a U.S. citizen \70\ who is a bona fide resident of a
foreign country or countries for an uninterrupted period that
includes an entire taxable year, or (2) a U.S. citizen or
resident present in a foreign country or countries for at least
330 full days in any 12-consecutive-month period.
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\69\ Sec. 911.
\70\ Generally, only U.S. citizens may qualify under the bona fide
residence test. A U.S. resident alien who is a citizen of a country
with which the United States has a tax treaty may, however, qualify for
the section 911 exclusions under the bona fide residence test by
application of a nondiscrimination provision of the treaty.
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The maximum amount of foreign earned income that an
individual may exclude in 2015 is $100,800.\71\ The maximum
amount of foreign housing costs that an individual may exclude
in 2015 is, in the absence of Treasury adjustment for
geographic differences in housing costs, $16,128.\72\ The
combined foreign earned income exclusion and housing cost
exclusion may not exceed the taxpayer's total foreign earned
income for the taxable year. The taxpayer's foreign tax credit
is reduced by the amount of the credit that is attributable to
excluded income.
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\71\ Sec. 911(b)(2)(D)(i). This amount is adjusted annually for
inflation. The exclusion amount is taken against the lowest marginal
tax rates. See sec. 911(f).
\72\ Sec. 911(c)(1) and (2). The Secretary of the Treasury has
authority to issue guidance making geographic cost-based adjustments.
See sec. 911(c)(2)(B). The Secretary has exercised this authority
annually. The most recent guidance, Notice 2015-33 (April 14, 2015),
includes adjustments for many locations. Under these adjustments, the
maximum housing cost exclusion for any geographic area is $114,300 for
expenses for housing in Hong Kong, China.
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Explanation of Provision
Under the provision, a taxpayer who elects to exclude from
gross income for a taxable year any amount of foreign earned
income or foreign housing costs may not claim the refundable
portion of the child tax credit for the taxable year.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2014.
PART SEVEN: SURFACE TRANSPORTATION AND VETERANS HEALTH CARE CHOICE
IMPROVEMENT ACT OF 2015 (PUBLIC LAW 114-41) \73\
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\73\ H.R. 3236. The House passed H.R. 3236 on July 29, 2015. The
bill passed the Senate without amendment on July 30, 2015. The
President signed the bill on July 31, 2015.
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TITLE II--REVENUE PROVISIONS
A. Extension of Highway Trust Fund Expenditure Authority (sec. 2001 of
the Act and secs. 9503, 9504, and 9308 of the Code)
Present Law
Under present law, the Internal Revenue Code (sec. 9503)
authorizes expenditures (subject to appropriations) to be made
from the Highway Trust Fund (and Sport Fish Restoration and
Boating Trust Fund and Leaking Underground Storage Tank Trust
Fund) through July 31, 2015, for purposes provided in specified
authorizing legislation as in effect on the date of enactment.
Explanation of Provision
This provision extends the authority to make expenditures
(subject to appropriations) from the Highway Trust Fund (and
Sport Fish Restoration and Boating Trust Fund and Leaking
Underground Storage Tank Trust Fund) through October 29, 2015.
Effective Date
The provision is effective on the date of enactment (July
31, 2015).
B. Funding of Highway Trust Fund (sec. 2002 of the Act and sec. 9503(f)
of the Code)
Public Law No. 110-318, ``an Act to amend the Internal
Revenue Code of 1986 to restore the Highway Trust Fund
balance'' transferred, out of money in the Treasury not
otherwise appropriated, $8,017,000,000 to the Highway Trust
Fund effective September 15, 2008. Public Law No. 111-46, ``an
Act to restore sums to the Highway Trust Fund and for other
purposes,'' transferred, out of money in the Treasury not
otherwise appropriated, $7 billion to the Highway Trust Fund
effective August 7, 2009. The Hiring Incentives to Restore
Employment Act transferred, out of money in the Treasury not
otherwise appropriated, $14,700,000,000 to the Highway Trust
Fund and $4,800,000,000 to the Mass Transit Account in the
Highway Trust Fund.\74\ The HIRE Act provisions generally were
effective as of March 18, 2010.
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\74\ The Hiring Incentives to Restore Employment Act (the ``HIRE''
Act), Pub. L. No. 111-147, sec. 442.
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Moving Ahead for Progress in the 21st Century (``MAP-21'')
\75\ provided that, out of money in the Treasury not otherwise
appropriated, the following transfers were to be made from the
General Fund to the Highway Trust Fund:
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\75\ Moving Ahead for Progress in the 21st Century Act (``MAP-
21''), Pub. L. No. 112-141, sec. 40201(a)(2), and sec. 40251.
------------------------------------------------------------------------
FY 2013 FY 2014
------------------------------------------------------------------------
Highway Account............. $6.2 billion........ $10.4 billion
Mass Transit Account........ .................... $2.2 billion
------------------------------------------------------------------------
MAP-21 also transferred $2.4 billion from the Leaking
Underground Storage Tank Trust Fund to the Highway Account in
the Highway Trust Fund.
The Highway and Transportation Funding Act of 2014
transferred $7.765 billion from the General Fund to the Highway
Account of the Highway Trust Fund, $2 billion from the General
Fund to the Mass Transit Account of the Highway Trust Fund, and
$1 billion from the Leaking Underground Storage Tank Trust Fund
to the Highway Account of the Highway Trust Fund.\76\ The
provisions were effective August 8, 2014.
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\76\ Highway and Transportation Funding Act of 2014, Pub. L. No.
113-159, sec. 2002.
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Explanation of Provision
The provision provides that out of money in the Treasury
not otherwise appropriated, the following transfers are to be
made from the General Fund to the Highway Trust Fund: $6.068
billion to the Highway Account and $2 billion to the Mass
Transit Account.
Effective Date
The provision is effective on the date of enactment (July
31, 2015).
C. Modification of Mortgage Reporting Requirements (sec. 2003 of the
Act and sec. 6050H of the Code)
Present Law
Any person who, in the course of a trade or business during
a calendar year, received from an individual $600 or more of
interest during a calendar year on an obligation secured by
real property (such as mortgage interest) must file an
information return with the IRS and must provide a copy of that
return to the payor.\77\ The information return generally must
include the name, address, and taxpayer identification number
of the individual from whom the interest was received, and the
amount of the interest and points received for the calendar
year.
---------------------------------------------------------------------------
\77\ Sec. 6050H.
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, the following additional information
is required to be included in information returns filed with
the IRS and statements furnished to the payor with respect to a
debt secured by real property: (i) the amount of outstanding
principal on the mortgage as of the beginning of the calendar
year, (ii) the loan origination date, and (iii) the address (or
other description in the case of property without an address)
of the property securing the debt.
Effective Date
The provision applies to returns required to be made, and
statements required to be furnished, after December 31, 2016.
D. Consistent Basis Reporting Between Estate and Person Acquiring
Property From Decedent (sec. 2004 of the Act and secs. 1014 and 6035 of
the Code)
Present Law
The value of an asset for purposes of the estate tax
generally is the fair market value at the time of death or at
the alternate valuation date.\78\ The basis of property
acquired from a decedent is the fair market value of the
property at the time of the decedent's death or as of an
alternate valuation date, if elected by the executor.\79\ Under
regulations, the fair market value of the property at the date
of the decedent's death (or alternate valuation date) is deemed
to be its value as appraised for estate tax purposes.\80\
However, the value of property as reported on the decedent's
estate tax return provides only a rebuttable presumption of the
property's basis in the hands of the heir.\81\ Unless the heir
is estopped by his or her previous actions or statements with
regard to the estate tax valuation, the heir may rebut the use
of the estate's valuation as his or her basis by clear and
convincing evidence. The heir is free to rebut the presumption
in two situations: (1) the heir has not used the estate tax
value for tax purposes, the IRS has not relied on the heir's
representations, and the statute of limitations on assessments
has not barred adjustments; and (2) the heir does not have a
special relationship to the estate which imposes a duty of
consistency.\82\
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\78\ Secs. 2031 and 2032.
\79\ Sec. 1014. See section 1022 for special basis rules apply to
property acquired from an electing estate of a decedent who died during
2010.
\80\ Treas. Reg. sec. 1.1014-3(a).
\81\ See Rev. Rul. 54-97, 1954-1 C.B. 113, 1954.
\82\ See Technical Advice Memorandum 199933001, January 7, 1999.
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Explanation of Provision
The provision amends section 1014 generally to require
consistency between the estate tax value of property and basis
of property acquired from a decedent. Under the provision, if
the value of property to which the provision applies has been
finally determined for estate tax purposes, the basis in the
hands of the recipient can be no greater than the value of the
property as finally determined. If the value of such property
has not been finally determined for estate tax purposes, then
the basis in the hands of the recipient can be no greater than
the value reported in a required statement. The provision
applies to property the inclusion of which in the decedent's
estate increased the liability for estate tax on such estate,
but does not include any property of an estate if the liability
for such tax does not exceed the credits allowable against such
tax. For purposes of the provision, the value of property has
been finally determined for estate tax purposes if: (1) the
value of the property is shown on an estate tax return, and the
value is not contested by the Secretary before the expiration
of the time for assessing estate tax; (2) in a case not
described in (1), the value is specified by the Secretary and
such value is not timely contested by the executor of the
estate; or (3) the value is determined by a court or pursuant
to a settlement agreement with the Secretary.
An executor of a decedent's estate that is required to file
an estate tax return under section 6018(a) is required to
report to both the recipient and the IRS the value of each
interest in property included in the gross estate. A person
that is required to file an estate tax return under section
6018(b) (returns by beneficiaries) is required to report to
each other person holding a legal or beneficial interest in
property to which the return relates and to the IRS the value
of each interest in property included in the gross estate. The
required reports must be furnished by the time prescribed by
the Secretary, but in no case later than the earlier of 30 days
after the return is due under section 6018 or 30 days after the
return is filed. In any case where reported information is
adjusted after a statement has been filed, a supplemental
statement must be filed not later than 30 days after such
adjustment is made.
The provision grants the Secretary authority to prescribe
regulations necessary to carry out the provision, including the
application of the provision when no estate tax return is
required to be filed and when the surviving joint tenant or
other recipient may have better information than the executor
regarding the basis or fair market value of the property.
The provision applies the penalty for failure to file
correct information returns under section 6721, and failure to
furnish correct payee statements under section 6722, to failure
to file the new information returns required under the
proposal. Additionally, the provision applies the accuracy-
related penalty under section 6662 to any inconsistent estate
basis. For this purpose, there is an inconsistent estate basis
if the basis of property claimed on a return exceeds the basis
as determined under the above-described new rules that
generally require consistency between the estate tax value of
property and the basis of property acquired from a decedent
under section 1014.
Effective Date
The provision is applicable to property with respect to
which an estate tax return is filed after the date of enactment
(July 31, 2015).
E. Clarification of 6-Year Statute of Limitations in Case of
Overstatement of Basis (sec. 2005 of Act and sec. 6501 of the Code)
Present Law
Taxes are generally required to be assessed within three
years after a taxpayer's return is filed, whether or not it was
timely filed.\83\ There are several circumstances under which
the general three-year limitations period does not begin to
run. If no return is filed,\84\ if a false or fraudulent return
with the intent to evade tax is filed, if private foundation
status is terminated, or a gift tax for certain gifts is not
properly disclosed, the tax may be assessed, or a proceeding in
court for collection of such tax may commence without
assessment, at any time.\85\
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\83\ Sec. 6501(a). Returns that are filed before the date they are
due are deemed filed on the due date. See sec. 6501(b)(1) and (2).
\84\ Sec. 6501(c)(3).
\85\ Sec. 6501(c)(1) and (2).
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Other exceptions to the general rule result in an extension
of the limitations period otherwise applicable. For example,
the limitation period may be extended by taxpayer consent.\86\
Failure to disclose or report certain information may also
result in extensions of the statute of limitations. For
example, failure to disclose a listed transaction as required
under section 6011 on any return or statement for a taxable
year will result in an extension that ensures that the
limitations period remains open for at least one year from the
date the requisite information is provided. The limitation
period with respect to such transaction will not expire before
the date which is one year after the earlier of (1) the date on
which the Secretary is provided the information so required, or
(2) the date that a ``material advisor'' (as defined in section
6111) makes its section 6112(a) list available for inspection
pursuant to a request by the Secretary under section
6112(b)(1)(A).\87\ In addition to the exceptions described
above, there are also circumstances under which the three-year
limitations period is suspended.\88\
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\86\ Sec. 6501(c)(4).
\87\ Sec. 6501(c)(10).
\88\ For example, service of an administrative summons triggers the
suspension either (1) beginning six months after service (in the case
of John Doe summonses) or (2) when a proceeding to quash a summons is
initiated by a taxpayer named in a summons to a third-party record-
keeper. Judicial proceedings initiated by the government to enforce a
summons generally do not suspend the limitation period.
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A separate limitations period of six years from the date a
return is filed is established for substantial omissions of
items from gross income. For a trade or business, the term
``gross income'' means the total amount received or accrued
from the sale of goods or services (if such amounts are
required to be shown on the return) prior to diminution by the
cost of such sales or services (generally, gross receipts). An
omission from gross income is substantial if the omission
exceeds 25 percent of the gross income reported on the return
or the amount omitted is attributable to a foreign financial
asset within the meaning of section 6038D (without regard to
dollar thresholds and regulatory exceptions to reporting based
on existence of duplicative disclosure requirements) and
exceeds $5,000.\89\ Amounts that are adequately disclosed on a
return, even if not reflected in the amount recorded as gross
income, are generally not considered to have been omitted for
purposes of determining whether the 25 percent threshold was
exceeded. An amount is considered to have been adequately
disclosed on a return if it is presented in a manner that is
``adequate to apprise the Secretary of the nature and amount of
such item.'' \90\
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\89\ Sec. 6501(e)(1). Similar six year limitations periods are
established for estate and gift taxes as well as excise taxes, based on
25 percent omissions from items required to be reported on the relevant
tax returns. See secs. 6501(e)(2) and 6501(e)(3).
\90\ Sec. 6501(e)(1)(B).
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The six-year statute was enacted in 1954, patterned on an
earlier five-year limitations period, with several
differences.\91\ The earlier statute was shortly thereafter the
subject of an opinion of the U.S. Supreme Court, in which the
Court held that the statute was clear on its face in requiring
an omission of income to trigger the exception.\92\ Neither the
present statute nor its predecessor explicitly addresses the
treatment of overstatements of basis.
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\91\ Section 275(c) of the Internal Revenue Code of 1939 stated in
its entirety ``If the taxpayer omits from gross income an amount
properly includible therein which is in excess of 25 per centum of the
amount of gross income stated in the return, the tax may be assessed,
or a proceeding in court for the collection of such tax may be begun
without assessment, at any time within 5 years after the return was
filed.'' 53 Stat. at Large 86 (1st Sess., 76th Cong. 1939). It did not
include language comparable to subparagraph 6501(e)(1)(B)(ii),
requiring adequacy of disclosure, nor did it distinguish between gross
receipts of a trade or business and other income.
\92\ The Colony, Inc., v. Commissioner, 357 U.S. 28 (1958).
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A series of courts have considered the issue of whether a
basis overstatement on a return may be considered an omission
from a taxpayer's income for purposes of the limitations
period. The cases dealt with adjustments to ``listed''
transactions \93\ on partnership returns. The litigation
results varied, with the result often depending upon the view
of the deciding court regarding the vitality of the opinion in
The Colony, Inc.\94\ In cases in which the taxpayer prevailed,
the courts generally followed the principle set forth in The
Colony, Inc., that ``the extended period of limitations applies
to situations where specific income receipts have been `left
out' in the computation of gross income and not when an
understatement of gross income resulted from an overstatement
of basis.''
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\93\ ``Listed transactions'' refers to transactions that are the
same or substantially similar to transactions that the IRS has
identified in a published notice as potentially abusive and therefore
subject to the reporting requirements under section 6011,
notwithstanding the fact that the transaction may not otherwise trigger
the reporting requirements.
\94\ The Federal, Ninth and Fourth Circuit Courts of Appeals and
the U.S. Tax Court held for the taxpayers. See Salman Ranch Ltd. v.
United States, 573 F.3d 1362 (Fed. Cir. 2009); Bakersfield Energy
Partners v. Commissioner, 128 T.C. 207 (2007), aff'd, 568 F.3d 767 (9th
Cir. 2009); and Home Concrete & Supply, LLC. v. United States, 634 F.3d
249 (4th Cir. 2011), aff'd 132 S. Ct. 1836 (2012), for proceedings
consistent with the holding in Home Concrete & Supply, LLC.). The Tenth
Circuit held for the government in Salman Ranch Ltd. v. Commissioner,
(647 F.3d 929 (10th Cir. 2011), cert. granted, judgment vacated and
remanded, (132 S. Ct. 2100 (2012) for proceedings consistent with the
holding in Home Concrete & Supply, LLC.).
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The Secretary promulgated regulations intended to resolve
the issue going forward, making it explicit that the portion of
income understated by reason of an overstated basis is to be
included in determining whether an understatement constituted a
25 percent omission for purposes of the statute of
limitations.\95\
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\95\ Treas. Regs. secs. 301.6229(c)(2)-1 and 301.6501(e)-1. The
Federal Circuit granted deference to the regulations issued subsequent
to its Salman Ranch opinion and held for the government. Grapevine
Imports, Ltd. v. United States, 636 F.3d 1368 (Fed. Cir. 2011) cert.
granted, judgment vacated and remanded, 132 S. Ct. 2099 (2012).
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In Home Concrete & Supply, LLC. v. United States, the U.S.
Supreme Court held that an overstatement of basis that
contributes to an understatement of income due is not itself
considered to be an omission of income, without regard to
whether the return reveals the computation of basis.\96\ In
deciding in favor of the taxpayer, the Supreme Court followed
its interpretation of the word ``omits'' in the predecessor to
section 6501 in The Colony, Inc. Having previously interpreted
an unambiguous term in the statute, the Court held that the
contrary interpretation by the Secretary in Treasury
regulations was invalid.
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\96\ 132 S. Ct. 1836; 182 L. Ed. 2d 746 (2012).
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Explanation of Provision
The provision provides that in determining whether an
amount greater than 25 percent of gross income was omitted from
a return, an understatement of gross income by reason of an
overstatement of unrecovered cost or other basis is an omission
of gross income, without regard to whether or not the amount of
unrecovered cost or basis claimed is disclosed on the return.
Effective Date
The provision is effective for returns filed after the date
of enactment (July 31, 2015), as well as to any other return
for which the assessment period specified in section 6501 had
not yet expired as of that date.
F. Tax Return Due Date Simplification (sec. 2006 of the Act and secs.
6071, 6072, and 6081 of the Code)
Present Law
Persons required to file income tax returns \97\ must file
such returns in the manner prescribed by the Secretary, in
compliance with due dates established in the Code, if any, or
by regulations. The Code includes a general rule that requires
income tax returns to be filed on or before the 15th day of the
fourth month following the end of the taxable year, but certain
exceptions are provided both in the Code and in regulations.
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\97\ Section 6012 provides general rules identifying who must file
an income tax return, while other Code provisions referenced herein
specifically address filing requirements of partnerships, corporations,
and other entities.
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A partnership generally is required to file a Federal
income tax return on or before the 15th day of the fourth month
after the end of the partnership taxable year.\98\ For a
partnership with a taxable year that is a calendar year, for
example, the partnership return due date (and the date by which
Schedules K-1 must be furnished to partners) is April 15.
However, a partnership is allowed an automatic five-month
extension of time to file the partnership return and the
Schedule K-1s (to September 15 in the foregoing example) by
submitting an application on Form 7004 in accordance with the
rules prescribed by the Treasury regulations.\99\
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\98\ Secs. 6031, 6072.
\99\ Sec. 6081. Treas. Reg. sec. 1.6081-2. See Department of the
Treasury, Internal Revenue Service, 2011 Instructions for Form 1065,
U.S. Return of Partnership Income, p. 3. Unlike other partnerships, an
electing large partnership is required to furnish a Schedule K-1 to
each partner by the first March 15 following the close of the
partnership's taxable year (sec. 6031(b)). However, an electing large
partnership is allowed an automatic six-month extension of time to file
the partnership return and the Schedule K-1s by submitting an
application on form 7004 in accordance with the rules prescribed by the
Treasury Regulations. Treas. Reg. sec. 1.6081-2(a)(2).
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A C corporation or an S corporation generally is required
to file a Federal income tax return on or before the 15th day
of the third month following the close of the corporation's
taxable year. For a corporation with a taxable year that is a
calendar year, for example, the corporate return due date is
March 15.\100\ However, a corporation is allowed an automatic
six-month extension of time to file the corporate return (to
September 15 in the foregoing example) by submitting an
application on Form 7004 in accordance with the rules
prescribed by the Treasury regulations.\101\
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\100\ Secs. 6012, 6037, 6072. Section 6012(a)(2) provides that
every corporation subject to taxation under subtitle A shall be
required to file an income tax return. Section 6037, which governs the
returns of S corporations, provides that any return filed pursuant to
section 6037 shall, for purposes of chapter 66 (relating to
limitations) be treated as a return filed by the corporation under
section 6012. Section 6072, which sets forth the due dates for filing
various income tax returns, provides that returns of corporations with
a taxable year that is a calendar year under section 6012 (and section
6037 based on the language in that section) are due March 15.
\101\ Section 6081(b) provides that a corporation is allowed an
automatic extension of three months to file its income tax return if
the corporation files the form prescribed by the Secretary and pays on
or before the due date prescribed for payment, the amount properly
estimated as its tax. However, section 6081(a) provides that the
Secretary may grant an automatic extension of up to six months to file
and the Treasury regulations do so provide. Treas. Reg. sec. 1.6081-3.
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To assist taxpayers in preparing their income tax returns
and to help the Internal Revenue Service (``IRS'') determine
whether such income tax returns are correct and complete,
present law imposes a variety of information reporting
requirements on participants in certain transactions.\102\ The
primary provision governing information reporting by payors
requires an information return by every person engaged in a
trade or business who makes payments aggregating $600 or more
in any taxable year to a single payee in the course of the
payor's trade or business.\103\ Payments subject to reporting
include fixed or determinable income or compensation, but do
not include payments for goods or certain enumerated types of
payments that are subject to other specific reporting
requirements.\104\ Detailed rules are provided for the
reporting of various types of investment income, including
interest, dividends, and gross proceeds from brokered
transactions (such as a sale of stock) paid to U.S.
persons.\105\
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\102\ Secs. 6031 through 6060.
\103\ Sec. 6041(a). The information return generally is submitted
electronically as a Form-1099 or Form-1096, although certain payments
to beneficiaries or employees may require use of Forms W-3 or W-2,
respectively. Treas. Reg. sec. 1.6041-1(a)(2).
\104\ Sec. 6041(a) requires reporting as to fixed or determinable
gains, profits, and income (other than payments to which section
6042(a)(1), 6044(a)(1), 6047(c), 6049(a), or 6050N(a) applies and other
than payments with respect to which a statement is required under
authority of section 6042(a), 6044(a)(2) or 6045). These payments
excepted from section 6041(a) include most interest, royalties, and
dividends.
\105\ Secs. 6042 (dividends), 6045 (broker reporting) and 6049
(interest) and the Treasury regulations thereunder.
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The payor of amounts described above is required to provide
the recipient of the payment with an annual statement showing
the aggregate payments made and contact information for the
payor.\106\ The statement must be supplied to taxpayers by the
payors by January 31 of the year following the calendar year
for which the return must be filed. Payors generally must file
the information return with the IRS on or before the last day
of February of the year following the calendar year for which
the return must be filed,\107\ unless they file electronically,
in which event the information returns are due March 31.\108\
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\106\ Sec. 6041(d).
\107\ Treas. Reg. sec. 31.6071(a)-1(a)(3)(i).
\108\ Secs. 6011(e) and 6071(b) apply to ``returns made under
subparts B and C of part III of this subchapter''; Treas. Reg. sec.
301.6011-2(b), mandates use of magnetic media by persons filing
information returns identified in the regulation or subsequent or
contemporaneous revenue procedures and permits use of magnetic media
for all others.
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Payors also must report wage amounts paid to employees on
information returns. For wages paid to, and taxes withheld
from, employees, the payors must file an information return
with the Social Security Administration (``SSA'') on or before
the last day of February of the year following the calendar
year for which the return must be filed.\109\ However, the due
date for information returns that are filed electronically is
March 31.
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\109\ Treas. Reg. sec. 31.6051-2; IRS, ``Filing Information Returns
Electronically,'' Pub. 3609 (Rev. 12-2011); Treas. Reg. sec.
31.6071(a)-1(a)(3)(i).
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Under the combined annual wage reporting (``CAWR'') system,
the SSA and the IRS have an agreement, in the form of a
Memorandum of Understanding, to share wage data and to resolve,
or reconcile, the differences in the wages reported to them.
Employers submit Forms W-2, Wage and Tax Statement (listing
Social Security wages earned by individual employees), and W-3,
Transmittal of Wage and Tax Statements (providing an aggregate
summary of wages paid and taxes withheld) directly to SSA.\110\
After it records the Forms W-2 and W-3 wage information in its
individual Social Security wage account records, SSA forwards
the Forms W-2 and W-3 information to IRS.\111\
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\110\ Pub. L. No. 94-202, sec. 232, 89 Stat. 1135 (1976) (effective
with respect to statements reporting income received after 1977).
\111\ Employers submit quarterly reports to IRS on Form 941
regarding aggregate quarterly totals of wages paid and taxes due. IRS
then compares the W-3 wage totals to the Form 941 wage totals.
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U.S. persons who transfer assets to, and hold interests in,
foreign bank accounts or foreign entities may be subject to
self-reporting requirements under both Title 26 (the Internal
Revenue Code) and Title 31 (the Bank Secrecy Act) of the United
States Code. With respect to account holders, a U.S. citizen,
resident, or person doing business in the United States is
required to keep records and file reports, as specified by the
Secretary, when that person enters into a transaction or
maintains an account with a foreign financial agency.\112\
Regulations promulgated pursuant to broad regulatory authority
granted to the Secretary in the Bank Secrecy Act \113\ provide
additional guidance regarding the disclosure obligation with
respect to foreign accounts and require filing FinCEN Report
114, Report of Foreign Bank and Financial Accounts (``FBAR''),
by June 30 of the year following the year in which the $10,000
filing threshold is met.\114\ The FBAR is required to be filed
electronically with the Treasury Department through the FinCEN
BSA E-filing System.\115\ Failure to file the FBAR is subject
to both criminal \116\ and civil penalties.\117\ The
regulations do not provide for extensions of time in which to
file the FBAR.
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\112\ 31 U.S.C. sec. 5314. The term ``agency'' in the Bank Secrecy
Act includes financial institutions.
\113\ 31 U.S.C. sec. 5314(a) provides: ``Considering the need to
avoid impeding or controlling the export or import of monetary
instruments and the need to avoid burdening unreasonably a person
making a transaction with a foreign financial agency, the Secretary of
the Treasury shall require a resident or citizen of the United States
or a person in, and doing business in, the United States, to keep
records, file reports, or keep records and file reports, when the
resident, citizen, or person makes a transaction or maintains a
relation for any person with a foreign financial agency.''
\114\ 31 C.F.R. sec. 103.27(c). The $10,000 threshold is the
aggregate value of all foreign financial accounts in which a U.S.
person has a financial interest or over which the U.S. person has
signature or other authority.
\115\ See http://bsaefiling.fincen.treas.gov/main.html. The
predecessor form, Treasury Form TD F 90-22.1, was filed with the IRS
Detroit Computing Center.
\116\ 31 U.S.C. sec. 5322 (failure to file is punishable by a fine
up to $250,000 and imprisonment for five years, which may double if the
violation occurs in conjunction with certain other violations).
\117\ 31 U.S.C. sec. 5321(a)(5).
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Explanation of Provision
The provision includes the following changes: (i) filing
deadline for partnerships and S corporations precede the due
dates of their individual and corporate investors and (ii) the
due date for filing returns by C corporations to be determined
under general rule, with effect that it is a later return than
under present law. It also includes statutory confirmation that
six-month extension for time to file corporate income tax
return is automatic, and requires regulatory updates to the
rules regarding extension of time to file a return, including
changes to conform the FBAR filing due date with income tax
filing dates for individuals.
Filing deadlines for business income tax returns
The provision accelerates the due date for filing of
Federal income tax returns of partnerships and S corporations
by one month, to the 15th day of the third month following the
close of the taxable year. It also removes C corporations from
the scope of the exception to the general rule that requires
income tax returns to be filed by the 15th day of the fourth
month after the end of a taxable year, with the result that C
corporation returns are generally due on or before the 15th day
of the fourth month following the close of a taxable year, with
the exception of certain C corporations electing a fiscal year
ending on June 30. For those C corporations, the first return
for which the due date as amended applies is the return with
respect to a fiscal year beginning in 2026.
Extensions of time to file tax returns
The provision modifies the statute (consistent with current
Treasury regulations) to grant an automatic six-month extension
of time to file a Federal corporate income tax return, with two
exceptions. First, C corporations with a taxable year ending on
June 30 are granted a seven-month extension for returns with
respect to taxable years beginning before January 1, 2026. For
C corporations with a taxable year ending on December 31, the
extension available for taxable years beginning before January
1, 2026 is five months. As with present law, the eligibility
for the automatic extension is contingent on the corporation
filing the form prescribed by the Secretary and paying all tax
estimated to be due on or before the due date prescribed for
payment.
The provision requires that the Treasury Department modify
its regulations to conform the extension periods prescribed to
the following terms. The maximum extension for the returns of
partnerships using a calendar year is a six-month period ending
on September 15. The maximum extension for the returns of
trusts using a calendar year is a 5\1/2\ month period ending on
September 30. The maximum extension for the returns of employee
benefit plans using a calendar year is an automatic 3\1/2\
month period ending on November 15.\118\ The maximum extension
for the returns of tax-exempt organizations using a calendar
year is an automatic six-month period ending on November 15.
The due date for forms relating to the Annual Information
Return of Foreign Trust with a United States Owner for calendar
year filers is April 15 with a maximum extension for a six-
month period ending on October 15.
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\118\ The provision relating to returns of employee benefit plans
was repealed by section 32104 of the Fixing America's Surface
Transportation (``FAST'') Act, Pub. L. No. 114-94, as described in Part
Twelve, Title XXXII, item C.
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FBAR due date conformity with income tax filing
In addition to requiring modification of the regulatory
deadlines established for extensions of time to file income tax
returns, the provision also requires that regulations
establishing the due date for the form required under FBAR be
amended. Under the provision, the FBAR due date is April 15
with regulatory authority to grant an extension of up to a six-
month period ending on October 15. The provision permits the
Secretary to waive any penalties for failure to file a timely
request for an extension if the reporting period to which the
penalty relates is the first period for which the taxpayer was
subject to the FBAR requirements.
Effective Date
Changes to the filing due dates for partnerships, S
corporations and C corporations are effective for returns for
taxable years beginning after December 31, 2015, with one
exception. For returns for C corporations with fiscal years
ending on June 30, the amended due date does not apply until
taxable years beginning after December 31, 2025.
The requirements that the Secretary revise certain filing
due dates and extensions for taxable years beginning after
December 31, 2016 are effective upon date of enactment (July
31, 2015).
Finally, the automatic six-month extension of time to file
corporate income tax returns is effective for taxable years
beginning after December 31, 2015 of all corporations, with the
exceptions of C corporations with taxable years ending either
June 30 or December 31. For years beginning before January 1,
2026, C corporations with a taxable year ending June 30 are
permitted a seven month extension of time to file rather than
six months. For C corporations with a taxable year ending
December 31, the maximum extension of time to file for years
beginning before January 1, 2026 is five months rather than six
months.
G. Transfers of Excess Pension Assets to Retiree Health Accounts (sec.
2007 of the Act and sec. 420 of the Code)
Present Law
Subject to various conditions, a qualified transfer of
excess assets of a defined benefit plan may be made to a
retiree medical account or life insurance account within the
plan to fund retiree health benefits and group term life
insurance benefits (``applicable retiree benefits'').\119\ For
this purpose, excess assets generally means the excess, if any,
of the value of the plan's assets over 125 percent of the sum
of the plan's funding target and target normal cost for the
plan year (as defined under the funding rules for single-
employer plans). A qualified transfer does not result in plan
disqualification, is not a prohibited transaction, and is not
treated as a reversion. No deduction is allowed to the employer
for (1) a qualified transfer, or (2) the payment of applicable
retiree benefits out of transferred funds (and any income
thereon).
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\119\ Sec. 420. Qualified transfers of excess assets are generally
made within single-employer defined benefit plans, but are permitted
also within multiemployer plans.
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In order for the transfer to be qualified, accrued
retirement benefits under the plan generally must be 100-
percent vested as if the plan terminated immediately before the
transfer (or in the case of a participant who separated in the
one-year period ending on the date of the transfer, immediately
before the separation). In addition, at least 60 days before
the date of a qualified transfer, the employer must notify the
Secretary of Labor, the Secretary of the Treasury, employee
representatives, and the plan administrator of the transfer,
and the plan administrator must notify each plan participant
and beneficiary of the transfer.\120\
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\120\ Sec. 101(e) of the Employee Retirement Income Security Act of
1974.
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No more than one qualified transfer may be made in any
taxable year. For this purpose, a transfer to a retiree medical
account and a transfer to a retiree life insurance account in
the same year are treated as one transfer. No qualified
transfer may be made after December 31, 2021.
Explanation of Provision
Under the provision, no qualified transfers may be made
after December 31, 2025. Thus, qualified transfers are
permitted through that date.
Effective Date
The provision is effective on the date of enactment (July
31, 2015).
H. Equalization of Highway Trust Fund Excise Taxes on Liquefied Natural
Gas, Liquefied Petroleum Gas, and Compressed Natural Gas (sec. 2008 of
the Act and sec. 4041 of the Code)
Present Law
The Code imposes an excise tax on gasoline, diesel fuel,
kerosene, and certain alternative fuels at the following rates:
\121\
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\121\ These fuels are subject to an additional 0.1-cent-per-gallon
excise tax to fund the Leaking Underground Storage Tank (``LUST'')
Trust Fund (secs. 4041(d) and 4081(a)(2)(B)). That tax is imposed as an
``add-on'' to other existing taxes.
\122\ Diesel-water emulsions are taxed at 19.7 cents per gallon
(sec. 4081(a)(2)(D)).
\123\ The rate of tax is 24.3 cents per gallon in the case of
liquefied natural gas, any liquid fuel (other than ethanol or methanol)
derived from coal, and liquid hydrocarbons derived from biomass. Other
alternative fuels sold or used as motor fuel are generally taxed at
18.3 cents per gallon. ``Alternative fuel'' also includes compressed
natural gas. The rate for compressed natural gas is 18.3 cents per
energy equivalent of a gallon of gasoline. See sec. 4041(a)(2) and (3).
------------------------------------------------------------------------
------------------------------------------------------------------------
Gasoline.......................... 18.3 cents per gallon
Diesel fuel and kerosene.......... 24.3 cents per gallon \122\
Alternative fuels................. 24.3 and 18.3 cents per gallon \123\
------------------------------------------------------------------------
The Code imposes tax on gasoline, diesel fuel, and kerosene
upon removal from a refinery or on importation, unless the fuel
is transferred in bulk by registered pipeline or barge to a
registered terminal facility.\124\ The imposition of tax on
alternative fuels generally occurs at retail when the fuel is
sold to an owner, lessee or other operator of a motor vehicle
or motorboat for use as a fuel in such motor vehicle or
motorboat.
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\124\ Sec. 4081(a)(1).
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Liquefied natural gas (``LNG'') and liquefied petroleum gas
(also known as propane) are classified as alternative fuels.
LNG is taxed at the same per gallon rate as diesel, 24.3 cents
per gallon. According to the Oak Ridge National Laboratory,
diesel fuel has an energy content of 128,700 Btu per gallon
(lower heating value) and LNG has an energy content of 74,700
Btu per gallon (lower heating value). Therefore, a gallon of
LNG produces approximately 58 percent of the energy produced by
a gallon of diesel fuel.
Liquefied petroleum gas is taxed at the same per gallon
rate as gasoline, 18.3 cents per gallon. According to the Oak
Ridge National Laboratory, gasoline has an energy content of
115,400 Btu per gallon (lower heating value), and liquefied
petroleum gas has an energy content of 83,500 Btu per gallon
(lower heating value). Therefore, a gallon of liquefied
petroleum gas produces approximately 72 percent of the energy
produced by a gallon of gasoline.
Compressed natural gas is taxed at 18.3 cents per energy
equivalent of a gasoline gallon of gasoline. In Notice 2006-92,
the IRS provided that this rate is 18.3 cents per 126.67 cubic
feet of compressed natural gas.
Explanation of Provision
The provision changes the tax rate of LNG to a rate based
on its energy equivalent of a gallon of diesel and changes the
tax rate of liquefied petroleum gas to a rate based on its
energy equivalent of a gallon of gasoline.
Specifically, the provision provides that liquefied
petroleum gas is taxed at 18.3 cents per energy equivalent of a
gallon of gasoline. For this purpose, ``energy equivalent of a
gallon of gasoline'' means, with respect to liquefied petroleum
gas, the amount of such fuel having a Btu content of 115,400
(lower heating value), which is 5.75 pounds of liquefied
petroleum gas.
LNG is taxed at 24.3 cents per energy equivalent of a
gallon of diesel fuel. For this purpose, ``energy equivalent of
a gallon of diesel'' means, with respect to a liquefied natural
gas fuel, the amount of such fuel having a Btu content of
128,700 (lower heating value), which is 6.06 pounds of
liquefied natural gas.
Compressed natural gas is taxed at 18.3 cents per energy
equivalent of a gallon of gasoline, which is 5.66 pounds of
compressed natural gas.
Effective Date
The provision is effective for fuel sold or used after
December 31, 2015.
TITLE IV--VETERANS PROVISIONS
A. Exemption in Determination of Employer Health Insurance Mandate
(sec. 4007(a) of the Act and sec. 4980H of the Code)
Present Law
Employer shared responsibility for health coverage
In general
Under the Patient Protection and Affordable Care Act
(``PPACA''),\125\ as amended by the Health Care and Education
Reconciliation Act of 20101A\126\ (referred to collectively as
the ``Affordable Care Act'' or ``ACA''), an applicable large
employer may be subject to a tax, called an ``assessable
payment,'' for a month if one or more of its full-time
employees is certified to the employer as receiving for the
month a premium assistance credit for health insurance
purchased on an American Health Benefit Exchange or reduced
cost-sharing for the employee's share of expenses covered by
such health insurance.\127\ As discussed below, whether an
applicable large employer owes an assessable payment and the
amount of any assessable payment depend on whether the employer
offers its full-time employees and their dependents the
opportunity to enroll in minimum essential coverage under a
group health plan sponsored by the employer and, if it does,
whether the coverage offered is affordable and provides minimum
value.\128\
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\125\ Pub. L. No. 111-148.
\126\ Pub. L. No. 111-152.
\127\ Sec. 4980H. This is sometimes referred to as the employer
shared responsibility requirement or employer mandate. An applicable
large employer is also subject to annual reporting requirements under
section 6056. Premium assistance credits for health insurance purchased
on an American Health Benefit Exchange are provided under section 36B.
Reduced cost-sharing for an individual's share of expenses covered by
such health insurance is provided under section 1402 of PPACA. For
further information on these provisions, see Part II.B-D of Joint
Committee on Taxation, Present Law and Background Relating to the Tax-
Related Provisions in the Affordable Care Act (JCX-6-13), March 4,
2013, available at www.jct.gov.
\128\ Under the ACA, these rules are effective for months beginning
after December 31, 2013. However, in Notice 2013-45, 2013-31 I.R.B.
116, Part III, Q&A-2, the Internal Revenue Service (``IRS'') announced
that no assessable payments will be assessed for 2014. In addition, in
2014, the IRS announced that no assessable payments for 2015 will apply
to applicable large employers that have fewer than 100 full-time
employees and full-time equivalent employees and meet certain other
requirements. Section XV.D.6 of the preamble to the final regulations,
T.D. 9655, 79 Fed. Reg. 8544, 8574-8575, February 12, 2014.
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Definitions of full-time employee and applicable large
employer
For purposes of applying these rules, full-time employee
means, with respect to any month, an employee who is employed
on average at least 30 hours of service per week. Hours of
service are to be determined under regulations, rules, and
guidance prescribed by the Secretary of the Treasury
(``Secretary''), in consultation with the Secretary of Labor,
including rules for employees who are not compensated on an
hourly basis.
Applicable large employer generally means, with respect to
a calendar year, an employer who employed an average of at
least 50 full-time employees on business days during the
preceding calendar year.\129\ Solely for purposes of
determining whether an employer is an applicable large employer
(that is, whether the employer has at least 50 full-time
employees), besides the number of full-time employees, the
employer must include the number of its full-time equivalent
employees for a month, determined by dividing the aggregate
number of hours of service for that month (up to a maximum of
120 for any employee) of employees who are not full-time
employees for the month by 120. In addition, in determining
whether an employer is an applicable large employer, members of
the same controlled group, group under common control, and
affiliated service group are treated as a single employer.\130\
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\129\ Additional rules apply, for example, in the case of an
employer that was not in existence for the entire preceding calendar
year.
\130\ The rules for determining controlled group, group under
common control, and affiliated service group under section 414(b), (c),
(m) and (o) apply for this purpose. If the group is an applicable large
employer under this test, each member of the group is an applicable
large employer and subject to the employer shared responsibility
requirement even if the member by itself would not be an applicable
large employer. In addition, in determining assessable payments (as
discussed herein), only one 30-employee reduction in full-time
employees applies to the group and is allocated among the members
ratably based on the number of full-time employees employed by each
member.
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Assessable payments
If an applicable large employer does not offer its full-
time employees and their dependents minimum essential coverage
under an employer-sponsored plan for a month and at least one
full-time employee is certified as receiving for the month a
premium assistance credit or reduced cost-sharing, the employer
may be subject to an assessable payment of $2,0001A\131\
(divided by 12 and applied on a monthly basis) multiplied by
the number of its full-time employees minus 30, regardless of
the number of full-time employees so certified. For example, in
2016, Employer A fails to offer minimum essential coverage and
has 100 full-time employees, 10 of whom receive premium
assistance credits for the entire year. The employer's
assessable payment is $2,000 for each full-time employee over
the 30-employee threshold, for a total of $140,000 ($2,000
multiplied by 70 (100 - 30)).
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\131\ For calendar years after 2014, the $2,000 dollar amount, and
the $3,000 dollar amount referenced herein, are increased by the
percentage (if any) by which the average per capita premium for health
insurance coverage in the United States for the preceding calendar year
(as estimated by the Secretary of Health and Human Services (``HHS'')
no later than October 1 of the preceding calendar year) exceeds the
average per capita premium for 2013 (as determined by the Secretary of
HHS), rounded down to the nearest $10.
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Generally, an employee who is offered minimum essential
coverage under an employer-sponsored plan is not eligible for a
premium assistance credit or reduced cost-sharing unless the
coverage is unaffordable or fails to provide minimum
value.\132\ However, if an employer offers its full-time
employees and their dependents minimum essential coverage under
an employer-sponsored plan and at least one full-time employee
is certified as receiving a premium assistance credit or
reduced cost-sharing (because the coverage is unaffordable or
fails to provide minimum value), the employer may be subject to
an assessable payment of $3,000 (divided by 12 and applied on a
monthly basis) multiplied by the number of such full-time
employees. However, the assessable payment in this case is
capped at the amount that would apply if the employer failed to
offer its full-time employees and their dependents minimum
essential coverage. For example, in 2016, Employer A offers
minimum essential coverage and has 100 full-time employees, 20
of whom receive premium assistance credits for the entire year.
The employer's assessable payment before consideration of the
cap is $3,000 for each full-time employee receiving a credit,
for a total of $60,000 ($3,000 multiplied by 20). The cap on
the assessable payment is the amount that would have applied if
the employer failed to offer coverage, or $140,000 ($2,000
multiplied by 70 (100 - 30)). In this example, the cap
therefore does not affect the amount of the assessable payment,
which remains at $60,000.
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\132\ Under section 36B(c)(2)(C), coverage under an employer-
sponsored plan is unaffordable if the employee's share of the premium
for self-only coverage exceeds 9.5 percent of household income, and the
coverage fails to provide minimum value if the plan's share of total
allowed cost of provided benefits is less than 60 percent of such
costs.
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TRICARE and veterans health programs
The Military Health System provides active and retired
members of the armed forces and their families (including
certain survivors and former spouses) with medical coverage,
primarily through the TRICARE program.\133\ The TRICARE program
offers various health plans, including a managed care option
and fee-for-service options.
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\133\ 110 U.S.C. chapter 55. Under section 5000A(f)(1)(A)(iv), this
coverage satisfies the requirement under ACA that individuals have
minimum essential coverage.
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The Veterans Health Administration (``VHA''), within the
Department of Veterans Affairs, provides certain veterans and
family members (including certain survivors) with medical
coverage through its health care programs.\134\ Enrolled
veterans are provided a medical benefits package that covers a
range of medical care, including inpatient, outpatient, and
preventive services. Medical coverage for eligible family
members of veterans is provided through the Civilian Health and
Medical Program of the Department of Veterans Affairs
(``CHAMPVA'').\135\
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\134\ 138 U.S.C. chapters 17 and 18.
\135\ Under section 5000A(f)(1)(A)(v), minimum essential coverage
includes coverage under a VHA health care program, as determined by the
Secretary of Veterans Affairs, in coordination with the Secretary of
Health and Human Services and the Secretary. Under Treas. Reg. sec.
1.5000A-2(b)(1)(v), the medical benefits package that enrolled veterans
receive and CHAMPVA coverage are minimum essential coverage, as well as
the comprehensive health care program for certain children of Vietnam
Veterans and Veterans of covered service in Korea who are suffering
from spina bifida.
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Explanation of Provision
Under the provision, solely for purposes of determining
whether an employer is an applicable large employer (and
possibly subject to an assessable payment), an individual is
not taken into account as an employee for the month if the
individual has medical coverage for the month under (1) a
program for members of the armed forces, including coverage
under the TRICARE program, or (2) under a VHA health care
program, as determined by the Secretary of Veterans Affairs, in
coordination with the Secretary of Health and Human Services
and the Secretary. The provision affects only the determination
of applicable large employer status, not whether an employer
that is an applicable large employer, after application of the
provision, is subject to an assessable payment or the amount of
any assessable payment.
Effective Date
The provision applies to months beginning after December
31, 2013.
B. Eligibility for Health Savings Account Not Affected by Receipt of
Medical Care for a Service-Connected Disability (sec. 4007(b) of the
Act and sec. 223 of the Code)
Present Law
An individual with a high deductible health plan and no
other health plan (other than a plan that provides certain
permitted insurance or permitted coverage) is generally
eligible to make deductible contributions to a health savings
account (``HSA''), subject to certain limits (an ``eligible
individual''). HSA contributions made on behalf of an eligible
individual by an employer are excludible from income and wages
for employment tax purposes. Eligibility for HSA contributions
is generally determined monthly, based on the individual's
status and health plan coverage as of the first day of the
month. Contributions to an HSA cannot be made once an
individual is enrolled in Medicare.
An individual with other coverage in addition to a high
deductible health plan is still eligible to make HSA
contributions if such other coverage is permitted insurance or
permitted coverage. Permitted insurance is: (1) insurance if
substantially all of the coverage provided under such insurance
relates to (a) liabilities incurred under worker's compensation
law, (b) tort liabilities, (c) liabilities relating to
ownership or use of property (e.g., auto insurance), or (d)
such other similar liabilities as the Secretary of the Treasury
may prescribe by regulations; (2) insurance for a specified
disease or illness; and (3) insurance that provides a fixed
payment per day (or other period) for hospitalization.
Permitted coverage is coverage (whether provided through
insurance or otherwise) for accidents, disability, dental care,
vision care, or long-term care. Coverage under certain health
flexible spending arrangements or health reimbursement
arrangements is also permitted.
Under IRS guidance, an otherwise eligible individual who is
eligible for medical benefits under a program of the Department
of Veterans Affairs (``VA''), but who has not actually received
such benefits during the preceding three months, is an eligible
individual.\136\ However, an individual is not eligible to make
HSA contributions for any month if the individual has received
VA medical benefits at any time during the previous three
months unless the benefits are for permissible coverage or
preventive care.\137\
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\136\ Notice 2004-50, 2004-2 C.B. 196, Q&A-5.
\137\ Notice 2004-50, Q&A-5; Notice 2008-59, 2008-2 C.B. 123, Q&A-
9.
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Explanation of Provision
Under the provision, an individual does not fail to be
treated as an eligible individual for any period merely because
the individual receives hospital care or medical services under
any law administered by the VA for a service-connected
disability.\138\
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\138\ For this purpose, the definition of service-connected
disability under 38 U.S.C. sec. 101(16) applies.
---------------------------------------------------------------------------
The provision does not otherwise change the application of
the present-law rule for individuals eligible for VA medical
benefits. Thus, an otherwise eligible individual who is
eligible for VA medical benefits, but who has not actually
received such benefits during the preceding three months,
continues to be an eligible individual. However, an individual
is not eligible to make HSA contributions for any month if the
individual has received VA medical benefits at any time during
the previous three months unless the benefits are for
permissible coverage or preventive care or for a service-
connected disability.
Effective Date
The provision applies to months beginning after December
31, 2015.
PART EIGHT: AIRPORT AND AIRWAY EXTENSION ACT OF 2015 (PUBLIC LAW 114-
55) \139\
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\139\ H.R. 3614. The House passed H.R. 3614 on September 28, 2015.
The Senate passed the bill without amendment on September 29, 2015. The
President signed the bill on September 30, 2015.
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A. Extension of Spending Authority and Taxes Funding Airport and Airway
Trust Fund (secs. 201 and 202 of the Act and secs. 4083, 4801, 4261,
4271, and 9502 of the Code)
Present Law
Taxes dedicated to the Airport and Airway Trust Fund
Excise taxes are imposed on amounts paid for commercial air
passenger and freight transportation and on fuels used in
commercial and noncommercial (i.e., transportation that is not
``for hire'') aviation to fund the Airport and Airway Trust
Fund.\140\ The present aviation excise taxes and rates are as
follows:
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\140\ Air transportation through U.S. airspace that neither lands
in nor takes off from a point in the United States (or the 225-mile
zone, described below) is exempt from the aviation excise taxes, but
the transportation provider is subject to certain ``overflight fees''
imposed by the Federal Aviation Administration pursuant to
Congressional authorization.
\141\ The domestic flight segment portion of the tax is adjusted
annually (effective each January 1) for inflation (adjustments based on
the changes in the consumer price index (the ``CPI'')). Special rules
apply to air transportation between the continental United States and
Alaska or Hawaii and between Alaska and Hawaii. The portion of such
transportation that is not within the United States (e.g., the portion
over the Pacific Ocean) is not subject to the 7.5-percent domestic air
passenger excise tax. In addition to this pro-rated ad valorem tax, an
$8.90 (2015) international tax rate for the excluded portion of the
travel is imposed. The domestic flight segment component of tax applies
under the same rules as for flights within the continental United
States. Further, transportation within Alaska or Hawaii is taxed in the
same manner as domestic transportation within the continental United
States.
\142\ The international arrival and departure tax rate is adjusted
annually for inflation (measured by changes in the CPI).
------------------------------------------------------------------------
Tax (and Code section) Tax Rates
------------------------------------------------------------------------
Domestic air passengers (sec. 4261)....... 7.5 percent of fare, plus
$4.00 (2015) per domestic
flight segment generally
\141\
International air passengers (sec. 4261).. $17.70 (2015) per arrival or
departure \142\
Amounts paid for right to award free or 7.5 percent of amount paid
reduced rate passenger air transportation
(sec. 4261).
Air cargo (freight) transportation (sec. 6.25 percent of amount
4271). charged for domestic
transportation; no tax on
international cargo
transportation
------------------------------------------------------------------------
------------------------------------------------------------------------
Tax (and Code section) Tax Rates
------------------------------------------------------------------------
Aviation fuels (sec. 4081): \143\
Commercial aviation................... 4.3 cents per gallon
Non-commercial (general) aviation: ............................
Aviation gasoline................. 19.3 cents per gallon
Jet fuel.......................... 21.8 cents per gallon
Fractional aircraft fuel surtax (sec. 14.1 cents per gallon
4043).
------------------------------------------------------------------------
The Airport and Airway Trust Fund excise taxes (except for
4.3 cents per gallon of the taxes on aviation fuels and the
14.1 cents per gallon fractional aircraft fuel surtax) are
scheduled to expire after September 30, 2015. The 4.3-cents-
per-gallon fuels tax rate is permanent.
---------------------------------------------------------------------------
\143\ Like most other taxable motor fuels, aviation fuels are
subject to an additional 0.1-cent-per-gallon excise tax to fund the
LUST Trust Fund.
---------------------------------------------------------------------------
With respect to fractional aircraft, the exemption from the
excise tax on commercial transportation for fractional aircraft
is scheduled to expire after September 30, 2015.\144\ The
fractional aircraft fuel surtax expires after September 30,
2021.
---------------------------------------------------------------------------
\144\ Sec. 4261(i).
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Airport and Airway Trust Fund expenditure provisions
The Airport and Airway Trust Fund was established in 1970
to finance a major portion of national aviation programs
(previously funded entirely with General Fund revenues).
Operation of the Trust Fund is governed by parallel provisions
of the Code and authorizing statutes.\145\ The Code provisions
govern deposit of revenues into the Trust Fund and approve
expenditure purposes in authorizing statutes as in effect on
the date of enactment of the latest authorizing Act. The
authorizing Acts provide for specific Trust Fund expenditure
programs.
---------------------------------------------------------------------------
\145\ Sec. 9502 and 49 U.S.C. sec. 48101, et. seq.
---------------------------------------------------------------------------
No expenditures are permitted to be made from the Airport
and Airway Trust Fund after September 30, 2015. The purposes
for which Airport and Airway Trust Fund monies are permitted to
be expended are fixed as of the date of enactment of the FAA
Modernization and Reform Act of 2012; therefore, the Code must
be amended in order to authorize new Airport and Airway Trust
Fund expenditure purposes.\146\ The Code contains a specific
enforcement provision to prevent expenditure of Trust Fund
monies for purposes not authorized under Code section
9502.\147\ This provision provides that, should such unapproved
expenditures occur, no further aviation excise tax receipts
will be transferred to the Trust Fund. Rather, the aviation
taxes will continue to be imposed, but the receipts will be
retained in the General Fund.
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\146\ Sec. 9502(d).
\147\ Sec. 9502(e)(1).
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Explanation of Provision
The Act extends through March 31, 2016, the taxes,
exemptions, and expenditure authority that were scheduled to
expire on September 30, 2015.
Effective Date
The provision is effective on the date of enactment
(September 30, 2015).
PART NINE: SURFACE TRANSPORTATION EXTENSION ACT OF 2015 (PUBLIC LAW
114-73) \148\
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\148\ H.R. 3819. The House passed H.R. 3819 on October 27, 2015.
The bill passed the Senate without amendment on October 28, 2015. The
President signed the bill on October 29, 2015.
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A. Extension of Highway Trust Fund Expenditure Authority (sec. 2001 of
the Act and secs. 9503, 9504, and 9508 of the Code)
Present Law
Under present law, the Internal Revenue Code (sec. 9503)
authorizes expenditures (subject to appropriations) to be made
from the Highway Trust Fund (and Sport Fish Restoration and
Boating Trust Fund and Leaking Underground Storage Tank Trust
Fund) through October 29, 2015, for purposes provided in
specified authorizing legislation as in effect on the date of
enactment.
Explanation of Provision
This provision extends the authority to make expenditures
(subject to appropriations) from the Highway Trust Fund (and
Sport Fish Restoration and Boating Trust Fund and Leaking
Underground Storage Tank Trust Fund) through November 20, 2015.
Effective Date
The provision is effective on date of enactment (October
29, 2015).
PART TEN: BIPARTISAN BUDGET ACT OF 2015 (PUBLIC LAW 114-74) \149\
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\149\ H.R. 1314. The House Ways and Means Committee reported H.R.
1314 on April 13, 2015 (H.R. Rep. No. 114-67). The House passed the
bill on April 15, 2015. The Senate passed the bill with an amendment on
May 22, 2015. The House agreed to an amendment to the Senate amendment
on October 28, 2015. The Senate agreed to the House amendment on
October 30, 2015. The President signed the bill on November 2, 2015.
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TITLE V--PENSIONS
A. Mortality Tables and Extension of Current Funding Stabilization
Percentages to 2018, 2019, and 2020 (secs. 503-504 of the Act, sec. 430
of the Code, and secs. 101(f) and 303 of ERISA)\150\
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\150\ Sections 501-502 of the Act change the premiums required to
be paid to the Pension Benefit Guaranty Corporation with respect to
single-employer defined benefit plans under sections 4006-4007 of the
Employee Retirement Income Security Act of 1974 (``ERISA'').
---------------------------------------------------------------------------
Present Law
Minimum funding rules
A defined benefit plan maintained by a single employer is
subject to minimum funding rules that generally require the
sponsoring employer to make a certain level of contribution for
each plan year to fund plan benefits.\151\ The minimum funding
rules for single-employer defined benefit plans were
substantially revised by the Pension Protection Act of 2006
(``PPA'').\152\
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\151\ Secs. 412 and 430; ERISA secs. 302-303. For purposes of
whether a plan is maintained by a single employer, certain related
entities, such as the members of a controlled group, are treated as a
single employer. Different funding rules apply to multiemployer and
certain multiple-employer defined benefit plans, which are types of
plans maintained by two or more unrelated employers. A number of
exceptions to the minimum funding rules apply. For example,
governmental plans (within the meaning of section 414(d)) and church
plans (within the meaning of section 414(e)) are generally not subject
to the minimum funding rules. Under section 4971, an excise tax
generally applies if the minimum funding requirements are not
satisfied.
\152\ Pub. L. No. 109-280. The PPA minimum funding rules for
single-employer plans are generally effective for plan years beginning
after December 31, 2007. Subsequent changes were made by the Worker,
Retiree, and Employer Recovery Act of 2008 (``WRERA''), Pub. L. No.
110-458; the Preservation of Access to Care for Medicare Beneficiaries
and Pension Relief Act of 2010 (``PRA 2010''), Pub. L. No. 111-192; and
the Moving Ahead for Progress in the 21st Century Act, Pub. L. No. 112-
141, and the Highway and Transportation Funding Act of 2014, Pub. L.
No. 113-159, discussed further herein.
---------------------------------------------------------------------------
Minimum required contributions
In general
The minimum required contribution for a plan year for a
single-employer defined benefit plan generally depends on a
comparison of the value of the plan's assets, reduced by any
prefunding balance or funding standard carryover balance (``net
value of plan assets''),\153\ with the plan's funding target
and target normal cost. The plan's funding target for a plan
year is the present value of all benefits accrued or earned as
of the beginning of the plan year. A plan's target normal cost
for a plan year is generally the present value of benefits
expected to accrue or to be earned during the plan year.
---------------------------------------------------------------------------
\153\ The value of plan assets is generally reduced by any
prefunding balance or funding standard carryover balance in determining
minimum required contributions. A prefunding balance results from plan
contributions that exceed the minimum required contributions. A funding
standard carryover balance results from a positive balance in the
funding standard account that applied under the funding requirements in
effect before PPA. Subject to certain conditions, a prefunding balance
or funding standard carryover balance may be credited against the
minimum required contribution for a year, reducing the amount that must
be contributed.
---------------------------------------------------------------------------
If the net value of plan assets is less than the plan's
funding target, so that the plan has a funding shortfall
(discussed further below), the minimum required contribution is
the sum of the plan's target normal cost and the shortfall
amortization charge for the plan year (determined as described
below).\154\ If the net value of plan assets is equal to or
exceeds the plan's funding target, the minimum required
contribution is the plan's target normal cost, reduced by the
amount, if any, by which the net value of plan assets exceeds
the plan's funding target.
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\154\ If the plan has obtained a waiver of the minimum required
contribution (a funding waiver) within the past five years, the minimum
required contribution also includes the related waiver amortization
charge, that is, the annual installment needed to amortize the waived
amount in level installments over the five years following the year of
the waiver.
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Shortfall amortization charge
The shortfall amortization charge for a plan year is the
sum of the annual shortfall amortization installments
attributable to the shortfall bases for that plan year and the
six previous plan years. Generally, if a plan has a funding
shortfall for the plan year, a shortfall amortization base must
be established for the plan year.\155\ A plan's funding
shortfall is the amount by which the plan's funding target
exceeds the net value of plan assets. The shortfall
amortization base for a plan year is: (1) the plan's funding
shortfall, minus (2) the present value, determined using the
segment interest rates (discussed below), of the aggregate
total of the shortfall amortization installments that have been
determined for the plan year and any succeeding plan year with
respect to any shortfall amortization bases for the six
previous plan years. The shortfall amortization base is
amortized in level annual installments (``shortfall
amortization installments'') over a seven-year period beginning
with the current plan year and using the segment interest rates
(discussed below).\156\
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\155\ If the value of plan assets, reduced only by any prefunding
balance if the employer elects to apply the prefunding balance against
the required contribution for the plan year, is at least equal to the
plan's funding target, no shortfall amortization base is established
for the year.
\156\ Under PRA 2010, employers were permitted to elect to use one
of two alternative extended amortization schedules for up to two
``eligible'' plan years during the period 2008-2011. The use of an
extended amortization schedule has the effect of reducing the amount of
the shortfall amortization installments attributable to the shortfall
amortization base for the eligible plan year. However, the shortfall
amortization installments attributable to an eligible plan year may be
increased by an additional amount, an ``installment acceleration
amount,'' in the case of employee compensation exceeding $1 million,
extraordinary dividends, or stock redemptions within a certain period
of the eligible plan year.
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The shortfall amortization base for a plan year may be
positive or negative, depending on whether the present value of
remaining installments with respect to amortization bases for
previous years is more or less than the plan's funding
shortfall. If the shortfall amortization base is positive (that
is, the funding shortfall exceeds the present value of the
remaining installments), the related shortfall amortization
installments are positive. If the shortfall amortization base
is negative, the related shortfall amortization installments
are negative. The positive and negative shortfall amortization
installments for a particular plan year are netted when adding
them up in determining the shortfall amortization charge for
the plan year, but the resulting shortfall amortization charge
cannot be less than zero (that is, negative amortization
installments may not offset normal cost).
If the net value of plan assets for a plan year is at least
equal to the plan's funding target for the year, so the plan
has no funding shortfall, any shortfall amortization bases and
related shortfall amortization installments are
eliminated.\157\ As indicated above, if the net value of plan
assets exceeds the plan's funding target, the excess is applied
against target normal cost in determining the minimum required
contribution.
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\157\ Any amortization base relating to a funding waiver for a
previous year is also eliminated.
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Mortality tables
In general
In determining the present value of benefits for purposes
of a plan's target normal cost and funding target, specific
mortality tables prescribed by the IRS generally must be used.
\158\ These tables are to be based on the actual experience of
pension plans and projected trends in such experience. In
prescribing tables, the IRS is required to take into account
results of available independent studies of mortality of
individuals covered by pension plans. In addition, the IRS is
required (at least every 10 years) to revise any table in
effect to reflect the actual experience of pension plans and
projected trends in such experience. The currently applicable
mortality tables are specified in regulations, as updated in
subsequent IRS guidance.\159\
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\158\ Sec. 430(h)(3) and ERISA sec. 303(h)(3). Separate mortality
tables are required to be used with respect to disabled participants.
\159\ Treas. Reg. sec. 1.430(h)(3)-2, as updated by Notice 2008-85,
2008-42 I.R.B. 905, for valuation dates occurring in 2009-2013, Notice
2013-49, 2013-32 I.R.B. 127, for valuation dates occurring in calendar
years 2014 and 2015, and Notice 2015-53, 2015-33 I.R.B. 190, for
valuation dates occurring in calendar year 2016. These tables are based
on the tables contained in a report issued by the Society of Actuaries
in July 2000, the RP-2000 Mortality Tables Report, after a study of
mortality experience for retirement plan participants. Notices 2013-49
and 2015-53 discuss the Society of Actuaries' recent studies and
reports on mortality experience for retirement plan participants and
the expectation that the Treasury Department and IRS will issue
proposed regulations providing updated mortality tables.
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Substitute mortality table
In some cases, a separate mortality table (a ``substitute''
mortality table) may be used upon request of the plan sponsor
and approval by the IRS.\160\ Two requirements must be met in
order for a substitute mortality table to be used: (1) the
table must reflect the actual experience of the pension plans
maintained by the plan sponsor and projected trends in general
mortality experience, and (2) there must be a sufficient number
of plan participants, and the pension plans must have been
maintained for a sufficient period of time, to have credible
information necessary for purposes of requirement (1). In
addition, a substitute mortality table generally may not be
used for any plan unless (1) a separate mortality table is
established and used for each other plan maintained by the plan
sponsor and, if the plan sponsor is a member of a controlled
group, each member of the controlled group, and (2) the
requirements for using a substitute mortality table are met
with respect to the mortality table established for each plan,
taking into account only the participants of that plan, the
time that plan has been in existence, and the actual experience
of that plan.
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\160\ Sec. 430(h)(3)(C) and ERISA sec. 303(h)(3)(C).
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In general, a substitute mortality table may be used during
the period of consecutive year plan years (not to exceed 10)
specified in the plan sponsor's request. However, a substitute
mortality table ceases to be in effect as of the earlier of (1)
the date on which there is a significant change in the
participants in the plan by reason of a plan spinoff or merger
or otherwise, or (2) the date on which the plan actuary
determines that the table does not meet the requirements for
being used, as described above.
Treasury regulations and IRS guidance provide details as to
the requirements for a substitute mortality table and the
procedure for requesting approval to use a substitute mortality
table.\161\
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\161\ Treas. Reg. sec. 1.430(h)(3)-2; Rev. Proc. 2008-62, 2008-2
C.B. 935, superseding Rev. Proc. 2007-37, 2007-1 C.B. 1433.
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Interest rate used to determine target normal cost and funding target
The minimum funding rules for single-employer plans also
specify the interest rates that must be used in determining the
present value of benefits for purposes of a plan's target
normal cost and funding target. Present value is generally
determined using three interest rates (``segment'' rates), each
of which applies to benefit payments expected to be made from
the plan during a certain period.\162\
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\162\ Sec. 430(h)(2) and ERISA sec. 303(h)(2).
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The first segment rate applies to benefits reasonably
determined to be payable during the five-year period beginning
on the plan's annual valuation date;\163\ the second segment
rate applies to benefits reasonably determined to be payable
during the 15-year period following the initial five-year
period; and the third segment rate applies to benefits
reasonably determined to be payable after the end of that 15-
year period. Under the funding rules as enacted in PPA (``PPA''
rules), each segment rate is a single interest rate determined
monthly by the Secretary of the Treasury, on the basis of a
corporate bond yield curve, taking into account only the
portion of the yield curve based on corporate bonds maturing
during the particular segment rate period. The corporate bond
yield curve used for this purpose reflects the average, for the
24-month period ending with the preceding month, of yields on
investment grade corporate bonds with varying maturities and
that are in the top three quality levels available.\164\ The
Internal Revenue Service (``IRS'') publishes the segment rates
each month.
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\163\ Subject to an exception for small plans with no more than 100
participants, the annual valuation date for a plan must be the first
day of the plan year.
\164\ Solely for purposes of determining minimum required
contributions, in lieu of the segment rates, an employer may elect to
use interest rates on a yield curve based on the yields on investment
grade corporate bonds for the month preceding the month in which the
plan year begins (that is, without regard to the 24-month averaging
described above) (``monthly yield curve''). If an election to use a
monthly yield curve is made, it cannot be revoked without IRS approval.
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Under the Moving Ahead for Progress in the 21st Century Act
(``MAP-21'') and the Highway and Transportation Funding Act of
2014 (``2014 Highway Act''), for plan years beginning after
December 31, 2011, a segment rate determined under the PPA
rules is adjusted if it falls outside a specified percentage
range of the average segment rates for a preceding period. In
particular, if a segment rate determined under the PPA rules is
less than the applicable minimum percentage in the specified
range, the segment rate is adjusted upward to match the minimum
percentage. If a segment rate determined under the PPA rules is
more than the applicable maximum percentage in the specified
range, the segment rate is adjusted downward to match the
maximum percentage. For this purpose, an average segment rate
is the average of the segment rates determined under the PPA
rules for the 25-year period ending September 30 of the
calendar year preceding the calendar year in which the plan
year begins. The Secretary is to determine average segment
rates on an annual basis and may prescribe equivalent rates for
any years in the 25-year period for which segment rates
determined under the PPA rules are not available. The Secretary
is directed to publish the average segment rates each month.
The specified percentage range (that is, the range from the
applicable minimum percentage to the applicable maximum
percentage) for a plan year is determined by reference to the
calendar year in which the plan year begins as follows:
90 percent to 110 percent for 2012 through
2017,
85 percent to 115 percent for 2018,
80 percent to 120 percent for 2019,
75 percent to 125 percent for 2020, and
70 percent to 130 percent for 2021 or later.
Annual funding notice
The plan administrator of a single-employer defined benefit
plan must provide an annual funding notice to each participant
and beneficiary, each labor organization representing
participants or beneficiaries, and the Pension Benefit Guaranty
Corporation (``PBGC'').\165\ In addition to the information
required to be provided in all funding notices, in the case of
a single-employer defined benefit plan, the notice must include
(1) the plan's funding target attainment percentage for the
plan year to which the notice relates and the two preceding
plan years, (2) the value of the plan's assets and benefit
liabilities (that is, the present value of benefits owed under
the plan) for the plan year and the two preceding years,
determined in the same manner as under the funding rules, and
(3) the value of the plan's assets and benefit liabilities as
of the last day of the plan year to which the notice relates,
determined using the fair market value of plan assets (rather
than value determined under the funding rules) and, in
computing benefit liabilities, the interest rates used in
computing variable-rate PBGC premiums.\166\
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\165\ ERISA sec. 101(f). Annual funding notice requirements, with
some differences, apply also to multiemployer and multiple-employer
plans.
\166\ In applying the funding rules, the value of plan assets may
be determined on the basis of average fair market values over a period
of up to 24 months. PBGC variable-rate premiums are based on a plan's
unfunded vested benefit liabilities, computed using the first, second
and third segment rates as determined under the PPA rules (without the
adjustments applicable for funding purposes), but based on a monthly
corporate bond yield curve, rather than a yield curve reflecting
average yields for a 24-month period.
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Additional information must be included in a single-
employer plan's annual funding notice in the case of an
applicable plan year. For this purpose, an applicable plan year
is any plan year beginning after December 31, 2011, and before
January 1, 2020, for which (1) the plan's funding target,
determined using segment rates as adjusted to reflect average
segment rates (``adjusted'' segment rates), is less than 95
percent of the funding target determined without regard to
adjusted segment rates, (2) the plan has a funding shortfall,
determined without regard to adjusted segment rates, greater
than $500,000, and (3) the plan had 50 or more participants on
any day during the preceding plan year. Specifically, the
notice must include (1) a statement that MAP-21 and the 2014
Highway Act modified the method for determining the interest
rates used to determine the actuarial value of benefits earned
under the plan, providing for a 25-year average of interest
rates to be taken into account in addition to a two-year
average, (2) a statement that, as a result of MAP-21 and the
2014 Highway Act, the plan sponsor may contribute less money to
the plan when interest rates are at historical lows, and (3) a
table showing, for the applicable plan year and each of the two
preceding plan years, the plan's funding target attainment
percentage, funding shortfall, and the employer's minimum
required contribution, each determined both using adjusted
segment rates and without regard to adjusted segment rates.
Explanation of Provision
Mortality tables
The provision relates to the requirement that there must be
a sufficient number of plan participants, and the pension plans
must have been maintained for a sufficient period of time, to
have credible information, in order for a substitute mortality
table to be used. Under the provision, the determination of
whether plans have credible information is to be made in
accordance with established actuarial credibility theory. The
provision specifies that this standard permits the use of
tables that reflect adjustments to the generally applicable
mortality tables prescribed by the IRS if the adjustments are
based on the actual experience of the pension plans maintained
by the plan sponsor and projected trends in general mortality
experience.\167\
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\167\ The provision specifies also that this standard is materially
different from rules relating to substitute mortality tables in effect
on the date of enactment of the provision, including Rev. Proc. 2007-
37.
---------------------------------------------------------------------------
Applicable minimum and maximum percentages and annual funding notice
The provision revises the specified percentage ranges (that
is, the range from the applicable minimum percentage to the
applicable maximum percentage of average segment rates) for
determining whether a segment rate must be adjusted upward or
downward. Under the provision, the specified percentage range
for a plan year is determined by reference to the calendar year
in which the plan year begins as follows:
90 percent to 110 percent for 2012 through
2020,
85 percent to 115 percent for 2021,
80 percent to 120 percent for 2022,
75 percent to 125 percent for 2023, and
70 percent to 130 percent for 2024 or later.
In addition, for purposes of the additional information
that must be provided in a funding notice for an applicable
plan year, an applicable plan year includes any plan year that
begins after December 31, 2011, and before January 1, 2023, and
that otherwise meets the definition of applicable plan year.
Effective Date
The provision applies to plan years beginning after
December 31, 2015.
TITLE XI--REVENUE PROVISIONS RELATED TO TAX COMPLIANCE
A. Partnership Audits and Adjustments (sec. 1101 of the Act and secs.
6221-6241 of the Code)
Present Law
Reporting requirements of partnerships generally
For Federal income tax purposes, a partnership is not a
taxable entity. Instead, a partnership is a conduit and the
items of partnership income, deduction, gain, loss, and credit
are taken into account on the partners' income tax returns. A
partnership is required to file an annual information return
setting forth items of partnership information necessary to
carry out the income tax (Form 1065).\168\ A partnership is
also required to furnish to each partner a statement of such
partnership information as is relevant to the partner's income
tax (Schedule K-1).\169\ For taxable years beginning after
December 31, 2015, partnership returns and partner statements
are generally due by the 15th day of the third month after the
end of the partnership taxable year.\170\
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\168\ Sec. 6031(a).
\169\ Sec. 6031(b).
\170\ See sec. 6072(b) as amended by Pub. L. No. 114-41, sec. 2006
(114th Congress). For taxable years beginning after December 31, 2015,
a partnership can request a six-month extension of time to file. See
also Department of the Treasury, Internal Revenue Service, 2011
Instructions for Form 1065, U.S. Return of Partnership Income, p. 4.
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Rules relating to audit and adjustment procedures for partnerships
There are three sets of rules for tax audits and
adjustments for partners and partnerships. First, for
partnerships with more than 100 partners and that so elect, the
electing large partnership rules enacted in 1997 apply.\171\
Relatively few partnerships have made this election. Second,
for partnerships with more than 10 partners or with
passthroughs as partners (and that are not electing large
partnerships), the TEFRA rules enacted in 1982 apply.\172\
Under these two sets of rules, partnership items generally are
determined at the partnership level under unified procedures.
Third, for partnerships with 10 or fewer partners that have not
elected the TEFRA audit rules, audit and adjustment rules
applicable generally to taxpayers subject to the Federal income
tax apply.\173\
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\171\ Secs. 6240-6255.
\172\ Secs. 6221-6234. TEFRA refers to the Tax Equity and Fiscal
Responsibility Act of 1982 (Pub. L. No. 97-248), in which these rules
were enacted.
\173\ Secs. 6231 and 6201 et seq.
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For a partnership with few partners that does not elect to
be governed by TEFRA rules, the tax treatment of an adjustment
to a partnership's items of income, gain, loss, deduction, or
credit is determined for each partner in separate proceedings,
both administrative and judicial. These are known as deficiency
proceedings. Adjustments to items of income, gains, losses,
deductions, or credits of the partnership generally are made in
separate actions for each partner. Particularly in the case of
a partnership with partners in different locations, this may
result in separate judicial determinations in different courts
that are potentially subject to different appellate
jurisdiction. Prior to the 1982 enactment of TEFRA, these had
been the rules for all adjustments with respect to partners,
regardless of the number of partners in the partnership.
TEFRA rules
Unified rules
TEFRA established unified rules. These rules require the
tax treatment of all ``partnership items'' to be determined at
the partnership, rather than the partner, level. Partnership
items are those items that are more appropriately determined at
the partnership level than at the partner level, as provided by
regulations.\174\ The IRS may challenge the reporting position
of a partnership by conducting a single administrative
proceeding to resolve issues with respect to all partners.
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\174\ Sec. 6231(a)(3). Any item that is affected by a partnership
item (for example, on the partner's return) is an ``affected item.''
Affected items of a partner are subject to determination at the partner
level. Sec. 6231(a)(5).
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The rationale stated in 1982 for adding new rules for
partnerships was that ``[d]etermination of the tax liability of
partners resulted in administrative problems under prior law
due to the fragmented nature of such determinations. These
problems became excessively burdensome as partnership
syndications have developed and grown in recent years. Large
partnerships with partners in many audit jurisdictions result
in the statute of limitations expiring with respect to some
partners while other partners are required to pay additional
taxes. Where there are tiered partnerships, identifying the
taxpayer is difficult.'' \175\
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\175\ See Joint Committee on Taxation, General Explanation of the
Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of
1982 (JCS-38-82), December 31, 1982, p. 268. Additional reasons for the
1982 change mentioned include the problems of duplication of
administrative and judicial effort, inconsistent results, difficulty of
reaching settlement, and inadequacy of prior-law filing and
recordkeeping requirements for foreign partnerships with U.S. partners.
---------------------------------------------------------------------------
The TEFRA rules do not, however, change the process for
collecting underpayments with respect to deficiencies at the
partner (not the partnership) level, though a settlement
agreement with respect to partnership items binds all parties
to the settlement.\176\
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\176\ Sec. 6224(c). The IRS has set forth procedures for entering
into such partnership audit settlement agreements, which are summarized
in Part F of Chief Counsel Notice 2009-27, ``Frequently Asked Questions
Regarding The Unified Partnership Audit And Litigation Procedures Set
Forth In Sections 6221-6234,'' IRS CC Notice 2009-027, August 21, 2009.
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Tax Matters Partner
The TEFRA rules establish the Tax Matters Partner as the
primary representative of a partnership in dealings with the
IRS. The Tax Matters Partner is a general partner designated by
the partnership or, in the absence of designation, the general
partner with the largest profits interest at the close of the
taxable year. If no Tax Matters Partner is designated, and it
is impractical to apply the largest profits interest rule, the
IRS may select any partner as the Tax Matters Partner.
Notice requirements: notice required to partners separately
The IRS generally is required to give notice of the
beginning of partnership-level administrative proceedings and
any resulting administrative adjustment to all partners whose
names and addresses are furnished to the IRS. For partnerships
with more than 100 partners, however, the IRS generally is not
required to give notice to any partner whose profits interest
is less than one percent.
Partners must report items consistently with the
partnership
Partners are required to report partnership items
consistently with the partnership's reporting, unless the
partner notifies the IRS of inconsistent treatment. If a
partner fails to notify the IRS of inconsistent treatment, the
IRS can assess that partner under its math error authority.
That is, the IRS may make a computational adjustment and
immediately assess any additional tax that results.\177\
Additional tax attributable to an adjustment of a partnership
item is assessed against each of the taxpayers who were
partners in the year in which the understatement of tax
liability arose.
---------------------------------------------------------------------------
\177\ Secs. 6222 and 6230(b).
---------------------------------------------------------------------------
Partners' limited ability to challenge partnership
treatment
Partners have rights to participate in administrative
proceedings at the partnership level, and can request an
administrative adjustment or a refund for the partner's own
separate tax liability. To the extent that a settlement is
reached with respect to partnership items, all partners are
entitled to consistent treatment.\178\
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\178\ Sec. 6224.
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Statute of limitations
Absent an agreement to extend the statute of limitations,
the IRS generally cannot adjust a partnership item for a
partnership taxable year if more than three years have elapsed
since the later of the filing of the partnership return, or the
last day for the filing of the partnership return (without
extensions). The statute of limitations is extended in
specified circumstances such as in the case of a false return,
a substantial omission of income, or no return.
One-year period
If the administrative adjustment is timely made within the
limitations period described above, the tax resulting from that
adjustment, as well as the tax attributable to affected items,
including related penalties or additions to tax, must be timely
assessed. The period in which the tax must be assessed against
the partners does not expire before one year following the date
on which the final partnership administrative adjustment may no
longer be petitioned to the U.S. Tax Court or, if a petition
was filed, a decision of the court with respect to such
petition is final.\179\
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\179\ Sec. 6229(d) and (g).
---------------------------------------------------------------------------
Adjudication of disputes concerning partnership items
After the IRS makes an administrative adjustment, the Tax
Matters Partner (and, in limited circumstances, certain other
partners) may file a petition for readjustment of partnership
items in the Tax Court, the district court in which the
partnership's principal place of business is located, or the
Court of Federal Claims.
Electing large partnership audit rules
Definition of electing large partnership
In 1997, an additional audit system was enacted for
electing large partnerships.\180\ The 1997 legislation also
enacted specific simplified reporting rules for electing large
partnerships.\181\ The provisions define an electing large
partnership as any partnership that elects to be subject to the
specified reporting and audit rules, if the number of partners
in the partnership's preceding taxable year is 100 or
more.\182\
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\180\ Secs. 6240-6255, enacted by the Taxpayer Relief Act of 1997,
Pub. L. No. 105-34.
\181\ Secs. 771-777.
\182\ Sec. 775.
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The rationale stated in 1997 for adding new audit rules for
large partnerships was that ``[a]udit procedures for large
partnerships are inefficient and more complex than those for
other large entities. The IRS must assess any deficiency
arising from a partnership audit against a large number of
partners, many of whom cannot easily be located and some of
whom are no longer partners. In addition, audit procedures are
cumbersome and can be complicated further by the intervention
of partners acting individually.'' \183\
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\183\ See Joint Committee on Taxation, General Explanation of Tax
Legislation Enacted in 1997 (JCS-23-97), December 17, 1997, p. 363.
---------------------------------------------------------------------------
Unified rules
As under the TEFRA partnership rules, electing large
partnerships and their partners are subject to unified audit
rules. Thus, the tax treatment of partnership items is
determined at the partnership, rather than the partner, level.
Partnership representative
Each electing large partnership is required to designate a
partner or other person to act on its behalf. If an electing
large partnership fails to designate such a person, the IRS is
permitted to designate any one of the partners as the person
authorized to act on the partnership's behalf.
Notice requirements: separate partner notices not required
Unlike the TEFRA partnership audit rules, the IRS is not
required to give notice to individual partners of the
commencement of an administrative proceeding or of a final
adjustment. Instead, the IRS is authorized to send notice of a
partnership adjustment to the partnership itself by certified
or registered mail. The IRS may give proper notice by mailing
the notice to the last known address of the partnership, even
if the partnership had terminated its existence.
Partners must report items consistently with the
partnership
Under the electing large partnership audit rules, a partner
is not permitted to report any partnership items inconsistently
with the partnership return, even if the partner notifies the
IRS of the inconsistency. The IRS may adjust a partnership item
that was reported inconsistently by a partner and immediately
assess any additional tax without first auditing the
partnership.\184\
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\184\ Sec. 6241(b).
---------------------------------------------------------------------------
Adjustments flow through to persons that are partners in
the year in which the adjustment takes effect
Unlike the TEFRA partnership audit rules, however,
partnership adjustments generally flow through to the partners
for the year in which the adjustment takes effect.\185\ Thus,
the current-year partners' share of current-year partnership
items of income, gains, losses, deductions, or credits are
adjusted to reflect partnership adjustments that take effect in
that year. The adjustments generally do not affect prior-year
returns of any partners (except in the case of changes to any
partner's distributive shares).
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\185\ Sec. 6242.
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Partnership's payment of imputed underpayment is permitted
In lieu of passing through an adjustment to its partners,
the partnership may elect to pay an imputed underpayment. The
imputed underpayment generally is calculated by netting the
adjustments to the income, gain, loss, or deductions of the
partnership and multiplying that amount by the highest Federal
income tax rate (whether individual or corporate). Adjustments
to credits are taken into account as increases or decreases in
the amount of tax. A partner may not file a claim for credit or
refund of his allocable share of the payment. A partnership may
make this election only if it meets requirements set forth in
Treasury regulations designed to ensure payment (for example,
in the case of a foreign partnership).
Regardless of whether a partnership adjustment passes
through to the partners, an adjustment must be offset if it
requires another adjustment in a year that is after the
adjusted year and before the year the adjustment that was made
takes effect.
For example, assume that an electing large partnership
expenses a $1,000 item in year one. However, on audit in year
four, it is determined that the item should have been
capitalized and amortized ratably over 10 years rather than
deducted in full in year one. The $900 adjustment for the
improper deduction ($1,000 minus the year one amortization of
$100) is offset by $100 of adjustments for amortization
deductions in each of years two and three. The adjustment in
year four is $700 (that is, $1,000 minus $300, the sum of the
first three years' ratable amortization of $100 per year),
apart from any interest or penalty. The year four partners are
required to include an additional $700 in income for that year.
The partnership ratably amortizes the $700 in years four to 10.
Partnership, not partners separately, is liable for any
penalties and interest
The partnership, rather than the partners individually,
generally is liable for any interest and penalties that result
from a partnership adjustment. Interest is computed for the
period beginning on the return due date for the adjusted year
and ending on the earlier of the return due date for the
partnership taxable year in which the adjustment takes effect
or the date the partnership pays the imputed underpayment.
Thus, in the above example, the partnership is liable for four
years' worth of interest (on a declining principal amount).
Penalties (such as the accuracy and fraud penalties) are
determined on a year-by-year basis (without offsets) based on
an imputed underpayment. All accuracy penalty criteria and
waiver criteria (such as reasonable cause or substantial
authority) are determined as if the partnership were a taxable
individual. Accuracy and fraud penalties are assessed and
accrue interest in the same manner as if asserted against a
taxable individual.
Any payment (for Federal income taxes, interest, or
penalties) that an electing large partnership is required to
make is nondeductible.
If a partnership ceases to exist before a partnership
adjustment takes effect, the former partners are required to
take the adjustment into account, as provided by regulations.
Regulations are also authorized to prevent abuse and to enforce
efficiently the audit rules in circumstances that present
special enforcement considerations (such as partnership
bankruptcy).
Partners cannot request refunds separately
The IRS may challenge the reporting position of a
partnership by conducting a single administrative proceeding to
resolve the issue with respect to all partners. Unlike the
TEFRA partnership audit rules, however, partners have no right
individually to participate in settlement conferences or to
request a refund.
Timing of Schedules K-1 to partners
An electing large partnership is required to furnish copies
of information returns (Schedule K-1, Partner's Share of
Income, Deductions, Credits, etc.) to partners by March 15
following the close of the partnership's taxable year (often a
calendar year).\186\
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\186\ Sec. 6031(b).
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Statute of limitations
Absent an agreement to extend the statute of limitations,
the IRS generally cannot adjust a partnership item for a
partnership taxable year if more than three years have elapsed
since the later of the filing of the partnership return or the
last day for the filing of the partnership return. The statute
of limitations is extended in specified circumstances such as
in the case of a false return, a substantial omission of
income, or no return.
Adjudication of disputes concerning partnership items
As under the TEFRA rules, a partnership adjustment can be
challenged in the Tax Court, the district court in which the
partnership's principal place of business is located, or the
Court of Federal Claims. However, only the partnership, and not
partners individually, can petition for a readjustment of
partnership items.
If a petition for readjustment of partnership items is
filed by the partnership, the court with which the petition is
filed has jurisdiction to determine the tax treatment of all
partnership items of the partnership for the partnership
taxable year to which the notice of partnership adjustment
relates, and the proper allocation of such items among the
partners. Thus, the court's jurisdiction is not limited to the
items adjusted in the notice.
Explanation of Provision
Repeal of TEFRA and electing large partnership rules
Generally for returns filed for partnership taxable years
beginning after 2017, the provision repeals the tax reporting
provisions and voluntary centralized audit procedures for
electing large partnerships, as well as the TEFRA partnership
audit and adjustment rules. In place of the repealed
procedures, a centralized system for audit, adjustment,
assessment, and collection of tax applies to all partnerships,
except those eligible partnerships that have filed a valid
election out. Electing out of the centralized system leaves
applicable the present-law rules for deficiency proceedings.
The centralized system is located in subchapter C of chapter 63
of the Code.
In General
Determination at partnership level
Under the centralized system, the audit of a partnership
takes place at the partnership level. Any adjustment to items
of income, gain, loss, deduction, or credit of a partnership
for a partnership taxable year, and any partner's distributive
share thereof, generally are determined at the partnership
level.\187\ Any tax attributable to these items generally is
assessed and collected at the partnership level. The
applicability of any penalty, addition to tax, or additional
amount that relates to an adjustment of any item of income,
gain, loss, deduction, or credit of a partnership for a
partnership taxable year or to any partner's distributive share
thereof is determined at the partnership level. Unlike prior
law, distinctions between partnership items and affected items
are no longer made. An underpayment of tax determined as a
result of an examination of a taxable year is imputed to the
year during which the adjustment is finally determined, and
generally is assessed against and collected from the
partnership with respect to that year rather than the reviewed
year.
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\187\ Sec. 6221(a).
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Under the centralized system, a partnership may seek
modification of the imputed underpayment amount by providing
the Secretary with specified information about the tax status
of partners and about the nature and amount of items of income
or gain, by means of reviewed-year partners filing amended
returns with payment, or on the basis of other factors in
regulations or guidance. A partnership may elect an alternative
to partnership payment of the imputed underpayment in which
each reviewed-year partner is furnished a statement of the
partner's share of the adjustments (similar to Schedule K-1)
and each such reviewed-year partner increases its tax for the
year the statement is furnished. A partnership may file an
administrative adjustment request.
Rules are provided relating to statutes of limitation and
other applicable time periods, interest and penalties, judicial
review, and other aspects of the centralized system under the
provision.
Election out
The centralized system is applicable to any partnership
unless it meets eligibility requirements and has made a valid
election out for a taxable year.\188\
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\188\ Sec. 6221(b).
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100 or fewer statements
A partnership may elect out of the centralized system (and
it and its partners are governed by the present-law deficiency
proceedings) for a partnership taxable year if it meets
eligibility requirements. One of the eligibility requirements
is that for the taxable year, the partnership is required to
furnish 100 or fewer statements under section 6031(b)
(Schedules K-1) with respect to its partners.
A further eligibility requirement for a partnership to make
the election is that each of its partners is an individual, a
deceased partner's estate, a C corporation, a foreign entity
that would be required to be treated as a C corporation if it
were a domestic entity, or an S corporation (provided special
rules are met). A partnership with a foreign entity as a
partner can meet this eligibility requirement if, under the
rules of section 7701, the foreign entity would be taxable as a
C corporation if it were domestic; that is, the foreign entity
has elected to be, or is, treated as a per se corporation under
the check-the-box regulatory rules under section 7701.\189\ A C
corporation partner that is a regulated investment company
(``RIC'') or a real estate investment trust (``REIT'') does not
prevent the partnership from being able to elect out, provided
the applicable requirements are met.
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\189\ See Treas. Reg. sec. 301.7701-2 and -3.
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Example
For example, a partnership is formed to conduct a joint
venture between two corporations, X and Y. X's domestic C
corporation subsidiary, W, owns a 50-percent interest in the
partnership, and Y's domestic C corporation subsidiary, Z, owns
a 50-percent interest in the partnership. The partnership is
required to furnish two statements (Schedules K-1), one to W
and one to Z. The partnership is eligible to elect out of the
centralized system for the taxable year, provided that the
partnership meets the requirements (described below) as to the
time and manner of electing out, including (among other
requirements) disclosing to the Secretary the names and
employer identification numbers of W and Z.
Time and manner of election out
The election is to be made with a timely-filed return of
the partnership taxable year to which the election relates; the
election is valid only for that year. The election must include
the name and taxpayer identification number of each partner of
the partnership in the manner prescribed by the Secretary. The
partnership must notify each of its partners of the election in
the manner prescribed by the Secretary.
S corporation partners
For a partnership with a partner that is an S corporation
to elect out, the partnership is required to include with its
election (in the manner prescribed by the Secretary) a
disclosure of the name and taxpayer identification number of
each person with respect to whom the S corporation must furnish
a statement under section 6037(b) for the S corporation's
taxable year ending with or within the partnership's taxable
year for which the election is made. This requirement is met if
the partnership discloses the name and taxpayer identification
number of each S corporation shareholder with respect to which
a statement (Schedule K-1) is required to be furnished under
section 6037(b). These statements required to be furnished by
the S corporation are treated as statements required to be
furnished by the partnership for purposes of the 100-or-fewer-
statements criterion for the partnership's eligibility to elect
out.
Example
For example, if a partnership has 50 partners, 49 of which
are individuals and one of which is an S corporation with 30
shareholders all of whom are individuals, the partnership is
treated as being required to furnish 80 statements. This is the
sum of 49 statements for individual partners, one statement for
the S corporation partner, and 30 statements for individuals
with respect to whom the S corporation must furnish statements.
The partnership meets the 100-or-fewer-statements criterion for
the partnership's eligibility to elect out.
Foreign partners
The Secretary may provide for an alternative form of
identification of any foreign partners (for example, if the
foreign partners do not have U.S. taxpayer identification
numbers) for purposes of the requirement of disclosure of the
name and taxpayer identification number of each partner by the
partnership.
Other persons as partners
The Secretary may by regulation or other guidance identify
other types of partners to whom rules similar to the special
rules in the case of a partner that is an S corporation can
apply. This guidance shall take into account, for purposes of
applying the 100-or-fewer-statements criterion,\190\ each
direct and indirect interest in the partnership of any person
to which a statement (comparable to the partner statement under
section 6031(b)) is required to be furnished by any person.
Such guidance may also take into account any person with
respect to which a comparable statement is not required to be
furnished but which has an interest (direct or indirect) in the
partnership. Further, such guidance shall require the
partnership to disclose to the Secretary the name and taxpayer
identification number of each person with respect to which a
statement (comparable to the partner statement under section
6031(b)) is required to be furnished and of other persons with
an interest (direct or indirect) in the partnership.
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\190\ Sec. 6221(b)(1)(B).
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Examples
For example, assume that a partner of a partnership is a
disregarded entity such as a State-law limited liability
company (``LLC'') with only one member, a domestic corporation.
Such guidance may provide that the partnership can make the
election if the partnership includes (in the manner prescribed
by the Secretary) a disclosure of the name and taxpayer
identification number of each of the disregarded entity and the
corporation that is its sole member, and each of them is taken
into account as if each were a statement recipient in
determining whether the 100-or-fewer-statements criterion is
met.
As another example, such guidance may provide that a
partnership with a trust as a partner can make the election if
the partnership includes (in the manner prescribed by the
Secretary) a disclosure of the name and taxpayer identification
number of the trustee, each person who is or is deemed to be an
owner of the trust, and any other person that the Secretary
determines to be necessary and appropriate, and each one of
such persons is taken into account as if each were a statement
recipient in determining whether the 100-or-fewer-statements
criterion is met. Similar guidance may be provided with respect
to a partnership with a partner that is a grantor trust, a
former grantor trust that continues in existence for the two-
year period following the death of the deemed owner, or a trust
receiving property from a decedent's estate for a two-year
period.
As a further example, to the extent that such rules are
consistent with prompt and efficient collection of tax
attributable to the income of partnerships and partners, such
guidance may provide rules permitting election out in the case
of a partnership (the first partnership) with one or more
direct or indirect partners which are themselves partnerships.
Under any such guidance with respect to tiered partnerships,
the sum of all direct and indirect partners (including each
partnership and its partners) may not exceed 100 persons with
respect to which a section 6031(b) statement must be furnished,
and each partner must be identified. That is, eligibility of
the first partnership to make the election requires the first
partnership to include (in the manner prescribed by the
Secretary) a disclosure of the name and taxpayer identification
number of each direct partner of the first partnership and each
indirect partner (including each partnership and its partners)
in every tier, and requires that each is taken into account in
determining whether the 100-or-fewer-statements criterion is
met.
Requirement of consistency with partnership return
The centralized system imposes a consistency requirement. A
partner on its return must treat each item of income, gain,
loss, deduction or credit attributable to a partnership in a
manner that is consistent with the treatment of such income,
gain, loss, deduction, or credit on the partnership
return.\191\ An underpayment that results from a failure of a
partner to conform to the partnership reporting of an item is
treated as a math error on the partner's return and cannot be
abated under section 6213(b)(2).\192\ The underpayment may be
subject to additions to tax.
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\191\ Sec. 6222(a).
\192\ Sec. 6222(b).
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Notice of inconsistent position
If the partnership has filed a return but the partner's
treatment on the partner's return is (or may be) inconsistent
with the partnership's return, or if the partnership has not
filed a return, the math error treatment and nonabatement
treatment do not apply if the partner files a statement
identifying the inconsistent position.\193\ Further, a partner
is treated as having complied with the obligation to file a
statement identifying the inconsistent position in the
circumstance in which the partner demonstrates to the
satisfaction of the Secretary that the treatment of the item on
the partner's return is consistent with the treatment of the
item on the statement furnished to the partner by the
partnership, and the partner elects the application of this
rule.
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\193\ Sec. 6222(c).
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A final decision in an administrative or judicial
proceeding with respect to a partnership under the centralized
system is binding on the partnership and all partners of the
partnership.\194\ In contrast, a final determination in an
administrative or judicial proceeding with respect to a
partner's identified inconsistent position is not binding on
the partnership if the partnership is not a party to the
proceeding.\195\ No inference is intended that the partnership
is bound by any other proceeding to which it is not a party,
such as an administrative or judicial proceeding with respect
to a partner's unidentified inconsistent position.
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\194\ Sec. 6223(b).
\195\ Sec. 6222(d).
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Partners bound by actions of partnership; designation of partnership
representative
For purposes of the centralized system, the partnership
acts through its partnership representative. The partnership
representative has the sole authority to act on behalf of the
partnership under the centralized system.\196\ Under the
centralized system, the partnership and all partners of the
partnership are bound by actions taken by the partnership.\197\
Thus, for example, partners may not participate in or contest
results of an examination of a partnership by the Secretary. A
partnership and all partners of the partnership are also bound
by any final decision in a proceeding with respect to the
partnership brought under the centralized system of subchapter
C. Thus, for example, a settlement agreement entered into by
the partnership, a notice of final partnership adjustment with
respect to the partnership that is not contested, or the final
decision of the court with respect to the partnership if the
notice of final partnership adjustment is contested, bind the
partnership and all partners of the partnership.
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\196\ Sec. 6223(a).
\197\ Sec. 6223(b).
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Each partnership is required to designate a partner (or
other person) with a substantial presence in the United States
as the partnership representative. A substantial presence in
the United States enables the partnership representative to
meet with the Secretary in the United States as is necessary or
appropriate, and facilitates communication during the audit
process and during any other proceedings in which the
partnership is involved. In any case in which such a
designation by the partnership is not in effect, the Secretary
may select any person as the partnership representative.
Partnership Adjustments
Partnership adjustments by the Secretary
The centralized system provides that any adjustment to
items of income, gain, loss, deduction, or credit of a
partnership for a partnership taxable year, and any partner's
distributive share thereof, are determined at the partnership
level. Any tax attributable to these items is assessed and
generally is collected at the partnership level as an imputed
underpayment paid by the partnership.
Reviewed year and adjustment year
For purposes of the centralized system, the reviewed year
means the partnership taxable year to which the item being
adjusted relates. For example, in an examination by the
Secretary of a partnership's taxable year 2018, 2018 is the
reviewed year.\198\
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\198\ Sec. 6225(d)(1).
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The adjustment year means (1) in the case of an adjustment
pursuant to the decision of a court (under the centralized
system's judicial review provisions), the partnership taxable
year in which the decision becomes final; (2) in the case of an
administrative adjustment request, the partnership taxable year
in which the administrative adjustment request is made; or (3)
in any other case, the partnership taxable year in which the
notice of final partnership adjustment is mailed.\199\ For
example, in the case of adjustments with respect to partnership
taxable year 2018 resulting in an imputed underpayment assessed
in 2020 that the partnership then litigates in Tax Court, the
decision of which is not appealed and becomes final in 2021,
the adjustment year is 2021.
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\199\ Sec. 6225(d)(2).
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Payment of imputed underpayment by the partnership
Any adjustment to items of income, gain, loss, deduction,
or credit of a partnership for a partnership taxable year, and
any partner's distributive share thereof, are determined at the
partnership level. In the event of any adjustment by the
Secretary in the amount of any item of income, gain, loss,
deduction, or credit of a partnership, or any partner's
distributive share, that results in an imputed underpayment,
the partnership is required to pay the imputed underpayment in
the adjustment year.\200\
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\200\ Sec. 6225(a)(1).
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Interest at partnership level
Interest due is determined at the partnership level and
accrues at the rate applicable to underpayments.\201\
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\201\ Sec. 6621(a)(2). Rules relating to interest, penalties, and
additions to tax are further described below.
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Adjustment that does not result in imputed underpayment
Any adjustment by the Secretary in the amount of any item
of income, gain, loss, deduction, or credit of a partnership,
or any partner's distributive share, that does not result in an
imputed underpayment is taken into account by the partnership
in the adjustment year. The amount of the adjustment is treated
as a reduction in non-separately stated income or an increase
in non-separately stated loss (whichever is appropriate). It
may also be appropriate to treat the amount of an adjustment as
a reduction (or increase) in a separately stated amount of
income, gain, loss, or deduction. The amount of an adjustment
in a credit is taken into account as a separately stated
item.\202\
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\202\ Sec. 6225(a)(2).
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Determination of imputed underpayment amount
An imputed underpayment of tax with respect to a
partnership adjustment for any reviewed year is determined by
netting all adjustments of items of income, gain, loss, or
deduction and multiplying the net amount by the highest rate of
Federal income tax applicable either to individuals or to
corporations that is in effect for the reviewed year.\203\ Any
adjustments to items of credit are taken into account as an
increase or decrease, as the case may be, in the figure
resulting from this multiplication. Any net increase or
decrease in loss is treated as a decrease or increase,
respectively, in income. Netting is done taking into account
applicable limitations, restrictions, and special rules under
present law.
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\203\ Sec. 6225(b)(1). The rule for determining the imputed
underpayment applies except as provided in subsection 6225(c), which
provides that the Secretary shall establish procedures under which the
imputed underpayment amount may be modified consistent with
requirements imposed thereunder.
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Examples
Example.--Assume that a partnership reports the following
items on its return for taxable year 2018 (dollar amounts in
thousands):
rental income of $100
depreciation deduction of <$70>
interest expense deduction of <$20>
deduction for compensation paid of <$50>
In an examination of the partnership's taxable year 2018,
the Secretary determines that depreciation was <$80>, not
<$70>, for the year. (Assume that this change does not affect
depreciation in other taxable years.) The Secretary also finds
that $5 of rental income was omitted, for total rental income
of $105, not $100, for the year. The adjustment reflecting an
increase of $5 of rental income is netted with the adjustment
reflecting the <$10> change in the depreciation (both ordinary
in character and not subject to differing limitations or
restrictions). The resulting adjustment is a net increase in
loss of <$5>. There is no imputed underpayment. For the
adjustment year (not 2018, the reviewed year), the partnership
has an increase in non-separately stated loss of <$5> (or a
reduction in non-separately income of <$5>).
Example.--As another example, assume a partnership reports
the following items on its return for taxable year 2019 (dollar
amounts in thousands):
ordinary income of $300
long-term capital gain (from asset sales) of
$125, long-term capital loss (from asset sales) of
<$75>, for a net long-term capital gain of $50
depreciation deduction of <$100>
tax credit of $5
In an examination of the partnership's taxable year 2019,
the Secretary adjusts these items as follows and finds:
ordinary income of $500 (a $200 adjustment)
long-term capital gain of $200 (a $75
adjustment) and long-term capital loss of <$25> (a
<$50> adjustment), for a net long-term capital gain of
$175 (a $125 adjustment)
depreciation deduction of <$70> (a <$30>
adjustment)
tax credit of $3 (a <$2> credit adjustment)
These are netted under the provision as follows. The
adjustments to ordinary income and to the ordinary depreciation
deduction are netted: $200 minus <$30> yields $230. The
adjustments to long-term capital gain and loss are netted: $75
minus <$50> yields $125. The adjustments total $355. Assume
that the highest rate of Federal income tax applicable to
individuals or corporations in 2019 is 39.6 percent. The
product of $355 and 39.6 percent is $140.58. The credit
adjustment of <$2> increases that figure, yielding an imputed
underpayment of $142.58 (not taking into account possible
modifications further described below). The partnership pays
the imputed underpayment in the adjustment year.
Determining imputed underpayment amount: adjustments to
distributive shares
In determining an imputed underpayment, any adjustment that
reallocates the distributive share of any item from one partner
to another is taken into account by disregarding any decrease
in any item of income or gain and disregarding any increase in
any item of deduction, loss, or credit.\204\
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\204\ Sec. 6225(b)(2).
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Example
For example, assume that a partnership has two partners, L
and M. Under the partnership agreement, $100 of rental income
is allocated to L and $70 of depreciation and interest
deductions are allocated to M for the taxable year. The
Secretary notifies the partnership and the partnership
representative of an administrative proceeding initiated at the
partnership level with respect to the partnership's return for
2024. Assume that the Secretary determines that the $70
distributive share of depreciation and interest deductions
should be reallocated from M to L. The imputed underpayment of
the partnership is determined without decreasing the $100 of
rental income by the $70 of depreciation and interest
deductions. The adjustment is a $70 increase in income. Assume
that the highest rate of Federal income tax applicable to
individuals or corporations in 2024 is 39.6 percent. The
product of $70 and 39.6 percent is $27.72, the amount of the
imputed underpayment. However, the partnership may implement
procedures for modifying the imputed underpayment as so
determined.
Modification of imputed underpayment amount
When an audit of a partnership is commenced, the Secretary
notifies the partnership and the partnership representative of
the administrative proceeding initiated at the partnership
level. The Secretary also notifies the partnership and the
partnership representative of any proposed partnership
adjustment developed during the proceeding.\205\ The Secretary
must establish procedures for modification of the amount of an
imputed underpayment.\206\ One or more modification procedures
may be implemented by the partnership after the initiation of
the administrative proceeding, including before any notice of
proposed adjustment. These procedures include the filing of
amended returns by reviewed year partners, determination of the
imputed underpayment without regard to the portion of it
allocable to a tax-exempt partner, and modification of the
applicable highest tax rates, including determining the portion
of an imputed underpayment to which a lower rate applies.\207\
In addition, the Secretary may by regulations or guidance
provide for additional procedures to modify imputed
underpayment amounts on the basis of factors that the Secretary
determines are necessary or appropriate to carry out the
function of the modification provisions, that is, to determine
the amount of tax due as closely as possible to the tax due if
the partnership and partners had correctly reported and paid
while at the same time to implement the most efficient and
prompt assessment and collection of tax attributable to the
income of the partnership and partners.
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\205\ Sec. 6231(a)(1) and (2).
\206\ Sec. 6225(c).
\207\ See section 411 of the Protecting Americans from Tax Hikes
Act of 2015 (Division Q of Pub. L. No. 114-113). Under the provision,
certain section 469(k) passive activity losses can reduce the imputed
underpayment of a publicly traded partnership under the centralized
system. The imputed underpayment can be determined without regard to
the portion of the underpayment that the partnership demonstrates is
attributable to (i.e., would be offset by) specified passive activity
losses attributable to a specified partner. The amount of the specified
passive activity loss is concomitantly decreased, and the partnership
takes the net decrease into account as an adjustment in the adjustment
year with respect to the specified partners to which the net decrease
relates. A specified passive activity loss for any specified partner of
a publicly traded partnership means the lesser of the section 469(k)
passive activity loss of that partner which is separately determined
with respect to the partnership (1) for the partner's taxable year in
which or with which the reviewed year of the partnership ends, or (2)
for the partner's taxable year in which or with which the adjustment
year of the partnership ends. A specified partner is a person who
continuously meets each of three requirements for the period starting
with the partner's taxable year in which or with which the partnership
reviewed year ends through the partner's taxable year in which or with
which the partnership adjustment year ends. These three requirements
are that the person is a partner of the publicly traded partnership;
the person is an individual, estate, trust, closely held C corporation,
or personal service corporation; and the person has a specified passive
activity loss with respect to the publicly traded partnership.
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Anything required to be submitted pursuant to the
modification of the amount of an imputed underpayment must be
submitted to the Secretary not later than the close of the 270-
day period beginning on the date the notice of a proposed
partnership adjustment is mailed, unless the 270-day period is
extended with the consent of the Secretary.
Any modification of the amount of an imputed underpayment
is made only upon approval of the modification by the
Secretary.
Modification procedures: amended returns of reviewed year
partners
Payments made by reviewed year partners with amended
returns can reduce the amount of an imputed underpayment.\208\
Procedures for modification provide that the amount of an
imputed underpayment is determined without regard to the
portion of the underpayment taken into account by payment of
tax included with amended returns of the reviewed year
partners. The amended return relates to the taxable year of the
partner that includes the end of the reviewed year of the
partnership. The amended return is to take into account all
adjustments in the amount of any item of income, gain, loss,
deduction, or credit of the partnership (or any partner's
distributive share) properly allocable to each partner, along
with changes for any other taxable year with respect to which
any tax attribute is affected by reason of the adjustments.
Payment of any tax due is to be included with the amended
return. In the case of an adjustment that reallocates the
distributive share of any item from one partner to another,
this modification procedure is only available if amended
returns for the reviewed year are filed by all partners
affected by the adjustment.
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\208\ Sec. 6225(c)(2).
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Modification procedures: tax-exempt partners
Procedures for modification provide for determining the
amount of the imputed underpayment without regard to the
portion of it that the partnership demonstrates is allocable to
a partner that would not owe tax by reason of its status as a
tax-exempt entity for the reviewed year.\209\ For this purpose,
a tax-exempt entity means (1) the United States, any State or
political subdivision thereof, any possession of the United
States, or any agency or instrumentality of any of these, (2)
an organization (other than a cooperative) that is exempt from
Federal income tax, (3) any foreign person or entity, and (4)
any Indian tribal government determined by the Secretary in
consultation with the Secretary of the Interior to exercise
governmental functions. Under this procedure for modification,
the partnership demonstrates the amounts of adjustments that
are allocable to the tax-exempt partner and the resulting
portion of the imputed underpayment allocable to that
partner.\210\
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\209\ Sec. 6225(c)(3).
\210\ Secs. 6225(c)(3) and 168(h)(2)(A).
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Modification procedures: modification of applicable highest
tax rates
Procedures for modification provide for taking into account
a rate of tax lower than the highest rate of Federal income tax
applicable either to individuals or to corporations that is in
effect for the reviewed year, for certain types of taxpayers or
types of income.\211\
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\211\ Sec. 6225(c)(4).
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The partnership may demonstrate that a portion of an
imputed underpayment is allocable to a partner that is a C
corporation, and for that C corporation partner, the highest
marginal rate of Federal income tax (35 percent in 2016, for
example) for ordinary income and capital gain \212\ for the
reviewed year is lower than the highest marginal rate of
Federal income tax for individuals (39.6 percent in 2016, for
example). For a C corporation, the highest marginal rate of
Federal income tax is the highest rate of tax specified in
section 11(b).
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\212\ The Secretary has regulatory authority under the provision,
including authority to acknowledge or identify the types of income,
gain, deduction, and loss to which the lower rate applies. See also
section 411 of the Protecting Americans from Tax Hikes Act of 2015
(Division Q of Pub. L. No. 114-113). A lower rate of tax may be taken
into account in the case of either capital gain or ordinary income of a
partner that is a C corporation.
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Similarly, the partnership may demonstrate that a portion
of an imputed underpayment relates to an item of long-term
capital gain or qualified dividend income that is allocable to
a partner who is an individual, and that the highest rate of
tax with respect to that item of long-term capital gain or
qualified dividend income for the reviewed year (20 percent for
2016, for example) is lower than the highest rate of Federal
income tax applicable to individuals for the reviewed year
(39.6 percent in 2016, for example). The highest rate for the
type of income and type of taxpayer applies under the
modification. An S corporation is treated as an individual for
this purpose.
In general, the portion of the imputed underpayment to
which the lower rate applies with respect to a partner is
determined by reference to the partner's distributive share of
items of income, gain, loss, deduction, and credit to which the
imputed underpayment relates. However, if the partner's
distributive share differs among items, then the portion of the
imputed underpayment to which the lower rate applies is
determined by reference to the amount of the partner's
distributive share of net gain or loss if the partnership had
sold all of its assets at their fair market value as of the
close of the reviewed year. For example, adjustments are made
to a partnership's rental income from property A and its
depreciation deductions with respect to property B. A corporate
partner has a 20 percent distributive share of rental income
from property A, a 15 percent distributive share of
depreciation deductions from property B, and a 20 percent
distributive share of any gain in the reviewed year. However,
if the partnership had sold its assets at fair market value as
of the close of the reviewed year, the gain would have been
$100, and based on its capital account, the corporate partner's
distributive share would have been $20. Thus, the portion of
the imputed underpayment to which the lower rate applies with
respect to the corporate partner is 20 percent.
Modification procedures: additional procedures
Additional procedures to modify the amount of an imputed
underpayment may be provided by the Secretary on the basis of
factors the Secretary determines are necessary or appropriate
to carry out the purposes of the provision. These procedures
allow partnerships to demonstrate tax attributes or information
with respect to the reviewed year and with respect to reviewed
year partners that could permit modification of the imputed
underpayment to more closely approximate the amount of tax due
with respect to the reviewed year if the partnership and
partners had correctly reported and paid the tax due.
In the absence of regulations or guidance specifically
addressing the manner in which these modifications or
calculations are made, it is anticipated that partnerships will
furnish to the Secretary the necessary documentation, data, and
calculations to determine the amount of the reduction of the
imputed underpayment with a reasonably high degree of accuracy.
Alternative to payment of imputed underpayment by partnership
As an alternative to partnership payment of the imputed
underpayment in the adjustment year, the audited partnership
may elect to furnish to the Secretary and to each partner of
the partnership for the reviewed year a statement of the
partner's share of any adjustments to income, gain, loss,
deduction and credit as determined in the notice of final
partnership adjustment.\213\ In this case, each such partner
takes these adjustments into account and pays the tax as
provided under the provision.\214\
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\213\ Sec. 6226(a).
\214\ Sec. 6226(b).
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Payment by reviewed year partners in year that includes
date of the statement
The reviewed year partner's tax is increased for the
partner's taxable year that includes the date of the statement.
Amount of the reviewed year partner's adjustment
The reviewed year partner's tax is increased by an amount
equal to the aggregate of the adjustment amounts as determined
under the provision. This includes the amount by which the
partner's tax would increase if the partner's distributive
share of the adjustment amounts were included for the partner's
taxable year that includes the end of the reviewed year, plus
the amount by which the tax would increase by reason of
adjustment to tax attributes in years after that year of the
partner and before the year of the date of the statement. Tax
attributes in any subsequent taxable year are required to be
appropriately adjusted.
Penalties, additions to tax, additional amounts
Penalties, additions to tax, and additional amounts are
determined at the partnership level; \215\ each reviewed year
partner is liable for its share of the penalty, addition to
tax, and additional amount.\216\
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\215\ Secs. 6221 and 6226(c).
\216\ Sec. 6226(c).
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Interest at partner level from reviewed year, with
adjustments
In the case of an imputed underpayment for which the
election under this provision is made, interest is determined
at the partner level.\217\ Interest is determined from the due
date of the partner's return for the taxable year to which the
increase is attributable. Interest is determined taking into
account any increases attributable to a change in tax
attributes for an intervening tax year. The rate of interest
determined at the partner level is the underpayment rate as
modified under the provision, that is, the rate is the sum of
the Federal short-term rate (determined monthly) plus 5
percentage points.
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\217\ Sec. 6226(c)(2).
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Time and manner of making election
The partnership may make this election not later than 45
days after the notice of final partnership adjustment.\218\ The
election is revocable only with the consent of the Secretary.
The election may be made whether or not the partnership files a
petition for judicial review of the notice of final partnership
adjustment.\219\
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\218\ Sec. 6226(a)(1).
\219\ Sec. 6226(d). See section 411 of the Protecting Americans
from Tax Hikes Act of 2015 (Division Q of Pub. L. No. 114-113).
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The partnership may make the election within 45 days from
the notice of final partnership adjustment, and within 90 days
from the notice of final partnership adjustment may file a
petition for readjustment with the Tax Court, district court,
or Court of Federal Claims.\220\ Upon the final court decision,
dismissal of the case, or settlement, the partnership is to
implement the election by furnishing statements (at the time
and manner prescribed by the Secretary) to the reviewed year
partners showing each partner's share of the adjustments as
finally determined. As part of any settlement, for example, it
is contemplated that the Secretary may permit revocation of a
previously made election, and the partnership may pay at the
partnership level.
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\220\ Sec. 6234.
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Time and manner of furnishing statement
The statement is to be furnished to the Secretary and to
partners within such time and in such manner as is prescribed
by the Secretary. In the absence of such guidance, the
statements are to be furnished to the Secretary and to all
partners within a reasonable period following the last day on
which to make the election under this provision. The date the
statement is furnished (as well as the date of the statement)
is the date the statement is mailed, for this purpose.
Information furnished on statement to the Secretary and to
partners
The statement furnished to the Secretary and to partners is
to include the amounts of and tax attributes of the adjustments
allocable to the recipient partner. Under regulatory authority,
the Secretary may require the statement to show the amount of
the imputed underpayment allocable to the recipient partner. In
addition, the statement is to include the name and taxpayer
identification number of the recipient partner. The Secretary
may require that the statement include such additional
information as is necessary or appropriate to carry out the
purposes of the provision, such as the address of the recipient
partner and the date the statement is mailed.
Treatment of tiered partnerships and other tiered entities
Tiered partnerships.--In the case of tiered partnerships, a
partnership that receives a statement from the audited
partnership is treated similarly to an individual \221\ who
receives a statement from the audited partnership. That is, the
recipient partnership takes into account the aggregate of the
adjustment amounts determined for the partner's taxable year
including the end of the reviewed year, plus the adjustments to
tax attributes in the following taxable years of the recipient
partnership. The recipient partnership pays the tax
attributable to adjustments with respect to the reviewed year
and the intervening years, calculated as if it were an
individual (consistently with section 703), for the taxable
year that includes the date of the statement. The recipient
partnership, its partners in the taxable year that is the
reviewed year of the audited partnership, and its partners in
the year that includes the date of the statement, may have
entered into indemnification agreements under the partnership
agreement with respect to the risk of tax liability of reviewed
year partners being borne economically by partners in the year
that includes the date of the statement. Because the payment of
tax by a partnership under the centralized system is
nondeductible, payments under an indemnification or similar
agreement with respect to the tax are nondeductible.
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\221\ See section 703, which states, ``the taxable income of a
partnership shall be computed in the same manner as in the case of an
individual . . .''.
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Deficiency dividends.--A recipient partner that is a RIC or
REIT and that receives a statement from an audited partnership
including adjustments for a prior (reviewed) year may wish to
make a deficiency dividend \222\ with respect to the reviewed
year. Guidance coordinating the receipt of a statement from an
audited partnership by a RIC or REIT with the deficiency
dividend procedures is expected to be issued by the Secretary.
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\222\ Sec. 860.
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Administrative adjustment request by partnership
A partnership may file a request for an administrative
adjustment in the amount of one or more items of income, gain,
loss, deduction, or credit of the partnership for a partnership
taxable year.\223\ Following the filing of the administrative
adjustment request, the partnership may apply most of the
procedures for modification \224\ in a manner similar to
modification of an imputed underpayment under new section
6225(c). Like the partnership audit, tax resulting from the
adjustment may be paid by the partners in the manner in which a
partnership pays an imputed underpayment in the adjustment year
under new section 6225. Alternatively, the adjustment may be
taken into account by the partnership and partners, and the tax
paid by reviewed year partners upon receipt of statements
showing the adjustments, similar to new section 6226.\225\
However, in the case of an adjustment (pursuant to a
partnership's administrative adjustment request) that would not
result in an imputed underpayment, any refund is not paid to
the partnership; rather, procedures similar to the procedure
for furnishing reviewed year partners with statements
reflecting the requested adjustment apply, with appropriate
adjustments.
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\223\ Sec. 6227.
\224\ Not including the modifications pursuant to filing of amended
returns of reviewed year partners in new section 6225(c)(2).
\225\ Sec. 6227(b)(2); interest is computed at the underpayment
rate (sec. 6621(a)(2)) without substituting ``5 percentage points'' for
``3 percentage points'' as under section 6226(c)(2)(C).
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Time for making administrative adjustment request
A partnership may not file an administrative adjustment
request more than three years after the later of (1) the date
on which the partnership return for the year in question is
filed, or (2) the last day for filing the partnership return
for that year (without extensions).
In no event may a partnership file an administrative
adjustment request after a notice of an administrative
proceeding with respect to the taxable year is mailed.
Tiered partnerships
In the case of tiered partnerships, a partnership's
partners that are themselves partnerships may choose to file an
administrative adjustment request with respect to their
distributive shares of an adjustment. The partners and indirect
partners that are themselves partnerships may choose to
coordinate the filing of administrative adjustment requests as
a group to the extent permitted by the Secretary.
Procedural Rules
In general \226\
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\226\ Secs. 6231 through 6235.
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The new centralized system provides rules governing
notices, time limitations, restrictions on assessment and the
imposition of interest and penalties in the context of a
partnership adjustment.\227\ The provisions include specific
grants of regulatory authority to address the identification of
foreign partners, the manner of notifying partners of an
election out of centralized procedures, the manner in which a
partnership representative is selected, and the extent to which
the new centralized system may be applied before the generally
applicable effective date.
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\227\ Secs. 6231-6235.
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Notice of proceedings and adjustments
The centralized system contemplates three types of
principal notifications by the Secretary to the partnership and
the partnership representative in the course of an
administrative proceeding with respect to that partnership. The
notifications also apply to any proceeding with respect to an
administrative adjustment request filed by a partnership.\228\
These notices are (1) notice of any administrative proceeding
initiated at the partnership level; (2) notice of a proposed
partnership adjustment resulting from the proceeding; and (3)
notice of any final partnership adjustment resulting from the
proceeding. Such notices are sufficient if mailed to the last
known address of the partnership representative or the
partnership, even if the partnership has terminated its
existence.
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\228\ Secs. 6231(a) and 6227.
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A notice of proposed adjustments informs the partnership of
any adjustments tentatively determined by the Secretary and the
amount of any imputed underpayment resulting from such
adjustments. The issuance of a notice of proposed partnership
adjustment begins the running of a period of 270 days in which
to supply all information required by the Secretary in support
of a request for modification. During that same period, the
Secretary may not issue a notice of final partnership
adjustment.\229\ The Secretary is required to establish
procedures and timeframes for the modification process in
published guidance, which may include conditions under which
extensions of time in which to submit final documentation of a
modification request may be permitted by the Secretary.\230\
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\229\ Sec. 6231(a).
\230\ Sec. 6225(c)(7).
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With the issuance of a notice of final partnership
adjustment to the partnership, a 90-day period begins during
which the partnership may seek judicial review of the
partnership adjustment. The issuance of a notice of final
partnership adjustment also marks the beginning of the 45-day
period in which the partnership may elect the alternative
payment procedures.\231\ Further notices of adjustment or
assessments of tax against the partnership with respect to the
partnership taxable year that is the subject of the notice of
final partnership adjustment are prohibited during the period
in which judicial review may be sought or during which a
judicial proceeding is pending (absent a showing of fraud,
malfeasance, or misrepresentation of a material fact).\232\
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\231\ Sec. 6226.
\232\ Sec. 6231(b).
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Any notice of partnership adjustment may be rescinded by
the Secretary, if the partnership consents. If the notice is
rescinded, it is a nullity, and does not confer a right to seek
judicial review, nor does it bar issuance of further notices.
Assessment, collection and payment
An imputed underpayment is assessed and collected in the
same manner as if it were a tax imposed for the adjustment year
under the Federal income tax.\233\ The general provisions for
assessment, collection and payment under subtitle F of the Code
apply unless superseded by rules of the new centralized system.
As a result, an imputed underpayment may be assessed against a
partnership if the partnership agrees with the results of the
examination, following the expiration of the 90th day after
issuance of a notice of final partnership adjustment without
initiation of judicial proceedings, or in the case of timely
judicial proceedings, following the entry of final decision of
such proceedings. If no court proceeding is initiated within
the 90-day period, the amount that may be assessed against the
partnership is limited to the imputed underpayment shown in the
notice.\234\
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\233\ Sec. 6232.
\234\ Sec. 6232(e).
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In the case of an administrative adjustment request for
which the adjustment is determined and taken into account by
the partnership in the partnership taxable year in which the
request is made,\235\ the imputed underpayment is required to
be paid when the request is filed, and is assessed at that
time. If the administrative adjustment request is subsequently
audited and results in an imputed underpayment greater than
that reported and paid with the originally filed request, the
additional amount of the imputed underpayment may be assessed
in the same manner and subject to same restrictions as any
other imputed underpayment determined after examination.
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\235\ Secs. 6232(a) and 6227(b)(1).
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Restrictions on assessment, levy, and collection
The centralized system provides a limitation on the time
for assessment of a deficiency as well as levy and court
proceedings for collection. Except as otherwise provided, no
assessment of a deficiency may be made, and no levy or court
proceeding for collection of any amount resulting from an
adjustment may be made, begun, or prosecuted with respect to
the partnership taxable year in issue before the close of the
90th day after the day that a notice of final partnership
adjustment was mailed. If a petition for judicial review is
filed,\236\ no such assessment may be made and no such levy or
court proceeding may be made, begun, or prosecuted before the
decision of the court has become final.\237\
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\236\ Sec. 6234.
\237\ Sec. 6232(b).
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A premature action (i.e., one that violates the limitation
on the time of assessment, levy, and court proceeding for
collection) may be enjoined in the proper court, including the
Tax Court.\238\ This rule applies notwithstanding the general
rule prohibiting suits for the purpose of restraining the
assessment or collection of any tax.\239\ The Tax Court has no
jurisdiction to enjoin any such premature action unless a
timely petition for judicial review has been filed,\240\ and
then only in respect of the adjustments that are the subject of
the petition.
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\238\ Sec. 6232(c).
\239\ Sec. 7421(a).
\240\ Sec. 6234.
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Several exceptions to the restrictions on assessment are
provided.\241\ First, rules similar to the math error authority
under section 6213(b) are permitted as exceptions to the
restrictions on assessment described above. The exceptions
apply to instances in which a partnership is notified that
adjustments to its return are necessary to correct errors
arising from mathematical or clerical errors and in the case of
a tiered partnership that fails to prepare its partnership
return consistently with that of the partnership in which it is
a partner. In the case of an inconsistent return position, the
rules similar to those in section 6213(b) (providing for
subsequent abatement of any resulting assessments if challenged
within 60 days) are not applicable. Finally, a partnership may
waive the restrictions on the making of any partnership
adjustment.
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\241\ Sec. 6232(d).
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Interest and penalties
Interest
In general, interest due is determined at the partnership
level and accrues at the rate applicable to underpayments.\242\
Two periods are relevant in computing the total interest due:
the period in which the imputed underpayment of income tax
exists, and the period attributable only to late payment of any
imputed underpayment after notice and demand. For an imputed
underpayment, interest accrues for the period from the due date
of the return for the reviewed year until the due date of the
adjustment year return, or, if earlier, payment of the imputed
tax. If the imputed underpayment is not timely paid with the
return for the adjustment year, interest is computed from the
return due date for the adjustment year until payment.
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\242\ Sec. 6621(a)(2).
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If the partnership elects the alternative payment method
under section 6226, under which the underpayment is determined
at the partner level, the interest due is computed at the
partner level. The underpayment interest begins to accrue from
the due date of the return for the taxable year to which the
increase is attributable, at a rate two percentage points
higher than the rate otherwise applicable to underpayments.
Penalties
Generally, the partnership is liable for any penalty,
addition to tax, or additional amount.\243\ These amounts are
determined at the partnership level as if the partnership were
an individual who was subject to Federal income tax for the
reviewed year, and the imputed underpayment were an actual
underpayment or understatement for the reviewed year.
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\243\ Sec. 6233(a)(1)(B).
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A penalty, addition to tax, or additional amount may apply
with respect to an adjustment year return of a partnership in
the event of late payment of an imputed underpayment, or, in
the case of an election by the partnership under section 6226,
with respect to the adjustment year return of a partner. In
such cases, the penalty for failure to pay applies.\244\ For
purposes of accuracy-related and fraud penalties, the
determination is made by treating the imputed underpayment as
an underpayment of tax.\245\
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\244\ Secs. 6233(b)(3)(A) and 6651(a)(2).
\245\ Secs. 6662, 6662A, 6663, and 6664.
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Judicial review of partnership adjustment
A partnership may seek judicial review of a notice of final
partnership adjustment within 90 days after the notice is
mailed. Judicial review is available in the U.S. Tax Court, the
Court of Federal Claims or a U.S. district court for the
district in which the partnership has its principal place of
business.
With respect to judicial review in either the Court of
Federal Claims or a U.S. district court, jurisdiction is
contingent on the partnership depositing with the Secretary, on
or before the date of the petition, an amount equal to the full
imputed underpayment. The deposit is not treated as a payment
of tax other than for purposes of determining whether interest
on any underpayment as ultimately determined would be due. The
proceeding under this provision is a de novo proceeding, and
determinations made pursuant to the proceeding are subject to
review to the same extent as any other decision, decree or
judgment of the court in question.
Once a proceeding is initiated, a decision to dismiss the
proceeding (other than a dismissal because the notice of final
partnership adjustment was rescinded under section 6231(c)), is
a judgment on the merits upholding the final partnership
adjustments.
Period of limitations on making adjustments
In general, the Secretary may adjust an item on a
partnership return at any time within three years of the date a
return is filed (or the return due date, if the return is not
filed) or an administrative adjustment request is made. The
time within which the adjustment is made by the Secretary may
be later if a notice of proposed adjustment \246\ is issued,
because the issuance of a notice of proposed partnership
adjustment begins the running of a period of 270 days in which
the partnership may seek a modification of the imputed
underpayment. Although the partnership generally is limited to
270 days from the issuance of that notice to seek a
modification of the imputed underpayment, extensions may be
permitted by the IRS. During the 270-day period, the Secretary
may not issue a notice of final partnership adjustment.
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\246\ Sec. 6231.
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After the timely issuance of a notice of proposed
adjustment resulting in an imputed underpayment, the notice of
final partnership adjustment may be issued no later than either
the date which is 270 days after the partnership has completed
its response seeking a revision of an imputed underpayment, or,
if the partnership provides an incomplete or no response, no
later than 330 days after the date of a notice of proposed
adjustment.\247\
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\247\ See section 411 of the Protecting Americans from Tax Hikes
Act of 2015 (Division Q of Pub. L. No. 114-113), which rectifies the
unintended conflict between section 6231 (barring the Secretary from
issuing the notice of final partnership adjustment earlier than the
expiration of the 270 days after the notice of a proposed adjustment)
and section 6235 (requiring that a notice of final partnership
adjustment be filed no later than 270 days after the notice of proposed
adjustment in the case of a partnership that does not seek modification
of the imputed underpayment). As amended, section 6235 provides that a
notice of final partnership adjustment to a partnership that does not
seek modification of an underpayment in response to a notice of
proposed adjustment may be issued up to 330 days (plus any additional
number of days that were agreed upon as an extension of time for
taxpayer response) after the notice of proposed adjustment.
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The partnership may consent to an extension of time within
which a partnership adjustment may be made. In addition, the
provision contemplates that the Secretary may agree to extend
the period of time in which the request for modification is
submitted, under procedures to be established for submitting
and reviewing requests for modification. If an extension of the
time within which to seek a modification is granted, a similar
period is added to the time within which the Secretary may
issue a notice of final partnership adjustment. The procedures
for modifications of imputed underpayments are required to
provide rules that exclude from any underpayment of tax the
portion of adjustments that may have already been taken into
consideration on amended returns filed by partners and for
which the allocable underpayment of tax was paid.
Several exceptions similar to those generally applicable
outside the context of partnerships are provided to the
limitations period. In the case of a fraudulent return or
failure to file a return, a partnership adjustment may be made
at any time. If a partnership files a return on which it makes
a substantial omission of income within the meaning of section
6501(e)(1)(A), the Secretary may make adjustments to the return
within six years of the date the return was filed.
In addition, if a notice of final partnership adjustment
described in section 6231 is mailed, the limitations period is
suspended for the period during which judicial remedies under
section 6234 may be pursued or are pursued and for one year
thereafter. Where a partnership elects to apply section 6226,
this provision operates to ensure that the period in which the
Secretary may assess the resulting underpayment due from each
partner is open for at least one year after proceedings at the
partnership level have concluded. The partner who is
responsible for paying an underpayment arising from the
partnership reviewed year must compute such tax with respect to
his taxable year in which or with which the partnership
reviewed year ends, and pay the additional tax with the return
for the year in which the partnership mails the statements to
partners under section 6226. Because the additional tax arises
from an adjustment at the partnership level that is binding on
the partner, the partner may neither contest the merits of the
partnership adjustment, nor may the partner claim the Secretary
is time-barred with respect to such adjustment.
Examples
The interaction of the notice requirements of new section
6231 and the limitations period with regard to adjustments to
partnership returns that result in imputed underpayments under
new section 6235 is illustrated in this example regarding a
partnership's taxable year 2018.
On March 15, 2019, it files a timely income tax return for
the taxable year 2018. Absent any other activity by the
Secretary or the partnership, the general three-year
limitations period in which any item on the return may be
adjusted expires in three years, on March 15, 2022.
On December 15, 2020, the Secretary notifies the
partnership that it intends to initiate an administrative
proceeding with respect to the 2018 partnership return. That
notice neither shortens nor extends the period in which
partnership adjustments may be made by the Secretary, but it
ends the period in which the partnership may submit an
administrative adjustment request with respect to that taxable
year.
On September 15, 2021, the Secretary issues a notice of
proposed adjustments that result in an imputed underpayment.
Issuance of this notice triggers a period of 270 days during
which the Secretary may not issue a notice of final partnership
adjustment and within which the partnership must submit all
required documentation in support of a request for modification
of the imputed underpayment. This 270-day periods ends on June
15, 2022, which is later than the expiration of the otherwise
applicable limitations period. The deadline for issuance of a
notice of final partnership adjustment will depend upon whether
and how the partnership responds to the proposed notice of
adjustments.
If nothing further is received from the partnership, the
Secretary may issue a notice of final partnership adjustment no
later than 330 days after the notice of proposed adjustments
(i.e., within 60 days after the expiration of the 270-day
period in which partnership was permitted to respond). Because
the 330th day after September 15, 2021, falls on Sunday, August
14, 2022, the final date on which the Secretary may issue a
notice of final partnership adjustment is Monday, August 15,
2022.\248\
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\248\ See section 7503.
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The partnership may instead respond to the notice with a
timely request for modification of the imputed underpayment but
ask for additional time to complete its submission in support
of the request for modification. For example, the Secretary may
grant a timely request for 45 additional days, allowing the
partnership until Monday, August 1, 2022, to submit its
complete response.
If the partnership fails to provide the
required information by August 1, 2022 and no further
extension is granted, then the Secretary may issue a
notice of final partnership adjustment no later than
September 30, which is 60 days after August 1, 2022
(the end of the 270-day period plus the additional time
that was granted to the taxpayer to provide its
complete response).
If the partnership instead provides its
complete response on August 1, a notice of final
partnership adjustment may be issued up to 270 days
after the date on which the information required by the
Secretary was submitted, or April 28, 2023. During this
270-day period ending with April 28, 2023, the
Secretary is expected to review the information that
was submitted and revise the adjustments that were
proposed if appropriate.
In the alternative, consider a variation of the above facts
in which the partnership submits an administrative adjustment
request on June 1, 2020 that corrects several errors on its
timely- filed 2018 return. The administrative adjustment
request results in an imputed underpayment of tax, which the
partnership pays in full, with interest from March 15, 2019
(the filing date of the return) when it submits the
administrative adjustment request. On December 15, 2020, the
Secretary notifies the partnership that he will initiate an
administrative proceeding with regard to taxable year 2018. On
September 15, 2021, the Secretary issues a notice of proposed
adjustments to the partnership 2018 return.
As a result of submitting an administrative adjustment
request, the period in which partnership adjustments to the
taxable year 2018 may be made is extended to June 1, 2023, the
date that is three years from the date the administrative
adjustment request is submitted. Because that date is later
than all of the extensions described in the preceding
scenarios, the Secretary may issue a notice of final
partnership adjustments on or before June 1, 2023, provided
that such notice is issued after expiration of the 270-day
period within which the partnership must respond to the notice
of proposed adjustments issued September 15, 2021. The issuance
of a notice of proposed adjustments cannot shorten the
limitations period for making an adjustment to the partnership
return.
Issues raised by the partnership in its administrative
adjustment request may be the subject of inquiry by the
Secretary in several ways. If the original partnership return
may be the subject of an examination, the administrative
adjustment request is likely to be reviewed as part of that
process. Alternatively, the administrative adjustment request
may be subject to examination on its own. Interest on an
imputed underpayment accrues from March 15, 2019, the
unextended due date of the 2018 timely return until payment,
whether the examination was prompted by the return or solely by
the administrative adjustment request. However, full payment of
the reported underpayment reported on the administrative
adjustment request, plus interest calculated through the date
of the administrative adjustment requests, ends accrual of
additional interest with respect to that portion of the
underpayment ultimately determined that was reported on the
administrative adjustment request. If an increase in the
imputed underpayment reported by the partnership results from
the relevant examination, the additional tax that should have
been reported and paid with the administrative adjustment
request submitted during 2020 will incur interest from March
15, 2019, unextended due date of the 2018 return, to the date
the amount is paid.
In addition, the issues presented in the administrative
adjustment request may be relevant to determining the correct
treatment of items reported by the partnership on returns for
other periods. For example, the year in which the request is
filed may be subject to examination for issues related to the
items that were the subject of the administrative adjustment
request. In that case, information from taxable year 2018 is
relevant, regardless of whether an examination of 2018 is
opened. However, no imputed underpayment for 2018 may be
determined without initiating an administrative proceeding with
respect to that year.
Definitions and Special Rules
Definitions and special rules \249\
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\249\ Sec. 6241.
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Partnership
The term partnership means any partnership required to file
a return under section 6031(a). This includes any partnership
described in section 761 that is required to file a return.
Partnership adjustment
The term partnership adjustment means any adjustment in the
amount of any item of income, gain, loss, deduction, or credit
of a partnership, or any partner's distributed share thereof.
Return due date
The term return due date means, with respect to the taxable
year, the date prescribed for filing the partnership return for
such taxable year (determined without regard to extensions).
Payments nondeductible
No deduction is allowed under the Federal income tax for
any payment required to be made by a partnership under the
centralized system of partnership audit, assessment, and
collection.
Under the centralized system, the flowthrough nature of the
partnership under subchapter K of the Code is unchanged, but
the partnership is treated as a point of collection of
underpayments that would otherwise be the responsibility of
partners. The return filed by the partnership, though it is an
information return, is treated as if it were a tax return where
necessary to implement examination, assessment, and collection
of the tax due and any penalties, additions to tax, and
interest.
A basis adjustment (reduction) to a partner's basis in its
partnership interest is made to reflect the nondeductible
payment by the partnership of the tax. Specifically, present-
law section 705(a)(2)(B) applies, providing that the adjusted
basis of a partner's interest in a partnership is the basis of
the interest determined under applicable rules relating to
contributions and transfers, and decreased (but not below zero)
by expenditures of the partnership that are not deductible in
computing its taxable income and not properly chargeable to
capital account. Concomitantly, the partnership's total
adjusted basis in its assets is reduced by the cash payment of
the tax. Thus, parallel basis reductions are made to outside
and inside basis to reflect the partnership's payment of the
tax. Partners, former partners, and the partnership may have
entered into indemnification agreements under the partnership
agreement with respect to the risk of tax liability of former
or new partners being borne economically by new or former
partners, respectively. Because the payment of tax by a
partnership under the centralized system is nondeductible,
payments under an indemnification or similar agreement with
respect to or arising from the tax are nondeductible.
Partnerships having principal place of business outside the
United States
For purposes of judicial review following a notice of final
partnership adjustment, a principal place of business located
outside the United States is treated as located in the District
of Columbia.
Suspension of period of limitations on making adjustment,
assessment or collection
The provision includes a rule similar to the present-law
rule \250\ to conform the automatic stay of the Bankruptcy Code
(Title 11) with the limitations period applicable under the
centralized system for partnership adjustments. Any statute of
limitations period provided under the centralized system on
making a partnership adjustment, or on assessment or collection
of an imputed underpayment, is suspended during the period the
Secretary is prohibited by reason of the Title 11 case from
making the adjustment, assessment, or collection. For
adjustment or assessment, the relevant statute of limitations
is extended for 60 days thereafter. For collection, the
relevant statute of limitations is extended for six months
thereafter.
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\250\ Sec. 6213(f).
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In a case under Title 11, the 90-day period to petition for
judicial review after the mailing of the notice of final
partnership adjustment \251\ is suspended during the period the
partnership is prohibited by reason of the Title 11 case from
filing such a petition for judicial review, and for 60 days
thereafter.
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\251\ Sec. 6234.
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Treatment where partnership ceases to exist
If a partnership ceases to exist before a partnership
adjustment under the centralized system is made, the adjustment
is taken into account by the former partners of the
partnership, under regulations provided by the Secretary.
Whether a partnership ceases to exist for this purpose is
determined without regard to whether there is a technical
termination of the partnership within the meaning of section
708(b)(1)(B). The successor partnership in a technical
termination succeeds to the adjustment or imputed underpayment,
absent regulations to the contrary. A partnership that
terminates within the meaning of section 708(b)(1)(A) is
treated as ceasing to exist. In addition, a partnership also
may be treated as ceasing to exist in other circumstances or
based on other factors, under regulations provided by the
Secretary. For example, for the purpose of whether a
partnership ceases to exist under new section 6241(7), a
partnership that has no significant income, revenue, assets, or
activities at the time the partnership adjustment takes effect
may be treated as having ceased to exist.
Extension to entities filing partnership return
If a partnership return (Form 1065) is filed by an entity
for a taxable year but it is determined that the entity is not
a partnership (or that there is no entity) for the year, then,
to the extent provided in regulations, the provisions of this
subchapter are extended in respect of that year to the entity
and its items of income, gain, loss, deduction, and credit, and
to persons holding an interest in the entity.
For example, assume two taxpayers purport to create a
partnership for taxable year 2018, and a Form 1065 is filed for
that year. The partnership is the subject of an audit under the
centralized system for 2018, and pursuant to the provisions for
judicial review, the partnership is determined by a court not
to exist as partnership. Nevertheless, the rules of the
centralized system apply to the items of income, gain, loss,
deduction and credit, and to the two taxpayers, in respect of
2018. An imputed underpayment may be collected from the
purported partnership in the adjustment year pursuant to new
section 6225. Alternatively, the purported partnership
representative may elect (at the time and in the manner
prescribed by the Secretary) under new section 6226 to issue
statements to the two taxpayers, which purported to hold
partnership interests for the reviewed year. To the extent of
the adjustments, each of the two taxpayer's tax may be
increased for the taxpayer's taxable year that includes the
date of the statement. In this situation, the amount of the
increase for each of them is amount by which the taxpayer's tax
would increase if the taxpayer's share of the adjustment
amounts were included for the taxpayer's taxable year that
includes the end of the reviewed year, plus the amount by which
the tax would increase by reason of adjustment to tax
attributes in years after that year of the taxpayer and before
the year of the date of the statement.
Related provisions
Binding nature of partnership adjustment proceedings
The provision clarifies that the merits of an issue that is
the subject of a final determination in a proceeding brought
under the centralized system \252\ is among the issues that are
precluded from being raised at a collection due process hearing
(in connection with the right to, and opportunity for, such a
hearing prior to a levy on any property or right to any
property under present law).\253\ The provision does not
restrict the authority of the Secretary to permit an
opportunity for administrative review, similar to the
Collection Appeals Program,\254\ nor does it limit a partner's
right to seek review of the conduct of collection measures,
such as whether notices of Federal tax lien or notice of intent
to levy were timely issued.
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\252\ That is, a proceeding brought under subchapter C of chapter
63 of the Code.
\253\ Section 6330 establishes the requirement that the IRS provide
notice of potential collection action and offer an opportunity for a
hearing before an impartial officer, and identifies which issues may be
raised at such hearing and which are precluded. Issues permitted to be
raised include the underlying liability only if the taxpayer did not
receive a notice of deficiency or otherwise have an opportunity to
contest the liability. Prior to amendment, the issues that were
precluded listed those that were the subject of any previous
administrative or judicial proceeding. Treas. Reg. 301-6330. The
Secretary's power to levy is set forth in present-law section 6331.
\254\ For example, under TEFRA, the IRS permits partners to raise
computational issues, interest abatement questions and other collection
due process rights in administrative appeals in order to assure
consistency in the handling of the cases, even though the partners are
precluded from questioning the substance of the partnership adjustment.
See Internal Revenue Manual, paragraph 8.22.8.19, TEFRA Partnerships.
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For example, assume that a partnership is audited with
respect to taxable year 2018. One of the adjustments reflects
the partnership's omission of income of $1,000 in calculating
partnership taxable income. Following receipt of the notice of
final partnership adjustment, the partnership decides not to
litigate. The partnership elects to issue statements to
reviewed year partners, whose tax is increased for the
partner's taxable year that includes the date of the statement,
2021. Reviewed year partner A's adjustment is $100, resulting
in an increase in tax of $35, but partner A does not pay the
increased amount of tax. The time for the partnership to
litigate the adjustments has elapsed and the notice of final
partnership adjustment is a final determination. Prior to any
levy on any property or right to any property of partner A in
connection with collection of the $35 tax, partner A has the
right to and is afforded the opportunity for a hearing (the
collection due process hearing). At the hearing, partner A may
not raise the issue of whether the $1,000 (or A's $100 share of
it) was properly includable in determining partnership taxable
income, because a final determination with respect to the issue
was made in a proceeding brought under the centralized system.
The result is the same if the partnership had decided to seek
judicial review and the final determination of the court is
that the $1,000 is includable in determining partnership
taxable income.
Restriction on authority to amend partner information
statements
The provision provides that partner information returns
(currently Schedules K-1) required to be furnished by the
partnership \255\ may not be amended after the due date of the
partnership return to which the partner information returns
relate. The due date takes into account the permitted extension
period. For example, the Schedules K-1 furnished by a
partnership with respect to its taxable year 2020 may not be
amended after the due date for the partnership 2020 return. If
the partnership has a calendar taxable year, the due date for
its partnership 2020 return is September 15, 2021 (taking into
account the permitted 6-month extension following the due date
of March 15, 2021), after which date the Schedules K-1 for 2020
may no longer be amended.\256\ The partnership may, however,
file an administrative adjustment request pursuant to new
section 6227, and the partnership may pay any resulting imputed
underpayment at the partnership level.
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\255\ The requirement of furnishing partner information returns is
imposed by section 6031(b). See section 411 of the Protecting Americans
from Tax Hikes Act of 2015 (Division Q of Pub. L. No. 114-113),
correcting a conforming amendment to strike the last sentence of
section 6031(b) under prior law, which sentence related to repealed
provisions on electing large partnerships.
\256\ This rule does not, however, preclude the filing of amended
returns of reviewed-year partners pursuant to the procedure for
modification of an imputed underpayment in section 6225(c)(2).
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Example
For example, assume that a partnership files its Form 1065
for taxable year 2020 on March 15, 2021. On November 3, 2021,
the partnership discovers an omission from income for 2020. The
partnership may not issue amended Schedules K-1 to its partners
for 2020. However, the partnership may file an administrative
adjustment request and pay the underpayment consistently with
new section 6227(b)(1) for the partnership taxable year in
which the administrative adjustment request is made. In this
situation, the partnership does not furnish amended Schedules
K-1 to the partners and the partners do not file amended
Federal and State income tax returns with respect to the
omitted income.\257\
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\257\ The partnership that files the administrative adjustment
request is not precluded from furnishing under section 6227(b)(2) an
adjusted statement (similar to a Schedule K-1) to each reviewed-year
partner, who is then required to pay tax attributable to the
partnership adjustment (as provided under guidance provided by the
Secretary).
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Effective Date
The provision applies to returns filed for partnership
taxable years beginning after December 31, 2017. The provision
relating to administrative adjustment requests applies to
requests with respect to returns filed for partnership taxable
years beginning after December 31, 2017. The provision relating
to the election of a partnership to furnish statements to
partners (section 6226) applies to elections with respect to
returns filed for partnership taxable years beginning after
December 31, 2017.
A partnership may elect for the provisions of the
centralized system (other than the election out under section
6221(b)) to apply to any return of the partnership filed for
partnership taxable years beginning after the date of enactment
and before January 1, 2018. This election is made at such time
and in such form and manner as the Secretary of the Treasury
may prescribe. A partnership may not elect out of the
centralized system under section 6221(b) in combination with
this election.
A partnership may choose to make this election, for
example, to be eligible before 2018 to pay at the partnership
level, to obviate the need to furnish amended Schedules K-1 to
correct a partnership-level error, or to obviate the need for
partners receiving amended Schedules K-1 to file amended
Federal and State income tax returns. A partnership may not
elect out of the centralized system under section 6221(b) in
combination with this election.
B. Partnership Interests Created by Gift (sec. 1102 of the Act and
secs. 704(e) and 761(b) of the Code)
Present Law
Under present law, a partnership includes an unincorporated
organization that carries on any business, financial operation,
or venture which is not otherwise treated as a trust, estate,
or corporation under the Internal Revenue Code.\258\ The
Supreme Court has stated that the test of a partnership is
``whether considering all the facts . . . the parties in good
faith and acting with a business purpose intended to join
together in the present conduct of the enterprise''.\259\ A
partner means a member of a partnership.\260\
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\258\ Sec. 761(a). See also sec. 7701(a)(2).
\259\ Commissioner v. Culbertson, 337 U.S. 733, 742 (1949).
\260\ Sec. 761(b).
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Present law also provides that the manner in which a person
acquires a capital interest is not determinative of whether
that person is recognized as a partner for income tax purposes.
If he owns a capital interest in a partnership in which capital
is a material income-producing factor, whether or not the
interest was derived by purchase or gift from any person, the
owner is treated as a partner.\261\ The predecessor of this
provision was enacted in 1951 to prevent the IRS from denying
partner status to a taxpayer who shared actual ownership of the
partnership's income-producing capital on the basis that the
interest was acquired from a family member.\262\ According to
the legislative history, ``Your committee's amendment makes it
clear that, however the owner of a partnership interest may
have acquired such interest, the income is taxed to the owner,
if he is the real owner. If the ownership is real, it does not
matter what motivated the transfer to him or whether the
business benefitted from the entrance of the new partner.''
\263\ The focus of the legislation was on which party
(transferor or transferee) actually owns a partnership
interest, not on whether a particular interest qualifies as a
partnership interest. The provision states the general
principle that income derived from capital is taxed to the
owner of the capital.\264\
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\261\ Sec. 704(e)(1).
\262\ Pub. L. No. 82-183, sec. 340(a).
\263\ S. Rep. No. 781, 82d Cong., 1st Sess., 38, 39 (1951): H.R.
Rep. No. 586, 82d Cong., 1st Sess. 32 (1951).
\264\ See 4 Bittker and Lokken, Federal Taxation of Income,
Estates, and Gifts, para. 86.3.1, at 86-29 (3rd ed. 2003). ``The
reference to `ownership' of a capital interest is odd because it is a
pervasive principle of tax law, seemingly needing no repetition for a
limited class of assets, that income from property transferred by gift
is thereafter taxed to the donee.''
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In a partnership known as Castle Harbour, LLC, two foreign
banks held interests, the nature of which was the subject of
dispute for income tax purposes. At the trial level, the
District Court held that the tax-indifferent banks were
partners even though the interest was not ``bona fide
partnership equity participation'' \265\ because the interest
met the definition of a capital interest within the meaning of
section 704(e)(1).\266\ Thus, the tax-indifferent banks were
partners to which income could be allocated. The trial court
was reversed on appeal.\267\
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\265\ TIFD III-E, Inc. v. United States, 459 F.3d 220 (2d Cir.
2006), reversing and remanding 342 F.Supp. 2d 94 (D. Conn. 2004). TIFD
III-E, Inc. was tax matters partner for Castle Harbour, LLC.
\266\ TIFD III-E, Inc. v. United States, 660 F. Supp. 2d 367 (D.
Conn. 2009).
\267\ TIFD III-E, Inc. v. United States, 666 F.3d 836 (2d Cir.
2012).
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Explanation of Provision
The provision clarifies that, in the case of a capital
interest in a partnership in which capital is a material
income-producing factor, the determination of whether a person
is a partner with respect to the interest is made without
regard to whether the interest was derived by gift from any
other person. The provision strikes paragraph (1) of section
704(e) and modifies the definition of partner in section 761 to
eliminate any argument that the provision provides an
alternative test as to whether the holder of a capital interest
is a partner with respect to that interest, or whether the
interest constitutes a capital interest in a partnership.
The provision is intended to retain the present-law
determination of which person (for example, the donor or the
donee) is a partner. The provision is not intended to change
the principle that the real owner of a capital interest is to
be taxed on the income from the interest, regardless of the
motivation behind or the means of the transfer of the interest.
Thus, as under present law, the fact that an individual
received such a partnership interest by gift from a family
member does not determine whether that individual is (or is
not) a partner.
The provision places the new provision in section 761,
relating to definitions, rather than section 704, relating to a
partner's distributive share.\268\
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\268\ The predecessor to section 704(e)(1) was located in the
definitions at section 3797(a)(2) of the Internal Revenue Code of 1939.
It was placed at section 704(e)(1) when the Code was recodified as the
Internal Revenue Code of 1954.
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Effective Date
The provision applies to partnership taxable years
beginning after December 31, 2015.
PART ELEVEN: SURFACE TRANSPORTATION EXTENSION ACT OF 2015, PART II
(PUBLIC LAW 114-87) \269\
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\269\ H.R. 3996. The House passed H.R. 3996 on November 16, 2015.
The bill passed the Senate without amendment on November 19, 2015. The
President signed the bill on November 20, 2015.
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A. Extension of Highway Trust Fund Expenditure Authority (sec. 2001 of
the Act and secs. 9503, 9504, and 9508 of the Code)
Present Law
Under present law, the Internal Revenue Code (sec. 9503)
authorizes expenditures (subject to appropriations) to be made
from the Highway Trust Fund (and Sport Fish Restoration and
Boating Trust Fund and Leaking Underground Storage Tank Trust
Fund) through November 20, 2015, for purposes provided in
specified authorizing legislation as in effect on the date of
enactment.
Explanation of Provision
This provision extends the authority to make expenditures
(subject to appropriations) from the Highway Trust Fund (and
Sport Fish Restoration and Boating Trust Fund and Leaking
Underground Storage Tank Trust Fund) through December 4, 2015.
Effective Date
The provision is effective on date of enactment (November
20, 2015).
PART TWELVE: FIXING AMERICA'S SURFACE TRANSPORTATION ACT (``FAST ACT'')
(PUBLIC LAW 114-94) \270\
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\270\ H.R. 22. The House passed H.R, 22 on January 6, 2015. The
Senate Committee on Finance reported H.R. 22 on February 12, 2015 (S.
Rep. No. 114-3). The Senate passed H.R. 22 with an amendment on July
30, 2015. The conference report was filed on December 1, 2015 (H. Rep.
No. 114-357) and was passed by the House on December 3, 2015, and the
Senate on December 3, 2015. The President signed the bill on December
4, 2015.
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DIVISION C--FINANCE
TITLE XXXI--HIGHWAY TRUST FUND AND RELATED TAXES
A. Extension of Highway Trust Fund Expenditure Authority (secs. 31101
of the Act and secs. 9503, 9504, and 9508 of the Code)
Present Law
In general
Under present law, revenues from the highway excise taxes,
as imposed through October 1, 2016, generally are dedicated to
the Highway Trust Fund. Dedication of excise tax revenues to
the Highway Trust Fund and expenditures from the Highway Trust
Fund are governed by the Code.\271\ The Code authorizes
expenditures (subject to appropriations) from the Highway Trust
Fund through December 4, 2015, for the purposes provided in
authorizing legislation, as such legislation was in effect on
the date of enactment of the Surface Transportation Extension
Act of 2015, Part II.
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\271\ Sec. 9503. The Highway Trust Fund statutory provisions were
placed in the Internal Revenue Code in 1982.
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Highway Trust Fund expenditure purposes
The Highway Trust Fund has a separate account for mass
transit, the Mass Transit Account.\272\ The Highway Trust Fund
and the Mass Transit Account are funding sources for specific
programs.
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\272\ Sec. 9503(e)(1).
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Highway Trust Fund expenditure purposes have been revised
with each authorization Act enacted since establishment of the
Highway Trust Fund in 1956. In general, expenditures authorized
under those Acts (as the Acts were in effect on the date of
enactment of the most recent such authorizing Act) are
specified by the Code as Highway Trust Fund expenditure
purposes. The Code provides that the authority to make
expenditures from the Highway Trust Fund expires after December
4, 2015. Thus, no Highway Trust Fund expenditures may occur
after December 4, 2015, without an amendment to the Code.
Section 9503 of the Code appropriates to the Highway Trust
Fund amounts equivalent to the taxes received from the
following: the taxes on diesel, gasoline, kerosene and special
motor fuel, the tax on tires, the annual heavy vehicle use tax,
and the tax on the retail sale of heavy trucks and
trailers.\273\ Section 9601 provides that amounts appropriated
to a trust fund pursuant to sections 9501 through 9511, are to
be transferred at least monthly from the General Fund of the
Treasury to such trust fund on the basis of estimates made by
the Secretary of the Treasury of the amounts referred to in the
Code section appropriating the amounts to such trust fund. The
Code requires that proper adjustments be made in amounts
subsequently transferred to the extent prior estimates were in
excess of, or less than, the amounts required to be
transferred.
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\273\ Sec. 9503(b)(1).
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Explanation of Provision
The provision provides for expenditure authority through
September 30, 2020.\274\ The Code provisions governing the
purposes for which monies in the Highway Trust Fund may be
spent are updated to include the FAST Act.
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\274\ Cross-references to the reauthorization Act in the Code
provisions governing the Sport Fish Restoration and Boating Trust Fund
are also updated to include the FAST Act. In addition the date
references in the Code provisions governing the Leaking Underground
Storage Tank Trust Fund, and the Sport Fish Restoration and Boating
Trust Fund are also updated.
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Effective Date
The provision is effective on the date of enactment
(December 4, 2015).
B. Extension of Highway-Related Taxes (sec. 31102 of the Act and secs.
4041, 4051, 4071, 4081, 4221, 4481, 4483, and 6412 of the Code)
Present Law Highway Trust Fund Excise Taxes
In general
Six separate excise taxes are imposed to finance the
Federal Highway Trust Fund program. Three of these taxes are
imposed on highway motor fuels. The remaining three are a
retail sales tax on heavy highway vehicles, a manufacturers'
excise tax on heavy vehicle tires, and an annual use tax on
heavy vehicles. A substantial majority of the revenues produced
by the Highway Trust Fund excise taxes are derived from the
taxes on motor fuels. The annual use tax on heavy vehicles
expires October 1, 2017. Except for 4.3 cents per gallon of the
Highway Trust Fund fuels tax rates, the remaining taxes are
scheduled to expire after October 1, 2016. The 4.3-cents-per-
gallon portion of the fuels tax rates is permanent.\275\ The
six taxes are summarized below.
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\275\ This portion of the tax rates was enacted as a deficit
reduction measure in 1993. Receipts from it were retained in the
General Fund until 1997 legislation provided for their transfer to the
Highway Trust Fund.
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Highway motor fuels taxes
The Highway Trust Fund motor fuels tax rates are as
follows: \276\
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\276\ Secs. 4081(a)(2)(A)(i), 4081(a)(2)(A)(iii), 4041(a)(2),
4041(a)(3), and 4041(m). Some of these fuels also are subject to an
additional 0.1-cent-per-gallon excise tax to fund the Leaking
Underground Storage Tank Trust Fund (secs. 4041(d) and 4081(a)(2)(B)).
------------------------------------------------------------------------
------------------------------------------------------------------------
Gasoline.................................. 18.3 cents per gallon
Diesel fuel and kerosene.................. 24.3 cents per gallon
Alternative fuels......................... 18.3 or 24.3 cents per
gallon generally \277\
------------------------------------------------------------------------
Non-fuel Highway Trust Fund excise taxes
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\277\ See secs. 4041(a)(2), 4041(a)(3), and 4041(m).
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In addition to the highway motor fuels excise tax revenues,
the Highway Trust Fund receives revenues produced by three
excise taxes imposed exclusively on heavy highway vehicles or
tires. These taxes are:
1. A 12-percent excise tax imposed on the first retail sale
of the following articles: truck chassis and bodies, truck
trailer and semitrailer chassis and bodies, and tractors of the
kind chiefly used for highway transportation in combination
with a trailer or semitrailer (generally, the taxes apply to
trucks having a gross vehicle weight in excess of 33,000 pounds
and trailers having such a weight in excess of 26,000 pounds);
\278\
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\278\ Sec. 4051.
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2. An excise tax imposed on highway tires with a rated load
capacity exceeding 3,500 pounds, generally at a rate of 0.945
cents per 10 pounds of excess; \279\ and
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\279\ Sec. 4071.
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3. An annual use tax imposed on highway vehicles having a
taxable gross weight of 55,000 pounds or more.\280\ (The
maximum rate for this tax is $550 per year, imposed on vehicles
having a taxable gross weight over 75,000 pounds.)
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\280\ Sec. 4481.
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The taxable year for the annual use tax is from July 1st
through June 30th of the following year. For the period July 1,
2016, through September 30, 2016, the amount of the annual use
tax is reduced by 75 percent.\281\
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\281\ Sec. 4482(c)(4) and (d).
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Explanation of Provision
The provision generally extends present-law taxes through
September 30, 2022. The heavy vehicle use tax is extended
through September 30, 2023.
Effective Date
The provision is effective October 1, 2016.
C. Additional Transfers to the Highway Trust Fund (sec. 31201 of the
Act and sec. 9503 of the Code)
Present Law
Public Law No. 110-318, ``an Act to amend the Internal
Revenue Code of 1986 to restore the Highway Trust Fund
balance'' transferred, out of money in the Treasury not
otherwise appropriated, $8,017,000,000 to the Highway Trust
Fund effective September 15, 2008. Public Law No. 111-46, ``an
Act to restore sums to the Highway Trust Fund and for other
purposes,'' transferred, out of money in the Treasury not
otherwise appropriated, $7 billion to the Highway Trust Fund
effective August 7, 2009. The Hiring Incentives to Restore
Employment Act transferred, out of money in the Treasury not
otherwise appropriated, $14,700,000,000 to the Highway Trust
Fund and $4,800,000,000 to the Mass Transit Account in the
Highway Trust Fund.\282\ The HIRE Act provisions generally were
effective as of March 18, 2010.
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\282\ The Hiring Incentives to Restore Employment Act (the ``HIRE''
Act), Pub. L. No. 111-147, sec. 442.
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Moving Ahead for Progress in the 21st Century (``MAP-21'')
\283\ provided that, out of money in the Treasury not otherwise
appropriated, the following transfers were to be made from the
General Fund to the Highway Trust Fund:
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\283\ Moving Ahead for Progress in the 21st Century Act (``MAP-
21''), Pub. L. No. 112-141, sec. 40201(a)(2), and sec. 40251.
------------------------------------------------------------------------
FY 2013 FY 2014
------------------------------------------------------------------------
Highway Account....................... $6.2 billion $10.4 billion
Mass Transit Account.................. $2.2 billion
------------------------------------------------------------------------
MAP-21 also transferred $2.4 billion from the Leaking
Underground Storage Tank Trust Fund to the Highway Account in
the Highway Trust Fund.
The Highway and Transportation Funding Act of 2014
transferred $7.765 billion from the General Fund to the Highway
Account of the Highway Trust Fund, $2 billion from the General
Fund to the Mass Transit Account of the Highway Trust Fund, and
$1 billion from the Leaking Underground Storage Tank Trust Fund
to the Highway Account of the Highway Trust Fund.\284\ The
provisions were effective on August 8, 2014.
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\284\ Highway and Transportation Funding Act of 2014, Pub. L. No.
113-159, sec. 2002.
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The Surface Transportation and Veterans Health Care Choice
Improvement Act of 2015, provided, out of money not otherwise
appropriated, the following transfers from the General Fund to
the Highway Trust Fund: $6.068 billion to the Highway Account,
and $2 billion to the Mass Transit Account. The provision was
effective July 31, 2015.
Explanation of Provision
The provision provides that out of money in the Treasury
not otherwise appropriated, the following transfers are to be
made from the General Fund to the Highway Trust Fund:
$51,900,000,000 to the Highway Account and $18,100,000,000 to
the Mass Transit account.
Effective Date
The provision is effective on the date of enactment
(December 4, 2015).
D. Transfer to Highway Trust Fund of Certain Motor Vehicle Safety
Penalties (sec. 31202 of the Act and sec. 9503 of the Code)
Present Law
Present law imposes certain civil penalties related to
violations of motor vehicle safety.
Explanation of Provision
The provision deposits the civil penalties related to motor
vehicle safety in the Highway Trust Fund instead of in the
Treasury's General Fund.
Effective Date
The provision is effective for amounts collected after the
date of enactment (December 4, 2015).
E. Appropriation From Leaking Underground Storage Tank Trust Fund (sec.
31203 of the Act and secs. 9503 and 9508 of the Code)
Present Law
Fuels of a type subject to other trust fund excise taxes
generally are subject to an add-on excise tax of 0.1-cent-per-
gallon to fund the Leaking Underground Storage Tank (``LUST'')
Trust Fund.\285\ For example, the LUST excise tax applies to
gasoline, diesel fuel, kerosene, and most alternative fuels
subject to highway and aviation fuels excise taxes, and to
fuels subject to the inland waterways fuel excise tax. This
excise tax is imposed on both uses and parties subject to the
other taxes, and to situations (other than export) in which the
fuel otherwise is tax-exempt. For example, off-highway business
use of gasoline and off-highway use of diesel fuel and kerosene
generally are exempt from highway motor fuels excise tax.
Similarly, States and local governments and certain other
parties are exempt from such tax. Nonetheless, all such uses
and parties are subject to the 0.1-cent-per-gallon LUST excise
tax.
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\285\ Secs. 4041, 4042, and 4081.
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Liquefied natural gas, compressed natural gas, and
liquefied petroleum gas are exempt from the LUST tax.
Additionally, methanol and ethanol fuels produced from coal
(including peat) are taxed at a reduced rate of 0.05 cents per
gallon.
Explanation of Provision
The provision transfers $100 million on the date of
enactment (December 4, 2015), $100 million on October 1, 2016,
and an additional $100 million on October 1, 2017, from the
LUST Trust Fund to the Highway Account of the Highway Trust
Fund.
Effective Date
The provision is effective on the date of enactment
(December 4, 2015).
TITLE XXXII--OFFSETS
A. Revocation or Denial of Passport in Case of Certain Unpaid Taxes
(sec. 32101 of the Act and secs. 6320, 6331, 7345 and 6103(k)(11) of
the Code)
Present Law
The administration of passports is the responsibility of
the Department of State.\286\ The Secretary of State may refuse
to issue or renew a passport if the applicant owes child
support in excess of $2,500 or owes certain types of Federal
debts, such as expenses incurred in providing assistance to an
applicant to return to the United States. The scope of this
authority does not extend to rejection or revocation of a
passport on the basis of delinquent Federal taxes. Although
issuance of a passport does not require a social security
number or taxpayer identification number (``TIN''), the
applicant is required under the Code to provide such number.
Failure to provide a TIN is reported by the State Department to
the IRS and may result in a $500 fine.\287\
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\286\ ``Passport Act of 1926,'' 22 U.S.C. sec. 211a et seq.
\287\ Sec. 6039E.
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Returns and return information are confidential and may not
be disclosed by the IRS, other Federal employees, State
employees, and certain others having access to such information
except as provided in the Internal Revenue Code.\288\ There are
a number of exceptions to the general rule of nondisclosure
that authorize disclosure in specifically identified
circumstances, including disclosure of information about
federal tax debts for purposes of reviewing an application for
a Federal loan \289\ and for purposes of enhancing the
integrity of the Medicare program.\290\
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\288\ Sec. 6103.
\289\ Sec. 6103(l)(3).
\290\ Sec. 6103(l)(22).
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Explanation of Provision
In general
Under the provision, the Secretary of State is required to
deny a passport (or renewal of a passport) to a seriously
delinquent taxpayer and is permitted to revoke any passport
previously issued to such person. In addition to the revocation
or denial of passports to delinquent taxpayers, the Secretary
of State is authorized to deny an application for a passport if
the applicant fails to provide a social security number or
provides an incorrect or invalid social security number. With
respect to an incorrect or invalid number, the inclusion of an
erroneous number is a basis for rejection of the application
only if the erroneous number was provided willfully,
intentionally, recklessly or negligently. Exceptions to these
rules are permitted for emergency or humanitarian
circumstances, including the issuance of a passport for short-
term use to return to the United States by the delinquent
taxpayer.
The provision authorizes limited sharing of information
between the Secretary of State and Secretary of the Treasury.
If the Commissioner of Internal Revenue certifies to the
Secretary of the Treasury the identity of persons who have
seriously delinquent Federal taxes as defined in this
provision, the Secretary of the Treasury or his delegate is
authorized to transmit such certification to the Secretary of
State for use in determining whether to issue, renew, or revoke
a passport. Certification of a seriously delinquent tax debt
under this provision is added to the list of actions for which
the time in which the action must be performed may be postponed
due to the taxpayer's service in a combat zone.\291\ Applicants
whose names are included on the certifications provided to the
Secretary of State are ineligible for a passport. The Secretary
of State and Secretary of the Treasury are held harmless with
respect to any certification issued pursuant to this provision.
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\291\ Sec. 7508(a).
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Applicable only to ``seriously delinquent tax debt''
The provision applies only to ``seriously delinquent tax
debt,'' which includes any outstanding Federal tax liability
(including interest and any penalties) in excess of $50,000
\292\ for which a notice of lien or a notice of levy has been
filed. With respect to debts for which a notice of lien has
been filed, the debt is considered seriously delinquent only if
the taxpayer's administrative review rights have been exhausted
or lapsed. The amount is to be adjusted for inflation annually,
using calendar year 2014, and a cost-of-living adjustment. Even
if a tax debt otherwise meets the statutory threshold, it may
not be considered seriously delinquent if (1) the debt is being
paid in a timely manner pursuant to an installment agreement or
offer-in-compromise, or (2) collection action with respect to
the debt is suspended because a collection due process hearing
or innocent spouse relief has been requested or is pending.
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\292\ The amount is indexed to inflation annually, based on
calendar year 2015.
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Taxpayer safeguards
Several measures ensure that the IRS corrects erroneous
certifications and considers actions taken by a taxpayer after
action has been initiated under this provision if such actions
would have the effect of removing the debt from the category of
seriously delinquent debt. These measures include limits on the
authority of the Commissioner, notification requirements,
standards under which the Commissioner may reverse the
certification of serious delinquency, and limits on authority
to delegate the certification process.
The Commissioner may not delegate the authority to provide
certification of a seriously delinquent tax debt except to a
Deputy Commissioner for Services and Enforcement, or to a
Division Commissioner (the head of an IRS operating division).
Neither official may redelegate such authority.
The Commissioner must inform taxpayers regarding the
procedures in three ways. First, the possible loss of a
passport is added to the list of matters required to be
included in notices to taxpayer of potential collection
activity under sections 6320 or 6331. Second, the Commissioner
must provide contemporaneous notice to a taxpayer when the
Commissioner sends a certification of serious delinquency to
the Secretary. Finally, in instances in which the Commissioner
decertifies the taxpayer's status as a delinquent taxpayer, he
is required to provide notice to the taxpayer at the same time
as the notice to the Secretary of the Treasury.
The decertification process provides a mechanism under
which the Commissioner can correct an erroneous certification
or end the certification because the debt is no longer
seriously delinquent, due to certain events subsequent to the
certification. If after certifying the delinquency to the
Secretary, the IRS receives full payment of the seriously
delinquent tax debt; the taxpayer enters into an installment
agreement under section 6159; the IRS accepts an offer in
compromise under section 7122; or a spouse files for relief
from joint liability, the Commissioner must notify the
Secretary that the taxpayer is not seriously delinquent. In
each instance, the ``decertification'' is limited to the
taxpayer who is the subject of one of the above actions. In the
case of a claim for innocent spouse relief, the decertification
is only with respect to the spouse claiming relief, not both
spouses. The Commissioner must generally decertify within 30
days of the event that requires decertification.
The Commissioner must provide the notice of decertification
to the Secretary of the Treasury, who must in turn promptly
notify the Secretary of State of the decertification. The
Secretary of State must delete the certification from the
records regarding that taxpayer.
In addition, the provision allows limited judicial review
of a wrongful certification (or failure to decertify) in a
Federal district court or the U.S. Tax Court. If the court
determines that the certification is erroneous, the court may
order the Secretary of the Treasury to notify the Secretary of
State of the error. No other relief is authorized.
Effective Date
The provision is effective on the date of enactment
(December 4, 2015).
B. Reform of Rules Related to Qualified Tax Collection Contracts, and
Special Compliance Personnel Program (secs. 32102-32103 of the Act and
sec. 6306 of the Code)
Present Law
Code section 6306 permits the IRS to use private debt
collection companies to locate and contact taxpayers owing
outstanding tax liabilities of any type \293\ and to arrange
payment of those taxes by the taxpayers. There must be an
assessment pursuant to section 6201 in order for there to be an
outstanding tax liability. An assessment is the formal
recording of the taxpayer's tax liability that fixes the amount
payable. An assessment must be made before the IRS is permitted
to commence enforcement actions to collect the amount payable.
In general, an assessment is made at the conclusion of all
examination and appeals processes within the IRS.\294\
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\293\ This provision generally applies to any type of tax imposed
under the Internal Revenue Code.
\294\ An amount of tax reported as due on the taxpayer's tax return
is considered to be self-assessed. If the IRS determines that the
assessment or collection of tax will be jeopardized by delay, it has
the authority to assess the amount immediately (sec. 6861), subject to
several procedural safeguards.
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Several steps are involved in the deployment of private
debt collection companies. First, the private debt collection
company contacts the taxpayer by letter.\295\ If the taxpayer's
last known address is incorrect, the private debt collection
company searches for the correct address. Second, the private
debt collection company telephones the taxpayer to request full
payment.\296\ If the taxpayer cannot pay in full immediately,
the private debt collection company offers the taxpayer an
installment agreement providing for full payment of the taxes
over a period of as long as five years. If the taxpayer is
unable to pay the outstanding tax liability in full over a
five-year period, the private debt collection company obtains
financial information from the taxpayer and will provide this
information to the IRS for further processing and action by the
IRS.
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\295\ The provision requires that the IRS disclose confidential
taxpayer information to the private debt collection company. Section
6103(n) permits disclosure of returns and return information for ``the
providing of other services . . . for purposes of tax administration.''
\296\ The private debt collection company is not permitted to
accept payment directly. Payments are required to be processed by IRS
employees.
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The Code specifies several procedural conditions under
which the provision would operate. First, provisions of the
Fair Debt Collection Practices Act apply to the private debt
collection company. Second, the employees of private sector
debt collection companies are prohibited from committing any
act or omission which employees of the IRS are prohibited from
committing in the performance of similar services. Third,
subcontractors are prohibited from having contact with
taxpayers, providing quality assurance services, and composing
debt collection notices; any other service provided by a
subcontractor must receive prior approval from the IRS.
The Code creates a revolving fund from the amounts
collected by the private debt collection companies. The private
debt collection companies are paid out of this fund. The Code
prohibits the payment of fees for all services in excess of 25
percent of the amount collected under a tax collection
contract.
The Code provides that up to 25 percent of the amount
collected may be used for IRS collection enforcement
activities. The law also requires Treasury to provide a
biennial report to the Committee on Finance and the Committee
on Ways and Means. The report is to include, among other items,
a cost benefit analysis, the impact of the debt collection
contracts on collection enforcement staff levels in the IRS,
and an evaluation of contractor performance.
The Omnibus Appropriations Act of 2009 (the ``Act''), which
made appropriations for the fiscal year ending September 30,
2009, included a provision stating that none of the funds made
available in the Act could be used to fund or administer
section 6306.\297\ Around the same time, the IRS announced that
the IRS would not renew its contracts with private debt
collection agencies.\298\
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\297\ Pub. L. No. 111-8, March 11, 2009.
\298\ IR-2009-19, March 5, 2009.
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Explanation of Provision
Qualified tax collection contracts
The provision requires the Secretary to enter into
qualified tax collection contracts for the collection of
inactive tax receivables. Inactive tax receivables are defined
as any tax receivable (i) removed from the active inventory for
lack of resources or inability to locate the taxpayer, (ii) for
which more than 1/3 of the applicable limitations period has
lapsed and no IRS employee has been assigned to collect the
receivable; and (iii) for which, a receivable has been assigned
for collection but more than 365 days have passed without
interaction with the taxpayer or a third party for purposes of
furthering the collection. Tax receivables are defined as any
outstanding assessment which the IRS includes in potentially
collectible inventory.
The provision designates certain tax receivables as not
eligible for collection under qualified tax collection
contracts, specifically a contract that: (i) is subject to a
pending or active offer-in-compromise or installment agreement;
(ii) is classified as an innocent spouse case; (iii) involves a
taxpayer identified by the Secretary as being (a) deceased, (b)
under the age of 18, (c) in a designated combat zone, or (d) a
victim of identity theft; (iv) is currently under examination,
litigation, criminal investigation, or levy; or (v) is
currently subject to a proper exercise of a right of appeal.
The provision grants authority to the Secretary to prescribe
procedures for taxpayers in Presidentially declared disaster
areas to request relief from immediate collection measures
under the provision.
The provision requires the Secretary to give priority to
private collection contractors and debt collection centers
currently approved by the Treasury Department's Financial
Management Service on the schedule required under section
3711(g) of title 31 of the United States Code, to the extent
appropriate to carry out the purposes of the provision.
The provision adds an additional exception to section 6103
to allow contractors to identify themselves as such and
disclose the nature, subject, and reason for the contact.
Disclosures are permitted only in situations and under
conditions approved by the Secretary.
The provision requires the Secretary to prepare two reports
for the House Committee on Ways and Means and the Senate
Committee on Finance. The first report is required annually and
due not later than 90 days after each fiscal year and is
required to include: (i) the total number and amount of tax
receivables provided to each contractor for collection under
this section, (ii) the total amounts collected by and
installment agreements resulting from the collection efforts of
each contactor and the collection costs incurred by the IRS;
(iii) the impact of such contacts on the total number and
amount of unpaid assessments, and on the number and amount of
assessments collected by IRS personnel after initial contact by
a contractor, (iv) the amount of fees retained by the Secretary
under subsection (e) and a description of the use of such
funds; and (v) a disclosure safeguard report in a form similar
to that required under section 6103(p)(5).
The second report is required biannually and is required to
include: (i) an independent evaluation of contactor
performance; and (ii) a measurement plan that includes a
comparison of the best practices used by private collectors to
the collection techniques used by the IRS and mechanisms to
identify and capture information on successful collection
techniques used by the contractors that could be adopted by the
IRS.
Special compliance personnel program
The provision requires that the amount that, under current
law, is to be retained and used by the IRS for collection
enforcement activities under section 6306 of the Code be
instead used to fund a newly created special compliance
personnel program. The provision also requires the Secretary to
establish an account for the hiring, training, and employment
of special compliance personnel. No other source of funding for
the program is permitted, and funds deposited in the special
account are restricted to use for the program, including
reimbursement of the IRS and other agencies for the cost of
administering the qualified debt collection program and all
costs associated with employment of special compliance
personnel and the retraining and reassignment of other
personnel as special compliance personnel. Special compliance
personnel are individuals employed by the IRS to serve either
as revenue officers performing field collection functions, or
as persons operating the automated collection system.
The provision requires the Secretary to prepare annually a
report for the House Committee on Ways and Means and the Senate
Committee on Finance, to be submitted no later than March of
each year. In the report, the Secretary is to describe for the
preceding fiscal year accounting of all funds received in the
account, administrative and program costs, number of special
compliance personnel hired and employed as well as actual
revenue collected by such personnel. Similar information for
the current and following fiscal year, using both actual and
estimated amounts, is required.
Effective Date
The provision relating to qualified tax collection
contracts applies to tax receivables identified by the
Secretary after the date of enactment (December 4, 2015). The
requirement to give priority to certain private collection
contractors and debt collection centers applies to contracts
and agreements entered into within three months after the date
of enactment, and the new exception to section 6103 applies to
disclosures made after the date of enactment. The requirement
of the reports to Congress is effective on the date of
enactment.
The provision relating to the special compliance personnel
program applies to amounts collected and retained by the
Secretary after the date of enactment.
C. Repeal of Modification of Automatic Extension of Return Due Date for
Certain Employee Benefit Plans (sec. 32104 of the Act and secs. 6058
and 6059 of the Code)
Present Law
An employer that maintains a pension, annuity, stock bonus,
profit-sharing or other funded deferred compensation plan (or
the plan administrator of the plan) is required to file an
annual return containing information required under regulations
with respect to the qualification, financial condition, and
operation of the plan.\299\ The plan administrator of a defined
benefit plan subject to the minimum funding requirements \300\
is required to file an annual actuarial report.\301\ These
filing requirements are met by filing an Annual Return/Report
of Employee Benefit Plan, Form 5500, and providing the
information as required on the form and related
instructions.\302\
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\299\ Sec. 6058.
\300\ Sec. 412. Most governmental plans (defined in section 414(d))
and church plans (defined in section 414(e)) are exempt from the
minimum funding requirements.
\301\ Sec. 6059.
\302\ Treas. Reg. secs. 301.6058-1(a) and 301.6059-1. Form 5500
consists of a main form and various schedules, some of which require
additional information to be included. The schedules that must be filed
and the additional information that must be included with Form 5500
depend on the type and size of plan. A simplified annual reporting
form, Annual Return/Report of Small Employee Benefit Plan, Form 5500-
SF, is available to certain plans (covering fewer than 100 employees)
that are subject to reporting requirements under ERISA and the Code.
References herein to Form 5500 include Form 5500-SF.
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Similarly, the Employee Retirement Income Security Act of
1974 (``ERISA'') requires the administrator of certain pension
and welfare benefit plans to file annual reports disclosing
certain information to the Department of Labor (``DOL'') and,
with respect to some defined benefit plans, to the Pension
Benefit Guaranty Corporation (``PBGC'').\303\ Plan
administrators also comply with these ERISA filing requirements
by filing Form 5500.
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\303\ ERISA secs. 103, 104, and 4065. Most governmental plans and
church plans are exempt from ERISA, including the ERISA reporting
requirements. ERISA section 3004 requires that, when the IRS and DOL
carry out provisions relating to the same subject matter, they must
consult with each other and develop rules, regulations, practices and
forms designed to reduce duplication of effort, duplication of
reporting, and the burden of compliance by plan administrators and
employers. Under ERISA section 4065, the PBGC is required to work with
the IRS and DOL to combine the annual report to PBGC with reports
required to be made to those agencies.
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Forms 5500 are filed with DOL, and information from Forms
5500 is shared with the IRS and PBGC.\304\ Form 5500 is due by
the last day of the seventh month following the close of the
plan year.\305\ DOL and IRS rules allow the due date to be
automatically extended by 2 months if a request for extension
is filed.\306\ Thus, in the case of a plan that uses the
calendar year as the plan year, the extended due date for Form
5500 is October 15.
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\304\ Form 5500 filings are also publicly released in accordance
with section 6104(b) and Treas. Reg. section 301.6104(b)-1 and ERISA
sections 104(a)(1) and 106(a).
\305\ Under ERISA section 104(a)(1), the annual report is due
within 210 days after the close of the plan year or within such time as
provided by regulations to reduce duplicative filings. DOL and IRS
regulations provide for filing at the time required by the forms and
instructions issued by the agencies. 29 C.F.R. sec. 2520.104a-5(a)(2)
and Treas. Reg. secs. 301.6058-1(a)(4) and 301.6059-1(a).
\306\ Treas. Reg. sec. 1.6081-11(a). Instructions for Form 5500
also provide for an automatic extension of time to file the Form 5500
until the due date of the Federal income tax return of the employer
maintaining the plan if (1) the plan year and the employer's tax year
are the same; (2) the employer has been granted an extension of time to
file its federal income tax return to a date later than the normal due
date for filing the Form 5500; and (3) a copy of the application for
extension of time to file the Federal income tax return is maintained
with the records of the Form 5500 filer. An extension granted by using
this automatic extension procedure cannot be extended beyond a total of
9+ months beyond the close of the plan year.
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Under the Surface Transportation and Veterans Health Care
Choice Improvement Act of 2015, in the case of returns for
taxable years beginning after December 31, 2015, the Secretary
of the Treasury is directed to modify appropriate regulations
to provide that the maximum extension for the returns of
employee benefit plans filing Form 5500 is an automatic 3 month
period ending on November 15 for calendar-year plans.\307\
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\307\ Sec. 2006(b)(3) of Pub. L. No. 114-41 (July 31, 2015). See
Part Seven, Title II, item F.
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Explanation of Provision
The provision repeals the provision in the Surface
Transportation and Veterans Health Care Choice Improvement Act
of 2015 that provides for an automatic 3 month extension of the
due date for filing Form 5500. Thus, the extended due date for
Form 5500 is determined under DOL and IRS rules as in effect
before enactment of the Surface Transportation and Veterans
Health Care Choice Improvement Act of 2015.
Effective Date
The provision is effective for returns for taxable years
beginning after December 31, 2015.
PART THIRTEEN: CONSOLIDATED APPROPRIATIONS ACT, 2016 (PUBLIC LAW 114-
113) \308\
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\308\ H.R. 2029. The House passed H.R. 2029 on April 30, 2015. The
Senate passed the bill with an amendment on November 10, 2015. The
House agreed to amendments to the Senate amendment on December 17, and
December 18, 2015, and the bill, as amended, passed the House on
December 18, 2015. The Senate agreed to the House amendments on
December 18, 2015. The President signed the bill on December 18, 2015.
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DIVISION P--TAX-RELATED PROVISIONS
A. High Cost Employer-Sponsored Health Coverage Excise Tax (secs. 101-
103 of the Act and sec. 4980I of the Code)
Present Law
In general
Effective for years beginning after December 31, 2017, an
excise tax is imposed on the provider of applicable employer-
sponsored health coverage (the ``coverage provider'') if the
aggregate cost of the coverage for an employee (including a
former employee, surviving spouse, or any other primary insured
individual) exceeds a threshold amount (referred to as ``high
cost health coverage'').\309\ The tax is 40 percent of the
amount by which aggregate cost exceeds the threshold amount
(the ``excess benefit'').
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\309\ Sec. 4980I, which was added to the Code by section 9001 of
PPACA and amended by section 10901 of PPACA and section 1401 of HCERA.
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The annual threshold amount for 2018 is $10,200 for self-
only coverage and $27,500 for other coverage (such as family
coverage), multiplied by a one-time health cost adjustment
percentage.\310\ This threshold is then adjusted annually
(including for 2018) by an age and gender adjusted excess
premium amount.\311\ The age and gender adjusted excess premium
amount is the excess, if any, of (1) the premium cost of
standard FEHBP coverage for the type of coverage provided to an
individual if priced for the age and gender characteristics of
all employees of the employer, over (2) the premium cost of
standard FEHBP coverage if priced for the age and gender
characteristics of the national workforce. For this purpose,
standard FEHBP coverage means the per employee cost of Blue
Cross/Blue Shield standard benefit coverage under the Federal
Employees Health Benefit Program.
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\310\ The health cost adjustment percentage is 100 percent plus the
excess, if any, of (1) the percentage by which the cost of standard
FEHBP coverage for 2018 (determined according to specified criteria)
exceeds the cost of standard FEHBP coverage for 2010, over (2) 55
percent.
\311\ Under section 4980I, the 2018 threshold amounts are increased
by $1,650 for self-only coverage or $3,450 for other coverage in the
case of certain retirees and participants in a plan covering employees
in a high-risk profession or repair or installation of electrical or
telecommunications lines. For years after 2018, the threshold amounts
(after application of the health cost adjustment percentage), and the
increases for certain retirees and participants in a plan covering
employees in a high-risk profession or repair or installation of
electrical or telecommunications lines, are indexed to the Consumer
Price Index for Urban Consumers (``CPI-U'') (CPI-U increased by one
percentage point for 2019 only), rounded to the nearest $50.
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The excise tax is determined on a monthly basis, by
reference to the aggregate cost of applicable employer-
sponsored coverage for the month and 1/12 of the annual
threshold amount. The excise tax is not deductible for income
tax purposes.\312\
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\312\ Sec. 275(a)(6), referring to taxes imposed by chapter 43.
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Applicable employer-sponsored coverage and determination of cost
Subject to certain exceptions, applicable employer-
sponsored coverage is coverage under any group health plan
offered to an employee by an employer that is excludible from
the employee's gross income or that would be excludible if it
were employer-sponsored coverage.\313\ Thus, applicable
employer-sponsored coverage includes coverage for which an
employee pays on an after-tax basis. Applicable employer-
sponsored coverage includes coverage under any group health
plan established and maintained primarily for its civilian
employees by the Federal government or any Federal agency or
instrumentality, or the government of any State or political
subdivision thereof or any agency or instrumentality of a State
or political subdivision.
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\313\ Section 106 provides an exclusion for employer-provided
coverage.
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Applicable employer-sponsored coverage includes both
insured and self-insured health coverage, including coverage in
the form of reimbursements under a health flexible spending
arrangement (``health FSA'') or a health reimbursement
arrangement and contributions to a health savings account
(``HSA'') or Archer medical savings account (``Archer
MSA'').\314\ In the case of a self-employed individual,
coverage is treated as applicable employer-sponsored coverage
if the self-employed individual is allowed a deduction for all
or any portion of the cost of coverage.\315\
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\314\ Some types of coverage are not included in applicable
employer-sponsored coverage, such as long-term care coverage, separate
insurance coverage substantially all the benefits of which are for
treatment of the mouth (including any organ or structure within the
mouth) or of the eye, and certain excepted benefits. Excepted benefits
for this purpose include (whether through insurance or otherwise)
coverage only for accident, or disability income insurance, or any
combination thereof; coverage issued as a supplement to liability
insurance; liability insurance, including general liability insurance
and automobile liability insurance; workers' compensation or similar
insurance; automobile medical payment insurance; credit-only insurance;
and other similar insurance coverage (as specified in regulations),
under which benefits for medical care are secondary or incidental to
other insurance benefits. Applicable employer-sponsored coverage does
not include coverage only for a specified disease or illness or
hospital indemnity or other fixed indemnity insurance if the cost of
the coverage is not excludible from an employee's income or deductible
by a self-employed individual.
\315\ Section 162(l) allows a deduction to a self-employed
individual for the cost of health insurance.
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For purposes of the excise tax, the cost of applicable
employer-sponsored coverage is generally determined under rules
similar to the rules for determining the applicable premium for
purposes of COBRA continuation coverage,\316\ except that any
portion of the cost of coverage attributable to the excise tax
is not taken into account. Cost is determined separately for
self-only coverage and other coverage. Special valuation rules
apply to certain retiree coverage, health FSAs, and
contributions to HSAs and Archer MSAs.
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\316\ Sec. 4980B(f)(4).
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Calculation of excess benefit and imposition of excise tax
In determining the excess benefit with respect to an
employee (i.e., the amount by which the cost of applicable
employer-sponsored coverage for the employee exceeds the
threshold amount), the aggregate cost of all applicable
employer-sponsored coverage of the employee is taken into
account. The threshold amount for self-only coverage generally
applies to an employee. The threshold amount for other coverage
applies to an employee only if the coverage provides minimum
essential coverage to the employee and at least one other
beneficiary and the benefits provided do not vary based on
whether the covered individual is the employee or other
beneficiary. For purposes of the threshold amount, any coverage
provided under a multiemployer plan is treated as coverage
other than self-only coverage.\317\
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\317\ As defined in section 414(f), a multiemployer plan is
generally a plan to which more than one employer is required to
contribute and that is maintained pursuant to one or more collective
bargaining agreements between one or more employee organizations and
more than one employer.
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The excise tax is imposed on the coverage provider.\318\ In
the case of insured coverage (i.e., coverage under a policy,
certificate, or contract issued by an insurance company), the
health insurance issuer is liable for the excise tax. In the
case of self-insured coverage, the person that administers the
plan benefits (``plan administrator'') is generally liable for
the excise tax. The person that administers the plan benefits
includes the plan sponsor if the plan sponsor administers
benefits under the plan. In the case of employer contributions
to an HSA or an Archer MSA, the employer is liable for the
excise tax.
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\318\ The excise tax is allocated pro rata among the coverage
providers, with each responsible for the excise tax on an amount equal
to the total excess benefit multiplied by a fraction, the numerator of
which is the cost of the applicable employer-sponsored coverage of that
coverage provider and the denominator of which is the aggregate cost of
all applicable employer-sponsored coverage of the employee.
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The employer is generally responsible for calculating the
amount of excess benefit allocable to each coverage provider
and notifying each coverage provider (and the IRS) of the
coverage provider's allocable share. In the case of applicable
employer-sponsored coverage under a multiemployer plan, the
plan sponsor is responsible for the calculation and
notification.\319\
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\319\ The employer or multiemployer plan sponsor may be liable for
a penalty if the total excise tax due exceeds the tax on the excess
benefit calculated and allocated among coverage providers by the
employer or plan sponsor.
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Explanation of Provision
Changes related to the excise tax
The Act includes two provisions that make changes with
respect to this excise tax. One provision delays the effective
date for the excise tax until years beginning after December
31, 2019, thereby delaying by two years (from 2018 to 2020) the
year when the excise tax first becomes effective. However, the
provision retains the 2018 threshold amount and provides the
same adjustments to that amount for purposes of determining the
threshold amounts for 2020 and subsequent years, and
adjustments thereto. Thus, the threshold amounts that apply in
2020 and subsequent years include the same cost-of-living
adjustments to the 2018 threshold amounts that apply under
present law.
The other provision eliminates the denial of the deduction
of the excise tax for income tax purposes.\320\
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\320\ The Act provides that section 275(a)(6) that denies a
deduction for taxes imposed by chapter 43 does not apply to this excise
tax.
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GAO study of suitable benchmarks for age and gender adjustment
The Act includes a provision that directs the Government
Accountability Office to report to the Committee on Finance of
the Senate and the Committee on Ways and Means of the House on
(1) the suitability of the use of the premium cost of standard
FEHBP coverage as a benchmark for the age and gender adjustment
of the applicable dollar limit with respect to the excise tax
and (2) recommendations regarding any more suitable benchmarks
for the age and gender adjustment. The report is to be provided
not later than 18 months after the date of enactment (December
18, 2015) and to be prepared in consultation with the National
Association of Insurance Commissioners.
Effective Date
The provisions are effective on the date of enactment
(December 18, 2015).
B. Annual Fee on Health Insurance Providers (sec. 201 of the Act and
sec. 9010 of the Patient Protection and Affordable Care Act \321\)
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\321\ ``PPACA'', Pub. L. No. 111-148, as amended.
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Present Law
An annual fee applies to any covered entity engaged in the
business of providing health insurance with respect to United
States (``U.S.'') health risks.\322\ The aggregate annual fee
for all covered entities is the applicable amount. The
applicable amount is $8 billion for calendar year 2014, $11.3
billion for calendar years 2015 and 2016, $13.9 billion for
calendar year 2017, and $14.3 billion for calendar year 2018.
For calendar years after 2018, the applicable amount is indexed
to the rate of premium growth.
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\322\ Sec. 9010 of PPACA.
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The aggregate annual fee is apportioned among the providers
based on a ratio designed to reflect relative market share of
U.S. health insurance business. For each covered entity, the
fee for a calendar year is an amount that bears the same ratio
to the applicable amount as (1) the covered entity's net
premiums written during the preceding calendar year with
respect to health insurance for any U.S. health risk, bears to
(2) the aggregate net written premiums of all covered entities
during such preceding calendar year with respect to such health
insurance.
Explanation of Provision
The provision applies a one-year moratorium to the annual
fee on health insurance providers for calendar year 2017.
Effective Date
The provision is effective upon date of enactment (December
18, 2015).
C. Miscellaneous Provisions
1. Extension and phaseout of credits with respect to facilities
producing electricity from wind (secs. 301-302 of the Act and
secs. 45 and 48 of the Code) \323\
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\323\ The Senate Committee on Finance reported S. 1946 (``Tax
Relief Extension Act of 2015'') on August 5, 2015 (S. Rep. No. 114-
118). See sec. 157 of the bill as reported.
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Present Law
Renewable electricity production credit
An income tax credit is allowed for the production of
electricity from qualified energy resources at qualified
facilities (the ``renewable electricity production
credit'').\324\ Qualified energy resources comprise wind,
closed-loop biomass, open-loop biomass, geothermal energy,
municipal solid waste, qualified hydropower production, and
marine and hydrokinetic renewable energy. Qualified facilities
are, generally, facilities that generate electricity using
qualified energy resources. To be eligible for the credit,
electricity produced from qualified energy resources at
qualified facilities must be sold by the taxpayer to an
unrelated person.
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\324\ Sec. 45. In addition to the renewable electricity production
credit, section 45 also provides income tax credits for the production
of Indian coal and refined coal at qualified facilities.
SUMMARY OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE
RESOURCES
------------------------------------------------------------------------
Credit amount
Eligible electricity for 2015 \1\
production activity (sec. (cents per Expiration \2\
45) kilowatt-hour)
------------------------------------------------------------------------
Wind........................ 2.3 December 31, 2014
Closed-loop biomass......... 2.3 December 31, 2014
Open-loop biomass (including 1.2 December 31, 2014
agricultural livestock
waste nutrient facilities).
Geothermal.................. 2.3 December 31, 2014
Municipal solid waste 1.2 December 31, 2014
(including landfill gas
facilities and trash
combustion facilities).
Qualified hydropower........ 1.2 December 31, 2014
Marine and hydrokinetic..... 1.2 December 31, 2014
------------------------------------------------------------------------
\1\ In general, the credit is available for electricity produced during
the first 10 years after a facility has been placed in service.
\2\ Expires for property the construction of which begins after this
date.
Election to claim energy credit in lieu of renewable electricity
production credit
A taxpayer may make an irrevocable election to have certain
property which is part of a qualified renewable electricity
production facility be treated as energy property eligible for
a 30 percent investment credit under section 48. For this
purpose, qualified facilities are facilities otherwise eligible
for the renewable electricity production credit with respect to
which no credit under section 45 has been allowed. A taxpayer
electing to treat a facility as energy property may not claim
the renewable electricity production credit. The eligible basis
for the investment credit for taxpayers making this election is
the basis of the depreciable (or amortizable) property that is
part of a facility capable of generating electricity eligible
for the renewable electricity production credit.
Explanation of Provision
For qualified wind power facilities, the provision extends
for two years the full renewable electricity production credit
and the election to claim the energy credit in lieu of the
electricity production credit, through December 31, 2016. For
wind facilities the construction of which begins in 2017, the
credits are extended at a rate equal to 80 percent of the
otherwise available credit rate. For wind facilities the
construction of which begins in 2018, the credits are extended
at a rate equal to 60 percent of the otherwise available credit
rate. For wind facilities the construction of which begins in
2019, the credits are extended at a rate equal to 40 percent of
the otherwise available credit rate.
Effective Date
The provision takes effect January 1, 2015.
2. Modification of energy investment credit (sec. 303 of the Act and
sec. 48 of the Code)
Present Law
In general
A nonrefundable, 10-percent business energy credit \325\ is
allowed for the cost of new property that is equipment that
either (1) uses solar energy to generate electricity, to heat
or cool a structure, or to provide solar process heat or (2) is
used to produce, distribute, or use energy derived from a
geothermal deposit, but only, in the case of electricity
generated by geothermal power, up to the electric transmission
stage. Property used to generate energy for the purposes of
heating a swimming pool is not eligible solar energy property.
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\325\ Sec. 48.
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The energy credit is a component of the general business
credit.\326\ An unused general business credit generally may be
carried back one year and carried forward 20 years.\327\ The
taxpayer's basis in the property is reduced by one-half of the
amount of the credit claimed. For projects whose construction
time is expected to equal or exceed two years, the credit may
be claimed as progress expenditures are made on the project,
rather than during the year the property is placed in service.
The credit is allowed against the alternative minimum tax.
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\326\ Sec. 38(b)(1).
\327\ Sec. 39.
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Special rules for solar energy property
For periods prior to January 1, 2017, the credit for
otherwise eligible solar energy property is increased to 30
percent. In addition, equipment that uses fiber-optic
distributed sunlight to illuminate the inside of a structure is
solar energy property eligible for the 30-percent credit. For
periods after December 31, 2016, the credit rate reverts to 10
percent and fiber optic property no longer qualifies.
Fuel cells and microturbines
The energy credit applies to qualified fuel cell power
plants, but only for periods prior to January 1, 2017. The
credit rate is 30 percent.
A qualified fuel cell power plant is an integrated system
composed of a fuel cell stack assembly and associated balance
of plant components that (1) converts a fuel into electricity
using electrochemical means, and (2) has an electricity-only
generation efficiency of greater than 30 percent and a capacity
of at least one-half kilowatt. The credit may not exceed $1,500
for each 0.5 kilowatt of capacity.
The energy credit applies to qualifying stationary
microturbine power plants for periods prior to January 1, 2017.
The credit is limited to the lesser of 10 percent of the basis
of the property or $200 for each kilowatt of capacity.
A qualified stationary microturbine power plant is an
integrated system comprised of a gas turbine engine, a
combustor, a recuperator or regenerator, a generator or
alternator, and associated balance of plant components that
converts a fuel into electricity and thermal energy. Such
system also includes all secondary components located between
the existing infrastructure for fuel delivery and the existing
infrastructure for power distribution, including equipment and
controls for meeting relevant power standards, such as voltage,
frequency and power factors. Such system must have an
electricity-only generation efficiency of not less than 26
percent at International Standard Organization conditions and a
capacity of less than 2,000 kilowatts.
Geothermal heat pump property
The energy credit applies to qualified geothermal heat pump
property placed in service prior to January 1, 2017. The credit
rate is 10 percent. Qualified geothermal heat pump property is
equipment that uses the ground or ground water as a thermal
energy source to heat a structure or as a thermal energy sink
to cool a structure.
Small wind property
The energy credit applies to qualified small wind energy
property placed in service prior to January 1, 2017. The credit
rate is 30 percent. Qualified small wind energy property is
property that uses a qualified wind turbine to generate
electricity. A qualifying wind turbine means a wind turbine of
100 kilowatts of rated capacity or less.
Combined heat and power property
The energy credit applies to combined heat and power
(``CHP'') property placed in service prior to January 1, 2017.
The credit rate is 10 percent.
CHP property is property: (1) that uses the same energy
source for the simultaneous or sequential generation of
electrical power, mechanical shaft power, or both, in
combination with the generation of steam or other forms of
useful thermal energy (including heating and cooling
applications); (2) that has an electrical capacity of not more
than 50 megawatts or a mechanical energy capacity of not more
than 67,000 horsepower or an equivalent combination of
electrical and mechanical energy capacities; (3) that produces
at least 20 percent of its total useful energy in the form of
thermal energy that is not used to produce electrical or
mechanical power, and produces at least 20 percent of its total
useful energy in the form of electrical or mechanical power (or
a combination thereof); and (4) the energy efficiency
percentage of which exceeds 60 percent. CHP property does not
include property used to transport the energy source to the
generating facility or to distribute energy produced by the
facility.
The otherwise allowable credit with respect to CHP property
is reduced to the extent the property has an electrical
capacity or mechanical capacity in excess of any applicable
limits. Property in excess of the applicable limit (15
megawatts or a mechanical energy capacity of more than 20,000
horsepower or an equivalent combination of electrical and
mechanical energy capacities) is permitted to claim a fraction
of the otherwise allowable credit. The fraction is equal to the
applicable limit divided by the capacity of the property. For
example, a 45 megawatt property would be eligible to claim 15/
45ths, or one third, of the otherwise allowable credit. Again,
no credit is allowed if the property exceeds the 50 megawatt or
67,000 horsepower limitations described above.
Additionally, systems whose fuel source is at least 90
percent open-loop biomass and that would qualify for the credit
but for the failure to meet the efficiency standard are
eligible for a credit that is reduced in proportion to the
degree to which the system fails to meet the efficiency
standard. For example, a system that would otherwise be
required to meet the 60-percent efficiency standard, but which
only achieves 30-percent efficiency, would be permitted a
credit equal to one-half of the otherwise allowable credit
(i.e., a 5-percent credit).
Election of energy credit in lieu of section 45 production
tax credit
A taxpayer may make an irrevocable election to have certain
qualified facilities placed in service after 2008 and whose
construction begins before January 1, 2015, be treated as
energy property eligible for a 30-percent investment credit
under section 48.\328\ For this purpose, qualified facilities
are facilities otherwise eligible for the renewable electricity
production tax credit with respect to which no credit under
section 45 has been allowed. A taxpayer electing to treat a
facility as energy property may not claim the production credit
under section 45.
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\328\ See section 302 of the Act relating to an extension of the
January 1, 2015, date in the case of wind facilities.
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Explanation of Provision
The provision extends and modifies the increased credit
rate, but only with respect to property that uses solar energy
to generate electricity, to heat or cool a structure, or to
provide solar process heat. The credit rate is 30 percent for
2017, 2018 and 2019; 26 percent for 2020; and 22 percent for
2021. The credit rate is 10 percent for 2022 and thereafter, as
provided for under present law. The credit rate is determined
by the year in which construction of the property commences,
and applies at the time the property is placed in service.
Property must be placed in service prior to December 31, 2023,
to qualify for a credit rate in excess of 10 percent.
Effective Date
The provision is effective on the date of enactment
(December 18, 2015).
3. Credit for residential energy efficient property (section 304 of the
Act and 25D of the Code)
Present Law
In general
Present law (sec. 25D) provides a personal tax credit for
the purchase of qualified solar electric property and qualified
solar water heating property that is used exclusively for
purposes other than heating swimming pools and hot tubs. The
credit is equal to 30 percent of qualifying expenditures.
Section 25D also provides a 30 percent credit for the
purchase of qualified geothermal heat pump property, qualified
small wind energy property, and qualified fuel cell power
plants. The credit for any fuel cell may not exceed $500 for
each 0.5 kilowatt of capacity.
The credit is nonrefundable. The credit with respect to all
qualifying property may be claimed against the alternative
minimum tax.
The credit applies to property placed in service prior to
January 1, 2017.
Qualified property
Qualified solar electric property is property that uses
solar energy to generate electricity for use in a dwelling
unit. Qualifying solar water heating property is property used
to heat water for use in a dwelling unit located in the United
States and used as a residence if at least half of the energy
used by such property for such purpose is derived from the sun.
A qualified fuel cell power plant is an integrated system
comprised of a fuel cell stack assembly and associated balance
of plant components that (1) converts a fuel into electricity
using electrochemical means, (2) has an electricity-only
generation efficiency of greater than 30 percent, and (3) has a
nameplate capacity of at least 0.5 kilowatt. The qualified fuel
cell power plant must be installed on or in connection with a
dwelling unit located in the United States and used by the
taxpayer as a principal residence.
Qualified small wind energy property is property that uses
a wind turbine to generate electricity for use in a dwelling
unit located in the U.S. and used as a residence by the
taxpayer.
Qualified geothermal heat pump property means any equipment
which (1) uses the ground or ground water as a thermal energy
source to heat the dwelling unit or as a thermal energy sink to
cool such dwelling unit, (2) meets the requirements of the
Energy Star program which are in effect at the time that the
expenditure for such equipment is made, and (3) is installed on
or in connection with a dwelling unit located in the United
States and used as a residence by the taxpayer.
Additional rules
The depreciable basis of the property is reduced by the
amount of the credit. Expenditures for labor costs allocable to
onsite preparation, assembly, or original installation of
property eligible for the credit are eligible expenditures.
Special proration rules apply in the case of jointly owned
property, condominiums, and tenant-stockholders in cooperative
housing corporations. If less than 80 percent of the property
is used for nonbusiness purposes, only that portion of
expenditures that is used for nonbusiness purposes is taken
into account.
Explanation of Provision
The provision extends the credit for five years, through
December 31, 2021, but only with respect to qualified solar
electric property and qualified solar water heating property.
The provision modifies the credit rate, reducing it to 26
percent for property placed in service in 2020 and 22 percent
for property placed in service in 2021.
Effective Date
The provision is effective on January 1, 2017.
4. Treatment of transportation costs of independent refiners (sec. 305
of the Act and sec. 199 of the Code)
Present Law
In general
Present law provides a deduction from taxable income (or,
in the case of an individual, adjusted gross income \329\) that
is equal to nine percent of the lesser of the taxpayer's
qualified production activities income or taxable income
(determined without regard to the section 199 deduction) for
the taxable year.\330\ For taxpayers subject to the 35-percent
corporate income tax rate, the nine-percent deduction
effectively reduces the corporate income tax rate to just under
32 percent on qualified production activities income.\331\
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\329\ For this purpose, adjusted gross income is determined after
application of sections 86, 135, 137, 219, 221, 222, and 469, without
regard to the section 199 deduction. Sec. 199(d)(2).
\330\ Sec. 199.
\331\ This example assumes the deduction does not exceed the wage
limitation discussed below.
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In general, qualified production activities income is equal
to domestic production gross receipts reduced by the sum of:
(1) the costs of goods sold that are allocable to those
receipts; and (2) other expenses, losses, or deductions which
are properly allocable to those receipts.\332\
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\332\ Sec. 199(c)(1). In computing qualified production activities
income, the domestic production activities deduction itself is not an
allocable deduction. Sec. 199(c)(1)(B)(ii). See Treas. Reg. secs.
1.199-1 through 1.199-9 where the Secretary has prescribed rules for
the proper allocation of items of income, deduction, expense, and loss
for purposes of determining qualified production activities income.
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Domestic production gross receipts generally are gross
receipts of a taxpayer that are derived from: (1) any sale,
exchange, or other disposition, or any lease, rental, or
license, of qualifying production property \333\ that was
manufactured, produced, grown or extracted by the taxpayer in
whole or in significant part within the United States; \334\
(2) any sale, exchange, or other disposition, or any lease,
rental, or license, of qualified film \335\ produced by the
taxpayer; (3) any lease, rental, license, sale, exchange, or
other disposition of electricity, natural gas, or potable water
produced by the taxpayer in the United States; (4) construction
of real property performed in the United States by a taxpayer
in the ordinary course of a construction trade or business; or
(5) engineering or architectural services performed in the
United States for the construction of real property located in
the United States.\336\
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\333\ Qualifying production property generally includes any
tangible personal property, computer software, and sound recordings.
Sec. 199(c)(5).
\334\ When used in the Code in a geographical sense, the term
``United States'' generally includes only the States and the District
of Columbia. Sec. 7701(a)(9). A special rule for determining domestic
production gross receipts, however, provides that for taxable years
beginning after December 31, 2005, and before January 1, 2017, in the
case of any taxpayer with gross receipts from sources within the
Commonwealth of Puerto Rico, the term ``United States'' includes the
Commonwealth of Puerto Rico, but only if all of the taxpayer's Puerto
Rico-sourced gross receipts are taxable under the Federal income tax
for individuals or corporations for such taxable year. Secs.
199(d)(8)(A) and (C), as extended by section 170 of the Act. In
computing the 50-percent wage limitation, the taxpayer is permitted to
take into account wages paid to bona fide residents of Puerto Rico for
services performed in Puerto Rico. Sec. 199(d)(8)(B).
\335\ Qualified film includes any motion picture film or videotape
(including live or delayed television programming, but not including
certain sexually explicit productions) if 50 percent or more of the
total compensation relating to the production of the film (including
compensation in the form of residuals and participations) constitutes
compensation for services performed in the United States by actors,
production personnel, directors, and producers. Sec. 199(c)(6).
\336\ Sec. 199(c)(4).
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The amount of the deduction for a taxable year is limited
to 50 percent of the W-2 wages paid by the taxpayer, and
properly allocable to domestic production gross receipts,
during the calendar year that ends in such taxable year.\337\
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\337\ For purposes of the provision, ``W-2 wages'' include the sum
of the amounts of wages as defined in section 3401(a) and elective
deferrals that the taxpayer properly reports to the Social Security
Administration with respect to the employment of employees of the
taxpayer during the calendar year ending during the taxpayer's taxable
year. Elective deferrals include elective deferrals as defined in
section 402(g)(3), amounts deferred under section 457, and, for taxable
years beginning after December 31, 2005, designated Roth contributions
(as defined in section 402A). See sec. 199(b)(2). The wage limitation
for qualified films includes any compensation for services performed in
the United States by actors, production personnel, directors, and
producers and is not restricted to W-2 wages. Sec. 199(b)(2)(D),
effective for taxable years beginning after December 31, 2007.
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Limitation for oil related qualified production activities income
With respect to a taxpayer that has oil related qualified
production activities income, the nine percent deduction is
reduced by three percent of the least of the taxpayer's oil
related qualified production activities income, qualified
production activities income, or taxable income (determined
without regard to the section 199 deduction).\338\ The term
``oil related qualified production activities income'' means
the qualified production activities income attributable to the
production, refining, processing, transportation, or
distribution of oil, gas, or any primary product thereof (as
defined in section 927(a)(2)(C) prior to its repeal).\339\
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\338\ Sec. 199(d)(9). For example, assume a C corporation (the
``taxpayer'') has qualified production activities income of $750,000--
of which $650,000 is oil related qualified production activities
income--taxable income of $2,000,000, and has paid sufficient domestic
production wages to not be subject to the wages paid limitation for the
taxable year. The taxpayer's tentative section 199 deduction of $67,500
($750,000 * 9 percent) is reduced by $19,500 ($650,000 * 3 percent),
resulting in a section 199 deduction of $48,000 for the taxable year
($67,500-$19,500).
\339\ See also Prop. Treas. Reg. sec. 1.199-1(f) (REG-136459-09)
where the Secretary has proposed guidance on oil related qualified
production activities income. Prop. Treas. Reg. sec. 1.199-1(f) will
apply to taxable years beginning on or after the date the final
regulations are published in the Federal Register.
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Explanation of Provision
For taxpayers in the trade or business of refining crude
oil and who are not major integrated oil companies (within the
meaning of section 167(h)(5)(B), determined without regard to
clause (iii) thereof), the provision provides that in computing
oil related qualified production activities income, only 25
percent of the properly allocable costs related to the
transportation of oil are allocated to domestic production
gross receipts. This has the effect of increasing oil related
qualified production activities income for independent refiners
with transportation costs that are properly allocable to
domestic production gross receipts.\340\
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\340\ Continuing the above example, assume the taxpayer has
properly allocable oil related transportation costs of $100,000 that
were included in determining the qualified production activities income
noted above. Under this provision, the taxpayer will only allocate
$25,000 of such costs to domestic production gross receipts. Thus, the
taxpayer's oil related qualified production activities income of
$650,000 and qualified production activities income of $750,000 will
each increase by $75,000 ($100,000-$25,000), resulting in oil related
qualified production activities income of $725,000 and qualified
production activities income of $825,000. Hence, the taxpayer's
tentative section 199 deduction of $74,250 ($825,000 * 9 percent) is
reduced by $21,750 ($725,000 * 3 percent), resulting in a section 199
deduction of $52,500 for the taxable year ($74,250-$21,750) (compared
to $48,000 under present law).
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Effective Date
The provision applies to taxable years beginning after
December 31, 2015, and before January 1, 2022.
DIVISION Q--PROTECTING AMERICANS FROM TAX HIKES ACT OF 2015
TITLE I--EXTENDERS \341\
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\341\ The Senate Committee on Finance reported S. 1946 (``Tax
Relief Extension Act of 2015'') on August 5, 2015 (S. Rep. No. 114-
118). The bill generally extended expiring provisions through 2016 with
some modifications. The House Committee on Ways and Means reported the
following bills relating to the modification and making permanent or
extending certain expiring provisions: H.R. 629 (``Permanent S
Corporation Built-in Gain Recognition Period Act of 2015'') on February
9, 2015 (H.R. Rep. No. 114-15), H.R. 630 (``Permanent S Corporation
Charitable Contribution Act of 2015'') on February 9, 2015 (H.R. Rep.
No. 114-16), H.R. 641 (``Conservation Easement Incentive Act of 2015'')
on February 9, 2015 (H.R. Rep. No. 114-17), H.R. 644 (``America Gives
More Act of 2015'') on February 9, 2015 (H.R. Rep. No. 114-18), H.R.
637 (``Permanent IRA Charitable Contribution Act of 2015'') on February
9, 2015 (H.R. Rep. No. 114-20), H.R. 636 (``America's Small Business
Tax Relief Act of 2015'') on February 9, 2015 (H.R. Rep. No.114-21),
H.R. 622 (``State and Local Sales Tax Deduction Fairness Act of 2015'')
on April 6, 2015 (H.R. Rep. No. 114-51), H.R. 880 (``American Research
and Competitiveness Act of 2015'') on May 14, 2015 (H.R. Rep. 114-113),
H.R. 765 (``Restaurant and Retail Jobs and Growth Act of 2015'') on
October 23, 2015 (H.R. Rep No. 114-306), H.R. 961 (``Permanent Active
Financing Exception Act of 2015'') on October 23, 2015 (H.R. Rep. No.
114-307), H.R. 1430 (``Permanent CFC Look-Through Act of 2015'') on
October 23, 2015 (H.R. Rep. No. 114-309), H.R. 2940 (``Educator Tax
Relief Act of 2015'') on October 23, 2015 (H.R. Rep. No. 114-310), and
H.R 2510 (relating to bonus depreciation) on October 28, 2015 (H.R.
Rep. No. 114-317, Part 1). Each of the bills reported by the House
Committee on Ways and Means prior to October passed the House, either
separately or in a bill combining certain of the provisions.
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A. Permanent Extensions
Part 1--Tax Relief for Families and Individuals
1. Reduced earnings threshold for additional child tax credit made
permanent (sec. 101 of the Act and sec. 24 of the Code)
An individual may claim a tax credit of $1,000 for each
qualifying child under the age of 17. A child who is not a
citizen, national, or resident of the United States cannot be a
qualifying child.
The aggregate amount of child credits that may be claimed
is phased out for individuals with income over certain
threshold amounts. Specifically, the otherwise allowable
aggregate child tax credit amount is reduced by $50 for each
$1,000 (or fraction thereof) of modified adjusted gross income
(``modified AGI'') over $75,000 for single individuals or heads
of households, $110,000 for married individuals filing joint
returns, and $55,000 for married individuals filing separate
returns. For purposes of this limitation, modified AGI includes
certain otherwise excludable income earned by U.S. citizens or
residents living abroad or in certain U.S. territories.
The credit is allowable against both the regular tax and
the alternative minimum tax (``AMT''). To the extent the child
tax credit exceeds the taxpayer's tax liability, the taxpayer
is eligible for a refundable credit (the additional child tax
credit) equal to 15 percent of earned income in excess of a
threshold dollar amount (the ``earned income'' formula). This
threshold dollar amount is $10,000 indexed for inflation from
2001. The American Recovery and Reinvestment Act, as
subsequently extended by the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010 \342\ and the
American Taxpayer Relief Act of 2012,\343\ set the threshold at
$3,000 for taxable years 2009 to 2017.
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\342\ Pub. L. No. 111-312.
\343\ Pub. L. No. 112-240.
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Families with three or more qualifying children may
determine the additional child tax credit using the
``alternative formula'' if this results in a larger credit than
determined under the earned income formula. Under the
alternative formula, the additional child tax credit equals the
amount by which the taxpayer's social security taxes exceed the
taxpayer's earned income tax credit (``EITC'').
Earned income is defined as the sum of wages, salaries,
tips, and other taxable employee compensation plus net self-
employment earnings. Unlike the EITC, which also includes the
preceding items in its definition of earned income, the
additional child tax credit is based only on earned income to
the extent it is included in computing taxable income. For
example, some ministers' parsonage allowances are considered
self-employment income, and thus are considered earned income
for purposes of computing the EITC, but the allowances are
excluded from gross income for individual income tax purposes,
and thus are not considered earned income for purposes of the
additional child tax credit since the income is not included in
taxable income.
Explanation of Provision
The provision makes permanent the earned income threshold
of $3,000.
Effective Date
The provision applies to taxable years beginning after the
date of enactment (December 18, 2015).
2. American opportunity tax credit made permanent (sec. 102 of the Act
and sec. 25A of the Code)
Present Law
Hope credit and American opportunity tax credit
Hope credit
For taxable years beginning before 2009 and after 2017,
individual taxpayers are allowed to claim a nonrefundable
credit, the Hope credit, against Federal income taxes of up to
$1,950 (estimated 2015 level) per eligible student per year for
qualified tuition and related expenses paid for the first two
years of the student's post-secondary education in a degree or
certificate program.\344\ The Hope credit rate is 100 percent
on the first $1,300 of qualified tuition and related expenses,
and 50 percent on the next $1,300 of qualified tuition and
related expenses (estimated for 2015). These dollar amounts are
indexed for inflation, with the amount rounded down to the next
lowest multiple of $100. Thus, for example, a taxpayer who
incurs $1,300 of qualified tuition and related expenses for an
eligible student is eligible (subject to the AGI phaseout
described below) for a $1,300 Hope credit. If a taxpayer incurs
$2,600 of qualified tuition and related expenses for an
eligible student, then he or she is eligible for a $1,950 Hope
credit.
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\344\ Sec. 25A. For taxable years 2009-2017, the American
Opportunity tax credit applies (discussed infra). Both the Hope credit
and the American Opportunity tax credit (in the case of taxable years
from 2009-2017) may be claimed against a taxpayer's alternative minimum
tax liability.
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The Hope credit that a taxpayer may otherwise claim is
phased out ratably for taxpayers with modified AGI between
$55,000 and $65,000 ($110,000 and $130,000 for married
taxpayers filing a joint return), as estimated by the JCT staff
for 2015. The beginning points of the AGI phaseout ranges are
indexed for inflation, with the amount rounded down to the next
lowest multiple of $1,000. The size of the phaseout ranges for
single and married taxpayers are always $10,000 and $20,000
respectively.
The qualified tuition and related expenses must be incurred
on behalf of the taxpayer, the taxpayer's spouse, or a
dependent of the taxpayer. The Hope credit is available with
respect to an individual student for two taxable years,
provided that the student has not completed the first two years
of post-secondary education before the beginning of the second
taxable year.
The Hope credit is available in the taxable year the
expenses are paid, subject to the requirement that the
education is furnished to the student during that year or
during an academic period beginning during the first three
months of the next taxable year. Qualified tuition and related
expenses paid with the proceeds of a loan generally are
eligible for the Hope credit. The repayment of a loan itself is
not a qualified tuition or related expense.
A taxpayer may claim the Hope credit with respect to an
eligible student who is not the taxpayer or the taxpayer's
spouse (e.g., in cases in which the student is the taxpayer's
child) only if the taxpayer claims the student as a dependent
for the taxable year for which the credit is claimed. If a
student is claimed as a dependent, the student is not entitled
to claim a Hope credit for that taxable year on the student's
own tax return. If a parent (or other taxpayer) claims a
student as a dependent, any qualified tuition and related
expenses paid by the student are treated as paid by the parent
(or other taxpayer) for purposes of determining the amount of
qualified tuition and related expenses paid by such parent (or
other taxpayer) under the provision. In addition, for each
taxable year, a taxpayer may claim only one of the Hope credit,
the Lifetime Learning credit, or an above-the-line deduction
for qualified tuition and related expenses with respect to an
eligible student.
The Hope credit is available for qualified tuition and
related expenses, which include tuition and fees (excluding
nonacademic fees) required to be paid to an eligible
educational institution as a condition of enrollment or
attendance of an eligible student at the institution. Charges
and fees associated with meals, lodging, insurance,
transportation, and similar personal, living, or family
expenses are not eligible for the credit. The expenses of
education involving sports, games, or hobbies are not qualified
tuition and related expenses unless this education is part of
the student's degree program.
Qualified tuition and related expenses generally include
only out-of-pocket expenses. Qualified tuition and related
expenses do not include expenses covered by employer-provided
educational assistance and scholarships that are not required
to be included in the gross income of either the student or the
taxpayer claiming the credit. Thus, total qualified tuition and
related expenses are reduced by any scholarship or fellowship
grants excludable from gross income under section 117 and any
other tax-free educational benefits received by the student (or
the taxpayer claiming the credit) during the taxable year. The
Hope credit is not allowed with respect to any education
expense for which a deduction is claimed under section 162 or
any other section of the Code.
An eligible student for purposes of the Hope credit is an
individual who is enrolled in a degree, certificate, or other
program (including a program of study abroad approved for
credit by the institution at which such student is enrolled)
leading to a recognized educational credential at an eligible
educational institution. The student must pursue a course of
study on at least a half-time basis. A student is considered to
pursue a course of study on at least a half-time basis if the
student carries at least one-half the normal full-time work
load for the course of study the student is pursuing for at
least one academic period that begins during the taxable year.
To be eligible for the Hope credit, a student must not have
been convicted of a Federal or State felony for the possession
or distribution of a controlled substance.
Eligible educational institutions generally are accredited
post-secondary educational institutions offering credit toward
a bachelor's degree, an associate's degree, or another
recognized post-secondary credential. Certain proprietary
institutions and post-secondary vocational institutions also
are eligible educational institutions. To qualify as an
eligible educational institution, an institution must be
eligible to participate in Department of Education student aid
programs.
American Opportunity tax credit (``AOTC'')
The AOTC refers to modifications to the Hope credit that
apply for taxable years beginning in 2009 through 2017. The
maximum allowable modified credit is $2,500 per eligible
student per year for qualified tuition and related expenses
paid for each of the first four years of the student's post-
secondary education in a degree or certificate program. The
modified credit rate is 100 percent on the first $2,000 of
qualified tuition and related expenses, and 25 percent on the
next $2,000 of qualified tuition and related expenses. For
purposes of the modified credit, the definition of qualified
tuition and related expenses is expanded to include course
materials.
The modified credit is available with respect to an
individual student for four years, provided that the student
has not completed the first four years of post-secondary
education before the beginning of the fourth taxable year.
Thus, the modified credit, in addition to other modifications,
extends the application of the Hope credit to two more years of
post-secondary education.
The modified credit that a taxpayer may otherwise claim is
phased out ratably for taxpayers with modified AGI between
$80,000 and $90,000 ($160,000 and $180,000 for married
taxpayers filing a joint return). The modified credit may be
claimed against a taxpayer's AMT liability.
Forty percent of a taxpayer's otherwise allowable modified
credit is refundable. However, no portion of the modified
credit is refundable if the taxpayer claiming the credit is a
child to whom section 1(g) applies for such taxable year
(generally, any child who has at least one living parent, does
not file a joint return, and is either under age 18 or under
age 24 and a student providing less than one-half of his or her
own support).
Explanation of Provision
The provision makes the modifications to the Hope credit,
known as the AOTC, permanent.
Effective Date
The provision is effective for taxable years beginning
after the date of enactment (December 18, 2015).
3. Modification of the earned income tax credit made permanent (sec.
103 of the Act and sec. 32 of the Code)
Present Law
Overview
Low- and moderate-income workers may be eligible for the
refundable earned income tax credit (``EITC''). Eligibility for
the EITC is based on earned income, adjusted gross income
(``AGI''), investment income, filing status, number of
children, and immigration and work status in the United States.
The amount of the EITC is based on the presence and number of
qualifying children in the worker's family, as well as on
adjusted gross income and earned income.
The EITC generally equals a specified percentage of earned
income up to a maximum dollar amount. The maximum amount
applies over a certain income range and then diminishes to zero
over a specified phaseout range. For taxpayers with earned
income (or AGI, if greater) in excess of the beginning of the
phaseout range, the maximum EITC amount is reduced by the
phaseout rate multiplied by the amount of earned income (or
AGI, if greater) in excess of the beginning of the phaseout
range. For taxpayers with earned income (or AGI, if greater) in
excess of the end of the phaseout range, no credit is allowed.
An individual is not eligible for the EITC if the aggregate
amount of disqualified income of the taxpayer for the taxable
year exceeds $3,400 (for 2015). This threshold is indexed for
inflation. Disqualified income is the sum of: (1) interest
(both taxable and tax exempt); (2) dividends; (3) net rent and
royalty income (if greater than zero); (4) capital gains net
income; and (5) net passive income that is not self-employment
income (if greater than zero).
The EITC is a refundable credit, meaning that if the amount
of the credit exceeds the taxpayer's Federal income tax
liability, the excess is payable to the taxpayer as a direct
transfer payment.
Filing status
An unmarried individual may claim the EITC if he or she
files as a single filer or as a head of household. Married
individuals generally may not claim the EITC unless they file
jointly. An exception to the joint return filing requirement
applies to certain spouses who are separated. Under this
exception, a married taxpayer who is separated from his or her
spouse for the last six months of the taxable year is not
considered to be married (and, accordingly, may file a return
as head of household and claim the EITC), provided that the
taxpayer maintains a household that constitutes the principal
place of abode for a dependent child (including a son, stepson,
daughter, stepdaughter, adopted child, or a foster child) for
over half the taxable year, and pays over half the cost of
maintaining the household in which he or she resides with the
child during the year.
Presence of qualifying children and amount of the earned income credit
Four separate credit schedules apply: one schedule for
taxpayers with no qualifying children, one schedule for
taxpayers with one qualifying child, one schedule for taxpayers
with two qualifying children, and one schedule for taxpayers
with three or more qualifying children.\345\
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\345\ All income thresholds are indexed for inflation annually.
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Taxpayers with no qualifying children may claim a credit if
they are over age 24 and below age 65. The credit is 7.65
percent of earnings up to $6,580, resulting in a maximum credit
of $503 for 2015. The maximum is available for those with
incomes between $6,580 and $8,240 ($13,750 if married filing
jointly). The credit begins to phase out at a rate of 7.65
percent of earnings above $8,240 ($13,750 if married filing
jointly) resulting in a $0 credit at $14,820 of earnings
($20,330 if married filing jointly).
Taxpayers with one qualifying child may claim a credit in
2015 of 34 percent of their earnings up to $9,880, resulting in
a maximum credit of $3,359. The maximum credit is available for
those with earnings between $9,880 and $18,110 ($23,630 if
married filing jointly). The credit begins to phase out at a
rate of 15.98 percent of earnings above $18,110 ($23,630 if
married filing jointly). The credit is completely phased out at
$39,131 of earnings ($44,651 if married filing jointly).
Taxpayers with two qualifying children may claim a credit
in 2015 of 40 percent of earnings up to $13,870, resulting in a
maximum credit of $5,548. The maximum credit is available for
those with earnings between $13,870 and $18,110 ($23,630 if
married filing jointly). The credit begins to phase out at a
rate of 21.06 percent of earnings $18,110 ($23,630 if married
filing jointly). The credit is completely phased out at $44,454
of earnings ($49,974 if married filing jointly).
A temporary provision most recently extended in the
American Taxpayer Relief Act of 2012 (``ATRA'') \346\ allows
taxpayers with three or more qualifying children to claim a
credit of 45 percent for taxable years through 2017. For
example, in 2015 taxpayers with three or more qualifying
children may claim a credit of 45 percent of earnings up to
$13,870, resulting in a maximum credit of $6,242. The maximum
credit is available for those with earnings between $13,870 and
$18,110 ($23,630 if married filing jointly). The credit begins
to phase out at a rate of 21.06 percent of earnings above
$18,110 ($23,630 if married filing jointly). The credit is
completely phased out at $47,747 of earnings ($53,267 if
married filing jointly).
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\346\ Pub. L. No. 112-240.
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Under an additional provision most recently extended in
ATRA, the phase-out thresholds for married couples were raised
to an amount $5,000 (indexed for inflation from 2009) above
that for other filers. The increase is $5,520 for 2015. This
increase is reflected in the description of the credit, above.
If more than one taxpayer lives with a qualifying child,
only one of these taxpayers may claim the child for purposes of
the EITC. If multiple eligible taxpayers actually claim the
same qualifying child, then a tiebreaker rule determines which
taxpayer is entitled to the EITC with respect to the qualifying
child. Any eligible taxpayer with at least one qualifying child
who does not claim the EITC with respect to qualifying children
due to failure to meet certain identification requirements with
respect to such children (i.e., providing the name, age and
taxpayer identification number of each of such children) may
not claim the EITC for taxpayers without qualifying children.
Explanation of Provision
The provision makes permanent the EITC rate of 45 percent
for taxpayers with three or more qualifying children.
The provision makes permanent the higher phase-out
thresholds for married couples filing joint returns.
Effective Date
The provision applies to taxable years beginning after
December 31, 2015.
4. Extension and modification of deduction for certain expenses of
elementary and secondary school teachers (sec. 104 of the Act
and sec. 62(a)(2)(D) of the Code)
Present Law
In general, ordinary and necessary business expenses are
deductible. However, unreimbursed employee business expenses
generally are deductible only as an itemized deduction and only
to the extent that the individual's total miscellaneous
deductions (including employee business expenses) exceed two
percent of adjusted gross income. An individual's otherwise
allowable itemized deductions may be further limited by the
overall limitation on itemized deductions, which reduces
itemized deductions for taxpayers with adjusted gross income in
excess of a threshold amount. In addition, miscellaneous
itemized deductions are not allowable under the alternative
minimum tax.
Certain expenses of eligible educators are allowed as an
above-the-line deduction. Specifically, for taxable years
beginning prior to January 1, 2015, an above-the-line deduction
is allowed for up to $250 annually of expenses paid or incurred
by an eligible educator for books, supplies (other than
nonathletic supplies for courses of instruction in health or
physical education), computer equipment (including related
software and services) and other equipment, and supplementary
materials used by the eligible educator in the classroom.\347\
To be eligible for this deduction, the expenses must be
otherwise deductible under section 162 as a trade or business
expense. A deduction is allowed only to the extent the amount
of expenses exceeds the amount excludable from income under
section 135 (relating to education savings bonds), 529(c)(1)
(relating to qualified tuition programs), and section 530(d)(2)
(relating to Coverdell education savings accounts).
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\347\ Sec. 62(a)(2)(D).
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An eligible educator is a kindergarten through grade twelve
teacher, instructor, counselor, principal, or aide in a school
for at least 900 hours during a school year. A school means any
school that provides elementary education or secondary
education (kindergarten through grade 12), as determined under
State law.
The above-the-line deduction for eligible educators is not
allowed for taxable years beginning after December 31, 2014.
Explanation of Provision
The provision makes permanent the deduction for eligible
educator expenses.
The provision indexes the $250 maximum deduction amount for
inflation, and provides that expenses for professional
development shall also be considered eligible expenses for
purposes of the deduction.
Effective Date
The provision making above-the-line deduction permanent
applies to taxable years beginning after December 31, 2014.
The provisions pertaining to indexing the $250 maximum
deduction amount and qualifying professional development
expenses apply to taxable years beginning after December 31,
2015.
5. Extension of parity for exclusion from income for employer-provided
mass transit and parking benefits (sec. 105 of the Act and
132(f) of the Code)
Present Law
Qualified transportation fringes
Qualified transportation fringe benefits provided by an
employer are excluded from an employee's gross income for
income tax purposes and from an employee's wages for employment
tax purposes.\348\ Qualified transportation fringe benefits
include qualified parking, transit passes, vanpool benefits,
and qualified bicycle commuting reimbursements.
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\348\ Secs. 132(a)(5) and (f), 3121(a)(20), 3231(e)(5), 3306(b)(16)
and 3401(a)(19).
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No amount is includible in the income of an employee merely
because the employer offers the employee a choice between cash
and qualified transportation fringe benefits (other than a
qualified bicycle commuting reimbursement).
Qualified transportation fringe benefits also include a
cash reimbursement (under a bona fide reimbursement
arrangement) by an employer to an employee for parking, transit
passes, or vanpooling. In the case of transit passes, however,
in general, a cash reimbursement is considered a qualified
transportation fringe benefit only if a voucher or similar item
that can be exchanged only for a transit pass is not readily
available for direct distribution by the employer to the
employee.
Mass transit parity
Before February 17, 2009, the amount that could be excluded
as qualified transportation fringe benefits was subject to a
monthly limit of $175 for qualified parking benefits and $100
for combined transit pass and vanpool benefits, with each
monthly limit adjusted annually for inflation, rounded down to
the next lowest multiple of $5.00.\349\ Effective for months
beginning on or after February 17, 2009, and before January 1,
2015, parity in qualified transportation fringe benefits was
provided by temporarily increasing the monthly exclusion for
combined employer-provided transit pass and vanpool benefits to
the same level as the monthly exclusion for employer-provided
parking.\350\
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\349\ The base year used for each adjustment reflects the year for
which the particular monthly limit became effective. Specifically, a
base year of 1998 is used for qualified parking benefits and a base
year of 2001 for combined transit pass and vanpool benefits.
\350\ Parity was provided originally by the American Recovery and
Reinvestment Act of 2009 (``ARRA''), Pub. L. No. 111-5, effective for
months beginning on or after February 17, 2009, the date of enactment
of ARRA.
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As of January 1, 2015, a lower monthly limit again applies
to the exclusion for combined transit pass and vanpool
benefits. Specifically, for 2015, the amount that can be
excluded as qualified transportation fringe benefits is limited
to $130 per month in combined transit pass and vanpool benefits
and $250 per month in qualified parking benefits. For 2016, the
monthly exclusion limit for combined transit pass and vanpool
benefits remains at $130; the monthly exclusion limit for
qualified parking benefits increases to $255.
Explanation of Provision
The provision reinstates parity in the exclusion for
employer-provided parking benefits and for combined employer-
provided transit pass and vanpool benefits (by increasing the
monthly exclusion amount for combined transit pass and vanpool
benefits to $175 before adjustment for inflation \351\) and
makes parity permanent. Thus, for 2015, the monthly limit on
the exclusion for combined transit pass and vanpool benefits is
$250, the same as the monthly limit on the exclusion for
qualified parking benefits. Similarly, for 2016 and later
years, the same monthly limit will apply to the exclusion for
combined transit pass and vanpool benefits and the exclusion
for qualified parking benefits.
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\351\ The provision failed to include a conforming change to repeal
the base year applicable in adjusting the monthly amount for combined
transit pass and vanpool benefits. A technical correction is needed to
make this change.
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In order for the extension to be effective retroactive to
January 1, 2015, expenses incurred for months beginning after
December 31, 2014, and before the date of enactment of the
provision (December 18, 2015), by an employee for employer-
provided vanpool and transit benefits may be reimbursed (under
a bona fide reimbursement arrangement) by employers on a tax-
free basis to the extent they exceed $130 per month and are no
more than $250 per month. It is intended that the rule that an
employer reimbursement is excludible only if vouchers are not
available to provide the benefit continues to apply, except in
the case of reimbursements for vanpool or transit benefits
between $130 and $250 for months beginning after December 31,
2014, and before enactment of the provision. Further, it is
intended that reimbursements of the additional amount for
expenses incurred for months beginning after December 31, 2014,
and before enactment of the provision, may be made in addition
to the provision of benefits or reimbursements of up to the
applicable monthly limit for expenses incurred for months
beginning after enactment of the provision.
Effective Date
The provision applies to months after December 31, 2014.
6. Deduction for State and local sales taxes (sec. 106 of the Act and
sec. 164 of the Code)
Present Law
For purposes of determining regular tax liability, an
itemized deduction is permitted for certain State and local
taxes paid, including individual income taxes, real property
taxes, and personal property taxes. The itemized deduction is
not permitted for purposes of determining a taxpayer's
alternative minimum taxable income. For taxable years beginning
before January 1, 2015, at the election of the taxpayer, an
itemized deduction may be taken for State and local general
sales taxes in lieu of the itemized deduction provided under
present law for State and local income taxes. As is the case
for State and local income taxes, the itemized deduction for
State and local general sales taxes is not permitted for
purposes of determining a taxpayer's alternative minimum
taxable income. Taxpayers have two options with respect to the
determination of the sales tax deduction amount. Taxpayers may
deduct the total amount of general State and local sales taxes
paid by accumulating receipts showing general sales taxes paid.
Alternatively, taxpayers may use tables created by the
Secretary that show the allowable deduction. The tables are
based on average consumption by taxpayers on a State-by-State
basis taking into account number of dependents, modified
adjusted gross income and rates of State and local general
sales taxation. Taxpayers who live in more than one
jurisdiction during the tax year are required to pro-rate the
table amounts based on the time they live in each jurisdiction.
Taxpayers who use the tables created by the Secretary may, in
addition to the table amounts, deduct eligible general sales
taxes paid with respect to the purchase of motor vehicles,
boats, and other items specified by the Secretary. Sales taxes
for items that may be added to the tables are not reflected in
the tables themselves.
A general sales tax is a tax imposed at one rate with
respect to the sale at retail of a broad range of classes of
items.\352\ No deduction is allowed for any general sales tax
imposed with respect to an item at a rate other than the
general rate of tax. However, in the case of food, clothing,
medical supplies, and motor vehicles, the above rules are
relaxed in two ways. First, if the tax does not apply with
respect to some or all of such items, a tax that applies to
other such items can still be considered a general sales tax.
Second, the rate of tax applicable with respect to some or all
of these items may be lower than the general rate. However, in
the case of motor vehicles, if the rate of tax exceeds the
general rate, such excess is disregarded and the general rate
is treated as the rate of tax.
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\352\ Sec. 164(b)(5)(B).
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A compensating use tax with respect to an item is treated
as a general sales tax, provided such tax is complementary to a
general sales tax and a deduction for sales taxes is allowable
with respect to items sold at retail in the taxing jurisdiction
that are similar to such item.
Explanation of Provision
The provision makes permanent the election to deduct State
and local sales taxes in lieu of State and local income taxes.
Effective Date
The provision applies to taxable years beginning after
December 31, 2014.
Part 2--Incentives for Charitable Giving
7. Special rule for qualified conservation contributions made permanent
(sec. 111 of the Act and sec. 170(b) of the Code)
Present Law
Charitable contributions generally
In general, a deduction is permitted for charitable
contributions, subject to certain limitations that depend on
the type of taxpayer, the property contributed, and the donee
organization. The amount of deduction generally equals the fair
market value of the contributed property on the date of the
contribution. Charitable deductions are provided for income,
estate, and gift tax purposes.\353\
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\353\ Secs. 170, 2055, and 2522, respectively.
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In general, in any taxable year, charitable contributions
by a corporation are not deductible to the extent the aggregate
contributions exceed ten percent of the corporation's taxable
income computed without regard to net operating or capital loss
carrybacks. Total deductible contributions of an individual
taxpayer to public charities, private operating foundations,
and certain types of private nonoperating foundations generally
may not exceed 50 percent of the taxpayer's contribution base,
which is the taxpayer's adjusted gross income for a taxable
year (disregarding any net operating loss carryback). To the
extent a taxpayer has not exceeded the 50-percent limitation,
(1) contributions of capital gain property to public charities
generally may be deducted up to 30 percent of the taxpayer's
contribution base, (2) contributions of cash to most private
nonoperating foundations and certain other charitable
organizations generally may be deducted up to 30 percent of the
taxpayer's contribution base, and (3) contributions of capital
gain property to private foundations and certain other
charitable organizations generally may be deducted up to 20
percent of the taxpayer's contribution base.
Contributions in excess of the applicable percentage limits
generally may be carried over and deducted over the next five
taxable years, subject to the relevant percentage limitations
on the deduction in each of those years.
Capital gain property
Capital gain property means any capital asset or property
used in the taxpayer's trade or business the sale of which at
its fair market value, at the time of contribution, would have
resulted in gain that would have been long-term capital gain.
Contributions of capital gain property to a qualified charity
are deductible at fair market value within certain limitations.
Contributions of capital gain property to charitable
organizations described in section 170(b)(1)(A) (e.g., public
charities, private foundations other than private non-operating
foundations, and certain governmental units) generally are
deductible up to 30 percent of the taxpayer's contribution
base. An individual may elect, however, to bring all these
contributions of capital gain property for a taxable year
within the 50-percent limitation category by reducing the
amount of the contribution deduction by the amount of the
appreciation in the capital gain property. Contributions of
capital gain property to charitable organizations described in
section 170(b)(1)(B) (e.g., private non-operating foundations)
are deductible up to 20 percent of the taxpayer's contribution
base.
For purposes of determining whether a taxpayer's aggregate
charitable contributions in a taxable year exceed the
applicable percentage limitation, contributions of capital gain
property are taken into account after other charitable
contributions.
Qualified conservation contributions
Qualified conservation contributions are one exception to
the ``partial interest'' rule, which generally bars deductions
for charitable contributions of partial interests in
property.\354\ A qualified conservation contribution is a
contribution of a qualified real property interest to a
qualified organization exclusively for conservation purposes. A
qualified real property interest is defined as: (1) the entire
interest of the donor other than a qualified mineral interest;
(2) a remainder interest; or (3) a restriction (granted in
perpetuity) on the use that may be made of the real property.
Qualified organizations include certain governmental units,
public charities that meet certain public support tests, and
certain supporting organizations. Conservation purposes
include: (1) the preservation of land areas for outdoor
recreation by, or for the education of, the general public; (2)
the protection of a relatively natural habitat of fish,
wildlife, or plants, or similar ecosystem; (3) the preservation
of open space (including farmland and forest land) where such
preservation will yield a significant public benefit and is
either for the scenic enjoyment of the general public or
pursuant to a clearly delineated Federal, State, or local
governmental conservation policy; and (4) the preservation of
an historically important land area or a certified historic
structure.
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\354\ Secs. 170(f)(3)(B)(iii) and 170(h).
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Qualified conservation contributions of capital gain
property are subject to the same limitations and carryover
rules as other charitable contributions of capital gain
property.
Temporary rules regarding contributions of capital gain real property
for conservation purposes
In general
Under a temporary provision \355\ the 30-percent
contribution base limitation on deductions for contributions of
capital gain property by individuals does not apply to
qualified conservation contributions (as defined under present
law). Instead, individuals may deduct the fair market value of
any qualified conservation contribution to the extent of the
excess of 50 percent of the contribution base over the amount
of all other allowable charitable contributions. These
contributions are not taken into account in determining the
amount of other allowable charitable contributions.
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\355\ Sec. 170(b)(1)(E).
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Individuals are allowed to carry over any qualified
conservation contributions that exceed the 50-percent
limitation for up to 15 years.
For example, assume an individual with a contribution base
of $100 makes a qualified conservation contribution of property
with a fair market value of $80 and makes other charitable
contributions subject to the 50-percent limitation of $60. The
individual is allowed a deduction of $50 in the current taxable
year for the non-conservation contributions (50 percent of the
$100 contribution base) and is allowed to carry over the excess
$10 for up to 5 years. No current deduction is allowed for the
qualified conservation contribution, but the entire $80
qualified conservation contribution may be carried forward for
up to 15 years.
Farmers and ranchers
In the case of an individual who is a qualified farmer or
rancher for the taxable year in which the contribution is made,
a qualified conservation contribution is deductible up to 100
percent of the excess of the taxpayer's contribution base over
the amount of all other allowable charitable contributions.
In the above example, if the individual is a qualified
farmer or rancher, in addition to the $50 deduction for non-
conservation contributions, an additional $50 for the qualified
conservation contribution is allowed and $30 may be carried
forward for up to 15 years as a contribution subject to the
100-percent limitation.
In the case of a corporation (other than a publicly traded
corporation) that is a qualified farmer or rancher for the
taxable year in which the contribution is made, any qualified
conservation contribution is deductible up to 100 percent of
the excess of the corporation's taxable income (as computed
under section 170(b)(2)) over the amount of all other allowable
charitable contributions. Any excess may be carried forward for
up to 15 years as a contribution subject to the 100-percent
limitation.\356\
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\356\ Sec. 170(b)(2)(B).
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As an additional condition of eligibility for the 100-
percent limitation, with respect to any contribution of
property in agriculture or livestock production, or that is
available for such production, by a qualified farmer or
rancher, the qualified real property interest must include a
restriction that the property remain generally available for
such production. (There is no requirement as to any specific
use in agriculture or farming, or necessarily that the property
be used for such purposes, merely that the property remain
available for such purposes.)
A qualified farmer or rancher means a taxpayer whose gross
income from the trade or business of farming (within the
meaning of section 2032A(e)(5)) is greater than 50 percent of
the taxpayer's gross income for the taxable year.
Termination
The temporary rules regarding contributions of capital gain
real property for conservation purposes do not apply to
contributions made in taxable years beginning after December
31, 2014.\357\
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\357\ Secs. 170(b)(1)(E)(vi) and 170(b)(2)(B)(iii).
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Explanation of Provision
The provision reinstates and makes permanent the increased
percentage limits and extended carryforward period for
qualified conservation contributions made in taxable years
beginning after December 31, 2014.
The provision also includes special rules for qualified
conservation contributions by certain Native Corporations. For
this purpose, the term Native Corporation has the meaning given
such term by section 3(m) of the Alaska Native Claims
Settlement Act.\358\ In the case of any qualified conservation
contribution which is made by a Native Corporation and is a
contribution of property that was land conveyed under the
Alaska Native Claims Settlement Act, a deduction for the
contribution is allowed to the extent that the aggregate amount
of such contributions does not exceed the excess of 100 percent
of the taxpayer's taxable income over the amount of all other
allowable charitable contributions. Any excess may be carried
forward for up to 15 years as a contribution subject to the
100-percent limitation. The provision shall not be construed to
modify the existing property rights validly conveyed to Native
Corporations under the Alaska Native Claims Settlement Act.
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\358\ 43 U.S.C. sec. 1602(m) (providing that the term Native
Corporation includes ``any Regional Corporation, any Village
Corporation, any Urban Corporation, and any Group Corporation,'' as
those terms are defined under the Alaska Native Claims Settlement Act).
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Effective Date
The provision generally applies to contributions made in
taxable years beginning after December 31, 2014.
The provision for qualified conservation contributions by
certain Native Corporations applies to contributions made in
taxable years beginning after December 31, 2015.
8. Tax-free distributions from individual retirement plans for
charitable purposes (sec. 112 of the Act and sec. 408(d)(8) of
the Code)
Present Law
In general
If an amount withdrawn from a traditional individual
retirement arrangement (``IRA'') or a Roth IRA is donated to a
charitable organization, the rules relating to the tax
treatment of withdrawals from IRAs apply to the amount
withdrawn and the charitable contribution is subject to the
normally applicable limitations on deductibility of such
contributions. An exception applies in the case of a qualified
charitable distribution.
Charitable contributions
In computing taxable income, an individual taxpayer who
itemizes deductions generally is allowed to deduct the amount
of cash and up to the fair market value of property contributed
to the following entities: (1) a charity described in section
170(c)(2); (2) certain veterans' organizations, fraternal
societies, and cemetery companies; \359\ and (3) a Federal,
State, or local governmental entity, but only if the
contribution is made for exclusively public purposes.\360\ The
deduction also is allowed for purposes of calculating
alternative minimum taxable income.
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\359\ Secs. 170(c)(3)-(5).
\360\ Sec. 170(c)(1).
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The amount of the deduction allowable for a taxable year
with respect to a charitable contribution of property may be
reduced depending on the type of property contributed, the type
of charitable organization to which the property is
contributed, and the income of the taxpayer.\361\
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\361\ Secs. 170(b) and (e).
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A taxpayer who takes the standard deduction (i.e., who does
not itemize deductions) may not take a separate deduction for
charitable contributions.\362\
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\362\ Sec. 170(a).
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A payment to a charity (regardless of whether it is termed
a ``contribution'') in exchange for which the donor receives an
economic benefit is not deductible, except to the extent that
the donor can demonstrate, among other things, that the payment
exceeds the fair market value of the benefit received from the
charity. To facilitate distinguishing charitable contributions
from purchases of goods or services from charities, present law
provides that no charitable contribution deduction is allowed
for a separate contribution of $250 or more unless the donor
obtains a contemporaneous written acknowledgement of the
contribution from the charity indicating whether the charity
provided any good or service (and an estimate of the value of
any such good or service provided) to the taxpayer in
consideration for the contribution.\363\ In addition, present
law requires that any charity that receives a contribution
exceeding $75 made partly as a gift and partly as consideration
for goods or services furnished by the charity (a ``quid pro
quo'' contribution) is required to inform the contributor in
writing of an estimate of the value of the goods or services
furnished by the charity and that only the portion exceeding
the value of the goods or services may be deductible as a
charitable contribution.\364\
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\363\ Sec. 170(f)(8). For any contribution of a cash, check, or
other monetary gift, no deduction is allowed unless the donor maintains
as a record of such contribution a bank record or written communication
from the donee charity showing the name of the donee organization, the
date of the contribution, and the amount of the contribution. Sec.
170(f)(17).
\364\ Sec. 6115.
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Under present law, total deductible contributions of an
individual taxpayer to public charities, private operating
foundations, and certain types of private nonoperating
foundations generally may not exceed 50 percent of the
taxpayer's contribution base, which is the taxpayer's adjusted
gross income for a taxable year (disregarding any net operating
loss carryback). To the extent a taxpayer has not exceeded the
50-percent limitation, (1) contributions of capital gain
property to public charities generally may be deducted up to 30
percent of the taxpayer's contribution base, (2) contributions
of cash to most private nonoperating foundations and certain
other charitable organizations generally may be deducted up to
30 percent of the taxpayer's contribution base, and (3)
contributions of capital gain property to private foundations
and certain other charitable organizations generally may be
deducted up to 20 percent of the taxpayer's contribution base.
Contributions by individuals in excess of the 50-percent,
30-percent, and 20-percent limits generally may be carried over
and deducted over the next five taxable years, subject to the
relevant percentage limitations on the deduction in each of
those years.
In general, a charitable deduction is not allowed for
income, estate, or gift tax purposes if the donor transfers an
interest in property to a charity (e.g., a remainder) while
also either retaining an interest in that property (e.g., an
income interest) or transferring an interest in that property
to a noncharity for less than full and adequate
consideration.\365\ Exceptions to this general rule are
provided for, among other interests, remainder interests in
charitable remainder annuity trusts, charitable remainder
unitrusts, and pooled income funds, and present interests in
the form of a guaranteed annuity or a fixed percentage of the
annual value of the property.\366\ For such interests, a
charitable deduction is allowed to the extent of the present
value of the interest designated for a charitable organization.
---------------------------------------------------------------------------
\365\ Secs. 170(f), 2055(e)(2), and 2522(c)(2).
\366\ Sec. 170(f)(2).
---------------------------------------------------------------------------
IRA rules
Within limits, individuals may make deductible and
nondeductible contributions to a traditional IRA. Amounts in a
traditional IRA are includible in income when withdrawn (except
to the extent the withdrawal represents a return of
nondeductible contributions). Certain individuals also may make
nondeductible contributions to a Roth IRA (deductible
contributions cannot be made to Roth IRAs). Qualified
withdrawals from a Roth IRA are excludable from gross income.
Withdrawals from a Roth IRA that are not qualified withdrawals
are includible in gross income to the extent attributable to
earnings. Includible amounts withdrawn from a traditional IRA
or a Roth IRA before attainment of age 59\1/2\ are subject to
an additional 10-percent early withdrawal tax, unless an
exception applies. Under present law, minimum distributions are
required to be made from tax-favored retirement arrangements,
including IRAs. Minimum required distributions from a
traditional IRA must generally begin by April 1 of the calendar
year following the year in which the IRA owner attains age
70\1/2\.\367\
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\367\ Minimum distribution rules also apply in the case of
distributions after the death of a traditional or Roth IRA owner.
---------------------------------------------------------------------------
If an individual has made nondeductible contributions to a
traditional IRA, a portion of each distribution from an IRA is
nontaxable until the total amount of nondeductible
contributions has been received. In general, the amount of a
distribution that is nontaxable is determined by multiplying
the amount of the distribution by the ratio of the remaining
nondeductible contributions to the account balance. In making
the calculation, all traditional IRAs of an individual are
treated as a single IRA, all distributions during any taxable
year are treated as a single distribution, and the value of the
contract, income on the contract, and investment in the
contract are computed as of the close of the calendar year.
In the case of a distribution from a Roth IRA that is not a
qualified distribution, in determining the portion of the
distribution attributable to earnings, contributions and
distributions are deemed to be distributed in the following
order: (1) regular Roth IRA contributions; (2) taxable
conversion contributions; \368\ (3) nontaxable conversion
contributions; and (4) earnings. In determining the amount of
taxable distributions from a Roth IRA, all Roth IRA
distributions in the same taxable year are treated as a single
distribution.
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\368\ Conversion contributions refer to conversions of amounts in a
traditional IRA to a Roth IRA.
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Distributions from an IRA (other than a Roth IRA) are
generally subject to withholding unless the individual elects
not to have withholding apply.\369\ Elections not to have
withholding apply are to be made in the time and manner
prescribed by the Secretary.
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\369\ Sec. 3405.
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Qualified charitable distributions
Otherwise taxable IRA distributions from a traditional or
Roth IRA are excluded from gross income to the extent they are
qualified charitable distributions.\370\ The exclusion may not
exceed $100,000 per taxpayer per taxable year. Special rules
apply in determining the amount of an IRA distribution that is
otherwise taxable. The otherwise applicable rules regarding
taxation of IRA distributions and the deduction of charitable
contributions continue to apply to distributions from an IRA
that are not qualified charitable distributions. A qualified
charitable distribution is taken into account for purposes of
the minimum distribution rules applicable to traditional IRAs
to the same extent the distribution would have been taken into
account under such rules had the distribution not been directly
distributed under the qualified charitable distribution
provision. An IRA does not fail to qualify as an IRA as a
result of qualified charitable distributions being made from
the IRA.
---------------------------------------------------------------------------
\370\ Sec. 408(d)(8). The exclusion does not apply to distributions
from employer-sponsored retirement plans, including SIMPLE IRAs and
simplified employee pensions (``SEPs'').
---------------------------------------------------------------------------
A qualified charitable distribution is any distribution
from an IRA directly by the IRA trustee to an organization
described in section 170(b)(1)(A) (generally, public charities)
other than a supporting organization (as described in section
509(a)(3)) or a donor advised fund (as defined in section
4966(d)(2)). Distributions are eligible for the exclusion only
if made on or after the date the IRA owner attains age 70\1/2\
and only to the extent the distribution would be includible in
gross income (without regard to this provision).
The exclusion applies only if a charitable contribution
deduction for the entire distribution otherwise would be
allowable (under present law), determined without regard to the
generally applicable percentage limitations. Thus, for example,
if the deductible amount is reduced because of a benefit
received in exchange, or if a deduction is not allowable
because the donor did not obtain sufficient substantiation, the
exclusion is not available with respect to any part of the IRA
distribution.
If the IRA owner has any IRA that includes nondeductible
contributions, a special rule applies in determining the
portion of a distribution that is includible in gross income
(but for the qualified charitable distribution provision) and
thus is eligible for qualified charitable distribution
treatment. Under the special rule, the distribution is treated
as consisting of income first, up to the aggregate amount that
would be includible in gross income (but for the qualified
charitable distribution provision) if the aggregate balance of
all IRAs having the same owner were distributed during the same
year. In determining the amount of subsequent IRA distributions
includible in income, proper adjustments are to be made to
reflect the amount treated as a qualified charitable
distribution under the special rule.
Distributions that are excluded from gross income by reason
of the qualified charitable distribution provision are not
taken into account in determining the deduction for charitable
contributions under section 170.
Under present law, the exclusion does not apply to
distributions made in taxable years beginning after December
31, 2014.
Explanation of Provision
The provision reinstates and makes permanent the exclusion
from gross income for qualified charitable distributions from
an IRA.
Effective Date
The provision applies to distributions made in taxable
years beginning after December 31, 2014.
9. Extension and expansion of charitable deduction for contributions of
food inventory (sec. 113 of the Act and sec. 170 of the Code)
Present Law
Charitable contributions in general
In general, an income tax deduction is permitted for
charitable contributions, subject to certain limitations that
depend on the type of taxpayer, the property contributed, and
the donee organization.\371\ In the case of an individual, the
deduction is limited to various percentages of the contribution
base, depending on the donee and the property contributed. In
the case of a corporation,\372\ the deduction generally is
limited to ten percent of the taxable income (with
modifications).\373\ Contributions in excess of these
limitations may be carried forward for up to five taxable
years.
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\371\ Sec. 170.
\372\ Sec. 170(b)(1). The contribution base is the adjusted gross
income determined without regard net operating loss carrybacks.
\373\ Sec. 170(b)(2).
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Charitable contributions of cash are deductible in the
amount contributed. Subject to several exceptions,
contributions of property are deductible at the fair market
value of the property. One exception provides that the amount
of the charitable contribution is reduced by the amount of any
gain which would not have been long-term capital gain if the
property contributed had been sold by the taxpayer at its fair
market value at the time of the contribution.\374\
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\374\ Sec. 170(e)(1)(A).
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General rules regarding contributions of inventory
As a result of the exception described above, a taxpayer's
deduction for charitable contributions of inventory generally
is limited to the taxpayer's basis (typically, cost) in the
inventory, or, if less, the fair market value of the inventory.
However, for certain contributions of inventory, a C
corporation may claim an enhanced deduction equal to the lesser
of (1) basis plus one-half of the item's appreciation (i.e.,
basis plus one-half of fair market value in excess of basis) or
(2) two times basis.\375\ To be eligible for the enhanced
deduction, the contributed property generally must be inventory
of the taxpayer and must be contributed to a charitable
organization described in section 501(c)(3) (except for private
nonoperating foundations), and the donee must (1) use the
property consistent with the donee's exempt purpose solely for
the care of the ill, the needy, or infants; (2) not transfer
the property in exchange for money, other property, or
services; and (3) provide the taxpayer a written statement that
the donee's use of the property will be consistent with such
requirements. In the case of contributed property subject to
the Federal Food, Drug, and Cosmetic Act, as amended, the
property must satisfy the applicable requirements of such Act
on the date of transfer and for 180 days prior to the
transfer.\376\
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\375\ Sec. 170(e)(3).
\376\ Sec. 170(e)(3)(A)(iv).
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To use the enhanced deduction, the taxpayer must establish
that the fair market value of the donated item exceeds basis.
The valuation of food inventory has been the subject of
disputes between taxpayers and the IRS.\377\
---------------------------------------------------------------------------
\377\ Lucky Stores Inc. v. Commissioner, 105 T.C. 420 (1995)
(holding that the value of surplus bread inventory donated to charity
was the full retail price of the bread rather than half the retail
price, as the IRS asserted).
---------------------------------------------------------------------------
Temporary rule expanding and modifying the enhanced deduction for
contributions of food inventory
Under a temporary provision, any taxpayer engaged in a
trade or business, whether or not a C corporation, is eligible
to claim the enhanced deduction for donations of food
inventory.\378\ For taxpayers other than C corporations, the
total deduction for donations of food inventory in a taxable
year generally may not exceed ten percent of the taxpayer's net
income for such taxable year from all sole proprietorships, S
corporations, or partnerships (or other non C corporations)
from which contributions of apparently wholesome food are made.
For example, if a taxpayer is a sole proprietor, a shareholder
in an S corporation, and a partner in a partnership, and each
business makes charitable contributions of food inventory, the
taxpayer's deduction for donations of food inventory is limited
to ten percent of the taxpayer's net income from the sole
proprietorship and the taxpayer's interests in the S
corporation and partnership. However, if only the sole
proprietorship and the S corporation made charitable
contributions of food inventory, the taxpayer's deduction would
be limited to ten percent of the net income from the trade or
business of the sole proprietorship and the taxpayer's interest
in the S corporation, but not the taxpayer's interest in the
partnership.\379\
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\378\ Sec. 170(e)(3)(C).
\379\ The ten-percent limitation does not affect the application of
the generally applicable percentage limitations. For example, if ten
percent of a sole proprietor's net income from the proprietor's trade
or business is greater than 50 percent of the proprietor's contribution
base which otherwise limits the deduction, the available deduction for
the taxable year (with respect to contributions to public charities) is
50 percent of the proprietor's contribution base. Consistent with
present law, these contributions may be carried forward because they
exceed the 50-percent limitation. Contributions of food inventory by a
taxpayer that is not a C corporation that exceed the ten-percent
limitation but do not exceed the 50-percent limitation may not be
carried forward.
---------------------------------------------------------------------------
Under the temporary provision, the enhanced deduction for
food is available only for food that qualifies as ``apparently
wholesome food.'' Apparently wholesome food is defined as food
intended for human consumption that meets all quality and
labeling standards imposed by Federal, State, and local laws
and regulations even though the food may not be readily
marketable due to appearance, age, freshness, grade, size,
surplus, or other conditions.
The provision does not apply to contributions made after
December 31, 2014.
Explanation of Provision
The provision reinstates and makes permanent the enhanced
deduction for contributions of food inventory for contributions
made after December 31, 2014.
For taxable years beginning after December 31, 2015, the
provision also modifies the enhanced deduction for food
inventory contributions by: (1) increasing the charitable
percentage limitation for food inventory contributions and
clarifying the carryover and coordination rules for these
contributions; (2) including a presumption concerning the tax
basis of food inventory donated by certain businesses; and (3)
including presumptions that may be used when valuing donated
food inventory.
First, the ten-percent limitation described above
applicable to taxpayers other than C corporations is increased
to 15 percent. For C corporations, these contributions are made
subject to a limitation of 15 percent of taxable income (as
modified). The general ten-percent limitation for a C
corporation does not apply to these contributions, but the ten-
percent limitation applicable to other contributions is reduced
by the amount of these contributions. Qualifying food inventory
contributions in excess of these 15-percent limitations may be
carried forward and treated as qualifying food inventory
contributions in each of the five succeeding taxable years in
order of time.
Second, if the taxpayer does not account for inventory
under section 471 and is not required to capitalize indirect
costs under section 263A, the taxpayer may elect, solely for
computing the enhanced deduction for food inventory, to treat
the basis of any apparently wholesome food as being equal to 25
percent of the fair market value of such food.
Third, in the case of any contribution of apparently
wholesome food which cannot or will not be sold solely by
reason of internal standards of the taxpayer, lack of market,
or similar circumstances, or by reason of being produced by the
taxpayer exclusively for the purposes of transferring the food
to an organization described in section 501(c)(3), the fair
market value of such contribution shall be determined (1)
without regard to such internal standards, such lack of market
or similar circumstances, or such exclusive purpose, and (2) by
taking into account the price at which the same or
substantially the same food items (as to both type and quality)
are sold by the taxpayer at the time of the contributions (or,
if not so sold at such time, in the recent past).
Effective Date
The provision generally applies to contributions made after
December 31, 2014.
The modifications to increase the corporate percentage
limit and to provide for presumptions relating to basis and
valuation apply to taxable years beginning after December 31,
2015.
10. Extension of modification of tax treatment of certain payments to
controlling exempt organizations (sec. 114 of the Act and sec.
512 of the Code)
Present Law
In general, organizations exempt from Federal income tax
are subject to the unrelated business income tax on income
derived from a trade or business regularly carried on by the
organization that is not substantially related to the
performance of the organization's tax-exempt functions.\380\ In
general, interest, rents, royalties, and annuities are excluded
from the unrelated business income of tax-exempt
organizations.\381\
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\380\ Sec. 511.
\381\ Sec. 512(b).
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Section 512(b)(13) provides rules regarding income derived
by an exempt organization from a controlled subsidiary. In
general, section 512(b)(13) treats otherwise excluded rent,
royalty, annuity, and interest income as unrelated business
taxable income if such income is received from a taxable or
tax-exempt subsidiary that is 50-percent controlled by the
parent tax-exempt organization to the extent the payment
reduces the net unrelated income (or increases any net
unrelated loss) of the controlled entity (determined as if the
entity were tax exempt).
In the case of a stock subsidiary, ``control'' means
ownership by vote or value of more than 50 percent of the
stock. In the case of a partnership or other entity,
``control'' means ownership of more than 50 percent of the
profits, capital, or beneficial interests. In addition, present
law applies the constructive ownership rules of section 318 for
purposes of section 512(b)(13). Thus, a parent exempt
organization is deemed to control any subsidiary in which it
holds more than 50 percent of the voting power or value,
directly (as in the case of a first-tier subsidiary) or
indirectly (as in the case of a second-tier subsidiary).
For payments made pursuant to a binding written contract in
effect on August 17, 2006 (or renewal of such a contract on
substantially similar terms), the general rule of section
512(b)(13) applies only to the portion of payments received or
accrued in a taxable year that exceeds the amount of the
payment that would have been paid or accrued if the amount of
such payment had been determined under the principles of
section 482 (i.e., at arm's length).\382\ A 20-percent penalty
is imposed on the larger of such excess determined without
regard to any amendment or supplement to a return of tax, or
such excess determined with regard to all such amendments and
supplements. This special rule does not apply to payments
received or accrued after December 31, 2014.
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\382\ Sec. 512(b)(13)(E).
---------------------------------------------------------------------------
Explanation of Provision
The provision reinstates the special rule and makes it
permanent. Accordingly, under the provision, payments of rent,
royalties, annuities, or interest by a controlled organization
to a controlling organization pursuant to a binding written
contract in effect on August 17, 2006 (or renewal of such a
contract on substantially similar terms), may be includible in
the unrelated business taxable income of the controlling
organization only to the extent the payment exceeds the amount
of the payment determined under the principles of section 482
(i.e., at arm's length). Any such excess is subject to a 20-
percent penalty on the larger of such excess determined without
regard to any amendment or supplement to a return of tax, or
such excess determined with regard to all such amendments and
supplements.
Effective Date
The provision applies to payments received or accrued after
December 31, 2014.
11. Extension of basis adjustment to stock of S corporations making
charitable contributions of property (sec. 115 of the Act and
sec. 1367 of the Code)
Present Law
Under present law, if an S corporation contributes money or
other property to a charity, each shareholder takes into
account the shareholder's pro rata share of the contribution in
determining its own income tax liability.\383\ A shareholder of
an S corporation reduces the basis in the stock of the S
corporation by the amount of the charitable contribution that
flows through to the shareholder.\384\
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\383\ Sec. 1366(a)(1)(A).
\384\ Sec. 1367(a)(2)(B).
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In the case of charitable contributions made in taxable
years beginning before January 1, 2015, the amount of a
shareholder's basis reduction in the stock of an S corporation
by reason of a charitable contribution made by the corporation
is equal to the shareholder's pro rata share of the adjusted
basis of the contributed property. For contributions made in
taxable years beginning after December 31, 2014, the amount of
the reduction is the shareholder's pro rata share of the fair
market value of the contributed property.
Explanation of Provision
The provision makes the pre-2015 rule relating to the basis
reduction on account of charitable contributions of property
permanent.
Effective Date
The provision applies to charitable contributions made in
taxable years beginning after December 31, 2014.
Part 3--Incentives for Growth, Jobs, Investment, and Innovation
12. Extension and modification of research credit (sec. 121 of the Act
and secs. 38 and 41 and new sec. 3111(f) of the Code)
Present Law
Research credit
General rule
For general research expenditures, a taxpayer may claim a
research credit equal to 20 percent of the amount by which the
taxpayer's qualified research expenses for a taxable year
exceed its base amount for that year.\385\ Thus, the research
credit is generally available with respect to incremental
increases in qualified research. An alternative simplified
credit (with a 14-percent rate and a different base amount) may
be claimed in lieu of this credit.\386\
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\385\ Sec. 41(a)(1).
\386\ Sec. 41(c)(5).
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A 20-percent research tax credit also is available with
respect to the excess of (1) 100 percent of corporate cash
expenses (including grants or contributions) paid for basic
research conducted by universities (and certain nonprofit
scientific research organizations) over (2) the sum of (a) the
greater of two minimum basic research floors plus (b) an amount
reflecting any decrease in nonresearch giving to universities
by the corporation as compared to such giving during a fixed-
base period, as adjusted for inflation.\387\ This separate
credit computation commonly is referred to as the basic
research credit.
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\387\ Sec. 41(a)(2) and (e). The base period for the basic research
credit generally extends from 1981 through 1983.
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Finally, a research credit is available for a taxpayer's
expenditures on research undertaken by an energy research
consortium.\388\ This separate credit computation commonly is
referred to as the energy research credit. Unlike the other
research credits, the energy research credit applies to all
qualified expenditures, not just those in excess of a base
amount.
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\388\ Sec. 41(a)(3).
---------------------------------------------------------------------------
The research credit, including the basic research credit
and the energy research credit, expires for amounts paid or
incurred after December 31, 2014.\389\
---------------------------------------------------------------------------
\389\ Sec. 41(h).
---------------------------------------------------------------------------
Computation of general research credit
The general research tax credit applies only to the extent
that the taxpayer's qualified research expenses for the current
taxable year exceed its base amount. The base amount for the
current year generally is computed by multiplying the
taxpayer's fixed-base percentage by the average amount of the
taxpayer's gross receipts for the four preceding years. If a
taxpayer both incurred qualified research expenses and had
gross receipts during each of at least three years from 1984
through 1988, then its fixed-base percentage is the ratio that
its total qualified research expenses for the 1984-1988 period
bears to its total gross receipts for that period (subject to a
maximum fixed-base percentage of 16 percent). Special rules
apply to all other taxpayers (so called start-up firms).\390\
In computing the research credit, a taxpayer's base amount
cannot be less than 50 percent of its current-year qualified
research expenses.
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\390\ The Small Business Job Protection Act of 1996 expanded the
definition of start-up firms under section 41(c)(3)(B)(i) to include
any firm if the first taxable year in which such firm had both gross
receipts and qualified research expenses began after 1983. A special
rule (enacted in 1993) is designed to gradually recompute a start-up
firm's fixed-base percentage based on its actual research experience.
Under this special rule, a start-up firm is assigned a fixed-base
percentage of three percent for each of its first five taxable years
after 1993 in which it incurs qualified research expenses. A start-up
firm's fixed-base percentage for its sixth through tenth taxable years
after 1993 in which it incurs qualified research expenses is a phased-
in ratio based on the firm's actual research experience. For all
subsequent taxable years, the taxpayer's fixed-base percentage is its
actual ratio of qualified research expenses to gross receipts for any
five years selected by the taxpayer from its fifth through tenth
taxable years after 1993. Sec. 41(c)(3)(B).
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Alternative simplified credit
The alternative simplified credit is equal to 14 percent of
qualified research expenses that exceed 50 percent of the
average qualified research expenses for the three preceding
taxable years.\391\ The rate is reduced to 6 percent if a
taxpayer has no qualified research expenses in any one of the
three preceding taxable years.\392\ An election to use the
alternative simplified credit applies to all succeeding taxable
years unless revoked with the consent of the Secretary.\393\
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\391\ Sec. 41(c)(5)(A).
\392\ Sec. 41(c)(5)(B).
\393\ Sec. 41(c)(5)(C).
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Eligible expenses
Qualified research expenses eligible for the research tax
credit consist of: (1) in-house expenses of the taxpayer for
wages and supplies attributable to qualified research; (2)
certain time-sharing costs for computer use in qualified
research; and (3) 65 percent of amounts paid or incurred by the
taxpayer to certain other persons for qualified research
conducted on the taxpayer's behalf (so-called contract research
expenses).\394\ Notwithstanding the limitation for contract
research expenses, qualified research expenses include 100
percent of amounts paid or incurred by the taxpayer to an
eligible small business, university, or Federal laboratory for
qualified energy research.
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\394\ Under a special rule, 75 percent of amounts paid to a
research consortium for qualified research are treated as qualified
research expenses eligible for the research credit (rather than 65
percent under the general rule under section 41(b)(3) governing
contract research expenses) if (1) such research consortium is a tax-
exempt organization that is described in section 501(c)(3) (other than
a private foundation) or section 501(c)(6) and is organized and
operated primarily to conduct scientific research, and (2) such
qualified research is conducted by the consortium on behalf of the
taxpayer and one or more persons not related to the taxpayer. Sec.
41(b)(3)(C).
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To be eligible for the credit, the research not only has to
satisfy the requirements of section 174, but also must be
undertaken for the purpose of discovering information that is
technological in nature, the application of which is intended
to be useful in the development of a new or improved business
component of the taxpayer, and substantially all of the
activities of which constitute elements of a process of
experimentation for functional aspects, performance,
reliability, or quality of a business component. Research does
not qualify for the credit if substantially all of the
activities relate to style, taste, cosmetic, or seasonal design
factors.\395\ In addition, research does not qualify for the
credit if: (1) conducted after the beginning of commercial
production of the business component; (2) related to the
adaptation of an existing business component to a particular
customer's requirements; (3) related to the duplication of an
existing business component from a physical examination of the
component itself or certain other information; (4) related to
certain efficiency surveys, management function or technique,
market research, market testing, or market development, routine
data collection or routine quality control; (5) related to
software developed primarily for internal use by the taxpayer;
(6) conducted outside the United States, Puerto Rico, or any
U.S. possession; (7) in the social sciences, arts, or
humanities; or (8) funded by any grant, contract, or otherwise
by another person (or government entity).\396\
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\395\ Sec. 41(d)(3).
\396\ Sec. 41(d)(4).
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Relation to deduction
Deductions allowed to a taxpayer under section 174 (or any
other section) are reduced by an amount equal to 100 percent of
the taxpayer's research tax credit determined for the taxable
year.\397\ Taxpayers may alternatively elect to claim a reduced
research tax credit amount under section 41 in lieu of reducing
deductions otherwise allowed.\398\
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\397\ Sec. 280C(c). For example, assume that a taxpayer makes
credit-eligible research expenditures of $1 million during the year and
that the base period amount is $600,000. Under the standard credit
calculation (i.e., where a taxpayer may claim a research credit equal
to 20 percent of the amount by which its qualified expenses for the
year exceed its base period amount), the taxpayer is allowed a credit
equal to 20 percent of the $400,000 increase in research expenditures,
or $80,000 (($1 million - $600,000) * 20% = $80,000). To avoid a double
benefit, the amount of the taxpayer's deduction under section 174 is
reduced by $80,000 (the amount of the research credit), leaving a
deduction of $920,000 ($1 million - $80,000).
\398\ Sec. 280C(c)(3). Taxpayers making this election reduce the
allowable research credit by the maximum corporate tax rate (currently
35 percent). Continuing with the example from the prior footnote, an
electing taxpayer would have its credit reduced to $52,000 ($80,000 -
($80,000 * 0.35%)), but would retain its $1 million deduction for
research expenses. This option might be desirable for a taxpayer who
cannot claim the full amount of the research credit otherwise allowable
due to the limitation imposed by the alternative minimum tax.
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Specified credits allowed against alternative minimum tax
For any taxable year, the general business credit (which is
the sum of the various business credits) generally may not
exceed the excess of the taxpayer's net income tax \399\ over
the greater of (1) the taxpayer's tentative minimum tax or (2)
25 percent of so much of the taxpayer's net regular tax
liability \400\ as exceeds $25,000.\401\ Any general business
credit in excess of this limitation may be carried back one
year and forward up to 20 years.\402\ The tentative minimum tax
is an amount equal to specified rates of tax imposed on the
excess of the alternative minimum taxable income over an
exemption amount.\403\ Generally, the tentative minimum tax of
a C corporation with average annual gross receipts of less than
$7.5 million for prior three-year periods is zero.\404\
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\399\ The term ``net income tax'' means the sum of the regular tax
liability and the alternative minimum tax, reduced by the credits
allowable under sections 21 through 30D. Sec. 38(c)(1).
\400\ The term ``net regular tax liability'' means the regular tax
liability reduced by the sum of certain nonrefundable personal and
other credits. Sec. 38(c)(1).
\401\ Sec. 38(c)(1).
\402\ Sec. 39(a)(1).
\403\ Sec. 55(b). For example, assume a taxpayer has a regular tax
liability of $80,000, a tentative minimum tax of $100,000, and a
research credit determined under section 41 of $90,000 for the taxable
year (and no other credits). Under present law, the taxpayer's research
credit is limited to the excess of $100,000 over the greater of (1)
$100,000 or (2) $13,750 (25% of the excess of $80,000 over $25,000).
Accordingly, no research credit may be claimed ($100,000 - $100,000 =
$0) for the taxable year and the taxpayer's net tax liability is
$100,000. The $90,000 research credit may be carried back or forward
under the rules applicable to the general business credit.
\404\ Sec. 55(e).
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In applying the tax liability limitation to a list of
``specified credits'' that are part of the general business
credit, the tentative minimum tax is treated as being
zero.\405\ Thus, the specified credits generally may offset
both regular tax and alternative minimum tax (``AMT'')
liabilities.
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\405\ See section 38(c)(4)(B) for the list of specified credits,
which does not presently include the research credit determined under
section 41.
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For taxable years beginning in 2010, an eligible small
business was allowed to offset both the regular and AMT
liability with the general business credits determined for the
taxable year (``eligible small business credits'').\406\ For
this purpose, an eligible small business was, with respect to
any taxable year, a corporation, the stock of which was not
publicly traded, a partnership, or a sole proprietor, if the
average annual gross receipts did not exceed $50 million.\407\
Credits determined with respect to a partnership or S
corporation were not treated as eligible small business credits
by a partner or shareholder unless the partner or shareholder
met the gross receipts test for the taxable year in which the
credits were treated as current year business credits.\408\
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\406\ Sec. 38(c)(5)(B).
\407\ Sec. 38(c)(5)(C).
\408\ Sec. 38(c)(5)(D).
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FICA taxes
The Federal Insurance Contributions Act (``FICA'') imposes
tax on employers and employees based on the amount of wages (as
defined for FICA purposes) paid to an employee during the year,
often referred to as ``payroll'' taxes.\409\ The tax imposed on
the employer and on the employee is each composed of two parts:
(1) the Social Security or old age, survivors, and disability
insurance (``OASDI'') tax equal to 6.2 percent of covered wages
up to the taxable wage base ($118,500 for 2015); and (2) the
Medicare or hospital insurance (``HI'') tax equal to 1.45
percent of all covered wages.\410\ The employee portion of the
FICA tax generally must be withheld and remitted to the Federal
government by the employer.
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\409\ Secs. 3101-3128.
\410\ The employee portion of the HI tax under FICA (not the
employer portion) is increased by an additional tax of 0.9 percent on
wages received in excess of a threshold amount. The threshold amount is
$250,000 in the case of a joint return, $125,000 in the case of a
married individual filing a separate return, and $200,000 in any other
case.
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An employer generally files quarterly employment tax
returns showing its liability for FICA taxes with respect to
its employees' wages for the quarter, as well as the employee
FICA taxes and income taxes withheld from the employees' wages.
Explanation of Provision
Research credit
The provision makes permanent the present law credit.\411\
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\411\ In making the present law research credit permanent, Congress
did not intend to reinstate the previously terminated alternative
incremental research credit. See letter dated January 27, 2016,
reprinted in Tax Notes Today (Doc 2016-2887, 2016 Tax Notes Today 27-
38), from Chairmen Brady and Hatch and Ranking Members Levin and Wyden
to Secretary of the Treasury Lew and Commissioner of Internal Revenue
Service Koskinen so stating and announcing their intention to introduce
technical correction legislation to strike the alternative incremental
research credit from the Code, effective as if included in the PATH
Act.
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Specified credits allowed against alternative minimum tax
The provision provides that, in the case of an eligible
small business (as defined in section 38(c)(5)(C), after
application of rules similar to the rules of section
38(c)(5)(D)), the research credit determined under section 41
for taxable years beginning after December 31, 2015, is a
specified credit. Thus, these research credits of an eligible
small business may offset both regular tax and AMT
liabilities.\412\
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\412\ Using the above example, under this provision, the limitation
would be the excess of $100,000 over the greater of (1) $0 or (2)
$13,750. Since $13,750 is greater than $0, the $100,000 would be
reduced by $13,750 such that the research credit would be limited to
$86,250. Hence, the taxpayer would be able to claim a research credit
of $86,250 against its $100,000 net income tax (the sum of $80,000
regular tax liability and $20,000 alternative minimum tax), which would
result in $13,750 of total net tax owed ($100,000--$86,250). The
remaining $3,750 of its research credit ($90,000--$86,250) may be
carried back or forward, as applicable.
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Payroll tax credit
In general
Under the provision, for taxable years beginning after
December 31, 2015, a qualified small business may elect for any
taxable year to claim a certain amount of its research credit
as a payroll tax credit against its employer OASDI liability,
rather than against its income tax liability.\413\ If a
taxpayer makes an election under this provision, the amount so
elected is treated as a research credit for purposes of section
280C.\414\
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\413\ The credit does not apply against its employer HI liability
or against the employee portion of FICA taxes the employer is required
to withhold and remit to the government.
\414\ Thus, taxpayers are either denied a section 174 deduction in
the amount of the credit or may elect a reduced research credit amount.
The election is not taken into account for purposes of determining any
amount allowable as a payroll tax deduction.
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A qualified small business is defined, with respect to any
taxable year, as a corporation (including an S corporation) or
partnership (1) with gross receipts of less than $5 million for
the taxable year,\415\ and (2) that did not have gross receipts
for any taxable year before the five taxable year period ending
with the taxable year. An individual carrying on one or more
trades or businesses also may be considered a qualified small
business if the individual meets the conditions set forth in
(1) and (2), taking into account its aggregate gross receipts
received with respect to all trades or businesses. A qualified
small business does not include an organization exempt from
income tax under section 501.
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\415\ For this purpose, gross receipts are determined under the
rules of section 448(c)(3), without regard to subparagraph (A) thereof.
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The payroll tax credit portion is the least of (1) an
amount specified by the taxpayer that does not exceed $250,000,
(2) the research credit determined for the taxable year, or (3)
in the case of a qualified small business other than a
partnership or S corporation, the amount of the business credit
carryforward under section 39 from the taxable year (determined
before the application of this provision to the taxable year).
For purposes of this provision, all members of the same
controlled group or group under common control are treated as a
single taxpayer.\416\ The $250,000 amount is allocated among
the members in proportion to each member's expenses on which
the research credit is based. Each member may separately elect
the payroll tax credit, but not in excess of its allocated
dollar amount.
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\416\ For this purpose, all persons or entities treated as a single
taxpayer under section 41(f)(1) are treated as a single person.
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A taxpayer may make an annual election under this section,
specifying the amount of its research credit not to exceed
$250,000 that may be used as a payroll tax credit, on or before
the due date (including extensions) of its originally filed
return.\417\ A taxpayer may not make an election for a taxable
year if it has made such an election for five or more preceding
taxable years. An election to apply the research credit against
OASDI liability may not be revoked without the consent of the
Secretary of the Treasury (``Secretary''). In the case of a
partnership or S corporation, an election to apply the credit
against its OASDI liability is made at the entity level.
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\417\ In the case of a qualified small business that is a
partnership, this is the return required to be filed under section
6031. In the case of a qualified small business that is an S
corporation, this is the return required to be filed under section
6037. In the case of any other qualified small business, this is the
return of tax for the taxable year.
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Application of credit against OASDI tax liability
The payroll tax portion of the research credit is allowed
as a credit against the qualified small business's OASDI tax
liability for the first calendar quarter beginning after the
date on which the qualified small business files its income tax
or information return for the taxable year. The credit may not
exceed the OASDI tax liability for a calendar quarter on the
wages paid with respect to all employees of the qualified small
business.
If the payroll tax portion of the credit exceeds the
qualified small business's OASDI tax liability for a calendar
quarter, the excess is allowed as a credit against the OASDI
liability for the following calendar quarter.
Other rules
The Secretary is directed to prescribe such regulations as
are necessary to carry out the purposes of the provision,
including (1) to prevent the avoidance of the purposes of the
limitations and aggregation rules through the use of successor
companies or other means, (2) to minimize compliance and
record-keeping burdens, and (3) for recapture of the credit
amount applied against OASDI taxes in the case of an adjustment
to the payroll tax portion of the research credit, including
requiring amended returns in such a case.
Effective Date
The provision to make the research credit permanent applies
to amounts paid or incurred after December 31, 2014.
The provision to allow the research credit against AMT
applies to research credits of eligible small businesses
determined for taxable years beginning after December 31, 2015.
The provision to allow the research credit against FICA
taxes applies to taxable years beginning after December 31,
2015.
13. Extension and modification of employer wage credit for employees
who are active duty members of the uniformed services (sec. 122
of the Act and sec. 45P of the Code)
Present Law
Differential pay
In general, compensation paid by an employer to an employee
is deductible by the employer unless the expense must be
capitalized.\418\ In the case of an employee who is called to
active duty with respect to the armed forces of the United
States, some employers voluntarily pay the employee the
difference between the compensation that the employer would
have paid to the employee during the period of military service
less the amount of pay received by the employee from the
military. This payment by the employer is often referred to as
``differential pay.''
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\418\ Sec. 162(a)(1).
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Wage credit for differential pay
If an employer qualifies as an eligible small business
employer, the employer is allowed a credit against its income
tax liability for a taxable year in an amount equal to 20
percent of the sum of the eligible differential wage payments
for each of the employer's qualified employees during the year.
An eligible small business employer means, with respect to
a taxable year, an employer that: (1) employed on average less
than 50 employees on business days during the taxable year; and
(2) under a written plan of the taxpayer, provides eligible
differential wage payments to every qualified employee. For
this purpose, members of controlled groups, groups under common
control, and affiliated service groups are treated as a single
employer.\419\ The credit is not available with respect to an
employer that has failed to comply with the employment and
reemployment rights of members of the uniformed services.\420\
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\419\ Sec. 414(b), (c), (m) and (o).
\420\ Chapter 43 of Title 38 of the United States Code deals with
these rights.
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Differential wage payment means any payment that: (1) is
made by an employer to an individual with respect to any period
during which the individual is performing service in the
uniformed services of the United States while on active duty
for a period of more than 30 days, and (2) represents all or a
portion of the wages that the individual would have received
from the employer if the individual were performing services
for the employer.\421\ Eligible differential wage payments are
so much of the differential wage payments paid to a qualified
employee as does not exceed $20,000. A qualified employee is an
individual who has been an employee of the employer for the 91-
day period immediately preceding the period for which any
differential wage payment is made.
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\421\ Sec. 3401(h)(2).
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No deduction may be taken for that portion of compensation
that is equal to the credit.\422\ In addition, the amount of
any other income tax credit otherwise allowable with respect to
compensation paid to an employee must be reduced by the
differential wage payment credit allowed with respect to the
employee. The credit is not allowable against a taxpayer's
alternative minimum tax liability. Certain rules applicable to
the work opportunity tax credit in the case of tax-exempt
organizations, estates and trusts, regulated investment
companies, real estate investment trusts and certain
cooperatives apply also to the differential wage payment
credit.\423\
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\422\ Sec. 280C(a).
\423\ Sec. 52(c), (d), (e).
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The credit is available with respect to amounts paid after
June 17, 2008,\424\ and before January 1, 2015.
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\424\ The credit was originally provided by the Heroes Earnings
Assistance and Relief Tax Act of 2008 (``HEART Act''), Pub. L. No. 110-
245, effective for amounts paid after June 17, 2008, the date of
enactment of the HEART Act.
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Explanation of Provision
The provision reinstates the differential wage payment
credit and makes it permanent. The provision also modifies the
credit by making it available to an employer of any size,
rather than only to eligible small business employers.
Effective Date
The provision reinstating the credit and making it
permanent applies to payments made after December 31, 2014.
The provision making the credit available to employers of
any size applies to taxable years beginning after December 31,
2015.
14. Extension of 15-year straight-line cost recovery for qualified
leasehold improvements, qualified restaurant buildings and
improvements, and qualified retail improvements (sec. 123 of
the Act and sec. 168 of the Code)
Present Law
In general
A taxpayer generally must capitalize the cost of property
used in a trade or business and recover such cost over time
through annual deductions for depreciation or amortization.
Tangible property generally is depreciated under the modified
accelerated cost recovery system (``MACRS''), which determines
depreciation by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of
various types of depreciable property.\425\ The cost of
nonresidential real property is recovered using the straight-
line method of depreciation and a recovery period of 39 years.
Nonresidential real property is subject to the mid-month
placed-in-service convention. Under the mid-month convention,
the depreciation allowance for the first year in which property
is placed in service is based on the number of months the
property was in service, and property placed in service at any
time during a month is treated as having been placed in service
in the middle of the month.
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\425\ Sec. 168.
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Depreciation of leasehold improvements
Generally, depreciation allowances for improvements made on
leased property are determined under MACRS, even if the MACRS
recovery period assigned to the property is longer than the
term of the lease. This rule applies regardless of whether the
lessor or the lessee places the leasehold improvements in
service. If a leasehold improvement constitutes an addition or
improvement to nonresidential real property already placed in
service, the improvement generally is depreciated using the
straight-line method over a 39-year recovery period, beginning
in the month the addition or improvement was placed in service.
However, exceptions exist for certain qualified leasehold
improvements, qualified restaurant property, and qualified
retail improvement property.
Qualified leasehold improvement property
Section 168(e)(3)(E)(iv) provides a statutory 15-year
recovery period for qualified leasehold improvement property
placed in service before January 1, 2015. Qualified leasehold
improvement property is any improvement to an interior portion
of a building that is nonresidential real property, provided
certain requirements are met.\426\ The improvement must be made
under or pursuant to a lease either by the lessee (or
sublessee), or by the lessor, of that portion of the building
to be occupied exclusively by the lessee (or sublessee). The
improvement must be placed in service more than three years
after the date the building was first placed in service.
Qualified leasehold improvement property does not include any
improvement for which the expenditure is attributable to the
enlargement of the building, any elevator or escalator, any
structural component benefiting a common area, or the internal
structural framework of the building.\427\ If a lessor makes an
improvement that qualifies as qualified leasehold improvement
property, such improvement does not qualify as qualified
leasehold improvement property to any subsequent owner of such
improvement.\428\ An exception to the rule applies in the case
of death and certain transfers of property that qualify for
non-recognition treatment.\429\
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\426\ Sec. 168(e)(6).
\427\ Sec. 168(e)(6) and (k)(3).
\428\ Sec. 168(e)(6)(A).
\429\ Sec. 168(e)(6)(B).
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Qualified leasehold improvement property is generally
recovered using the straight-line method and a half-year
convention.\430\ Qualified leasehold improvement property
placed in service after December 31, 2014 is subject to the
general rules described above.
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\430\ Sec. 168(b)(3)(G) and (d). An additional first-year
depreciation deduction (``bonus depreciation'') is allowed equal to 50
percent of the adjusted basis of qualified property acquired and placed
in service before January 1, 2015 (January 1, 2016 for certain longer-
lived and transportation property). See sec. 168(k). Qualified property
eligible for bonus depreciation includes qualified leasehold
improvement property. Sec. 168(k)(2)(A)(i)(IV).
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Qualified restaurant property
Section 168(e)(3)(E)(v) provides a statutory 15-year
recovery period for qualified restaurant property placed in
service before January 1, 2015. Qualified restaurant property
is any section 1250 property that is a building or an
improvement to a building, if more than 50 percent of the
building's square footage is devoted to the preparation of, and
seating for on-premises consumption of, prepared meals.\431\
Qualified restaurant property is recovered using the straight-
line method and a half-year convention.\432\ Additionally,
qualified restaurant property is not eligible for bonus
depreciation unless it also satisfies the definition of
qualified leasehold improvement property.\433\ Qualified
restaurant property placed in service after December 31, 2014
is subject to the general rules described above.
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\431\ Sec. 168(e)(7).
\432\ Sec. 168(b)(3)(H) and (d).
\433\ Sec. 168(e)(7)(B).
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Qualified retail improvement property
Section 168(e)(3)(E)(ix) provides a statutory 15-year
recovery period for qualified retail improvement property
placed in service before January 1, 2015. Qualified retail
improvement property is any improvement to an interior portion
of a building which is nonresidential real property if such
portion is open to the general public \434\ and is used in the
retail trade or business of selling tangible personal property
to the general public, and such improvement is placed in
service more than three years after the date the building was
first placed in service.\435\ Qualified retail improvement
property does not include any improvement for which the
expenditure is attributable to the enlargement of the building,
any elevator or escalator, any structural component benefiting
a common area, or the internal structural framework of the
building.\436\ In the case of an improvement made by the owner
of such improvement, the improvement is a qualified retail
improvement only so long as the improvement is held by such
owner.\437\
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\434\ Improvements to portions of a building not open to the
general public (e.g., stock room in back of retail space) do not
qualify under the provision.
\435\ Sec. 168(e)(8).
\436\ Sec. 168(e)(8)(C).
\437\ Sec. 168(e)(8)(B). Rules similar to section 168(e)(6)(B)
apply in the case of death and certain transfers of property that
qualify for non-recognition treatment.
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Retail establishments that qualify for the 15-year recovery
period include those primarily engaged in the sale of goods.
Examples of these retail establishments include, but are not
limited to, grocery stores, clothing stores, hardware stores,
and convenience stores. Establishments primarily engaged in
providing services, such as professional services, financial
services, personal services, health services, and
entertainment, do not qualify. Generally, it is intended that
businesses defined as a store retailer under the current North
American Industry Classification System (industry sub-sectors
441 through 453) qualify while those in other industry classes
do not qualify.\438\
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\438\ Joint Committee on Taxation, General Explanation of Tax
Legislation Enacted in the 110th Congress (JCS-1-09), March 2009, p.
402.
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Qualified retail improvement property is recovered using
the straight-line method and a half-year convention.\439\
Additionally, qualified retail improvement property is not
eligible for bonus depreciation unless it also satisfies the
definition of qualified leasehold improvement property.\440\
Qualified retail improvement property placed in service after
December 31, 2014 is subject to the general rules described
above.
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\439\ Sec. 168(b)(3)(I) and (d).
\440\ Sec. 168(e)(8)(D).
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Explanation of Provision
The provision makes permanent the present-law provisions
for qualified leasehold improvement property, qualified
restaurant property, and qualified retail improvement property.
Effective Date
The provision applies to property placed in service after
December 31, 2014.
15. Extension and modification of increased expensing limitations and
treatment of certain real property as section 179 property
(sec. 124 of the Act and sec. 179 of the Code)
Present Law
A taxpayer may elect under section 179 to deduct (or
``expense'') the cost of qualifying property, rather than to
recover such costs through depreciation deductions, subject to
limitation. For taxable years beginning in 2014, the maximum
amount a taxpayer may expense is $500,000 of the cost of
qualifying property placed in service for the taxable
year.\441\ The $500,000 amount is reduced (but not below zero)
by the amount by which the cost of qualifying property placed
in service during the taxable year exceeds $2,000,000.\442\ The
$500,000 and $2,000,000 amounts are not indexed for inflation.
In general, qualifying property is defined as depreciable
tangible personal property that is purchased for use in the
active conduct of a trade or business.\443\ Qualifying property
excludes investments in air conditioning and heating
units.\444\ For taxable years beginning before 2015, qualifying
property also includes off-the-shelf computer software and
qualified real property (i.e., qualified leasehold improvement
property, qualified restaurant property, and qualified retail
improvement property).\445\ Of the $500,000 expense amount
available under section 179, the maximum amount available with
respect to qualified real property is $250,000 for each taxable
year.\446\
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\441\ For the years 2003 through 2006, the relevant dollar amount
is $100,000 (indexed for inflation); in 2007, the dollar limitation is
$125,000; for the 2008 and 2009 years, the relevant dollar amount is
$250,000; and for the years 2010 through 2013, the relevant dollar
limitation is $500,000. Sec. 179(b)(1).
\442\ For the years 2003 through 2006, the relevant dollar amount
is $400,000 (indexed for inflation); in 2007, the dollar limitation is
$500,000; for the 2008 and 2009 years, the relevant dollar amount is
$800,000; and for the years 2010 through 2013, the relevant dollar
limitation is $2,000,000. Sec. 179(b)(2).
\443\ Passenger automobiles subject to the section 280F limitation
are eligible for section 179 expensing only to the extent of the dollar
limitations in section 280F. For sport utility vehicles above the 6,000
pound weight rating, which are not subject to the limitation under
section 280F, the maximum cost that may be expensed for any taxable
year under section 179 is $25,000. Sec. 179(b)(5).
\444\ Sec. 179(d)(1) flush language.
\445\ Sec. 179(d)(1)(A)(ii) and (f).
\446\ Sec. 179(f)(3).
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For taxable years beginning in 2015 and thereafter, a
taxpayer may elect to deduct up to $25,000 of the cost of
qualifying property placed in service for the taxable year,
subject to limitation. The $25,000 amount is reduced (but not
below zero) by the amount by which the cost of qualifying
property placed in service during the taxable year exceeds
$200,000. The $25,000 and $200,000 amounts are not indexed for
inflation. In general, qualifying property is defined as
depreciable tangible personal property (not including off-the-
shelf computer software, qualified real property, or air
conditioning and heating units) that is purchased for use in
the active conduct of a trade or business.
The amount eligible to be expensed for a taxable year may
not exceed the taxable income for such taxable year that is
derived from the active conduct of a trade or business
(determined without regard to this provision).\447\ Any amount
that is not allowed as a deduction because of the taxable
income limitation may be carried forward to succeeding taxable
years (subject to limitations). However, amounts attributable
to qualified real property that are disallowed under the trade
or business income limitation may only be carried over to
taxable years in which the definition of eligible section 179
property includes qualified real property.\448\ Thus, if a
taxpayer's section 179 deduction for 2013 with respect to
qualified real property is limited by the taxpayer's active
trade or business income, such disallowed amount may be carried
over to 2014. Any such carryover amounts that are not used in
2014 are treated as property placed in service in 2014 for
purposes of computing depreciation. That is, the unused
carryover amount from 2013 is considered placed in service on
the first day of the 2014 taxable year.\449\
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\447\ Sec. 179(b)(3).
\448\ Section 179(f)(4) details the special rules that apply to
disallowed amounts with respect to qualified real property.
\449\ For example, assume that during 2013, a company's only asset
purchases are section 179-eligible equipment costing $100,000 and
qualifying leasehold improvements costing $200,000. Assume the company
has no other asset purchases during 2013, and has a taxable income
limitation of $150,000. The maximum section 179 deduction the company
can claim for 2013 is $150,000, which is allocated pro rata between the
properties, such that the carryover to 2014 is allocated $100,000 to
the qualified leasehold improvements and $50,000 to the equipment.
Assume further that in 2014, the company had no asset purchases and
had no taxable income. The $100,000 carryover from 2013 attributable to
qualified leasehold improvements is treated as placed in service as of
the first day of the company's 2014 taxable year under section
179(f)(4)(C). The $50,000 carryover allocated to equipment is carried
over to 2014 under section 179(b)(3)(B).
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No general business credit under section 38 is allowed with
respect to any amount for which a deduction is allowed under
section 179.\450\ If a corporation makes an election under
section 179 to deduct expenditures, the full amount of the
deduction does not reduce earnings and profits. Rather, the
expenditures that are deducted reduce corporate earnings and
profits ratably over a five-year period.\451\
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\450\ Sec. 179(d)(9).
\451\ Sec. 312(k)(3)(B).
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An expensing election is made under rules prescribed by the
Secretary.\452\ In general, any election or specification made
with respect to any property may not be revoked except with the
consent of the Commissioner. However, an election or
specification under section 179 may be revoked by the taxpayer
without consent of the Commissioner for taxable years beginning
after 2002 and before 2015.\453\
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\452\ Sec. 179(c)(1).
\453\ Sec. 179(c)(2).
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Explanation of Provision
The provision provides that the maximum amount a taxpayer
may expense, for taxable years beginning after 2014, is
$500,000 of the cost of qualifying property placed in service
for the taxable year. The $500,000 amount is reduced (but not
below zero) by the amount by which the cost of qualifying
property placed in service during the taxable year exceeds
$2,000,000. The $500,000 and $2,000,000 amounts are indexed for
inflation for taxable years beginning after 2015.
In addition, the provision makes permanent the treatment of
off-the-shelf computer software as qualifying property. The
provision also makes permanent the treatment of qualified real
property as eligible section 179 property. For taxable years
beginning in 2015, the provision extends the limitation on
carryovers and the maximum amount available with respect to
qualified real property of $250,000 for such taxable year. The
provision removes the limitation related to the amount of
section 179 property that may be attributable to qualified real
property for taxable years beginning after 2015. Further, for
taxable years beginning after 2015, the provision strikes the
flush language in section 179(d)(1) that excludes air
conditioning and heating units from the definition of
qualifying property.
The provision also makes permanent the permission granted
to a taxpayer to revoke without the consent of the Commissioner
any election, and any specification contained therein, made
under section 179.
Effective Date
The provision generally applies to taxable years beginning
after December 31, 2014.
The modifications apply to taxable years beginning after
December 31, 2015.
16. Extension of treatment of certain dividends of regulated investment
companies (sec. 125 of the Act and sec. 871(k) of the Code)
Present Law
A regulated investment company (``RIC'') is an entity that
meets certain requirements (including a requirement that its
income generally be derived from passive investments such as
dividends and interest and a requirement that it distribute at
least 90 percent of its income) and that elects to be taxed
under a special tax regime. Unlike an ordinary corporation, an
entity that is taxed as a RIC can deduct amounts paid to its
shareholders as dividends. In this manner, tax on RIC income is
generally not paid by the RIC but rather by its shareholders.
Income of a RIC distributed to shareholders as dividends is
generally treated as an ordinary income dividend by those
shareholders, unless other special rules apply. Dividends
received by foreign persons from a RIC are generally subject to
gross-basis tax under sections 871(a) and 881(a), and the RIC
payor of such dividends is obligated to withhold such tax under
sections 1441 and 1442.
Under a temporary provision of prior law, a RIC that earned
certain interest income that generally would not be subject to
U.S. tax if earned by a foreign person directly could, to the
extent of such net interest income, designate dividends it paid
as derived from such interest income for purposes of the
treatment of a foreign RIC shareholder. The consequence of that
designation was that such dividends were not subject to gross-
basis U.S. tax. Also, subject to certain requirements, the RIC
was exempt from withholding the gross-basis tax on such
dividends. Similar rules applied with respect to the
designation of certain short-term capital gain dividends.
However, these provisions relating to dividends with respect to
interest income and short-term capital gain of the RIC have
expired, and therefore do not apply to dividends with respect
to any taxable year of a RIC beginning after December 31,
2014.\454\
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\454\ Secs. 871(k), 881(e), 1441(a), 1441(c)(12), and 1442(a).
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Explanation of Provision
The provision reinstates and makes permanent the rules
exempting from gross-basis tax and from withholding of such tax
the interest-related dividends paid by and short-term capital
gain dividends paid by a RIC to a foreign person.
Effective Date
The provision applies to dividends paid with respect to any
taxable year of a RIC beginning after December 31, 2014.
17. Extension of exclusion of 100 percent of gain on certain small
business stock (sec. 126 of the Act and sec. 1202 of the Code)
Present Law
In general
A taxpayer other than a corporation may exclude 50 percent
(60 percent for certain empowerment zone businesses) of the
gain from the sale of certain small business stock acquired at
original issue and held for at least five years.\455\ The
amount of gain eligible for the exclusion by an individual with
respect to the stock of any corporation is the greater of (1)
ten times the taxpayer's basis in the stock or (2) $10 million
(reduced by the amount of gain eligible for exclusion in prior
years). To qualify as a small business, when the stock is
issued, the aggregate gross assets (i.e., cash plus aggregate
adjusted basis of other property) held by the corporation may
not exceed $50 million. The corporation also must meet certain
active trade or business requirements.
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\455\ Sec. 1202.
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The portion of the gain includible in taxable income is
taxed at a maximum rate of 28 percent under the regular tax
rates applicable to the net capital gain of individuals.\456\
Seven percent of the excluded gain is an alternative minimum
tax preference.\457\
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\456\ Sec. 1(h).
\457\ Sec. 57(a)(7).
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Special rules for stock acquired after February 17, 2009, and before
January 1, 2015
For qualified small business stock acquired after February
17, 2009, and before September 28, 2010, the percent of gain
which may be excluded is increased to 75 percent.
For qualified small business stock acquired after September
27, 2010, and before January 1, 2015, the percent of gain which
may be excluded is increased to 100 percent and the minimum tax
preference does not apply.
Explanation of Provision
The provision makes the post-September 27, 2010, 100-
percent exclusion and the exception from minimum tax preference
treatment permanent.
Effective Date
The provision applies to stock acquired after December 31,
2014.
18. Extension of reduction in S corporation recognition period for
built-in gains tax (sec. 127 of the Act and sec. 1374 of the
Code)
Present Law
In general
A ``small business corporation'' (as defined in section
1361(b)) may elect to be treated as an S corporation. Unlike C
corporations, S corporations generally pay no corporate-level
tax. Instead, items of income and loss of an S corporation pass
through to its shareholders. Each shareholder takes into
account separately its share of these items on its own income
tax return.\458\
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\458\ Sec. 1366.
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Under section 1374, a corporate level built-in gains tax,
at the highest marginal rate applicable to corporations
(currently 35 percent), is imposed on an S corporation's net
recognized built-in gain \459\ that arose prior to the
conversion of the C corporation to an S corporation and is
recognized by the S corporation during the recognition period,
i.e., the 10-year period beginning with the first day of the
first taxable year for which the S election is in effect.\460\
If the taxable income of the S corporation is less than the
amount of net recognized built-in gain in the year such built-
in gain is recognized (e.g., because of post-conversion
losses), no tax under section 1374 is imposed on the excess of
such built-in gain over taxable income for that year. However,
the untaxed excess of net recognized built-in gain over taxable
income for that year is treated as recognized built-in gain in
the succeeding taxable year.\461\ Treasury regulations provide
that if a corporation sells an asset before or during the
recognition period and reports the income from the sale using
the installment method under section 453 during or after the
recognition period, that income is subject to tax under section
1374.\462\
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\459\ Certain built-in income items are treated as recognized
built-in gain for this purpose. Sec. 1374(d)(5).
\460\ Sec. 1374(d)(7)(A).
\461\ Sec. 1374(d)(2)(B).
\462\ Treas. Reg. sec. 1.1374-4(h).
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The built-in gains tax also applies to net recognized
built-in gain attributable to any asset received by an S
corporation from a C corporation in a transaction in which the
S corporation's basis in the asset is determined (in whole or
in part) by reference to the basis of such asset (or other
property) in the hands of the C corporation.\463\ In the case
of such a transaction, the recognition period for any asset
transferred by the C corporation starts on the date the asset
was acquired by the S corporation in lieu of the beginning of
the first taxable year for which the corporation was an S
corporation.\464\
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\463\ Sec. 1374(d)(8)(A).
\464\ Sec. 1374(d)(8)(B).
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The amount of the built-in gains tax under section 1374 is
treated as a loss by each of the S corporation shareholders in
computing its own income tax. The character of the loss is
determined by allocating the loss proportionately among the
gains giving rise to the tax.\465\
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\465\ Sec. 1366(f)(2). Shareholders continue to take into account
all items of gain and loss of the S corporation under section 1366.
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Special rules for 2009, 2010, and 2011
For any taxable year beginning in 2009 and 2010, no tax was
imposed on the net recognized built-in gain of an S corporation
under section 1374 if the seventh taxable year in the
corporation's recognition period preceded such taxable
year.\466\ Thus, with respect to gain that arose prior to the
conversion of a C corporation to an S corporation, no tax was
imposed under section 1374 if the seventh taxable year that the
S corporation election was in effect preceded the taxable year
beginning in 2009 or 2010.
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\466\ Sec. 1374(d)(7)(B)(i).
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For any taxable year beginning in 2011, no tax was imposed
on the net recognized built-in gain of an S corporation under
section 1374 if the fifth year in the corporation's recognition
period preceded such taxable year.\467\ Thus, with respect to
gain that arose prior to the conversion of a C corporation to
an S corporation, no tax was imposed under section 1374 if the
fifth taxable year that the S corporation election was in
effect preceded the taxable year beginning in 2011.
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\467\ Sec. 1374(d)(7)(B)(ii).
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Special rules for 2012, 2013, and 2014
For taxable years beginning in 2012, 2013, and 2014, the
term ``recognition period'' in section 1374, for purposes of
determining the net recognized built-in gain, was applied by
substituting a five-year period for the otherwise applicable
10-year period.\468\ Thus, for such taxable years, the
recognition period was the five-year period beginning with the
first day of the first taxable year for which the corporation
was an S corporation (or beginning with the date of acquisition
of assets if the rules applicable to assets acquired from a C
corporation applied). If an S corporation with assets subject
to section 1374 disposed of such assets in a taxable year
beginning in 2012, 2013, or 2014 and the disposition occurred
more than five years after the first day of the relevant
recognition period, gain or loss on the disposition was not be
taken into account in determining the net recognized built-in
gain.
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\468\ Sec. 1374(d)(7)(C).
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The rule requiring the excess of net recognized built-in
gain over taxable income for a taxable year to be carried over
and treated as recognized built-in gain in the succeeding
taxable year applied only to gain recognized within the
recognition period.
If an S corporation subject to section 1374 sold a built-in
gain asset and reported the income from the sale using the
installment method under section 453, the treatment of all
payments received was governed by the provisions of section
1374(d)(7) applicable to the taxable year in which the sale was
made.\469\
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\469\ Sec. 1374(d)(7)(E).
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Application to regulated investment trusts and real estate investment
trusts
Under Treasury regulations issued under section 337(d), a
regulated investment company (``RIC'') or a real estate
investment trust (``REIT'') that was formerly a C corporation
(or that acquired assets from a C corporation) generally is
subject to the rules of section 1374 as if the RIC or REIT were
an S corporation, unless the relevant C corporation elects
``deemed sale'' treatment.\470\ The Treasury regulations
include an express reference to the 10-year recognition period
in section 1374.\471\
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\470\ Treas. Reg. sec. 1.337(d)-7(b)(1)(i) and (c)(1).
\471\ Treas. Reg. sec. 1.337(d)-7(b)(1)(ii).
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Explanation of Provision
The provision makes the rules applicable to taxable years
beginning in 2012, 2013, and 2014 permanent. Under current
Treasury regulations, these rules, including the five-year
recognition period, also would apply to REITs and RICs that do
not elect ``deemed sale'' treatment.
Effective Date
The provision applies to taxable years beginning after
December 31, 2014.
19. Extension of subpart F exception for active financing income (sec.
128 of the Act and secs. 953 and 954 of the Code)
Present Law
Under the subpart F rules,\472\ 10-percent-or-greater U.S.
shareholders of a controlled foreign corporation (``CFC'') are
subject to U.S. tax currently on certain income earned by the
CFC, whether or not such income is distributed to the
shareholders. The income subject to current inclusion under the
subpart F rules includes, among other things, insurance income
and foreign base company income. Foreign base company income
includes, among other things, foreign personal holding company
income and foreign base company services income (i.e., income
derived from services performed for or on behalf of a related
person outside the country in which the CFC is organized).
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\472\ Secs. 951-964.
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Foreign personal holding company income generally consists
of the following: (1) dividends, interest, royalties, rents,
and annuities; (2) net gains from the sale or exchange of (a)
property that gives rise to the preceding types of income, (b)
property that does not give rise to income, and (c) interests
in trusts, partnerships, and real estate mortgage investment
conduits (``REMICs''); (3) net gains from commodities
transactions; (4) net gains from certain foreign currency
transactions; (5) income that is equivalent to interest; (6)
income from notional principal contracts; (7) payments in lieu
of dividends; and (8) amounts received under personal service
contracts.
Insurance income subject to current inclusion under the
subpart F rules includes any income of a CFC attributable to
the issuing or reinsuring of any insurance or annuity contract
in connection with risks located in a country other than the
CFC's country of organization. Subpart F insurance income also
includes income attributable to an insurance contract in
connection with risks located within the CFC's country of
organization, as the result of an arrangement under which
another corporation receives a substantially equal amount of
consideration for insurance of other country risks. Investment
income of a CFC that is allocable to any insurance or annuity
contract related to risks located outside the CFC's country of
organization is taxable as subpart F insurance income.\473\
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\473\ Prop. Treas. Reg. sec. 1.953-1(a).
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Temporary exceptions from foreign personal holding company
income, foreign base company services income, and insurance
income apply for subpart F purposes for certain income that is
derived in the active conduct of a banking, financing, or
similar business, as a securities dealer, or in the conduct of
an insurance business (so-called ``active financing income'').
With respect to income derived in the active conduct of a
banking, financing, or similar business, a CFC is required to
be predominantly engaged in such business and to conduct
substantial activity with respect to such business to qualify
for the active financing exceptions. In addition, certain nexus
requirements apply, which provide that income derived by a CFC
or a qualified business unit (``QBU'') of a CFC from
transactions with customers is eligible for the exceptions if,
among other things, substantially all of the activities in
connection with such transactions are conducted directly by the
CFC or QBU in its home country, and such income is treated as
earned by the CFC or QBU in its home country for purposes of
such country's tax laws. Moreover, the exceptions apply to
income derived from certain cross border transactions, provided
that certain requirements are met. Additional exceptions from
foreign personal holding company income apply for certain
income derived by a securities dealer within the meaning of
section 475 and for gain from the sale of active financing
assets.
In the case of a securities dealer, the temporary exception
from foreign personal holding company income applies to certain
income. The income covered by the exception is any interest or
dividend (or certain equivalent amounts) from any transaction,
including a hedging transaction or a transaction consisting of
a deposit of collateral or margin, entered into in the ordinary
course of the dealer's trade or business as a dealer in
securities within the meaning of section 475. In the case of a
QBU of the dealer, the income is required to be attributable to
activities of the QBU in the country of incorporation, or to a
QBU in the country in which the QBU both maintains its
principal office and conducts substantial business activity. A
coordination rule provides that this exception generally takes
precedence over the exception for income of a banking,
financing or similar business, in the case of a securities
dealer.
In the case of insurance, a temporary exception from
foreign personal holding company income applies for certain
income of a qualifying insurance company with respect to risks
located within the CFC's country of creation or organization.
In the case of insurance, temporary exceptions from insurance
income and from foreign personal holding company income also
apply for certain income of a qualifying branch of a qualifying
insurance company with respect to risks located within the home
country of the branch, provided certain requirements are met
under each of the exceptions. Further, additional temporary
exceptions from insurance income and from foreign personal
holding company income apply for certain income of certain CFCs
or branches with respect to risks located in a country other
than the United States, provided that the requirements for
these exceptions are met. In the case of a life insurance or
annuity contract, reserves for such contracts are determined
under rules specific to the temporary exceptions.
Present law also permits a taxpayer in certain
circumstances, subject to approval by the IRS through the
ruling process, or as provided in published guidance, to
establish that the reserve of a life insurance company for life
insurance and annuity contracts is the amount taken into
account in determining the foreign statement reserve for the
contract (reduced by catastrophe, equalization, or deficiency
reserve or any similar reserve). IRS approval or published
guidance is to be based on whether the method, the interest
rate, the mortality and morbidity assumptions, and any other
factors taken into account in determining foreign statement
reserves (taken together or separately) provide an appropriate
means of measuring income for Federal income tax purposes.
The temporary exceptions apply for taxable years of foreign
corporations beginning after December 31, 1998 and before
January 1, 2015, and for taxable years of U.S. shareholders
with or within which such taxable years of such foreign
corporations end.
Explanation of Provision
The provision makes permanent the temporary exceptions from
subpart F foreign personal holding company income, foreign base
company services income, and insurance income for certain
income that is derived in the active conduct of a banking,
financing, or similar business, as a securities dealer, or in
the conduct of an insurance business.
Effective Date
The provision applies to taxable years of foreign
corporations beginning after December 31, 2014, and to taxable
years of U.S. shareholders with or within which such taxable
years of such foreign corporations end.
Part 4--Incentives for Real Estate Investment
20. Extension of temporary minimum low-income housing tax credit rate
for non-Federally subsidized buildings (sec. 131 of the Act and
sec. 42 of the Code)
Present Law
In general
The low-income housing credit may be claimed over a 10-year
credit period after each low-income building is placed-in-
service. The amount of the credit for any taxable year in the
credit period is the applicable percentage of the qualified
basis of each qualified low-income building.
Present value credit
The calculation of the applicable percentage is designed to
produce a credit equal to: (1) 70 percent of the present value
of the building's qualified basis in the case of newly
constructed or substantially rehabilitated housing that is not
Federally subsidized (the ``70-percent credit''); or (2) 30
percent of the present value of the building's qualified basis
in the case of newly constructed or substantially rehabilitated
housing that is Federally subsidized and existing housing that
is substantially rehabilitated (the ``30-percent credit'').
Where existing housing is substantially rehabilitated, the
existing housing is eligible for the 30-percent credit and the
qualified rehabilitation expenses (if not Federally subsidized)
are eligible for the 70-percent credit.
Calculation of the applicable percentage
In general
The credit percentage for a low-income building is set for
the earlier of: (1) the month the building is placed in
service; or (2) at the election of the taxpayer, (a) the month
the taxpayer and the housing credit agency enter into a binding
agreement with respect to such building for a credit
allocation, or (b) in the case of a tax-exempt bond-financed
project for which no credit allocation is required, the month
in which the tax-exempt bonds are issued.
These credit percentages (used for the 70-percent credit
and 30-percent credit) are adjusted monthly by the IRS on a
discounted after-tax basis (assuming a 28-percent tax rate)
based on the average of the Applicable Federal Rates for mid-
term and long-term obligations for the month the building is
placed in service. The discounting formula assumes that each
credit is received on the last day of each year and that the
present value is computed on the last day of the first year. In
a project consisting of two or more buildings placed in service
in different months, a separate credit percentage may apply to
each building.
Special rule
Under this rule the applicable percentage is set at a
minimum of 9 percent for newly constructed non-Federally
subsidized buildings placed in service after July 30, 2008, and
before January 1, 2015.
Explanation of Provision
The provision makes permanent the minimum applicable
percentage of 9 percent for newly constructed non-Federally
subsidized buildings.
Effective Date
The provision is effective on January 1, 2015.
21. Extension of military housing allowance exclusion for determining
whether a tenant in certain counties is low-income (sec. 132 of
the Act and secs. 42 and 142 of the Code)
Present Law
In general
To be eligible for the low-income housing credit, a
qualified low-income building must be part of a qualified low-
income housing project. In general, a qualified low-income
housing project is defined as a project that satisfies one of
two tests at the election of the taxpayer. The first test is
met if 20 percent or more of the residential units in the
project are both rent-restricted, and occupied by individuals
whose income is 50 percent or less of area median gross income
(the ``20-50 test''). The second test is met if 40 percent or
more of the residential units in such project are both rent-
restricted, and occupied by individuals whose income is 60
percent or less of area median gross income (the ``40-60
test''). These income figures are adjusted for family size.
Rule for income determinations before July 30, 2008 and on or after
January 1, 2015
The recipients of the military basic housing allowance must
include these amounts for purposes of low-income credit
eligibility income test, as described above.
Special rule for income determination before January 1, 2015
Under the provision the basic housing allowance (i.e.,
payments under 37 U.S.C. sec. 403) is not included in income
for the low-income credit income eligibility rules with respect
to qualified buildings. A qualified building is defined as any
building located in:
1. any county which contains a qualified military
installation to which the number of members of the Armed Forces
assigned to units based out of such qualified military
installation has increased by 20 percent or more as of June 1,
2008, over the personnel level on December 31, 2005; and
2. any counties adjacent to a county described in (1),
above.
For these purposes, a qualified military installation is
any military installation or facility with at least 1000
members of the Armed Forces assigned to it.\474\
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\474\ For a list of qualified military installations, see Notice
2008-79, 2008-40 I.R.B. 726, October 6, 2008, available at https://
www.irs.gov/irb/2008-40_IRB/ar10.htm.
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The provision applies to income determinations: (1) made
after July 30, 2008, and before January 1, 2015, in the case of
qualified buildings which received credit allocations on or
before July 30, 2008, or qualified buildings placed in service
on or before July 30, 2008, to the extent a credit allocation
was not required with respect to such building by reason of
42(h)(4) (i.e., such qualified building was at least 50 percent
tax-exempt bond financed with bonds subject to the private
activity bond volume cap) but only with respect to bonds issued
before July 30, 2008; and (2) made after July 30, 2008, in the
case of qualified buildings which received credit allocations
after July 30, 2008 and before January 1, 2015, or qualified
buildings placed in service after July 30, 2008, and before
January 1, 2015, to the extent a credit allocation was not
required with respect to such qualified building by reason of
42(h)(4) (i.e., such qualified building was at least 50 percent
tax-exempt bond financed with bonds subject to the private
activity bond volume cap) but only with respect to bonds issued
after July 30, 2008, and before January 1, 2015.
Explanation of Provision
The provision makes permanent the special rule that the
military basic housing allowance is not included in income for
purposes of the low-income housing credit income eligibility
rules for qualified buildings.
Effective Date
The provision is effective as if included in the enactment
of section 3005 of the Housing Assistance Tax Act of 2008.
22. Extension of RIC qualified investment entity treatment under FIRPTA
(sec. 133 of the Act and secs. 897 and 1445 of the Code)
Present Law
Special U.S. tax rules apply to capital gains of foreign
persons that are attributable to dispositions of interests in
U.S. real property. In general, although a foreign person (a
foreign corporation or a nonresident alien individual) is not
generally taxed on U.S. source capital gains unless certain
personal presence or active business requirements are met, a
foreign person who sells a U.S. real property interest
(``USRPI'') is subject to tax at the same rates as a U.S.
person, under the Foreign Investment in Real Property Tax Act
(``FIRPTA'') provisions codified in section 897 of the Code.
Withholding tax is also imposed under section 1445.
A USRPI includes stock or a beneficial interest in any
domestic corporation unless such corporation has not been a
U.S. real property holding corporation (as defined) during the
testing period. In general, if any class of stock of a
corporation is regularly traded on an established securities
market, stock of such class shall be treated as a USRPI only in
the case of a person who, at some time during the testing
period, held more than 5 percent of such class of stock.\475\ A
USRPI also does not include an interest in a domestically
controlled ``qualified investment entity.'' A distribution from
a ``qualified investment entity'' that is attributable to the
sale of a USRPI is subject to tax under FIRPTA, however, unless
the distribution is with respect to an interest that is
regularly traded on an established securities market located in
the United States and the recipient foreign corporation or
nonresident alien individual did not hold more than five
percent \476\ of that class of stock or beneficial interest
within the one-year period ending on the date of
distribution.\477\ Special rules apply to situations involving
tiers of qualified investment entities.
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\475\ Sec. 897(c)(3). See section 322 of the Act, described below
in item 11 of Title III.B., which, in the case of REIT stock only,
increases from five percent to 10 percent the maximum stock ownership a
shareholder may have held, during the testing period, of a class of
stock that is publicly traded, to avoid having that stock be treated as
a USRPI on disposition.
\476\ Sec. 897(h)(1). See section 322 of the Act, described below
in item 11 of Title III.B., which increases from five percent to 10
percent the percentage ownership threshold for publicly-traded REIT
stock.
\477\ Sections 857(b)(3)(F), 852(b)(3)(E), and 871(k)(2)(E) require
dividend treatment, rather than capital gain treatment, for certain
distributions to which FIRPTA does not apply by reason of this
exception. See also section 881(e)(2).
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The term ``qualified investment entity'' includes a real
estate investment trust (``REIT'') and also includes a
regulated investment company (``RIC'') that meets certain
requirements, although the inclusion of a RIC in that
definition does not apply for certain purposes after December
31, 2014.\478\
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\478\ Sec. 897(h).
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Explanation of Provision
The provision makes permanent the inclusion of a RIC within
the definition of a ``qualified investment entity'' under
section 897 for those situations in which that inclusion would
otherwise have expired after December 31, 2014.
Effective Date
The provision is generally effective on January 1, 2015.
The provision does not apply with respect to the
withholding requirement under section 1445 for any payment made
before the date of enactment (December 18, 2015), but a RIC
that withheld and remitted tax under section 1445 on
distributions made after December 31, 2014, and before the date
of enactment is not liable to the distributee with respect to
such withheld and remitted amounts.
B. Extensions Through 2019
1. Extension of new markets tax credit (sec. 141 of the Act and sec.
45D of the Code)
Present Law
Section 45D provides a new markets tax credit for qualified
equity investments made to acquire stock in a corporation, or a
capital interest in a partnership, that is a qualified
community development entity (``CDE'').\479\ The amount of the
credit allowable to the investor (either the original purchaser
or a subsequent holder) is (1) a five-percent credit for the
year in which the equity interest is purchased from the CDE and
for each of the following two years, and (2) a six-percent
credit for each of the following four years.\480\ The credit is
determined by applying the applicable percentage (five or six
percent) to the amount paid to the CDE for the investment at
its original issue, and is available to the taxpayer who holds
the qualified equity investment on the date of the initial
investment or on the respective anniversary date that occurs
during the taxable year.\481\ The credit is recaptured if at
any time during the seven-year period that begins on the date
of the original issue of the investment the entity (1) ceases
to be a qualified CDE, (2) the proceeds of the investment cease
to be used as required, or (3) the equity investment is
redeemed.\482\
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\479\ Section 45D was enacted by section 121(a) of the Community
Renewal Tax Relief Act of 2000, Pub. L. No. 106-554.
\480\ Sec. 45D(a)(2).
\481\ Sec. 45D(a)(3).
\482\ Sec. 45D(g).
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A qualified CDE is any domestic corporation or partnership:
(1) whose primary mission is serving or providing investment
capital for low-income communities or low-income persons; (2)
that maintains accountability to residents of low-income
communities by their representation on any governing board of
or any advisory board to the CDE; and (3) that is certified by
the Secretary as being a qualified CDE.\483\ A qualified equity
investment means stock (other than nonqualified preferred
stock) in a corporation or a capital interest in a partnership
that is acquired at its original issue directly (or through an
underwriter) from a CDE for cash, and includes an investment of
a subsequent purchaser if such investment was a qualified
equity investment in the hands of the prior holder.\484\
Substantially all of the investment proceeds must be used by
the CDE to make qualified low-income community investments and
the investment must be designated as a qualified equity
investment by the CDE. For this purpose, qualified low-income
community investments include: (1) capital or equity
investments in, or loans to, qualified active low-income
community businesses; (2) certain financial counseling and
other services to businesses and residents in low-income
communities; (3) the purchase from another CDE of any loan made
by such entity that is a qualified low-income community
investment; or (4) an equity investment in, or loan to, another
CDE.\485\
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\483\ Sec. 45D(c).
\484\ Sec. 45D(b).
\485\ Sec. 45D(d).
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A ``low-income community'' is a population census tract
with either (1) a poverty rate of at least 20 percent or (2)
median family income which does not exceed 80 percent of the
greater of metropolitan area median family income or statewide
median family income (for a non-metropolitan census tract, does
not exceed 80 percent of statewide median family income). In
the case of a population census tract located within a high
migration rural county, low-income is defined by reference to
85 percent (as opposed to 80 percent) of statewide median
family income.\486\ For this purpose, a high migration rural
county is any county that, during the 20-year period ending
with the year in which the most recent census was conducted,
has a net out-migration of inhabitants from the county of at
least 10 percent of the population of the county at the
beginning of such period.
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\486\ Sec. 45D(e).
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The Secretary is authorized to designate ``targeted
populations'' as low-income communities for purposes of the new
markets tax credit.\487\ For this purpose, a ``targeted
population'' is defined by reference to section 103(20) of the
Riegle Community Development and Regulatory Improvement Act of
1994 \488\ (the ``Act'') to mean individuals, or an
identifiable group of individuals, including an Indian tribe,
who are low-income persons or otherwise lack adequate access to
loans or equity investments. Section 103(17) of the Act
provides that ``low-income'' means (1) for a targeted
population within a metropolitan area, less than 80 percent of
the area median family income; and (2) for a targeted
population within a non-metropolitan area, less than the
greater of--80 percent of the area median family income, or 80
percent of the statewide non-metropolitan area median family
income.\489\ A targeted population is not required to be within
any census tract. In addition, a population census tract with a
population of less than 2,000 is treated as a low-income
community for purposes of the credit if such tract is within an
empowerment zone, the designation of which is in effect under
section 1391 of the Code, and is contiguous to one or more low-
income communities.
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\487\ Sec. 45D(e)(2).
\488\ Pub. L. No. 103-325.
\489\ Pub. L. No. 103-325.
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A qualified active low-income community business is defined
as a business that satisfies, with respect to a taxable year,
the following requirements: (1) at least 50 percent of the
total gross income of the business is derived from the active
conduct of trade or business activities in any low-income
community; (2) a substantial portion of the tangible property
of the business is used in a low-income community; (3) a
substantial portion of the services performed for the business
by its employees is performed in a low-income community; and
(4) less than five percent of the average of the aggregate
unadjusted bases of the property of the business is
attributable to certain financial property or to certain
collectibles.\490\
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\490\ Sec. 45D(d)(2).
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The maximum annual amount of qualified equity investments
was $3.5 million for calendar years 2010, 2011, 2012, 2013, and
2014. The new markets tax credit expired on December 31, 2014.
No amount of unused allocation limitation may be carried to any
calendar year after 2019.
Explanation of Provision
The provision extends the new markets tax credit for five
years, through 2019, permitting up to $3.5 million in qualified
equity investments for each of the 2015, 2016, 2017, 2018 and
2019 calendar years. The provision also extends for five years,
through 2024, the carryover period for unused new markets tax
credits.
Effective Date
The provision applies to calendar years beginning after
December 31, 2014.
2. Extension and modification of work opportunity tax credit (sec. 142
of the Act and secs. 51 and 52 of the Code)
Present Law
In general
The work opportunity tax credit is available on an elective
basis for employers hiring individuals from one or more of nine
targeted groups. The amount of the credit available to an
employer is determined by the amount of qualified wages paid by
the employer. Generally, qualified wages consist of wages
attributable to service rendered by a member of a targeted
group during the one-year period beginning with the day the
individual begins work for the employer (two years in the case
of an individual in the long-term family assistance recipient
category).
Targeted groups eligible for the credit
Generally, an employer is eligible for the credit only for
qualified wages paid to members of a targeted group.
(1) Families receiving TANF
An eligible recipient is an individual certified by a
designated local employment agency (e.g., a State employment
agency) as being a member of a family eligible to receive
benefits under the Temporary Assistance for Needy Families
Program (``TANF'') for a period of at least nine months part of
which is during the 18-month period ending on the hiring date.
For these purposes, members of the family are defined to
include only those individuals taken into account for purposes
of determining eligibility for the TANF.
(2) Qualified veteran
Prior to enactment of the ``VOW to Hire Heroes Act of
2011'' (the ``VOW Act''),\491\ there were two subcategories of
qualified veterans to whom wages paid by an employer were
eligible for the credit. Employers who hired veterans who were
eligible to receive assistance under a supplemental nutritional
assistance program were entitled to a maximum credit of 40
percent of $6,000 of qualified first-year wages paid to such
individual.\492\ Employers who hired veterans who were entitled
to compensation for a service-connected disability were
entitled to a maximum wage credit of 40 percent of $12,000 of
qualified first-year wages paid to such individual.\493\
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\491\ Pub. L. No. 112-56 (Nov. 21, 2011).
\492\ For these purposes, a qualified veteran must be certified by
the designated local agency as a member of a family receiving
assistance under a supplemental nutrition assistance program under the
Food and Nutrition Act of 2008 for a period of at least three months
part of which is during the 12-month period ending on the hiring date.
For these purposes, members of a family are defined to include only
those individuals taken into account for purposes of determining
eligibility for a supplemental nutrition assistance program under the
Food and Nutrition Act of 2008.
\493\ The qualified veteran must be certified as entitled to
compensation for a service-connected disability and (1) have a hiring
date which is not more than one year after having been discharged or
released from active duty in the Armed Forces of the United States; or
(2) have been unemployed for six months or more (whether or not
consecutive) during the one-year period ending on the date of hiring.
For these purposes, being entitled to compensation for a service-
connected disability is defined with reference to section 101 of Title
38, U.S. Code, which means having a disability rating of 10 percent or
higher for service connected injuries.
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The VOW Act modified the work opportunity credit with
respect to qualified veterans, by adding additional
subcategories. There are now five subcategories of qualified
veterans: (1) in the case of veterans who were eligible to
receive assistance under a supplemental nutritional assistance
program (for at least a three month period during the year
prior to the hiring date) the employer is entitled to a maximum
credit of 40 percent of $6,000 of qualified first-year wages;
(2) in the case of a qualified veteran who is entitled to
compensation for a service connected disability, who is hired
within one year of discharge, the employer is entitled to a
maximum credit of 40 percent of $12,000 of qualified first-year
wages; (3) in the case of a qualified veteran who is entitled
to compensation for a service connected disability, and who has
been unemployed for an aggregate of at least six months during
the one year period ending on the hiring date, the employer is
entitled to a maximum credit of 40 percent of $24,000 of
qualified first-year wages; (4) in the case of a qualified
veteran unemployed for at least four weeks but less than six
months (whether or not consecutive) during the one-year period
ending on the date of hiring, the maximum credit equals 40
percent of $6,000 of qualified first-year wages; and (5) in the
case of a qualified veteran unemployed for at least six months
(whether or not consecutive) during the one-year period ending
on the date of hiring, the maximum credit equals 40 percent of
$14,000 of qualified first-year wages.
A veteran is an individual who has served on active duty
(other than for training) in the Armed Forces for more than 180
days or who has been discharged or released from active duty in
the Armed Forces for a service-connected disability. However,
any individual who has served for a period of more than 90 days
during which the individual was on active duty (other than for
training) is not a qualified veteran if any of this active duty
occurred during the 60-day period ending on the date the
individual was hired by the employer. This latter rule is
intended to prevent employers who hire current members of the
armed services (or those departed from service within the last
60 days) from receiving the credit.
(3) Qualified ex-felon
A qualified ex-felon is an individual certified as: (1)
having been convicted of a felony under any State or Federal
law; and (2) having a hiring date within one year of release
from prison or the date of conviction.
(4) Designated community resident
A designated community resident is an individual certified
as being at least age 18 but not yet age 40 on the hiring date
and as having a principal place of abode within an empowerment
zone, enterprise community, renewal community or a rural
renewal community. For these purposes, a rural renewal county
is a county outside a metropolitan statistical area (as defined
by the Office of Management and Budget) which had a net
population loss during the five-year periods 1990-1994 and
1995-1999. Qualified wages do not include wages paid or
incurred for services performed after the individual moves
outside an empowerment zone, enterprise community, renewal
community or a rural renewal community.
(5) Vocational rehabilitation referral
A vocational rehabilitation referral is an individual who
is certified by a designated local agency as an individual who
has a physical or mental disability that constitutes a
substantial handicap to employment and who has been referred to
the employer while receiving, or after completing: (a)
vocational rehabilitation services under an individualized,
written plan for employment under a State plan approved under
the Rehabilitation Act of 1973; (b) under a rehabilitation plan
for veterans carried out under Chapter 31 of Title 38, U.S.
Code; or (c) an individual work plan developed and implemented
by an employment network pursuant to subsection (g) of section
1148 of the Social Security Act. Certification will be provided
by the designated local employment agency upon assurances from
the vocational rehabilitation agency that the employee has met
the above conditions.
(6) Qualified summer youth employee
A qualified summer youth employee is an individual: (1) who
performs services during any 90-day period between May 1 and
September 15; (2) who is certified by the designated local
agency as being 16 or 17 years of age on the hiring date; (3)
who has not been an employee of that employer before; and (4)
who is certified by the designated local agency as having a
principal place of abode within an empowerment zone, enterprise
community, or renewal community. As with designated community
residents, no credit is available on wages paid or incurred for
service performed after the qualified summer youth moves
outside of an empowerment zone, enterprise community, or
renewal community. If, after the end of the 90-day period, the
employer continues to employ a youth who was certified during
the 90-day period as a member of another targeted group, the
limit on qualified first-year wages will take into account
wages paid to the youth while a qualified summer youth
employee.
(7) Qualified supplemental nutrition assistance program
benefits recipient
A qualified supplemental nutrition assistance program
benefits recipient is an individual at least age 18 but not yet
age 40 certified by a designated local employment agency as
being a member of a family receiving assistance under a food
and nutrition program under the Food and Nutrition Act of 2008
for a period of at least six months ending on the hiring date.
In the case of families that cease to be eligible for food and
nutrition assistance under section 6(o) of the Food and
Nutrition Act of 2008, the six-month requirement is replaced
with a requirement that the family has been receiving food and
nutrition assistance for at least three of the five months
ending on the date of hire. For these purposes, members of the
family are defined to include only those individuals taken into
account for purposes of determining eligibility for a food and
nutrition assistance program under the Food and Nutrition Act
of 2008.
(8) Qualified SSI recipient
A qualified SSI recipient is an individual designated by a
local agency as receiving supplemental security income
(``SSI'') benefits under Title XVI of the Social Security Act
for any month ending within the 60-day period ending on the
hiring date.
(9) Long-term family assistance recipient
A qualified long-term family assistance recipient is an
individual certified by a designated local agency as being: (1)
a member of a family that has received family assistance for at
least 18 consecutive months ending on the hiring date; (2) a
member of a family that has received such family assistance for
a total of at least 18 months (whether or not consecutive)
after August 5, 1997 (the date of enactment of the welfare-to-
work tax credit) if the individual is hired within two years
after the date that the 18-month total is reached; or (3) a
member of a family who is no longer eligible for family
assistance because of either Federal or State time limits, if
the individual is hired within two years after the Federal or
State time limits made the family ineligible for family
assistance.
Qualified wages
Generally, qualified wages are defined as cash wages paid
by the employer to a member of a targeted group. The employer's
deduction for wages is reduced by the amount of the credit.
For purposes of the credit, generally, wages are defined by
reference to the FUTA definition of wages contained in sec.
3306(b) (without regard to the dollar limitation therein
contained). Special rules apply in the case of certain
agricultural labor and certain railroad labor.
Calculation of the credit
The credit available to an employer for qualified wages
paid to members of all targeted groups except for long-term
family assistance recipients equals 40 percent (25 percent for
employment of 400 hours or less) of qualified first-year wages.
Generally, qualified first-year wages are qualified wages (not
in excess of $6,000) attributable to service rendered by a
member of a targeted group during the one-year period beginning
with the day the individual began work for the employer.
Therefore, the maximum credit per employee is $2,400 (40
percent of the first $6,000 of qualified first-year wages).
With respect to qualified summer youth employees, the maximum
credit is $1,200 (40 percent of the first $3,000 of qualified
first-year wages). Except for long-term family assistance
recipients, no credit is allowed for second-year wages.
In the case of long-term family assistance recipients, the
credit equals 40 percent (25 percent for employment of 400
hours or less) of $10,000 for qualified first-year wages and 50
percent of the first $10,000 of qualified second-year wages.
Generally, qualified second-year wages are qualified wages (not
in excess of $10,000) attributable to service rendered by a
member of the long-term family assistance category during the
one-year period beginning on the day after the one-year period
beginning with the day the individual began work for the
employer. Therefore, the maximum credit per employee is $9,000
(40 percent of the first $10,000 of qualified first-year wages
plus 50 percent of the first $10,000 of qualified second-year
wages).
For calculation of the credit with respect to qualified
veterans, see the description of ``qualified veteran'' above.
Certification rules
Generally, an individual is not treated as a member of a
targeted group unless: (1) on or before the day on which an
individual begins work for an employer, the employer has
received a certification from a designated local agency that
such individual is a member of a targeted group; or (2) on or
before the day an individual is offered employment with the
employer, a pre-screening notice is completed by the employer
with respect to such individual, and not later than the 28th
day after the individual begins work for the employer, the
employer submits such notice, signed by the employer and the
individual under penalties of perjury, to the designated local
agency as part of a written request for certification. For
these purposes, a pre-screening notice is a document (in such
form as the Secretary may prescribe) which contains information
provided by the individual on the basis of which the employer
believes that the individual is a member of a targeted group.
An otherwise qualified unemployed veteran is treated as
certified by the designated local agency as having aggregate
periods of unemployment (whichever is applicable under the
qualified veterans rules described above) if such veteran is
certified by such agency as being in receipt of unemployment
compensation under a State or Federal law for such applicable
periods. The Secretary of the Treasury is authorized to provide
alternative methods of certification for unemployed veterans.
Minimum employment period
No credit is allowed for qualified wages paid to employees
who work less than 120 hours in the first year of employment.
Qualified tax-exempt organizations employing qualified veterans
The credit is not available to qualified tax-exempt
organizations other than those employing qualified veterans.
The special rules, described below, were enacted in the VOW
Act.
If a qualified tax-exempt organization employs a qualified
veteran (as described above) a tax credit against the FICA
taxes of the organization is allowed on the wages of the
qualified veteran which are paid for the veteran's services in
furtherance of the activities related to the function or
purpose constituting the basis of the organization's exemption
under section 501.
The credit available to such tax-exempt employer for
qualified wages paid to a qualified veteran equals 26 percent
(16.25 percent for employment of 400 hours or less) of
qualified first-year wages. The amount of qualified first-year
wages eligible for the credit is the same as those for non-tax-
exempt employers (i.e., $6,000, $12,000, $14,000 or $24,000,
depending on the category of qualified veteran).
A qualified tax-exempt organization means an employer that
is described in section 501(c) and exempt from tax under
section 501(a).
The Social Security Trust Funds are held harmless from the
effects of this provision by a transfer from the Treasury
General Fund.
Treatment of possessions
The VOW Act provided a reimbursement mechanism for the U.S.
possessions (American Samoa, Guam, the Commonwealth of the
Northern Mariana Islands, the Commonwealth of Puerto Rico, and
the United States Virgin Islands). The Secretary of the
Treasury is to pay to each mirror code possession (Guam, the
Commonwealth of the Northern Mariana Islands, and the United
States Virgin Islands) an amount equal to the loss to that
possession as a result of the VOW Act changes to the qualified
veterans rules. Similarly, the Secretary of the Treasury is to
pay to each non-mirror Code possession (American Samoa and the
Commonwealth of Puerto Rico) the amount that the Secretary
estimates as being equal to the loss to that possession that
would have occurred as a result of the VOW Act changes if a
mirror code tax system had been in effect in that possession.
The Secretary will make this payment to a non-mirror Code
possession only if that possession establishes to the
satisfaction of the Secretary that the possession has
implemented (or, at the discretion of the Secretary, will
implement) an income tax benefit that is substantially
equivalent to the qualified veterans credit allowed under the
VOW Act modifications.
An employer that is allowed a credit against U.S. tax under
the VOW Act with respect to a qualified veteran must reduce the
amount of the credit claimed by the amount of any credit (or,
in the case of a non-mirror Code possession, another tax
benefit) that the employer claims against its possession income
tax.
Other rules
The work opportunity tax credit is not allowed for wages
paid to a relative or dependent of the taxpayer. No credit is
allowed for wages paid to an individual who is a more than
fifty-percent owner of the entity. Similarly, wages paid to
replacement workers during a strike or lockout are not eligible
for the work opportunity tax credit. Wages paid to any employee
during any period for which the employer received on-the-job
training program payments with respect to that employee are not
eligible for the work opportunity tax credit. The work
opportunity tax credit generally is not allowed for wages paid
to individuals who had previously been employed by the
employer. In addition, many other technical rules apply.
Expiration
The work opportunity tax credit is not available for
individuals who begin work for an employer after December 31,
2014.
Explanation of Provision
The provision extends for five years the present-law
employment credit provision (through taxable years beginning on
or before December 31, 2019). Additionally, the provision
expands the work opportunity tax credit to employers who hire
individuals who are qualified long-term unemployment
recipients. For purposes of the provision, such persons are
individuals who have been certified by the designated local
agency as being in a period of unemployment of 27 weeks or
more, which includes a period in which the individual was
receiving unemployment compensation under State or Federal law.
With respect to wages paid to such individuals, employers would
be eligible for a 40 percent credit on the first $6,000 of
wages paid to such individual, for a maximum credit of $2,400
per eligible employee.
Effective Date
The provision generally applies to individuals who begin
work for the employer after December 31, 2014.
The provision relating to wages paid to qualified long-term
unemployment recipients applies to individuals who begin work
for the employer after December 31, 2015.
3. Extension and modification of bonus depreciation (sec. 143 of the
Act and sec. 168(k) of the Code)
Present Law
In general
An additional first-year depreciation deduction is allowed
equal to 50 percent of the adjusted basis of qualified property
acquired and placed in service before January 1, 2015 (January
1, 2016 for certain longer-lived and transportation
property).\494\
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\494\ Sec. 168(k). The additional first-year depreciation deduction
is subject to the general rules regarding whether an item must be
capitalized under section 263A.
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The additional first-year depreciation deduction is allowed
for both the regular tax and the alternative minimum tax
(``AMT''),\495\ but is not allowed in computing earnings and
profits.\496\ The basis of the property and the depreciation
allowances in the year of purchase and later years are
appropriately adjusted to reflect the additional first-year
depreciation deduction.\497\ The amount of the additional
first-year depreciation deduction is not affected by a short
taxable year.\498\ The taxpayer may elect out of additional
first-year depreciation for any class of property for any
taxable year.\499\
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\495\ Sec. 168(k)(2)(G). See also Treas. Reg. sec. 1.168(k)-1(d).
\496\ Treas. Reg. sec. 1.168(k)-1(f)(7).
\497\ Sec. 168(k)(1)(B).
\498\ Ibid.
\499\ Sec. 168(k)(2)(D)(iii). For the definition of a class of
property, see Treas. Reg. sec. 1.168(k)-1(e)(2).
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The interaction of the additional first-year depreciation
allowance with the otherwise applicable depreciation allowance
may be illustrated as follows. Assume that in 2014, a taxpayer
purchased new depreciable property and placed it in
service.\500\ The property's cost is $10,000, and it is five-
year property subject to the 200 percent declining balance
method and half-year convention. The amount of additional
first-year depreciation allowed is $5,000. The remaining $5,000
of the cost of the property is depreciable under the rules
applicable to five-year property. Thus, $1,000 also is allowed
as a depreciation deduction in 2014.\501\ The total
depreciation deduction with respect to the property for 2014 is
$6,000. The remaining $4,000 adjusted basis of the property
generally is recovered through otherwise applicable
depreciation rules.
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\500\ Assume that the cost of the property is not eligible for
expensing under section 179 or Treas. Reg. sec. 1.263(a)-1(f).
\501\ $1,000 results from the application of the half-year
convention and the 200 percent declining balance method to the
remaining $5,000.
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Property qualifying for the additional first-year
depreciation deduction must meet all of the following
requirements.\502\ First, the property must be: (1) property to
which the modified accelerated cost recovery system (``MACRS'')
applies with an applicable recovery period of 20 years or less;
(2) water utility property (as defined in section 168(e)(5));
(3) computer software other than computer software covered by
section 197; or (4) qualified leasehold improvement
property.\503\ Second, the original use \504\ of the property
must commence with the taxpayer.\505\ Third, the taxpayer must
acquire the property within the applicable time period (as
described below). Finally, the property must be placed in
service before January 1, 2015. An extension of the placed-in-
service date of one year (i.e., before January 1, 2016) is
provided for certain property with a recovery period of 10
years or longer and certain transportation property.\506\
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\502\ Requirements relating to actions taken before 2008 are not
described herein since they have little (if any) remaining effect.
\503\ The additional first-year depreciation deduction is not
available for any property that is required to be depreciated under the
alternative depreciation system of MACRS. Sec. 168(k)(2)(D)(i).
\504\ The term ``original use'' means the first use to which the
property is put, whether or not such use corresponds to the use of such
property by the taxpayer. If in the normal course of its business a
taxpayer sells fractional interests in property to unrelated third
parties, then the original use of such property begins with the first
user of each fractional interest (i.e., each fractional owner is
considered the original user of its proportionate share of the
property). Treas. Reg. sec. 1.168(k)-1(b)(3).
\505\ A special rule applies in the case of certain leased
property. In the case of any property that is originally placed in
service by a person and that is sold to the taxpayer and leased back to
such person by the taxpayer within three months after the date that the
property was placed in service, the property would be treated as
originally placed in service by the taxpayer not earlier than the date
that the property is used under the leaseback. If property is
originally placed in service by a lessor, such property is sold within
three months after the date that the property was placed in service,
and the user of such property does not change, then the property is
treated as originally placed in service by the taxpayer not earlier
than the date of such sale. Sec. 168(k)(2)(E)(ii).
\506\ Property qualifying for the extended placed-in-service date
must have an estimated production period exceeding one year and a cost
exceeding $1 million. Transportation property generally is defined as
tangible personal property used in the trade or business of
transporting persons or property. Certain aircraft which is not
transportation property, other than for agricultural or firefighting
uses, also qualifies for the extended placed-in-service-date, if at the
time of the contract for purchase, the purchaser made a nonrefundable
deposit of the lesser of 10 percent of the cost or $100,000, and which
has an estimated production period exceeding four months and a cost
exceeding $200,000.
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To qualify, property must be acquired (1) before January 1,
2015, or (2) pursuant to a binding written contract which was
entered before January 1, 2015. With respect to property that
is manufactured, constructed, or produced by the taxpayer for
use by the taxpayer, the taxpayer must begin the manufacture,
construction, or production of the property before January 1,
2015.\507\ Property that is manufactured, constructed, or
produced for the taxpayer by another person under a contract
that is entered into prior to the manufacture, construction, or
production of the property is considered to be manufactured,
constructed, or produced by the taxpayer.\508\ For property
eligible for the extended placed-in-service date, a special
rule limits the amount of costs eligible for the additional
first-year depreciation. With respect to such property, only
the portion of the basis that is properly attributable to the
costs incurred before January 1, 2015 (``progress
expenditures'') is eligible for the additional first-year
depreciation deduction.\509\
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\507\ Sec. 168(k)(2)(E)(i).
\508\ Treas. Reg. sec. 1.168(k)-1(b)(4)(iii).
\509\ Sec. 168(k)(2)(B)(ii). For purposes of determining the amount
of eligible progress expenditures, rules similar to section 46(d)(3) as
in effect prior to the Tax Reform Act of 1986 apply.
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The limitation under section 280F on the amount of
depreciation deductions allowed with respect to certain
passenger automobiles is increased in the first year by $8,000
for automobiles that qualify (and for which the taxpayer does
not elect out of the additional first-year deduction).\510\
While the underlying section 280F limitation is indexed for
inflation,\511\ the additional $8,000 amount is not indexed for
inflation.
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\510\ Sec. 168(k)(2)(F).
\511\ Sec. 280F(d)(7).
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Qualified leasehold improvement property
Qualified leasehold improvement property is any improvement
to an interior portion of a building that is nonresidential
real property, provided certain requirements are met.\512\ The
improvement must be made under or pursuant to a lease either by
the lessee (or sublessee), or by the lessor, of that portion of
the building to be occupied exclusively by the lessee (or
sublessee). The improvement must be placed in service more than
three years after the date the building was first placed in
service. Qualified leasehold improvement property does not
include any improvement for which the expenditure is
attributable to the enlargement of the building, any elevator
or escalator, any structural component benefiting a common
area, or the internal structural framework of the building. For
these purposes, a binding commitment to enter into a lease is
treated as a lease, and the parties to the commitment are
treated as lessor and lessee. A lease between related persons
is not considered a lease for this purpose.
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\512\ Sec. 168(k)(3). The additional first-year depreciation
deduction is not available for qualified New York Liberty Zone
leasehold improvement property as defined in section 1400L(c)(2). Sec.
168(k)(2)(D)(ii).
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Special rule for long-term contracts
In general, in the case of a long-term contract, the
taxable income from the contract is determined under the
percentage-of-completion method.\513\ Solely for purposes of
determining the percentage of completion under section
460(b)(1)(A), the cost of qualified property with a MACRS
recovery period of seven years or less is taken into account as
a cost allocated to the contract as if bonus depreciation had
not been enacted for property placed in service before January
1, 2015 (January 1, 2016 in the case of certain longer-lived
and transportation property).\514\
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\513\ Sec. 460.
\514\ Sec. 460(c)(6). Other dates involving prior years are not
described herein.
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Election to accelerate AMT credits in lieu of bonus depreciation
A corporation otherwise eligible for additional first-year
depreciation may elect to claim additional AMT credits in lieu
of claiming additional depreciation with respect to ``eligible
qualified property.'' \515\ In the case of a corporation making
this election, the straight line method is used for the regular
tax and the AMT with respect to eligible qualified
property.\516\
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\515\ Sec. 168(k)(4). Eligible qualified property means qualified
property eligible for bonus depreciation with minor effective date
differences having little (if any) remaining significance.
\516\ Sec. 168(k)(4)(A).
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Generally, an election under this provision for a taxable
year applies to subsequent taxable years. However, each time
the provision has been extended, a corporation which has
previously made an election has been allowed to elect not to
claim additional minimum tax credits, or, if no election had
previously been made, to make an election to claim additional
credits with respect to property subject to the extension.\517\
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\517\ Sec. 168(k)(4)(H), (I), (J), and (K).
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A corporation making an election increases the tax
liability limitation under section 53(c) on the use of minimum
tax credits by the bonus depreciation amount.\518\ The
aggregate increase in credits allowable by reason of the
increased limitation is treated as refundable.\519\
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\518\ Sec. 168(k)(4)(B)(ii).
\519\ Sec. 168(k)(4)(F).
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The bonus depreciation amount generally is equal to 20
percent of bonus depreciation for eligible qualified property
that could be claimed as a deduction absent an election under
this provision.\520\ As originally enacted, the bonus
depreciation amount for all taxable years was limited to the
lesser of (1) $30 million, or (2) six percent of the minimum
tax credits allocable to the adjusted net minimum tax imposed
for taxable years beginning before January 1, 2006.\521\
However, extensions of this provision have provided that this
limitation applies separately to property subject to each
extension.
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\520\ For this purpose, bonus depreciation is the difference
between (i) the aggregate amount of depreciation determined if section
168(k)(1) applied to all eligible qualified property placed in service
during the taxable year and (ii) the amount of depreciation that would
be so determined if section 168(k)(1) did not so apply. This
determination is made using the most accelerated depreciation method
and the shortest life otherwise allowable for each property. Sec.
168(k)(4)(C).
\521\ Sec. 168(k)(4)(C)(iii).
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All corporations treated as a single employer under section
52(a) are treated as one taxpayer for purposes of the
limitation, as well as for electing the application of this
provision.\522\
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\522\ Sec. 168(k)(4)(C)(iv).
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In the case of a corporation making an election which is a
partner in a partnership, for purposes of determining the
electing partner's distributive share of partnership items,
bonus depreciation does not apply to any eligible qualified
property and the straight line method is used with respect to
that property.\523\
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\523\ Sec. 168(k)(4)(G)(ii).
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Preproductive period costs of orchards, groves, and vineyards
An orchard, vineyard or grove generally produces annual
crops of fruits (e.g., apples, avocadoes, or grapes) or nuts
(e.g., pecans, pistachios, or walnuts). During the development
period of plants, a farmer generally incurs costs to cultivate,
spray, fertilize and irrigate the plants to their crop-
producing stage (i.e., preproductive period costs).\524\
Preproductive period costs may be deducted or capitalized,
depending on the preproductive period of the plant,\525\ as
well as whether the farmer elects to have section 263A not
apply.\526\ After the plants start producing fruit or nuts, a
farmer can depreciate the capitalized costs of the plants
(i.e., the acquisition costs of the seeds, seedlings, or plants
and their original planting which were capitalized when
incurred, as well as the preproductive period costs if section
263A applied).\527\ A 10-year recovery period is assigned to
any tree or vine bearing fruits or nuts.\528\ A seven-year
recovery period generally applies to other plants bearing
fruits or nuts.\529\
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\524\ See section 263A(e)(3), which defines the ``preproductive
period'' of a plant which will have more than one crop or yield as the
period before the first marketable crop or yield from such plant.
\525\ See section 263A(d)(1)(A)(ii). Section 263A generally
requires certain direct and indirect costs allocable to real or
tangible personal property produced by the taxpayer to be included in
either inventory or capitalized into the basis of such property, as
applicable.
\526\ See section 263A(d)(3).
\527\ In the case of any tree or vine bearing fruits or nuts, the
placed in service date does not occur until the tree or vine first
reaches an income-producing stage. Treas. Reg. sec. 1.46-3(d)(2). See
also, Rev. Rul. 80-25, 1980-1 C.B. 65, 1980; and Rev. Rul. 69-249,
1969-1 C.B. 31, 1969.
\528\ Sec. 168(e)(3)(D)(ii).
\529\ Sec. 168(e)(3)(C)(v).
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Explanation of Provision
Bonus depreciation
The provision extends and modifies the additional first-
year depreciation deduction for five years, generally through
2019 (through 2020 for certain longer-lived and transportation
property (``LLTP'' \530\)).\531\ The 50-percent allowance is
phased down for property placed in service in taxable years
beginning after 2017 (after 2018 for LLTP). Under the
provision, the bonus depreciation percentage rates are as
follows:
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\530\ LLTP means (i) certain longer-lived and transportation
property described in section 168(k)(2)(B), and (ii) certain aircraft
described in section 168(k)(2)(C).
\531\ Due to the passage of time since the provision's original
enactment, the provision eliminates the various acquisition date
requirements as no longer relevant. The provision also repeals as
deadwood the provision relating to property acquired during certain
pre-2012 periods (or certain pre-2013 periods for LLTP).
------------------------------------------------------------------------
Bonus Depreciation Percentage
---------------------------------------
Placed in Service Year Qualified
Property--in LLTP
General
------------------------------------------------------------------------
2015............................ 50 percent 50 percent
2016............................ 50 percent 50 percent
2017............................ 50 percent 50 percent
2018............................ 40 percent 50 percent \532\
2019............................ 30 percent 40 percent
2020............................ n/a 30 percent \533\
------------------------------------------------------------------------
The $8,000 increase amount in the limitation on the
depreciation deductions allowed with respect to certain
passenger automobiles is phased down from $8,000 by $1,600 per
calendar year beginning in 2018. Thus, the section 280F
increase amount for property placed in service in 2018 is
$6,400, and for 2019 is $4,800. The increase does not apply to
a taxpayer who elects to accelerate AMT credits in lieu of
bonus depreciation for a taxable year.
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\532\ It is intended that for LLTP placed in service in 2018, 50
percent applies to the entire adjusted basis. Similarly, for LLTP
placed in service in 2019, 40 percent applies to the entire adjusted
basis. A technical correction may be necessary with respect to LLTP
placed in service in 2018 and 2019 so that the statute reflects this
intent.
\533\ Note that in the case of LLTP described in section
168(k)(2)(B) and placed in service in 2020, 30 percent applies to the
adjusted basis attributable to manufacture, construction, or production
before January 1, 2020, and the remaining adjusted basis does not
qualify for bonus depreciation. Thirty percent applies to the entire
adjusted basis of certain aircraft described in section 168(k)(2)(C)
and placed in service in 2020.
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After 2015, the provision allows additional first-year
depreciation for qualified improvement property without regard
to whether the improvements are property subject to a lease,
and also removes the requirement that the improvement must be
placed in service more than three years after the date the
building was first placed in service.
The provision also extends the special rule for the
allocation of bonus depreciation to a long-term contract for
five years to property placed in service before January 1, 2020
(January 1, 2021, in the case of certain longer-lived and
transportation property).
Expansion of election to accelerate AMT credits in lieu of bonus
depreciation
The provision extends, with modifications, the election to
increase the AMT credit limitation in lieu of bonus
depreciation.
For taxable years ending after December 31, 2014, and
before January 1, 2016, a bonus depreciation amount, maximum
amount, and maximum increase amount is computed separately with
respect to property to which the extension of additional first-
year depreciation applies (``round 5 extension
property'').\534\ A corporation that has an election in effect
with respect to round 4 extension property claiming minimum tax
credits in lieu of bonus depreciation is treated as having an
election in effect for round 5 extension property, unless the
corporation elects otherwise. The provision also allows a
corporation that does not have an election in effect with
respect to round 4 extension property to elect to claim minimum
tax credits in lieu of bonus depreciation for round 5 extension
property. A separate bonus depreciation amount, maximum amount,
and maximum increase amount is computed and applied to round 5
extension property.\535\
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\534\ An election with respect to round 5 extension property is
binding for all property that is eligible qualified property solely by
reason of the extension of the 50-percent additional first-year
depreciation deduction.
\535\ In computing the maximum amount, the maximum increase amount
for round 5 extension property is reduced by bonus depreciation amounts
for preceding taxable years only with respect to round 5 extension
property.
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For taxable years ending after December 31, 2015, the bonus
depreciation amount for a taxable year (as defined under
present law with respect to all qualified property) is limited
to the lesser of (1) 50 percent of the minimum tax credit for
the first taxable year ending after December 31, 2015
(determined before the application of any tax liability
limitation), or (2) the minimum tax credit for the taxable year
allocable to the adjusted net minimum tax imposed for taxable
years ending before January 1, 2016 (determined before the
application of any tax liability limitation and determined on a
first-in, first-out basis).
The provision also provides that in the case of a
partnership having a single corporate partner owning (directly
or indirectly) more than 50 percent of the capital and profits
interests in the partnership, each partner takes into account
its distributive share of partnership depreciation in
determining its bonus depreciation amount.
Special rules for certain plants
The provision provides an election for certain plants
bearing fruits and nuts. Under the election, the applicable
percentage of the adjusted basis of a specified plant which is
planted or grafted after December 31, 2015 and before January
1, 2020, is deductible for regular tax and AMT purposes in the
year planted or grafted by the taxpayer, and the adjusted basis
is reduced by the amount of the deduction.\536\ The percentage
is 50 percent for 2016, and then is phased down by 10 percent
per calendar year beginning in 2018. Thus, the percentage for
2018 is 40 percent, and for 2019 is 30 percent. A specified
plant is any tree or vine that bears fruits or nuts, and any
other plant that will have more than one yield of fruits or
nuts and generally has a preproductive period of more than two
years from planting or grafting to the time it begins bearing
fruits or nuts.\537\ The election is revocable only with the
consent of the Secretary, and if the election is made with
respect to any specified plant, such plant is not treated as
qualified property eligible for bonus depreciation in the
subsequent taxable year in which it is placed in service.
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\536\ Any amount deducted under this election is not subject to
capitalization under section 263A.
\537\ A specified plant does not include any property that is
planted or grafted outside of the United States.
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Effective Date
The provision generally applies to property placed in
service after December 31, 2014, in taxable years ending after
such date.
The modifications relating to bonus depreciation apply to
property placed in service after December 31, 2015, in taxable
years ending after such date.
The modifications relating to the election to accelerate
AMT credits in lieu of claiming bonus depreciation generally
applies to taxable years ending after December 31, 2015. For a
taxable year beginning before January 1, 2016, and ending after
December 31, 2015, a transitional rule applies for purposes of
determining the amount eligible for the election to claim
additional AMT credits. The transitional rule applies the
present-law limitations to property placed in service in 2015
and the revised limitations to property placed in service in
2016.
The provision relating to certain plants bearing fruits and
nuts applies to specified plants planted or grafted after
December 31, 2015.
4. Extension of look-through treatment of payments between related
controlled foreign corporations under foreign personal holding
company rules (sec. 144 of the Act and sec. 954(c)(6) of the
Code)
Present Law
In general The rules of subpart F \538\ require U.S.
shareholders with a 10-percent or greater interest in a
controlled foreign corporation (``CFC'') to include certain
income of the CFC (referred to as ``subpart F income'') on a
current basis for U.S. tax purposes, regardless of whether the
income is distributed to the shareholders.
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\538\ Secs. 951-964.
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Subpart F income includes foreign base company income. One
category of foreign base company income is foreign personal
holding company income. For subpart F purposes, foreign
personal holding company income generally includes dividends,
interest, rents, and royalties, among other types of income.
There are several exceptions to these rules. For example,
foreign personal holding company income does not include
dividends and interest received by a CFC from a related
corporation organized and operating in the same foreign country
in which the CFC is organized, or rents and royalties received
by a CFC from a related corporation for the use of property
within the country in which the CFC is organized. Interest,
rent, and royalty payments do not qualify for this exclusion to
the extent that such payments reduce the subpart F income of
the payor. In addition, subpart F income of a CFC does not
include any item of income from sources within the United
States that is effectively connected with the conduct by such
CFC of a trade or business within the United States (``ECI'')
unless such item is exempt from taxation (or is subject to a
reduced rate of tax) pursuant to a tax treaty.
The ``look-through rule''
Under the ``look-through rule'' (sec. 954(c)(6)),
dividends, interest (including factoring income that is treated
as equivalent to interest under section 954(c)(1)(E)), rents,
and royalties received or accrued by one CFC from a related CFC
are not treated as foreign personal holding company income to
the extent attributable or properly allocable to income of the
payor that is neither subpart F income nor treated as ECI. For
this purpose, a related CFC is a CFC that controls or is
controlled by the other CFC, or a CFC that is controlled by the
same person or persons that control the other CFC. Ownership of
more than 50 percent of the CFC's stock (by vote or value)
constitutes control for these purposes.
The Secretary is authorized to prescribe regulations that
are necessary or appropriate to carry out the look-through
rule, including such regulations as are necessary or
appropriate to prevent the abuse of the purposes of such rule.
The look-through rule applies to taxable years of foreign
corporations beginning after December 31, 2005 and before
January 1, 2015, and to taxable years of U.S. shareholders with
or within which such taxable years of foreign corporations end.
Explanation of Provision
The provision extends for five years the application of the
look-through rule, to taxable years of foreign corporations
beginning before January 1, 2020, and to taxable years of U.S.
shareholders with or within which such taxable years of foreign
corporations end.
Effective Date
The provision applies to taxable years of foreign
corporations beginning after December 31, 2014, and to taxable
years of U.S. shareholders with or within which such taxable
years of foreign corporations end.
C. Extensions Through 2016
Part 1--Tax Relief for Families and Individuals
1. Extension and modification of exclusion from gross income of
discharges of acquisition indebtedness on principal residences
(sec. 151 of the Act and sec. 108 of the Code)
Present Law
In general Gross income includes income that is realized by
a debtor from the discharge of indebtedness, subject to certain
exceptions for debtors in Title 11 bankruptcy cases, insolvent
debtors, certain student loans, certain farm indebtedness, and
certain real property business indebtedness (secs. 61(a)(12)
and 108).\539\ In cases involving discharges of indebtedness
that are excluded from gross income under the exceptions to the
general rule, taxpayers generally reduce certain tax
attributes, including basis in property, by the amount of the
discharge of indebtedness.
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\539\ A debt cancellation which constitutes a gift or bequest is
not treated as income to the donee debtor (sec. 102).
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The amount of discharge of indebtedness excluded from
income by an insolvent debtor not in a Title 11 bankruptcy case
cannot exceed the amount by which the debtor is insolvent. In
the case of a discharge in bankruptcy or where the debtor is
insolvent, any reduction in basis may not exceed the excess of
the aggregate bases of properties held by the taxpayer
immediately after the discharge over the aggregate of the
liabilities of the taxpayer immediately after the discharge.
For all taxpayers, the amount of discharge of indebtedness
generally is equal to the difference between the adjusted issue
price of the debt being cancelled and the amount used to
satisfy the debt. These rules generally apply to the exchange
of an old obligation for a new obligation, including a
modification of indebtedness that is treated as an exchange (a
debt-for-debt exchange).
Qualified principal residence indebtedness
An exclusion from gross income is provided for any
discharge of indebtedness income by reason of a discharge (in
whole or in part) of qualified principal residence
indebtedness. Qualified principal residence indebtedness means
acquisition indebtedness (within the meaning of section
163(h)(3)(B), except that the dollar limitation is $2 million)
with respect to the taxpayer's principal residence. Acquisition
indebtedness with respect to a principal residence generally
means indebtedness which is incurred in the acquisition,
construction, or substantial improvement of the principal
residence of the individual and is secured by the residence. It
also includes refinancing of such indebtedness to the extent
the amount of the indebtedness resulting from such refinancing
does not exceed the amount of the refinanced indebtedness. For
these purposes, the term ``principal residence'' has the same
meaning as under section 121 of the Code.
If, immediately before the discharge, only a portion of a
discharged indebtedness is qualified principal residence
indebtedness, the exclusion applies only to so much of the
amount discharged as exceeds the portion of the debt which is
not qualified principal residence indebtedness. Thus, assume
that a principal residence is secured by an indebtedness of $1
million, of which $800,000 is qualified principal residence
indebtedness. If the residence is sold for $700,000 and
$300,000 debt is discharged, then only $100,000 of the amount
discharged may be excluded from gross income under the
qualified principal residence indebtedness exclusion.
The basis of the individual's principal residence is
reduced by the amount excluded from income under the provision.
The qualified principal residence indebtedness exclusion
does not apply to a taxpayer in a Title 11 case; instead the
general exclusion rules apply. In the case of an insolvent
taxpayer not in a Title 11 case, the qualified principal
residence indebtedness exclusion applies unless the taxpayer
elects to have the general exclusion rules apply instead.
The exclusion does not apply to the discharge of a loan if
the discharge is on account of services performed for the
lender or any other factor not directly related to a decline in
the value of the residence or to the financial condition of the
taxpayer.
The exclusion for qualified principal residence
indebtedness is effective for discharges of indebtedness before
January 1, 2015.
Explanation of Provision
The provision extends for two additional years (through
December 31, 2016) the exclusion from gross income for
discharges of qualified principal residence indebtedness. The
provision also provides for an exclusion from gross income in
the case of those taxpayers' whose qualified principal
residence indebtedness was discharged on or after January 1,
2017, if the discharge was subject to a written arrangement
entered into prior to January 1, 2017.
Effective Date
The provision generally applies to discharges of
indebtedness after December 31, 2014.
The provision relating to discharges pursuant to a written
arrangement applies to discharges of indebtedness after
December 31, 2015.
2. Extension of mortgage insurance premiums treated as qualified
residence interest (sec. 152 of the Act and sec. 163 of the
Code)
Present Law
In General
Present law provides that qualified residence interest is
deductible notwithstanding the general rule that personal
interest is nondeductible.\540\
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\540\ Sec. 163(h).
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Acquisition indebtedness and home equity indebtedness
Qualified residence interest is interest on acquisition
indebtedness and home equity indebtedness with respect to a
principal and a second residence of the taxpayer. The maximum
amount of home equity indebtedness is $100,000. The maximum
amount of acquisition indebtedness is $1 million. Acquisition
indebtedness means debt that is incurred in acquiring,
constructing, or substantially improving a qualified residence
of the taxpayer, and that is secured by the residence. Home
equity indebtedness is debt (other than acquisition
indebtedness) that is secured by the taxpayer's principal or
second residence, to the extent the aggregate amount of such
debt does not exceed the difference between the total
acquisition indebtedness with respect to the residence, and the
fair market value of the residence.
Qualified mortgage insurance
Certain premiums paid or accrued for qualified mortgage
insurance by a taxpayer during the taxable year in connection
with acquisition indebtedness on a qualified residence of the
taxpayer are treated as interest that is qualified residence
interest and thus deductible. The amount allowable as a
deduction is phased out ratably by 10 percent for each $1,000
(or fraction thereof) by which the taxpayer's adjusted gross
income exceeds $100,000 ($500 and $50,000, respectively, in the
case of a married individual filing a separate return). Thus,
the deduction is not allowed if the taxpayer's adjusted gross
income exceeds $109,000 ($54,000 in the case of married
individual filing a separate return).
For this purpose, qualified mortgage insurance means
mortgage insurance provided by the Department of Veterans
Affairs, the Federal Housing Administration, or the Rural
Housing Service, and private mortgage insurance (defined in
section two of the Homeowners Protection Act of 1998 as in
effect on the date of enactment of the provision).
Amounts paid for qualified mortgage insurance that are
properly allocable to periods after the close of the taxable
year are treated as paid in the period to which they are
allocated. No deduction is allowed for the unamortized balance
if the mortgage is paid before its term (except in the case of
qualified mortgage insurance provided by the Department of
Veterans Affairs or Rural Housing Service).
The provision does not apply with respect to any mortgage
insurance contract issued before January 1, 2007. The provision
terminates for any amount paid or accrued after December 31,
2014, or properly allocable to any period after that date.
Reporting rules apply under the provision.
Explanation of Provision
The provision extends the deduction for private mortgage
insurance premiums for two years (with respect to contracts
entered into after December 31, 2006). Thus, the provision
applies to amounts paid or accrued in 2015 and 2016 (and not
properly allocable to any period after 2016).
Effective Date
The provision applies to amounts paid or accrued after
December 31, 2014.
3. Extension of above-the-line deduction for qualified tuition and
related expenses (sec. 153 of the Act and sec. 222 of the Code)
Present Law
An individual is allowed a deduction for qualified tuition
and related expenses for higher education paid by the
individual during the taxable year.\541\ The deduction is
allowed in computing adjusted gross income. The term qualified
tuition and related expenses is defined in the same manner as
for the Hope and Lifetime Learning credits, and includes
tuition and fees required for the enrollment or attendance of
the taxpayer, the taxpayer's spouse, or any dependent of the
taxpayer with respect to whom the taxpayer may claim a personal
exemption, at an eligible institution of higher education for
courses of instruction of such individual at such
institution.\542\ The expenses must be in connection with
enrollment at an institution of higher education during the
taxable year, or with an academic period beginning during the
taxable year or during the first three months of the next
taxable year. The deduction is not available for tuition and
related expenses paid for elementary or secondary education.
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\541\ Sec. 222.
\542\ The deduction generally is not available for expenses with
respect to a course or education involving sports, games, or hobbies,
and is not available for student activity fees, athletic fees,
insurance expenses, or other expenses unrelated to an individual's
academic course of instruction.
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The maximum deduction is $4,000 for an individual whose
adjusted gross income for the taxable year does not exceed
$65,000 ($130,000 in the case of a joint return), or $2,000 for
other individuals whose adjusted gross income does not exceed
$80,000 ($160,000 in the case of a joint return). No deduction
is allowed for an individual whose adjusted gross income
exceeds the relevant adjusted gross income limitations, for a
married individual who does not file a joint return, or for an
individual with respect to whom a personal exemption deduction
may be claimed by another taxpayer for the taxable year. The
deduction is not available for taxable years beginning after
December 31, 2014.
The amount of qualified tuition and related expenses must
be reduced by certain scholarships, educational assistance
allowances, and other amounts paid for the benefit of such
individual,\543\ and by the amount of such expenses taken into
account for purposes of determining any exclusion from gross
income of: (1) income from certain U.S. savings bonds used to
pay higher education tuition and fees; and (2) income from a
Coverdell education savings account.\544\ Additionally, such
expenses must be reduced by the earnings portion (but not the
return of principal) of distributions from a qualified tuition
program if an exclusion under section 529 is claimed with
respect to expenses eligible for the qualified tuition
deduction. No deduction is allowed for any expense for which a
deduction is otherwise allowed or with respect to an individual
for whom a Hope or Lifetime Learning credit is elected for such
taxable year.
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\543\ Secs. 222(d)(1) and 25A(g)(2).
\544\ Sec. 222(c). These reductions are the same as those that
apply to the Hope and Lifetime Learning credits.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the qualified tuition deduction for
two years, through 2016.
Effective Date
The provision applies to taxable years beginning after
December 31, 2014.
Part 2--Incentives for Growth, Jobs, Investment, and Innovation
4. Extension of Indian employment tax credit (sec. 161 of the Act and
sec. 45A of the Code)
Present Law
In general, a credit against income tax liability is
allowed to employers for the first $20,000 of qualified wages
and qualified employee health insurance costs paid or incurred
by the employer with respect to certain employees.\545\ The
credit is equal to 20 percent of the excess of eligible
employee qualified wages and health insurance costs during the
current year over the amount of such wages and costs incurred
by the employer during 1993. The credit is an incremental
credit, such that an employer's current-year qualified wages
and qualified employee health insurance costs (up to $20,000
per employee) are eligible for the credit only to the extent
that the sum of such costs exceeds the sum of comparable costs
paid during 1993. No deduction is allowed for the portion of
the wages equal to the amount of the credit.
---------------------------------------------------------------------------
\545\ Sec. 45A.
---------------------------------------------------------------------------
Qualified wages means wages paid or incurred by an employer
for services performed by a qualified employee. A qualified
employee means any employee who is an enrolled member of an
Indian tribe or the spouse of an enrolled member of an Indian
tribe, who performs substantially all of the services within an
Indian reservation, and whose principal place of abode while
performing such services is on or near the reservation in which
the services are performed. An ``Indian reservation'' is a
reservation as defined in section 3(d) of the Indian Financing
Act of 1974 \546\ or section 4(10) of the Indian Child Welfare
Act of 1978.\547\ For purposes of the preceding sentence,
section 3(d) is applied by treating ``former Indian
reservations in Oklahoma'' as including only lands that are (1)
within the jurisdictional area of an Oklahoma Indian tribe as
determined by the Secretary of the Interior, and (2) recognized
by such Secretary as an area eligible for trust land status
under 25 C.F.R. Part 151 (as in effect on August 5, 1997).
---------------------------------------------------------------------------
\546\ Pub. L. No. 93-262.
\547\ Pub. L. No. 95-608.
---------------------------------------------------------------------------
An employee is not treated as a qualified employee for any
taxable year of the employer if the total amount of wages paid
or incurred by the employer with respect to such employee
during the taxable year exceeds an amount determined at an
annual rate of $30,000 (which after adjustment for inflation is
$45,000 for 2014).\548\ In addition, an employee will not be
treated as a qualified employee under certain specific
circumstances, such as where the employee is related to the
employer (in the case of an individual employer) or to one of
the employer's shareholders, partners, or grantors. Similarly,
an employee will not be treated as a qualified employee where
the employee has more than a five percent ownership interest in
the employer. Finally, an employee will not be considered a
qualified employee to the extent the employee's services relate
to gaming activities or are performed in a building housing
such activities.
---------------------------------------------------------------------------
\548\ See Instructions for Form 8845, Indian Employment Credit
(2014).
---------------------------------------------------------------------------
The wage credit is available for wages paid or incurred in
taxable years beginning on or before December 31, 2014.
Explanation of Provision
The provision extends for two years the present-law Indian
employment credit (through taxable years beginning on or before
December 31, 2016).
Effective Date
The provision applies to taxable years beginning after
December 31, 2014.
5. Extension and modification of railroad track maintenance credit
(sec. 162 of the Act and sec. 45G of the Code)
Present Law
Present law provides a 50-percent business tax credit for
qualified railroad track maintenance expenditures paid or
incurred by an eligible taxpayer during taxable years beginning
before January 1, 2015.\549\ The credit is limited to the
product of $3,500 times the number of miles of railroad track
(1) owned or leased by an eligible taxpayer as of the close of
its taxable year, and (2) assigned to the eligible taxpayer by
a Class II or Class III railroad that owns or leases such track
at the close of the taxable year.\550\ Each mile of railroad
track may be taken into account only once, either by the owner
of such mile or by the owner's assignee, in computing the per-
mile limitation. The credit also may reduce a taxpayer's tax
liability below its tentative minimum tax.\551\ Basis of the
railroad track must be reduced (but not below zero) by an
amount equal to 100 percent of the taxpayer's qualified
railroad track maintenance tax credit determined for the
taxable year.\552\
---------------------------------------------------------------------------
\549\ Sec. 45G(a) and (f).
\550\ Sec. 45G(b)(1).
\551\ Sec. 38(c)(4).
\552\ Sec. 45G(e)(3).
---------------------------------------------------------------------------
Qualified railroad track maintenance expenditures are
defined as gross expenditures (whether or not otherwise
chargeable to capital account) for maintaining railroad track
(including roadbed, bridges, and related track structures)
owned or leased as of January 1, 2005, by a Class II or Class
III railroad (determined without regard to any consideration
for such expenditure given by the Class II or Class III
railroad which made the assignment of such track).\553\
---------------------------------------------------------------------------
\553\ Sec. 45G(d).
---------------------------------------------------------------------------
An eligible taxpayer means any Class II or Class III
railroad, and any person who transports property using the rail
facilities of a Class II or Class III railroad or who furnishes
railroad-related property or services to a Class II or Class
III railroad, but only with respect to miles of railroad track
assigned to such person by such railroad under the
provision.\554\
---------------------------------------------------------------------------
\554\ Sec. 45G(c).
---------------------------------------------------------------------------
The terms Class II or Class III railroad have the meanings
given by the Surface Transportation Board.\555\
---------------------------------------------------------------------------
\555\ Sec. 45G(e)(1).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the present law credit for two years,
for qualified railroad track maintenance expenditures paid or
incurred in taxable years beginning after December 31, 2014,
and before January 1, 2017.
The provision also provides that qualified railroad track
maintenance expenditures paid or incurred in taxable years
beginning after December 31, 2015, are defined as gross
expenditures (whether or not otherwise chargeable to capital
account) for maintaining railroad track (including roadbed,
bridges, and related track structures) owned or leased as of
January 1, 2015, by a Class II or Class III railroad
(determined without regard to any consideration for such
expenditure given by the Class II or Class III railroad which
made the assignment of such track).
Effective Date
The provision generally applies to expenditures paid or
incurred in taxable years beginning after December 31, 2014.
The modification to the definition of qualified railroad
track maintenance expenditures applies to expenditures paid or
incurred in taxable years beginning after December 31, 2015.
6. Extension of mine rescue team training credit (sec. 163 of the Act
and sec. 45N of the Code)
Present Law
An eligible employer may claim a general business credit
against income tax with respect to each qualified mine rescue
team employee equal to the lesser of: (1) 20 percent of the
amount paid or incurred by the taxpayer during the taxable year
with respect to the training program costs of the qualified
mine rescue team employee (including the wages of the employee
while attending the program); or (2) $10,000.\556\ A qualified
mine rescue team employee is any full-time employee of the
taxpayer who is a miner eligible for more than six months of a
taxable year to serve as a mine rescue team member by virtue of
either having completed the initial 20 hour course of
instruction prescribed by the Mine Safety and Health
Administration's Office of Educational Policy and Development,
or receiving at least 40 hours of refresher training in such
instruction.\557\
---------------------------------------------------------------------------
\556\ Sec. 45N(a).
\557\ Sec. 45N(b).
---------------------------------------------------------------------------
An eligible employer is any taxpayer which employs
individuals as miners in underground mines in the United
States.\558\ The term ``wages'' has the meaning given to such
term by section 3306(b) \559\ (determined without regard to any
dollar limitation contained in that section).\560\
---------------------------------------------------------------------------
\558\ Sec. 45N(c).
\559\ Section 3306(b) defines wages for purposes of Federal
Unemployment Tax.
\560\ Sec. 45N(d).
---------------------------------------------------------------------------
No deduction is allowed for the portion of the expenses
otherwise deductible that is equal to the amount of the
credit.\561\ The credit does not apply to taxable years
beginning after December 31, 2014.\562\ Additionally, the
credit is not allowable for purposes of computing the
alternative minimum tax.\563\
---------------------------------------------------------------------------
\561\ Sec. 280C(e).
\562\ Sec. 45N(e).
\563\ Sec. 38(c).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the credit for two years through
taxable years beginning on or before December 31, 2016.
Effective Date
The provision applies to taxable years beginning after
December 31, 2014.
7. Extension of qualified zone academy bonds (sec. 164 of the Act and
sec. 54E of the Code)
Present Law
Tax-exempt bonds
Interest on State and local governmental bonds generally is
excluded from gross income for Federal income tax purposes if
the proceeds of the bonds are used to finance direct activities
of these governmental units or if the bonds are repaid with
revenues of the governmental units. These can include tax-
exempt bonds which finance public schools.\564\ An issuer must
file with the Internal Revenue Service certain information
about the bonds issued in order for that bond issue to be tax-
exempt.\565\ Generally, this information return is required to
be filed no later the 15th day of the second month after the
close of the calendar quarter in which the bonds were issued.
---------------------------------------------------------------------------
\564\ Sec. 103.
\565\ Sec. 149(e).
---------------------------------------------------------------------------
The tax exemption for State and local bonds does not apply
to any arbitrage bond.\566\ An arbitrage bond is defined as any
bond that is part of an issue if any proceeds of the issue are
reasonably expected to be used (or intentionally are used) to
acquire higher yielding investments or to replace funds that
are used to acquire higher yielding investments.\567\ 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.
---------------------------------------------------------------------------
\566\ Sec. 103(a) and (b)(2).
\567\ Sec. 148.
---------------------------------------------------------------------------
Qualified zone academy bonds
As an alternative to traditional tax-exempt bonds, State
and local governments were given the authority to issue
``qualified zone academy bonds.'' \568\ A total of $400 million
of qualified zone academy bonds is authorized to be issued
annually in calendar years 1998 through 2008, $1,400 million in
2009 and 2010, and $400 million in 2011, 2012, 2013 and 2014.
Each calendar year's bond limitation is allocated to the States
according to their respective populations of individuals below
the poverty line. Each State, in turn, allocates the bond
authority to qualified zone academies within such State.
---------------------------------------------------------------------------
\568\ See secs. 54E and 1397E.
---------------------------------------------------------------------------
A taxpayer holding a qualified zone academy bond on the
credit allowance date is entitled to a credit. The credit is
includible in gross income (as if it were a taxable interest
payment on the bond), and may be claimed against regular income
tax and alternative minimum tax liability.
Qualified zone academy bonds are a type of qualified tax
credit bond and subject to the general rules applicable to
qualified tax credit bonds.\569\ The Treasury Department sets
the credit rate at a rate estimated to allow issuance of
qualified zone academy bonds without discount and without
interest cost to the issuer.\570\ The Secretary determines
credit rates for tax credit bonds based on general assumptions
about credit quality of the class of potential eligible issuers
and such other factors as the Secretary deems appropriate. The
Secretary may determine credit rates based on general credit
market yield indexes and credit ratings. The maximum term of
the bond is determined by the Treasury Department, so that the
present value of the obligation to repay the principal on the
bond is 50 percent of the face value of the bond.
---------------------------------------------------------------------------
\569\ Sec. 54A.
\570\ Given the differences in credit quality and other
characteristics of individual issuers, the Secretary cannot set credit
rates in a manner that will allow each issuer to issue tax credit bonds
at par.
---------------------------------------------------------------------------
``Qualified zone academy bonds'' are defined as any bond
issued by a State or local government, provided that (1) at
least 100 percent of the available project proceeds are used
for the purpose of renovating, providing equipment to,
developing course materials for use at, or training teachers
and other school personnel in a ``qualified zone academy'' and
(2) private entities have promised to contribute to the
qualified zone academy certain equipment, technical assistance
or training, employee services, or other property or services
with a value equal to at least 10 percent of the bond proceeds.
A school is a ``qualified zone academy'' if (1) the school
is a public school that provides education and training below
the college level, (2) the school operates a special academic
program in cooperation with businesses to enhance the academic
curriculum and increase graduation and employment rates, and
(3) either (a) the school is located in an empowerment zone or
enterprise community designated under the Code, or (b) it is
reasonably expected that at least 35 percent of the students at
the school will be eligible for free or reduced-cost lunches
under the school lunch program established under the National
School Lunch Act.
Under section 6431, an issuer of specified tax credit
bonds, may elect to receive a payment in lieu of a credit being
allowed to the holder of the bond (``direct-pay bonds'').
Section 6431 is not available for qualified zone academy bond
allocations from the national limitation for years after 2010
or any carry forward of those allocations.
Explanation of Provision
The provision extends the qualified zone academy bond
program for two years. The provision authorizes issuance of up
to $400 million of qualified zone academy bonds for 2015 and
$400 million for 2016. The option to issue direct-pay bonds is
not available.
Effective Date
The provision applies to obligations issued after December
31, 2014.
8. Extension of classification of certain race horses as three-year
property (sec. 165 of the Act and sec. 168 of the Code)
Present Law
A taxpayer generally must capitalize the cost of property
used in a trade or business and recover such cost over time
through annual deductions for depreciation or
amortization.\571\ Tangible property generally is depreciated
under the modified accelerated cost recovery system
(``MACRS''), which determines depreciation by applying specific
recovery periods,\572\ placed-in-service conventions, and
depreciation methods to the cost of various types of
depreciable property.\573\ In particular, the statute assigns a
three-year recovery period for any race horse (1) that is
placed in service after December 31, 2008 and before January 1,
2015 \574\ and (2) that is placed in service after December 31,
2014 and that is more than two years old at such time it is
placed in service by the purchaser.\575\ A seven-year recovery
period is assigned to any race horse that is placed in service
after December 31, 2014 and that is two years old or younger at
the time it is placed in service.\576\
---------------------------------------------------------------------------
\571\ See secs. 263(a) and 167.
\572\ The applicable recovery period for an asset is determined in
part by statute and in part by historical Treasury guidance. Exercising
authority granted by Congress, the Secretary issued Revenue Procedure
87-56 (1987-2 C.B. 674), laying out the framework of recovery periods
for enumerated classes of assets. The Secretary clarified and modified
the list of asset classes in Revenue Procedure 88-22 (1988-1 C.B. 785).
In November 1988, Congress revoked the Secretary's authority to modify
the class lives of depreciable property. Revenue Procedure 87-56, as
modified, remains in effect except to the extent that the Congress has,
since 1988, statutorily modified the recovery period for certain
depreciable assets, effectively superseding any administrative guidance
with regard to such property.
\573\ Sec. 168.
\574\ Sec. 168(e)(3)(A)(i)(I), as in effect after amendment by the
Food, Conservation and Energy Act of 2008, Pub. L. No. 110-246, sec.
15344(b).
\575\ Sec. 168(e)(3)(A)(i)(II). A horse is more than two years old
after the day that is 24 months after its actual birthdate. Rev. Proc.
87-56, 1987-2 C.B. 674, as clarified and modified by Rev. Proc. 88-22,
1988-1 C.B. 785.
\576\ Rev. Proc. 87-56, 1987-2 C.B. 674, asset class 01.225.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the present-law three-year recovery
period for race horses for two years to apply to any race horse
(regardless of age when placed in service) which is placed in
service before January 1, 2017. Subsequently, the three-year
recovery period for race horses will only apply to those which
are more than two years old when placed in service by the
purchaser after December 31, 2016.
Effective Date
The provision applies to property placed in service after
December 31, 2014.
9. Extension of seven-year recovery period for motorsports
entertainment complexes (sec. 166 of the Act and sec. 168 of
the Code)
Present Law
A taxpayer generally must capitalize the cost of property
used in a trade or business and recover such cost over time
through annual deductions for depreciation or
amortization.\577\ Tangible property generally is depreciated
under the modified accelerated cost recovery system
(``MACRS''), which determines depreciation by applying specific
recovery periods,\578\ placed-in-service conventions, and
depreciation methods to the cost of various types of
depreciable property.\579\ The cost of nonresidential real
property is recovered using the straight-line method of
depreciation and a recovery period of 39 years.\580\
Nonresidential real property is subject to the mid-month
convention, which treats all property placed in service during
any month (or disposed of during any month) as placed in
service (or disposed of) on the mid-point of such month.\581\
All other property generally is subject to the half-year
convention, which treats all property placed in service during
any taxable year (or disposed of during any taxable year) as
placed in service (or disposed of) on the mid-point of such
taxable year.\582\ Land improvements (such as roads and fences)
are recovered using the 150-percent declining balance method
and a recovery period of 15 years.\583\ An exception exists for
the theme and amusement park industry, whose assets are
assigned a recovery period of seven years.\584\ Additionally, a
motorsports entertainment complex placed in service on or
before December 31, 2014 is assigned a recovery period of seven
years.\585\ For these purposes, a motorsports entertainment
complex means a racing track facility which is permanently
situated on land and which during the 36-month period following
its placed-in-service date hosts a racing event.\586\ The term
motorsports entertainment complex also includes ancillary
facilities, land improvements (e.g., parking lots, sidewalks,
fences), support facilities (e.g., food and beverage retailing,
souvenir vending), and appurtenances associated with such
facilities (e.g., ticket booths, grandstands).
---------------------------------------------------------------------------
\577\ See secs. 263(a) and 167.
\578\ The applicable recovery period for an asset is determined in
part by statute and in part by historical Treasury guidance. Exercising
authority granted by Congress, the Secretary issued Revenue Procedure
87-56 (1987-2 C.B. 674), laying out the framework of recovery periods
for enumerated classes of assets. The Secretary clarified and modified
the list of asset classes in Revenue Procedure 88-22 (1988-1 C.B. 785).
In November 1988, Congress revoked the Secretary's authority to modify
the class lives of depreciable property. Revenue Procedure 87-56, as
modified, remains in effect except to the extent that the Congress has,
since 1988, statutorily modified the recovery period for certain
depreciable assets, effectively superseding any administrative guidance
with regard to such property.
\579\ Sec. 168.
\580\ Sec. 168(b)(3)(A) and (c).
\581\ Sec. 168(d)(2)(A) and (d)(4)(B).
\582\ Sec. 168(d)(1) and (d)(4)(A). However, if substantial
property is placed in service during the last three months of a taxable
year, a special rule requires use of the mid-quarter convention, which
treats all property placed in service (or disposed of) during any
quarter as placed in service (or disposed of) on the mid-point of such
quarter. Sec. 168(d)(3) and (d)(4)(C).
\583\ Sec. 168(b)(2)(A) and asset class 00.3 of Rev. Proc. 87-56,
1987-2 C.B. 674. Under the 150-percent declining balance method, the
depreciation rate is determined by dividing 150 percent by the
appropriate recovery period, switching to the straight-line method for
the first taxable year where using the straight-line method with
respect to the adjusted basis as of the beginning of that year will
yield a larger depreciation allowance. Sec. 168(b)(2) and (b)(1)(B).
\584\ Asset class 80.0 of Rev. Proc. 87-56, 1987-2 C.B. 674.
\585\ Sec. 168(e)(3)(C)(ii).
\586\ Sec. 168(i)(15).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the present-law seven-year recovery
period for motorsports entertainment complexes for two years to
apply to property placed in service on or before December 31,
2016.
Effective Date
The provision applies to property placed in service after
December 31, 2014.
10. Extension and modification of accelerated depreciation for business
property on an Indian reservation (sec. 167 of the Act and sec.
168(j) of the Code)
Present Law
With respect to certain property used in connection with
the conduct of a trade or business within an Indian
reservation, depreciation deductions under section 168(j) are
determined using the following recovery periods:
------------------------------------------------------------------------
------------------------------------------------------------------------
3-year property........................ 2 years
5-year property........................ 3 years
7-year property........................ 4 years
10-year property....................... 6 years
15-year property....................... 9 years
20-year property....................... 12 years
Nonresidential real property........... 22 years \587\
------------------------------------------------------------------------
``Qualified Indian reservation property'' eligible for
accelerated depreciation includes property described in the
table above which is: (1) used by the taxpayer predominantly in
the active conduct of a trade or business within an Indian
reservation; (2) not used or located outside the reservation on
a regular basis; (3) not acquired (directly or indirectly) by
the taxpayer from a person who is related to the taxpayer;
\588\ and (4) is not property placed in service for purposes of
conducting gaming activities.\589\ Certain ``qualified
infrastructure property'' may be eligible for the accelerated
depreciation even if located outside an Indian reservation,
provided that the purpose of such property is to connect with
qualified infrastructure property located within the
reservation (e.g., roads, power lines, water systems, railroad
spurs, and communications facilities).\590\
---------------------------------------------------------------------------
\587\ Section 168(j)(2) does not provide shorter recovery periods
for water utility property, residential rental property, or railroad
grading and tunnel bores.
\588\ For these purposes, the term ``related persons'' is defined
in section 465(b)(3)(C).
\589\ Sec. 168(j)(4)(A).
\590\ Sec. 168(j)(4)(C).
---------------------------------------------------------------------------
An ``Indian reservation'' means a reservation as defined in
section 3(d) of the Indian Financing Act of 1974 (25 U.S.C.
1452(d)) \591\ or section 4(10) of the Indian Child Welfare Act
of 1978 (25 U.S.C. 1903(10)).\592\ For purposes of the
preceding sentence, section 3(d) is applied by treating
``former Indian reservations in Oklahoma'' as including only
lands that are (1) within the jurisdictional area of an
Oklahoma Indian tribe as determined by the Secretary of the
Interior, and (2) recognized by such Secretary as an area
eligible for trust land status under 25 C.F.R. part 151 (as in
effect on August 5, 1997).\593\
---------------------------------------------------------------------------
\591\ Pub. L. No. 93-262.
\592\ Pub. L. No. 95-608.
\593\ Sec. 168(j)(6).
---------------------------------------------------------------------------
The depreciation deduction allowed for regular tax purposes
is also allowed for purposes of the alternative minimum
tax.\594\ The accelerated depreciation for qualified Indian
reservation property is available with respect to property
placed in service on or before December 31, 2014.\595\
---------------------------------------------------------------------------
\594\ Sec. 168(j)(3).
\595\ Sec. 168(j)(8).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends for two years the present-law
accelerated depreciation for qualified Indian reservation
property to apply to property placed in service on or before
December 31, 2016.
The provision also provides that a taxpayer may annually
make an irrevocable election out of section 168(j) on a class-
by-class basis for qualified Indian reservation property placed
in service in taxable years beginning after December 31, 2015.
Effective Date
The provision generally applies to property placed in
service after December 31, 2014.
The modification providing an election out of section
168(j) applies to taxable years beginning after December 31,
2015.
11. Extension of election to expense mine safety equipment (sec. 168 of
the Act and sec. 179E of the Code)
Present Law
A taxpayer may elect to treat 50 percent of the cost of any
qualified advanced mine safety equipment property as an expense
in the taxable year in which the equipment is placed in
service.\596\ ``Qualified advanced mine safety equipment
property'' means any advanced mine safety equipment property
for use in any underground mine located in the United States
the original use of which commences with the taxpayer and which
is placed in service after December 20, 2006, and before
January 1, 2015.\597\
---------------------------------------------------------------------------
\596\ Sec. 179E(a).
\597\ Sec. 179E(c) and (g).
---------------------------------------------------------------------------
Advanced mine safety equipment property means any of the
following: (1) emergency communication technology or devices
used to allow a miner to maintain constant communication with
an individual who is not in the mine; (2) electronic
identification and location devices that allow individuals not
in the mine to track at all times the movements and location of
miners working in or at the mine; (3) emergency oxygen-
generating, self-rescue devices that provide oxygen for at
least 90 minutes; (4) pre-positioned supplies of oxygen
providing each miner on a shift the ability to survive for at
least 48 hours; and (5) comprehensive atmospheric monitoring
systems that monitor the levels of carbon monoxide, methane,
and oxygen that are present in all areas of the mine and that
can detect smoke in the case of a fire in a mine.\598\
---------------------------------------------------------------------------
\598\ Sec. 179E(d).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends for two years (through December 31,
2016) the present-law placed-in-service date allowing a
taxpayer to expense 50 percent of the cost of any qualified
advanced mine safety equipment property.
Effective Date
The provision applies to property placed in service after
December 31, 2014.
12. Extension of special expensing rules for certain film and
television productions; special expensing for live theatrical
productions (sec. 169 of the Act and sec. 181 of the Code)
Present Law
Under section 181, a taxpayer may elect \599\ to deduct the
cost of any qualifying film and television production,
commencing prior to January 1, 2015, in the year the
expenditure is incurred in lieu of capitalizing the cost and
recovering it through depreciation allowances.\600\ A taxpayer
may elect to deduct up to $15 million of the aggregate cost of
the film or television production under this section.\601\ The
threshold is increased to $20 million if a significant amount
of the production expenditures are incurred in areas eligible
for designation as a low-income community or eligible for
designation by the Delta Regional Authority as a distressed
county or isolated area of distress.\602\
---------------------------------------------------------------------------
\599\ See Treas. Reg. section 1.181-2 for rules on making an
election under this section.
\600\ For this purpose, a production is treated as commencing on
the first date of principal photography.
\601\ Sec. 181(a)(2)(A).
\602\ Sec. 181(a)(2)(B).
---------------------------------------------------------------------------
A qualified film or television production means any
production of a motion picture (whether released theatrically
or directly to video cassette or any other format) or
television program if at least 75 percent of the total
compensation expended on the production is for services
performed in the United States by actors, directors, producers,
and other relevant production personnel.\603\ The term
``compensation'' does not include participations and residuals
(as defined in section 167(g)(7)(B)).\604\ Each episode of a
television series is treated as a separate production, and only
the first 44 episodes of a particular series qualify under the
provision.\605\ Qualified productions do not include sexually
explicit productions as referenced by section 2257 of title 18
of the U.S. Code.\606\
---------------------------------------------------------------------------
\603\ Sec. 181(d)(3)(A).
\604\ Sec. 181(d)(3)(B).
\605\ Sec. 181(d)(2)(B).
\606\ Sec. 181(d)(2)(C).
---------------------------------------------------------------------------
For purposes of recapture under section 1245, any deduction
allowed under section 181 is treated as if it were a deduction
allowable for amortization.\607\
---------------------------------------------------------------------------
\607\ Sec. 1245(a)(2)(C).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the special treatment for film and
television productions under section 181 for two years to
qualified film and television productions commencing prior to
January 1, 2017.
The provision also expands section 181 to include any
qualified live theatrical production commencing after December
31, 2015. A qualified live theatrical production is defined as
a live staged production of a play (with or without music)
which is derived from a written book or script and is produced
or presented by a commercial entity in any venue which has an
audience capacity of not more than 3,000, or a series of venues
the majority of which have an audience capacity of not more
than 3,000. In addition, qualified live theatrical productions
include any live staged production which is produced or
presented by a taxable entity no more than 10 weeks annually in
any venue which has an audience capacity of not more than
6,500. In general, in the case of multiple live-staged
productions, each such live-staged production is treated as a
separate production. Similar to the exclusion for sexually
explicit productions from the present-law definition of
qualified productions, qualified live theatrical productions do
not include stage performances that would be excluded by
section 2257(h)(1) of title 18 of the U.S. Code, if such
provision were extended to live stage performances.
Effective Date
The provision generally applies to productions commencing
after December 31, 2014.
The modifications for live theatrical productions apply to
productions commencing after December 31, 2015. For purposes of
this provision, the date on which a qualified live theatrical
production commences is the date of the first public
performance of such production for a paying audience.
13. Extension of deduction allowable with respect to income
attributable to domestic production activities in Puerto Rico
(sec. 170 of the Act and sec. 199 of the Code)
Present Law
General
Present law generally provides a deduction from taxable
income (or, in the case of an individual, adjusted gross
income) that is equal to nine percent of the lesser of the
taxpayer's qualified production activities income or taxable
income for the taxable year. For taxpayers subject to the 35-
percent corporate income tax rate, the nine-percent deduction
effectively reduces the corporate income tax rate to slightly
less than 32 percent on qualified production activities income.
In general, qualified production activities income is equal
to domestic production gross receipts reduced by the sum of:
(1) the costs of goods sold that are allocable to those
receipts; and (2) other expenses, losses, or deductions which
are properly allocable to those receipts.
Domestic production gross receipts generally are gross
receipts of a taxpayer that are derived from: (1) any sale,
exchange, or other disposition, or any lease, rental, or
license, of qualifying production property \608\ that was
manufactured, produced, grown or extracted by the taxpayer in
whole or in significant part within the United States; (2) any
sale, exchange, or other disposition, or any lease, rental, or
license, of qualified film \609\ produced by the taxpayer; (3)
any lease, rental, license, sale, exchange, or other
disposition of electricity, natural gas, or potable water
produced by the taxpayer in the United States; (4) construction
of real property performed in the United States by a taxpayer
in the ordinary course of a construction trade or business; or
(5) engineering or architectural services performed in the
United States for the construction of real property located in
the United States.
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\608\ Qualifying production property generally includes any
tangible personal property, computer software, and sound recordings.
\609\ Qualified film includes any motion picture film or videotape
(including live or delayed television programming, but not including
certain sexually explicit productions) if 50 percent or more of the
total compensation relating to the production of the film (including
compensation in the form of residuals and participations) constitutes
compensation for services performed in the United States by actors,
production personnel, directors, and producers.
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The amount of the deduction for a taxable year is limited
to 50 percent of the wages paid by the taxpayer, and properly
allocable to domestic production gross receipts, during the
calendar year that ends in such taxable year.\610\ Wages paid
to bona fide residents of Puerto Rico generally are not
included in the definition of wages for purposes of computing
the wage limitation amount.\611\
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\610\ For purposes of the provision, ``wages'' include the sum of
the amounts of wages as defined in section 3401(a) and elective
deferrals that the taxpayer properly reports to the Social Security
Administration with respect to the employment of employees of the
taxpayer during the calendar year ending during the taxpayer's taxable
year.
\611\ Section 3401(a)(8)(C) excludes wages paid to United States
citizens who are bona fide residents of Puerto Rico from the term wages
for purposes of income tax withholding.
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Rules for Puerto Rico
When used in the Code in a geographical sense, the term
``United States'' generally includes only the States and the
District of Columbia.\612\ A special rule for determining
domestic production gross receipts, however, provides that in
the case of any taxpayer with gross receipts from sources
within the Commonwealth of Puerto Rico, the term ``United
States'' includes the Commonwealth of Puerto Rico, but only if
all of the taxpayer's Puerto Rico-sourced gross receipts are
taxable under the Federal income tax for individuals or
corporations.\613\ In computing the 50-percent wage limitation,
the taxpayer is permitted to take into account wages paid to
bona fide residents of Puerto Rico for services performed in
Puerto Rico.\614\
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\612\ Sec. 7701(a)(9).
\613\ Sec. 199(d)(8)(A).
\614\ Sec. 199(d)(8)(B).
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The special rules for Puerto Rico apply only with respect
to the first nine taxable years of a taxpayer beginning after
December 31, 2005 and before January 1, 2015.
Explanation of Provision
The provision extends the special domestic production
activities rules for Puerto Rico to apply for the first eleven
taxable years of a taxpayer beginning after December 31, 2005
and before January 1, 2017.
Effective Date
The provision applies to taxable years beginning after
December 31, 2014.
14. Extension and modification of empowerment zone tax incentives (sec.
171 of the Act and secs. 1391 and 1394 of the Code)
Present Law
The Omnibus Budget Reconciliation Act of 1993 (``OBRA 93'')
\615\ authorized the designation of nine empowerment zones
(``Round I empowerment zones'') to provide tax incentives for
businesses to locate within certain targeted areas \616\
designated by the Secretaries of the Department of Housing and
Urban Development (``HUD'') and the U.S. Department of
Agriculture (``USDA''). The first empowerment zones were
established in large rural areas and large cities. OBRA 93 also
authorized the designation of 95 enterprise communities, which
were located in smaller rural areas and cities. For tax
purposes, the areas designated as enterprise communities
continued as such for the ten-year period starting in the
beginning of 1995 and ending at the end of 2004.
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\615\ Pub. L. No. 103-66.
\616\ The targeted areas are those that have pervasive poverty,
high unemployment, and general economic distress, and that satisfy
certain eligibility criteria, including specified poverty rates and
population and geographic size limitations.
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The Taxpayer Relief Act of 1997 \617\ authorized the
designation of two additional Round I urban empowerment zones,
and 20 additional empowerment zones (``Round II empowerment
zones''). The Community Renewal Tax Relief Act of 2000 (``2000
Community Renewal Act'') \618\ authorized a total of 10 new
empowerment zones (``Round III empowerment zones''), bringing
the total number of authorized empowerment zones to 40.\619\ In
addition, the 2000 Community Renewal Act conformed the tax
incentives that are available to businesses in the Round I,
Round II, and Round III empowerment zones, and extended the
empowerment zone incentives through December 31, 2009.
Subsequent legislation extended the empowerment zone incentives
through December 31, 2014.\620\
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\617\ Pub. L. No. 105-34.
\618\ Pub. L. No. 106-554.
\619\ The urban part of the program is administered by HUD and the
rural part of the program is administered by the USDA. The eight Round
I urban empowerment zones are Atlanta, GA; Baltimore, MD; Chicago, IL;
Cleveland, OH; Detroit, MI; Los Angeles, CA; New York, NY; and
Philadelphia, PA/Camden, NJ. Atlanta relinquished its empowerment zone
designation in Round III. The three Round I rural empowerment zones are
Kentucky Highlands, KY; Mid-Delta, MI; and Rio Grande Valley, TX. The
15 Round II urban empowerment zones are Boston, MA; Cincinnati, OH;
Columbia, SC; Columbus, OH; Cumberland County, NJ; El Paso, TX; Gary/
Hammond/East Chicago, IN; Ironton, OH/Huntington, WV; Knoxville, TN;
Miami/Dade County, FL; Minneapolis, MN; New Haven, CT; Norfolk/
Portsmouth, VA; Santa Ana, CA; and St. Louis, Missouri/East St. Louis,
IL. The five Round II rural empowerment zones are Desert Communities,
CA; Griggs-Steele, ND; Oglala Sioux Tribe, SD; Southernmost Illinois
Delta, IL; and Southwest Georgia United, GA. The eight Round III urban
empowerment zones are Fresno, CA; Jacksonville, FL; Oklahoma City, OK;
Pulaski County, AR; San Antonio, TX; Syracuse, NY; Tucson, AZ; and
Yonkers, NY. The two Round III rural empowerment zones are Aroostook
County, ME; and Futuro, TX.
\620\ Pub. L. No. 111-312, sec. 753 (2010), Pub. L. No. 112-240,
sec. 327(a) (2013), Pub. L. No. 113-295, sec. 139 (2014).
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The tax incentives available within the designated
empowerment zones include a Federal income tax credit for
employers who hire qualifying employees (the ``wage credit''),
increased expensing of qualifying depreciable property, tax-
exempt bond financing, deferral of capital gains tax on the
sale of qualified assets sold and replaced, and partial
exclusion of capital gains tax on certain sales of qualified
small business stock.
The following is a description of the empowerment zone tax
incentives.
Wage credit
A 20-percent wage credit is available to employers for the
first $15,000 of qualified wages paid to each employee (i.e., a
maximum credit of $3,000 with respect to each qualified
employee) who (1) is a resident of the empowerment zone, and
(2) performs substantially all employment services within the
empowerment zone in a trade or business of the employer.\621\
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\621\ Sec. 1396. The $15,000 limit is annual, not cumulative, such
that the limit is the first $15,000 of wages paid in a calendar year
which ends with or within the taxable year.
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The wage credit rate applies to qualifying wages paid
before January 1, 2015. Wages paid to a qualified employee who
earns more than $15,000 are eligible for the wage credit
(although only the first $15,000 of wages is eligible for the
credit). The wage credit is available with respect to a
qualified full-time or part-time employee (employed for at
least 90 days), regardless of the number of other employees who
work for the employer. In general, any taxable business
carrying out activities in the empowerment zone may claim the
wage credit, regardless of whether the employer meets the
definition of an ``enterprise zone business.''\622\
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\622\ Secs. 1397C(b) and 1397C(c). However, the wage credit is not
available for wages paid in connection with certain business activities
described in section 144(c)(6)(B), including a golf course, country
club, massage parlor, hot tub facility, suntan facility, racetrack,
liquor store, or certain farming activities. In addition, wages are not
eligible for the wage credit if paid to: (1) a person who owns more
than five percent of the stock (or capital or profits interests) of the
employer, (2) certain relatives of the employer, or (3) if the employer
is a corporation or partnership, certain relatives of a person who owns
more than 50 percent of the business.
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An employer's deduction otherwise allowed for wages paid is
reduced by the amount of wage credit claimed for that taxable
year.\623\ Wages are not to be taken into account for purposes
of the wage credit if taken into account in determining the
employer's work opportunity tax credit under section 51.\624\
In addition, the $15,000 cap is reduced by any wages taken into
account in computing the work opportunity tax credit.\625\ The
wage credit may be used to offset up to 25 percent of the
employer's alternative minimum tax liability.\626\
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\623\ Sec. 280C(a).
\624\ Sec. 1396(c)(3)(A).
\625\ Secs. 1396(c)(3)(B).
\626\ Sec. 38(c)(2).
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Increased section 179 expensing limitation
An enterprise zone business is allowed up to an additional
$35,000 of section 179 expensing for qualified zone property
placed in service before January 1, 2015.\627\ For taxable
years beginning in 2014, the total amount that may be expensed
is $535,000 (assuming at least $35,000 of qualified zone
property is placed in service during the taxable year).\628\
The section 179 expensing allowed to a taxpayer is phased out
by the amount by which the cost of qualifying property placed
in service during the taxable year exceeds a specified dollar
amount.\629\ However, only 50 percent of the cost of qualified
zone property placed in service during the year by the taxpayer
is taken into account in determining the phase out of the
limitation amount.\630\
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\627\ Secs. 1397A.
\628\ See sec. 179(b)(1).
\629\ For taxable years beginning in 2014, the dollar amount is
$2,000,000. Sec. 179(b)(2). Section 124 of the Act permanently extends
the section 179 dollar amounts of $500,000 and $2,000,000 for taxable
years beginning after 2014.
\630\ Secs. 1397A(a)(2).
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The term ``qualified zone property'' is defined as
depreciable tangible property (including buildings) provided
that (i) the property is acquired by the taxpayer (from an
unrelated party) after the designation took effect, (ii) the
original use of the property in an empowerment zone commences
with the taxpayer, and (iii) substantially all of the use of
the property is in an empowerment zone in the active conduct of
a trade or business by the taxpayer.\631\ Special rules are
provided in the case of property that is substantially
renovated by the taxpayer.
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\631\ Sec. 1397D. Note, however, that to be eligible for the
increased section 179 expensing, the qualified zone property has to
also meet the definition of section 179 property (e.g., building
property would only qualify if it constitutes qualified real property
under section 179(f)).
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An enterprise zone business means any qualified business
entity and any qualified proprietorship. A qualified business
entity means any corporation or partnership if for such year:
(1) every trade or business of such entity is the active
conduct of a qualified business within an empowerment zone; (2)
at least 50 percent of the total gross income of such entity is
derived from the active conduct of such business; (3) a
substantial portion of the use of the tangible property of such
entity (whether owned or leased) is within an empowerment zone;
(4) a substantial portion of the intangible property of such
entity is used in the active conduct of any such business; (5)
a substantial portion of the services performed for such entity
by its employees are performed in an empowerment zone; (6) at
least 35 percent of its employees are residents of an
empowerment zone; (7) less than five percent of the average of
the aggregate unadjusted bases of the property of such entity
is attributable to collectibles other than collectibles that
are held primarily for sale to customers in the ordinary course
of such business; and (8) less than five percent of the average
of the aggregate unadjusted bases of the property of such
entity is attributable to nonqualified financial property.\632\
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\632\ Sec. 1397C(b).
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A qualified proprietorship is any qualified business
carried on by an individual as a proprietorship if for such
year: (1) at least 50 percent of the total gross income of such
individual from such business is derived from the active
conduct of such business in an empowerment zone; (2) a
substantial portion of the use of the tangible property of such
individual in such business (whether owned or leased) is within
an empowerment zone; (3) a substantial portion of the
intangible property of such business is used in the active
conduct of such business; (4) a substantial portion of the
services performed for such individual in such business by
employees of such business are performed in an empowerment
zone; (5) at least 35 percent of such employees are residents
of an empowerment zone; (6) less than five percent of the
average of the aggregate unadjusted bases of the property of
such individual which is used in such business is attributable
to collectibles other than collectibles that are held primarily
for sale to customers in the ordinary course of such business;
and (7) less than five percent of the average of the aggregate
unadjusted bases of the property of such individual which is
used in such business is attributable to nonqualified financial
property.\633\
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\633\ Sec. 1397C(c).
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A qualified business is defined as any trade or business
other than a trade or business that consists predominantly of
the development or holding of intangibles for sale or license
or any business prohibited in connection with the employment
credit.\634\ In addition, the leasing of real property that is
located within the empowerment zone is treated as a qualified
business only if (1) the leased property is not residential
property, and (2) at least 50 percent of the gross rental
income from the real property is from enterprise zone
businesses. The rental of tangible personal property is not a
qualified business unless at least 50 percent of the rental of
such property is by enterprise zone businesses or by residents
of an empowerment zone.
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\634\ Sec. 1397C(d). Excluded businesses include any private or
commercial golf course, country club, massage parlor, hot tub facility,
sun tan facility, racetrack or other facility used for gambling, or any
store the principal business of which is the sale of alcoholic
beverages for off-premises consumption. Sec. 144(c)(6).
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Expanded tax-exempt financing for certain zone facilities
States or local governments can issue enterprise zone
facility bonds to raise funds to provide an enterprise zone
business with qualified zone property.\635\ These bonds can be
used in areas designated enterprise communities as well as
areas designated empowerment zones. To qualify, 95 percent (or
more) of the net proceeds from the bond issue must be used to
finance: (1) qualified zone property whose principal user is an
enterprise zone business, and (2) certain land functionally
related and subordinate to such property.
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\635\ Sec. 1394.
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The term enterprise zone business is the same as that used
for purposes of the increased section 179 deduction limitation
(discussed above) with certain modifications for start-up
businesses. First, a business will be treated as an enterprise
zone business during a start-up period if (1) at the beginning
of the period, it is reasonable to expect the business to be an
enterprise zone business by the end of the start-up period, and
(2) the business makes bona fide efforts to be an enterprise
zone business. The start-up period is the period that ends with
the start of the first tax year beginning more than two years
after the later of (1) the issue date of the bond issue
financing the qualified zone property, and (2) the date this
property is first placed in service (or, if earlier, the date
that is three years after the issue date).\636\
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\636\ Sec. 1394(b)(3).
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Second, a business that qualifies as an enterprise zone
business at the end of the start-up period must continue to
qualify during a testing period that ends three tax years after
the start-up period ends. After the three-year testing period,
a business will continue to be treated as an enterprise zone
business as long as 35 percent of its employees are residents
of an empowerment zone or enterprise community.
The face amount of the bonds may not exceed $60 million for
an empowerment zone in a rural area, $130 million for an
empowerment zone in an urban area with zone population of less
than 100,000, and $230 million for an empowerment zone in an
urban area with zone population of at least 100,000.
Elective rollover of capital gain from the sale or exchange of any
qualified empowerment zone asset
Taxpayers can elect to defer recognition of gain on the
sale of a qualified empowerment zone asset held for more than
one year and replaced within 60 days by another qualified
empowerment zone asset in the same zone.\637\ A qualified
empowerment zone asset generally means stock or a partnership
interest acquired at original issue for cash in an enterprise
zone business, or tangible property originally used in an
enterprise zone business by the taxpayer. The deferral is
accomplished by reducing the basis of the replacement asset by
the amount of the gain recognized on the sale of the asset.
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\637\ Sec. 1397B.
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Partial exclusion of capital gains on certain small business stock
Generally, individuals may exclude a percentage of gain
from the sale of certain small business stock acquired at
original issue and held at least five years.\638\ For stock
acquired prior to February 18, 2009, or after December 31,
2014, the percentage is generally 50 percent, except that for
empowerment zone stock the percentage is 60 percent for gain
attributable to periods before January 1, 2019. For stock
acquired after February 17, 2009, and before January 1, 2015, a
higher percentage (either 75-percent or 100-percent) applies to
all small business stock with no additional percentage for
empowerment zone stock.\639\
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\638\ Sec. 1202.
\639\ Section 126 of the Act permanently extends the 100-percent
exclusion to small business stock for stock acquired after 2014.
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Other tax incentives
Other incentives not specific to empowerment zones but
beneficial to these areas include the work opportunity tax
credit for employers based on the first year of employment of
certain targeted groups, including empowerment zone residents
(up to $2,400 per employee), and qualified zone academy bonds
for certain public schools located in an empowerment zone or
expected (as of the date of bond issuance) to have at least 35
percent of its students receiving free or reduced lunches.
Explanation of Provision
Extension
The provision extends for two years, through December 31,
2016, the period for which the designation of an empowerment
zone is in effect, thus extending for two years the empowerment
zone tax incentives, including the wage credit, increased
section 179 expensing for qualifying property, tax-exempt bond
financing, and deferral of capital gains tax on the sale of
qualified assets replaced with other qualified assets. In the
case of a designation of an empowerment zone the nomination for
which included a termination date which is December 31, 2016,
termination shall not apply with respect to such designation if
the entity which made such nomination amends the nomination to
provide for a new termination date in such manner as the
Secretary may provide.
Modification of enterprise zone facility bond employment requirement
The provision also amends the requirements for tax-exempt
enterprise zone facility bonds to treat an employee as a
resident of an empowerment zone for purposes of the 35 percent
in-zone employment requirement if they are a resident of an
empowerment zone, an enterprise community, or a qualified low-
income community within an applicable nominating jurisdiction.
The applicable nominating jurisdiction means, with respect to
any empowerment zone or enterprise community, any local
government that nominated such community for designation under
section 1391. The definition of a qualified low-income
community is similar to the definition of a low income
community provided in section 45D(e) (concerning eligibility
for the new markets tax credit). A ``qualified low-income
community'' is a population census tract with either (1) a
poverty rate of at least 20 percent, or (2) median family
income which does not exceed 80 percent of the greater of
metropolitan area median family income or statewide median
family income (for a non-metropolitan census tract, does not
exceed 80 percent of statewide median family income). In the
case of a population census tract located within a high
migration rural county, low-income is defined by reference to
85 percent (as opposed to 80 percent) of statewide median
family income. For this purpose, a high migration rural county
is any county that, during the 20-year period ending with the
year in which the most recent census was conducted, has a net
out-migration of inhabitants from the county of at least 10
percent of the population of the county at the beginning of
such period.
The Secretary is authorized to designate ``targeted
populations'' as qualified low-income communities. For this
purpose, a ``targeted population'' is defined by reference to
section 103(20) of the Riegle Community Development and
Regulatory Improvement Act of 1994 (the ``Act'') to mean
individuals, or an identifiable group of individuals, including
an Indian tribe, who are low-income persons or otherwise lack
adequate access to loans or equity investments. Section 103(17)
of the Act provides that ``low-income'' means (1) for a
targeted population within a metropolitan area, less than 80
percent of the area median family income; and (2) for a
targeted population within a non-metropolitan area, less than
the greater of (a) 80 percent of the area median family income,
or (b) 80 percent of the statewide non-metropolitan area median
family income.
Effective Date
The provision generally applies to taxable years beginning
after December 31, 2014. The provision regarding the special
rule for the employee residence test in the context of tax-
exempt enterprise zone facility bonds applies to bonds issued
after December 31, 2015.
15. Extension of temporary increase in limit on cover over of rum
excise taxes to Puerto Rico and the Virgin Islands (sec. 172 of
the Act and sec. 7652(f) of the Code)
Present Law
A $13.50 per proof gallon \640\ excise tax is imposed on
distilled spirits produced in or imported into the United
States.\641\ The excise tax does not apply to distilled spirits
that are exported from the United States, including exports to
U.S. possessions (e.g., Puerto Rico and the Virgin
Islands).\642\
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\640\ A proof gallon is a liquid gallon consisting of 50 percent
alcohol. See sec. 5002(a)(10) and (11).
\641\ Sec. 5001(a)(1).
\642\ Secs. 5214(a)(1)(A), 5002(a)(15), 7653(b) and (c).
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The Code provides for cover over (payment) to Puerto Rico
and the Virgin Islands of the excise tax imposed on rum
imported (or brought) into the United States, without regard to
the country of origin.\643\ The amount of the cover over is
limited under Code section 7652(f) to $10.50 per proof gallon
($13.25 per proof gallon before January 1, 2015).
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\643\ Secs. 7652(a)(3), (b)(3), and (e)(1). One percent of the
amount of excise tax collected from imports into the United States of
articles produced in the Virgin Islands is retained by the United
States under section 7652(b)(3).
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Tax amounts attributable to shipments to the United States
of rum produced in Puerto Rico are covered over to Puerto Rico.
Tax amounts attributable to shipments to the United States of
rum produced in the Virgin Islands are covered over to the
Virgin Islands. Tax amounts attributable to shipments to the
United States of rum produced in neither Puerto Rico nor the
Virgin Islands are divided and covered over to the two
possessions under a formula.\644\ Amounts covered over to
Puerto Rico and the Virgin Islands are deposited into the
treasuries of the two possessions for use as those possessions
determine.\645\ All of the amounts covered over are subject to
the limitation.
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\644\ Sec. 7652(e)(2).
\645\ Secs. 7652(a)(3), (b)(3), and (e)(1).
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Explanation of Provision
The provision suspends for two years the $10.50 per proof
gallon limitation on the amount of excise taxes on rum covered
over to Puerto Rico and the Virgin Islands. Under the
provision, the cover over limitation of $13.25 per proof gallon
is extended for rum brought into the United States after
December 31, 2014 and before January 1, 2017. After December
31, 2016, the cover over amount reverts to $10.50 per proof
gallon.
Effective Date
The provision applies to articles brought into the United
States after December 31, 2014.
16. Extension of American Samoa economic development credit (sec. 173
of the Act and sec. 119 of Pub. L. No. 109-432)
Present Law
A domestic corporation that was an existing credit claimant
with respect to American Samoa and that elected the application
of section 936 for its last taxable year beginning before
January 1, 2006 is allowed a credit based on the corporation's
economic activity-based limitation with respect to American
Samoa. The credit is not part of the Code but is computed based
on the rules of sections 30A and 936. The credit is allowed for
the first nine taxable years of a corporation that begin after
December 31, 2005, and before January 1, 2015.
A corporation was an existing credit claimant with respect
to a American Samoa if (1) the corporation was engaged in the
active conduct of a trade or business within American Samoa on
October 13, 1995, and (2) the corporation elected the benefits
of the possession tax credit \646\ in an election in effect for
its taxable year that included October 13, 1995. A corporation
that added a substantial new line of business (other than in a
qualifying acquisition of all the assets of a trade or business
of an existing credit claimant) ceased to be an existing credit
claimant as of the close of the taxable year ending before the
date on which that new line of business was added.
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\646\ For taxable years beginning before January 1, 2006, certain
domestic corporations with business operations in the U.S. possessions
were eligible for the possession tax credit. Secs. 27(b) and 936. This
credit offset the U.S. tax imposed on certain income related to
operations in the U.S. possessions. Subject to certain limitations, the
amount of the possession tax credit allowed to any domestic corporation
equaled the portion of that corporation's U.S. tax that was
attributable to the corporation's non-U.S. source taxable income from
(1) the active conduct of a trade or business within a U.S. possession,
(2) the sale or exchange of substantially all of the assets that were
used in such a trade or business, or (3) certain possessions
investment. No deduction or foreign tax credit was allowed for any
possessions or foreign tax paid or accrued with respect to taxable
income that was taken into account in computing the credit under
section 936. Under the economic activity-based limit, the amount of the
credit could not exceed an amount equal to the sum of (1) 60 percent of
the taxpayer's qualified possession wages and allocable employee fringe
benefit expenses, (2) 15 percent of depreciation allowances with
respect to short-life qualified tangible property, plus 40 percent of
depreciation allowances with respect to medium-life qualified tangible
property, plus 65 percent of depreciation allowances with respect to
long-life qualified tangible property, and (3) in certain cases, a
portion of the taxpayer's possession income taxes. A taxpayer could
elect, instead of the economic activity-based limit, a limit equal to
the applicable percentage of the credit that otherwise would have been
allowable with respect to possession business income, beginning in
1998, the applicable percentage was 40 percent.
To qualify for the possession tax credit for a taxable year, a
domestic corporation was required to satisfy two conditions. First, the
corporation was required to derive at least 80 percent of its gross
income for the three-year period immediately preceding the close of the
taxable year from sources within a possession. Second, the corporation
was required to derive at least 75 percent of its gross income for that
same period from the active conduct of a possession business. Sec.
936(a)(2). The section 936 credit generally expired for taxable years
beginning after December 31, 2005.
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A corporation will qualify as an existing credit claimant
if it acquired all the assets of a trade or business of a
corporation that (1) actively conducted that trade or business
in a possession on October 13, 1995, and (2) had elected the
benefits of the possession tax credit in an election in effect
for the taxable year that included October 13, 1995.\647\
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\647\ Sec. 306.
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The amount of the credit allowed to a qualifying domestic
corporation under the provision is equal to the sum of the
amounts used in computing the corporation's economic activity-
based limitation with respect to American Samoa, except that no
credit is allowed for the amount of any American Samoa income
taxes. Thus, for any qualifying corporation the amount of the
credit equals the sum of (1) 60 percent of the corporation's
qualified American Samoa wages and allocable employee fringe
benefit expenses and (2) 15 percent of the corporation's
depreciation allowances with respect to short-life qualified
American Samoa tangible property, plus 40 percent of the
corporation's depreciation allowances with respect to medium-
life qualified American Samoa tangible property, plus 65
percent of the corporation's depreciation allowances with
respect to long-life qualified American Samoa tangible
property.
The section 936(c) rule denying a credit or deduction for
any possessions or foreign tax paid with respect to taxable
income taken into account in computing the credit under section
936 does not apply with respect to the credit allowed by the
provision.
For taxable years beginning after December 31, 2011 the
credit rules are modified in two ways. First, domestic
corporations with operations in American Samoa are allowed the
credit even if those corporations are not existing credit
claimants. Second, the credit is available to a domestic
corporation (either an existing credit claimant or a new credit
claimant) only if, in addition to satisfying all the present
law requirements for claiming the credit, the corporation also
has qualified production activities income (as defined in
section 199(c) by substituting ``American Samoa'' for ``the
United States'' in each place that latter term appears).
In the case of a corporation that is an existing credit
claimant with respect to American Samoa and that elected the
application of section 936 for its last taxable year beginning
before January 1, 2006, the credit applies to the first nine
taxable years of the corporation which begin after December 31,
2005, and before January 1, 2015. For any other corporation,
the credit applies to the first three taxable years of that
corporation which begin after December 31, 2011 and before
January 1, 2015.
Explanation of Provision
The provision extends the credit for two years to apply (a)
in the case of a corporation that is an existing credit
claimant with respect to American Samoa and that elected the
application of section 936 for its last taxable year beginning
before January 1, 2006, to the first eleven taxable years of
the corporation which begin after December 31, 2005, and before
January 1, 2017, and (b) in the case of any other corporation,
to the first five taxable years of the corporation which begin
after December 31, 2011 and before January 1, 2017.
Effective Date
The provision applies to taxable years beginning after
December 31, 2014.
17. Suspension of medical device excise tax (sec. 174 of the Act and
sec. 4191 of the Code)
Present Law
Effective for sales after December 31, 2012, a tax equal to
2.3 percent of the sale price is imposed on the sale of any
taxable medical device by the manufacturer, producer, or
importer of such device.\648\ A taxable medical device is any
device, as defined in section 201(h) of the Federal Food, Drug,
and Cosmetic Act,\649\ intended for humans. Regulations further
define a medical device as one that is listed by the Food and
Drug Administration (``FDA'') under section 510(j) of the
Federal Food, Drug, and Cosmetic Act and 21 C.F.R. Part 807,
pursuant to FDA requirements.\650\
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\648\ Sec. 4191.
\649\ 21 U.S.C. sec. 321. Section 201(h) defines device as ``an
instrument, apparatus, implement, machine, contrivance, implant, in
vitro reagent, or other similar or related article, including any
component, part, or accessory, which is (1) recognized in the official
National Formulary, or the United States Pharmacopeia, or any
supplement to them, (2) intended for use in the diagnosis of disease or
other conditions, or in the cure, mitigation, treatment, or prevention
of disease, in man or other animals, or (3) intended to affect the
structure or any function of the body of man or other animals, and
which does not achieve its primary intended purposes through chemical
action within or on the body of man or other animals and which is not
dependent upon being metabolized for the achievement of its primary
intended purposes.''
\650\ Treas. Reg. sec. 48.4191-2(a). The regulations also include
as devices items that should have been listed as a device with the FDA
as of the date the FDA notifies the manufacturer or importer that
corrective action with respect to listing is required.
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The excise tax does not apply to eyeglasses, contact
lenses, hearing aids, or any other medical device determined by
the Secretary to be of a type that is generally purchased by
the general public at retail for individual use (``retail
exemption''). Regulations provide guidance on the types of
devices that are exempt under the retail exemption. A device is
exempt under these provisions if: (1) it is regularly available
for purchase and use by individual consumers who are not
medical professionals; and (2) the design of the device
demonstrates that it is not primarily intended for use in a
medical institution or office or by a medical
professional.\651\ Additionally, the regulations provide
certain safe harbors for devices eligible for the retail
exemption.\652\
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\651\ Treas. Reg. sec. 48.4191-2(b)(2).
\652\ Treas. Reg. sec. 48.4191-2(b)(2)(iii). The safe harbors
include devices that are described as over-the-counter devices in
relevant FDA classification headings as well as certain FDA device
classifications listed in the regulations.
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The medical device excise tax is generally subject to the
rules applicable to other manufacturers excise taxes. These
rules include certain general manufacturers excise tax
exemptions including the exemption for sales for use by the
purchaser for further manufacture (or for resale to a second
purchaser in further manufacture) or for export (or for resale
to a second purchaser for export).\653\ If a medical device is
sold free of tax for resale to a second purchaser for further
manufacture or for export, the exemption does not apply unless,
within the six-month period beginning on the date of sale by
the manufacturer, the manufacturer receives proof that the
medical device has been exported or resold for use in further
manufacturing.\654\ In general, the exemption does not apply
unless the manufacturer, the first purchaser, and the second
purchaser are registered with the Secretary of the Treasury.
Foreign purchasers of articles sold or resold for export are
exempt from the registration requirement.
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\653\ Sec. 4221(a). Other general manufacturers excise tax
exemptions (i.e., the exemption for sales to purchasers for use as
supplies for vessels or aircraft, to a State or local government, to a
nonprofit educational organization, or to a qualified blood collector
organization) do not apply to the medical device excise tax.
\654\ Sec. 4221(b).
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The lease of a medical device is generally considered to be
a sale of such device.\655\ Special rules apply for the
imposition of tax to each lease payment. The use of a medical
device subject to tax by manufacturers, producers, or importers
of such device, is treated as a sale for the purpose of
imposition of excise taxes.\656\
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\655\ Sec. 4217(a).
\656\ Sec. 4218.
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There are also rules for determining the price of a medical
device on which the excise tax is imposed.\657\ These rules
provide for (1) the inclusion of containers, packaging, and
certain transportation charges in the price, (2) determining a
constructive sales price if a medical device is sold for less
than the fair market price, and (3) determining the tax due in
the case of partial payments or installment sales.
---------------------------------------------------------------------------
\657\ Sec. 4216.
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Explanation of Provision
The provision suspends the medical device excise tax for a
period of two years, for sales on or after January 1, 2016 and
before January 1, 2018.
Effective Date
The provision applies to sales after December 31, 2015.
Part 3--Incentives for Energy Production and Conservation
18. Extension and modification of credit for nonbusiness energy
property (sec. 181 of the Act and sec. 25C of the Code)
Present Law
Present law provides a 10-percent credit for the purchase
of qualified energy efficiency improvements to existing
homes.\658\ A qualified energy efficiency improvement is any
energy efficiency building envelope component (1) that meets or
exceeds the prescriptive criteria for such a component
established by the 2009 International Energy Conservation Code
as such Code (including supplements) is in effect on the date
of the enactment of the American Recovery and Reinvestment Tax
Act of 2009 \659\ (or, in the case of windows, skylights and
doors, and metal roofs with appropriate pigmented coatings or
asphalt roofs with appropriate cooling granules, meets the
Energy Star program requirements); (2) that is installed in or
on a dwelling located in the United States and owned and used
by the taxpayer as the taxpayer's principal residence; (3) the
original use of which commences with the taxpayer; and (4) that
reasonably can be expected to remain in use for at least five
years. The credit is nonrefundable.
---------------------------------------------------------------------------
\658\ Sec. 25C.
\659\ Pub. L. No. 111-5, February 17, 2009.
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Building envelope components are: (1) insulation materials
or systems which are specifically and primarily designed to
reduce the heat loss or gain for a dwelling and which meet the
prescriptive criteria for such material or system established
by the 2009 International Energy Conservation Code, as such
Code (including supplements) is in effect on the date of the
enactment of the American Recovery and Reinvestment Tax Act of
2009; \660\ (2) exterior windows (including skylights) and
doors; and (3) metal or asphalt roofs with appropriate
pigmented coatings or cooling granules that are specifically
and primarily designed to reduce the heat gain for a dwelling.
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\660\ Ibid.
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Additionally, present law provides credits for the purchase
of specific energy efficient property originally placed in
service by the taxpayer during the taxable year. The allowable
credit for the purchase of certain property is (1) $50 for each
advanced main air circulating fan, (2) $150 for each qualified
natural gas, propane, or oil furnace or hot water boiler, and
(3) $300 for each item of energy efficient building property.
An advanced main air circulating fan is a fan used in a
natural gas, propane, or oil furnace and which has an annual
electricity use of no more than two percent of the total annual
energy use of the furnace (as determined in the standard
Department of Energy test procedures).
A qualified natural gas, propane, or oil furnace or hot
water boiler is a natural gas, propane, or oil furnace or hot
water boiler with an annual fuel utilization efficiency rate of
at least 95.
Energy-efficient building property is: (1) an electric heat
pump water heater which yields an energy factor of at least 2.0
in the standard Department of Energy test procedure, (2) an
electric heat pump which achieves the highest efficiency tier
established by the Consortium for Energy Efficiency, as in
effect on January 1, 2009,\661\ (3) a central air conditioner
which achieves the highest efficiency tier established by the
Consortium for Energy Efficiency as in effect on January 1,
2009,\662\ (4) a natural gas, propane, or oil water heater
which has an energy factor of at least 0.82 or thermal
efficiency of at least 90 percent, and (5) biomass fuel
property.
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\661\ These standards are a seasonal energy efficiency ratio
(``SEER'') greater than or equal to 15, an energy efficiency ratio
(``EER'') greater than or equal to 12.5, and heating seasonal
performance factor (``HSPF'') greater than or equal to 8.5 for split
heat pumps, and SEER greater than or equal to 14, EER greater than or
equal to 12, and HSPF greater than or equal to 8.0 for packaged heat
pumps.
\662\ These standards are a SEER greater than or equal to 16 and
EER greater than or equal to 13 for split systems, and SEER greater
than or equal to 14 and EER greater than or equal to 12 for packaged
systems.
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Biomass fuel property is a stove that burns biomass fuel to
heat a dwelling unit located in the United States and used as a
principal residence by the taxpayer, or to heat water for such
dwelling unit, and that has a thermal efficiency rating of at
least 75 percent. Biomass fuel is any plant-derived fuel
available on a renewable or recurring basis, including
agricultural crops and trees, wood and wood waste and residues
(including wood pellets), plants (including aquatic plants),
grasses, residues, and fibers.
The credit is available for property placed in service
prior to January 1, 2015. The maximum credit for a taxpayer for
all taxable years is $500, and no more than $200 of such credit
may be attributable to expenditures on windows.
The taxpayer's basis in the property is reduced by the
amount of the credit. Special proration rules apply in the case
of jointly owned property, condominiums, and tenant-
stockholders in cooperative housing corporations. If less than
80 percent of the property is used for nonbusiness purposes,
only that portion of expenditures that is used for nonbusiness
purposes is taken into account.
For purposes of determining the amount of expenditures made
by any individual with respect to any dwelling unit,
expenditures which are made from subsidized energy financing
are not taken into account. The term ``subsidized energy
financing'' means financing provided under a Federal, State, or
local program a principal purpose of which is to provide
subsidized financing for projects designed to conserve or
produce energy.
Explanation of Provision
The provision extends the credit for two years, through
December 31, 2016. Additionally, the provision modifies the
efficiency standard to require that windows, skylights, and
doors meet Energy Star 6.0 standards.
Effective Date
The provision applies to property placed in service after
December 31, 2014.
The modification to the credit applies to property placed
in service after December 31, 2015.
19. Extension of credit for alternative fuel vehicle refueling property
(sec. 182 of the Act and section 30C of the Code)
Present Law
Taxpayers may claim a 30-percent credit for the cost of
installing qualified clean-fuel vehicle refueling property to
be used in a trade or business of the taxpayer or installed at
the principal residence of the taxpayer.\663\ The credit may
not exceed $30,000 per taxable year per location, in the case
of qualified refueling property used in a trade or business and
$1,000 per taxable year per location, in the case of qualified
refueling property installed on property which is used as a
principal residence.
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\663\ Sec. 30C.
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Qualified refueling property is property (not including a
building or its structural components) for the storage or
dispensing of a clean-burning fuel or electricity into the fuel
tank or battery of a motor vehicle propelled by such fuel or
electricity, but only if the storage or dispensing of the fuel
or electricity is at the point of delivery into the fuel tank
or battery of the motor vehicle. The original use of such
property must begin with the taxpayer.
Clean-burning fuels are any fuel at least 85 percent of the
volume of which consists of ethanol, natural gas, compressed
natural gas, liquefied natural gas, liquefied petroleum gas, or
hydrogen. In addition, any mixture of biodiesel and diesel
fuel, determined without regard to any use of kerosene and
containing at least 20 percent biodiesel, qualifies as a clean
fuel.
Credits for qualified refueling property used in a trade or
business are part of the general business credit and may be
carried back for one year and forward for 20 years. Credits for
residential qualified refueling property cannot exceed for any
taxable year the difference between the taxpayer's regular tax
(reduced by certain other credits) and the taxpayer's tentative
minimum tax. Generally, in the case of qualified refueling
property sold to a tax-exempt entity, the taxpayer selling the
property may claim the credit.
A taxpayer's basis in qualified refueling property is
reduced by the amount of the credit. In addition, no credit is
available for property used outside the United States or for
which an election to expense has been made under section 179.
The credit is available for property placed in service
before January 1, 2015.
Explanation of Provision
The provision extends for two years the 30-percent credit
for alternative fuel refueling property, through December 31,
2016.
Effective Date
The provision applies to property placed in service after
December 31, 2014.
20. Extension of credit for electric motorcycles (sec. 183 of the Act
and sec. 30D of the Code)
Present Law
For vehicles acquired before 2014, a 10-percent credit was
available for qualifying plug-in electric motorcycles and
three-wheeled vehicles.\664\ Qualifying two- or three-wheeled
vehicles needed to have a battery capacity of at least 2.5
kilowatt-hours, be manufactured primarily for use on public
streets, roads, and highways, and be capable of achieving
speeds of at least 45 miles per hours. The maximum credit for
any qualifying vehicle was $2,500.
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\664\ Sec. 30D(g).
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Explanation of Provision
The provision reauthorizes the credit for electric
motorcycles acquired in 2015 and 2016 (but not 2014). The
credit for electric three-wheeled vehicles is not extended.
Effective Date
The provision applies to vehicles acquired after December
31, 2014.
21. Extension of second generation biofuel producer credit (sec. 184 of
the Act and sec. 40(b)(6) of the Code)
Present Law
The second generation biofuel producer credit is a
nonrefundable income tax credit for each gallon of qualified
second generation biofuel fuel production of the producer for
the taxable year. The amount of the credit per gallon is $1.01.
The provision does not apply to qualified second generation
biofuel production after December 31, 2014.
``Qualified second generation biofuel production'' is any
second generation biofuel which is produced by the taxpayer and
which, during the taxable year, is: (1) sold by the taxpayer to
another person (a) for use by such other person in the
production of a qualified second generation biofuel mixture in
such person's trade or business (other than casual off-farm
production), (b) for use by such other person as a fuel in a
trade or business, or (c) who sells such second generation
biofuel at retail to another person and places such cellulosic
biofuel in the fuel tank of such other person; or (2) used by
the producer for any purpose described in (1)(a), (b), or
(c).\665\ Special rules apply for fuel derived from algae.
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\665\ In addition, for fuels derived from algae, cyanobacterial or
lemna, a special rule provides that qualified second generation biofuel
includes fuel that is sold by the taxpayer to another person for
refining by such other person into a fuel that meets the registration
requirements for fuels and fuel additives under section 211 of the
Clean Air Act.
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``Second generation biofuel'' means any liquid fuel that
(1) is produced in the United States and used as fuel in the
United States, (2) is derived by or from qualified feedstocks
and (3) meets the registration requirements for fuels and fuel
additives established by the Environmental Protection Agency
(``EPA'') under section 211 of the Clean Air Act. ``Qualified
feedstock'' means any lignocellulosic or hemicellulosic matter
that is available on a renewable or recurring basis, and any
cultivated algae, cyanobacteria or lemna. Second generation
biofuel does not include fuels that (1) are more than four
percent (determined by weight) water and sediment in any
combination, (2) have an ash content of more than one percent
(determined by weight), or (3) have an acid number greater than
25 (``unprocessed or excluded fuels''). It also does not
include any alcohol with a proof of less than 150.
The second generation biofuel producer credit cannot be
claimed unless the taxpayer is registered by the Internal
Revenue Service (``IRS'') as a producer of second generation
biofuel. Second generation biofuel eligible for the section 40
credit is precluded from qualifying as biodiesel, renewable
diesel, or alternative fuel for purposes of the applicable
income tax credit, excise tax credit, or payment provisions
relating to those fuels.
Because it is a credit under section 40(a), the second
generation biofuel producer credit is part of the general
business credits in section 38. However, the credit can only be
carried forward three taxable years after the termination of
the credit. The credit is also allowable against the
alternative minimum tax. Under section 87, the credit is
included in gross income.
Explanation of Provision
The provision extends the credit two years, through
December 31, 2016.
Effective Date
The provision applies to qualified second generation
biofuel production after December 31, 2014.
22. Extension of biodiesel and renewable diesel incentives (sec. 185 of
the Act and sec. 40A of the Code)
Present Law
Biodiesel
Present law provides an income tax credit for biodiesel
fuels (the ``biodiesel fuels credit''). The biodiesel fuels
credit is the sum of three credits: (1) the biodiesel mixture
credit, (2) the biodiesel credit, and (3) the small agri-
biodiesel producer credit. The biodiesel fuels credit is
treated as a general business credit. The amount of the
biodiesel fuels credit is includible in gross income. The
biodiesel fuels credit is coordinated to take into account
benefits from the biodiesel excise tax credit and payment
provisions discussed below. The credit does not apply to fuel
sold or used after December 31, 2014.
Biodiesel is monoalkyl esters of long chain fatty acids
derived from plant or animal matter that meet (1) the
registration requirements established by the EPA under section
211 of the Clean Air Act (42 U.S.C. sec. 7545) and (2) the
requirements of the American Society of Testing and Materials
(``ASTM'') D6751. Agri-biodiesel is biodiesel derived solely
from virgin oils including oils from corn, soybeans, sunflower
seeds, cottonseeds, canola, crambe, rapeseeds, safflowers,
flaxseeds, rice bran, mustard seeds, camelina, or animal fats.
Biodiesel may be taken into account for purposes of the
credit only if the taxpayer obtains a certification (in such
form and manner as prescribed by the Secretary) from the
producer or importer of the biodiesel that identifies the
product produced and the percentage of biodiesel and agri-
biodiesel in the product.
Biodiesel mixture credit
The biodiesel mixture credit is $1.00 for each gallon of
biodiesel (including agri-biodiesel) used by the taxpayer in
the production of a qualified biodiesel mixture. A qualified
biodiesel mixture is a mixture of biodiesel and diesel fuel
that is (1) sold by the taxpayer producing such mixture to any
person for use as a fuel, or (2) used as a fuel by the taxpayer
producing such mixture. The sale or use must be in the trade or
business of the taxpayer and is to be taken into account for
the taxable year in which such sale or use occurs. No credit is
allowed with respect to any casual off-farm production of a
qualified biodiesel mixture.
Per IRS guidance a mixture need only contain 1/10th of one
percent of diesel fuel to be a qualified mixture. Thus, a
qualified biodiesel mixture can contain 99.9 percent biodiesel
and 0.1 percent diesel fuel.
Biodiesel credit (B-100)
The biodiesel credit is $1.00 for each gallon of biodiesel
that is not in a mixture with diesel fuel (100 percent
biodiesel or B-100) and which during the taxable year is (1)
used by the taxpayer as a fuel in a trade or business or (2)
sold by the taxpayer at retail to a person and placed in the
fuel tank of such person's vehicle.
Small agri-biodiesel producer credit
The Code provides a small agri-biodiesel producer income
tax credit, in addition to the biodiesel and biodiesel mixture
credits. The credit is 10 cents per gallon for up to 15 million
gallons of agri-biodiesel produced by small producers, defined
generally as persons whose agri-biodiesel production capacity
does not exceed 60 million gallons per year. The agri-biodiesel
must (1) be sold by such producer to another person (a) for use
by such other person in the production of a qualified biodiesel
mixture in such person's trade or business (other than casual
off-farm production), (b) for use by such other person as a
fuel in a trade or business, or, (c) who sells such agri-
biodiesel at retail to another person and places such agri-
biodiesel in the fuel tank of such other person; or (2) used by
the producer for any purpose described in (a), (b), or (c).
Biodiesel mixture excise tax credit
The Code also provides an excise tax credit for biodiesel
mixtures. The credit is $1.00 for each gallon of biodiesel used
by the taxpayer in producing a biodiesel mixture for sale or
use in a trade or business of the taxpayer. A biodiesel mixture
is a mixture of biodiesel and diesel fuel that (1) is sold by
the taxpayer producing such mixture to any person for use as a
fuel or (2) is used as a fuel by the taxpayer producing such
mixture. No credit is allowed unless the taxpayer obtains a
certification (in such form and manner as prescribed by the
Secretary) from the producer of the biodiesel that identifies
the product produced and the percentage of biodiesel and agri-
biodiesel in the product.
The credit is not available for any sale or use for any
period after December 31, 2014. This excise tax credit is
coordinated with the income tax credit for biodiesel such that
credit for the same biodiesel cannot be claimed for both income
and excise tax purposes.
Payments with respect to biodiesel fuel mixtures
If any person produces a biodiesel fuel mixture in such
person's trade or business, the Secretary is to pay such person
an amount equal to the biodiesel mixture credit. The biodiesel
fuel mixture credit must first be taken against tax liability
for taxable fuels. To the extent the biodiesel fuel mixture
credit exceeds such tax liability, the excess may be received
as a payment. Thus, if the person has no section 4081
liability, the credit is refundable. The Secretary is not
required to make payments with respect to biodiesel fuel
mixtures sold or used after December 31, 2014.
Renewable diesel
Renewable diesel is liquid fuel that (1) is derived from
biomass (as defined in section 45K(c)(3)), (2) meets the
registration requirements for fuels and fuel additives
established by the EPA under section 211 of the Clean Air Act,
and (3) meets the requirements of the ASTM D975 or D396, or
equivalent standard established by the Secretary. ASTM D975
provides standards for diesel fuel suitable for use in diesel
engines. ASTM D396 provides standards for fuel oil intended for
use in fuel-oil burning equipment, such as furnaces. Renewable
diesel also includes fuel derived from biomass that meets the
requirements of a Department of Defense specification for
military jet fuel or an ASTM specification for aviation turbine
fuel.
For purposes of the Code, renewable diesel is generally
treated the same as biodiesel. In the case of renewable diesel
that is aviation fuel, kerosene is treated as though it were
diesel fuel for purposes of a qualified renewable diesel
mixture. Like biodiesel, the incentive may be taken as an
income tax credit, an excise tax credit, or as a payment from
the Secretary. The incentive for renewable diesel is $1.00 per
gallon. There is no small producer credit for renewable diesel.
The incentives for renewable diesel expired after December 31,
2014.
Explanation of Provision
The provision extends the present law income tax credit,
excise tax credit and payment provisions for biodiesel and
renewable diesel through December 31, 2016. As it relates to
fuel sold or used in 2015, the provision creates a special rule
to address claims regarding excise tax credits and claims for
payment for the period beginning on January 1, 2015 and ending
on December 31, 2015. In particular the provision directs the
Secretary to issue guidance within 30 days of the date of
enactment. Such guidance is to provide for a one-time
submission of claims covering periods occurring during 2015.
The guidance is to provide for a 180-day period for the
submission of such claims (in such manner as prescribed by the
Secretary) to begin no later than 30 days after such guidance
is issued. Such claims shall be paid by the Secretary of the
Treasury not later than 60 days after receipt. If the claim is
not paid within 60 days of the date of the filing, the claim
shall be paid with interest from such date determined by using
the overpayment rate and method under section 6621 of the Code.
Effective Date
The extension of present law applies to fuel sold or used
after December 31, 2014.
23. Extension of credit for the production of Indian coal facilities
(sec. 186 of the Act and sec. 45 of the Code)
Present Law
A credit is available for the production of Indian coal
sold to an unrelated third party from a qualified facility for
a nine-year period beginning January 1, 2006, and ending
December 31, 2014. The amount of the credit is $2.00 per ton
(adjusted for inflation; $2.317 for 2014). A qualified Indian
coal facility is a facility placed in service before January 1,
2009, that produces coal from reserves that on June 14, 2005,
were owned by a Federally recognized tribe of Indians or were
held in trust by the United States for a tribe or its members.
The credit is a component of the general business
credit,\666\ allowing excess credits to be carried back one
year and forward up to 20 years. The credit is not permitted
against the alternative minimum tax.
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\666\ Sec. 38(b)(8).
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Explanation of Provision
The provision extends the credit for the production of
Indian coal for two years (through December 31, 2016). The
provision also removes the placed-in-service limitation for
Indian coal facilities (thus permitting facilities placed in
service after December 31, 2008, to qualify). The provision
also modifies the third party sale requirement to permit
related party sales to qualify so long as the Indian coal is
subsequently sold to an unrelated third person. Finally, the
provision exempts the Indian coal credit from the alternative
minimum tax.
Effective Date
The extension of the credit applies to Indian coal produced
after December 31, 2014.
The removal of the placed-in-service limitation and the
modification to the third party sale requirement apply to coal
produced and sold after December 31, 2015.
The provision exempting the credit from the alternative
minimum tax applies to credits determined for taxable years
beginning after December 31, 2015.
24. Extension of credits with respect to facilities producing energy
from certain renewable resources (sec. 187 of the Act and secs.
45 and 48 of the Code)
Present Law
Renewable electricity production credit
An income tax credit is allowed for the production of
electricity from qualified energy resources at qualified
facilities (the ``renewable electricity production
credit'').\667\ Qualified energy resources comprise wind,
closed-loop biomass, open-loop biomass, geothermal energy,
municipal solid waste, qualified hydropower production, and
marine and hydrokinetic renewable energy. Qualified facilities
are, generally, facilities that generate electricity using
qualified energy resources. To be eligible for the credit,
electricity produced from qualified energy resources at
qualified facilities must be sold by the taxpayer to an
unrelated person.
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\667\ Sec. 45. In addition to the renewable electricity production
credit, section 45 also provides income tax credits for the production
of Indian coal and refined coal at qualified facilities.
SUMMARY OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE
RESOURCES
------------------------------------------------------------------------
Credit amount for
Eligible electricity production 2015 \1\ (cents Expiration \2\
activity (sec. 45) per kilowatt-hour)
------------------------------------------------------------------------
Wind........................... 2.3 December 31, 2014
Closed-loop biomass............ 2.3 December 31, 2014
Open-loop biomass (including 1.2 December 31, 2014
agricultural livestock waste
nutrient facilities).
Geothermal..................... 2.3 December 31, 2014
Municipal solid waste 1.2 December 31, 2014
(including landfill
gasfacilities and trash
combustion facilities).
Qualified hydropower........... 1.2 December 31, 2014
Marine and hydrokinetic........ 1.2 December 31, 2014
------------------------------------------------------------------------
\1\ In general, the credit is available for electricity produced during
the first 10 years after a facility has been placed in service.
\2\ Expires for property the construction of which begins after this
date.
Election to claim energy credit in lieu of renewable electricity
production credit
A taxpayer may make an irrevocable election to have certain
property which is part of a qualified renewable electricity
production facility be treated as energy property eligible for
a 30 percent investment credit under section 48. For this
purpose, qualified facilities are facilities otherwise eligible
for the renewable electricity production credit with respect to
which no credit under section 45 has been allowed. A taxpayer
electing to treat a facility as energy property may not claim
the renewable electricity production credit. The eligible basis
for the investment credit for taxpayers making this election is
the basis of the depreciable (or amortizable) property that is
part of a facility capable of generating electricity eligible
for the renewable electricity production credit.
Explanation of Provision
Except for wind facilities, the provision extends for two
years the renewable electricity production credit and the
election to claim the energy credit in lieu of the electricity
production credit (through December 31, 2016).
Effective Date
The provision is effective on January 1, 2015.
25. Extension of credit for energy-efficient new homes (sec. 188 of the
Act and sec. 45L of the Code)
Present Law
Present law provides a credit to an eligible contractor for
each qualified new energy-efficient home that is constructed by
the eligible contractor and acquired by a person from such
eligible contractor for use as a residence during the taxable
year. To qualify as a new energy-efficient home, the home must
be: (1) a dwelling located in the United States, (2)
substantially completed after August 8, 2005, and (3) certified
in accordance with guidance prescribed by the Secretary to have
a projected level of annual heating and cooling energy
consumption that meets the standards for either a 30-percent or
50-percent reduction in energy usage, compared to a comparable
dwelling constructed in accordance with the standards of
chapter 4 of the 2006 International Energy Conservation Code as
in effect (including supplements) on January 1, 2006, and any
applicable Federal minimum efficiency standards for equipment.
With respect to homes that meet the 30-percent standard, one-
third of such 30-percent savings must come from the building
envelope, and with respect to homes that meet the 50-percent
standard, one-fifth of such 50-percent savings must come from
the building envelope.
Manufactured homes that conform to Federal manufactured
home construction and safety standards are eligible for the
credit provided all the criteria for the credit are met. The
eligible contractor is the person who constructed the home, or
in the case of a manufactured home, the producer of such home.
The credit equals $1,000 in the case of a new home that
meets the 30-percent standard and $2,000 in the case of a new
home that meets the 50-percent standard. Only manufactured
homes are eligible for the $1,000 credit.
In lieu of meeting the standards of chapter 4 of the 2006
International Energy Conservation Code, manufactured homes
certified by a method prescribed by the Administrator of the
Environmental Protection Agency under the Energy Star Labeled
Homes program are eligible for the $1,000 credit provided
criteria (1) and (2), above, are met.
The credit applies to homes that are purchased prior to
January 1, 2015. The credit is part of the general business
credit.
Explanation of Provision
The provision extends the credit to homes that are acquired
prior to January 1, 2017.
Effective Date
The provision applies to homes acquired after December 31,
2014.
26. Extension of special allowance for second generation biofuel plant
property (sec. 189 of the Act and sec. 168(l) of the Code)
Present Law
Present law \668\ allows an additional first-year
depreciation deduction equal to 50 percent of the adjusted
basis of qualified second generation biofuel plant property. In
order to qualify, the property generally must be placed in
service before January 1, 2015.\669\
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\668\ Sec. 168(l).
\669\ Sec. 168(l)(2)(D).
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Qualified second generation biofuel plant property means
depreciable property used in the U.S. solely to produce any
liquid fuel that (1) is derived from qualified feedstocks, and
(2) meets the registration requirements for fuels and fuel
additives established by the Environmental Protection Agency
(``EPA'') under section 211 of the Clean Air Act.\670\
Qualified feedstocks means any lignocellulosic or
hemicellulosic matter that is available on a renewable or
recurring basis \671\ and any cultivated algae, cyanobacteria,
or lemna.\672\ Second generation biofuel does not include any
alcohol with a proof of less than 150 or certain unprocessed
fuel.\673\ Unprocessed fuels are fuels that (1) are more than
four percent (determined by weight) water and sediment in any
combination, (2) have an ash content of more than one percent
(determined by weight), or (3) have an acid number greater than
25.\674\
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\670\ Secs. 168(l)(2)(A) and 40(b)(6)(E).
\671\ For example, lignocellulosic or hemicellulosic matter that is
available on a renewable or recurring basis includes bagasse (from
sugar cane), corn stalks, and switchgrass.
\672\ Sec. 40(b)(6)(F).
\673\ Sec. 40(b)(6)(E)(ii) and (iii).
\674\ Sec. 40(b)(6)(E)(iii).
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The additional first-year depreciation deduction is allowed
for both regular tax and alternative minimum tax purposes for
the taxable year in which the property is placed in
service.\675\ The additional first-year depreciation deduction
is subject to the general rules regarding whether an item is
subject to capitalization under section 263A. The basis of the
property and the depreciation allowances in the year of
purchase and later years are appropriately adjusted to reflect
the additional first-year depreciation deduction.\676\ In
addition, there is no adjustment to the allowable amount of
depreciation for purposes of computing a taxpayer's alternative
minimum taxable income with respect to property to which the
provision applies.\677\ A taxpayer is allowed to elect out of
the additional first-year depreciation for any class of
property for any taxable year.\678\
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\675\ Sec. 168(l)(5).
\676\ Sec. 168(l)(1)(B).
\677\ Sec. 168(l)(5) and (k)(2)(G).
\678\ Sec. 168(l)(3)(D).
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In order for property to qualify for the additional first-
year depreciation deduction, it must meet the following
requirements: (1) the original use of the property must
commence with the taxpayer; and (2) the property must be (i)
acquired by purchase (as defined under section 179(d)) by the
taxpayer, and (ii) placed in service before January 1,
2015.\679\ Property that is manufactured, constructed, or
produced by the taxpayer for use by the taxpayer qualifies if
the taxpayer begins the manufacture, construction, or
production of the property before January 1, 2015 (and all
other requirements are met).\680\ Property that is
manufactured, constructed, or produced for the taxpayer by
another person under a contract that is entered into prior to
the manufacture, construction, or production of the property is
considered to be manufactured, constructed, or produced by the
taxpayer.
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\679\ Sec. 168(l)(2). Requirements relating to actions taken before
2007 are not described herein since they have little (if any) remaining
effect.
\680\ Sec. 168(l)(4) and (k)(2)(E).
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Property any portion of which is financed with the proceeds
of a tax-exempt obligation under section 103 is not eligible
for the additional first-year depreciation deduction.\681\
Recapture rules apply if the property ceases to be qualified
second generation biofuel plant property.\682\
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\681\ Sec. 168(l)(3)(C).
\682\ Sec. 168(l)(6).
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Property with respect to which the taxpayer has elected 50
percent expensing under section 179C is not eligible for the
additional first-year depreciation deduction.\683\
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\683\ Sec. 168(l)(7).
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Explanation of Provision
The provision extends the present law special depreciation
allowance for two years, to qualified second generation biofuel
plant property placed in service prior to January 1, 2017.
Effective Date
The provision applies to property placed in service after
December 31, 2014.
27. Extension of energy efficient commercial buildings deduction (sec.
190 of the Act and sec. 179D of the Code)
Present Law
In general
Code section 179D provides an election under which a
taxpayer may take an immediate deduction equal to energy-
efficient commercial building property expenditures made by the
taxpayer. Energy-efficient commercial building property is
defined as property (1) which is installed on or in any
building located in the United States that is within the scope
of Standard 90.1-2001 of the American Society of Heating,
Refrigerating, and Air Conditioning Engineers and the
Illuminating Engineering Society of North America (``ASHRAE/
IESNA''), (2) which is installed as part of (i) the interior
lighting systems, (ii) the heating, cooling, ventilation, and
hot water systems, or (iii) the building envelope, and (3)
which is certified as being installed as part of a plan
designed to reduce the total annual energy and power costs with
respect to the interior lighting systems, heating, cooling,
ventilation, and hot water systems of the building by 50
percent or more in comparison to a reference building which
meets the minimum requirements of Standard 90.1-2001 (as in
effect on April 2, 2003). The deduction is limited to an amount
equal to $1.80 per square foot of the property for which such
expenditures are made. The deduction is allowed in the year in
which the property is placed in service.
Certain certification requirements must be met in order to
qualify for the deduction. The Secretary, in consultation with
the Secretary of Energy, will promulgate regulations that
describe methods of calculating and verifying energy and power
costs using qualified computer software based on the provisions
of the 2005 California Nonresidential Alternative Calculation
Method Approval Manual or, in the case of residential property,
the 2005 California Residential Alternative Calculation Method
Approval Manual.
The Secretary is granted authority to prescribe procedures
for the inspection and testing for compliance of buildings that
are comparable, given the difference between commercial and
residential buildings, to the requirements in the Mortgage
Industry National Accreditation Procedures for Home Energy
Rating Systems.\684\ Individuals qualified to determine
compliance shall only be those recognized by one or more
organizations certified by the Secretary for such purposes.
---------------------------------------------------------------------------
\684\ See IRS Notice 2006-52, 2006-1 C.B. 1175, June 2, 2006; IRS
2008-40, 2008-14 I.R.B. 725 March 11, 2008.
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For energy-efficient commercial building property
expenditures made by a public entity, such as public schools,
the deduction may be allocated to the person primarily
responsible for designing the property in lieu of the public
entity.
If a deduction is allowed under this section, the basis of
the property is reduced by the amount of the deduction.
The deduction applies to property placed in service prior
to January 1, 2015.
Partial allowance of deduction
System-specific deductions
In the case of a building that does not meet the overall
building requirement of 50-percent energy savings, a partial
deduction is allowed with respect to each separate building
system that comprises energy efficient property and which is
certified by a qualified professional as meeting or exceeding
the applicable system-specific savings targets established by
the Secretary. The applicable system-specific savings targets
to be established by the Secretary are those that would result
in a total annual energy savings with respect to the whole
building of 50 percent, if each of the separate systems met the
system specific target. The separate building systems are (1)
the interior lighting system, (2) the heating, cooling,
ventilation and hot water systems, and (3) the building
envelope. The maximum allowable deduction is $0.60 per square
foot for each separate system.
Interim rules for lighting systems
In general, in the case of system-specific partial
deductions, no deduction is allowed until the Secretary
establishes system-specific targets.\685\ However, in the case
of lighting system retrofits, until such time as the Secretary
issues final regulations, the system-specific energy savings
target for the lighting system is deemed to be met by a
reduction in lighting power density of 40 percent (50 percent
in the case of a warehouse) of the minimum requirements in
Table 9.3.1.1 or Table 9.3.1.2 of ASHRAE/IESNA Standard 90.1-
2001. Also, in the case of a lighting system that reduces
lighting power density by 25 percent, a partial deduction of 30
cents per square foot is allowed. A pro-rated partial deduction
is allowed in the case of a lighting system that reduces
lighting power density between 25 percent and 40 percent.
Certain lighting level and lighting control requirements must
also be met in order to qualify for the partial lighting
deductions under the interim rule.
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\685\ IRS Notice 2008-40, Supra, set a target of a 10-percent
reduction in total energy and power costs with respect to the building
envelope, and 20 percent each with respect to the interior lighting
system and the heating, cooling, ventilation and hot water systems. IRS
Notice 2012-26 (2012-17 I.R.B. 847 April 23, 2012) established new
targets of 10-percent reduction in total energy and power costs with
respect to the building envelope, 25 percent with respect to the
interior lighting system and 15 percent with respect to the heating,
cooling, ventilation and hot water systems, effective beginning March
12, 2012. The targets from Notice 2008-40 may be used until December
31, 2013, but the targets of Notice 2012-26 apply thereafter.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the deduction for two years, through
December 31, 2016.
Effective Date
The provision applies to property placed in service after
December 31, 2014.
28. Extension of special rule for sales or dispositions to implement
FERC or State electric restructuring policy for qualified
electric utilities (sec. 191 of the Act and sec. 451(i) of the
Code)
Present Law
A taxpayer selling property generally realizes gain to the
extent the sales price (and any other consideration received)
exceeds the taxpayer's basis in the property.\686\ The realized
gain is subject to current income tax \687\ unless the
recognition of the gain is deferred or excluded from income
under a special tax provision.\688\
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\686\ See sec. 1001.
\687\ See secs. 61 and 451.
\688\ See, e.g., secs. 453, 1031 and 1033.
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One such special tax provision permits taxpayers to elect
to recognize gain from qualifying electric transmission
transactions ratably over an eight-year period beginning in the
year of sale if the amount realized from such sale is used to
purchase exempt utility property within the applicable period
\689\ (the ``reinvestment property'').\690\ If the amount
realized exceeds the amount used to purchase reinvestment
property, any realized gain is recognized to the extent of such
excess in the year of the qualifying electric transmission
transaction.
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\689\ The applicable period for a taxpayer to reinvest the proceeds
is four years after the close of the taxable year in which the
qualifying electric transmission transaction occurs.
\690\ Sec. 451(i).
---------------------------------------------------------------------------
A qualifying electric transmission transaction is the sale
or other disposition of property used by a qualified electric
utility to an independent transmission company prior to January
1, 2015.\691\ A qualified electric utility is defined as an
electric utility, which as of the date of the qualifying
electric transmission transaction, is vertically integrated in
that it is both (1) a transmitting utility (as defined in the
Federal Power Act \692\) with respect to the transmission
facilities to which the election applies, and (2) an electric
utility (as defined in the Federal Power Act \693\).\694\
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\691\ Sec. 451(i)(3).
\692\ Sec. 3(23), 16 U.S.C. sec. 796, defines ``transmitting
utility'' as any electric utility, qualifying cogeneration facility,
qualifying small power production facility, or Federal power marketing
agency that owns or operates electric power transmission facilities
that are used for the sale of electric energy at wholesale.
\693\ Sec. 3(22), 16 U.S.C. sec. 796, defines ``electric utility''
as any person or State agency (including any municipality) that sells
electric energy; such term includes the Tennessee Valley Authority, but
does not include any Federal power marketing agency.
\694\ Sec. 451(i)(6).
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In general, an independent transmission company is defined
as: (1) an independent transmission provider \695\ approved by
the Federal Energy Regulatory Commission (``FERC''); (2) a
person (i) who the FERC determines under section 203 of the
Federal Power Act \696\ (or by declaratory order) is not a
``market participant'' and (ii) whose transmission facilities
are placed under the operational control of a FERC-approved
independent transmission provider no later than four years
after the close of the taxable year in which the transaction
occurs; or (3) in the case of facilities subject to the
jurisdiction of the Public Utility Commission of Texas, (i) a
person which is approved by that Commission as consistent with
Texas State law regarding an independent transmission
organization, or (ii) a political subdivision, or affiliate
thereof, whose transmission facilities are under the
operational control of an organization described in (i).\697\
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\695\ For example, a regional transmission organization, an
independent system operator, or an independent transmission company.
\696\ 16 U.S.C. sec. 824b.
\697\ Sec. 451(i)(4).
---------------------------------------------------------------------------
Exempt utility property is defined as: (1) property used in
the trade or business of (i) generating, transmitting,
distributing, or selling electricity or (ii) producing,
transmitting, distributing, or selling natural gas; or (2)
stock in a controlled corporation whose principal trade or
business consists of the activities described in (1).\698\
Exempt utility property does not include any property that is
located outside of the United States.\699\
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\698\ Sec. 451(i)(5).
\699\ Sec. 451(i)(5)(C).
---------------------------------------------------------------------------
If a taxpayer is a member of an affiliated group of
corporations filing a consolidated return, the reinvestment
property may be purchased by any member of the affiliated group
(in lieu of the taxpayer).\700\
---------------------------------------------------------------------------
\700\ Sec. 451(i)(7).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends for two years the treatment under the
present-law deferral provision to sales or dispositions by a
qualified electric utility that occur prior to January 1, 2017.
Effective Date
The provision applies to dispositions after December 31,
2014.
29. Extension of excise tax credits and payment provisions relating to
alternative fuel (sec. 192 of the Act and secs. 6426 and 6427
of the Code)
Present Law
Alternative fuel and alternative fuel mixture credits and payments
The Code provides two per-gallon excise tax credits with
respect to alternative fuel: the alternative fuel credit, and
the alternative fuel mixture credit. For this purpose, the term
alternative fuel means liquefied petroleum gas, P Series fuels
(as defined by the Secretary of Energy under 42 U.S.C. sec.
13211(2)), compressed or liquefied natural gas, liquefied
hydrogen, liquid fuel derived from coal through the Fischer-
Tropsch process (coal-to-liquids), compressed or liquefied gas
derived from biomass, or liquid fuel derived from biomass. Such
term does not include ethanol, methanol, or biodiesel.
For coal-to-liquids produced after December 30, 2009, the
fuel must be certified as having been derived from coal
produced at a gasification facility that separates and
sequesters 75 percent of such facility's total carbon dioxide
emissions.
The alternative fuel credit is allowed against section 4041
liability, and the alternative fuel mixture credit is allowed
against section 4081 liability. Neither credit is allowed
unless the taxpayer is registered with the Secretary. The
alternative fuel credit is 50 cents per gallon of alternative
fuel or gasoline gallon equivalents \701\ of nonliquid
alternative fuel sold by the taxpayer for use as a motor fuel
in a motor vehicle or motorboat, sold for use in aviation or so
used by the taxpayer.
---------------------------------------------------------------------------
\701\ ``Gasoline gallon equivalent'' means, with respect to any
nonliquid alternative fuel (for example, compressed natural gas), the
amount of such fuel having a Btu (British thermal unit) content of
124,800 (higher heating value).
---------------------------------------------------------------------------
The alternative fuel mixture credit is 50 cents per gallon
of alternative fuel used in producing an alternative fuel
mixture for sale or use in a trade or business of the taxpayer.
An alternative fuel mixture is a mixture of alternative fuel
and taxable fuel (gasoline, diesel fuel or kerosene) that
contains at least 1/10 of one percent taxable fuel. The mixture
must be sold by the taxpayer producing such mixture to any
person for use as a fuel, or used by the taxpayer producing the
mixture as a fuel. The credits expired after December 31, 2014.
A person may file a claim for payment equal to the amount
of the alternative fuel credit (but not the alternative fuel
mixture credit). The alternative fuel credit must first be
applied to the applicable excise tax liability under section
4041 or 4081, and any excess credit may be taken as a payment.
These payment provisions generally also expire after December
31, 2014.
For purposes of the alternative fuel credit, alternative
fuel mixture credit and related payment provisions, alternative
fuel does not include fuel (including lignin, wood residues, or
spent pulping liquors) derived from the production of paper or
pulp.
Explanation of Provision
The provision extends the alternative fuel credit and
related payment provisions, and the alternative fuel mixture
credit through December 31, 2016.\702\
---------------------------------------------------------------------------
\702\ See section 342 of the Act with respect to additional
provisions related to liquefied petroleum gas and liquefied natural
gas.
---------------------------------------------------------------------------
In light of the retroactive nature of the provision, as it
relates to alternative fuel sold or used in 2015, the provision
creates a special rule to address claims regarding excise
credits and claims for payment for the period beginning January
1, 2015 and ending on December 31, 2015. In particular, the
provision directs the Secretary to issue guidance within 30
days of the date of enactment. Such guidance is to provide for
a one-time submission of claims covering periods occurring
during 2015. The guidance is to provide for a 180-day period
for the submission of such claims (in such manner as prescribed
by the Secretary) to begin no later than 30 days after such
guidance is issued.\703\ Such claims shall be paid by the
Secretary of the Treasury not later than 60 days after receipt.
If the claim is not paid within 60 days of the date of the
filing, the claim shall be paid with interest from such date
determined by using the overpayment rate and method under
section 6621 of such Code.
---------------------------------------------------------------------------
\703\ This guidance is provided by Notice 2015-3, 2015-6 I.R.B 583.
---------------------------------------------------------------------------
Effective Date
The provision generally applies to fuel sold or used after
December 31, 2014.
30. Extension of credit for fuel cell vehicles (sec. 193 of the Act and
sec. 30B of the Code)
Present Law
A credit is available through 2014 for vehicles propelled
by chemically combining oxygen with hydrogen and creating
electricity (fuel cell vehicles). The base credit is $4,000 for
vehicles weighing 8,500 pounds or less. Heavier vehicles can
get up to a $40,000 credit, depending on their weight. An
additional $1,000 to $4,000 credit is available to cars and
light trucks to the extent their fuel economy exceeds the 2002
base fuel economy set forth in the Code.
Explanation of Provision
The provision extends the credit for fuel cell vehicles for
two years, through December 31, 2016.
Effective Date
The provision applies to property purchased after December
31, 2014.
TITLE II--PROGRAM INTEGRITY
1. Modification of filing dates of returns and statements relating to
employee wage information and nonemployee compensation to
improve compliance (sec. 201 of the Act and secs. 6071 and 6402
of the Code)
Present Law
Information returns concerning certain payments
Present law requires persons to file an information return
concerning certain transactions with other persons.\704\ These
returns are intended to assist taxpayers in preparing their
income tax returns and to help the IRS determine whether such
income tax returns are correct and complete.
---------------------------------------------------------------------------
\704\ Secs. 6041-6050W.
---------------------------------------------------------------------------
One of the primary provisions requires every person engaged
in a trade or business who makes payments aggregating $600 or
more in any taxable year to a single payee in the course of the
payor's trade or business to file a return reporting these
payments.\705\ Payments subject to this reporting requirement
include fixed or determinable income or compensation, but do
not include payments for goods or certain enumerated types of
payments that are subject to other specific reporting
requirements. Other reporting requirements are provided for
various types of investment income, including interest,
dividends, and gross proceeds from brokered transactions (such
as a sale of stock) paid to U.S. persons.\706\
---------------------------------------------------------------------------
\705\ Sec. 6041(a). The information return generally is submitted
electronically as a Form 1099 (e.g., Form 1099-MISC, Miscellaneous
Income) or Form 1096, Annual Summary and Transmittal of U.S.
Information Returns, although certain payments to beneficiaries or
employees may require use of Forms W-3 or W-2, respectively. Treas.
Reg. sec. 1.6041-1(a)(2).
\706\ Secs. 6042 dividends), 6045 (broker reporting) and 6049
(interest) and the Treasury regulations thereunder.
---------------------------------------------------------------------------
The person filing an information return with respect to
payments described above is required to provide the recipient
of the payment with a written payee statement showing the
aggregate payments made and contact information for the
payor.\707\ The statement must be supplied to payees by the
payors by January 31 of the following calendar year.\708\
Payors generally must file the information return with the IRS
by February 28 of the year following the calendar year for
which the return must be filed.\709\ However, the due date for
most information returns that are filed electronically is March
31.\710\
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\707\ Sec. 6041(d).
\708\ Sec. 6041(d).
\709\ Treas. Reg. sec. 31.6071(a)-1(a)(3)(i).
\710\ Sections 6011(e) and 6071(b) apply to ``returns made under
subparts B and C of part III of this subchapter''; Treas. Reg. sec.
301.6011-2(b) mandates use of magnetic media by persons filing
information returns identified in the regulation or subsequent or
contemporaneous revenue procedures and permits use of magnetic media
for all others.
---------------------------------------------------------------------------
Information returns regarding wages paid employees
Payors must report wage amounts paid to employees on
information returns and provide the employee with an annual
statement showing the aggregate wages paid, taxes withheld, and
contact information for the payor by January 31 of the
following calendar year, using Form W-2, Wage and Tax
Statement.\711\ For wages paid to employees, and taxes withheld
from employee wages, the payors must file an information return
with the Social Security Administration (``SSA'') on or before
the last day of February of the year following the calendar
year for which the return must be filed, using Form W-3,
Transmittal of Wage and Tax Statements.\712\ The due date for
these information returns that are filed electronically is
March 31.
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\711\ Sec. 6051(a).
\712\ Treas. Reg. sec. 31.6051-2; IRS, ``Filing Information Returns
Electronically,'' Pub. 3609 (Rev. 12-2011); Treas. Reg. sec.
31.6071(a)-1(a)(3)(i).
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Under the combined annual wage reporting (``CAWR'') system,
the SSA and the IRS have an agreement, in the form of a
Memorandum of Understanding, to share wage data and to resolve,
or reconcile, the differences in the wages reported to them.
Employers submit Forms W-2, (listing Social Security wages
earned by individual employees), and W-3, (providing an
aggregate summary of wages paid and taxes withheld) directly to
SSA.\713\ After it records the wage information from Forms W-2
and W-3 in its individual Social Security wage account records,
SSA forwards the information to IRS.\714\
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\713\ Pub. L. No. 94-202, sec. 232, 89 Stat. 1135 (1976) (effective
with respect to statements reporting income received after 1977).
\714\ Employers submit quarterly reports to IRS on Form 941,
Employer's Quarterly Federal Tax Return, regarding aggregate quarterly
totals of wages paid and taxes due. IRS then compares the W-3 wage
totals to the Form 941 wage totals.
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Rules relating to refunds and certain refundable credits
A refund is due to a taxpayer with respect to a taxable
year if the taxpayer has made an overpayment of Federal income
taxes,\715\ to the extent that such overpayment is not required
to be applied to offset other liabilities.\716\
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\715\ Sec. 6402(a).
\716\ Such liabilities include past-due support payments (sec.
6402(c)), debts owed to other Federal agencies (sec. 6402(d)), certain
State income tax debts (sec. 6402(e)), or unemployment compensation
debts (sec. 6402(f)).
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An individual may reduce his or her tax liability by any
available tax credits. In some instances, a permissible credit
is ``refundable,'' i.e., it may result in a refund in excess of
any credits for withheld taxes or estimated tax payments
available to the individual. Two such credits are the child tax
credit and the earned income tax credit (``EITC'').
An individual may claim a tax credit for each qualifying
child under the age of 17. The amount of the credit per child
is $1,000. The aggregate amount of child credits that may be
claimed is phased out for individuals with income over certain
threshold amounts. Specifically, the otherwise allowable child
tax credit is reduced by $50 for each $1,000 (or fraction
thereof) of modified adjusted gross income over $75,000 for
single individuals or heads of households, $110,000 for married
individuals filing joint returns, and $55,000 for married
individuals filing separate returns. To the extent the child
credit exceeds the taxpayer's tax liability, the taxpayer is
eligible for a refundable credit \717\ (the additional child
tax credit) equal to 15 percent of earned income in excess of
$3,000.\718\
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\717\ The refundable credit may not exceed the maximum credit per
child of $1,000.
\718\ Families with three or more children may determine the
additional child tax credit using an alternative formula, if this
results in a larger credit than determined under the earned income
formula. Under the alternative formula, the additional child tax credit
equals the amount by which the taxpayer's social security taxes exceed
the taxpayer's EITC.
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The EITC is available to low-income workers who satisfy
certain requirements. The amount of the EITC varies depending
upon the taxpayer's earned income and whether the taxpayer has
one, two, more than two, or no qualifying children. In 2015,
the maximum EITC is $6,242 for taxpayers with more than two
qualifying children, $5,548 for taxpayers with two qualifying
children, $3,359 for taxpayers with one qualifying child, and
$503 for taxpayers with no qualifying children. The credit
amount begins to phaseout at an income level of $23,630 for
joint-filers with children, $18,110 for other taxpayers with
children, $13,750 for joint-filers with no children and $8,240
for other taxpayers with no qualifying children. The phaseout
percentages are 15.98 for taxpayers with one qualifying child,
21.06 for two or more qualifying children and 7.65 for no
qualifying children.
For purposes of computing a taxpayer's overpayment of tax,
the amount of refundable credits in excess of income tax
liability is considered to be an overpayment of tax.\719\ Thus,
the Internal Revenue Service pays the value of these credits,
to the extent they are in excess of a taxpayer's income tax
liability, and not applied to offset other liabilities, to the
taxpayer as a refund of tax.
---------------------------------------------------------------------------
\719\ Sec. 6401(b).
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At the time that the taxpayer files a return claiming a
refundable credit, the Internal Revenue Service is generally
not in possession of information needed to confirm the
taxpayer's eligibility for such credit, even though payors must
report wage amounts paid to employees on information returns
and provide the employee with an annual statement showing the
aggregate payments made and contact information for the payor
by January 31 of the following calendar year.\720\
---------------------------------------------------------------------------
\720\ Sec. 6051(a).
---------------------------------------------------------------------------
Explanation of Provision
The provision requires that certain information returns be
filed by January 31, generally the same date as the due date
for employee and payee statements, and that such returns are no
longer eligible for the extended filing date for electronically
filed returns under section 6071(b). Specifically, the
provision accelerates the filing of information on wages
reportable on Form W-2 and nonemployee compensation. The due
date for employee and payee statements remains the same.
Nonemployee compensation generally includes fees for
professional services, commissions, awards, travel expense
reimbursements, or other forms of payments for services
performed for the payor's trade or business by someone other
than in the capacity of an employee.
Additionally, the provision requires that no credit or
refund for an overpayment for a taxable year shall be made to a
taxpayer before the 15th day of the second month following the
close of that taxable year, if the taxpayer claimed the EITC or
additional child tax credit on the tax return. Individual
taxpayers are generally calendar year taxpayers, thus, for most
taxpayers who claim the EITC or additional child tax credit
this rule would apply such that a refund of tax would not be
made to such taxpayer prior to February 15th of the year
following the calendar year to which the taxes relate.
Effective Date
The provision is effective for returns and statements
relating to calendar years beginning after the date of
enactment (December 18, 2015). The provision pertaining to the
payment of certain refunds shall apply to credits or refunds
made after December 31, 2016.
2. Safe harbor for de minimis errors on information returns, payee
statements, and withholding (sec. 202 of the Act and secs. 6721
and 6722 of the Code)
Present Law
Failure to comply with the information reporting
requirements results in penalties, which may include a penalty
for failure to file the information return,\721\ to furnish
payee statements,\722\ or to comply with other various
reporting requirements.\723\ No penalty is imposed if the
failure is due to reasonable cause.\724\
---------------------------------------------------------------------------
\721\ Sec. 6721.
\722\ Sec. 6722.
\723\ Sec. 6723. The penalty for failure to comply timely with a
specified information reporting requirement is $50 per failure, not to
exceed $100,000 per calendar year.
\724\ Sec. 6724.
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Any person who is required to file an information return,
or furnish a payee statement, but who fails to do so on or
before the prescribed due date, is subject to a penalty that
varies based on when, if at all, the information return is
filed. Both the failure to file and failure to furnish
penalties are adjusted annually to account for inflation. In
the Trade Preferences Extension Act of 2015,\725\ the penalties
were increased for information returns or payee statements due
after December 31, 2015. The penalty amounts, whether they are
limited to a maximum amount in a calendar year, and the changes
enacted in the Trade Preferences Extension Act, are described
below.
---------------------------------------------------------------------------
\725\ Trade Preferences Extension Act of 2015, Pub. L. No. 114-27,
sec. 806 (June 29, 2015).
---------------------------------------------------------------------------
Penalties with respect to returns or statement due before
January 1, 2016.
If a person files an information return after the
prescribed filing date but on or before the date that is 30
days after the prescribed filing date, the amount of the
penalty is $30 per return (``first-tier penalty''), with a
maximum penalty of $250,000 per calendar year. If a person
files an information return after the date that is 30 days
after the prescribed filing date but on or before August 1, the
amount of the penalty is $60 per return (``second-tier
penalty''), with a maximum penalty of $500,000 per calendar
year. If an information return is not filed on or before August
1 of any year, the amount of the penalty is $100 per return
(``third-tier penalty''), with a maximum penalty of $1,500,000
per calendar year. If a failure to file is due to intentional
disregard of a filing requirement, the minimum penalty for each
failure is $250, with no calendar year limit.
Lower maximum levels for this failure to file correct
information return penalty apply to small businesses. Small
businesses are defined as firms having average annual gross
receipts for the most recent three taxable years that do not
exceed $5 million. The maximum penalties for small businesses
are: $75,000 (instead of $250,000) if the failures are
corrected on or before 30 days after the prescribed filing
date; $200,000 (instead of $500,000) if the failures are
corrected on or before August 1; and $500,000 (instead of
$1,500,000) if the failures are not corrected on or before
August 1.
Any person who is required to furnish a payee statement who
fails to do so on or before the prescribed filing date is
subject to a penalty that varies based on when, if at all, the
payee statement is furnished, similar to the penalty for filing
an information return discussed above. A first-tier penalty is
$30, subject to a maximum of $250,000, a second-tier penalty is
$60 per statement, up to $500,000, and a third-tier penalty is
$100, up to a maximum of $1,500,000. Lower maximum levels for
this failure to furnish correct payee statement penalty apply
to small businesses. Small businesses are defined as firms
having average annual gross receipts for the most recent three
taxable years that do not exceed $5 million. The maximum
penalties for small businesses are: $75,000 (instead of
$250,000) if the failures are corrected on or before 30 days
after the prescribed filing date; $200,000 (instead of
$500,000) if the failures are corrected on or before August 1;
and $500,000 (instead of $1,500,000) if the failures are not
corrected on or before August 1.
In cases in which the failure to file an information return
or to furnish the correct payee statement is due to intentional
disregard, the minimum penalty for each failure is $250, with
no calendar year limit. No distinction is made between small
businesses and other persons required to report.
Penalties with respect to returns or statements due after
December 31, 2015
The Trade Preferences Extension Act of 2015 increased the
penalties to the following amounts for information returns or
payee statements due after December 31, 2015. The first-tier
penalty is $50 per return, with a maximum penalty of $500,000
per calendar year. The second-tier penalty increases to $100
per return, with a maximum penalty of $1,500,000 per calendar
year. The third-tier penalty increases to $250 per return, with
a maximum penalty of $3,000,000 per calendar year.
The lower maximum levels applicable to small businesses
also were increased, as follows. The maximum penalties for
small businesses are: $175,000 if the failures are corrected on
or before 30 days after the prescribed filing date; $500,000 if
the failures are corrected on or before August 1; and
$1,000,000 if the failures are not corrected on or before
August 1.
For failures or misstatements due to intentional disregard,
the penalty per return or statement increased to $500, with no
calendar year limit. No distinction between small businesses
and other persons required to report is made in such cases.
Explanation of Provision
The provision creates a safe harbor from the application of
the penalty for failure to file a correct information return
and the penalty for failure to furnish a correct payee
statement in circumstances in which the information return or
payee statement is otherwise correctly filed but includes a de
minimis error of the amount required to be reported on such
return or statement. In general, a de minimis error of an
amount on the information return or statement need not be
corrected if the error for any single amount does not exceed
$100. A lower threshold of $25 is established for errors with
respect to the reporting of an amount of withholding or backup
withholding. The provision requires broker reporting to be
consistent with amounts reported on uncorrected returns which
are eligible for the safe harbor. If any person receiving payee
statements requests a corrected statement, the penalty for
failure to file a correct information return and the penalty
for failure to furnish a correct payee statement would continue
to apply in the case of a de minimis error.
Effective Date
The provision applies to information returns required to be
filed and payee statements required to be furnished after
December 31, 2016.
3. Requirements for the issuance of ITINs (sec. 203 of the Act and sec.
6109 of the Code)
Present Law
Any individual filing a U.S. tax return is required to
state his or her taxpayer identification number on such return.
Generally, a taxpayer identification number is the individual's
Social Security number (``SSN'').\726\ However, in the case of
individuals who are not eligible to be issued an SSN, but who
still have a tax filing obligation, the IRS issues IRS
individual taxpayer identification numbers (``ITIN'') for use
in connection with the individual's tax filing
requirements.\727\ An individual who is eligible to receive an
SSN may not obtain an ITIN for purposes of his or her tax
filing obligations.\728\ An ITIN does not provide eligibility
to work in the United States or claim Social Security benefits.
---------------------------------------------------------------------------
\726\ Sec. 6109(a).
\727\ Treas. Reg. Sec. 301.6109-1(d)(3)(i).
\728\ Treas. Reg. Sec. 301.6109-1(d)(3)(ii).
---------------------------------------------------------------------------
Examples of individuals who potentially need an ITIN in
order to file a U.S. return include nonresident aliens filing a
claim for a reduced withholding rate under treaty benefits, a
nonresident alien required to file a U.S. tax return, a U.S.
resident alien filing a U.S. tax return, a dependent or spouse
of a U.S. citizen or resident alien, or a dependent or spouse
of a nonresident alien visa holder.
Taxpayers applying for an ITIN must complete a Form W-7,
``Application For IRS Individual Taxpayer Identification
Number.'' For identification purposes, the Form W-7 requires
that taxpayers include original documentation such as passports
and birth certificates, or certified copies of these documents
by the issuing agency. Notarized or apostilized copies of such
documentation are insufficient.\729\ Supporting documentation
to establish a taxpayer's identity includes: passport, USCIS
photo identification, visa issued by U.S. Department of State,
U.S. driver's license, U.S. military identification card,
foreign driver's license, foreign military identification card,
national identification card (must be current and contain name,
photograph, address, DOB, and expiration date), U.S. state
identification card, foreign voter registration card, civil
birth certificate, medical records (valid only for dependents
under age 6), and school records (valid only for dependents
under age 14).
---------------------------------------------------------------------------
\729\ See Instructions for Form W-7 (Rev. December, 2014),
available at https://www.irs.gov/pub/irs-pdf/iw7.pdf.
---------------------------------------------------------------------------
The Form W-7, and accompanying original documentation, may
be submitted by mail.\730\ Additionally, a taxpayer may file
for an ITIN by bringing completed documentation and forms to an
IRS Taxpayer Assistance Center in the United States (which can
authenticate passports or national identification cards, and
forward the application on for processing) or an IRS office
abroad. Taxpayers may also visit an acceptance agent, an
individual who may submit a W-7 application on behalf of the
taxpayer along with documentary evidence, or, in the case of a
certifying acceptance agent, who is authorized by the IRS to
verify identifying documents in addition to submitting the Form
W-7. Applications submitted with the use of a certifying
acceptance agent must be accompanied by a certificate of
accuracy, attached to the Form W-7.
---------------------------------------------------------------------------
\730\ Ibid.
---------------------------------------------------------------------------
Under a policy announced in November 2012 for ITINs issued
on or after January 1, 2013, ITINs would automatically expire
after five years of the issuance date.\731\ That is, a taxpayer
would be required to reapply for a new ITIN after five years if
he or she still needed the ITIN for tax filing purposes. On
June 30, 2014, the IRS announced that it was revising this
policy. Under the revised policy, ITINs would be deactivated
only if the ITIN was not used during any tax year for a period
of five consecutive years.\732\
---------------------------------------------------------------------------
\731\ IR-2012-98 (Nov. 29, 2012), available at https://www.irs.gov/
uac/Newsroom/IRS-Strengthens-Integrity-of-ITIN-System;-Revised-
Application-Procedures-in-Effect-for-Upcoming-Filing-Season.
\732\ IR-2014-76 (June 30, 2014), available at https://www.irs.gov/
uac/Newsroom/Unused-ITINS-to-Expire-After-Five-Years%3B-New-Uniform-
Policy-Eases-Burden-on-Taxpayers,-Protects-ITIN-Integrity.
---------------------------------------------------------------------------
Explanation of Provision
The provision modifies certain rules related to ITIN
application procedures, and adds rules regarding the term of
existing and new ITINs.
ITIN application procedures
Under the provision, the Secretary is authorized to issue
ITINs to individuals either in person or via mail. In-person
applications may be submitted to either: (1) an employee of the
Internal Revenue Service or (2) a community-based certified
acceptance agent approved by the Secretary.\733\ In the case of
individuals residing outside of the United States, in-person
applications may be submitted to an employee of the Internal
Revenue Service or a designee of the Secretary at a United
States diplomatic mission or consular post. The provision
authorizes the Secretary to establish procedures to accept ITIN
applications via mail.
---------------------------------------------------------------------------
\733\ The community-based certified acceptance agent program is
intended to expand the existing IRS acceptance agent program. See Rev.
Proc. 2006-10, 2006-1 C.B. 293 (December 16, 2005).
---------------------------------------------------------------------------
The provision directs the Secretary to maintain a program
for certifying and training community-based acceptance agents.
Persons eligible to be acceptance agents may include financial
institutions, colleges and universities, Federal agencies,
State and local governments, including State agencies
responsible for vital records, persons that provide assistance
to taxpayers in the preparation of their tax returns, and other
persons or categories of persons as authorized by regulations
or in other guidance by the Secretary.
The provision allows the Secretary to determine what
documents are acceptable for purposes of proving an
individual's identity, foreign status and residency. However,
only original documentation or certified copies meeting the
requirements set forth by the Secretary will be acceptable.
Additionally, the provision requires the Secretary to develop
procedures that distinguish ITINs used by individuals solely
for the purpose of obtaining treaty benefits, so as to ensure
that such numbers are used only to claim treaty benefits.
Term of ITINs
General rule
Under the provision, any ITIN issued after December 31,
2012 shall expire if not used on a Federal income tax return
for a period of three consecutive taxable years (expiring on
December 31 of such third consecutive year). The IRS is
provided with math error authority related to returns filed
with an ITIN that has expired, been revoked by the Secretary,
or that is otherwise invalid.
Special rule in the case of ITINs issued prior to 2013
Under the provision, ITINs issued prior to 2013, while
remaining subject to the general rule described above,\734\
will, regardless of whether such ITIN has been used on Federal
income tax returns, no longer be valid as of the applicable
date, as follows:
---------------------------------------------------------------------------
\734\ In the case of ITINs that, including taxable year 2015, have
been unused on Federal income tax returns for three (or more)
consecutive taxable years, such ITINs shall expire on December 31,
2015.
------------------------------------------------------------------------
Year ITIN Issued Applicable Date
------------------------------------------------------------------------
Pre-2008....................................... January 1, 2017
2008........................................... January 1, 2018
2009 or 2010................................... January 1, 2019
2011 or 2012................................... January 1, 2020
------------------------------------------------------------------------
The provision also requires that the Treasury Office of
Inspector General conduct an audit two years after the date of
enactment (and every two years after) of the ITIN application
process. Additionally, the provision requires the Secretary to
conduct a study on the effectiveness of the application process
for ITINs prior to the implementation of the amendments made by
this provision, the effects of such amendments, the comparative
effectiveness of an in-person review process versus other
methods of reducing fraud in the ITIN program and improper
payments to ITIN holders as a result, and possible
administrative and legislative recommendations to improve such
process.
Effective Date
The provision relating to ITIN application procedures is
effective for applications for ITINs made after the date of
enactment (December 18, 2015). The provision relating to the
term of ITINs is effective on the date of enactment.
4. Prevention of retroactive claims of earned income credit, child tax
credit, and American Opportunity Tax Credit (secs. 204, 205,
and 206 of the Act and secs. 24, 25A and 32 of the Code)
Present Law
Refundable credits
An individual may reduce his or her tax liability by any
available tax credits. In some instances, a permissible credit
is ``refundable,'' i.e., it may result in a refund in excess of
any credits for withheld taxes or estimated tax payments
available to the individual. Three major credits are the child
tax credit, the earned income tax credit (``EITC'') and the
American opportunity tax credit.
An individual may claim a tax credit for each qualifying
child under the age of 17. The amount of the credit per child
is $1,000. The aggregate amount of child credits that may be
claimed is phased out for individuals with income over certain
threshold amounts. Specifically, the otherwise allowable child
tax credit is reduced by $50 for each $1,000 (or fraction
thereof) of modified adjusted gross income over $75,000 for
single individuals or heads of households, $110,000 for married
individuals filing joint returns, and $55,000 for married
individuals filing separate returns. To the extent the child
credit exceeds the taxpayer's tax liability, the taxpayer is
eligible for a refundable credit \735\ (the additional child
tax credit) equal to 15 percent of earned income in excess of
$3,000.\736\
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\735\ The refundable credit may not exceed the maximum credit per
child of $1,000.
\736\ Families with three or more children may determine the
additional child tax credit using an alternative formula, if this
results in a larger credit than determined under the earned income
formula. Under the alternative formula, the additional child tax credit
equals the amount by which the taxpayer's social security taxes exceed
the taxpayer's earned income tax credit.
---------------------------------------------------------------------------
The EITC is available to low-income workers who satisfy
certain requirements. The amount of the EITC varies depending
upon the taxpayer's earned income and whether the taxpayer has
one, two, more than two, or no qualifying children. In 2015,
the maximum EITC is $6,242 for taxpayers with more than two
qualifying children, $5,548 for taxpayers with two qualifying
children, $3,359 for taxpayers with one qualifying child, and
$503 for taxpayers with no qualifying children. The credit
amount begins to phaseout at an income level of $23,630 for
joint-filers with children, $18,110 for other taxpayers with
children, $13,750 for joint-filers with no children and $8,240
for other taxpayers with no qualifying children. The phaseout
percentages are 15.98 for taxpayers with one qualifying child,
21.06 for two or more qualifying children and 7.65 for no
qualifying children.
Certain individual taxpayers are allowed to claim a
nonrefundable credit, the Hope credit, against Federal income
taxes for qualified tuition and related expenses paid for the
first two years of the student's post-secondary education in a
degree or certificate program. The American Opportunity tax
credit, refers to modifications to the Hope credit that apply
for taxable years beginning in 2009 and extended through
2017.\737\ The maximum allowable modified credit is $2,500 per
eligible student per year for qualified tuition and related
expenses paid for each of the first four years of the student's
post-secondary education in a degree or certificate program.
The modified credit rate is 100 percent on the first $2,000 of
qualified tuition and related expenses, and 25 percent on the
next $2,000 of qualified tuition and related expenses. Forty
percent of a taxpayer's otherwise allowable American
opportunity tax credit is refundable.
---------------------------------------------------------------------------
\737\ These modifications are made permanent by section 102 of the
Act. See Part Thirteen, Division Q, Title II, item 10, supra.
---------------------------------------------------------------------------
Identification requirements with respect to refundable credits
In order to claim the earned income credit, a taxpayer must
include his or her taxpayer identification number (and if the
taxpayer is married filing a joint return, the taxpayer
identification number of the taxpayer's spouse) on the tax
return.\738\ For these purposes, a taxpayer identification
number must be a Social Security number (``SSN'') issued by the
Social Security Administration.\739\ Similarly, any child
claimed by a taxpayer for purposes of determining the earned
income credit must also be affiliated with a taxpayer
identification number on the tax return.\740\ Again, for these
purposes, such number must be an SSN issued by the Social
Security Administration.\741\
---------------------------------------------------------------------------
\738\ Sec. 32(c)(1)(E)(i) and (ii).
\739\ Sec. 32(m).
\740\ Sec. 32(c)(3)(D).
\741\ Sec. 32(m).
---------------------------------------------------------------------------
The child credit may not be claimed with respect to any
qualifying child unless the taxpayer includes the name and
taxpayer identification number of such qualifying child on the
tax return for the taxable year.\742\ For these purposes,
taxpayer identification number is not limited to an SSN, as is
the case for the earned income credit. Thus, a taxpayer may
claim a child using an IRS individual taxpayer identification
number (``ITIN''), issued by the IRS for those who are not
eligible to be issued an SSN but who still have tax filing
obligations. Additionally, a child may be identified on the
return using an adoption taxpayer identification number
(``ATIN''). There are no specific rules regarding the
identifying number affiliated with the taxpayer claiming the
child credit. Thus, the general rules applicable to all
taxpayers, requiring that an identifying number accompany the
return, are applicable.\743\
---------------------------------------------------------------------------
\742\ Sec. 24(e).
\743\ Sec. 6109.
---------------------------------------------------------------------------
For the American opportunity credit (in addition to the
other credits with respect to amounts paid for educational
expenses), no credit may be claimed by a taxpayer with respect
to the qualifying tuition and related expenses of an
individual, unless that individual's taxpayer identification
number is included on the tax return.\744\ As with the child
credit, for these purposes a taxpayer identification number is
not limited to a Social Security number. Thus, a taxpayer may
claim the credit with the use of an ITIN (either the taxpayer's
own ITIN, if they are filing as a non-dependent and claiming
tuition expenses incurred on their own behalf, or the ITIN of a
dependent to whom the credit relates).
---------------------------------------------------------------------------
\744\ Sec. 25A(g)(1).
---------------------------------------------------------------------------
Explanation of Provision
The provision denies to any taxpayer the EITC, child
credit, and American opportunity tax credit, with respect to
any taxable year for which such taxpayer has a taxpayer
identification number that has been issued after the due date
(or extended due date) for filing the return for such taxable
year. Similarly, a qualifying child (in the case of the EITC
and child credit) or a student (in the case of the American
opportunity credit) is not taken into account with respect to
any taxable year for which such child or student is associated
with a taxpayer identification number that has been issued
after the due date (or extended due date) for filing the return
for such taxable year.
Effective Date
The provision generally applies to any return of tax, and
any amendment or supplement to any return of tax, which is
filed after the date of the enactment. However, the provision
shall not apply to any return of tax (other than an amendment
or supplement to any return of tax) for any taxable year which
includes the date of the enactment, if such return is filed on
or before the due date for such return of tax.
5. Procedures to reduce improper claims (sec. 207 of the Act and secs.
24, 25A, 32, and 6695 of the Code)
Present Law
Eligibility requirements for certain credits
Two credits available to individuals use both income level
and the presence and number of qualifying children as factors
in determining eligibility for the credit: the child tax credit
\745\ and the earned income tax credit (``EITC'').\746\
Additionally, the Hope credit, the Lifetime Learning credit,
and the American opportunity tax credit (``AOTC'') are
available to taxpayers who meet adjusted gross income
requirements as well as specific requirements regarding the
payment of tuition and related expenses for secondary-
education.
---------------------------------------------------------------------------
\745\ Sec. 24.
\746\ Sec. 32. Additionally, the child and dependent care credit is
determined in part with respect to income and the presence of
qualifying children, but this credit is not implicated by the
provision.
---------------------------------------------------------------------------
EITC eligibility
Eligibility for the EITC is based on earned income,
adjusted gross income, investment income, filing status, number
of children, and immigration and work status in the United
States. The EITC generally equals a specified percentage of
earned income up to a maximum dollar amount. The maximum amount
applies over a certain income range and then diminishes to zero
over a specified phaseout range. For taxpayers with earned
income (or adjusted gross income (``AGI''), if greater) in
excess of the beginning of the phaseout range, the maximum EITC
amount is reduced by the phaseout rate multiplied by the amount
of earned income (or AGI, if greater) in excess of the
beginning of the phaseout range. For taxpayers with earned
income (or AGI, if greater) in excess of the end of the
phaseout range, no credit is allowed.
An individual is not eligible for the EITC if the aggregate
amount of disqualified income of the taxpayer for the taxable
year exceeds $3,400 (for 2015). This threshold is indexed for
inflation. Disqualified income is the sum of: (1) interest
(both taxable and tax exempt); (2) dividends; (3) net rent and
royalty income (if greater than zero); (4) capital gains net
income; and (5) net passive income that is not self-employment
income (if greater than zero).
No credit is allowed unless the taxpayer includes the
Social Security number of the taxpayer and such taxpayer's
spouse, on the tax return. Additionally, a qualifying child is
not taken into account for purposes of the EITC unless the
child's Social Security number is listed on the tax return.
Child credit eligibility
An individual may claim a child tax credit of $1,000 for
each qualifying child under the age of 17,\747\ provided that
the child is a citizen, national, or resident of the United
States.\748\ The aggregate amount of child credits that may be
claimed is phased out for individuals with income over certain
threshold amounts. Specifically, the otherwise allowable child
tax credit is reduced by $50 for each $1,000 (or fraction
thereof) of modified adjusted gross income over $75,000 for
single individuals or heads of households, $110,000 for married
individuals filing joint returns, and $55,000 for married
individuals filing separate returns. For purposes of this
limitation, modified adjusted gross income includes certain
otherwise excludable income earned by U.S. citizens or
residents living abroad or in certain U.S. territories.\749\ If
the resulting child credit exceeds the tax liability of the
taxpayer, the taxpayer is eligible for a refundable credit
(known as the additional child tax credit) \750\ equal to 15
percent of earned income in excess of a threshold dollar amount
(the ``earned income'' formula). Prior to 2009, the threshold
dollar amount was $10,000 and was indexed for inflation. For
taxable years beginning after 2009 and before January 1, 2018,
the threshold amount is $3,000, and is not indexed for
inflation. The $3,000 threshold is currently scheduled to
expire for taxable years beginning after December 31, 2017,
after which the threshold reverts to the indexed $10,000
amount.\751\
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\747\ Sec. 24(a).
\748\ Sec. 24(c).
\749\ Sec. 24(b).
\750\ Sec. 24(d).
\751\ An earlier provision of this Act makes the $3,000 threshold
permanent. See the description of sec. 101 of the Act.
---------------------------------------------------------------------------
Families with three or more children may determine the
additional child tax credit using the ``alternative formula,''
if this results in a larger credit than determined under the
earned income formula. Under the alternative formula, the
additional child tax credit equals the amount by which the
taxpayer's social security taxes exceed the taxpayer's EIC.
Hope credit, Lifetime Learning credit, and AOTC eligibility
The Hope credit, the Lifetime learning credit, and the AOTC
are available to certain taxpayers who incur tuition and
related expenses on secondary education.\752\ The AOTC is a
modification of the Hope credit, and applies only for taxable
years from 2009-2017.\753\ In the case of the Hope and Lifetime
Learning credits, the credit that a taxpayer may otherwise
claim is phased out ratably for taxpayers with modified
adjusted gross income between $55,000 and $65,000 ($110,000 and
$130,000 for married taxpayers filing a joint return). The AOTC
is phased out ratably for taxpayers with modified adjusted
gross income between $80,000 and $90,000 ($160,000 and $180,000
for married taxpayers filing a joint return), and may be
claimed against a taxpayer's AMT liability. 40 percent of a
taxpayer's otherwise allowable AOTC is refundable.
---------------------------------------------------------------------------
\752\ Sec. 25A. The Hope credit rate is 100 percent on the first
$1,300 of qualified tuition and related expenses, and 50 percent on the
next $1,300 of qualified tuition and related expenses (estimated for
2015). For the AOTC, the maximum credit is $2,500 per eligible student
per year for qualified tuition and related expenses paid for each of
the first four years of the student's post-secondary education in a
degree or certificate program. The credit rate is 100 percent on the
first $2,000 of qualified tuition and related expenses, and 25 percent
on the next $2,000 of qualified tuition and related expenses. For the
Lifetime Learning credit, 20 percent of up to $10,000 of qualified
tuition and related expenses per taxpayer return is eligible for the
credit (i.e., the maximum credit per taxpayer return is $2,000).
\753\ An earlier provision of this Act makes the modifications to
the Hope credit known as the AOTC permanent. See the description of
sec. 102 of the Act.
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The credits vary in availability: The Hope credit is
available with respect to an individual student for two years,
the AOTC is available for four years, while the Lifetime
Learning credit has no limit on availability. For all credits,
qualified tuition and related expenses must be incurred on
behalf of the taxpayer, the taxpayer's spouse, or a dependent
of the taxpayer. The credits are available in the taxable year
the tuition and related expenses are paid, subject to the
requirement that the education is furnished to the student
during that year or during an academic period beginning during
the first three months of the next taxable year. Qualified
tuition and related expenses paid with the proceeds of a loan
generally are eligible for the credits, but repayment of a loan
itself is not a qualified tuition or related expense.
A taxpayer may claim the Hope credit, Lifetime Learning
credit, or AOTC with respect to an eligible student who is not
the taxpayer or the taxpayer's spouse (e.g., in cases in which
the student is the taxpayer's child) only if the taxpayer
claims the student as a dependent for the taxable year for
which the credit is claimed. If a student is claimed as a
dependent, the student is not entitled to claim any of the
credits for education expenses for that taxable year on the
student's own tax return. If a parent (or other taxpayer)
claims a student as a dependent, any qualified tuition and
related expenses paid by the student are treated as paid by the
parent (or other taxpayer) for purposes of determining the
amount of qualified tuition and related expenses paid by such
parent (or other taxpayer) under the provision.
An eligible student for purposes of the Hope credit and
AOTC is an individual who is enrolled in a degree, certificate,
or other program (including a program of study abroad approved
for credit by the institution at which such student is
enrolled) leading to a recognized educational credential at an
eligible educational institution. The student must pursue a
course of study on at least a half-time basis. A student is
considered to pursue a course of study on at least a half-time
basis if the student carries at least one-half the normal full-
time work load for the course of study the student is pursuing
for at least one academic period that begins during the taxable
year.
Unlike the Hope credit and AOTC, the Lifetime Learning
credit is available to students who are enrolled on a part-time
basis. To be eligible for the Hope credit and the AOTC, a
student must not have been convicted of a Federal or State
felony for the possession or distribution of a controlled
substance. The Lifetime Learning credit does not contain this
requirement.
Diligence required by preparers returns for EITC claimants
Under Section 6695(g) of the Code, a penalty of $500 may be
imposed on a person who, as a tax return preparer,\754\
prepares a tax return for a taxpayer claiming the EITC, unless
the tax return preparer exercises due diligence with respect to
that claim. The due diligence requirements extend to both the
determination of eligibility for the credit and the amount of
the credit, as prescribed by regulations, which also detail how
to document one's compliance with those requirements.\755\ The
position taken with respect to the EITC must be based on
current and reasonable information that the paid preparer
develops, either directly from the taxpayer or by other
reasonable means. The preparer may not ignore implications of
information provided by taxpayers, and is expected to make
reasonable inquiries about incorrect, inconsistent or
incomplete information.
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\754\ Sec. 7701(a)(36) provides a general definition of tax return
preparer to include persons who are compensated to prepare all or a
substantial portion of a return or claim for refund, with certain
exceptions.
\755\ Treas. Reg. sec. 1.6695-2(b).
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The conclusions about eligibility and computation, as well
as the steps taken to develop those conclusions, must be
documented, using Form 8867, ``Paid Preparer's Earned Income
Credit Checklist,'' which is filed with the return.\756\ The
basis for the computation of the credit must also be
documented, either on a Computation Worksheet, or in an
alternative record containing the requisite information. The
preparer is required to maintain that documentation for three
years.
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\756\ If the return preparer electronically files the return or
claim for the taxpayer, the Form 8867 is filed electronically with the
return. If the prepared return or claim is given to the taxpayer to
file, the Form 8867 is provided to the taxpayer at the same time, to
submit with the return or claim for refund.
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The penalty may be waived with respect to a particular
return or claim for refund on the basis of all facts and
circumstances. The preparer must establish that he routinely
follows reasonable office procedures to ensure compliance. The
failure to comply with the requirements must be isolated and
inadvertent.\757\ The enhanced duties of due diligence required
with respect to the EITC do not extend to other refundable
credits.
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\757\ Treas. Reg. sec. 1.6695-2(d).
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There are no separately stated due diligence requirements
for paid tax return preparers who prepare Federal income tax
returns on which a child tax credit or the AOTC is claimed.
Explanation of Provision
The provision requires paid tax return preparers who
prepare Federal income tax returns on which a child (or
additional child) tax credit is claimed and on which the AOTC
is claimed to meet due diligence requirements similar to those
applicable to returns claiming an earned income tax credit.
The provision also requires the Secretary to conduct a
study evaluating the effectiveness of tax return preparer due
diligence requirements for the EITC, child tax credit and AOTC.
The study with respect to the EITC shall be completed one year
from the date of enactment (December 18, 2015), and the study
regarding the child credit and the AOTC shall be due two years
from the date of enactment.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2015.
6. Restrictions on taxpayers who improperly claimed credits in prior
year (sec. 208 of the Act and secs. 24, 25A and 6213 of the
Code)
Present Law
Refundable credits
An individual may reduce his or her tax liability by any
available tax credits. In some instances, a permissible credit
is ``refundable,'' i.e., it may result in a refund in excess of
any credits for withheld taxes or estimated tax payments
available to the individual. Three major credits are the child
tax credit, the earned income credit and the American
opportunity tax credit.
An individual may claim a tax credit for each qualifying
child under the age of 17. The amount of the credit per child
is $1,000. The aggregate amount of child credits that may be
claimed is phased out for individuals with income over certain
threshold amounts. Specifically, the otherwise allowable child
tax credit is reduced by $50 for each $1,000 (or fraction
thereof) of modified adjusted gross income over $75,000 for
single individuals or heads of households, $110,000 for married
individuals filing joint returns, and $55,000 for married
individuals filing separate returns. To the extent the child
credit exceeds the taxpayer's tax liability, the taxpayer is
eligible for a refundable credit \758\ (the additional child
tax credit) equal to 15 percent of earned income in excess of
$3,000.\759\
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\758\ The refundable credit may not exceed the maximum credit per
child of $1,000.
\759\ The $3,000 threshold was a temporary number that is made
permanent by section 101 of the Act. Families with three or more
children may determine the additional child tax credit using an
alternative formula, if this results in a larger credit than determined
under the earned income formula. Under the alternative formula, the
additional child tax credit equals the amount by which the taxpayer's
social security taxes exceed the taxpayer's earned income tax credit.
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A refundable earned income tax credit (``EITC'') is
available to low-income workers who satisfy certain
requirements. The amount of the EITC varies depending upon the
taxpayer's earned income and whether the taxpayer has one, two,
more than two, or no qualifying children. In 2015, the maximum
EITC is $6,242 for taxpayers with more than two qualifying
children, $5,548 for taxpayers with two qualifying children,
$3,359 for taxpayers with one qualifying child, and $503 for
taxpayers with no qualifying children. The credit amount begins
to phaseout at an income level of $23,630 for joint-filers with
children, $18,110 for other taxpayers with children, $13,750
for joint-filers with no children and $8,240 for other
taxpayers with no qualifying children. The phaseout percentages
are 15.98 for taxpayers with one qualifying child, 21.06 for
two or more qualifying children and 7.65 for no qualifying
children.
Certain individual taxpayers are allowed to claim a
nonrefundable credit, the Hope credit, against Federal income
taxes for qualified tuition and related expenses paid for the
first two years of the student's post-secondary education in a
degree or certificate program. The American Opportunity tax
credit, refers to modifications to the Hope credit that apply
for taxable years beginning in 2009 and extended through
2017.\760\ The maximum allowable modified credit is $2,500 per
eligible student per year for qualified tuition and related
expenses paid for each of the first four years of the student's
post-secondary education in a degree or certificate program.
The modified credit rate is 100 percent on the first $2,000 of
qualified tuition and related expenses, and 25 percent on the
next $2,000 of qualified tuition and related expenses. 40
percent of a taxpayer's otherwise allowable American
opportunity tax credit is refundable.
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\760\ The modifications to the Hope credit, known as the American
opportunity credit, are made permanent by section 102 of the Act.
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Disallowance period with respect to the earned income credit
A taxpayer who was previously disallowed the EITC may not
claim the EITC for a period of ten taxable years after the most
recent taxable year for which there was a final determination
that the taxpayer's claim of credit was due to fraud. Such
disallowance period is two years in the case of a taxpayer for
which there was a final determination that the taxpayer's EITC
claim was due to reckless or intentional disregard of rules and
regulations (but not to fraud).
Additionally, in the case of a taxpayer who was previously
denied the EITC for any taxable year as a result of IRS
deficiency procedures, the taxpayer may not claim an EITC in
subsequent years unless the taxpayer provides a Form 8862 with
the tax return, so as to demonstrate eligibility for the EITC
in that taxable year.
Math error authority
The Federal income tax system relies upon self-reporting
and assessment. A taxpayer is expected to prepare a report of
his liability \761\ and submit it to the Internal Revenue
Service (``IRS'') with any payment due. The Code provides
general authority for the IRS to assess all taxes shown on
returns,\762\ other than certain Federal unemployment tax and
estimated income taxes.\763\ The assessment is required to be
made by recording the liability in the ``office of the
Secretary'' in a manner determined under regulations.\764\ If
the IRS determines that the assessment was materially
incorrect, additional tax must be assessed within the
limitations period.\765\
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\761\ Secs. 6011 and 6012.
\762\ See sec. 6201(a), which authorizes assessment of tax computed
by the taxpayer as well as amounts computed by the IRS at the election
of the taxpayer, under section 6014.
\763\ Sec. 6201(b).
\764\ Sec. 6203.
\765\ Secs. 6204.
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The authority to assess the additional tax may be subject
to certain restrictions on assessment known as the deficiency
procedures.\766\ A deficiency of tax occurs if the amount of
certain taxes \767\ assessed for a period, after reduction for
any rebates of tax, is less than the liability determined under
the Code. Generally, in the case of income taxes, if the IRS
questions whether the correct tax liability has been self-
assessed by a taxpayer, the IRS generally first informs the
taxpayer by letter. Most discrepancies in income tax liability
identified by the IRS are resolved through such
``correspondence audits.'' In other cases, an examining agent
reviews the return and determines whether an adjustment in
income tax reported on the return is required. The
determination by the examining agent that an adjustment to the
return is required results in a notice to the taxpayer that
provides an opportunity for the taxpayer to invoke rights to an
administrative appeal or to agree to the adjustments within 30
days. If the taxpayer responds timely and disputes the
adjustments, the case is referred to an independent
administrative appeals officer for review. In most cases, the
taxpayer and the IRS agree on the merit or lack of merit of the
adjustments proposed, and the cases are closed without issuance
of a notice of deficiency. If the parties do not reach
agreement administratively, the IRS must issue a formal notice
of deficiency to a taxpayer,\768\ which begins a period within
which a taxpayer may petition the U.S. Tax Court. During that
period, as well as during the pendency of any proceeding in Tax
Court, assessment of the deficiency is not permitted.\769\
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\766\ Secs. 6211 through 6215.
\767\ The taxes to which deficiency procedures apply are income,
estate and gift and excise taxes arising under chapters 41, 42, or 44.
Secs. 6211 and 6213.
\768\ Sec. 6212.
\769\ Sec. 6213(a). If a taxpayer wishes to contest the merits in a
different court, the taxpayer may agree to assessment of the tax,
reserving his or her rights to contest the merits, pay the disputed
amount, and pursue a claim for refund reviewable in a suit in Federal
district court or Court of Federal Claims.
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There are several exceptions to the restrictions on
assessment of taxes that are generally subject to the
deficiency procedures.\770\ One of the principal exceptions is
the authority to assess without issuance of a notice of
deficiency if the error is a result of a mathematical or
clerical error, generally referred to as math error authority.
If the mistake on the return is of a type that is within the
meaning of mathematical or clerical error, the IRS assesses the
tax and sends notice of the math error to the taxpayer. Purely
mathematical or clerical issues are often identified early in
the processing of a return, prior to issuance of any refund;
they are not typically identified as a result of an examination
of a return.\771\ Although most math errors identified by the
IRS resulted in the assessment of additional tax, over 2.6
million of the 6.6 million math errors identified in FY2011
\772\ involved adjustments in taxpayers' favor for credits to
which taxpayers were entitled but had failed to claim, mostly
commonly the ``Making Work Pay Credit'' for taxable year 2010.
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\770\ Section 6213 provides that a taxpayer may waive the
restrictions on assessment, permits immediate assessment to reflect
payments of tax remitted to the IRS and to correct amounts credited or
applied as a result of claims for carrybacks under section 1341(b), and
requires assessment of amounts ordered as criminal restitution.
Assessment is also permitted in certain circumstances in which
collection of the tax would be in jeopardy. Sections 6851, 6852 or
6861.
\771\ See, Treasury Inspector General for Tax Administration, Some
Taxpayer Responses to Math Error Adjustments Were Not Worked Timely and
Accurately (TIGTA No. 2011-40-059), July 11, 2011.
\772\ 2011 IRS Data Book, Table 15.
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Since 1976, the issuance of a notice of math error begins a
60 day period within which a taxpayer may submit a request for
abatement of the math error adjustment, which then requires the
IRS to abate the assessment and refer the unresolved issue for
examination.\773\ The IRS Data Books do not report the number
of abatements of math error assessments.
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\773\ Although the exception to restrictions on assessment to
correct mathematical errors had long been in the Code, the requirement
to abate upon timely request was added in 1976 when the authority was
expanded to include correction of clerical errors. Sec. 6213(b)(2)(A);
Tax Reform Act of 1976, Pub. L. 94-55, Sec. 1206(a). In order to
reassess the amount abated, the IRS must comply with the deficiency
procedures.
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The scope of IRS math error authority now encompasses
numerous issues, many of which concern rules regarding
refundable credits.\774\ The summary assessment is used to deny
a claimed credit or deduction, either during initial processing
of a return on which the credit is claimed or in an examination
of the return after the refund has been issued. For example, in
2009, the authority was expanded to cover several grounds on
which a homebuyer credit could be disallowed.\775\ These
grounds include (1) an omission of any increase in tax required
by the recapture provisions of the credit; (2) information from
the person issuing the taxpayer identification number of the
taxpayer that indicates that the taxpayer does not meet the age
requirement of the credit; (3) information provided to the
Secretary by the taxpayer on an income tax return for at least
one of the two preceding taxable years that is inconsistent
with eligibility for such credit; or (4) failure to attach to
the return a properly executed copy of the settlement statement
used to complete the purchase.
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\774\ Math error authority currently applies to certain errors
related to the earned income tax credit and the child tax credit. Sec.
6213(g)(2)(F), (G), (I), (K), (L), and (M).
\775\ Sec. 6213(g)(2)(O) and (P).
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Explanation of Provision
The provision expands the disallowance rules that apply to
the EITC to the child tax credit and the American opportunity
tax credit. Thus, if an individual claims the child tax credit
or the American opportunity credit in a taxable year, that
individual is denied the credit, and such claim for credit was
determined to be due to fraud, or reckless or intentional
disregard of the rules, that individual may not claim the
credit for the next ten or two years, respectively.
Additionally, the provision requires that taxpayers who
were previously denied the child tax credit or the American
opportunity tax credit in any taxable year as a result of IRS
deficiency procedures to provide additional information
demonstrating eligibility for such credit, as required by the
Secretary.
The provision would add the following items to the list of
circumstances in which the IRS has authority to make an
assessment as a math error: (1) a taxpayer claimed the
EITC,\776\ child tax credit, or the AOTC during the period in
which a taxpayer is not permitted to claim such credit as a
consequence of having made a prior fraudulent or reckless
claim; and (2) there was an omission of information required by
the Secretary relating to a taxpayer making improper prior
claims of the child tax credit or the AOTC.
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\776\ Sec. 32(k)(1).
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Effective Date
The provision is effective for taxable years beginning
after December 31, 2015.
7. Treatment of credits for purposes of certain penalties (sec. 209 of
the Act and secs. 6664 and 6676 of the Code)
Present Law
Underpayment penalties
Under present law, an accuracy-related penalty or a fraud
penalty may be imposed on certain underpayments of tax.\777\
The Code imposes a 20-percent penalty on the portion of an
underpayment attributable to: negligence or disregard of rules
or regulations, a substantial understatement, a substantial
valuation overstatement, a substantial overstatement of pension
liabilities, a substantial estate or gift tax valuation
understatements, any disallowance of tax benefits by reason of
lacking economic substance, or any undisclosed foreign
financial asset understatement.\778\ A penalty of 75 percent of
an underpayment is imposed in the case of fraud. An exception
to these penalties for reasonable cause generally applies.\779\
An underpayment, for this purpose, means the excess of the
amount of tax imposed over the amount of tax shown on the
return.\780\
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\777\ Secs. 6662 and 6663. Present law also imposes a separate
accuracy-related 20-percent penalty on portions of an underpayment
attributable to a listed or reportable transaction. Sec. 6662A(a). The
penalty increases to 30 percent if the transaction is not adequately
disclosed. Secs. 6662A(c) and 6664(d)(2)(A).
\778\ The 20-percent penalty is increased to 40 percent when there
is a gross valuation misstatement involving a substantial valuation
overstatement, a substantial overstatement of pension liabilities, a
substantial estate or gift tax valuation understatement, or when a
transaction lacking economic substance is not properly disclosed. Secs.
6662(h) and 6662(i).
\779\ Sec. 6664(c). There is no reasonable cause exception for tax
benefits disallowed by reason of a transaction lacking economic
substance and certain valuation overstatements related to charitable
deduction property.
\780\ Sec. 6664(a). Previous assessments and rebates may also be
taken into account.
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These penalties are assessed in the same manner as
taxes.\781\ In the case of income taxes, a taxpayer may contest
any deficiency in tax determined by the IRS in the Tax Court
before an assessment of the tax may be made.\782\ Generally a
deficiency in tax is the excess of the amount of tax imposed
over the amount of tax shown on the return.\783\
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\781\ Sec. 6665(a).
\782\ Sec. 6211-6215.
\783\ Sec. 6211. Previous assessments and rebates may also be taken
into account.
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The Code allows certain credits against the income
tax.\784\ Most of the credits may not exceed the taxpayer's
income tax. However certain credits (``refundable credits'')
may exceed the tax and the amount of these credits in excess of
the tax imposed (reduced by the other credits) is an
overpayment which creates a refund or credit.\785\ Refundable
credits include a portion of the child credit, the American
opportunity tax credit, and the earned income credit.\786\
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\784\ Secs. 21-54AA.
\785\ Sec. 6401(b).
\786\ Refundable credits include credits for withholding of taxes.
Treas. Reg. secs. 1-6664-2(b) and (c) provide special rules for the
withholding credits.
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In determining a deficiency in tax, the refundable credits
in excess of tax are treated as negative amounts of tax.\787\
Thus, the amounts of tax imposed and the tax shown on the
return may be negative amounts. The Code does not provide a
similar rule for the determination of an underpayment for
purposes of the penalties.\788\
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\787\ Sec. 6211(b)(4).
\788\ The Improved Penalty Administration and Compliance Tax Act
(the ``Act''), Pub. L. No. 101-239, sec. 7721(c), revised the penalties
to provide a single accuracy-related penalty for various types of
misconduct. The definition of underpayment for purposes of similar
penalties prior to that Act was defined by reference to the definition
of a deficiency. See sec. 6653(c)(1) prior to its repeal by the Act.
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The Tax Court ruled that for purposes of determining the
amount of an underpayment for purposes of the penalty
provisions, the tax shown on the return may not be less than
zero.\789\ Thus, no accuracy-related penalty or fraud penalty
may be imposed to the extent the refundable credits reduce the
tax imposed below zero.
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\789\ Rand v. Commissioner, 141 T.C. No. 12 (November 18, 2013).
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Erroneous claims
Present law imposes a penalty of 20 percent on the amount
by which a claim for refund or credit exceeds the amount
allowable unless it is shown that the claim has a reasonable
basis.\790\ The penalty does not apply to claims relating to
the earned income credit. The penalty does not apply to the
portion of any claim to which the accuracy-related and fraud
penalties apply. The deficiency procedures do not apply to this
penalty.
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\790\ Sec. 6676.
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Explanation of Provision
The provision amends the definition of underpayment
applicable to the determination of accuracy-related and fraud
penalties by incorporating in the definition the rule that in
determining the tax imposed and the amount of tax shown on the
return, the excess of the refundable credits over the tax is
taken into account as negative amount of tax. Thus, if a
taxpayer files an income tax return erroneously claiming
refundable credits in excess of tax, there is an underpayment
on which an accuracy-related or fraud penalty may be imposed.
The provision also repeals the exception from the erroneous
claims penalty for the earned income credit and changes the
standard for penalty relief from reasonable basis to reasonable
cause.
Effective Date
The provision amending the definition of underpayment is
effective for returns filed after the date of enactment
(December 18, 2015) and for returns filed on or before the date
of enactment if the statute of limitations period for
assessment has not expired.
The provision repealing the exception from the erroneous
claim penalty is effective for claims filed after the date of
enactment.
The provision relating to reasonable cause is effective for
claims filed after the date of enactment.\791\
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\791\ A technical correction is needed to provide the effective
date.
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8. Increase the penalty applicable to paid tax preparers who engage in
willful or reckless conduct (sec. 210 of the Act and sec. 6694
of the Code)
Present Law
Tax return preparers are subject to a penalty for
preparation of a return or refund claim with respect to which
an understatement of tax liability results. If the
understatement is due to an ``unreasonable position,'' the
penalty is the greater of $1,000 or 50 percent of the income
derived (or to be derived) by the return preparer with respect
to that return.\792\ Any position that a return preparer does
not reasonably believe is more likely than not to be sustained
on its merits is an ``unreasonable position'' unless the
position is disclosed on the return or there is ``substantial
authority'' for the position.\793\ There is a substantial
authority for a position if the weight of the authorities
supporting the treatment is substantial in relation to the
weight of authorities supporting contrary treatment. If the
position taken meets the definition of a tax shelter (as
defined in section 6662(d)(2)(B)(ii)(I)) or a listed or
reportable transaction (as referenced in 6662A), the preparer
must have a reasonable belief that the position would more
likely than not be sustained on its merits. If the
understatement is due to willful or reckless conduct, the
penalty increases to the greater of $5,000 or 50 percent of the
income derived (or to be derived) by the return preparer with
respect to that return.\794\
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\792\ Sec. 6694(a)(1).
\793\ Sec. 6694(a)(2).
\794\ Sec. 6694(b).
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Explanation of Provision
The provision increases the penalty rate on paid tax return
preparers for understatements due to willful or reckless
conduct to the greater of $5,000 or 75 percent of the income
derived (or to be derived) by the preparer with respect to the
return or claim for refund.
Effective Date
The provision is effective for returns prepared for taxable
years ending after the date of enactment (December 18, 2015).
9. Employer identification number required for American opportunity tax
credit (sec. 211 of the Act and secs. 25A and 6050S of the
Code)
Certain individual taxpayers are allowed to claim a
nonrefundable credit, the Hope credit, against Federal income
taxes for qualified tuition and related expenses paid for the
first two years of the student's post-secondary education in a
degree or certificate program. The American Opportunity tax
credit, refers to modifications to the Hope credit that apply
for taxable years beginning in 2009 and extended through
2017.\795\ The maximum allowable modified credit is $2,500 per
eligible student per year for qualified tuition and related
expenses paid for each of the first four years of the student's
post-secondary education in a degree or certificate program.
The modified credit rate is 100 percent on the first $2,000 of
qualified tuition and related expenses, and 25 percent on the
next $2,000 of qualified tuition and related expenses. 40
percent of a taxpayer's otherwise allowable American
opportunity tax credit is refundable.
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\795\ The American opportunity credit was made permanent in another
section of this Act. See the description of sec. 102 of this Act.
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For the American opportunity credit (in addition to the
other credits with respect to amounts paid for educational
expenses), no credit may be claimed by a taxpayer with respect
to the qualifying tuition and related expenses of an
individual, unless that individual's taxpayer identification
number is included on the tax return.\796\ The Code imposes no
reporting requirement with respect to the identity of the
educational institution attended by the individual.
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\796\ Sec. 25A(g)(1).
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Section 6050S of the Code imposes reporting requirements,
related to higher education tax benefits, on eligible
educational institutions and certain other persons.\797\
Eligible educational institutions are subject to the reporting
requirements if the institution enrolls any individual for any
academic period. The information return must include the name,
address, and taxpayer identification number of any individual
(a) who is or has been enrolled at an eligible education
institution and with respect to whom certain transactions are
made or (b) with respect to whom certain payments were made or
received. Additionally, eligible educational institutions are
required to provide the following information: (a) the
aggregate amount of payments received or the aggregate amount
billed for qualified tuition and related expenses during the
calendar year; (b) the aggregate amount of grants received by
the individual for payment of costs of attendance that are
administered and processed by the institution during the
calendar year; and (c) the amount of any adjustments to the
aggregate amounts reported under (a) or (b) with respect to the
individual for a prior calendar year.
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\797\ In addition to eligible educational institutions, the
relevant reporting requirements discussed herein are imposed on persons
who are engaged in a trade or business of making payments to any
individual under an insurance arrangements as reimbursements or refunds
(or similar amounts) of qualified tuition and related expenses.
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Explanation of Provision
The provision requires that taxpayers claiming the American
opportunity tax credit provide the employer identification
number of the educational institution attended by the
individual to whom the credit relates.
The provision modifies the reporting requirements under
section 6050S of the Code to require an educational institution
to provide its employer identification number on the Form 1098-
T.\798\
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\798\ This is already required under Treasury regulations. See
Treas. Reg. secs. 1.6050S-1(b)(2)(ii)(A) and 1.6050S-1(b)(3)(ii)(A).
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Effective Date
The provision requiring the employer identification number
is effective for taxable years beginning after December 31,
2015.
The provision modifying the information reporting
requirements is effective for expenses paid after December 31,
2015, for education furnished in academic periods beginning
after such date.
10. Higher education information reporting only to include qualified
tuition and related expenses actually paid (sec. 212 of the Act
and sec. 6050S of the Code)
Present Law
Section 6050S of the Code imposes reporting requirements,
related to higher education tax benefits, on eligible
educational institutions and certain other persons.\799\
Eligible educational institutions are subject to the reporting
requirements if the institution enrolls any individual for any
academic period. The information return must include the name,
address, and taxpayer identification number of any individual
(a) who is or has been enrolled at an eligible education
institution and with respect to whom certain transactions are
made or (b) with respect to whom certain payments were made or
received. Additionally, eligible educational institutions are
required to provide the following information: (a) the
aggregate amount of payments received or the aggregate amount
billed for qualified tuition and related expenses during the
calendar year; (b) the aggregate amount of grants received by
the individual for payment of costs of attendance that are
administered and processed by the institution during the
calendar year; and (c) the amount of any adjustments to the
aggregate amounts reported under (a) or (b) with respect to the
individual for a prior calendar year.
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\799\ In addition to eligible educational institutions, the
relevant reporting requirements discussed herein are imposed on persons
who are engaged in a trade or business of making payments to any
individual under an insurance arrangements as reimbursements or refunds
(or similar amounts) of qualified tuition and related expenses.
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Explanation of Provision
The provision requires eligible educational institutions
that have a reporting obligation to report the aggregate amount
of payments of qualified tuition and related expenses received
during the calendar year.
Effective Date
The provision is effective for expenses paid after December
31, 2015, for education furnished in academic periods beginning
after such date.
TITLE III--MISCELLANEOUS PROVISIONS
A. Family Tax Relief
1. Exclusion for amounts received under the work colleges program (sec.
301 of the Act and sec. 117 of the Code) \800\
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\800\ The Senate Committee on Finance reported S. 912 on April 14,
2015 (S. Rep. No. 114-22).
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Present Law
Under present law, an individual who is a candidate for a
degree at a qualifying educational organization may exclude
amounts received as a qualified scholarship from gross income
and wages. In addition, present law provides an exclusion from
gross income and wages for qualified tuition reductions for
certain education provided to employees of certain educational
organizations. The exclusions for qualified scholarships and
qualified tuition reductions do not apply to any amount
received by a student that represents payment for teaching,
research, or other services by the student required as a
condition for receiving the scholarship or tuition reduction.
Payments for such services are includible in gross income and
wages. An exception to this rule applies in the case of the
National Health Services Corps Scholarship Program and the F.
Edward Herbert Armed Forces Health Professions Scholarship and
Financial Assistance Program.
Explanation of Provision
The provision exempts from gross income any payments from a
comprehensive student work-learning-service program (as defined
in section 448(e) of the Higher Education Act of 1965) operated
by a work college (as defined in such section). Specifically, a
work college must require resident students to participate in a
work-learning-service program that is an integral and stated
part of the institution's educational philosophy and program.
Effective Date
The provision is effective for amounts received in taxable
years beginning after the date of enactment (December 18,
2015).
2. Modification of rules relating to section 529 programs (sec. 302 of
the Act and sec. 529 of the Code) \801\
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\801\ The House Committee on Ways and Means reported H.R. 529 on
February 20, 2015 (H.R. Rep. No. 114-25). The House passed the bill on
February 25, 2015. The Senate Committee on Finance reported S. 335 on
May 21, 2015 (S. Rep. No. 114-56).
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Present Law
Section 529 qualified tuition programs
In general
A qualified tuition program is a program established and
maintained by a State or agency or instrumentality thereof, or
by one or more eligible educational institutions, which
satisfies certain requirements and under which a person may
purchase tuition credits or certificates on behalf of a
designated beneficiary that entitle the beneficiary to the
waiver or payment of qualified higher education expenses of the
beneficiary (a ``prepaid tuition program''). Section 529
provides specified income tax and transfer tax rules for the
treatment of accounts and contracts established under qualified
tuition programs.\802\ In the case of a program established and
maintained by a State or agency or instrumentality thereof, a
qualified tuition program also includes a program under which a
person may make contributions to an account that is established
for the purpose of satisfying the qualified higher education
expenses of the designated beneficiary of the account, provided
it satisfies certain specified requirements (a ``savings
account program''). Under both types of qualified tuition
programs, a contributor establishes an account for the benefit
of a particular designated beneficiary to provide for that
beneficiary's higher education expenses.
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\802\ For purposes of this description, the term ``account'' is
used interchangeably to refer to a prepaid tuition benefit contract or
a tuition savings account established pursuant to a qualified tuition
program.
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In general, prepaid tuition contracts and tuition savings
accounts established under a qualified tuition program involve
prepayments or contributions made by one or more individuals
for the benefit of a designated beneficiary. Decisions with
respect to the contract or account are typically made by an
individual who is not the designated beneficiary. Qualified
tuition accounts or contracts generally require the designation
of a person (generally referred to as an ``account owner'')
\803\ whom the program administrator (oftentimes a third party
administrator retained by the State or by the educational
institution that established the program) may look to for
decisions, recordkeeping, and reporting with respect to the
account established for a designated beneficiary. The person or
persons who make the contributions to the account need not be
the same person who is regarded as the account owner for
purposes of administering the account. Under many qualified
tuition programs, the account owner generally has control over
the account or contract, including the ability to change
designated beneficiaries and to withdraw funds at any time and
for any purpose. Thus, in practice, qualified tuition accounts
or contracts generally involve a contributor, a designated
beneficiary, an account owner (who oftentimes is not the
contributor or the designated beneficiary), and an
administrator of the account or contract.
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\803\ Section 529 refers to contributors and designated
beneficiaries, but does not define or otherwise refer to the term
``account owner,'' which is a commonly used term among qualified
tuition programs.
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Qualified higher education expenses
For purposes of receiving a distribution from a qualified
tuition program that qualifies for favorable tax treatment
under the Code, qualified higher education expenses means
tuition, fees, books, supplies, and equipment required for the
enrollment or attendance of a designated beneficiary at an
eligible educational institution, and expenses for special
needs services in the case of a special needs beneficiary that
are incurred in connection with such enrollment or attendance.
Qualified higher education expenses generally also include room
and board for students who are enrolled at least half-time. For
taxable years 2009 and 2010 only, qualified higher education
expenses included the purchase of any computer technology or
equipment, or Internet access or related services, if such
technology or services were to be used by the beneficiary or
the beneficiary's family during any of the years a beneficiary
was enrolled at an eligible institution.
Contributions to qualified tuition programs
Contributions to a qualified tuition program must be made
in cash. Section 529 does not impose a specific dollar limit on
the amount of contributions, account balances, or prepaid
tuition benefits relating to a qualified tuition account;
however, the program is required to have adequate safeguards to
prevent contributions in excess of amounts necessary to provide
for the beneficiary's qualified higher education expenses.
Contributions generally are treated as a completed gift
eligible for the gift tax annual exclusion. Contributions are
not tax deductible for Federal income tax purposes, although
they may be deductible for State income tax purposes. Amounts
in the account accumulate on a tax-free basis (i.e., income on
accounts in the plan is not subject to current income tax).
A qualified tuition program may not permit any contributor
to, or designated beneficiary under, the program to direct
(directly or indirectly) the investment of any contributions
(or earnings thereon) more than two times in any calendar year,
and must provide separate accounting for each designated
beneficiary. A qualified tuition program may not allow any
interest in an account or contract (or any portion thereof) to
be used as security for a loan.
Distributions from qualified tuition programs
Distributions from a qualified tuition program are
excludable from the distributee's gross income to the extent
that the total distribution does not exceed the qualified
higher education expenses incurred for the beneficiary.\804\
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\804\ Sec. 529(c)(3)(B)(i) and (ii)(I).
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If a distribution from a qualified tuition program exceeds
the qualified higher education expenses incurred for the
beneficiary, the amount includible in gross income is
determined, first, by applying the annuity rules of section 72
\805\ to determine the amount which would be includible in
gross income if none of the amount distributed was for
qualified higher education expenses and, then, reducing that
amount by an amount which bears the same ratio to that amount
as the qualified higher education expenses bear to the amount
of the distribution.\806\
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\805\ Under section 72, a distribution is includible in income to
the extent that the distribution represents earnings on the
contribution to the program, determined on a pro rata basis.
\806\ Sec. 529(c)(3)(A) and (B)(ii).
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For example, assume a taxpayer had $5,000 in a qualified
tuition program account, $4,000 of which was the amount
contributed. Also assume the taxpayer withdraws $1,000 from the
account and $500 is used for qualified higher education
expenses. First, the taxpayer applies the annuity rules of
section 72 which results in $200 being included in income under
section 72 assuming none of the distribution is used for
qualified higher education expenses. Then the taxpayer reduces
the $200 by one-half because 50 percent of the distribution was
used for qualified higher education expenses. Thus, $100 is
includible in gross income. This amount is subject to an
additional 10-percent tax (unless an exception applies).
The Code provides that, except as provided by the Secretary
of the Treasury (``Secretary''), for purposes of this
calculation, the taxpayer's account value, income, and
investment amount, are generally measured as of December 31st
of the taxable year in which the distribution was made. The
Secretary has issued guidance providing that the earnings
portion of a distribution is to be computed on the date of each
distribution.\807\
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\807\ Notice 2001-81, 2001-2 C.B. 617, December 10, 2001.
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In the case of an individual who is the designated
beneficiary for more than one qualified tuition program, all
such accounts are aggregated for purposes of calculating the
earnings in the account under section 72. The Secretary has
provided in guidance that this aggregation is required only in
the case of accounts contained within the same 529 program,
having the same account owner and the same designated
beneficiary.\808\
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\808\ Ibid.
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Explanation of Provision
The provision makes three modifications to section 529.
First, the provision provides that qualified higher
education expenses include the purchase of computer or
peripheral equipment (as defined in section 168(i)(2)(B)),
computer software (as defined in section 197(e)(3)(B)), or
Internet access and related services if the equipment,
software, or services are to be used primarily by the
beneficiary during any of the years the beneficiary is enrolled
at an eligible education institution.
Second, the provision repeals the rules providing that
section 529 accounts must be aggregated for purposes of
calculating the amount of a distribution that is included in a
taxpayer's income. Thus, in the case of a designated
beneficiary who has received multiple distributions from a
qualified tuition program in the taxable year, the portion of a
distribution that represents earnings is now to be computed on
a distribution-by-distribution basis, rather than an aggregate
basis, such that the computation applies to each distribution
from an account. The following example illustrates the
operation of this provision: Assume that two designated savings
accounts \809\ have been established by the same account owner
within the same qualified tuition program for the same
designated beneficiary. Account A contains $20,000, all of
which consists of contributed amounts (i.e., it has no
earnings). Account B contains $30,000, $20,000 of which
constitutes an investment in the account, and $10,000
attributable to earnings on that investment. Assume a taxpayer
were to receive a $10,000 distribution from Account A, with
none of the proceeds being spent on qualified higher education
expenses. Under present law, both of the designated
beneficiary's accounts would be aggregated for purposes of
computing earnings. Thus, $2,000 of the $10,000 distribution
from Account A ($10,000 * $10,000/$50,000) would be included in
the designated beneficiary's income. Under the provision, the
accounts would not be aggregated for purposes of determining
earnings on the account. Thus, because Account A has no
earnings, no amount of the distribution would be included in
the designated beneficiary's income for the taxable year.
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\809\ As used in this example, the term `account' refers to a sum
of money set aside in a qualified tuition program, and does not refer
to the allocation of such money into differing investment options
offered by such program.
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Third, the provision creates a new rule that provides, in
the case of a designated beneficiary who receives a refund of
any higher education expenses, any distribution that was used
to pay the refunded expenses shall not be subject to tax if the
designated beneficiary recontributes the refunded amount to the
qualified tuition program within 60 days of receiving the
refund, only to the extent that such recontribution is not in
excess of the refund. A transition rule allows for
recontributions of amounts refunded after December 31, 2014,
and before the date of enactment (December 18, 2015) to be made
not later than 60 days after the enactment of this provision.
Effective Date
The provision allowing computer technology to be considered
a higher education expense is effective for taxable years
beginning after December 31, 2014. The provision removing the
aggregation requirement in the case of multiple distributions
is effective for distributions made after December 31, 2014.
The provision allowing a recontribution of refunded tuition
amounts is effective for tuition refunded after December 31,
2014.
3. Modification to qualified ABLE programs (sec. 303 of the Act and
sec. 529A of the Code)
Present Law
In general
The Code provides for a tax-favored savings program
intended to benefit disabled individuals, known as qualified
ABLE programs.\810\ A qualified ABLE program is a program
established and maintained by a State or agency or
instrumentality thereof. A qualified ABLE program must meet the
following conditions: (1) under the provisions of the program,
contributions may be made to an account (an ``ABLE account''),
established for the purpose of meeting the qualified disability
expenses of the designated beneficiary of the account; (2) the
program must limit a designated beneficiary to one ABLE
account; (3) the program must allow for the establishment of
ABLE accounts only for a designated beneficiary who is either a
resident of the State maintaining such ABLE program or a
resident of a State that has not established an ABLE program (a
``contracting State'') which has entered into a contract with
such State to provide the contracting State's residents with
access to the State's ABLE program; and (4) the program must
meet certain other requirements discussed below. A qualified
ABLE program is generally exempt from income tax, but is
otherwise subject to the taxes imposed on the unrelated
business income of tax-exempt organizations.
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\810\ Sec. 529A.
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A designated beneficiary of an ABLE account is the owner of
the ABLE account. A designated beneficiary must be an eligible
individual (defined below) who established the ABLE account and
who is designated at the commencement of participation in the
qualified ABLE program as the beneficiary of amounts paid (or
to be paid) into and from the program.
Contributions to an ABLE account must be made in cash and
are not deductible for Federal income tax purposes. Except in
the case of a rollover contribution from another ABLE account,
an ABLE account must provide that it may not receive aggregate
contributions during a taxable year in excess of the amount
under section 2503(b) of the Code (the annual gift tax
exemption). For 2015, this is $14,000.\811\ Additionally, a
qualified ABLE program must provide adequate safeguards to
ensure that ABLE account contributions do not exceed the limit
imposed on accounts under the qualified tuition program of the
State maintaining the qualified ABLE program. Amounts in the
account accumulate on a tax-deferred basis (i.e., income on
accounts under the program is not subject to current income
tax).
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\811\ This amount is indexed for inflation. In the case that
contributions to an ABLE account exceed the annual limit, an excise tax
in the amount of six percent of the excess contribution to such account
is imposed on the designated beneficiary. Such tax does not apply in
the event that the trustee of such account makes a corrective
distribution of such excess amounts by the due date (including
extensions) of the individual's tax return for the year within the
taxable year.
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A qualified ABLE program may permit a designated
beneficiary to direct (directly or indirectly) the investment
of any contributions (or earnings thereon) no more than two
times in any calendar year and must provide separate accounting
for each designated beneficiary. A qualified ABLE program may
not allow any interest in the program (or any portion thereof)
to be used as security for a loan.
Distributions from an ABLE account are generally includible
in the distributee's income to the extent consisting of
earnings on the account.\812\ Distributions from an ABLE
account are excludable from income to the extent that the total
distribution does not exceed the qualified disability expenses
of the designated beneficiary during the taxable year. If a
distribution from an ABLE account exceeds the qualified
disability expenses of the designated beneficiary, a pro rata
portion of the distribution is excludable from income. The
portion of any distribution that is includible in income is
subject to an additional 10-percent tax unless the distribution
is made after the death of the beneficiary. Amounts in an ABLE
account may be rolled over without income tax liability to
another ABLE account for the same beneficiary \813\ or another
ABLE account for the designated beneficiary's brother, sister,
stepbrother or stepsister who is also an eligible individual.
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\812\ The rules of section 72 apply in determining the portion of a
distribution that consists of earnings.
\813\ For instance, if a designated beneficiary were to relocate to
a different State.
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Except in the case of an ABLE account established in a
different ABLE program for purposes of transferring ABLE
accounts,\814\ no more than one ABLE account may be established
by a designated beneficiary. Thus, once an ABLE account has
been established by a designated beneficiary, no account
subsequently established by such beneficiary shall be treated
as an ABLE account.
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\814\ In which case the contributor ABLE account must be closed 60
days after the transfer to the new ABLE account is made.
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A contribution to an ABLE account is treated as a completed
gift of a present interest to the designated beneficiary of the
account. Such contributions qualify for the per-donee annual
gift tax exclusion ($14,000 for 2015) and, to the extent of
such exclusion, are exempt from the generation skipping
transfer (``GST'') tax. A distribution from an ABLE account
generally is not subject to gift tax or GST tax.
Eligible individuals
As described above, a qualified ABLE program may provide
for the establishment of ABLE accounts only if those accounts
are established and owned by an eligible individual, such owner
referred to as a designated beneficiary. For these purposes, an
eligible individual is an individual either (1) for whom a
disability certification has been filed with the Secretary for
the taxable year, or (2) who is entitled to Social Security
Disability Insurance benefits or SSI benefits \815\ based on
blindness or disability, and such blindness or disability
occurred before the individual attained age 26.
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\815\ These are benefits, respectively, under Title II or Title XVI
of the Social Security Act.
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A disability certification means a certification to the
satisfaction of the Secretary, made by the eligible individual
or the parent or guardian of the eligible individual, that the
individual has a medically determinable physical or mental
impairment, which results in marked and severe functional
limitations, and which can be expected to result in death or
which has lasted or can be expected to last for a continuous
period of not less than 12 months, or is blind (within the
meaning of section 1614(a)(2) of the Social Security Act). Such
blindness or disability must have occurred before the date the
individual attained age 26. Such certification must include a
copy of the diagnosis of the individual's impairment and be
signed by a licensed physician.\816\
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\816\ No inference may be drawn from a disability certification for
purposes of eligibility for Social Security, SSI or Medicaid benefits.
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Qualified disability expenses
As described above, the earnings on distributions from an
ABLE account are excluded from income only to the extent total
distributions do not exceed the qualified disability expenses
of the designated beneficiary. For this purpose, qualified
disability expenses are any expenses related to the eligible
individual's blindness or disability which are made for the
benefit of the designated beneficiary. Such expenses include
the following expenses: education, housing, transportation,
employment training and support, assistive technology and
personal support services, health, prevention and wellness,
financial management and administrative services, legal fees,
expenses for oversight and monitoring, funeral and burial
expenses, and other expenses, which are approved by the
Secretary under regulations and consistent with the purposes of
section 529A.
Transfer to State
In the event that the designated beneficiary dies, subject
to any outstanding payments due for qualified disability
expenses incurred by the designated beneficiary, all amounts
remaining in the deceased designated beneficiary's ABLE account
not in excess of the amount equal to the total medical
assistance paid such individual under any State Medicaid plan
established under title XIX of the Social Security Act shall be
distributed to such State upon filing of a claim for payment by
such State. Such repaid amounts shall be net of any premiums
paid from the account or by or on behalf of the beneficiary to
the State's Medicaid Buy-In program.
Treatment of ABLE accounts under Federal programs
Any amounts in an ABLE account, and any distribution for
qualified disability expenses, shall be disregarded for
purposes of determining eligibility to receive, or the amount
of, any assistance or benefit authorized by any Federal means-
tested program. However, in the case of the SSI program, a
distribution for housing expenses is not disregarded, nor are
amounts in an ABLE account in excess of $100,000. In the case
that an individual's ABLE account balance exceeds $100,000,
such individual's SSI benefits shall not be terminated, but
instead shall be suspended until such time as the individual's
resources fall below $100,000. However, such suspension shall
not apply for purposes of Medicaid eligibility.
Treatment of ABLE accounts in bankruptcy
Property of a bankruptcy estate may not include certain
amounts contributed to an ABLE account, if the designated
beneficiary of such account was a child, stepchild, grandchild
or stepgrandchild of the debtor during the taxable year in
which funds were placed in the account. Such funds shall be
excluded from the bankruptcy estate only to the extent that
they were contributed to an ABLE account at least 365 days
prior to the filing of the title 11 petition, are not pledged
or promised to any entity in connection with any extension of
credit, and are not excess contributions as defined in new
section 4973(h). In the case of funds contributed to an ABLE
account that are contributed not earlier than 720 days (and not
later than 365 days) prior to the filing of the petition, only
up to $6,225 may be excluded.
Explanation of Provision
The provision eliminates the requirement that ABLE accounts
may be established only in the State of residence of the ABLE
account owner.\817\
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\817\ The Joint Committee staff's technical explanation of the PATH
Act of 2015 incorrectly stated that the provision allowed for rollovers
to ABLE accounts from qualified tuition programs (also known as 529
accounts). See Joint Committee on Taxation, Technical Explanation of
the Revenue Provisions of the Protecting Americans from Tax Hikes Act
of 2015, House Amendment #2 to the Senate Amendment to H.R. 2029 (Rules
Committee Print 114-40), (JCX-144-15), December 17, 2015, p. 151. The
provision does not change the rules relating to rollovers to ABLE
accounts.
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Effective Date
The provision applies to taxable years beginning after
December 31, 2014.
4. Exclusion from gross income of certain amounts received by wrongly
incarcerated individuals (sec. 304 of the Act and new sec. 139F
of the Code)
Present Law
The taxability of damages, i.e., the amounts received as a
result of a claim or legal action for compensation for injury,
depends upon the nature of the underlying claim. If a direct
payment on the underlying claim would be includible as income
under section 61, and no specific exemption for that type of
income is otherwise provided in the Code, then damages intended
to compensate for loss of that includible income are themselves
includible income.\818\ Section 104 of the Code specifically
excludes from gross income most compensation for physical
injuries or physical sickness. Damages for non-physical
injuries, such as mental anguish, damage to reputation,
discrimination, or lost income, are not within the purview of
the section 104 exclusion. Compensation related to wrongful
incarceration but not physical injuries or physical sickness is
not specifically addressed by the Code.
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\818\ For example, a claim for lost wages results in taxable
damages, because the wages themselves would have been taxable, but an
award for damage to property may not result in includible income if the
award does not exceed the recipient's basis in the property.
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Explanation of Provision
Under the provision, with respect to any wrongfully
incarcerated individual, gross income shall not include any
civil damages, restitution, or other monetary award (including
compensatory or statutory damages and restitution imposed in a
criminal matter) relating to the incarceration of such
individual for the covered offense for which such individual
was convicted.
A wrongfully incarcerated individual means an individual:
(1) who was convicted of a covered offense;
(2) who served all or part of a sentence of
imprisonment relating to that covered offense; and
(3)(i) was pardoned, granted clemency, or granted
amnesty for such offense because the individual was
innocent, or
(ii) for whom the judgment of conviction for
the offense was reversed or vacated, and whom
the indictment, information, or other
accusatory instrument for that covered offense
was dismissed or who was found not guilty at a
new trial after the judgment of conviction for
that covered offense was reversed or vacated.
For these purposes, a covered offense is any criminal
offense under Federal or State law, and includes any criminal
offense arising from the same course of conduct as that
criminal offense.
The provision contains a special rule allowing individuals
to make a claim for credit or refund of any overpayment of tax
resulting from the exclusion, even if such claim would be
disallowed under the Code or by operation of any law or rule of
law (including res judicata), if the claim for credit or refund
is filed before the close of the one-year period beginning on
the date of enactment (December 18, 2015).
Effective Date
The provision is effective for taxable years beginning
before, on, or after the date of enactment (December 18, 2015).
5. Clarification of special rule for certain governmental plans (sec.
305 of the Act and sec. 105(j) of the Code) \819\
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\819\ The Senate Committee on Finance reported S.910 on April 14,
2015 (S. Rep. No. 114-21).
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Present Law
Reimbursements under an employer-provided accident or
health plan for medical care expenses for employees, their
spouses, their dependents, and adult children under age 27 are
excludible from gross income.\820\ However, in order for these
reimbursements to be excluded from income, the plan may
reimburse expenses of only the employee and the employee's
spouse, dependents, and children under age 27. In the case of a
deceased employee, the plan generally may reimburse medical
expenses of only the employee's surviving spouse, dependents
and children under age 27. If a plan reimburses expenses of any
other beneficiary, all expense reimbursements under the plan
are included in income, including reimbursements of expenses of
the employee and the employee's spouse, dependents and children
under age 27 (or the employee's surviving spouse, dependents
and children under age 27).\821\
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\820\ Sec. 105(b).
\821\ Rev. Rul. 2006-36, 2006-2 C.B. 353. The ruling is effective
for plan years beginning after December 31, 2008, in the case of plans
including certain reimbursement provisions on or before August 14,
2006.
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Under a limited exception, reimbursements under a plan do
not fail to be excluded from income solely because the plan
provides for reimbursements of medical expenses of a deceased
employee's beneficiary, without regard to whether the
beneficiary is the employee's surviving spouse, dependent, or
child under age 27.\822\ In order for the exception to apply,
the plan must have provided, on or before January 1, 2008, for
reimbursement of the medical expenses of a deceased employee's
beneficiary. In addition, the plan must be funded by a medical
trust (1) that is established in connection with a public
retirement system, and (2) that either has been authorized by a
State legislature, or has received a favorable ruling from the
IRS that the trust's income is not includible in gross income
by reason of the exclusion for income of a State or political
subdivision.\823\ This exception preserves the exclusion for
reimbursements of expenses of the employee and the employee's
spouse, dependents, and children under age 27 (or the
employee's surviving spouse, dependents, and children under age
27). Reimbursements of expenses of other beneficiaries are
included in income.
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\822\ Sec. 105(j).
\823\ This exclusion is provided under section 115.
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Explanation of Provision
The provision expands the exception to apply to additional
plans. As expanded, the exception applies to a plan funded by a
medical trust (1) that is either established in connection with
a public retirement system or established by or on behalf of a
State or political subdivision thereof, and (2) that either has
been authorized by a State legislature or has received a
favorable ruling from the IRS that the trust's income is not
includible in gross income by reason of either the exclusion
for income of a State or political subdivision or the exemption
from income tax for a voluntary employees' beneficiary
association (``VEBA'').\824\ As under present law, the plan is
still required to have provided, on or before January 1, 2008,
for reimbursement of the medical expenses of a deceased
employee's beneficiary, without regard to whether the
beneficiary is the employee's surviving spouse, dependent, or
child under age 27.
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\824\ Tax-exempt status for a VEBA is provided under Code section
501(c)(9).
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The provision also clarifies that this exception preserves
the exclusion for reimbursements of expenses of the employee
and the employee's spouse, dependents, and children under age
27, or the employee's surviving spouse, dependents, and
children under age 27 (referred to under the provision as
``qualified taxpayers'') and that, as under present law,
reimbursements of expenses of other beneficiaries are included
in income.
Effective Date
The provision is effective with respect to payments after
the date of enactment (December 18, 2015).
6. Rollovers permitted from other retirement plans into SIMPLE
retirement accounts (sec. 306 of the Act and sec. 408(p)(1)(B)
of the Code)
Present Law
Certain small businesses can establish a simplified
retirement plan called the savings incentive match plan for
employees (``SIMPLE'') retirement plan. SIMPLE plans can be
adopted by employers: (1) that employ 100 or fewer employees
who received at least $5,000 in compensation during the
preceding year; and (2) that do not maintain another employer-
sponsored retirement plan.\825\ A SIMPLE plan can be either an
individual retirement arrangement (an ``IRA'') for each
employee \826\ or part of a qualified cash or deferred
arrangement (a ``section 401(k) plan'').\827\ The rules
applicable to SIMPLE IRAs and SIMPLE section 401(k) plans are
similar, but not identical.
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\825\ Sec. 408(p)(2)(C)(i). There is a two-year grace period for an
employer that establishes and maintains a SIMPLE IRA for one or more
years and satisfies the 100 employee limit but fails to meet the 100
employer limit in a subsequent year, provided that the reason for the
failure is not due to an acquisition, disposition, or similar
transaction involving the employer.
\826\ Sec. 408(p). A SIMPLE IRA may not be in the form of a Roth
IRA.
\827\ Sec. 401(k)(11).
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Distributions from employer-sponsored retirement plans and
IRAs (including SIMPLE plans) are generally includible in gross
income, except to the extent the amount distributed represents
a return of after-tax contributions (that is, basis). The
portion of a distribution made before age 59\1/2\, death, or
disability that is includible in gross income is generally
subject to an additional 10-percent income tax.\828\ Early
withdrawals from a SIMPLE plan generally are subject to the
additional 10-percent tax. However, in the case of a SIMPLE
IRA, early withdrawals during the two-year period beginning on
the date the employee first participated in the SIMPLE IRA are
subject to an additional 25 percent tax.\829\
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\828\ Sec. 72(t). There are other exceptions to the 10-percent
additional income tax, besides attainment of age 59\1/2\, death, or
disability.
\829\ Sec. 72(t)(6).
---------------------------------------------------------------------------
If certain requirements are met, distributions from
employer-sponsored retirement plans and IRAs generally may
generally be rolled over on a nontaxable basis to another
employer-sponsored retirement plan or IRA. However, a
distribution from a SIMPLE IRA during the two-year period
beginning on the date the employee first participated in the
SIMPLE IRA may be rolled over only to another SIMPLE IRA. In
addition, because the only contributions that may be made to a
SIMPLE IRA are contributions under a SIMPLE plan, distributions
from other employer-sponsored retirement plans and IRAs cannot
be rolled over to a SIMPLE IRA, even after this two-year
period.
Explanation of Provision
The provision permits rollovers of distributions from
employer-sponsored retirement plans and traditional IRAs (that
are not SIMPLE IRAs) into a SIMPLE IRA after the expiration of
the two-year period following the date the employee first
participated in the SIMPLE IRA (the two-year period during
which the additional income tax on distributions from a SIMPLE
IRA is 25 percent instead of 10 percent).
Effective Date
The provision applies to contributions to SIMPLE IRAs made
after the date of enactment (December 18, 2015).
7. Technical amendment relating to rollover of certain airline payment
amounts (sec. 307 of the Act and sec. 1106 of the FAA
Modernization and Reform Act of 2012)
Present Law
Individual retirement arrangements
The Code provides for two types of individual retirement
arrangements (``IRAs''): traditional IRAs and Roth IRAs.\830\
---------------------------------------------------------------------------
\830\ Traditional IRAs are described in section 408, and Roth IRAs
are described in section 408A.
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Contributions to a traditional IRA may be deductible from
gross income, or nondeductible contributions may be made, which
result in ``basis.'' Distributions from a traditional IRA are
includible in gross income to the extent not treated as a
return of basis (that is, if attributable to deductible
contributions or earnings).
Contributions to a Roth IRA are not deductible (and result
in basis), and qualified distributions from a Roth IRA are
excludable from gross income. Distributions from a Roth IRA
that are not qualified distributions are includible in gross
income to the extent not treated as a return of basis (that is,
if attributable to earnings). In general, a qualified
distribution from a Roth IRA is a distribution that (1) is made
after the five taxable year period beginning with the first
taxable year for which the individual first made a contribution
to a Roth IRA, and (2) is made on or after the individual
attains age 59\1/2\, death, or disability or which is a
qualified special purpose distribution.
The total amount that an individual may contribute to one
or more IRAs for a year (other than a rollover contribution,
discussed below) is generally limited to the lesser of: (1) a
dollar amount ($5,500 for 2015, plus $1,000 if the individual
is age 50 or older); or (2) the amount of the individual's
compensation that is includible in gross income for the year.
In the case of married individuals filing a joint return, a
contribution up to the dollar limit for each spouse may be
made, provided the combined compensation of the spouses is at
least equal to the contributed amount.
Subject to certain requirements, an individual may roll a
distribution from an IRA over to an IRA of the same type on a
nontaxable basis (that is, without income inclusion). In
addition, an individual generally may convert a traditional IRA
to a Roth IRA. In that case, the amount converted is includible
in income as if a distribution from the traditional IRA had
been made.
Rollover of airline payments to traditional IRAs
Under the FAA Modernization and Reform Act of 2012 (``2012
FAA Act''), if a qualified airline employee contributes any
portion of an airline payment amount to a traditional IRA
within 180 days of receipt of the amount (or, if later, within
180 days of February 14, 2012, the date of enactment of the
2012 FAA Act), the amount contributed is treated as a rollover
contribution to the IRA.\831\ A qualified airline employee
making such a rollover contribution may exclude the contributed
amount from gross income for the taxable year in which the
airline payment amount was paid to the qualified airline
employee.
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\831\ Sec. 1106 of Pub. L. No. 112-95. Under section 125 of the
Worker, Retiree, and Employer Recovery Act of 2008 (``WRERA''), Pub. L.
No. 110-458, a qualified airline employee is permitted to contribute
any portion of an airline payment amount to a Roth IRA within 180 days
of receipt of such amount (or, if later, within 180 days of December
23, 2008, the date of enactment of WRERA), and the amount contributed
is treated as a rollover contribution to the Roth IRA. The 2012 FAA Act
permitted an employee who had previously made a rollover contribution
of an airline payment amount to a Roth IRA to recharacterize all or a
portion of the rollover contribution as a rollover contribution to a
traditional IRA and to exclude the recharacterized amount from income.
---------------------------------------------------------------------------
For this purpose, a qualified airline employee is an
employee or former employee of a commercial passenger airline
carrier who was a participant in a qualified defined benefit
plan maintained by the carrier that was terminated or that
became subject to the benefit accrual and other restrictions
applicable to certain plans under the Pension Protection Act of
2006 (``PPA'').\832\ If a qualified airline employee dies after
receiving an airline payment amount, or if an airline payment
amount is paid to a surviving spouse of a qualified airline
employee, the surviving spouse may receive the same rollover
contribution treatment (and the related exclusion from income)
as the employee could have received.
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\832\ Pub. L. No. 109-280. Section 402 of PPA provides funding
relief with respect to certain defined benefit plans maintained by
commercial passenger airlines, subject to meeting the benefit accrual
and other restrictions under PPA section 402(b)(2) and (3).
---------------------------------------------------------------------------
An airline payment amount is any payment of any money or
other property payable by a commercial passenger airline to a
qualified airline employee: (1) under the approval of an order
of a Federal bankruptcy court in a case filed after September
11, 2001, and before January 1, 2007, and (2) in respect of the
qualified airline employee's interest in a bankruptcy claim
against the airline carrier, any note of the carrier (or amount
paid in lieu of a note being issued), or any other fixed
obligation of the carrier to pay a lump sum amount. An airline
payment amount does not include any amount payable on the basis
of the carrier's future earnings or profits. The amount of any
airline payment amount is determined without regard to the
withholding of the employee's share of taxes under the Federal
Insurance Contributions Act (``FICA'') or income tax.\833\
Thus, for purposes of the rollover provision and the related
exclusion from income, the gross amount of the airline payment
amount (before withholding) applies.
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\833\ Secs. 3102 and 3402. An airline payment amount that is
excluded from income under the 2012 FAA Act continues to be wages for
FICA and Social Security earnings purposes.
---------------------------------------------------------------------------
The ability to contribute airline payment amounts to a
traditional IRA as a rollover contribution (and the related
exclusion from income) is subject to limitations. First, a
qualified airline employee is not permitted to contribute an
airline payment amount to a traditional IRA for a taxable year
if, at any time during the taxable year or a preceding taxable
year, the employee was a ``covered employee,'' that is, the
principal executive officer (or an individual acting in such
capacity) within the meaning of the Securities Exchange Act of
1934 or among the three most highly compensated officers for
the taxable year (other than the principal executive officer),
of the commercial passenger airline carrier making the airline
payment amount.\834\ Second, in the case of a qualified airline
employee who was not at any time a covered employee, the amount
that may be contributed to a traditional IRA for a taxable year
cannot exceed the excess (if any) of (1) 90 percent of the
aggregate airline payment amounts received during the taxable
year and all preceding taxable years, over (2) the aggregate
amount contributed to a traditional IRA (and excluded from
income) for all preceding taxable years (``90 percent
limitation'').
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\834\ Covered employee status is defined by reference to section
162(m) (limiting deductions for compensation of covered employees),
which defines a covered employee as (1) the chief executive officer of
the corporation (or an individual acting in such capacity) as of the
close of the taxable year, and (2) the four most highly compensated
officers for the taxable year (other than the chief executive officer),
whose compensation is required to be reported to shareholders under the
Securities Exchange Act of 1934. Treas. Reg. sec. 1.162-27(c)(2)
provides that whether an employee is the chief executive officer or
among the four most highly compensated officers is determined pursuant
to the executive compensation disclosure rules promulgated under the
Securities Exchange Act of 1934. To reflect 2006 changes made to the
disclosure rules by the Securities and Exchange Commission, Notice
2007-49, 2007-25 I.R.B. 1429, provides that ``covered employee'' means
any employee who is (1) the principal executive officer (or an
individual acting in such capacity) within the meaning of the amended
disclosure rules, or (2) among the three most highly compensated
officers for the taxable year (other than the principal executive
officer).
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Under the 2012 FAA Act, a qualified airline employee who
excludes from income an airline payment amount contributed to a
traditional IRA may file a claim for a refund until the later
of: (1) the usual period of limitation (generally, three years
from the time the return was filed or two years from the time
the tax was paid, whichever period expires later),\835\ or (2)
April 15, 2013.
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\835\ Sec. 6511(a).
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The definition of qualified airline employee under the 2012
FAA Act was amended in 2014 to include an employee or former
employee of a commercial passenger airline carrier who was a
participant in a qualified defined benefit plan maintained by
the carrier that was frozen (that is, under which all benefit
accruals ceased) as of November 1, 2012 (``2014
amendments'').\836\ The 2014 amendments also amended the
definition of airline payment amount under the 2012 FAA Act to
include any payment of any money or other property payable by a
commercial passenger airline (but not any amount payable on the
basis of the carrier's future earnings or profits) to a
qualified airline employee: (1) under the approval of an order
of a Federal bankruptcy court in a case filed on November 29,
2011, and (2) in respect of the qualified airline employee's
interest in a bankruptcy claim against the airline carrier, any
note of the carrier (or amount paid in lieu of a note being
issued), or any other fixed obligation of the carrier to pay a
lump sum amount. Thus, as a result of the 2014 amendments, if a
qualified airline employee (other than a covered employee as
described above) under a qualified defined benefit plan that
was frozen as of November 1, 2012, receives an airline payment
amount under a Federal bankruptcy order in a case filed on
November 29, 2011, and, subject to the 90 percent limitation
described above, contributes any portion of the airline payment
amount to a traditional IRA within 180 days of receipt of the
amount, the amount contributed is treated as a rollover
contribution to the traditional IRA and may be excluded from
gross income for the taxable year in which the airline payment
amount was paid to the qualified airline employee.\837\
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\836\ An act to amend certain provisions of the FAA Modernization
and Reform Act of 2012, Pub. L. No. 113-243, enacted December 18, 2014.
The 2014 amendments allow a qualified airline employee who excludes
from income an airline payment amount contributed to a traditional IRA
to file a claim for a refund until the later of (1) the usual period of
limitation (generally, three years from the time the return was filed
or two years from the time the tax was paid, whichever period expires
later), or (2) April 15, 2015.
\837\ As permitted under present law, after the contribution, an
individual may convert the traditional IRA to a Roth IRA.
---------------------------------------------------------------------------
Unlike the 2012 FAA Act, the 2014 amendments did not
contain a provision to allow previously made payments that came
within the definition of airline payment amounts as a result of
the amendments to be rolled over within 180 days after
enactment.\838\
---------------------------------------------------------------------------
\838\ As described above, the WRERA provision enacted in 2008 also
contained a provision allowing rollovers within 180 days of receipt of
an airline payment amount or, if later, within 180 days of the date of
enactment of WRERA.
---------------------------------------------------------------------------
Explanation of Provision
The provision allows any amount that comes within the
definition of an airline payment amount as a result of the 2014
amendments to be rolled over within 180 days of receipt or, if
later, within the period beginning on December 18, 2014, and
ending 180 days after enactment of the provision.
Effective Date
The provision is effective as if included in the 2014
amendments.
8. Treatment of early retirement distributions for nuclear materials
couriers, United States Capitol Police, Supreme Court Police,
and diplomatic security special agents (sec. 308 of the Act and
sec. 72(t) of the Code)
Present Law
An individual who receives a distribution from a qualified
retirement plan before age 59\1/2\, death, or disability is
subject to a 10-percent early withdrawal tax on the amount
includible in income unless an exception to the tax
applies.\839\ Among other exceptions, the early distribution
tax does not apply to distributions made to an employee who
separates from service after age 55 (the ``separation from
service'' exception), or to distributions that are part of a
series of substantially equal periodic payments made for the
life, or life expectancy, of the employee or the joint lives,
or life expectancies, of the employee and his or her
beneficiary (the ``equal periodic payments'' exception).\840\
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\839\ Sec. 72(t).
\840\ Sec. 72(t)(2)(iv) and (v). Section 72(t)(4) provides a
recapture rule under which, in general, if the series of payments
eligible for the equal periodic payments exception is modified within
five years of the first payment or before age 59\1/2\, an additional
tax applies equal to the early withdrawal tax that would have applied
in the absence of the exception.
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Under a special rule for qualified public safety employees,
the separation from service exception applies to distributions
from a governmental defined benefit pension plan if the
employee separates from service after age 50 (rather than age
55). A qualified public safety employee is an employee of a
State or political subdivision of a State if the employee
provides police protection, firefighting services, or emergency
medical services for any area within the jurisdiction of such
State or political subdivision.
The special rule for applying the separation from service
exception to qualified public safety employees was revised by
the Defending Public Safety Employees' Retirement Act,
effective for distributions after December 31, 2015.\841\
First, the definition of qualified public safety employee was
expanded to include Federal law enforcement officers, Federal
customs and border protection officers, Federal firefighters,
and air traffic controllers.\842\ In addition, the special rule
was extended to distributions from governmental defined
contribution plans (rather than just governmental defined
benefit plans).\843\
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\841\ Sec. 2 of Pub. L. No. 114-26, enacted June 29, 2015,
discussed in Part Five. This provision also allows a qualified public
safety employee to modify a series of payments to which the equal
periodic payments exception has applied without being subject to the
recapture rule described above.
\842\ These positions are defined by reference to the provisions of
the Civil Service Retirement System (CSRS) and the Federal Employees
Retirement System (FERS).
\843\ Under section 7701(j), the Federal Thrift Savings Plan is
treated as a qualified defined contribution plan.
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Explanation of Provision
The provision amends the definition of qualified public
safety employee to include nuclear materials couriers,\844\
members of the United States Capitol Police, members of the
Supreme Court police, and diplomatic security special agents of
the United States Department of State.
---------------------------------------------------------------------------
\844\ These positions are defined by reference to the provisions of
CSRS and FERS.
---------------------------------------------------------------------------
Effective Date
The provision applies to distributions after December 31,
2015.
9. Prevention of extension of tax collection period for members of the
Armed Forces who are hospitalized as a result of combat zone
injuries (sec. 309 of the Act and secs. 6502 and 7508(e) of the
Code) \845\
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\845\ The Senate Committee on Finance reported S. 907 on April 14,
2015 (S. Rep. No. 114-18).
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Present Law
The Code provides active duty military and civilians in
designated combat zones additional time in which to file tax
returns, pay tax liabilities and take other actions required in
order to comply with their tax obligations.\846\ A commensurate
amount of time is provided for the IRS to complete actions
required with respect to assessment and collection of the
obligations of such active duty military and civilian
taxpayers. The additional time provided equals the actual time
in duty status, which includes hospitalization resulting from
service, plus 180 days. In other words, in determining how much
time remains in which to perform a task required by the Code,
both the taxpayer and the IRS may disregard the period of
active duty.
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\846\ Sec. 7508.
---------------------------------------------------------------------------
The Code provides that collection activities generally may
only occur within ten years after assessment.\847\ The effect
of the provisions described above is to extend the 10-year
collection period for combat zone taxpayers.
---------------------------------------------------------------------------
\847\ Sec. 6502.
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, the collection period for taxpayers
hospitalized for combat zone injuries shall not be suspended by
reason of any period of continuous hospitalization or the 180
days after hospitalization. Accordingly, the collection period
expires 10 years after assessment, plus the actual time spent
in a combat zone, regardless of the length of the postponement
period available for hospitalized taxpayers to comply with
their tax obligations.
Effective Date
The provision applies to taxes assessed before, on, or
after the date of the enactment (December 18, 2015).
B. Real Estate Investment Trusts
Overview
In general
A real estate investment trust (``REIT'') is an entity that
otherwise would be taxed as a U.S. corporation but elects to be
taxed under a special REIT tax regime. To qualify as a REIT, an
entity must meet a number of requirements. At least 90 percent
of REIT income (other than net capital gain) must be
distributed annually;\848\ the REIT must derive most of its
income from passive, generally real estate-related,
investments; and REIT assets must be primarily real estate-
related. In addition, a REIT must have transferable interests
and at least 100 shareholders, and no more than 50 percent of
the REIT interests may be owned by five or fewer individual
shareholders (as determined using specified attribution rules).
Other requirements also apply.\849\
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\848\ Even if a REIT meets the 90-percent income distribution
requirement for REIT qualification, more stringent distribution
requirements must be met in order to avoid an excise tax under section
4981.
\849\ Secs. 856 and 857.
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If an electing entity meets the requirements for REIT
status, the portion of its income that is distributed to its
shareholders as a dividend or qualifying liquidating
distribution each year is deductible by the REIT (whereas a
regular subchapter C corporation cannot deduct such
distributions).\850\ As a result, the distributed income of the
REIT is not taxed at the entity level; instead, it is taxed
only at the investor level. Although a REIT is not required to
distribute more than the 90 percent of its income described
above to retain REIT status, it is taxed at ordinary corporate
rates on amounts not distributed or treated as
distributed.\851\
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\850\ Liquidating distributions are covered to the extent of
earnings and profits, and are defined to include redemptions of stock
that are treated by shareholders as a sale of stock under section 302.
Secs. 857(b)(2)(B), 561, and 562(b).
\851\ An additional four-percent excise tax is imposed to the
extent a REIT does not distribute at least 85 percent of REIT ordinary
income and 95 percent of REIT capital gain net income within a calendar
year period. In addition, to the extent a REIT distributes less than
100 percent of its ordinary income and capital gain net income in a
year, the difference between the amount actually distributed and 100
percent is added to the distribution otherwise required in a subsequent
year to avoid the excise tax. Sec. 4981.
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A REIT may designate a capital gain distribution to its
shareholders, who treat the designated amount as long-term
capital gain when distributed. A REIT also may retain net
capital gain and pay corporate income tax on the amount
retained, while the shareholders include the undistributed
capital gain in income, obtain a credit for the corporate tax
paid, and step up the basis of their REIT stock for the amount
included in income.\852\ In this manner, capital gain also is
taxed only once, whether or not distributed, rather than at
both the entity and investor levels.
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\852\ Sec. 857(b)(3).
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Income tests
A REIT is restricted to earning certain types of generally
passive income. Among other requirements, at least 75 percent
of the gross income of a REIT in each taxable year must consist
of real estate-related income. Such income includes: rents from
real property; gain from the sale or other disposition of real
property (including interests in real property) that is not
stock in trade of the taxpayer, inventory, or other property
held by the taxpayer primarily for sale to customers in the
ordinary course of its trade or business; interest on mortgages
secured by real property or interests in real property; and
certain income from foreclosure property (the ``75-percent
income test'').\853\ Qualifying rents from real property
include rents from interests in real property and charges for
services customarily furnished or rendered in connection with
the rental of real property,\854\ but do not include
impermissible tenant service income.\855\ Impermissible tenant
service income includes amounts for services furnished by the
REIT to tenants or for managing or operating the property,
other than amounts attributable to services that are provided
by an independent contractor or taxable REIT subsidiary, or
services that certain tax exempt organizations could perform
under the section 512(b)(3) rental exception from unrelated
business taxable income.\856\ Qualifying rents from real
property include rent attributable to personal property which
is leased under, or in connection with, a lease of real
property, but only if the rent attributable to such personal
property for the taxable year does not exceed 15 percent of the
total rent for the taxable year attributable to both the real
and personal property leased under, or in connection with, the
lease.\857\
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\853\ Secs. 856(c)(3) and 1221(a)(1). Income from sales that are
not prohibited transactions solely by virtue of section 857(b)(6) also
is qualified REIT income.
\854\ Sec. 856(d)(1)(A) and (B).
\855\ Sec. 856(d)(2)(C).
\856\ Sec. 856(d)(7)(A) and (C). If impermissible tenant service
income with respect to any real or personal property is more than one
percent of all amounts received or accrued during the taxable year
directly or indirectly with respect to such property, then the
impermissible tenant service income with respect to such property
includes all such amounts. Sec. 856(d)(7)(B). The amount treated as
received for any service (or management or operation) shall not be less
than 150 percent of the direct cost of the trust in furnishing or
rendering the service (or providing the management or operation). Sec.
856(d)(7)(D). For purposes of the 75-percent and 95-percent income
tests, impermissible tenant service income is included in gross income
of the REIT. Sec. 856(d)(7)(E).
\857\ Sec. 856(d)(1)(C).
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In addition, rents received from any entity in which the
REIT owns more than 10 percent of the vote or value generally
are not qualifying income.\858\ However, there is an exception
for certain rents received from taxable REIT subsidiaries
(described further below), in which a REIT may own more than 10
percent of the vote or value.
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\858\ Sec. 856(d)(2)(B).
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In addition, 95 percent of the gross income of a REIT for
each taxable year must be from the 75-percent income sources
and a second permitted category of other, generally passive
sources such as dividends and interest (the ``95-percent income
test'').\859\
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\859\ Sec. 856(c)(2).
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A REIT must be a U.S. domestic entity, but it is permitted
to hold foreign real estate or other foreign assets, provided
the 75-percent and 95-percent income tests and the other
requirements for REIT qualification are met.\860\
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\860\ See Rev. Rul. 74-191, 1974-1 C.B. 170.
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Asset tests
At least 75 percent of the value of a REIT's assets must be
real estate assets, cash and cash items (including
receivables), and Government securities \861\ (the ``75-percent
asset test'').\862\ Real estate assets are real property
(including interests in real property and interests in
mortgages on real property) and shares (or transferable
certificates of beneficial interest) in other REITs.\863\ No
more than 25 percent of a REIT's assets may be securities other
than such real estate assets.\864\
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\861\ Government securities are defined for this purpose under
section 856(c)(5)(F), by reference to the Investment Company Act of
1940. The term includes securities issued or guaranteed by the United
States or persons controlled or supervised by and acting as an
instrumentality thereof, but does not include securities issued or
guaranteed by a foreign, state, or local government entity or
instrumentality.
\862\ Sec. 856(c)(4)(A).
\863\ Temporary investments in certain stock or debt instruments
also can qualify if they are temporary investments of new capital, but
only for the one-year period beginning on the date the REIT receives
such capital. Sec. 856(c)(5)(B).
\864\ Sec. 856(c)(4)(B)(i).
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Except with respect to securities of a taxable REIT
subsidiary, not more than five percent of the value of a REIT's
assets may be securities of any one issuer, and the REIT may
not possess securities representing more than 10 percent of the
outstanding value or voting power of any one issuer.\865\ In
addition, not more than 25 percent of the value of a REIT's
assets may be securities of one or more taxable REIT
subsidiaries.\866\
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\865\ Sec. 856(c)(4)(B)(iii).
\866\ Sec. 856(c)(4)(B)(ii).
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The asset tests must be met as of the close of each quarter
of a REIT's taxable year. However, a REIT that has met the
asset tests as of the close of any quarter does not lose its
REIT status solely because of a discrepancy during a subsequent
quarter between the value of the REIT's investments and such
requirements, unless such discrepancy exists immediately after
the acquisition of any security or other property and is wholly
or partly the result of such acquisition.\867\
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\867\ Sec. 856(c)(4). In the case of such an acquisition, the REIT
also has a grace period of 30 days after the close of the quarter to
eliminate the discrepancy.
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Taxable REIT subsidiaries
A REIT generally cannot own more than 10 percent of the
vote or value of a single entity. However, there is an
exception for ownership of a taxable REIT subsidiary (``TRS'')
that is taxed as a corporation, provided that securities of one
or more TRSs do not represent more than 25 percent of the value
of REIT assets.
A TRS generally can engage in any kind of business activity
except that it is not permitted directly or indirectly to
operate either a lodging facility or a health care facility, or
to provide to any other person (under a franchise, license, or
otherwise) rights to any brand name under which any lodging
facility or health care facility is operated.\868\
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\868\ The latter restriction does not apply to rights provided to
an independent contractor to operate or manage a lodging or health care
facility if such rights are held by the corporation as a franchisee,
licensee, or in similar capacity and such lodging facility or health
care facility is either owned by such corporation or is leased by such
corporation from the REIT. Sec. 856(l)(3).
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However, a TRS may rent a lodging facility or health care
facility from its parent REIT and is permitted to hire an
independent contractor \869\ to operate such facility. Rent
paid to the parent REIT by the TRS with respect to hotel,
motel, or other transient lodging facility operated by an
independent contractor is qualified rent for purposes of the
REIT's 75-percent and 95-percent income tests.\870\ This
lodging facility rental rule is an exception to the general
rule that rent paid to a REIT by any corporation (including a
TRS) in which the REIT owns 10 percent or more of the vote or
value is not qualified rental income for purposes of the 75-
percent or 95-percent REIT income tests.\871\ There is also an
exception to the general rule in the case of a TRS that rents
space in a building owned by its parent REIT if at least 90
percent of the space in the building is rented to unrelated
parties and the rent paid by the TRS to the REIT is comparable
to the rent paid by the unrelated parties.\872\
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\869\ An independent contractor will not fail to be treated as such
for this purpose because the TRS bears the expenses of operation of the
facility under the contract, or because the TRS receives the revenues
from the operation of the facility, net of expenses for such operation
and fees payable to the operator pursuant to the contract, or both.
Sec. 856(d)(9)(B).
\870\ Sec. 856(d)(8)(B).
\871\ Sec. 856(d)(2)(B).
\872\ Sec. 856(d)(8)(A).
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REITs are subject to a tax equal to 100 percent of
redetermined rents, redetermined deductions, and excess
interest. These are defined generally as the amounts of
specified REIT transactions with a TRS of the REIT, to the
extent such amounts differ from an arm's length amount.\873\
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\873\ Sec. 857(b)(7).
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Prohibited transactions tax
REITs are subject to a prohibited transaction tax (``PTT'')
of 100 percent of the net income derived from prohibited
transactions. For this purpose, a prohibited transaction is a
sale or other disposition of property by the REIT that is
``stock in trade of a taxpayer or other property which would
properly be included in the inventory of the taxpayer if on
hand at the close of the taxable year, or property held for
sale to customers by the taxpayer in the ordinary course of his
trade or business'' \874\ and is not foreclosure property. The
PTT for a REIT does not apply to a sale if the REIT satisfies
certain safe harbor requirements in section 857(b)(6)(C) or
(D), including an asset holding period of at least two
years.\875\ If the conditions are met, a REIT may either (1)
make no more than seven sales within a taxable year (other than
sales of foreclosure property or involuntary conversions under
section 1033), or (2) sell either no more than 10 percent of
the aggregate bases, or no more than 10 percent of the
aggregate fair market value, of all its assets as of the
beginning of the taxable year (computed without regard to sales
of foreclosure property or involuntary conversions under
section 1033), without being subject to the PTT tax.\876\
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\874\ This definition is the same as the definition of certain
property the sale or other disposition of which would produce ordinary
income rather than capital gain under section 1221(a)(1).
\875\ Additional requirements for the safe harbor limit the amount
of expenditures the REIT can make during the two-year period prior to
the sale that are includible in the adjusted basis of the property,
require marketing to be done by an independent contractor, and forbid a
sales price that is based on the income or profits of any person.
\876\ Sec. 857(b)(6).
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REIT shareholder tax treatment
Although a REIT typically does not pay corporate level tax
due to the deductible distribution of its income, and thus is
sometimes compared to a partnership or S corporation, REIT
equity holders are not treated as being engaged in the
underlying activities of the REIT as are partners or S
corporation shareholders, and the activities at the REIT level
that characterize its income do not generally flow through to
equity owners to characterize the tax treatment of REIT
distributions to them. A distribution to REIT shareholders out
of REIT earnings and profits is generally treated as an
ordinary income REIT dividend and is treated as ordinary income
taxed at the shareholder's normal rates on such income.\877\
However, a REIT is permitted to designate a ``capital gain
dividend'' to the extent a distribution is made out of its net
capital gain.\878\ Such a dividend is treated as long-term
capital gain to the shareholders.\879\
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\877\ Because a REIT dividend is generally paid out of income that
was not taxed to the distributing entity, the dividend is not eligible
for the dividends received deductions to a corporate shareholder. Sec.
243(d)(3). A REIT dividend is not eligible for the 20 percent qualified
dividend rate to an individual shareholder, except to the extent such
dividend is attributable to REIT income from nondeductible C
corporation dividends, or to certain income of the REIT that was
subject to corporate level tax. Sec. 857(c).
\878\ Sec. 857(b)(3)(C). Net capital gain is the excess of the net
long-term capital gain for the taxable year over the net short-term
capital loss for the taxable year. Sec. 1222.
\879\ A REIT may also retain its net capital gain without
distribution, while designating a capital gain dividend for inclusion
in shareholder income. In this case, the REIT pays corporate-level tax
on the capital gain, but the shareholder includes the undistributed
capital gain in income, receives a credit for the corporate level tax
paid, and steps up the basis of the REIT stock for the amount included
in income, with the result that the net tax paid is the shareholder-
level capital gain tax. Sec. 857(b)(3)(D).
---------------------------------------------------------------------------
REIT shareholders are not taxed on REIT income unless the
income is distributed to them (except in the case of REIT net
capital gain retained by the REIT and designated for inclusion
in the shareholder's income as explained in the preceding
footnote). However, since a REIT must distribute 90 percent of
its ordinary income annually, and typically will distribute or
designate its income as capital gain dividends to avoid a tax
at the REIT level, REIT income generally is taxed in full at
the shareholder level annually.
REIT shareholders are not entitled to any share of REIT
losses to offset against other shareholder income. However, if
the REIT itself has income, its losses offset its income in
determining how much it is required to distribute to meet the
distribution requirements. Also, REIT losses that reduce
earnings and profits can cause a distribution that exceeds the
REIT's earnings and profits to be treated as a nontaxable
return of capital to its shareholders.
Tax exempt shareholders
A tax exempt shareholder is exempt from tax on REIT
dividends, and is not treated as engaging in any of the
activities of the REIT. As one example, if the REIT borrowed
money and its income at the REIT level were debt-financed, a
tax exempt shareholder would not have debt-financed unrelated
business income from the REIT dividend.
Foreign shareholders
Except as provided by the Foreign Investment in Real
Property Tax Act of 1980 (``FIRPTA''),\880\ a REIT shareholder
that is a foreign corporation or a nonresident alien individual
normally treats its dividends as fixed and determinable annual
and periodic income that is subject to withholding under
section 1441 but not treated as active business income that is
effectively connected with the conduct of a U.S. trade or
business, regardless of the level of real estate activity of
the REIT in the United States.\881\ A number of treaties permit
a lower rate of withholding on REIT dividends than the Code
would otherwise require.
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\880\ Pub. L. No. 96-499. FIRPTA treats income of a foreign
investor from the sale or disposition of U.S. real property interests
as effectively connected with the operation of a trade or business in
the United States. Such income is taxed at regular U.S. rates and
withholding obligations are imposed on payors of the income. Secs. 897
and 1445.
\881\ As noted above, REITs are not permitted to receive income
from property that is inventory or that is held for sale to customers
in the ordinary course of the REIT's business. However, REITs may
engage in certain activities, including acquisition, development,
lease, and sale of real property, and may provide ``customary
services'' to tenants.
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Although FIRPTA applies in many cases to foreign investment
in U.S. real property through a REIT, REITs offer foreign
investors some ability to invest in U.S real property interests
without subjecting gain on the sale of REIT stock to FIRPTA
(for example, if the REIT is domestically controlled).\882\ In
general, if any class of stock of a corporation is regularly
traded on an established securities market, stock of such class
is subject to FIRPTA only in the case of a person who, at some
time during the testing period, held more than 5 percent of
such class of stock.\883\ Also, if the REIT stock is publicly
traded and the foreign investor does not own more than five
percent of such stock, the investor can receive distributions
from the sale by the REIT of U.S. real property interests
without such distributions being subject to FIRPTA.\884\
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\882\ Sec. 897(h)(2).
\883\ Sec. 897(c)(3).
\884\ Sec. 897(h)(1).
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1. Restriction on tax-free spinoffs involving REITs (sec. 311 of the
Act and secs. 355 and 856 of the Code)
Present Law
A corporation generally is required to recognize gain on
the distribution of property (including stock of a subsidiary)
to its shareholders as if the corporation had sold such
property for its fair market value.\885\ In addition, the
shareholders receiving the distributed property are ordinarily
treated as receiving a dividend equal to the value of the
distribution (to the extent of the distributing corporation's
earnings and profits),\886\ or capital gain in the case of an
acquisition of its stock that significantly reduces the
shareholder's interest in the parent corporation.\887\
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\885\ Sec. 311(b).
\886\ Sec. 301(b)(1) and (c)(1).
\887\ Sec. 302(a) and (b)(2).
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An exception to these rules applies if the distribution of
the stock of a controlled corporation satisfies the
requirements of section 355. If all the requirements are
satisfied, there is no tax to the distributing corporation or
to the shareholders on the distribution.
One requirement to qualify for tax-free treatment under
section 355 is that both the distributing corporation and the
controlled corporation must be engaged immediately after the
distribution in the active conduct of a trade or business that
has been conducted for at least five years and was not acquired
in a taxable transaction during that period (the ``active
business test'').\888\
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\888\ Sec. 355(b).
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For this purpose, the active business test is satisfied
only if (1) immediately after the distribution, the corporation
is engaged in the active conduct of a trade or business, or (2)
immediately before the distribution, the corporation had no
assets other than stock or securities in the controlled
corporations and each of the controlled corporations is engaged
immediately after the distribution in the active conduct of a
trade or business.\889\ For this purpose, the active business
test is applied by reference to the relevant affiliated group
rather than on a single corporation basis. For the parent
distributing corporation, the relevant affiliated group
consists of the distributing corporation as the common parent
and all corporations affiliated with the distributing
corporation through stock ownership described in section
1504(a)(1) (regardless of whether the corporations are
otherwise includible corporations under section 1504(b)),\890\
immediately after the distribution. The relevant affiliated
group for a controlled distributed subsidiary corporation is
determined in a similar manner (with the controlled corporation
as the common parent).
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\889\ Sec. 355(b)(1).
\890\ Sec. 355(b)(3).
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In determining whether a corporation is directly engaged in
an active trade or business that satisfies the requirement, IRS
ruling practice formerly required that the value of the gross
assets of the trade or business being relied on must ordinarily
constitute at least five percent of the total fair market value
of the gross assets of the corporation directly conducting the
trade or business.\891\ The IRS suspended this specific rule in
connection with its general administrative practice of moving
IRS resources away from advance rulings on factual aspects of
section 355 transactions in general.\892\
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\891\ Rev. Proc. 2003-3, sec. 4.01(30), 2003-1 I.R.B. 113.
\892\ Rev. Proc. 2003-48, 2003-29 I.R.B. 86. Since then, the IRS
discontinued private rulings on whether a transaction generally
qualifies for nonrecognition treatment under section 355. Nonetheless,
the IRS may still rule on certain significant issues. See Rev. Proc.
2016-1, 2016-1 I.R.B. 1; Rev. Proc. 2016-3, 2016-1 I.R.B. 126.
Recently, the IRS announced that it will not rule in certain situations
in which property owned by any distributing or controlled corporation
becomes the property of a RIC or a REIT; however, the IRS stated that
the policy did not extend to situations in which, immediately after the
date of the distribution, both the distributing and controlled
corporation will be RICs, or both of such corporations will be REITs,
and there is no plan or intention on the date of the distribution for
either the distributing or the controlled corporation to cease to be a
RIC or a REIT. See Rev. Proc. 2015-43, 2015-40 I.R.B. 467.
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Section 355 does not apply to an otherwise qualifying
distribution if, immediately after the distribution, either the
distributing or the controlled corporation is a disqualified
investment corporation and any person owns a 50 percent
interest in such corporation and did not own such an interest
before the distribution. A disqualified investment corporation
is a corporation of which two-thirds or more of its asset value
is comprised of certain passive investment assets. Real estate
is not included as such an asset.\893\
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\893\ Sec. 355(g).
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The IRS has ruled that a REIT may satisfy the active
business requirement through its rental activities.\894\ More
recently, the IRS has issued a private ruling indicating that a
REIT that has a TRS can satisfy the active business requirement
by virtue of the active business of its TRS.\895\ Thus, a C
corporation that owns REIT-qualified assets may create a REIT
to hold such assets and spin off that REIT without tax
consequences to it or its shareholders (if the newly-formed
REIT satisfies the active business requirement through its
rental activities or the activities of a TRS). Following the
spin-off, income from the assets held in the REIT is no longer
subject to corporate level tax (unless there is a disposition
of such assets that incurs tax under the built in gain rules).
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\894\ Rev. Rul. 2001-29, 2001-1 C.B. 1348.
\895\ Priv. Ltr. Rul. 201337007. A private ruling may be relied
upon only by the taxpayer to which it is issued. However, private
rulings provide some indication of administrative practice.
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Explanation of Provision
The provision makes a REIT generally ineligible to
participate in a tax-free spin-off as either a distributing or
controlled corporation under section 355. There are two
exceptions, however. First, the general rule does not apply if,
immediately after the distribution, both the distributing and
the controlled corporations are REITs.\896\ Second, a REIT may
spin off a TRS if (1) the distributing corporation has been a
REIT at all times during the 3-year period ending on the date
of the distribution, (2) the controlled corporation has been a
TRS of the REIT at all times during such period, and (3) the
REIT has had control (as defined in section 368(c) \897\
applied by taking into account stock owned directly or
indirectly, including through one or more partnerships, by the
REIT) of the TRS at all times during such period. For this
purpose, control of a partnership means ownership of at least
80 percent of the profits interest and at least 80 percent of
the capital interests.
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\896\ As long as a REIT election for each corporation is effective
immediately after the distribution, the elections may be made after
that time.
\897\ Under section 368(c), the term ``control'' means the
ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80
percent of the total number of shares of all other classes of stock of
the corporation.
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A controlled corporation will be treated as meeting the
control requirements if the stock of such corporation was
distributed by a TRS in a transaction to which section 355 (or
so much of section 356 as relates to section 355) applies and
the assets of such corporation consist solely of the stock or
assets held by one or more TRSs of the distributing corporation
meeting the control requirements noted above.
If a corporation that is not a REIT was a distributing or
controlled corporation with respect to any distribution to
which section 355 applied, such corporation (and any successor
corporation) shall not be eligible to make a REIT election for
any taxable year beginning before the end of the 10-year period
beginning on the date of such distribution.
Effective Date
The provision generally applies to distributions on or
after December 7, 2015,\898\ but does not apply to any
distribution pursuant to a transaction described in a ruling
request initially submitted to the Internal Revenue Service on
or before such date, which request has not been withdrawn and
with respect to which a ruling has not been issued or denied in
its entirety as of such date.
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\898\ The provision does not apply to distributions by a
corporation pursuant to a plan under which stock constituting control
(within the meaning of section 368(c)) of the controlled corporation
was distributed before December 7, 2015.
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2. Reduction in percentage limitation on assets of REIT which may be
taxable REIT subsidiaries (sec. 312 of the Act and sec. 856 of
the Code)
Present Law
A REIT generally is not permitted to own securities
representing more than 10 percent of the vote or value of any
entity, nor is it permitted to own securities of a single
issuer comprising more than 5 percent of REIT value.\899\ In
addition, rents received by a REIT from a corporation of which
the REIT directly or indirectly owns more than 10 percent of
the vote or value generally are not qualified rents for
purposes of the 75-percent and 95-percent income tests.\900\
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\899\ Sec. 856(c)(4)(B)(iii).
\900\ Sec. 856(d)(2)(B).
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There is an exception from these rules in the case of a
TRS.\901\ No more than 25 percent of the value of total REIT
assets may consist of securities of one or more TRSs.\902\
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\901\ Sec. 856(d)(8).
\902\ Sec. 856(c)(4)(B)(ii).
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Explanation of Provision
The provision reduces to 20 percent the permitted
percentage of total REIT assets that may be securities of one
or more TRSs.
Effective Date
The provision applies to taxable years beginning after
December 31, 2017.
3. Prohibited transaction safe harbors (sec. 313 of the Act and sec.
857 of the Code)
Present Law
REITs are subject to a prohibited transaction tax (``PTT'')
of 100 percent of the net income derived from prohibited
transactions. For this purpose, a prohibited transaction is a
sale or other disposition of property by the REIT that is
``stock in trade of a taxpayer or other property which would
properly be included in the inventory of the taxpayer if on
hand at the close of the taxable year, or property held for
sale to customers by the taxpayer in the ordinary course of his
trade or business'' \903\ and is not foreclosure property. The
PTT for a REIT does not apply to a sale if the REIT satisfies
certain safe harbor requirements in section 857(b)(6)(C) or
(D), including an asset holding period of at least two
years.\904\ If the conditions are met, a REIT may either (1)
make no more than seven sales within a taxable year (other than
sales of foreclosure property or involuntary conversions under
section 1033), or (2) sell either no more than 10 percent of
the aggregate bases, or no more than 10 percent of the
aggregate fair market value, of all its assets as of the
beginning of the taxable year (computed without regard to sales
of foreclosure property or involuntary conversions under
section 1033), without being subject to the PTT tax.\905\
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\903\ This definition is the same as the definition of certain
property the sale or other disposition of which would produce ordinary
income rather than capital gain under section 1221(a)(1).
\904\ Additional requirements for the safe harbor limit the amount
of expenditures the REIT can make during the two-year period prior to
the sale that are includible in the adjusted basis of the property,
require marketing to be done by an independent contractor, and forbid a
sales price that is based on the income or profits of any person.
\905\ Sec. 857(b)(6).
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The additional requirements for the safe harbor limit the
amount of expenditures the REIT or a partner of the REIT can
make during the two-year period prior to the sale that are
includible in the adjusted basis of the property. Also, if more
than seven sales are made during the taxable year,
substantially all marketing and development expenditures with
respect to the property must have been made through an
independent contractor from whom the REIT itself does not
derive or receive any income.
Explanation of Provision
The provision expands the amount of property that a REIT
may sell in a taxable year within the safe harbor provisions,
from 10 percent of the aggregate basis or fair market value, to
20 percent of the aggregate basis or fair market value.
However, in any taxable year, the aggregate adjusted bases and
the fair market value of property (other than sales of
foreclosure property or sales to which section 1033 applies)
sold during the three taxable year period ending with such
taxable year may not exceed 10 percent of the sum of the
aggregate adjusted bases or the sum of the fair market value of
all of the assets of the REIT as of the beginning of each of
the 3 taxable years that are part of the period.
The provision clarifies that the determination of whether
property is described in section 1221(a)(1) is made without
regard to whether or not such property qualifies for the safe
harbor from the prohibited transactions rules.
Effective Date
The provision generally applies to taxable years beginning
after the date of enactment (December 18, 2015). However, the
provision clarifying the determination of whether property is
described in section 1221(a)(1) has retroactive effect, but
does not apply to any sale of property to which section
857(b)(6)(G) applies.
4. Repeal of preferential dividend rule for publicly offered REITs;
authority for alternative remedies to address certain REIT
distribution failures (secs. 314 and 315 of the Act and sec.
562 of the Code)
Present Law
A REIT is allowed a deduction for dividends paid to its
shareholders.\906\ In order to qualify for the deduction, a
dividend must not be a ``preferential dividend.'' \907\ For
this purpose, a dividend is preferential unless it is
distributed pro rata to shareholders, with no preference to any
share of stock compared with other shares of the same class,
and with no preference to one class as compared with another
except to the extent the class is entitled to a preference.
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\906\ Sec. 857(b)(2)(B).
\907\ Sec. 562(c).
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Similar rules apply to regulated investment companies
(``RICs'').\908\ However, the preferential dividend rule does
not apply to a publicly offered RIC (as defined in section
67(c)(2)(B)).\909\
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\908\ Sec. 852(b)(2)(D).
\909\ Sec. 562(c).
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Explanation of Provision
The provision repeals the preferential dividend rule for
publicly offered REITs. For this purpose, a REIT is publicly
offered if it is required to file annual and periodic reports
with the Securities and Exchange Commission under the
Securities Exchange Act of 1934.
For other REITs, the provision provides the Secretary of
the Treasury with authority to provide an appropriate remedy to
cure the failure of the REIT to comply with the preferential
dividend requirements in lieu of not considering the
distribution to be a dividend for purposes of computing the
dividends-paid deduction where the Secretary determines the
failure to comply is inadvertent or is due to reasonable cause
and not due to willful neglect, or the failure is a type of
failure identified by the Secretary as being so described.
Effective Date
The provision to repeal the preferential dividend rule for
publicly offered REITs applies to distributions in taxable
years beginning after December 31, 2014.
The provision granting authority to the Secretary of the
Treasury to provide alternative remedies addressing certain
REIT distribution failures applies to distributions in taxable
years beginning after December 31, 2015.
5. Limitations on designation of dividends by REITs (sec. 316 of the
Act and sec. 857 of the Code)
Present Law
A REIT that has a net capital gain for a taxable year may
designate dividends that it pays or is treated as paying during
the year as capital gain dividends.\910\ A capital gain
dividend is treated by the shareholder as gain from the sale or
exchange of a capital asset held more than one year.\911\ The
amount that may be designated as capital gain dividends for any
taxable year may not exceed the REIT's net capital gain for the
year.
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\910\ Sec. 857(b)(3)(C).
\911\ Sec. 857(b)(3)(B).
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A REIT may designate dividends that it pays or is treated
as paying during the year as qualified dividend income.\912\
Qualified dividend income is taxed to individuals at the same
tax rate as net capital gain, under rules enacted by the
Taxpayer Relief Act of 1997.\913\ The amount that may be
designated as qualified dividend income for any taxable year is
limited to qualified dividend income received by the REIT plus
some amounts subject to corporate taxation at the REIT level.
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\912\ Sec. 857(c)(2).
\913\ Sec. 1(h)(11) enacted in Pub. L. No. 105-34.
---------------------------------------------------------------------------
The IRS has ruled that a RIC may designate the maximum
amount permitted under each of the provisions allowing a RIC to
designate dividends even if the aggregate of all the designated
amounts exceeds the total amount of the RIC's dividends
distributions.\914\
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\914\ Rev. Rul. 2005-31, 2005-1 C.B.1084.
---------------------------------------------------------------------------
The IRS also has ruled that if a RIC has two or more
classes of stock and it designates the dividends that it pays
on one class as consisting of more than that class's
proportionate share of a particular type of income, the
designations are not effective for federal tax purposes to the
extent that they exceed the class's proportionate share of that
type of income.\915\ The Internal Revenue Service announced
that it would provide guidance that RICs and REITs must use in
applying the capital gain provision enacted by the Taxpayer
Relief Act of 1997.\916\ The announcement referred to the
designation limitations of Revenue Ruling 89-91.
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\915\ Rev. Rul. 89-81, 1989-1 C.B. 226.
\916\ Notice 97-64, 1997-2 C.B. 323. Recently, the IRS modified
Notice 97-64 and provided certain new rules for RICs; the designation
limitations in Revenue Ruling 89-81, however, continue to apply. Notice
2015-41, 2015-24 I.R.B. 1058.
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Explanation of Provision
The provision limits the aggregate amount of dividends
designated by a REIT for a taxable year under all of the
designation provisions to the amount of dividends paid with
respect to the taxable year (including dividends described in
section 858 that are paid after the end of the REIT taxable
year but treated as paid by the REIT with respect to the
taxable year).
The provision provides the Secretary of the Treasury
authority to prescribe regulations or other guidance requiring
the proportionality of the designation for particular types of
dividends (for example, capital gain dividends) among shares or
beneficial interests in a REIT.
Effective Date
The provision applies to distributions in taxable years
beginning after December 31, 2015.
6. Debt instruments of publicly offered REITs and mortgages treated as
real estate assets (sec. 317 of the Act and sec. 856 of the
Code)
Present Law
At least 75 percent of the value of a REIT's assets must be
real estate assets, cash and cash items (including
receivables), and Government securities (the ``75-percent asset
test'').\917\ Real estate assets are real property (including
interests in real property and mortgages on real property) and
shares (or transferable certificates of beneficial interest) in
other REITs.\918\ No more than 25 percent of a REIT's assets
may be securities other than such real estate assets.\919\
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\917\ Sec. 856(c)(4)(A).
\918\ Such term also includes any property (not otherwise a real
estate asset) attributable to the temporary investment of new capital,
but only if such property is stock or a debt instrument, and only for
the one-year period beginning on the date the REIT receives such
capital. Sec. 856(c)(5)(B).
\919\ Sec. 856(c)(4)(B)(i).
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Except with respect to a TRS, not more than five percent of
the value of a REIT's assets may be securities of any one
issuer, and the REIT may not possess securities representing
more than 10 percent of the outstanding value or voting power
of any one issuer.\920\ No more than 25 percent of the value of
a REIT's assets may be securities of one or more TRSs.\921\
---------------------------------------------------------------------------
\920\ Sec. 856(c)(4)(B)(iii).
\921\ Sec. 856(c)(4)(B)(ii).
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The asset tests must be met as of the close of each quarter
of a REIT's taxable year.\922\
---------------------------------------------------------------------------
\922\ Sec. 856(c)(4). However, a REIT that has met the asset tests
as of the close of any quarter does not lose its REIT status solely
because of a discrepancy during a subsequent quarter between the value
of the REIT's investments and such requirements, unless such
discrepancy exists immediately after the acquisition of any security or
other property and is wholly or partly the result of such acquisition.
Sec. 856(c)(4).
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At least 75 percent of a REIT's gross income must be from
certain real estate related and other items. In addition, at
least 95 percent of a REIT's gross income must be from
specified sources that include the 75 percent items and also
include interest, dividends, and gain from the sale or other
disposition of securities (whether or not real estate-related).
Explanation of Provision
Under the provision, debt instruments issued by publicly
offered REITs are treated as real estate assets, as are
interests in mortgages on interests in real property (for
example, an interest in a mortgage on a leasehold interest in
real property). Such assets therefore are qualified assets for
purposes of meeting the 75-percent asset test, but are subject
to special limitations described below.
As under present law, income from debt instruments issued
by publicly offered REITs that is interest income or gain from
the sale or other disposition of a security is treated as
qualified income for purposes of the 95-percent gross income
test. Income from debt instruments issued by publicly offered
REITs that would not have been treated as real estate assets
but for the new provision, however, is not qualified income for
purposes of the 75-percent income test, and not more than 25
percent of the value of a REIT's total assets is permitted to
be represented by such debt instruments.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2015.
7. Asset and income test clarification regarding ancillary personal
property (sec. 318 of the Act and sec. 856 of the Code)
Present Law
75-percent income test
Among other requirements, at least 75 percent of the gross
income of a REIT in each taxable year must consist of real
estate-related income. Such income includes: rents from real
property; income from the sale or exchange of real property
(including interests in real property) that is not stock in
trade, inventory, or held by the taxpayer primarily for sale to
customers in the ordinary course of its trade or business;
interest on mortgages secured by real property or interests in
real property; and certain income from foreclosure property
(the ``75-percent income test''). Amounts attributable to most
types of services provided to tenants (other than certain
``customary services''), or to more than specified amounts of
personal property, are not qualifying rents.
The Code definition of rents from real property includes
rent attributable to personal property which is leased under,
or in connection with, a lease of real property, but only if
the rent attributable to such property for the taxable year
does not exceed 15 percent of the total rent for the taxable
year attributable to both the real and personal property leased
under, or in connection with, such lease.\923\
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\923\ Sec. 856(d)(1)(C).
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For purposes of determining whether interest income is from
a mortgage secured by real property, Treasury regulations
provide that where a mortgage covers both real property and
other property, an apportionment of the interest must be made.
If the loan value of the real property is equal to or exceeds
the amount of the loan, then the entire interest income is
apportioned to the real property. However, if the amount of the
loan exceeds the loan value of the real property, then the
interest income apportioned to the real property is an amount
equal to the interest income multiplied by a fraction, the
numerator of which is the loan value of the real property and
the denominator of which is the amount of the loan.\924\ The
remainder of the interest income is apportioned to the other
property.
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\924\ Treas. Reg. sec. 1.856-5(c)(1). The amount of the loan for
this purpose is defined as the hightest principal amount of the loan
outstanding during the taxable year. Treas. Reg. sec. 1.856-5(c)(3).
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The loan value of real property is defined as the fair
market value of the property determined as of the date on which
the commitment by the REIT to make the loan becomes binding on
the REIT. In the case of a loan purchased by a REIT, the loan
value of the real property is the fair market value of the real
property determined as of the date on which the commitment of
the REIT to purchase the loan becomes binding.\925\
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\925\ Special rules apply to construction loans. Treas. Reg. sec.
1.856-5(c)(2).
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75-percent asset test
At the close of each quarter of the taxable year, at least
75 percent of the value of a REIT's total assets must be
represented by real estate assets, cash and cash items, and
Government securities.
Real estate assets generally mean real property (including
interests in real property and interests in mortgages on real
property) and shares (or transferable certificates of
beneficial interest) in other REITs.
Neither the Code nor regulations address the allocation of
value in cases where real property and personal property may
both be present.
Explanation of Provision
The provision allows certain ancillary personal property
leased with real property to be treated as real property for
purposes of the 75-percent asset test, applying the same
threshold that applies under present law for purposes of
determining rents from real property under section 856(d)(l)(C)
for purposes of the 75-percent income test.
The provision also modifies the present-law rules for
determining when an obligation secured by a mortgage is
considered secured by a mortgage on real property if the
security includes personal property as well. Under the
provision, in the case of an obligation secured by a mortgage
on both real property and personal property, if the fair market
value of such personal property does not exceed 15 percent of
the total fair market value of all such property, such personal
property is treated as real property for purposes of the 75-
percent income and 75-percent asset test computations.\926\ In
making this determination, the fair market value of all
property (both personal and real) is determined at the same
time and in the same manner as the fair market value of real
property is determined for purposes of apportioning interest
income between real property and personal property under the
rules for determining whether interest income is from a
mortgage secured by real property.
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\926\ Sec. 856(c)(3)(B) and (4)(A).
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Effective Date
The provision is effective for taxable years beginning
after December 31, 2015.
8. Hedging provisions (sec. 319 of the Act and sec. 857 of the Code)
Present Law
Except as provided by Treasury regulations, income from
certain REIT hedging transactions that are clearly identified,
including gain from the sale or disposition of such a
transaction, is not included as gross income under either the
95-percent income or 75-percent income test. Transactions
eligible for this exclusion include transactions that hedge
indebtedness incurred or to be incurred by the REIT to acquire
or carry real estate assets and transactions entered primarily
to manage risk of currency fluctuations with respect to items
of income or gain described in section 856(c)(2) or (3).\927\
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\927\ Sec. 856(c)(5)(G).
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Explanation of Provision
The provision expands the scope of the present-law
exception of certain hedging income from gross income for
purposes of the income tests, under section 856(c)(5)(G). Under
the provision, if (1) a REIT enters into one or more positions
described in clause (i) of section 856(c)(5)(G) with respect to
indebtedness described therein or one or more positions
described in clause (ii) of section 856(c)(5)(G) with respect
to property that generates income or gain described in section
856(c)(2) or (3); (2) any portion of such indebtedness is
extinguished or any portion of such property is disposed of;
and (3) in connection with such extinguishment or disposition,
such REIT enters into one or more transactions which would be
hedging transactions described in subparagraph (B) or (C) of
section 1221(b)(2) with respect to any position referred to in
(1) above, if such position were ordinary property,\928\ then
any income of such REIT from any position referred to in (1)
and from any transaction referred to in (3) (including gain
from the termination of any such position or transaction) shall
not constitute gross income for purposes of the 75-percent or
95-percent gross income tests, to the extent that such
transaction hedges such position.
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\928\ Such definition of a hedging transaction is applied for
purposes of this provision without regard to whether or not the
position referred to is ordinary property.
---------------------------------------------------------------------------
The provision is intended to extend the current treatment
of income from certain REIT hedging transactions as income that
is disregarded for purposes of the 75-percent and 95-percent
income tests to income from positions that primarily manage
risk with respect to a prior hedge that a REIT enters in
connection with the extinguishment or disposal (in whole or in
part) of the liability or asset (respectively) related to such
prior hedge, to the extent the new position qualifies as a
section 1221 hedge or would so qualify if the hedged position
were ordinary property.
The provision also clarifies that the identification
requirement that applies to all hedges under the hedge gross
income rules is the requirement described in section
1221(a)(7), determined after taking account of any curative
provisions provided under the regulations referred to therein.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2015.
9. Modification of REIT earnings and profits calculation to avoid
duplicate taxation (sec. 320 of the Act and secs. 562 and 857
of the Code)
Present Law
For purposes of computing earnings and profits of a
corporation, the alternative depreciation system, which
generally is less accelerated than the system used in
determining taxable income, is used in the case of the
depreciation of tangible property. Also, certain amounts
treated as currently deductible for purposes of computing
taxable income are allowed as a deduction ratably over a period
of five years for computing earnings and profits. Finally, the
installment method is not allowed in computing earnings and
profits from the installment sale of property.\929\
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\929\ Sec. 312(k)(3) and (n)(5).
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In the case of a REIT, the current earnings and profits of
a REIT are not reduced by any amount which is not allowable as
a deduction in computing its taxable income for the taxable
year.\930\ In addition, for purposes of computing the deduction
for dividends paid by a REIT for a taxable year, earnings and
profits are increased by the total amount of gain on the sale
or exchange of real property by the trust during the year.\931\
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\930\ Sec. 857(d)(1). This provision applies to a REIT without
regard to whether it meets the requirements of section 857(a) for the
taxable year.
\931\ Sec. 562(e).
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These rules can by illustrated by the following example:
Example.--Assume that a REIT had $100 of taxable income and
earnings and profits in each of five consecutive taxable years
(determined without regard to any energy efficient commercial
building deduction \932\ and without regard to any deduction
for dividends paid). Assume that in the first of the five
years, the REIT had an energy efficient commercial building
deduction in computing its taxable income of $10, reducing its
pre-dividend taxable income to $90. Assume further that the
deduction is allowable at a rate of $2 per year over the five-
year period beginning with the first year in computing its
earnings and profits.
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\932\ Sec. 179D.
---------------------------------------------------------------------------
Under present law, the REIT's earnings and profits in the
first year are $98 ($100 less $2). In each of the next four
years, the REIT's current earnings and profits are $100 ($98 as
computed for the first year plus an additional $2 under section
857(d)(1) for the $2 not deductible in computing taxable income
for the year).
Assume the REIT distributes $100 to its shareholders at the
close of each of the five years. Under present law, the
shareholders have $98 dividend income in the first year and a
$2 return of capital and $100 dividend income in each of the
following four years, for a total of $498 dividend income,
notwithstanding that the REIT had only $490 pre-dividend
taxable income over the period. The dividends paid by the REIT
reduce its taxable income to zero in each of the taxable years.
Explanation of Provision
Under the provision, the current earnings and profits of a
REIT for a taxable year are not reduced by any amount that (1)
is not allowable as a deduction in computing its taxable income
for the current taxable year and (2) was not so allowable for
any prior taxable year. Thus, under the provision, if an amount
is allowable as a deduction in computing taxable income in year
one and is allowable in computing earnings and profits in year
two (determined without regard to present-law section
857(d)(1)), section 857(d)(1) no longer applies and the
deduction in computing the year two earnings and profits of the
REIT is allowable. Thus, a lesser maximum amount will be a
dividend to shareholders in that year. This provision does not
change the present-law determination of current earnings and
profits for purposes of computing a REIT's deduction for
dividends paid.
In addition, the provision provides that the current
earnings and profits of a REIT for a taxable year for purposes
of computing the deduction for dividends paid are increased by
any amount of gain on the sale or exchange of real property
taken into account in determining the taxable income of the
REIT for the taxable year (to the extent the gain is not
otherwise so taken into account). Thus, in the case of an
installment sale of real property, current earnings and profits
for purposes of the REIT's deduction for dividends paid for a
taxable year are increased by the amount of gain taken into
account in computing its taxable income for the year and not
otherwise taken into account in computing the current earnings
and profits.
The following illustrates the application of the provision:
Example.--Assume the same facts as in the above example.
Under the provision, as under present law, in the first taxable
year, the earnings and profits of the REIT were $98 and the
shareholders take into account $98 dividend income and $2 is a
return of capital. Under the provision, in each of the next
four years, the earnings and profits are $98 (i.e., section
857(d)(1) does not apply) so that the shareholders take into
account $98 of dividend income in each year and $2 is a return
of capital each year.
For purposes of the REIT's deduction for dividends paid,
present law remains unchanged so that the REIT's taxable income
will be reduced to zero in each of the taxable years.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2015.
10. Treatment of certain services provided by taxable REIT subsidiaries
(sec. 321 of the Act and sec. 857 of the Code)
Present Law
Taxable REIT subsidiaries
A TRS generally can engage in any kind of business activity
except that it is not permitted directly or indirectly to
operate either a lodging facility or a health care facility, or
to provide to any other person (under a franchise, license, or
otherwise) rights to any brand name under which any lodging
facility or health care facility is operated.
REITs are subject to a tax equal to 100 percent of
redetermined rents, redetermined deductions, and excess
interest. These are defined generally as the amounts of
specified REIT transactions with a TRS of the REIT, to the
extent such amounts differ from an arm's length amount.
Prohibited transactions tax
REITs are subject to a prohibited transaction tax (``PTT'')
of 100 percent of the net income derived from prohibited
transactions.\933\ For this purpose, a prohibited transaction
is a sale or other disposition of property by the REIT that is
stock in trade of a taxpayer or other property that would
properly be included in the inventory of the taxpayer if on
hand at the close of the taxable year, or property held for
sale to customers by the taxpayer in the ordinary course of his
trade or business and is not foreclosure property. The PTT for
a REIT does not apply to a sale of property which is a real
estate asset if the REIT satisfies certain criteria in section
857(b)(6)(C) or (D).
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\933\ Sec. 857(b)(6).
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Section 857(b)(6)(C) provides that a prohibited transaction
does not include a sale of property which is a real estate
asset (as defined in section 856(c)(5)(B)) and which is
described in section 1221(a)(1) if (1) the REIT has held the
property for not less than two years; (2) aggregate
expenditures made by the REIT, or any partner of the REIT,
during the two year period preceding the date of sale which are
includible in the basis of the property do not exceed 30
percent of the net selling price of the property; (3) either:
(A) the REIT does not make more than seven sales of property
\934\ during the taxable year, or (B) the aggregate adjusted
bases (as determined for purposes of computing earnings and
profits) of property \935\ sold during the taxable year does
not exceed 10 percent of the aggregate bases (as so determined)
of all of the assets of the REIT as of the beginning of the
taxable year, or (C) the fair market value of property \936\
sold during the taxable year does not exceed 10 percent of the
aggregate fair market value of all the assets of the REIT as of
the beginning of the taxable year; (4) in the case of land or
improvements, not acquired through foreclosure (or deed in lieu
of foreclosure), or lease termination, the REIT has held the
property for not less than two years for production of rental
income; and (5) if the requirement of (3)(A) above is not
satisfied, substantially all of the marketing and development
expenditures with respect to the property were made through an
independent contractor (as defined in section 856(d)(3)) from
whom the REIT does not derive or receive any income.
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\934\ Sales of foreclosure property or sales to which section 1033
applies are excluded.
\935\ Sales of foreclosure property or sales to which section 1033
applies are excluded.
\936\ Sales of foreclosure property or sales to which section 1033
applies are excluded.
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Section 857(b)(6)(D) provides that a prohibited transaction
does not include a sale of property which is a real estate
asset (as defined in section 856(c)(5)(B)) and which is
described in section 1221(a)(1) if (1) the REIT has held the
property for not less than two years in connection with the
trade or business of producing timber; (2) the aggregate
expenditures made by the REIT, or any partner of the REIT,
during the two year period preceding the date of sale which (A)
are includible in the basis of the property (other than
timberland acquisition expenditures), and (B) are directly
related to operation of the property for the production of
timber or for the preservation of the property for use as a
timberland, do not exceed 30 percent of the net selling price
of the property; (3) the aggregate expenditures made by the
REIT, or a partner of the REIT, during the two year period
preceding the date of sale which (A) are includible in the
basis of the property (other than timberland acquisition
expenditures), and (B) are not directly related to operation of
the property for the production of timber or for the
preservation of the property for use as a timberland, do not
exceed five percent of the net selling price of the property;
(4) either: (A) the REIT does not make more than seven sales of
property \937\ during the taxable year, or (B) the aggregate
adjusted bases (as determined for purposes of computing
earnings and profits) of property \938\ sold during the taxable
year does not exceed 10 percent of the aggregate bases (as so
determined) of all of the assets of the REIT as of the
beginning of the taxable year, or (C) the fair market value of
property \939\ sold during the taxable year does not exceed 10
percent of the aggregate fair market value of all the assets of
the REIT as of the beginning of the taxable year; (5) if the
requirement of (4)(A) above is not satisfied, substantially all
of the marketing expenditures with respect to the property were
made through an independent contractor (as defined in section
856(d)(3)) from whom the REIT does not derive or receive any
income, or, in the case of a sale on or before the termination
date, a TRS; and (6) the sales price of the property sold by
the trust is not based in whole or in part on income or profits
derived from the sale or operation of such property.
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\937\ Sales of foreclosure property or sales to which section 1033
applies are excluded.
\938\ Sales of foreclosure property or sales to which section 1033
applies are excluded.
\939\ Sales of foreclosure property or sales to which section 1033
applies are excluded.
---------------------------------------------------------------------------
Foreclosure property
Under current law, certain income and gain derived from
foreclosure property satisfies the 95-percent and 75-percent
REIT income tests.\940\ Property will cease to be foreclosure
property, however, if used in a trade or business conducted by
the REIT, other than through an independent contractor from
which the REIT itself does not derive or receive any income,
more than 90 days after the day on which the REIT acquired such
property.\941\
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\940\ Sec. 856(c)(2)(F) and (3)(F).
\941\ Sec. 856(e)(4)(C).
---------------------------------------------------------------------------
Explanation of Provision
For purposes of the exclusion from the prohibited
transactions excise tax, the provision modifies the requirement
of section 857(b)(6)(C)(v), that substantially all of the
development expenditures with respect to the property were made
through an independent contractor from whom the REIT itself
does not derive or receive any income, to allow a TRS to have
developed the property.\942\
---------------------------------------------------------------------------
\942\ The requirement limiting the amount of expenditures added to
basis that the REIT, or a partner of the REIT, may make within two
years prior to the sale, as well as other requirements for the
exclusion, are retained.
---------------------------------------------------------------------------
The provision also allows a TRS to make marketing
expenditures with respect to property under section
857(b)(6)(C)(v) or 857(b)(6)(D)(v) without causing property
that is otherwise eligible for the prohibited transaction
exclusion to lose such qualification.
The provision allows a TRS to operate foreclosure property
without causing loss of foreclosure property status, under
section 856(e)(4)(C).
The items subject to the 100-percent excise tax on certain
non-arm's-length transactions between a TRS and a REIT are
expanded to include ``redetermined TRS service income.'' Such
income is defined as gross income of a TRS of a REIT
attributable to services provided to, or on behalf of, such
REIT (less the deductions properly allocable thereto) to the
extent the amount of such income (less such deductions) would
be increased on distribution, apportionment, or allocation
under section 482 (but for the exception from section 482 if
the 100-percent excise tax applies). The term does not include
gross income attributable to services furnished or rendered to
a tenant of the REIT (or deductions properly attributable
thereto), since that income is already subject to a separate
provision of the 100-percent excise tax rules.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2015.
11. Exception from FIRPTA for certain stock of REITs; exception for
interests held by foreign retirement and pension funds (secs.
322 and 323 of the Act and secs. 897 and 1445 of the Code)
\943\
---------------------------------------------------------------------------
\943\ The Senate Committee on Finance reported S.915 on April 14,
2015 (S. Rep. No. 114-25). Section 2 of that bill contained a provision
similar to section 322 of the Protecting Americans from Tax Hikes Act
of 2015 (Division Q of Pub. L. No. 114-113).
---------------------------------------------------------------------------
Present Law
General rules relating to FIRPTA
A foreign person that is not engaged in the conduct of a
trade or business in the United States generally is not subject
to any U.S. tax on capital gain from U.S. sources, including
capital gain from the sale of stock or other capital
assets.\944\
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\944\ Secs. 871(b) and 882(a). Property is treated as held by a
person for use in connection with the conduct of a trade or business in
the United States, even if not so held at the time of sale, if it was
so held within 10 years prior to the sale. Sec. 864(c)(7). Also, all
gain from an installment sale is treated as from the sale of property
held in connection with the conduct of such a trade or business if the
property was so held during the year in which the installment sale was
made, even if the recipient of the payments is no longer engaged in the
conduct of such trade or business when the payments are received. Sec.
864(c)(6).
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However, the Foreign Investment in Real Property Tax Act of
1980 (``FIRPTA'') \945\ generally treats a foreign person's
gain or loss from the disposition of a U.S. real property
interest (``USRPI'') as income that is effectively connected
with the conduct of a U.S. trade or business, and thus taxable
at the income tax rates applicable to U.S. persons, including
the rates for net capital gain.\946\ With certain exceptions,
if a foreign corporation distributes a USRPI, gain is
recognized on the distribution (including a distribution in
redemption or liquidation) of a USRPI, in an amount equal to
the excess of the fair market value of the USRPI (as of the
time of distribution) over its adjusted basis.\947\ A foreign
person subject to tax on FIRPTA gain is required to file a U.S.
tax return under the normal rules relating to receipt of income
effectively connected with a U.S. trade or business.\948\
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\945\ Pub. L. No. 96-499. The rules governing the imposition and
collection of tax under FIRPTA are contained in a series of provisions
enacted in 1980 and subsequently amended. See secs. 897, 1445, 6039C,
and 6652(f).
\946\ Sec. 897(a).
\947\ Sec. 897(d). In addition, such gain may also be subject to
the branch profits tax at a 30-percent rate (or lower treaty rate).
\948\ In addition, section 6039C authorizes regulations that would
require a return reporting foreign direct investments in U.S. real
property interests. No such regulations have been issued, however.
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The payor of amounts that FIRPTA treats as effectively
connected with a U.S. trade or business (``FIRPTA income'') to
a foreign person generally is required to withhold U.S. tax
from the payment.\949\ Withholding generally is 10 percent of
the sales price, in the case of a direct sale by the foreign
person of a USRPI (but withholding is not required in certain
cases, including on any sale of stock that is regularly traded
on an established securities market \950\), and 10 percent of
the amount realized by the foreign shareholder in the case of
certain distributions by a corporation that is or has been a
U.S. real property holding corporation (``USRPHC'') during the
applicable testing period.\951\ The withholding is generally 35
percent of the amount of a distribution to a foreign person of
net proceeds attributable to the sale of a USRPI from an entity
such as a partnership, REIT, or RIC.\952\ The foreign person
can request a refund with its U.S. tax return, if appropriate,
based on that person's total U.S. effectively connected income
and deductions (if any) for the taxable year.
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\949\ Sec. 1445(a).
\950\ Sec. 1445(b)(6).
\951\ Sec. 1445(e)(3). Withholding at 10 percent of a gross amount
may also apply in certain other circumstances under regulations. See
sec. 1445(e)(4) and (5).
\952\ Sec. 1445(e)(6) and Treasury regulations thereunder. The
Treasury Department is authorized to issue regulations that would
reduce the 35 percent withholding on distributions to 20 percent during
the time that the maximum income tax rate on dividends and capital
gains of U.S. persons is 20 percent.
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USRPHCs and five-percent public shareholder exception
USRPIs include not only interests in real property located
in the United States or the U.S. Virgin Islands, but also stock
of a USRPHC, generally defined as any domestic corporation,
unless the taxpayer establishes that the fair market value of
the corporation's USRPIs was less than 50 percent of the
combined fair market value of all its real property interests
(U.S. and worldwide) and all its assets used or held for use in
a trade or business, at all times during a ``testing period,''
which is the shorter of the duration of the taxpayer's
ownership of the stock after June 18, 1980, or the five-year
period ending on the date of disposition of the stock.\953\
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\953\ Sec. 897(c)(1) and (2).
---------------------------------------------------------------------------
Under an exception, even if a corporation is a USRPHC, a
shareholder's shares of a class of stock that is regularly
traded on an established securities market are not treated as
USRPIs if the shareholder holds (applying attribution rules) no
more than five percent of that class of stock at any time
during the testing period.\954\ Among other things, the
relevant attribution rules require attribution between a
corporation and a shareholder that owns five percent or more in
value of the stock of such corporation.\955\ The attribution
rules also attribute stock ownership between spouses and
between children, grandchildren, parents, and grandparents.
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\954\ Sec. 897(c)(3). The constructive ownership attribution rules
are specified in section 897(c)(6)(C).
\955\ If a person owns, directly or indirectly, five percent or
more in value of the stock in a corporation, such person is considered
as owning the stock owned directly or indirectly by or for such
corporation, in that proportion which the value of the stock such
person so owns bears to the value of all the stock in such corporation.
Sec. 318(c)(2)(C) as modified by section 897(c)(6)(C). Also, if five
percent or more in value of the stock in a corporation is owned
directly or indirectly, by or for any person, such corporation shall be
considered as owning the stock owned, directly or indirectly, by or for
such person. Sec. 318(c)(3)(C) as modified by section 897(c)(6)(C).
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FIRPTA rules for foreign investment through REITs and RICs
Special FIRPTA rules apply to foreign investment through a
``qualified investment entity,'' which includes any REIT and
certain RICs that invest largely in USRPIs (including stock of
one or more REITs).\956\
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\956\ Sec. 897(h)(4)(A)(i). The provision including certain RICs in
the definition of qualified investment entity previously expired
December 31, 2014. Section 133 of the Protecting Americans from Tax
Hikes Act of 2015 (Division Q of Pub. L. No. 114-113) reinstated the
provision and made it permanent as of January 1, 2015, as described
above in item 22 of Title I.A.
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Stock of domestically controlled qualified investment
entities not a USRPI
If a qualified investment entity is ``domestically
controlled'' (defined to mean that less than 50 percent in
value of the qualified investment entity has been owned
(directly or indirectly) by foreign persons during the relevant
testing period \957\), stock of such entity is not a USRPI and
a foreign shareholder can sell the stock of such entity without
being subject to tax under FIRPTA, even if the stock would
otherwise be stock of a USRPHC. Treasury regulations provide
that for purposes of determining whether a REIT is domestically
controlled, the actual owner of REIT shares is the ``person who
is required to include in his return the dividends received on
the stock.'' \958\ The IRS has issued a private letter ruling
concluding that the term ``directly or indirectly'' for this
purpose does not require looking through corporate entities
that, in the facts of the ruling, were represented to be fully
taxable domestic corporations for U.S. federal income tax
purposes ``and not otherwise a REIT, RIC, hybrid entity,
conduit, disregarded entity, or other flow-through or look-
through entity.'' \959\
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\957\ The testing period for this purpose if the shorter of (i) the
period beginning on June 19, 1980, and ending on the date of
disposition or distribution, as the case may be, (ii) the five-year
period ending on the date of the disposition or distribution, as the
case may be, or (iii) the period during which the qualified investment
entity was in existence. Sec. 897(h)(4)(D).
\958\ Treas. Reg. sec. 1.897-1(c)(2)(i) and -8(b).
\959\ PLR 200923001. A private letter ruling may be relied upon
only by the taxpayer to which it is issued. However, private letter
rulings provide some indication of administrative practice.
---------------------------------------------------------------------------
FIRPTA applies to qualified investment entity (REIT and
certain RIC) distributions attributable to gain
from sale or exchange of USRPIs, except for
distributions to certain five-percent or smaller
shareholders
A distribution by a REIT or other qualified investment
entity, to the extent attributable to gain from the entity's
sale or exchange of USRPIs, is treated as FIRPTA income.\960\
The FIRPTA character is retained if the distribution occurs
from one qualified investment entity to another, through a tier
of REITs or RICs.\961\ An IRS notice (Notice 2007-55) states
that this rule retaining the FIRPTA income character of
distributions attributable to the sale of USRPIs applies to any
distributions under sections 301, 302, 331, and 332 (i.e., to
dividend distributions, distributions treated as sales or
exchanges of stock by the investor, and both nonliquidating and
liquidating distributions) and that the IRS will issue
regulations to that effect.\962\
---------------------------------------------------------------------------
\960\ Sec. 897(h)(1).
\961\ In 2006, the Tax Increase Prevention and Reconciliation Act
of 2005 (``TIPRA''), Pub. L. No. 109-222, sec. 505, specified the
retention of this FIRPTA character on a distribution to an upper-tier
qualified investment entity, and added statutory withholding
requirements.
\962\ Notice 2007-55, 2007-2 C.B.13. The Notice also states that in
the case of a foreign government investor, because FIRPTA income is
treated as effectively connected with the conduct of a U.S. trade or
business, proceeds distributed by a qualified investment entity from
the sale of USRPIs are not exempt from tax under section 892. The
Notice cites and compares existing temporary regulations and indicates
that Treasury will apply those regulations as well to certain
distributions. See Temp. Treas. Reg. secs. 1.892-3T, 1.897-9T(e), and
1.1445-10T(b).
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There is an exception to this rule in the case of
distributions to certain public shareholders. If an investor
has owned no more than five percent of a class of stock of a
REIT or other qualified investment entity that is regularly
traded on an established securities market located in the
United States during the one-year period ending on the date of
the distribution, then amounts attributable to gain from entity
sales or exchanges of USRPIs can be distributed to such a
shareholder without being subject to FIRPTA tax.\963\ Such
distributions that are dividends are treated as dividends from
the qualified investment entity,\964\ and thus generally would
be subject to U.S. dividend withholding tax (as reduced under
any applicable treaty), but are not treated as income
effectively connected with the conduct of a U.S. trade or
business. An IRS Chief Counsel advice memorandum concludes that
such distributions which are made in complete liquidation of a
REIT are not treated as dividends from the qualified investment
entity and thus generally would not be subject to U.S. dividend
withholding tax (in addition to not being treated as income
effectively connected with the conduct of a U.S. trade or
business).\965\
---------------------------------------------------------------------------
\963\ Sec. 897(h)(1), second sentence.
\964\ Secs. 852(b)(3)(E) and 857(b)(3)(F).
\965\ AM 2008-003, February 15, 2008.
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Explanation of Provision
Exception from FIRPTA for certain REIT stock
In the case of REIT stock only, the provision increases
from five percent to 10 percent the maximum stock ownership a
shareholder may have held, during the testing period, of a
class of stock that is publicly traded, to avoid having that
stock be treated as a USRPI on disposition.
The provision likewise increases from five percent to 10
percent the percentage ownership threshold that, if not
exceeded, results in treating a distribution to holders of
publicly traded REIT stock, attributable to gain from sales of
exchanges of USRPIs, as a dividend, rather than as FIRPTA gain.
The attribution rules of section 897(c)(6)(C) retain the
present-law rule that requires attribution between a
shareholder and a corporation if the shareholder owns more than
five percent of a class of stock of the corporation. The
attribution rules now apply, however, to the determination of
whether a person holds more than 10 percent of a class of
publicly traded REIT stock.
The provision also provides that REIT stock held by a
qualified shareholder, including stock held indirectly through
one or more partnerships, is not a U.S real property interest
in the hands of such qualified shareholder, except to the
extent that an investor in the qualified shareholder (other
than an investor that is a qualified shareholder) holds more
than 10 percent of that class of stock of the REIT (determined
by application of the constructive ownership rules of section
897(c)(6)(C)). Thus, so long as the ``more than 10 percent''
rule is not exceeded, a qualified shareholder may own and
dispose of any amount of stock of a REIT (including stock of a
privately-held, non-domestically controlled REIT that is owned
by such qualified shareholder) without the application of
FIRPTA.
If an investor in the qualified shareholder (other than an
investor that is a qualified shareholder) directly, indirectly,
or constructively holds more than 10 percent of such class of
REIT stock (an ``applicable investor''), then a percentage of
the REIT stock held by the qualified shareholder equal to the
applicable investor's percentage ownership of the qualified
shareholder is treated as a USRPI in the hands of the qualified
shareholder and is subject to FIRPTA. In that case, an amount
equal to such percentage multiplied by the disposition proceeds
and REIT distribution proceeds attributable to underlying USRPI
gain is treated as FIRPTA gain in the hands of the qualified
shareholder.
The provision is intended to override in certain cases one
of the conclusions reached in AM 2008-003. Specifically, the
provision contains special rules with respect to certain
distributions that are treated as a sale or exchange of REIT
stock under section 301(c)(3), 302, or 331 with respect to a
qualified shareholder. Any such amounts attributable to an
applicable investor are ineligible for the FIRPTA exception for
qualified shareholders, and thus are subject to FIRPTA. Any
such amounts attributable to other investors are treated as a
dividend received from a REIT for purposes of U.S. dividend
withholding tax and the application of income tax treaties,
notwithstanding their general treatment under the Code.
A qualified shareholder is defined as a foreign person that
(i) either is eligible for the benefits of a comprehensive
income tax treaty which includes an exchange of information
program and whose principal class of interests is listed and
regularly traded on one or more recognized stock exchanges (as
defined in such comprehensive income tax treaty), or is a
foreign partnership that is created or organized under foreign
law as a limited partnership in a jurisdiction that has an
agreement for the exchange of information with respect to taxes
with the United States and has a class of limited partnership
units representing greater than 50 percent of the value of all
the partnership units that is regularly traded on the NYSE or
NASDAQ markets, (ii) is a qualified collective investment
vehicle (as defined below), and (iii) maintains records on the
identity of each person who, at any time during the foreign
person's taxable year, is the direct owner of 5 percent or more
of the class of interests or units (as applicable) described in
(i), above.
A qualified collective investment vehicle is defined as a
foreign person that (i) would be eligible for a reduced rate of
withholding under the comprehensive income tax treaty described
above, even if such entity holds more than 10 percent of the
stock of such REIT,\966\ (ii) is publicly traded, is treated as
a partnership under the Code, is a withholding foreign
partnership, and would be treated as a USRPHC if it were a
domestic corporation, or (iii) is designated as such by the
Secretary of the Treasury and is either (a) fiscally
transparent within the meaning of section 894, or (b) required
to include dividends in its gross income, but is entitled to a
deduction for distributions to its investors.
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\966\ The qualified collective investment vehicle must be eligible
for a reduced rate of withholding under a provision in the dividends
article of the relevant treaty dealing specifically with dividends paid
by REITs. For example, the U.S. income tax treaties with Australia and
the Netherlands provide such a reduced rate of withholding under
certain circumstances.
---------------------------------------------------------------------------
The provision also contains rules with respect to
partnership allocations of USRPI gains to applicable investors.
If an applicable investor's proportionate share of USRPI gain
for the taxable year exceeds such partner's distributive share
of USRPI gain for the taxable year then such partner's
distributive share of non-USRPI income or gain is
recharacterized as USRPI gain for the taxable year in the
amount that the distributive share of USRPI gain exceeds the
proportionate share of USRPI gain. For purposes of these
partnership allocation rules, USRPI gain is defined to comprise
the net of gain recognized on disposition of a USRPI,
distributions from a REIT that are treated as USRPI gain, and
loss from the disposition of USRPIs. An investor's
proportionate share of USRPI gain is determined based on the
applicable investor's largest proportionate share of income or
gain for the taxable year, and if such proportionate amount may
vary during the existence of the partnership, such share is the
highest share the applicable investor may receive.
Domestically controlled qualified investment entity
The provision redefines the term ``domestically controlled
qualified investment entity'' to provide a number of new rules
and presumptions relating to whether a qualified investment
entity is domestically controlled. First, a qualified
investment entity shall be permitted to presume that holders of
less than five percent of a class of stock regularly traded on
an established securities market in the United States are U.S.
persons throughout the testing period, except to the extent
that the qualified investment entity has actual knowledge that
such persons are not U.S. persons. Second, any stock in the
qualified investment entity held by another qualified
investment entity (I) which has issued any class of stock that
is regularly traded on an established stock exchange, or (II)
which is a RIC that issues redeemable securities (within the
meaning of section 2 of the Investment Company Act of 1940)
shall be treated as held by a foreign person unless such other
qualified investment entity is domestically controlled (as
determined under the new rules) in which case such stock shall
be treated as held by a U.S. person. Finally, any stock in a
qualified investment entity held by any other qualified
investment entity not described in (I) or (II) of the preceding
sentence shall only be treated as held by a U.S. person to the
extent that the stock of such other qualified investment entity
is (or is treated under the new provision as) held by a U.S.
person.
Exception for interests held by foreign retirement and pension funds
The provision exempts from the rules of section 897 any
USRPI held directly (or indirectly through one or more
partnerships) by, or to any distribution received from a real
estate investment trust by, a qualified foreign pension fund or
by a foreign entity wholly-owned by a qualified foreign pension
fund. A qualified foreign pension fund means any trust,
corporation, or other organization or arrangement \967\ (A)
which is created or organized under the law of a country other
than the United States, (B) which is established to provide
retirement or pension benefits to participants or beneficiaries
that are current or former employees (or persons designated by
such employees) of one or more employers in consideration for
services rendered,\968\ (C) which does not have a single
participant or beneficiary with a right to more than five
percent of its assets or income, (D) which is subject to
government regulation and provides annual information reporting
about its beneficiaries to the relevant tax authorities in the
country in which it is established or operates, and (E) with
respect to which, under the laws of the country in which it is
established or operates, (i) contributions to such organization
or arrangement that would otherwise be subject to tax under
such laws are deductible or excluded from the gross income of
such entity or taxed at a reduced rate, or (ii) taxation of any
investment income of such organization or arrangement is
deferred or such income is taxed at a reduced rate.
---------------------------------------------------------------------------
\967\ Foreign pension funds may be structured in a variety of ways,
and may comprise one or more separate entities. The word
``arrangement'' encompasses such alternative structures.
\968\ Multi-employer and government-sponsored public pension funds
that provide pension and pension-related benefits may satisfy this
prong of the definition. For example, such pension funds may be
established for one or more companies or professions, or for the
general working public of a foreign country.
---------------------------------------------------------------------------
The provision also makes conforming changes to section 1445
to eliminate withholding on sales by qualified foreign pension
funds (and their wholly-owned foreign subsidiaries) of USRPIs.
The Secretary of the Treasury may provide such regulations
as are necessary to carry out the purposes of the provision.
Effective Date
The provision to extend exceptions from FIRPTA for certain
REIT stock applies to dispositions and distributions on or
after the date of enactment (December 18, 2015).
The provision to modify the definition of a domestically
controlled qualified investment entity is effective on the date
of enactment (December 18, 2015).
The exception for interests held by foreign retirement and
pension funds generally applies to dispositions and
distributions after the date of enactment (December 18, 2015).
12. Increase in rate of withholding of tax on dispositions of United
States real property interests (sec. 324 of the Act and sec.
1445 of the Code) \969\
---------------------------------------------------------------------------
\969\ The Senate Committee on Finance reported S.915 on April 14,
2015 (S. Rep. No. 114-25). Section 3 of that bill contained an
identical provision.
---------------------------------------------------------------------------
Present Law
A purchaser of a USRPI from any person is obligated to
withhold 10 percent of gross purchase price unless certain
exceptions apply.\970\ The obligation does not apply if the
transferor furnishes an affidavit that the transferor is not a
foreign person. Even absent such an affidavit, the obligation
does not apply to the purchase of publicly traded stock.\971\
Also, the obligation does not apply to the purchase of stock of
a nonpublicly traded domestic corporation, if the corporation
furnishes the transferee with an affidavit stating the
corporation is not and has not been a USRPHC during the
applicable period (unless the transferee has actual knowledge
or receives a notification that the affidavit is false).\972\
---------------------------------------------------------------------------
\970\ Sec. 1445.
\971\ Sec. 1445(b)(6).
\972\ Sec. 1445(b)(3). Other exceptions also apply. Sec. 1445(b).
---------------------------------------------------------------------------
Treasury regulations \973\ generally provide that a
domestic corporation must, within a reasonable period after
receipt of a request from a foreign person holding an interest
in it, inform that person whether the interest constitutes a
USRPI.\974\ No particular form is required. The statement must
be dated and signed by a responsible corporate officer who must
verify under penalties of perjury that the statement is correct
to his knowledge and belief. If a foreign investor requests
such a statement, then the corporation must provide a notice to
the IRS that includes the name and taxpayer identification
number of the corporation as well as the investor, and
indicates whether the interest in question is a USRPI. However,
these requirements do not apply to a domestically controlled
REIT or to a corporation that has issued any class of stock
which is regularly traded on an established securities market
at any time during the calendar year. In such cases a
corporation may voluntarily choose to comply with the notice
requirements that would otherwise have applied.\975\
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\973\ Treas. Reg. Sec. 1.897-2(h).
\974\ As described previously, stock of a U.S. corporation is not
generally a USRPI unless it is stock of a USRPHC. However, all U.S.
corporate stock is deemed to be such stock, unless it is shown that the
corporation's U.S. real property interests do not amount to the
relevant 50 percent or more of the corporation's relevant assets. Also,
even if a REIT is a USRPHC, if it is domestically controlled its stock
is not a USRPI.
\975\ Treas. Reg. sec. 1.897-2(h)(3).
---------------------------------------------------------------------------
In addition to these exceptions that might be determined at
the entity level, even if a corporation is a USRPHC, its stock
is not a USRPI in the hands of the seller if the stock is of a
class that is publicly traded and the foreign shareholder
disposing of the stock has not owned (applying attribution
rules) more than five percent of such class of stock during the
relevant period.
Explanation of Provision
The provision generally increases the rate of withholding
of tax on dispositions and certain distributions of URSPIs,
from 10 percent to 15 percent. There is an exception to this
higher rate of withholding (retaining the 10 percent
withholding tax rate under present law) for sales of residences
intended for personal use by the acquirer, with respect to
which the purchase price does not exceed $1,000,000. Thus, if
the present law exception for personal residences (where the
purchase price does not exceed $300,000) does not apply, the 10
percent withholding rate is retained so long as the purchase
price does not exceed $1,000,000.
Effective Date
The provision applies to dispositions after the date which
is 60 days after the date of enactment (December 18, 2015).
13. Interests in RICs and REITs not excluded from definition of United
States real property interests (sec. 325 of the Act and sec.
897 of the Code) \976\
---------------------------------------------------------------------------
\976\ The Senate Committee on Finance reported S.915 on April 14,
2015 (S. Rep. No. 114-25). Section 6 of that bill contained an
identical provision.
---------------------------------------------------------------------------
Present Law
An interest in a corporation is not a USRPI if (1) as of
the date of disposition of such interest, such corporation did
not hold any USRPIs and (2) all of the USRPIs held by such
corporation during the shorter of (i) the period of time after
June 18, 1980, during which the taxpayer held such interest, or
(ii) the five-year period ending on the date of disposition of
such interest, were either disposed of in transactions in which
the full amount of the gain (if any) was recognized, or ceased
to be USRPIs by reason of the application of this rule to one
or more other corporations (the so-called ``cleansing
rule'').\977\
---------------------------------------------------------------------------
\977\ Sec. 897(c)(1)(B).
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, the cleansing rule applies to stock of
a corporation only if neither such corporation nor any
predecessor of such corporation was a RIC or a REIT at any time
during the shorter of the period after June 18, 1980 during
which the taxpayer held such stock, or the five-year period
ending on the date of the disposition of such stock.
Effective Date
The provision applies to dispositions on or after the date
of enactment (December 18, 2015).
14. Dividends derived from RICs and REITs ineligible for deduction for
United States source portion of dividends from certain foreign
corporations (sec. 326 of the Act and sec. 245 of the Code)
\978\
---------------------------------------------------------------------------
\978\ The Senate Committee on Finance reported S.915 on April 14,
2015 (S. Rep. No. 114-25). Section 7 of that bill contained an
identical provision.
---------------------------------------------------------------------------
Present Law
A corporation is generally allowed to deduct a portion of
the dividends it receives from another corporation. The
deductible amount is a percentage of the dividends received.
The percentage depends on the level of ownership that the
corporate shareholder has in the corporation paying the
dividend. The dividends-received deduction is 70 percent of the
dividend if the recipient owns less than 20 percent of the
stock of the payor corporation, 80 percent if the recipient
owns at least 20 percent but less than 80 percent of the stock
of the payor corporation, and 100 percent if the recipient owns
80 percent or more of the stock of the payor corporation.\979\
---------------------------------------------------------------------------
\979\ Sec. 243.
---------------------------------------------------------------------------
Dividends from REITs are not eligible for the corporate
dividends received deduction.\980\ Dividends from a RIC are
eligible only to the extent attributable to dividends received
by the RIC from certain other corporations, and are treated as
dividends from a corporation that is not 20-percent owned.\981\
---------------------------------------------------------------------------
\980\ Secs. 243(d)(3) and 857(c)(1).
\981\ Secs. 243(d)(2) and 854(b)(1)(A) and (C).
---------------------------------------------------------------------------
Dividends received from a foreign corporation are not
generally eligible for the dividends-received deduction.
However, section 245 provides that if a U.S. corporation is a
10-percent shareholder of a foreign corporation, the U.S.
corporation is generally entitled to a dividends-received
deduction for the portion of dividends received that are
attributable to the post-1986 undistributed U.S. earnings of
the foreign corporation. The post-1986 undistributed U.S.
earnings are measured by reference to earnings of the foreign
corporation effectively connected with the conduct of a trade
or business within the United States, or received by the
foreign corporation from an 80-percent-owned U.S.
corporation.\982\ A 2013 IRS chief counsel advice memorandum
advised that dividends received by a 10-percent U.S. corporate
shareholder from a foreign corporation controlled by the
shareholder are not eligible for the dividends-received
deduction if the dividends were attributable to interest income
of an 80-percent owned RIC.\983\ Treasury regulations section
1.246-1 states that the deductions provided in sections ``243 .
. . 244 . . . and 245 (relating to dividends received from
certain foreign corporations)'' are not allowable with respect
to any dividend received from certain entities, one of which is
a REIT.
---------------------------------------------------------------------------
\982\ Sec. 245
\983\ IRS CCA 201320014. The situation addressed in the memorandum
involved a controlled foreign corporation that had terminated its
``CFC'' status before year end, through a transfer of stock to a
partnership. The advice was internal IRS advice to the Large Business
and International Division. Such advice is not to be relied upon or
cited as precedent by taxpayers, but may offer some indication of
administrative practice.
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, for purposes of determining whether
dividends from a foreign corporation (attributable to dividends
from an 80-percent owned domestic corporation) are eligible for
a dividends-received deduction under section 245, dividends
from RICs and REITs are not treated as dividends from domestic
corporations.
Effective Date
The provision applies to dividends received from RICs and
REITs on or after the date of enactment (December 18, 2015). No
inference is intended with respect to the proper treatment
under section 245 of dividends received from RICs or REITs
before such date.
C. Additional Provisions
1. Provide special rules concerning charitable contributions to, and
public charity status of, agricultural research organizations
(sec. 331 of the Act and secs. 170(b) and 501(h) of the Code)
\984\
---------------------------------------------------------------------------
\984\ The Senate Committee on Finance reported S. 906 on April 14,
2015 (S. Rep. No. 114-19).
---------------------------------------------------------------------------
Present Law
Public charities and private foundations
An organization qualifying for tax-exempt status under
section 501(c)(3) of the Internal Revenue Code of 1986, as
amended (the ``Code'') is further classified as either a public
charity or a private foundation. An organization may qualify as
a public charity in several ways.\985\ Certain organizations
are classified as public charities per se, regardless of their
sources of support. These include churches, certain schools,
hospitals and other medical organizations (including medical
research organizations), certain organizations providing
assistance to colleges and universities, and governmental
units.\986\ Other organizations qualify as public charities
because they are broadly publicly supported or support specific
public charities. First, a charity may qualify as publicly
supported if at least one-third of its total support is from
gifts, grants or other contributions from governmental units or
the general public.\987\ Alternatively, it may qualify as
publicly supported if it receives more than one-third of its
total support from a combination of gifts, grants, and
contributions from governmental units and the public plus
revenue arising from activities related to its exempt purposes
(e.g., fee for service income). In addition, this category of
public charity must not rely excessively on endowment income as
a source of support.\988\ A supporting organization, i.e., an
organization that provides support to another section 501(c)(3)
entity that is not a private foundation and meets certain other
requirements of the Code, also is classified as a public
charity.\989\
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\985\ The Code does not expressly define the term ``public
charity,'' but rather provides exceptions to those entities that are
treated as private foundations.
\986\ Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through
(iv) for a description of these organizations).
\987\ Treas. Reg. sec. 1.170A-9(f)(2). Failing this mechanical
test, the organization may qualify as a public charity if it passes a
``facts and circumstances" test. Treas. Reg. sec. 1.170A-9(f)(3).
\988\ To meet this requirement, the organization must normally
receive more than one-third of its support from a combination of (1)
gifts, grants, contributions, or membership fees and (2) certain gross
receipts from admissions, sales of merchandise, performance of
services, and furnishing of facilities in connection with activities
that are related to the organization's exempt purposes. Sec.
509(a)(2)(A). In addition, the organization must not normally receive
more than one-third of its support in each taxable year from the sum of
(1) gross investment income and (2) the excess of unrelated business
taxable income as determined under section 512 over the amount of
unrelated business income tax imposed by section 511. Sec.
509(a)(2)(B).
\989\ Sec. 509(a)(3). Organizations organized and operated
exclusively for testing for public safety also are classified as public
charities. Sec. 509(a)(4). Such organizations, however, are not
eligible to receive deductible charitable contributions under section
170.
---------------------------------------------------------------------------
A section 501(c)(3) organization that does not fit within
any of the above categories is a private foundation. In
general, private foundations receive funding from a limited
number of sources (e.g., an individual, a family, or a
corporation).
The deduction for charitable contributions to private
foundations is in some instances less generous than the
deduction for charitable contributions to public charities. For
example, an individual taxpayer who makes a cash charitable
contribution may deduct the contribution up to 50 percent of
her contribution base (generally, adjusted gross income, with
modifications) if the contribution is made to a public charity,
but only up to 30 percent of her contribution base if the
contribution is made to a non-operating private
foundation.\990\
---------------------------------------------------------------------------
\990\ Secs. 170(b)(1)(A) and (B).
---------------------------------------------------------------------------
In addition, private foundations are subject to a number of
operational rules and restrictions that do not apply to public
charities, as well as a tax on their net investment
income.\991\
---------------------------------------------------------------------------
\991\ Unlike public charities, private foundations are subject to
tax on their net investment income at a rate of two percent (one
percent in some cases). Sec. 4940. Private foundations also are subject
to more restrictions on their activities than are public charities. For
example, private foundations are prohibited from engaging in self-
dealing transactions (sec. 4941), are required to make a minimum amount
of charitable distributions each year (sec. 4942), are limited in the
extent to which they may control a business (sec. 4943), may not make
jeopardizing investments (sec. 4944), and may not make certain
expenditures (sec. 4945). Violations of these rules result in excise
taxes on the foundation and, in some cases, may result in excise taxes
on the managers of the foundation.
---------------------------------------------------------------------------
Medical research organizations
A medical research organization is treated as a public
charity per se, regardless of its sources of financial support,
and charitable contributions to a medical research organization
may qualify for the more preferential 50-percent
limitation.\992\
---------------------------------------------------------------------------
\992\ Secs. 170(b)(1)(A)(iii) and 509(a)(1).
---------------------------------------------------------------------------
To qualify as a medical research organization, an
organization's principal purpose or functions must be medical
research, and it must be directly engaged in the continuous
active conduct of medical research in conjunction with a
hospital.\993\ For a contribution to a medical research
organization to qualify for the more preferential 50-percent
limitation of section 170(b)(1)(A), during the calendar year in
which the contribution is made, the organization must be
committed to spend such contribution for the active conduct of
medical research before January 1 of the fifth calendar year
beginning after the date such contribution is made.\994\
---------------------------------------------------------------------------
\993\ Treas. Reg. sec. 1.170A-9(d)(2)(i).
\994\ Ibid.
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Lobbying activities of section 501(c)(3) organizations
Charitable organizations face limits on the amount of
permissible lobbying activity. An organization does not qualify
for tax-exempt status as a charitable organization unless ``no
substantial part'' of its activities constitutes ``carrying on
propaganda, or otherwise attempting, to influence legislation''
(commonly referred to as ``lobbying'').\995\ Public charities
may engage in limited lobbying activities, provided that such
activities are not substantial, without losing their tax-exempt
status and generally without being subject to tax. In contrast,
private foundations are subject to a restriction that lobbying
activities, even if insubstantial, may result in the foundation
being subject to penalty excise taxes.\996\
---------------------------------------------------------------------------
\995\ Sec. 501(c)(3).
\996\ Sec. 4945(d)(1).
---------------------------------------------------------------------------
For purposes of determining whether lobbying activities are
a substantial part of a public charity's overall functions, a
public charity may choose between two standards, the
``substantial part'' test or the ``expenditure'' test.\997\ The
substantial part test derives from the statutory language
quoted above and uses a facts and circumstances approach to
measure the permissible level of lobbying activities. The
expenditure test sets specific dollar limits, calculated as a
percentage of a charity's total exempt purpose expenditures, on
the amount a charity may spend to influence legislation.\998\
---------------------------------------------------------------------------
\997\ Secs. 501(c)(3), 501(h), and 4911. Churches and certain
church-related entities may not choose the expenditure test. Sec.
501(h)(5).
\998\ Secs. 501(h) and 4911.
---------------------------------------------------------------------------
Explanation of Provision
The provision amends section 170(b)(1)(A) to provide
special treatment for certain agricultural research
organizations, consistent with the present-law treatment for
medical research organizations. The effect of the proposed
amendment, therefore, is to: (1) allow certain charitable
contributions to qualifying agricultural research organizations
to qualify for the 50-percent limitation; and (2) treat
qualifying agricultural research organizations as public
charities (i.e., non-private foundations) per se, regardless of
their sources of financial support.
To qualify, an agricultural research organization must be
engaged in the continuous active conduct of agricultural
research (as defined in section 1404 of the Agricultural
Research, Extension, and Teaching Policy Act of 1977) in
conjunction with a land-grant college or university (as defined
in such section) or a non-land grant college of agriculture (as
defined in such section). In addition, for a contribution to an
agricultural research organization to qualify for the 50-
percent limitation, during the calendar year in which a
contribution is made to the organization, the organization must
be committed to spend the contribution for such research before
January 1 of the fifth calendar year which begins after the
date of the contribution. It is intended that the provision be
interpreted in like manner to and consistent with the rules
applicable to medical research organizations.
An agricultural research organization is permitted to use
the expenditure test of section 501(h) for purposes of
determining whether a substantial part of its activities
consist of carrying on propaganda, or otherwise attempting, to
influence legislation (i.e., lobbying).
Effective Date
The provision is effective for contributions made on or
after the date of enactment (December 18, 2015).
2. Remove bonding requirements for certain taxpayers subject to Federal
excise taxes on distilled spirits, wine, and beer (sec. 332 of
the Act and secs. 5061(d), 5173(a), 5351, 5401 and 5551 of the
Code)
Present Law
An excise tax is imposed on all distilled spirits, wine,
and beer produced in, or imported into, the United States.\999\
The tax liability legally comes into existence the moment the
alcohol is produced or imported but payment of the tax is not
required until a subsequent withdrawal or removal from the
distillery, winery, brewery, or, in the case of an imported
product, from customs custody or bond.\1000\ The excise tax is
paid on the basis of a return \1001\ and is paid at the time of
removal unless the taxpayer has a withdrawal bond in place. In
that case, the taxes are paid with semi-monthly returns, the
periods for which run from the 1st to the 15th of the month and
from the 16th to the last day of the month, with the returns
and payments due not later than 14 days after the close of the
respective return period.\1002\ For example, payments of taxes
with respect to removals occurring from the 1st to the 15th of
the month are due with the applicable return on the 29th.
Taxpayers who expect to be liable for not more than $50,000 in
excise taxes for the calendar year may pay quarterly.\1003\
Under regulations, wineries with less than $1,000 in annual
excise taxes may file and pay on an annual basis.\1004\
Taxpayers who were liable for a gross amount of taxes of
$5,000,000 or more for the preceding calendar year must make
deposits of tax for the current calendar year by electronic
funds transfer.\1005\
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\999\ Secs. 5001, 5041, and 5051.
\1000\ Secs. 5006, 5043, and 5054. In general, proprietors of
distilled spirit plants, proprietors of bonded wine cellars, brewers,
and importers are liable for the tax. Secs. 5005, 5043, and 5054.
Customs and Border Protection (CBP) collects the excise tax on imported
products.
\1001\ Sec. 5061.
\1002\ Under a special rule, September has three return periods.
Sec. 5061.
\1003\ Sec. 5061.
\1004\ 27 CFR sec. 24.273.
\1005\ Sec. 5061.
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Certain removals or transfers are exempt from tax. For
example, distilled spirits, wine, and beer may be removed
either free of tax or without immediate payment of tax for
certain uses,\1006\ such as for export or an industrial use.
Bulk distilled spirits, as well as wine and beer, may be
transferred without payment of the tax between bonded premises
under certain conditions specified in the regulations; \1007\
such bulk products, if imported, may be transferred without
payment of the tax to domestic bonded premises under certain
conditions.\1008\ The tax liability accompanies such a product
that is transferred in bond.
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\1006\ Such uses are specified in sections 5053, 5214, 5362, and
5414.
\1007\ See, e.g., sec. 5212. Domestic bottled distilled spirits
cannot be transferred in bond between distilleries. See 27 CFR sec.
19.402.
\1008\ Secs. 5005, 5232, 5364, and 5418. Imported bottled distilled
spirits, wine, and beer cannot be transferred in bond from customs
custody to a distillery, winery, or brewery. See sec. 5061(d)(2)(B).
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Before commencing operations, a distiller must register, a
winery must qualify, and a brewery must file a notice with the
Alcohol and Tobacco Tax and Trade Bureau (TTB) and receive
approval to operate.\1009\ Various types of bonds (including
operations bonds and tax deferral or withdrawal bonds) are
required for any person operating a distilled spirits plant,
winery, or brewery.\1010\ The bond amounts are generally set by
regulations and determined based on the underlying excise tax
liability.\1011\
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\1009\ Secs. 5171, 5351-53, and 5401; 27 CFR sec. 19.72(b)
(distilled spirits plant), 27 CFR sec. 24.106 (wine producer), 27 CFR
sec. 25.61(a) (brewer).
\1010\ Secs. 5173, 5354, 5401, and 5551; 27 CFR parts 19 (Distilled
Spirits), 24 (Wine), and 25 (Beer).
\1011\ See, e.g., 27 CFR sec. 19.166(c) requiring a withdrawal bond
for distilled spirits in the amount of excise tax that has not been
paid (up to a maximum of $1 million); 27 CFR sec. 24.148(a)(2)
requiring a wine bond to cover the amount of tax deferred (up to a
maximum of $250,000); 27 CFR sec. 25.93(a) requiring a bond equal to 10
percent of the maximum excise tax for which the brewer will be liable
to pay during a calendar year for brewers required to file tax returns
and remit excise taxes semimonthly and a bond equal to $1,000 for
brewers who were liable for not more than $50,000 in excise taxes with
respect to beer in the previous year and who reasonably expect to be
liable for not more than $50,000 in such taxes during the current year.
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Explanation of Provision
The provision allows any distilled spirits, wine, or beer
taxpayer who reasonably expects to be liable for not more than
$50,000 per year in alcohol excise taxes (and who was liable
for not more than $50,000 in such taxes in the preceding
calendar year) to file and pay such taxes quarterly, rather
than semi-monthly. The provision also creates an exemption from
the bond requirement in the Code for these taxpayers. The
provision includes conforming changes to the other sections of
the Code describing bond requirements.
Additionally, the provision allows any distilled spirits,
wine, or beer taxpayer with a reasonably expected alcohol
excise tax liability of not more than $1,000 per year to file
and pay such taxes annually rather than on a quarterly basis.
Effective Date
The provision is effective for calendar quarters beginning
more than one year after the date of enactment (December 18,
2015).
3. Modification to alternative tax for certain small insurance
companies (sec. 333 of the Act and sec. 831(b) of the Code)
\1012\
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\1012\ The Senate Committee on Finance reported S. 905 on April 14,
2015 (S. Rep. No. 114-16).
---------------------------------------------------------------------------
Present Law
Under present law, the taxable income of a property and
casualty insurance company is the sum of the amount earned from
underwriting income and from investment income (as well as
gains and other income items), reduced by allowable deductions.
For this purpose, underwriting income and investment income are
computed on the basis of the underwriting and investment
exhibit of the annual statement approved by the National
Association of Insurance Commissioners. Insurance companies are
subject to tax at regular corporate income tax rates.
In lieu of the tax otherwise applicable, certain property
and casualty insurance companies may elect to be taxed only on
taxable investment income under section 831(b). The election is
available to mutual and stock companies with net written
premiums or direct written premiums (whichever is greater) that
do not exceed $1,200,000.
For purposes of determining whether a company meets this
dollar limit, the company is treated as receiving during the
taxable year amounts of net or direct written premiums that are
received during that year by all other companies that are
members of the same controlled group as the company. A
controlled group means any controlled group of corporations as
defined in section 1563(a), but applying a ``more than 50
percent'' threshold in lieu of the ``at least 80 percent''
threshold in the requirement that one of the corporations own
at least 80 percent of the total combined voting power of all
classes of stock entitled to vote or at least 80 percent of the
total value of share of all classes of stock of each of the
corporations; without treating insurance companies as a
separate controlled group; and without treating life insurance
companies as excluded members.\1013\
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\1013\ Sec. 1563(a)(1) and (4), and (b)(2)(D), as modified by sec.
831(b)(2)(B).
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Explanation of Provision
The provision modifies the section 831(b) eligibility rules
for a property and casualty insurance company to elect to be
taxed only on taxable investment income.
Increase and indexing of dollar limits
The provision increases the amount of the limit on net
written premiums or direct written premiums (whichever is
greater) from $1,200,000 to $2,200,000 and indexes this amount
for inflation starting in 2016. The base year for calculating
the inflation adjustment is 2013. If the amount, as adjusted,
is not a multiple of $50,000, it is rounded to the next lowest
multiple of $50,000.
Diversification requirements
The provision adds diversification requirements to the
eligibility rules. A company can meet these in one of two ways.
Risk diversification test
An insurance company meets the diversification requirement
if no more than 20 percent of the net written premiums (or, if
greater, direct written premiums) of the company for the
taxable year is attributable to any one policyholder. In
determining the attribution of premiums to any policyholder,
all policyholders that are related \1014\ or are members of the
same controlled group \1015\ are treated as one policyholder.
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\1014\ For this purpose, persons are related within the meaning of
section 267(b) or 707(b).
\1015\ Members of the same controlled group are determined as under
present law for purposes determining whether a company meets the dollar
limit applicable to net written premiums (or, if greater, direct
written premiums). The provision relocates the controlled group
definition, as modified for purposes of section 831, in section
831(b)(2)(C).
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Relatedness test
If the company does not meet this 20-percent requirement,
an alternative diversification requirement applies for the
company to be eligible to elect 831(b) treatment.\1016\ Under
this requirement, no person who holds (directly or indirectly)
an interest in the company is a specified holder who holds
(directly or indirectly) aggregate interests in the company
that constitute a percentage of the entire interests in the
company that is more than a de minimis percentage higher than
the percentage of interests in the specified assets with
respect to the company held (directly or indirectly) by the
specified holder. Except as otherwise provided in regulations
or other guidance, two percentage points or less is treated as
de minimis. An indirect interest for this purpose includes any
interest held through a trust, estate, partnership, or
corporation.
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\1016\ These added eligibility rules reflect the concern expressed
by the Senate Committee on Finance upon reporting out S. 905, ``An Act
to Amend the Internal Revenue Code of 1986 to Increase the Limitation
on Eligibility for the Alternative Tax for Certain Small Insurance
Companies,'' when the Committee stated, ``The Committee notes that the
provision does not include a related proposal that would narrow
eligibility to elect the alternative tax in a manner intended to
address abuse potential, but that may cause problems for certain
States. The Committee therefore wants the Treasury Department to study
the abuse of captive insurance companies for estate planning purposes,
so Congress can better understand the scope of this problem and whether
legislation is necessary to address it.'' S. Rep. 114-16, April 14,
2015, page 2.
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A specified holder means, with respect to an insurance
company, any individual who holds (directly or indirectly) an
interest in the insurance company and who is a spouse or lineal
descendant (including by adoption) of an individual who holds
an interest (directly or indirectly) in the specified assets
with respect to the insurance company.
The specified assets with respect to an insurance company
mean the trades or businesses, rights, or assets with respect
to which the net written premiums (or direct written premiums)
of the company are paid.
For example, assume that in 2017, a captive insurance
company does not meet the requirement that no more than 20
percent of its net (or direct) written premiums is attributable
to any one policyholder. The captive has one policyholder,
Business, certain of whose property and liability risks the
captive covers (the specified assets), and Business pays the
captive $2 million in premiums in 2017. Business is owned 70
percent by Father and 30 percent by Son. The captive is owned
100 percent by Son (whether directly, or through a trust,
estate, partnership, or corporation). Son is Father's lineal
descendant. Son, a specified holder, has a non-de minimis
percentage greater interest in the captive (100 percent) than
in the specified assets with respect to the captive (30
percent). Therefore, the captive is not eligible to elect
section 831(b) treatment.
If, by contrast, all the facts were the same except that
Son owned 30 percent and Father owned 70 percent of the
captive, Son would not have a non-de minimis percentage greater
interest in the captive (30 percent) than in the specified
assets with respect to the captive (30 percent). The captive
would meet the diversification requirement for eligibility to
elect section 831(b) treatment. The same result would occur if
Son owned less than 30 percent of the captive (and Father more
than 70 percent), and the other facts remained unchanged.
Any insurance company for which an 831(b) election is in
effect for a taxable year must report information required by
the Secretary relating to the diversification requirements
imposed under the provision.
The provision also makes a technical amendment striking an
unnecessary redundant parenthetical reference to interinsurers
and reciprocal underwriters.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2016.
4. Treatment of timber gain (sec. 334 of the Act and sec. 1201 of the
Code)
Present Law
Treatment of certain timber gain
Under present law, if a taxpayer cuts standing timber, the
taxpayer may elect to treat the cutting as a sale or exchange
eligible for capital gains treatment (sec. 631(a)). The fair
market value of the timber on the first day of the taxable year
in which the timber is cut is used to determine the gain
attributable to such cutting. Such fair market value is
thereafter considered the taxpayer's cost of the cut timber for
all purposes, such as to determine the taxpayer's income from
later sales of the timber or timber products. Also, if a
taxpayer disposes of the timber with a retained economic
interest or makes an outright sale of the timber, the gain is
eligible for capital gain treatment (sec. 631(b)). This
treatment under either section 631(a) or (b) requires that the
taxpayer has owned the timber or held the contract right for a
period of more than one year.
The maximum regular rate of tax on the net capital gain of
an individual is 20 percent.\1017\ Certain gains are subject to
an additional 3.8-percent tax.\1018\
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\1017\ Sec. 1(h).
\1018\ Sec. 1411.
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The net capital gain of a corporation is taxed at the same
rates as ordinary income, up to a maximum rate of 35
percent.\1019\
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\1019\ Secs. 11 and 1201.
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Explanation of Provision
The Act provides a 23.8-percent alternative tax rate for
corporations on the portion of a corporation's taxable income
that consists of qualified timber gain (or, if less, the net
capital gain) for a taxable year.
Qualified timber gain means the net gain described in
section 631(a) and (b) for the taxable year, determined by
taking into account only trees held more than 15 years.
Effective Date
The provision applies to taxable years beginning in 2016.
5. Modification of definition of hard cider (sec. 335 of the Act and
sec. 5041 of the Code) \1020\
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\1020\ The Senate Committee on Finance reported S.906 on April 14,
2015 (S. Rep. No. 114-17).
---------------------------------------------------------------------------
Present Law
An excise tax is imposed on all distilled spirits, wine,
and beer produced in, or imported into, the United
States.\1021\ The tax liability legally comes into existence
the moment the alcohol is produced or imported but payment of
the tax is not required until a subsequent withdrawal or
removal from the distillery, winery, brewery, or, in the case
of an imported product, from customs custody or bond.\1022\
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\1021\ Secs. 5001 (distilled spirits), 5041 (wines), and 5051
(beer).
\1022\ Secs. 5006, 5043, and 5054. In general, proprietors of
distilled spirit plants, proprietors of bonded wine cellars, brewers,
and importers are liable for the tax.
---------------------------------------------------------------------------
Distilled spirits, wine, and beer produced or imported into
the United States are taxed at the following rates per
specified volumetric measure:
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\1023\ A ``proof gallon'' is a U.S. liquid gallon of proof spirits,
or the alcoholic equivalent thereof. Generally a proof gallon is a U.S.
liquid gallon consisting of 50 percent alcohol. On lesser quantities,
the tax is paid proportionately. Credits are allowed for wine content
and flavors content of distilled spirits. Sec. 5010.
\1024\ Small domestic wine producers (i.e., those producing not
more than 250,000 wine gallons in a calendar year) are allowed a credit
of $0.90 per wine gallon ($0.056 per wine gallon in the case of hard
cider) on the first 100,000 wine gallons (other than champagne and
other sparkling wines) removed. The credit is reduced by one percent
for each 1,000 wine gallons produced in excess of 150,000 wine gallons
per calendar year.
\1025\ A ``wine gallon'' is a U.S. gallon of liquid measure
equivalent to the volume of 231 cubic inches. On lesser quantities, the
tax is paid proportionately.
\1026\ Sec. 5001(a)(4).
\1027\ A small domestic brewer (one who produces not more than 2
million barrels in a calendar year) is subject to a per barrel rate of
$7.00 on the first 60,000 barrels produced in that year.
\1028\ A ``barrel'' contains not more than 31 gallons, each gallon
equivalent to the volume of 231 cubic inches. On lesser quantities, the
tax is paid proportionately.
------------------------------------------------------------------------
Item Current Tax Rate
------------------------------------------------------------------------
Distilled Spirits......................... $13.50 per proof gallon
\1023\
Wine \1024\
Still Wines:
Not more than 14 percent alcohol.. $1.07 per wine gallon
\1025\
More than 14 percent but not more $1.57 per wine gallon
than 21 percent alcohol.
More than 21 percent but not more $3.15 per wine gallon
than 24 percent alcohol.
More than 24 percent alcohol...... Taxed as distilled
spirits \1026\
($13.50 per proof gallon)
Hard cider............................ $0.226 per wine gallon
Sparkling Wines--
Champagne and other naturally $3.40 per wine gallon
sparkling wines.
Artificially carbonated wines..... $3.30 per wine gallon
Beer \1027\............................... $18.00 per barrel \1028\
------------------------------------------------------------------------
Hard cider is a still wine derived primarily from apples or
apple concentrate and water, containing no other fruit product,
and containing at least one-half of one percent and less than
seven percent alcohol by volume.\1029\ Still wines are wines
containing not more than 0.392 grams of carbon dioxide per
hundred milliliters of wine.
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\1029\ Sec. 5041(b)(6).
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Other wines made from apples, apple concentrate or other
fruit products are taxed at the rates applicable in accordance
with the alcohol and carbon dioxide content of the wine.
Explanation of Provision
The provision would amend the definition of hard cider to
mean a wine with a carbonation level that does not exceed 0.64
grams of carbon dioxide per hundred milliliters of wine.
Additionally, the provision would expand the hard cider
definition to include pears, or pear juice concentrate and
water, in addition to apples and apple juice concentrate and
water. Under the provision, the Secretary may, by regulation,
prescribe tolerance to the limitation as may be reasonably
necessary in good commercial practice. The provision would
change the allowable alcohol content of cider to at least one-
half of one percent and less than 8.5 percent alcohol by
volume.
Effective Date
The provision applies to hard cider removed during calendar
years beginning after December 31, 2016.
6. Church plan clarification (sec. 336 of the Act and sec. 414 of the
Code)
Present Law
Tax-favored retirement plans
Tax-favored employer-sponsored retirement plans include
qualified retirement plans and section 403(b) plans.\1030\ A
qualified retirement plan may be maintained by any type of
employer. Section 403(b) plans may be maintained only by (1)
certain tax-exempt organizations,\1031\ and (2) educational
institutions of State or local governments (i.e., public
schools, including colleges and universities).
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\1030\ Secs. 401(a) and 403(b).
\1031\ These are organizations exempt from tax under section
501(c)(3).
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Qualified retirement plans and section 403(b) plans are
subject to various requirements to receive tax-favored
treatment, such as nondiscrimination requirements, vesting
requirements, and limits on contributions and benefits,
discussed below. In the case of plans subject to the Employee
Retirement Income Security Act of 1974 (``ERISA''),
requirements similar to some of the requirements under the
Code, such as vesting requirements, apply also under ERISA.
Under the Code, these plans generally are prohibited from
discriminating in favor of highly compensated employees \1032\
with respect to contributions and benefits under the plan
(``general nondiscrimination rule'') and with respect to the
group of employees eligible to participate in a plan (``minimum
coverage rule'').\1033\
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\1032\ Under section 414(q), an employee generally is treated as
highly compensated if the employee (1) was a five-percent owner of the
employer at any time during the year or the preceding year, or (2) had
compensation for the preceding year in excess of $120,000 (for 2015).
\1033\ Sections 401(a)(3) and 410(b) deal with the minimum coverage
requirement; section 401(a)(4) deals with the general nondiscrimination
requirements, with related rules in section 401(a)(5). In addition to
the minimum coverage and general nondiscrimination requirements, under
section 401(a)(26), the group of employees who accrue benefits under a
defined benefit plan for a year must consist of at least 50 employees,
or, if less, 40 percent of the workforce, subject to a minimum of two
employees accruing benefits. Special tests apply to elective deferrals
under section 401(k) and employer matching contributions and after-tax
employee contributions under section 401(m). Detailed regulations
implement these statutory requirements. The nondiscrimination rules,
with some modifications, apply to a section 403(b) plan by cross-
reference in section 403(b)(12).
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Special rules for plans maintained by churches or church-related
organizations
Special rules apply with respect to qualified retirement
plans that are church plans and to section 403(b) plans that
are maintained by churches or qualified church-controlled
organizations.
A qualified retirement plan that is a church plan is
excepted from various requirements applicable to qualified
plans generally under the Code unless an election is made for
the plan to be subject to these requirements.\1034\ A church
plan with respect to which this election is not made is
generally referred to as a ``nonelecting church plan.'' \1035\
A nonelecting church plan is also exempt from ERISA.\1036\
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\1034\ Secs. 401(a), last sentence, 410 (c) and (d), and 411(e).
The requirements from which a church plan is exempt include the minimum
participation, vesting, anti-alienation, and qualified joint and
survivor requirements. With respect to the nondiscrimination
requirements applicable to qualified retirement plans, Notice 2001-46,
2001-2 C.B. 122, provides that, until further notice, nonelecting
church plans may be operated in accordance with a reasonable, good
faith interpretation of the statutory requirements, rather than having
to comply with the requirements in the nondiscrimination regulations.
\1035\ Under section 411(e)(2), a nonelecting church plan is
subject to the vesting, participation, and nondiscriminatory vesting
requirements in effect before the enactment of ERISA (the pre-ERISA
vesting requirements). Under the pre-ERISA vesting requirements, a
participant's accrued benefit is not required to become nonforfeitable
(or vested) until the participant attains normal retirement age under
the plan, rather than in accordance with a prescribed schedule as is
generally required for qualified retirement plans. In addition, the
pattern of vesting under the plan may not have the effect of
discriminating in favor of a prohibited group of officers,
shareholders, supervisors, and highly compensated employees.
\1036\ ERISA sec. 4(b)(2).
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For this purpose, a church plan generally is a plan
established and maintained for its employees (or their
beneficiaries) by a church or by a convention or association of
churches that is tax-exempt.\1037\ For this purpose, employees
of a tax-exempt organization that is controlled by or
associated with a church or a convention or association of
churches are treated as employed by a church or convention or
association of churches. Associated with a church or a
convention or association of churches for this purpose means
sharing common religious bonds and convictions. Finally, a
church plan also includes a plan maintained by an organization
that is controlled by or associated with a church or convention
or association of churches and has as its principal purpose or
function the administration or funding of a plan or program for
providing retirement or welfare benefits, or both, for the
employees of the church or convention or association of
churches (a ``church plan organization'').
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\1037\ Secs. 414(e) and 501. A similar definition applies under
ERISA section 3(33). The definition of church plan is not limited to
retirement plans. For example, a health plan may be a church plan.
---------------------------------------------------------------------------
A section 403(b) plan maintained by a church or qualified
church-controlled organization is not subject to the
nondiscrimination requirements otherwise applicable to section
403(b) plans.\1038\ For this purpose, church means a church, a
convention or association of churches, or an elementary or
secondary school that is controlled, operated, or principally
supported by a church or by a convention or association of
churches and includes a qualified church-controlled
organization.\1039\ A qualified church-controlled organization
is any church-controlled tax-exempt organization \1040\ other
than an organization that (1) offers goods, services, or
facilities for sale, other than on an incidental basis, to the
general public, other than goods, services, or facilities that
are sold at a nominal charge substantially less than the cost
of providing the goods, services, or facilities; and (2)
normally receives more than 25 percent of its support from
either governmental sources, or receipts from admissions, sales
of merchandise, performance of services, or furnishing of
facilities, in activities that are not unrelated trades or
businesses, or from both. Church controlled organizations that
are not qualified church-controlled organizations are generally
referred to as ``nonqualified church-controlled
organizations.''
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\1038\ Sec. 403(b)(1)(D).
\1039\ Sec. 403(b)(12)(B), which incorporates by reference the
definitions in section 3121(w)(3)(A) and (B).
\1040\ For this purpose, exempt status under section 501(c)(3) is
required.
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Aggregation rules for groups under common control
General rule
In general, in applying the requirements for tax-favored
treatment, employees of employers (including corporations and
other entities) that are members of a group under common
control are treated as employed by a single employer (referred
to as aggregation rules).\1041\ For example, in applying the
nondiscrimination requirements, the employees of all the
members of a group, and the benefits provided under plans
maintained by any member of the group, are generally taken into
account. In the case of taxable entities, common control is
generally based on the percentage of equity ownership with a
general threshold of 80 percent ownership. Other tests apply
for entities that do not involve ownership.
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\1041\ Sec. 414(c) and the regulations thereunder provide for
aggregation of groups under common control. Section 414 (b), (m) and
(o) also provide aggregation rules for a controlled group of
corporations and affiliated service groups. Under section 414(t), the
aggregation rules apply also for purposes of various benefits other
than retirement benefits. In addition, other provisions incorporate the
aggregation rules by reference, such as section 4980H, requiring
certain employers to offer health coverage to full-time employees.
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Rules for tax-exempt organizations (other than churches)
Treasury regulations provide rules for determining whether
tax-exempt organizations are under common control.\1042\
---------------------------------------------------------------------------
\1042\ Treas. Reg. sec. 1.414(c)-5.
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Under one rule, common control exists between an exempt
organization and another organization if at least 80 percent of
the directors or trustees of one organization are either
representatives of, or directly or indirectly controlled by,
the other organization. A trustee or director is treated as a
representative of another exempt organization if he or she also
is a trustee, director, agent, or employee of the other exempt
organization. A trustee or director is controlled by another
organization if the other organization has the general power to
remove the trustee or director and designate a new trustee or
director. Whether a person has the power to remove or designate
a trustee or director is based on facts and circumstances.
Under a permissive aggregation rule, exempt organizations
that maintain a plan that covers one or more employees from
each organization may treat themselves as under common control
(and, thus, as a single employer) if each of the organizations
regularly coordinates their day-to-day exempt activities.\1043\
The regulations also permit the IRS, in published guidance, to
permit other types of combinations of entities that include
exempt organizations to elect to be treated as under common
control for one or more specified purposes if (1) there are
substantial business reasons for maintaining each entity in a
separate trust, corporation, or other form, and (2) the
treatment would be consistent with the anti-abuse standards
described below.
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\1043\ The regulations give as an example an entity that provides a
type of emergency relief within one geographic region and another that
provides that type of emergency relief within another geographic region
and indicates that the two organizations may treat themselves as under
common control if they have a single plan covering employees of both
entities and regularly coordinate their day-to-day exempt activities.
Similarly, a hospital that is an exempt organization and another exempt
organization with which it coordinates the delivery of medical services
or medical research may treat themselves as under common control if
there is a single plan covering employees of the hospital and employees
of the other exempt organization and the coordination is a regular part
of their day-to-day exempt activities.
---------------------------------------------------------------------------
The regulations provide an anti-abuse rule under which the
IRS may treat an entity as under common control with an exempt
organization in certain cases. These include any case in which
the IRS determines that the structure of one or more exempt
organizations (which may include an exempt organization and a
taxable entity) or the positions taken by the organizations
have the effect of avoiding or evading any requirements for
tax-favored retirement plans (or any other requirement for
purposes of which the common control rules apply).\1044\
---------------------------------------------------------------------------
\1044\ Treas. Reg. sec. 1.414(c)-5(f).
---------------------------------------------------------------------------
Rules for churches and qualified church-controlled
organizations
The regulations for determining common control of tax-
exempt organizations generally do not apply to churches or
qualified church-controlled organizations, as defined for
purposes of the exception to the section 403(b)
nondiscrimination rules.\1045\ The regulations do, however,
provide a rule for permissive disaggregation between churches
and qualified church-controlled organizations and other
entities. In the case of a church plan (as defined above) to
which contributions are made by two or more entities that are
common law employers, any employer may apply the general
aggregation rules for tax-exempt entities (as described above)
to entities that are not a church or qualified church-
controlled organization separately from entities that are
churches or qualified church-controlled organizations. For
example, in the case of a group of entities consisting of a
church, a secondary school (which is a qualified church-
controlled organization), and several nursing homes each of
which receives more than 25 percent of its support from fees
paid by residents (so that none of them is a qualified church-
controlled organization), the nursing homes may treat
themselves as being under common control with each other, but
not as being under common control with the church and the
school, even though the nursing homes would be under common
control with the school and the church under the general
aggregation rules for tax-exempt entities.
---------------------------------------------------------------------------
\1045\ Under Treas. Reg. sec. 1.414(c)-5(e), the rules for churches
and qualified church-controlled organizations are reserved.
---------------------------------------------------------------------------
The preamble to the Treasury regulations also indicates
that churches and qualified church-controlled organizations
maintaining section 403(b) plans can continue to rely on
previous guidance \1046\ that provides a safe harbor standard
for determining the members of a controlled group.\1047\ Under
this safe harbor, a controlled group includes each entity of
which at least 80 percent of the directors, trustees or other
individual members of the entity's governing body are either
representatives of or directly or indirectly control, or are
controlled by, the contributing employer. In addition, under
the safe harbor, an entity is included in the same controlled
group as the contributing employer if the entity provides
directly or indirectly at least 80 percent of the contributing
employer's operating funds and there is a degree of common
management or supervision between the entities. A degree of
common management or supervision exists if the entity providing
the funds has the power to appoint or nominate officers, senior
management or members of the board of directors (or other
governing board) of the entity receiving the funds. A degree of
common management or supervision also exists if the entity
providing the funds is involved in the day-to-day operations of
the entity.
---------------------------------------------------------------------------
\1046\ Notice 89-23, 1989-1 C.B. 654, Part V.B.2.a.
\1047\ 72 Fed. Reg. 41128, 41138 (July 26, 2007).
---------------------------------------------------------------------------
Limits on contributions and benefits
Contributions or benefits under a qualified retirement plan
are subject to limits. The limit that applies is generally
based on whether the plan is a defined contribution plan or a
defined benefit plan.\1048\
---------------------------------------------------------------------------
\1048\ Sec. 415(a)(1).
---------------------------------------------------------------------------
Total contributions to a defined contribution plan on
behalf of an employee (other than catch-up contributions for an
employee age 50 or older) for a year cannot exceed the lesser
of $53,000 (for 2015) and the employee's compensation.\1049\
Contributions made by an employer to more than one plan are
aggregated for purposes of this limit, and employee
contributions to a defined benefit plan, if any, are also taken
into account in applying the limit.
---------------------------------------------------------------------------
\1049\ Sec. 415(c).
---------------------------------------------------------------------------
An employee's annual benefit under all defined benefit
plans of an employer generally must be limited to the lesser of
$210,000 (for 2015) and the employee's average compensation for
the three years resulting in the highest average.\1050\ The
dollar limit applies to benefits commencing between age 62 and
age 65 in the form of a straight life annuity for the life of
the employee. If benefits under a plan are paid in a form other
than a straight life annuity commencing between age 62 and age
65, the benefits payable under the other form (including any
benefit subsidies) generally cannot exceed the dollar limit
when actuarially converted to a straight life annuity
commencing at age 62.\1051\
---------------------------------------------------------------------------
\1050\ Sec. 415(b). In general, the dollar limit is prorated in the
case of a participant with fewer than 10 years of participation in a
plan, and the compensation limit is prorated in the case of a
participant with fewer than 10 years of service with the employer.
\1051\ Specified interest and, in some cases, mortality assumptions
apply in doing this conversion.
---------------------------------------------------------------------------
Section 403(b) plans are generally defined contribution
plans and are subject to the limits on contributions to defined
contribution plans.\1052\ However, under the Tax Equity and
Fiscal Responsibility Act of 1982, certain defined benefit
arrangements established by church-related organizations and in
effect on September 3, 1982, are treated as section 403(b)
plans (``section 403(b) defined benefit plans'').\1053\ Under
Treasury regulations, the present value of an employee's annual
accrual under a section 403(b) defined benefit plan is subject
to the limit on contributions to a defined contribution plan,
and the benefits under the plan are subject to the limit on
benefits under a defined benefit plan.\1054\ Thus, the plan is
subject to both limits.
---------------------------------------------------------------------------
\1052\ Secs. 403(b)(1), first sentence, and 415(k)(4). However,
section 415(a)(2), last sentence, suggests that a section 403(b) plan
could be subject instead to the limit on benefits under a defined
benefit plan.
\1053\ Sec. 251(e)(5) of Pub. L. No. 97-248.
\1054\ Treas. Reg. secs. 1.403(b)-10(f) and 1.415-1(b)(2) and (3).
---------------------------------------------------------------------------
Automatic enrollment
Qualified defined contribution plans and section 403(b)
plans may include a feature under which an employee may elect
between the receipt of cash compensation and plan
contributions, referred to as elective deferrals.\1055\ Plans
are commonly designed so that an employee will receive cash
compensation unless the employee affirmatively elects to make
elective deferrals. Alternatively, some plans provide for
automatic enrollment, a design under which elective deferrals
are made at a specified rate for an employee, instead of cash
compensation, unless the employee elects not to make deferrals
or to make deferrals at a different rate. The Code provides
various rules to accommodate automatic enrollment
arrangements.\1056\
---------------------------------------------------------------------------
\1055\ Secs. 401(k) and 403(b)(1) and (12). The amount of elective
deferrals an employee may make is subject to limits.
\1056\ See, for example, secs. 401(k)(13) and (m)(12), 414(w), and
4979(f)(1). For a discussion of automatic enrollment, see Joint
Committee on Taxation, Present Law and Background Relating to Tax-
Favored Retirement Savings (JCX-98-14), September 15, 2014, pages 36-
38, available at www.jct.gov.
---------------------------------------------------------------------------
In the case of a plan subject to ERISA, ERISA generally
preempts State laws relating to employee benefit plans.\1057\
ERISA also expressly exempts any State laws that would impede a
plan from providing an automatic enrollment arrangement, as
described in the ERISA preemption provision.\1058\ However,
ERISA preemption does not apply with respect to plans that are
exempt from ERISA, including nonelecting church plans.
---------------------------------------------------------------------------
\1057\ ERISA sec. 514(a).
\1058\ ERISA sec. 514(e).
---------------------------------------------------------------------------
Vesting requirements and transfers between plans
In general, employer-provided benefits under a qualified
retirement plan are subject to minimum vesting requirements,
which depend on whether the plan is a defined contribution plan
or a defined benefit plan.\1059\ In addition, under either type
of plan, a participant must be fully vested at all times in
benefits attributable to his or her own contributions. However,
a nonelecting church plan is exempt from these vesting
requirements. In contrast, contributions to a section 403(b)
plan, including a section 403(b) that is a church plan, must be
fully vested at all times.\1060\
---------------------------------------------------------------------------
\1059\ Sec. 411(a) and ERISA sec. 203. Under a defined contribution
plan, a participant must vest in benefits attributable to employer
contributions under one of two vesting schedules: 100 percent vesting
after three years of service or graduated vesting over two to six years
of service. With respect to employer-provided benefits under a defined
benefit plan, a participant generally must vest under one of two
vesting schedules: 100 percent vesting after five years of service, or
graduated vesting over three to seven years of service. Under certain
defined benefit plans, full vesting must occur after three years of
service.
\1060\ Sec. 403(b)(1)(C).
---------------------------------------------------------------------------
A distribution to a participant from a qualified retirement
plan or a section 403(b) plan generally may be rolled over to
the other type of plan, including by a direct transfer to the
recipient plan. In addition, in some cases, benefits and assets
from one type of plan may be transferred to another plan of the
same type or two plans of the same type may be merged into a
single plan. However, transfers of benefits and assets between
a qualified retirement plan and a section 403(b) plan are not
permitted through a trustee-to-trustee transfer (other than a
rollover of a distribution) or through a merger of two
plans.\1061\
---------------------------------------------------------------------------
\1061\ Treas. Reg. sec. 1.403(b)-10(b)(1).
---------------------------------------------------------------------------
Group trusts
Assets of a tax-favored retirement plan generally must be
set aside in a trust or other fund and used for the exclusive
benefit of participants and beneficiaries. IRS guidance allows
the assets of different qualified retirement plans, including
plans maintained by unrelated employers, to be pooled and held
by a ``group trust,'' thus enabling employers of various sizes
to benefit from economies of scale for administrative and
investment purposes.\1062\ In addition to qualified retirement
plan assets, a group trust may also hold assets associated with
certain other tax-favored retirement arrangements, including
section 403(b) plans. However, a group trust may not hold other
assets, such as the assets of employers sponsoring the plans.
---------------------------------------------------------------------------
\1062\ Rev. Rul. 81-100, 1981-1 C.B. 326, most recently modified by
Rev. Rul. 2014-24, 2014-2 C.B. 529.
---------------------------------------------------------------------------
The assets of a section 403(b) plan generally must be
invested in annuity contracts or stock of regulated investment
companies (that is, mutual funds).\1063\ Under a special rule,
certain defined contribution arrangements, referred to as
retirement income accounts, established or maintained by a
church, or a convention or association of churches, including a
church plan organization (as described above), are treated as
annuity contracts and thus are treated as section 403(b) plans,
the assets of which may be invested in a group trust.\1064\ The
assets of retirement income accounts may also be commingled in
a common fund with assets of a church itself (that is, assets
that are not retirement plan assets) that are devoted
exclusively to church purposes.\1065\ However, unless permitted
by the IRS, the assets of a church plan sponsor may not be
combined with other types of retirement plan assets, such as in
a group trust.\1066\
---------------------------------------------------------------------------
\1063\ Sec. 403(b)(1)(A) and (7).
\1064\ Sec. 403(b)(9); Treas. Reg. sec. 1.403(b)-8(f).
\1065\ Treas. Reg. sec. 1.403(b)-9(a)(6).
\1066\ Ibid.
---------------------------------------------------------------------------
Explanation of Provision
Application of controlled group rules to church plans
General rule
For purposes of applying the controlled group rules with
respect to employers that are organizations eligible to
maintain church plans, the general rule under the provision is
that one organization is not aggregated with another
organization and treated as a single employer unless two
conditions are satisfied. First, one of the organizations
provides directly or indirectly at least 80 percent of the
operating funds for the other organization during the preceding
taxable year of the recipient organization, and, second, there
is a degree of common management or supervision between the
organizations, such that the organization providing the
operating funds is directly involved in the day-to-day
operations of the other organization.
Nonqualified church-controlled organizations
Notwithstanding the general rule, an organization that is a
nonqualified church-controlled organization (``first
organization'') is aggregated with one or more other
nonqualified church-controlled organizations or an organization
that is not a tax-exempt organization (``other organization'')
and thus treated as a single employer if at least 80 percent of
the directors or trustees of the other organization or
organizations are either representatives of, or directly or
indirectly controlled by, the first organization.
Permissive aggregation among church-related organizations
With respect to organizations associated with a church or
convention or association of churches and eligible to maintain
a church plan, an election may be made to treat the
organizations as a single employer even if they would not
otherwise be aggregated. The election must be made by the
church or convention or association of churches with which such
organizations are associated, or by an organization designated
by the church or convention or association of churches. The
election, once made, applies to all succeeding plan years
unless revoked with notice provided to the Secretary of the
Treasury (``Secretary'') in such manner as the Secretary
prescribes.
Permissive disaggregation of church-related organizations
For purposes of applying the general rule above, in the
case of a church plan, an employer may elect to treat entities
that are churches or qualified church-controlled organizations
separately from other entities, regardless of whether the
entities maintain separate church plans. The election, once
made, applies to all succeeding plan years unless revoked with
notice provided to the Secretary in such manner as the
Secretary prescribes.
Anti-abuse rule
Under the provision, the anti-abuse rule in the regulations
continues to apply for purposes of the rules for determining
whether entities are under common control.
Contribution and benefit limits for section 403(b) defined benefit
plans
Under the provision, a section 403(b) defined benefit plan
is subject to the limit on benefits under a defined benefit
plan and is not subject to the limit on contributions to a
defined contribution plan.
Automatic enrollment by church plans
The provision preempts any State law relating to wage,
salary or payroll payment, collection, deduction, garnishment,
assignment, or withholding that would directly or indirectly
prohibit or restrict the inclusion of an automatic contribution
arrangement in a church plan. For this purpose, an automatic
contribution arrangement is an arrangement under which a plan
participant (1) may elect to have the plan sponsor or the
employer make payments as contributions under the plan on
behalf of the participant, or to the participant directly in
cash, and (2) is treated as having elected to have the plan
sponsor or the employer make contributions equal to a uniform
percentage of compensation provided under the plan until the
participant specifically elects not to have contributions made
or to have contributions made at a different percentage.
Within a reasonable period before the first day of each
plan year, the plan sponsor, plan administrator or employer
maintaining the arrangement must provide each participant with
notice of the participant's rights and obligations under the
arrangement. The notice must include an explanation of (1) the
participant's right under the arrangement not to have
contributions made on the participant's behalf (or to elect to
have contributions made at a different percentage) and (2) how
contributions made under the arrangement will be invested in
the absence of any investment election by the participant. The
notice must be sufficiently accurate and comprehensive to
apprise the participant of such rights and obligations and must
be written in a manner calculated to be understood by the
average participant to whom the arrangement applies.
The participant must have a reasonable period of time,
after receipt of the explanation described above and before the
first contribution is made, to make an election not to have
contributions made or to have contributions made at a different
percentage. If a participant has not made an affirmative
investment election, contributions made under the arrangement
must be invested in a default investment selected with the
care, skill, prudence, and diligence that a prudent person
selecting an investment option would use.
Allow certain plan transfers and mergers
Under the provision, if a qualified retirement plan that is
a church plan and a section 403(b) plan are both maintained by
the same church or convention or association of churches, and
two requirements are satisfied, a transfer of all or a portion
of a participant's or beneficiary's accrued benefit from one
plan to the other, or a merger of the two plans, is permitted.
The two requirements are that (1) the total accrued benefit of
each participant or beneficiary immediately after the transfer
or merger be equal to or greater than the participant's or
beneficiary's total accrued benefit immediately before the
transfer or merger, and (2) the total accrued benefit be
nonforfeitable (i.e., 100 percent vested) after the transfer or
merger and at all times thereafter. The permitted transfer or
merger does not result in any income inclusion by the
participant or beneficiary and does not affect the tax-favored
status of the qualified retirement plan or section 403(b) plan.
Investment of church plan and church assets in group trusts
The provision allows the investment in a group trust of the
assets of a church plan, including a qualified retirement plan
and a retirement income account, as well as the assets of a
church plan organization with respect to a church plan or
retirement income account and any other assets permitted to be
commingled for investment purposes with the assets of a church
plan, retirement income account, or a church plan organization,
without adversely affecting the tax status of the group trust,
the church plan, the retirement income account, the church plan
organization, or any other plan or trust that invests in the
group trust.
Effective Date
The changes made to the controlled group rules and the
provision relating to limits on defined benefit section 403(b)
plans apply to years beginning before, on, or after the date of
enactment (December 18, 2015).
The provision relating to automatic enrollment is effective
on the date of enactment.
The provision relating to plan transfers and mergers
applies to transfers or mergers occurring after the date of
enactment.
The provision relating to investments in group trusts
applies to investments made after the date of enactment.
D. Revenue Provisions
1. Updated ASHRAE standards for energy efficient commercial buildings
deduction (sec. 341 of the Act and sec. 179D of the Code)
\1067\
---------------------------------------------------------------------------
\1067\ The Senate Committee on Finance reported S. 1946 on August
5, 2015 (S. Rep. No. 114-118). See sec. 160.
---------------------------------------------------------------------------
Present Law
In general
Code section 179D provides an election under which a
taxpayer may take an immediate deduction equal to energy-
efficient commercial building property expenditures made by the
taxpayer. Energy-efficient commercial building property is
defined as property (1) which is installed on or in any
building located in the United States that is within the scope
of Standard 90.1-2001 of the American Society of Heating,
Refrigerating, and Air Conditioning Engineers and the
Illuminating Engineering Society of North America (``ASHRAE/
IESNA''), (2) which is installed as part of (i) the interior
lighting systems, (ii) the heating, cooling, ventilation, and
hot water systems, or (iii) the building envelope, and (3)
which is certified as being installed as part of a plan
designed to reduce the total annual energy and power costs with
respect to the interior lighting systems, heating, cooling,
ventilation, and hot water systems of the building by 50
percent or more in comparison to a reference building which
meets the minimum requirements of Standard 90.1-2001 (as in
effect on April 2, 2003). The deduction is limited to an amount
equal to $1.80 per square foot of the property for which such
expenditures are made. The deduction is allowed in the year in
which the property is placed in service.
Certain certification requirements must be met in order to
qualify for the deduction. The Secretary, in consultation with
the Secretary of Energy, will promulgate regulations that
describe methods of calculating and verifying energy and power
costs using qualified computer software based on the provisions
of the 2005 California Nonresidential Alternative Calculation
Method Approval Manual or, in the case of residential property,
the 2005 California Residential Alternative Calculation Method
Approval Manual.
The Secretary is granted authority to prescribe procedures
for the inspection and testing for compliance of buildings that
are comparable, given the difference between commercial and
residential buildings, to the requirements in the Mortgage
Industry National Accreditation Procedures for Home Energy
Rating Systems.\1068\ Individuals qualified to determine
compliance shall only be those recognized by one or more
organizations certified by the Secretary for such purposes.
---------------------------------------------------------------------------
\1068\ See IRS Notice 2006-52, 2006-1 C.B. 1175, June 2, 2006; IRS
2008-40, 2008-14 I.R.B. 725 March 11, 2008.
---------------------------------------------------------------------------
For energy-efficient commercial building property
expenditures made by a public entity, such as public schools,
the deduction may be allocated to the person primarily
responsible for designing the property in lieu of the public
entity.
If a deduction is allowed under this section, the basis of
the property is reduced by the amount of the deduction.
The deduction is effective for property placed in service
prior to January 1, 2015.
Partial allowance of deduction
System-specific deductions
In the case of a building that does not meet the overall
building requirement of 50-percent energy savings, a partial
deduction is allowed with respect to each separate building
system that comprises energy efficient property and which is
certified by a qualified professional as meeting or exceeding
the applicable system-specific savings targets established by
the Secretary. The applicable system-specific savings targets
to be established by the Secretary are those that would result
in a total annual energy savings with respect to the whole
building of 50 percent, if each of the separate systems met the
system specific target. The separate building systems are (1)
the interior lighting system, (2) the heating, cooling,
ventilation and hot water systems, and (3) the building
envelope. The maximum allowable deduction is $0.60 per square
foot for each separate system.
Interim rules for lighting systems
In general, in the case of system-specific partial
deductions, no deduction is allowed until the Secretary
establishes system-specific targets.\1069\ However, in the case
of lighting system retrofits, until such time as the Secretary
issues final regulations, the system-specific energy savings
target for the lighting system is deemed to be met by a
reduction in lighting power density of 40 percent (50 percent
in the case of a warehouse) of the minimum requirements in
Table 9.3.1.1 or Table 9.3.1.2 of ASHRAE/IESNA Standard 90.1-
2001. Also, in the case of a lighting system that reduces
lighting power density by 25 percent, a partial deduction of 30
cents per square foot is allowed. A pro-rated partial deduction
is allowed in the case of a lighting system that reduces
lighting power density between 25 percent and 40 percent.
Certain lighting level and lighting control requirements must
also be met in order to qualify for the partial lighting
deductions under the interim rule.
---------------------------------------------------------------------------
\1069\ IRS Notice 2008-40, Supra, set a target of a 10-percent
reduction in total energy and power costs with respect to the building
envelope, and 20 percent each with respect to the interior lighting
system and the heating, cooling, ventilation and hot water systems. IRS
Notice 2012-26 (2012-17 I.R.B. 847 April 23, 2012) established new
targets of 10-percent reduction in total energy and power costs with
respect to the building envelope, 25 percent with respect to the
interior lighting system and 15 percent with respect to the heating,
cooling, ventilation and hot water systems, effective beginning March
12, 2012. The targets from Notice 2008-40 may be used until December
31, 2013, but the targets of Notice 2012-26 apply thereafter.
---------------------------------------------------------------------------
Explanation of Provision
The provision increases the efficiency standards for
property placed in service after December 31, 2015, such that
qualifying buildings are determined relative to the ASHRAE/
IESNA 90.1-2007 standards. A separate section of the Act,
section 190, extends the deduction for two years, through
December 31, 2016.
Effective Date
The provision applies to property placed in service after
December 31, 2015.
2. Excise tax equivalency for liquefied petroleum gas and liquefied
natural gas (sec. 342 of the Act and sec. 6426 of the Code)
\1070\
---------------------------------------------------------------------------
\1070\ The Senate Committee on Finance reported S. 1946 on August
5, 2015 (S. Rep. No. 114-118). See sec. 303.
---------------------------------------------------------------------------
Present Law
Fuel excise taxes
The alternative fuel and alternative fuel excise tax
credits are allowable as credits against the fuel excise taxes
imposed by sections 4081 and 4041. Fuel excise taxes are
imposed on taxable fuel (gasoline, diesel fuel or kerosene)
under section 4081. In general, these fuels are taxed when
removed from a refinery, terminal rack, upon entry into the
United States, or upon sale to an unregistered person. A back-
up tax under section 4041 is imposed on previously untaxed fuel
and alternative fuel used or sold for use as fuel in a motor
vehicle or motorboat to the supply tank of a highway vehicle.
In general, the rates of tax are 18.3 cents per gallon (or in
the case of compressed natural gas 18.3 cents per gasoline
gallon equivalent), and in the case of liquefied natural gas,
and liquid fuel derived from coal or biomass, 24.3 cents per
gallon.
For fuel sold or used after December 31, 2015, liquefied
petroleum gas will be taxed at 18.3 cents per energy equivalent
of a gallon of gasoline (defined as 5.75 pounds of liquefied
petroleum gas); liquefied natural gas will be taxed at 24.3
cents per energy equivalent of a gallon of diesel (defined as
6.06 pounds of liquefied natural gas); and compressed natural
gas will be taxed at 18.3 cents per energy equivalent of a
gallon of gasoline (defined as 5.66 pounds of compressed
natural gas.
Excise tax credits and payments
The alternative fuel and alternative fuel excise tax credit
provides a 50 cents per gallon credit for specific alternative
fuels. Nonliquid alternative fuels receive a credit of 50 cents
per gasoline gallon equivalent (defined as the amount of such
fuel having a Btu content of 128,700 (higher heating value).
Liquefied natural gas and liquefied petroleum gas are afforded
a credit of 50 cents per gallon. To the extent the alternative
fuel credit exceeds tax, it is refundable as a payment under
section 6427(e)(2). The alternative fuel mixture credit is not
eligible for the payment incentive.
Explanation of Provision
The alternative fuel excise tax credits and outlay payment
provisions (extended by section 192 of the Act) related to
liquefied natural gas and liquefied petroleum gas are converted
to the same energy equivalent basis used for the purpose of the
section 4041 tax for fuel sold or used after December 31, 2015.
For liquefied natural gas the credit is 50 cents per energy
equivalent of diesel fuel (6.06 pounds of liquefied natural
gas) and for liquefied petroleum gas the credit is 50 cents per
energy equivalent of gasoline (5.75 pounds of liquefied
petroleum gas).
Effective Date
The provision is effective for fuel sold or used after
December 31, 2015.
3. Exclusion from gross income of certain clean coal power grants (sec.
343 of the Act) \1071\
---------------------------------------------------------------------------
\1071\ The Senate Committee on Finance reported S. 1946 on August
5, 2015 (S. Rep. No. 114-118). See sec. 301.
---------------------------------------------------------------------------
Present Law
Section 402 of the Energy Policy Act of 2005 provides
criteria for Federal financial assistance under the Clean Coal
Power Initiative. To the extent this financial assistance comes
in the form of a grant, award, or allowance, it must generally
be included in income under section 61 of the Internal Revenue
Code (the ``Code'').
Corporate taxpayers may be eligible to exclude such
financial assistance from gross income as a contribution of
capital under section 118 of the Code. The basis of any
property acquired by reason of such a contribution of capital
must be reduced by the amount of the contribution. This
exclusion is not available to non-corporate taxpayers.
Explanation of Provision
With respect to eligible non-corporate recipients, the
provision excludes from gross income and alternative minimum
taxable income any grant, award, or allowance made pursuant to
section 402 of the Energy Policy Act of 2005. The provision
requires that, to the extent the grant, award or allowance is
related to depreciable property, the adjusted basis is reduced
by the amount excluded from income under the provision. The
provision requires eligible non-corporate recipients to pay an
upfront payment to the Federal government equal to 1.18 percent
of the value of the grant, award, or allowance.
Under the provision, eligible non-corporate recipients are
defined as (1) any recipient (other than a corporation) of any
grant, award, or allowance made pursuant to Section 402 of the
Energy Policy Act of 2005 that (2) makes the upfront 1.18-
percent payment, where (3) the grant, award, or allowance would
have been excludable from income by reason of Code section 118
if the taxpayer had been a corporation. In the case of a
partnership, the eligible non-corporate recipients are the
partners.
Effective Date
The provision is effective for payments received in taxable
years beginning after December 31, 2011.
4. Clarification of valuation rule for early termination of certain
charitable remainder unitrusts (sec. 344 of the Act and sec.
664(e) of the Code)
Present Law
Charitable remainder trusts
A charitable remainder trust may be structured as a
charitable remainder annuity trust (``CRAT'') or a charitable
remainder unit trust (``CRUT''). A CRAT is a trust that is
required to pay, at least annually, a fixed dollar amount of at
least five percent of the initial value of the trust to a
noncharity for the life of an individual or for a period of 20
years or less, with the remainder passing to charity.\1072\ A
CRUT is a trust that generally is required to pay, at least
annually, a fixed percentage of at least five percent of the
fair market value of the trust's assets determined at least
annually to a noncharity (the income beneficiary) for the life
of an individual or for a period 20 years or less, with the
remainder passing to charity.\1073\
---------------------------------------------------------------------------
\1072\ Sec. 664(d)(1).
\1073\ Sec. 664(d)(2).
---------------------------------------------------------------------------
The Code provides two exceptions under which the trustee of
a CRUT may pay the income beneficiary an amount different from
the fixed percentage of the value of the trust's assets, as
described above. First, in a net income only CRUT (``NICRUT''),
the trustee pays the income beneficiary the lesser of the trust
income for the year or the fixed percentage of the value of the
trust assets, described above.\1074\ Stated differently, the
distribution that otherwise would be made to the income
beneficiary is limited by the trust income. Second, in a net
income CRUT with a make-up feature (``NIMCRUT''), the trustee
makes make-up distributions when a CRUT has distributed less
than the fixed percentage of the value of the trust assets in a
prior year by reason of the net income limit.\1075\
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\1074\ Sec. 664(d)(3)(A).
\1075\ Sec. 664(d)(3)(B).
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A trust does not qualify as a CRAT if the annuity for a
year is greater than 50 percent of the initial fair market
value of the trust's assets. A trust does not qualify as a CRUT
if the percentage of assets that are required to be distributed
at least annually is greater than 50 percent. A trust does not
qualify as a CRAT or a CRUT unless the value of the remainder
interest in the trust is at least 10 percent of the value of
the assets contributed to the trust.
Distributions from a CRAT or CRUT are treated in the
following order as: (1) ordinary income to the extent of the
trust's undistributed ordinary income for that year and all
prior years; (2) capital gains to the extent of the trust's
undistributed capital gain for that year and all prior years;
(3) other income (e.g., tax-exempt income) to the extent of the
trust's undistributed other income for that year and all prior
years; and (4) corpus.\1076\
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\1076\ Sec. 664(b).
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In general, distributions to the extent they are
characterized as income are includible in the income of the
beneficiary for the year that the annuity or unitrust amount is
required to be distributed even though the annuity or unitrust
amount is not distributed until after the close of the trust's
taxable year.\1077\
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\1077\ Treas. Reg. sec. 1.664-1(d)(4).
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CRATs and CRUTs are exempt from Federal income tax for a
tax year unless the trust has any unrelated business taxable
income for the year. Unrelated business taxable income includes
certain debt financed income. A charitable remainder trust that
loses exemption from income tax for a taxable year is taxed as
a regular complex trust. As such, the trust is allowed a
deduction in computing taxable income for amounts required to
be distributed in a taxable year, not to exceed the amount of
the trust's distributable net income for the year.
Valuation of interests in a charitable remainder trust
When the grantor funds a CRAT or a CRUT, the grantor
generally may take an income tax charitable deduction equal to
the present value of the charitable remainder interest of the
trust \1078\ determined on the date of the transfer (or, in the
case of a testamentary transfer, on the date of the decedent's
death or an alternate valuation date). For purposes of
determining the amount of the grantor's charitable
contribution, the remainder interest of a CRAT or CRUT (whether
a standard CRUT, a NICRUT, or NIMCRUT) is computed on the basis
that an amount equal to five percent of the net fair market
value of its assets (or a greater amount, if required under the
terms of the trust instrument) is to be distributed each year
to the income beneficiary.\1079\ Thus, in the case of a NICRUT
or a NIMCRUT, the net income limitation is disregarded.
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\1078\ Sec. 170(f)(2)(A).
\1079\ Sec. 664(e).
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The Code does not provide a rule for valuing the interests
in a charitable remainder trust in the event of an early
termination of the trust.
Explanation of Provision
Under the provision, in the case of the early termination
of a NICRUT or NIMCRUT, the remainder interest is valued using
rules similar to the rules for valuing the remainder interest
of a charitable remainder trust when determining the amount of
the grantor's charitable contribution deduction. In other
words, the remainder interest is computed on the basis that an
amount equal to five percent of the net fair market value of
the trust assets (or a greater amount, if required under the
terms of the trust instrument) is to be distributed each year,
with any net income limit being disregarded.\1080\
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\1080\ The provision was introduced in the House of Representatives
on December 8, 2015, as H.R. 4192 (114th Cong., 1st Sess.). For a
statement of the bill sponsors' intent, see 161 Cong. Rec. E1726 (Dec.
8, 2015) (statement of Rep. Tiberi) (``My bill provides that, on an
early termination of a charitable remainder trust, the donor and the
charity will apportion the value of the trust using the same
methodology that was used to determine the value of the remainder
interest on formation. The donor will recognize capital gain on the
total value received, the charity will receive its share of the trust's
assets, and the early termination will not constitute self-dealing or
otherwise disqualify the charitable remainder trust.'').
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Effective Date
The provision is effective for terminations of trusts
occurring after the date of enactment (December 18, 2015).
5. Prevention of transfer of certain losses from tax indifferent
parties (sec. 345 of the Act and sec. 267 of the Code)
Present Law
Related party sales
Sections 267(a)(1) and 707(b) generally disallow a
deduction for a loss on the sale or exchange of property,
directly or indirectly, to certain related parties or
controlled partnerships. When a loss has been so disallowed,
section 267(d) provides that the transferee may reduce any gain
that the transferee later recognizes on a disposition of the
asset by the amount of loss disallowed to the transferor.\1081\
Thus, the application of section 267(d) shifts the benefit of
the loss to the transferee to the extent of post-sale
appreciation.
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\1081\ The loss disallowance rules of sections 267(a) and 707(b)
together, and the corresponding rule under section 267(d), apply to
transactions between the following parties:
(1) Members of a family, which include ancestors, lineal
descendants, spouse and siblings (whether by the whole or half blood).
(2) An individual and a corporation more than 50 percent in value
of the outstanding stock of which is owned, directly or indirectly, by
or for the individual.
(3) Two corporations which are members of the same controlled group
(as defined in sec. 267(f)).
(4) A grantor and a fiduciary of any trust.
(5) A fiduciary of a trust and a fiduciary of another trust, if the
same person is a grantor of both trusts.
(6) A fiduciary of a trust and a beneficiary of such trust.
(7) A fiduciary of a trust and a beneficiary of another trust, if
the same person is a grantor of both trusts.
(8) A fiduciary of a trust and a corporation more than 50 percent
in value of the outstanding stock of which is owned, directly or
indirectly, by or for the trust or by or for a person who is a grantor
of the trust.
(9) A person and an organization to which section 501 applies and
which is controlled directly or indirectly by the person or (if such
person is an individual) by members of the family of the individual.
(10) A corporation and a partnership if the same persons own more
than 50 percent in value of the outstanding stock of the corporation
and more than 50 percent of the capital interest or profits interest in
the partnership.
(11) Two S corporations in which the same persons own more than 50
percent in value of the outstanding stock of each corporation.
(12) An S corporation and a C corporation if the same persons own
more than 50 percent in value of the outstanding stock of each
corporation.
(13) Except in the case of a sale or exchange in satisfaction of a
pecuniary bequest, an executor of an estate and a beneficiary of the
estate.
(14) A partnership and a person owning, directly or indirectly,
more than 50 percent of the capital interest or profits interest in the
partnership.
(15) Two partnerships in which the same persons own, directly or
indirectly, more than 50 percent of the capital interests or profits
interests.
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A different rule applies in the case of a sale or exchange
between two corporations that are members of the same
controlled group. Under section 267(f), the loss to the
transferor is not denied entirely, but rather is deferred until
such time as the property is transferred outside the controlled
group and there would be recognition of loss under consolidated
return principles, or such other time as may be prescribed in
regulations. While the loss is deferred, it is not transferred
to another party.
Sections 267 and 707 generally operate on an item-by-item
basis, so that if a transferor sells several items of
separately acquired property to a related or controlled party
in a single transaction, the disallowance at the time of the
sale applies to each loss regardless of any gains recognized on
other property in the same transfer.\1082\
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\1082\ This rule in effect prevents a transferor from selectively
realizing certain losses to offset gains in a transaction with a
related party.
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Transferee basis in gift cases
In the case of property acquired by gift, the basis
generally is the basis in the hands of the transferor. If the
basis exceeds the fair market value at the time of the gift,
however, the basis for purposes of determining loss is the fair
market value at that time.\1083\ This rule has the same effect
as the rule in section 267(d), in effect allowing the loss at
the time of the transfer to offset post-transfer appreciation.
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\1083\ Sec. 1015.
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Transferee basis in certain nontaxable corporate organizations and
reorganizations
In the case of certain nontaxable organizations and
reorganizations, the transferee corporation takes the same
basis in property that the property had in the hands of the
transferor, increased by the amount of any gain recognized by
the transferor.\1084\ However, in cases involving the
importation of a net built-in loss, the transferee's aggregate
adjusted basis may not exceed the fair market value of the
property immediately after the transaction.\1085\ This rule
applies to a transfer of property if (i) gain or loss with
respect to such property is not subject to Federal income tax
in the hands of the transferor immediately before the transfer
and (ii) gain or loss with respect to such property is subject
to such tax in the hands of the transferee immediately after
such transfer.
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\1084\ Sec. 362(a) and (b).
\1085\ Sec. 362(e)(1).
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Explanation of Provision
The provision provides that the general rule of section
267(d) does not apply to the extent gain or loss with respect
to property that has been sold or exchanged is not subject to
Federal income tax in the hands of the transferor immediately
before the transfer but any gain or loss with respect to the
property is subject to Federal income tax in the hands of the
transferee immediately after the transfer. Thus, the basis of
the property in the hands of the transferee will be its cost
for purposes of determining gain or loss, thereby precluding a
loss importation result.
Effective Date
The provision applies to sales and other dispositions of
property acquired after December 31, 2015, by the taxpayer in a
sale or exchange to which section 267(a)(1) applied.
6. Treatment of certain persons as employers with respect to motion
picture projects (sec. 346 of the Act and new sec. 3512 of the
Code)
Present Law
FICA and FUTA taxes
The Federal Insurance Contributions Act (``FICA'') imposes
tax on employers and employees based on the amount of wages (as
defined for FICA purposes) paid to an employee during the
year.\1086\ The tax imposed on the employer and on the employee
is each composed of two parts: (1) the Social Security or old
age, survivors, and disability insurance (``OASDI'') tax equal
to 6.2 percent of covered wages up to the OASDI wage base
($118,500 for 2015); and (2) the Medicare or hospital insurance
(``HI'') tax equal to 1.45 percent of all covered wages.\1087\
The employee portion of the FICA tax generally must be withheld
and remitted to the Federal government by the employer.
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\1086\ Secs. 3101-3128. FICA taxes, FUTA taxes (discussed herein),
taxes under the Railroad Retirement Tax Act or ``RRTA'' (secs. 3201-
3241) and income tax withholding (secs. 3401-3404) are commonly
referred to collectively as employment taxes. Sections 3501-3511
provide additional employment tax rules.
\1087\ For taxable years beginning after 2012, the employee portion
of the HI tax under FICA (not the employer portion) is increased by an
additional tax of 0.9 percent on wages received in excess of a
threshold amount. The threshold amount is $250,000 in the case of a
joint return, $125,000 in the case of a married individual filing a
separate return, and $200,000 in any other case.
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The Federal Unemployment Tax Act (``FUTA'') imposes a tax
on employers of six percent of wages up to the FUTA wage base
of $7,000.\1088\ An employer may take a credit against its FUTA
tax liability for its contributions to a State unemployment
fund and, in certain cases, an additional credit for
contributions that would have been required if the employer had
been subject to a higher contribution rate under State law. For
purposes of the credit, the term ``contributions'' means
payments required by State law to be made by an employer into
an unemployment fund, to the extent the payments are made by
the employer without being deducted or deductible from
employees' remuneration.
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\1088\ Secs. 3301-3311.
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Responsibility for employment tax compliance
FICA and FUTA tax responsibility generally rests with the
person who is the employer of an employee under a common-law
test that has been incorporated into Treasury
regulations.\1089\ Under the regulations, an employer-employee
relationship generally exists if the person for whom services
are performed has the right to control and direct the
individual who performs the services, not only as to the result
to be accomplished by the work, but also as to the details and
means by which that result is accomplished. That is, an
employee is subject to the will and control of the employer,
not only as to what is to be done, but also as to how it is to
be done. It is not necessary that the employer actually control
the manner in which the services are performed; rather, it is
sufficient that the employer have a right to control. Whether
the requisite control exists is determined on the basis of all
the relevant facts and circumstances. The test of whether an
employer-employee relationship exists often arises in
determining whether a worker is an employee or an independent
contractor. However, the same test applies in determining
whether a worker is an employee of one person or another.
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\1089\ Treas. Reg. secs. 31.3121(d)-1(c)(1) and 31.3306(i)-1(a).
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In some cases, a person other than the common-law employer
(a ``third party'') may be liable for employment taxes. In
particular, if wages are paid to an employee by a third party
and the third party, rather than the employer, has control of
the payment of the wages, the third party is the ``statutory''
employer responsible for complying with applicable employment
tax requirements.\1090\
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\1090\ Sec. 3401(d)(1) (for purposes of income tax withholding, if
the employer does not have control of the payment of wages, the person
having control of the payment of such wages is treated as the
employer); Otte v. United States, 419 U.S. 43 (1974) (the person who
has the control of the payment of wages is treated as the employer for
purposes of withholding the employee's share of FICA taxes from wages);
In re Armadillo Corporation, 561 F.2d 1382 (10th Cir. 1977), and In re
The Laub Baking Company v. United States, 642 F.2d 196 (6th Cir. 1981)
(the person who has control of the payment of wages is the employer for
purposes of the employer's share of FICA taxes and FUTA tax). The mere
fact that wages are paid by a person other than the employer does not
necessarily mean that the payor has control of the payment of the
wages. Rather, control depends on the facts and circumstances. See, for
example, Consolidated Flooring Services v. United States, 38 Fed. Cl.
450 (1997), and Winstead v. United States, 109 F. 2d 989 (4th Cir.
1997).
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As indicated above, remuneration with respect to employment
with a particular employer for a year is excepted from OASDI or
FUTA taxes to the extent it exceeds the applicable OASDI or
FUTA wage base.\1091\ In contrast, if an employee works for
multiple employers during a year, a separate wage base
generally applies in determining the employer share of OASDI
tax and FUTA tax with respect to remuneration for employment
with each employer, even if the wages earned with all the
employers are paid by the same third party.\1092\
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\1091\ An employee is subject to OASDI tax only with respect to
remuneration up to the applicable wage base for a year, regardless of
whether the employee works for only one employer or for more than one
employer during the year. If, as a result of working for more than one
employer, OASDI tax is withheld with respect to remuneration above the
applicable wage base, the employee is allowed a credit under section
31(b).
\1092\ Cencast Services, L.P. v. United States, 729 F.3d 1352 (Fed.
Cir. 2013).
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Explanation of Provision
Under the provision, for purposes of the OASDI and FUTA
wage bases, remuneration paid by a ``motion picture project
employer'' during a calendar year to a ``motion picture project
worker'' is treated as remuneration paid with respect to
employment of the motion picture project worker by the motion
picture project employer. As a result, all remuneration paid by
the motion picture project employer to a motion picture project
worker during a calendar year is subject to a single OASDI wage
base and a single FUTA wage base, without regard to the
worker's status as a common law employee of multiple clients of
the motion picture project employer during the year.
A person must meet several criteria to be treated as a
motion picture project employer. The person (directly or
through an affiliate \1093\) must (1) be a party to a written
contract covering the services of motion picture project
workers with respect to motion picture projects \1094\ in the
course of the trade or business of a client of the motion
picture project employer, (2) be contractually obligated to pay
remuneration to the motion picture project workers without
regard to payment or reimbursement by any other person, (3)
control the payment (within the meaning of the Code) of
remuneration to the motion picture project workers and pay the
remuneration from its own account or accounts, (4) be a
signatory to one or more collective bargaining agreements with
a labor organization that represents motion picture project
workers, and (5) have treated substantially all motion picture
project workers whom the person pays as employees (and not as
independent contractors) during the calendar year for purposes
of determining FICA, FUTA and other employment taxes. In
addition, at least 80 percent of all FICA remuneration paid by
the person in the calendar year must be paid to motion picture
project workers.
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\1093\ For purposes of the provision, ``affiliate'' and
``affiliated'' status are based on the aggregation rules applicable for
retirement plan purposes under section 414(b) and (c).
\1094\ For purposes of the provision, a motion picture project
generally means a project for the production of a motion picture film
or video tape as described in section 168(f)(3).
---------------------------------------------------------------------------
A motion picture project worker means any individual who
provides services on motion picture projects for clients of a
motion picture project employer that are not affiliated with
the motion picture project employer.
Effective Date
The provision applies to remuneration paid after December
31, 2015. Nothing in the amendments made by the provision is to
be construed to create any inference as to the law before the
date of enactment (December 18, 2015).
TITLE IV--TAX ADMINISTRATION
A. Internal Revenue Service Reforms\1095\
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\1095\ The House Committee on Ways and Means reported H.R. 1058 on
April 13, 2015 (H.R. Rep. 114-70). The House passed the bill on April
15, 2015.
---------------------------------------------------------------------------
1. Duty to ensure that Internal Revenue Service employees are familiar
with and act in accordance with certain taxpayer rights (sec.
401 of Act and sec. 7803 of the Code)
Present Law
The Code\1096\ provides that the Commissioner has such
duties and powers as prescribed by the Secretary. Unless
otherwise specified by the Secretary, such duties and powers
include the power to administer, manage, conduct, direct, and
supervise the execution and application of the internal revenue
laws or related statutes and tax conventions to which the
United States is a party, and to recommend to the President a
candidate for Chief Counsel (and recommend the removal of the
Chief Counsel). If the Secretary determines not to delegate
such specified duties to the Commissioner, such determination
will not take effect until 30 days after the Secretary notifies
the House Committees on Ways and Means, Government Reform and
Oversight, and Appropriations, and the Senate Committees on
Finance, Governmental Affairs, and Appropriations. The
Commissioner is to consult with the Oversight Board on all
matters within the Board's authority (other than the
recommendation of candidates for Commissioner and the
recommendation to remove the Commissioner).
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\1096\ Sec. 7803(a).
---------------------------------------------------------------------------
Unless otherwise specified by the Secretary, the
Commissioner is authorized to employ such persons as the
Commissioner deems proper for the administration and
enforcement of the internal revenue laws and is required to
issue all necessary directions, instructions, orders, and rules
applicable to such persons. Unless otherwise provided by the
Secretary, the Commissioner will determine and designate the
posts of duty.
Explanation of Provision
The provision adds to the Commissioner's duties the
requirement to ensure that employees of the IRS are familiar
with and act in accord with taxpayer rights as afforded by
other provisions of the Internal Revenue Code. These rights are
enumerated as follows: (A) the right to be informed, (B) the
right to quality service, (C) the right to pay no more than the
correct amount of tax, (D) the right to challenge the position
of the Internal Revenue Service and be heard, (E) the right to
appeal a decision of the Internal Revenue Service in an
independent forum, (F) the right to finality, (G) the right to
privacy, (H) the right to confidentiality, (I) the right to
retain representation, and (J) the right to a fair and just tax
system.
Effective Date
The provision is effective on the date of enactment
(December 18, 2015).
2. Prohibition of use of personal e-mail for official government
business (sec. 402 of the Act)
Present Law
Federal executive agencies are required to maintain and
preserve Federal records,\1097\ whether in paper or electronic
form, and protect against unauthorized removal of such records.
Policies for the retention and disposal of records must conform
to the requirements of the record-management procedures, as
implemented by the Archivist of the United States.\1098\ Email
accounts are specifically included within the scope of records
subject to the record-retention policies.\1099\ Each agency is
required to provide instruction and guidance to persons
conducting business on behalf of the agency, including
employees, officers and contractors, and use of personal email
accounts for agency business is to be discouraged.\1100\
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\1097\ 44 U.S.C. sec. 3101. See 44 U.S.C. sec. 3301 for a
definition of Federal records that generally includes all documentary
materials that agencies receive or create in the conduct of official
business and that may have evidentiary value with respect to official
business, regardless of the physical form of the materials.
\1098\ See generally Title 44, at chapter 29 (records management by
the Archivist of the United States and the General Services
Administration), chapter 31 (records management of Federal agencies)
and chapter 33 (disposal of records).
\1099\ 36 CFR sec. 1236.22(a).
\1100\ A quarterly bulletin published by the National Archives and
Records Administration provides guidance to executive agencies. See
generally NARA Bulletin 2013-03, available at http://www.archives.gov/
records-mgmt/bulletins/2013/2013-03.html.
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The government-wide record-management requirements are in
addition to the obligations to protect the sensitive
information for which the IRS is responsible. Tax information
is sensitive and confidential.\1101\ The Code imposes civil and
criminal penalties to protect it from unauthorized use,
inspection or disclosure.\1102\ As a condition of receiving tax
data, outside agencies must establish to the satisfaction of
the IRS that they have adequate programs and security protocols
in place to protect the data received.\1103\ Personal email
computer storage systems are not inspected by the IRS for
security.
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\1101\ Sec. 6103(a).
\1102\ See secs. 7213 (criminal unauthorized disclosure), 7213A
(criminal unauthorized inspection) and 7431 (civil remedy for
unauthorized inspection or disclosure).
\1103\ Sec. 6103(p)(4).
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Given the sensitive and confidential nature of the
information handled by the IRS and the need to be accountable
for all agency records, the IRS has in place policies
restricting the use of email accounts.\1104\ Transmission of
Federal tax information is only permitted outside the IRS in
limited circumstances. In 2012, the IRS published a revised
section of its manual in which it updated its administrative
rules on e-records generally, and banned use of non-IRS/
Treasury email for any governmental or official purpose.\1105\
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\1104\ I.R.M. paragraphs 1.10.3 et seq., and 11.3.1.
\1105\ I.R.M. paragraph 10.8.1.4.6.3.1, ``Privately Owned E-Mail
Accounts.'' (May 3, 2012).
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Explanation of Provision
The provision bars use of personal email accounts by IRS
employees for official government business.
Effective Date
The provision is effective on the date of enactment
(December 18, 2015).
3. Release of information regarding the status of certain
investigations (sec. 403 of the Act and sec. 6103 of the Code)
Present Law
Section 6103: Rules and penalties associated with the disclosure of
confidential returns and return information
In general
Generally, tax returns and return information (``tax
information'') are confidential and may not be disclosed unless
authorized in the Code.\1106\ Return information includes data
received, collected or prepared by the Secretary with respect
to the determination of the existence or possible existence of
liability of any person under the Code for any tax, penalty,
interest, fine, forfeiture, or other imposition or offense.
Information received, collected, or prepared by the Secretary
with respect to a Title 26 offense is the return information of
the person being investigated. Thus, generally, the Secretary
may not disclose the status of an investigation to a person
alleging a violation of their privacy (i.e., an unauthorized
disclosure of their return information) or other offense under
the Code committed by a third party.
---------------------------------------------------------------------------
\1106\ Sec. 6103(a).
---------------------------------------------------------------------------
Exceptions to the general rule
Section 6103 provides exceptions to the general rule of
confidentiality, detailing permissible disclosures. Among those
exceptions are disclosures to specified persons with a
``material interest'' in the return or return
information.\1107\ For example, upon written request, an
individual can obtain that individual's return, joint returns
are available to either spouse with respect to whom the return
was filed, and the administrator of an estate can obtain the
return of an estate. Similarly, return information may be
disclosed to those authorized to receive the return. However,
the Secretary may withhold return information the disclosure of
which the Secretary determines would seriously impair Federal
tax administration.\1108\
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\1107\ Sec. 6103(e).
\1108\ Sec. 6103(e)(7).
---------------------------------------------------------------------------
Under section 6103(c), the Secretary may disclose a
taxpayer's return or return information to such person or
persons as the taxpayer may designate in a request for or
consent to such disclosure. There are no restrictions placed on
the recipient of tax information received pursuant to the
consent of the taxpayer, and the penalties for unauthorized
disclosure or inspection (discussed below) do not apply to
persons receiving tax information pursuant to a taxpayer's
consent.
Criminal and civil penalties (sections 7213, 7213A, and
7431)
Criminal penalties apply for the unauthorized inspection or
disclosure of tax information. Willful unauthorized disclosure
is a felony under section 7213 and the willful unauthorized
inspection of tax information is a misdemeanor under section
7213A. Under section 7431, taxpayers may also pursue a civil
cause of action for disclosures and inspections not authorized
by section 6103.\1109\
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\1109\ Sec. 7431.
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Section 7214: Other offenses by officers and employees of the United
States
Section 7214 concerns offenses by officers and employees of
the United States. It provides, upon conviction, for the
dismissal from office, a $10,000 fine and/or five years
imprisonment of any officer or employee:
1. who is guilty of any extortion or willful
oppression under color of law; or
2. who knowingly demands other or greater sums than
are authorized by law, or receives any fee,
compensation, or reward, except as by law prescribed,
for the performance of any duty; or
3. who with intent to defeat the application of any
provision of this title fails to perform any of the
duties of his office or employment; or
4. who conspires or colludes with any other person to
defraud the United States; or
5. who knowingly makes opportunity for any person to
defraud the United States; or
6. who does or omits to do any act with intent to
enable any other person to defraud the United States;
or
7. who makes or signs any fraudulent entry in any
book, or makes or signs any fraudulent certificate,
return, or statement; or
8. who, having knowledge or information of the
violation of any revenue law by any person, or of fraud
committed by any person against the United States under
any revenue law, fails to report, in writing, such
knowledge or information to the Secretary; or
19. who demands, or accepts, or attempts to collect,
directly or indirectly as payment or gift, or
otherwise, any sum of money or other thing of value for
the compromise, adjustment, or settlement of any charge
or complaint for any violation or alleged violation of
law, except as expressly authorized by law so to do.
In the discretion of the court, up to one-half of the
amount of fine for a section 7214 violation may be awarded for
the use of the informer. In addition, the court is to render
judgment against said officer or employee for the amount of
damages sustained in favor of the party injured.
Section 7214 also provides that any internal revenue
officer or employee interested, directly or indirectly, in the
manufacture of tobacco, snuff, cigarettes, or in the
production, rectification or redistillation of distilled
spirits is to be dismissed from office and each such officer or
employee so interested in any such manufacture or production,
rectification, or redistillation of fermented liquors is to be
fined not more than $5,000.
Explanation of Provision
The provision amends section 6103(e) to provide that in the
case of an investigation involving the return or return
information of an individual alleging a violation of sections
7213, 7213A or 7214, the Secretary may disclose to the
complainant (or such person's designee) whether an
investigation, based on the person's provision of information
indicating a violation of sections 7213, 7213A or 7214 of the
Code, has been initiated, is open or is closed. The Secretary
may disclose whether the investigation substantiated a
violation of sections 7213, 7213A or 7214 of the Code, and
whether action has been taken with respect to the individual
who committed the substantiated violation, including whether
any referral has been made for prosecution of such individual.
As under present law section 6103(e), the Secretary may
disclose return information if the disclosure would not
seriously impair Federal tax administration.
Effective Date
The provision is effective for disclosures made on or after
the date of enactment (December 18, 2015).
4. Require the Secretary of the Treasury to describe administrative
appeals procedures relating to adverse determinations of tax-
exempt status of certain organizations (sec. 404 of the Act and
sec. 7123 of the Code)
Present Law
Section 501(c) organizations
Section 501(c) describes certain organizations that are
exempt from Federal income tax under section 501(a). Section
501(c) organizations include, among others, charitable
organizations (501(c)(3)), social welfare organizations
(501(c)(4)),\1110\ labor organizations (501(c)(5)), and trade
associations and business leagues (501(c)(6)). In addition to
being exempt from Federal income tax, section 501(c)(3)
organizations generally are eligible to receive tax deductible
contributions. Section 501(c)(3) organizations are subject to
operational rules and restrictions that do not apply to many
other types of tax-exempt organizations.
---------------------------------------------------------------------------
\1110\ Section 501(c)(4) provides tax exemption for civic leagues
or organizations not organized for profit but operated exclusively for
the promotion of social welfare, and no part of the net earnings of
which inures to the benefit of any private shareholder or individual.
An organization is operated exclusively for the promotion of social
welfare if it is engaged primarily in promoting in some way the common
good and general welfare of the people of a community. Treas. Reg. sec.
1.501(c)(4)-1(a)(2). The promotion of social welfare does not include
direct or indirect participation or intervention in political campaigns
on behalf of or in opposition to any candidate for public office;
however, social welfare organizations are permitted to engage in
political activity so long as the organization remains engaged
primarily in activities that promote social welfare. The lobbying
activities of a social welfare organization generally are not limited.
An organization is not operated primarily for the promotion of social
welfare if its primary activity is operating a social club for the
benefit, pleasure, or recreation of its members, or is carrying on a
business with the general public in a manner similar to organizations
that are operated for profit.
---------------------------------------------------------------------------
Application for tax exemption
Section 501(c)(3) organizations
Section 501(c)(3) organizations (with certain exceptions)
are required to seek formal recognition of tax-exempt status by
filing an application with the Internal Revenue Service
(``IRS'') (Form 1023 or Form 1023 EZ for small
organizations).\1111\ In response to the application, the IRS
issues a determination letter or ruling either recognizing the
applicant as tax-exempt or not. Certain organizations are not
required to apply for recognition of tax-exempt status in order
to qualify as tax-exempt under section 501(c)(3) but may do so.
These organizations include churches, certain church-related
organizations, organizations (other than private foundations)
the gross receipts of which in each taxable year are normally
not more than $5,000, and organizations (other than private
foundations) subordinate to another tax-exempt organization
that are covered by a group exemption letter.
---------------------------------------------------------------------------
\1111\ See sec. 508(a).
---------------------------------------------------------------------------
A favorable determination by the IRS on an application for
recognition of tax-exempt status will generally be retroactive
to the date that the section 501(c)(3) organization was created
if it files a completed Form 1023 or Form 1023 EZ within 15
months of the end of the month in which it was formed.\1112\ If
the organization does not file either form or files a late
application, it will not be treated as tax-exempt under section
501(c)(3) for any period prior to the filing of an application
for recognition of tax exemption.\1113\ Contributions to
section 501(c)(3) organizations that are subject to the
requirement that the organization apply for recognition of tax-
exempt status generally are not deductible from income, gift,
or estate tax until the organization receives a determination
letter from the IRS.\1114\
---------------------------------------------------------------------------
\1112\ Pursuant to Treas. Reg. sec. 301.9100-2(a)(2)(iv),
organizations are allowed an automatic 12-month extension as long as
the application for recognition of tax exemption is filed within the
extended, i.e., 27-month, period. The IRS also may grant an extension
beyond the 27-month period if the organization is able to establish
that it acted reasonably and in good faith and that granting relief
will not prejudice the interests of the government. Treas. Reg. secs.
301.9100-1 and 301.9100-3.
\1113\ Treas. Reg. sec. 1.508-1(a)(1).
\1114\ Sec. 508(d)(2)(B). Contributions made prior to receipt of a
favorable determination letter may be deductible prior to the
organization's receipt of such favorable determination letter if the
organization has timely filed its application to be recognized as tax-
exempt. Treas. Reg. secs. 1.508-1(a) and 1.508-2(b)(1)(i)(b).
---------------------------------------------------------------------------
Information required on Form 1023 includes, but is not
limited to: (1) a detailed statement of actual and proposed
activities; (2) compensation and financial information
regarding officers, directors, trustees, employees, and
independent contractors; (3) a statement of revenues and
expenses for the current year and the three preceding years (or
for the years of the organization's existence, if less than
four years); (4) a balance sheet for the current year; (5) a
description of anticipated receipts and contemplated
expenditures; (6) a copy of the articles of incorporation,
trust document, or other organizational or enabling document;
(7) organization bylaws (if any); and (8) information about
previously filed Federal income tax and exempt organization
returns, if applicable. The Form 1023 EZ requires less
information and relies primarily on attestations of the
applicant.
A favorable determination letter issued by the IRS will
state that the application for recognition of tax exemption and
supporting documents establish that the organization submitting
the application meets the requirements of section 501(c)(3) and
will classify the organization as either a public charity or a
private foundation.
Organizations that are classified as public charities (or
as private operating foundations) and not as private
nonoperating foundations may cease to satisfy the conditions
that entitled the organization to such status. The IRS makes an
initial determination of public charity or private foundation
status that is subsequently monitored by the IRS through annual
return filings. The IRS periodically announces in the Internal
Revenue Bulletin a list of organizations that have failed to
establish, or have been unable to maintain, their status as
public charities or as private operating foundations, and that
become private nonoperating foundations.
If the IRS denies an organization's application for
recognition of exemption under section 501(c)(3), the
organization may seek a declaratory judgment regarding its tax
status.\1115\ Prior to utilizing the declaratory judgment
procedure, the organization must have exhausted all
administrative remedies available to it within the IRS.
---------------------------------------------------------------------------
\1115\ Sec. 7428.
---------------------------------------------------------------------------
Other section 501(c) organizations
Most section 501(c) organizations--including organizations
described within sections 501(c)(4) (social welfare
organizations, etc.), 501(c)(5) (labor organizations, etc.), or
501(c)(6) (business leagues, etc.)--are not required to provide
notice to the Secretary that they are requesting recognition of
exempt status. Rather, organizations are exempt under these
provisions if they satisfy the requirements applicable to such
organizations. However, in order to obtain certain benefits
such as public recognition of tax-exempt status, exemption from
certain State taxes, and nonprofit mailing privileges, such
organizations voluntarily may request a formal recognition of
exempt status by filing a Form 1024.
If such an organization voluntarily requests a
determination letter by filing Form 1024 within 27 months of
the end of the month in which it was formed, its determination
of exempt status, once provided, generally will be effective as
of the organization's date of formation.\1116\ If, however, the
organization files Form 1024 after the 27-month deadline has
passed, its exempt status will be formally recognized only as
of the date the organization filed Form 1024.
---------------------------------------------------------------------------
\1116\ Rev. Proc. 2015-9, sec. 11, 2015-2 I.R.B. 249.
---------------------------------------------------------------------------
The declaratory judgment process available to organizations
seeking exemption under section 501(c)(3) is not available to
organizations seeking exemption under other subsections of the
Code, including sections 501(c)(4), 501(c)(5), and 501(c)(6).
Revocation (and suspension) of exempt status
An organization that has received a favorable tax-exemption
determination from the IRS generally may continue to rely on
the determination as long as there is not a ``material change,
inconsistent with exemption, in the character, the purpose, or
the method of operation of the organization, or a change in the
applicable law.'' \1117\ A ruling or determination letter
concluding that an organization is exempt from tax may,
however, be revoked or modified: (1) by notice from the IRS to
the organization to which the ruling or determination letter
was originally issued; (2) by enactment of legislation or
ratification of a tax treaty; (3) by a decision of the United
States Supreme Court; (4) by issuance of temporary or final
Regulations by the Treasury Department; (5) by issuance of a
revenue ruling, a revenue procedure, or other statement in the
Internal Revenue Bulletin; or (6) automatically, in the event
the organization fails to file a required annual return or
notice for three consecutive years.\1118\ A revocation or
modification of a determination letter or ruling may be
retroactive if, for example, there has been a change in the
applicable law, the organization omitted or misstated a
material fact, or the organization has operated in a manner
materially different from that originally represented.\1119\
---------------------------------------------------------------------------
\1117\ Ibid.
\1118\ Ibid., sec. 12.
\1119\ Ibid.
---------------------------------------------------------------------------
The IRS generally issues a letter revoking recognition of
an organization's tax-exempt status only after: (1) conducting
an examination of the organization; (2) issuing a letter to the
organization proposing revocation; and (3) allowing the
organization to exhaust the administrative appeal rights that
follow the issuance of the proposed revocation letter. In the
case of a section 501(c)(3) organization, the revocation letter
immediately is subject to judicial review under the declaratory
judgment procedures of section 7428. To sustain a revocation of
tax-exempt status under section 7428, the IRS must demonstrate
that the organization no longer is entitled to exemption.
Upon revocation of tax-exemption or change in the
classification of an organization (e.g., from public charity to
private foundation status), the IRS publishes an announcement
of such revocation or change in the Internal Revenue Bulletin.
Contributions made to organizations by donors who are unaware
of the revocation or change in status ordinarily will be
deductible if made on or before the date of publication of the
announcement.
The IRS may suspend the tax-exempt status of an
organization for any period during which an organization is
designated or identified by U.S. authorities as a terrorist
organization or supporter of terrorism.\1120\ Such an
organization also is ineligible to apply for tax exemption. The
period of suspension runs from the date the organization is
first designated or identified to the date when all
designations or identifications with respect to the
organization have been rescinded pursuant to the law or
Executive Order under which the designation or identification
was made. During the period of suspension, no deduction is
allowed for any contribution to a terrorist organization.
---------------------------------------------------------------------------
\1120\ Sec. 501(p) (enacted by Pub. L. No. 108-121, sec. 108(a),
effective for designations made before, on, or after November 11,
2003).
---------------------------------------------------------------------------
Appeals of adverse determinations or revocations of exempt status
Adverse determination
If the IRS reaches the conclusion that an organization does
not qualify for exempt status, the exempt organizations Rulings
and Agreements unit (``EO Rulings and Agreements'') will issue
a proposed adverse determination letter or ruling. The proposed
adverse determination will advise the taxpayer of its
opportunity to appeal the determination by requesting Appeals
Office consideration.\1121\
---------------------------------------------------------------------------
\1121\ Rev. Proc. 2015-9, 2015-2 I.R.B. 249, secs. 5 and 7.
---------------------------------------------------------------------------
If an organization protests an adverse determination, EO
Rulings and Agreements (if it maintains its adverse position)
will forward the protest and the application case file to the
Appeals Office, which will consider the organization's appeal.
If the Appeals Office agrees with EO Rulings and Agreements, it
will issue a final adverse determination letter or, if a
conference was requested, schedule a conference with the
organization. At the end of the conference process, the Appeals
Office will issue a final adverse determination letter or a
favorable determination letter.\1122\
---------------------------------------------------------------------------
\1122\ Ibid, sec. 7.
---------------------------------------------------------------------------
Prior to early 2015, certain cases were referred to EO
Technical, and that unit would issue the proposed adverse
determination. Under interim guidance issued on May 19, 2014,
by the Acting Director, Rulings and Agreements (Exempt
Organizations), an organization that receives a proposed
adverse determination with regard to an application that has
been transferred to EO Technical (or its successor) may request
a conference with EO Technical in addition to requesting
Appeals Office Consideration.\1123\ Prior to that time,
however, a determination letter issued on the basis of
technical advice from EO Technical could not be appealed to the
Appeals Office on issues that were the subject of the technical
advice.\1124\ The procedure described in the interim guidance
has since been added to the IRS Revenue Procedure relating to
exempt status determinations.\1125\
---------------------------------------------------------------------------
\1123\ IRS Memorandum, Appeals Office Consideration of All Proposed
Adverse Rulings Relating to Tax-Exempt Status from EO Technical by
Request, May 19, 2014.
\1124\ Rev. Proc. 2014-9, 2014-2 I.R.B. 281, sec. 7.
\1125\ Rev. Proc. 2015-9, 2015-2 I.R.B. 249, secs. 5 and 7.
---------------------------------------------------------------------------
Revocation or modification of a determination
As stated above, a determination letter or ruling
recognizing exemption may be revoked or modified. In the case
of a revocation or modification of a determination letter or
ruling, the appeal and conference procedures are essentially
the same as described above in connection with initial
determinations of exempt status.\1126\
---------------------------------------------------------------------------
\1126\ Ibid., sec. 12.
---------------------------------------------------------------------------
Explanation of Provision
The provision effectively codifies the May 19, 2014,
interim guidance by requiring the Secretary to describe
procedures under which a section 501(c) organization may
request an administrative appeal (including a conference
relating to such an appeal, if requested) to the Internal
Office of Appeals of an adverse determination. For this
purpose, an adverse determination includes a determination
adverse to the organization relating to:
1. the initial qualification or continuing classification
of the organization as exempt from tax under section 501(a);
2. the initial qualification or continuing classification
of the organization as an organization described in section
170(c)(2) (generally describing certain corporations, trusts,
community chests, funds, and foundations that are eligible
recipients of tax deductible contributions);
3. the initial or continuing classification of the
organization as a private foundation under section 509(a); or
4. the initial or continuing classification of the
organization as a private operating foundation under section
4942(j)(3).
Effective Date
The provision is effective for determinations made on or
after May 19, 2014.
5. Require section 501(c)(4) organizations to provide notice of
formation (sec. 405 of the Act, secs. 6033 and 6652 of the
Code, and new sec. 506 of the Code) \1127\
---------------------------------------------------------------------------
\1127\ The House Committee on Ways and Means reported H.R.1295 on
April 13, 2015 (H.R. Rep. 114-71). The House passed the bill on April
15, 2015.
---------------------------------------------------------------------------
Present Law
Section 501(c)(4) organizations
Section 501(c)(4) provides tax exemption for civic leagues
or organizations not organized for profit but operated
exclusively for the promotion of social welfare, or certain
local associations of employees, provided that no part of the
net earnings of the entity inures to the benefit of any private
shareholder or individual. An organization is operated
exclusively for the promotion of social welfare if it is
engaged primarily in promoting in some way the common good and
general welfare of the people of a community.\1128\ The
promotion of social welfare does not include direct or indirect
participation or intervention in political campaigns on behalf
of or in opposition to any candidate for public office;
however, social welfare organizations are permitted to engage
in political activity so long as the organization remains
engaged primarily in activities that promote social welfare.
The lobbying activities of a social welfare organization
generally are not limited. An organization is not operated
primarily for the promotion of social welfare if its primary
activity is operating a social club for the benefit, pleasure,
or recreation of its members, or is carrying on a business with
the general public in a manner similar to organizations that
are operated for profit.
---------------------------------------------------------------------------
\1128\ Treas. Reg. sec. 1.501(c)(4)-1(a)(2).
---------------------------------------------------------------------------
Application for tax exemption
Section 501(c)(3) organizations
Section 501(c)(3) organizations (with certain exceptions)
are required to seek formal recognition of tax-exempt status by
filing an application with the IRS (Form 1023).\1129\ In
response to the application, the IRS issues a determination
letter or ruling either recognizing the applicant as tax-exempt
or not. Certain organizations are not required to apply for
recognition of tax-exempt status in order to qualify as tax-
exempt under section 501(c)(3) but may do so. These
organizations include churches, certain church-related
organizations, organizations (other than private foundations)
the gross receipts of which in each taxable year are normally
not more than $5,000, and organizations (other than private
foundations) subordinate to another tax-exempt organization
that are covered by a group exemption letter.
---------------------------------------------------------------------------
\1129\ See sec. 508(a).
---------------------------------------------------------------------------
A favorable determination by the IRS on an application for
recognition of tax-exempt status will generally be retroactive
to the date that the section 501(c)(3) organization was created
if it files a completed Form 1023 or Form 1023 EZ within 15
months of the end of the month in which it was formed.\1130\ If
the organization does not file either form or files a late
application, it will not be treated as tax-exempt under section
501(c)(3) for any period prior to the filing of an application
for recognition of tax exemption.\1131\ Contributions to
section 501(c)(3) organizations that are subject to the
requirement that the organization apply for recognition of tax-
exempt status generally are not deductible from income, gift,
or estate tax until the organization receives a determination
letter from the IRS.\1132\
---------------------------------------------------------------------------
\1130\ Pursuant to Treas. Reg. sec. 301.9100-2(a)(2)(iv),
organizations are allowed an automatic 12-month extension as long as
the application for recognition of tax exemption is filed within the
extended, i.e., 27-month, period. The IRS also may grant an extension
beyond the 27-month period if the organization is able to establish
that it acted reasonably and in good faith and that granting relief
will not prejudice the interests of the government. Treas. Reg. secs.
301.9100-1 and 301.9100-3.
\1131\ Treas. Reg. sec. 1.508-1(a)(1).
\1132\ Sec. 508(d)(2)(B). Contributions made prior to receipt of a
favorable determination letter may be deductible prior to the
organization's receipt of such favorable determination letter if the
organization has timely filed its application to be recognized as tax-
exempt. Treas. Reg. secs. 1.508-1(a) and 1.508-2(b)(1)(i)(b).
---------------------------------------------------------------------------
Information required on Form 1023 includes, but is not
limited to: (1) a detailed statement of actual and proposed
activities; (2) compensation and financial information
regarding officers, directors, trustees, employees, and
independent contractors; (3) a statement of revenues and
expenses for the current year and the three preceding years (or
for the years of the organization's existence, if less than
four years); (4) a balance sheet for the current year; (5) a
description of anticipated receipts and contemplated
expenditures; (6) a copy of the articles of incorporation,
trust document, or other organizational or enabling document;
(7) organization bylaws (if any); and (8) information about
previously filed Federal income tax and exempt organization
returns, if applicable. The Form 1023 EZ requires less
information and relies primarily on attestations of the
applicant.
A favorable determination letter issued by the IRS will
state that the application for recognition of tax exemption and
supporting documents establish that the organization submitting
the application meets the requirements of section 501(c)(3) and
will classify the organization as either a public charity or a
private foundation.
Organizations that are classified as public charities (or
as private operating foundations) and not as private
nonoperating foundations may cease to satisfy the conditions
that entitled the organization to such status. The IRS makes an
initial determination of public charity or private foundation
status that is subsequently monitored by the IRS through annual
return filings. The IRS periodically announces in the Internal
Revenue Bulletin a list of organizations that have failed to
establish, or have been unable to maintain, their status as
public charities or as private operating foundations, and that
become private nonoperating foundations.
If the IRS denies an organization's application for
recognition of exemption under section 501(c)(3), the
organization may seek a declaratory judgment regarding its tax
status.\1133\ Prior to utilizing the declaratory judgment
procedure, the organization must have exhausted all
administrative remedies available to it within the IRS.
---------------------------------------------------------------------------
\1133\ Sec. 7428.
---------------------------------------------------------------------------
Other section 501(c) organizations
Most section 501(c) organizations--including organizations
described within sections 501(c)(4) (social welfare
organizations, etc.), 501(c)(5) (labor organizations, etc.), or
501(c)(6) (business leagues, etc.)--are not required to provide
notice to the Secretary that they are requesting recognition of
exempt status. Rather, organizations are exempt under these
provisions if they satisfy the requirements applicable to such
organizations. However, in order to obtain certain benefits
such as public recognition of tax-exempt status, exemption from
certain State taxes, and nonprofit mailing privileges, such
organizations voluntarily may request a formal recognition of
exempt status by filing a Form 1024.
If such an organization voluntarily requests a
determination letter by filing Form 1024 within 27 months of
the end of the month in which it was formed, its determination
of exempt status, once provided, generally will be effective as
of the organization's date of formation.\1134\ If, however, the
organization files Form 1024 after the 27-month deadline has
passed, its exempt status will be formally recognized only as
of the date the organization filed Form 1024.
---------------------------------------------------------------------------
\1134\ Rev. Proc. 2013-9, 2013-2 I.R.B. 255. Prior to the issuance
of Revenue Procedure 2013-9 in early 2013, an organization that filed
an application for exemption on Form 2014 generally could obtain a
determination that it was exempt as of its date of formation,
regardless of when it filed Form 1024.
---------------------------------------------------------------------------
The declaratory judgment process available to organizations
seeking exemption under section 501(c)(3) is not available to
organizations seeking exemption under other subsections of the
Code, including sections 501(c)(4), 501(c)(5), and 501(c)(6).
Revocation (and suspension) of exempt status
An organization that has received a favorable tax-exemption
determination from the IRS generally may continue to rely on
the determination as long as ``there are no substantial changes
in the organization's character, purposes, or methods of
operation.'' \1135\ A ruling or determination letter concluding
that an organization is exempt from tax may, however, be
revoked or modified: (1) by notice from the IRS to the
organization to which the ruling or determination letter was
originally issued; (2) by enactment of legislation or
ratification of a tax treaty; (3) by a decision of the United
States Supreme Court; (4) by issuance of temporary or final
Regulations by the Treasury Department; (5) by issuance of a
revenue ruling, a revenue procedure, or other statement in the
Internal Revenue Bulletin; or (6) automatically, in the event
the organization fails to file a required annual return or
notice for three consecutive years.\1136\ A revocation or
modification of a determination letter or ruling may be
retroactive if, for example, there has been a change in the
applicable law, the organization omitted or misstated a
material fact, or the organization has operated in a manner
materially different from that originally represented.\1137\
---------------------------------------------------------------------------
\1135\ Treas. Reg. sec. 1.501(a)-1(a)(2).
\1136\ Rev. Proc. 2013-9, 2013-2 I.R.B. 255.
\1137\ Ibid.
---------------------------------------------------------------------------
The IRS generally issues a letter revoking recognition of
an organization's tax-exempt status only after: (1) conducting
an examination of the organization; (2) issuing a letter to the
organization proposing revocation; and (3) allowing the
organization to exhaust the administrative appeal rights that
follow the issuance of the proposed revocation letter. In the
case of a section 501(c)(3) organization, the revocation letter
immediately is subject to judicial review under the declaratory
judgment procedures of section 7428. To sustain a revocation of
tax-exempt status under section 7428, the IRS must demonstrate
that the organization no longer is entitled to exemption.
Upon revocation of tax-exemption or change in the
classification of an organization (e.g., from public charity to
private foundation status), the IRS publishes an announcement
of such revocation or change in the Internal Revenue Bulletin.
Contributions made to organizations by donors who are unaware
of the revocation or change in status ordinarily will be
deductible if made on or before the date of publication of the
announcement.
The IRS may suspend the tax-exempt status of an
organization for any period during which an organization is
designated or identified by U.S. authorities as a terrorist
organization or supporter of terrorism.\1138\ Such an
organization also is ineligible to apply for tax exemption. The
period of suspension runs from the date the organization is
first designated or identified to the date when all
designations or identifications with respect to the
organization have been rescinded pursuant to the law or
Executive Order under which the designation or identification
was made. During the period of suspension, no deduction is
allowed for any contribution to a terrorist organization.
---------------------------------------------------------------------------
\1138\ Sec. 501(p) (enacted by Pub. L. No. 108-121, sec. 108(a),
effective for designations made before, on, or after November 11,
2003).
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, an organization described in section
501(c)(4) must provide to the Secretary notice of its formation
and intent to operate as such an organization, in such manner
as the Secretary may prescribe. The notice, together with a
reasonable user fee in an amount to be established by the
Secretary, must be provided no later than 60 days following the
organization's establishment and must include the following
information: (1) the name, address, and taxpayer identification
number of the organization; (2) the date on which, and the
State under the laws of which, the organization was organized;
and (3) a statement of the purpose of the organization. The
Secretary may extend the 60-day deadline for reasonable cause.
Any such fees collected may not be expended by the Secretary
unless provided by an appropriations Act. Within 60 days of
receipt of a notice of an organization's formation and intent
to operate as an organization described in section 501(c)(4),
the Secretary shall issue to the organization an acknowledgment
of the notice.
The provision amends section 6652(c) (which provides for
penalties in the event of certain failures to file an exempt
organization return or disclosure) to impose penalties for
failure to file the notice required under the proposal. An
organization that fails to file a notice within 60 days of its
formation (or, if an extension is granted for reasonable cause,
by the deadline established by the Secretary) is subject to a
penalty equal to $20 for each day during which the failure
occurs, up to a maximum of $5,000. In the event such a penalty
is imposed, the Secretary may make a written demand on the
organization specifying a date by which the notice must be
provided. If any person fails to comply with such a demand on
or before the date specified in the demand, a penalty of $20 is
imposed for each day the failure continues, up to a maximum of
$5,000.
With its first annual information return (Form 990, Form
990-EZ, or Form 990-N) filed after providing the notice
described above, a section 501(c)(4) organization must provide
such information as the Secretary may require, and in the form
prescribed by the Secretary, to support its qualification as an
organization described in section 501(c)(4). The Secretary is
not required to issue a determination letter following the
organization's filing of the expanded first annual information
return.
A section 501(c)(4) organization that desires additional
certainty regarding its qualification as an organization
described in section 501(c)(4) may file a request for a
determination, together with the required user fee, with the
Secretary. Such a request is in addition to, not in lieu of,
filing the required notice described above. It is intended that
such a request for a determination be submitted on a new form
(separate from Form 1024, which may continue to be used by
certain other organizations) that clearly states that filing
such a request is optional. The request for a determination is
treated as an application subject to public inspection and
disclosure under sections 6104(a) and (d).
Effective Date
The provision generally is effective for organizations
organized after the date of enactment (December 18, 2015).
Organizations organized on or before the date of enactment
that have not filed an application for exemption (Form 1024) or
annual information return or notice (under section 6033) on or
before the date of enactment must provide the notice required
under the provision within 180 days of the date of enactment.
6. Declaratory judgments for section 501(c)(4) and other exempt
organizations (sec. 406 of the Act and sec. 7428 of the Code)
\1139\
---------------------------------------------------------------------------
\1139\ The House Committee on Ways and Means reported H.R. 1295 on
April 13, 2015 (H.R. Rep. 114-71). The House passed the bill on April
15, 2015.
---------------------------------------------------------------------------
Present Law
In order for an organization to be granted tax exemption as
a charitable entity described in section 501(c)(3), it must
file an application for recognition of exemption with the IRS
and receive a favorable determination of its status.\1140\ For
most section 501(c)(3) organizations, eligibility to receive
tax-deductible contributions similarly is dependent upon its
receipt of a favorable determination from the IRS. In general,
a section 501(c)(3) organization can rely on a determination
letter or ruling from the IRS regarding its tax-exempt status,
unless there is a material change in its character, purposes,
or methods of operation. In cases where an organization
violates one or more of the requirements for tax exemption
under section 501(c)(3), the IRS generally may revoke an
organization's tax exemption, notwithstanding an earlier
favorable determination.
---------------------------------------------------------------------------
\1140\ Sec. 508(a).
---------------------------------------------------------------------------
Present law authorizes an organization to seek a
declaratory judgment regarding its tax-exempt status as a
remedy if the IRS denies its application for recognition of
exemption under section 501(c)(3), fails to act on such an
application, or informs a section 501(c)(3) organization that
it is considering revoking or adversely modifying its tax-
exempt status.\1141\ The right to seek a declaratory judgment
arises in the case of a dispute involving a determination by
the IRS with respect to: (1) the initial qualification or
continuing qualification of an organization as a charitable
organization for tax exemption purposes or for charitable
contribution deduction purposes; (2) the initial classification
or continuing classification of an organization as a private
foundation; (3) the initial classification or continuing
classification of an organization as a private operating
foundation; or (4) the failure of the IRS to make a
determination with respect to (1), (2), or (3).\1142\ A
``determination'' in this context generally means a final
decision by the IRS affecting the tax qualification of a
charitable organization. Section 7428 vests jurisdiction over
controversies involving such a determination in the U.S.
District Court for the District of Columbia, the U.S. Court of
Federal Claims, and the U.S. Tax Court.\1143\
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\1141\ Sec. 7428.
\1142\ Sec. 7428(a)(1).
\1143\ Sec. 7428(a)(2).
---------------------------------------------------------------------------
Prior to utilizing the declaratory judgment procedure, an
organization must have exhausted all administrative remedies
available to it within the IRS.\1144\ For the first 270 days
after a request for a determination is made and before the IRS
informs the organization of its decision, an organization is
deemed not to have exhausted its administrative remedies. If no
determination is made during the 270-day period, the
organization may initiate an action for declaratory judgment
after the period has elapsed. If, however, the IRS makes an
adverse determination during the 270-day period, an
organization may immediately seek declaratory relief. The 270-
day period does not begin with respect to applications for
recognition of tax-exempt status until the date a substantially
completed application is submitted.
---------------------------------------------------------------------------
\1144\ Sec. 7428(b)(2).
---------------------------------------------------------------------------
Under present law, a non-charity (i.e., an organization not
described in section 501(c)(3)) may not seek a declaratory
judgment with respect to an IRS determination regarding its
tax-exempt status. In general, such an organization must
petition the U.S. Tax Court for relief following the issuance
of a notice of deficiency or pay any tax owed and file a refund
action in Federal district court or the U.S. Court of Federal
Claims.
Explanation of Provision
The provision extends the section 7428 declaratory judgment
procedure to the initial determination or continuing
classification of an organization as tax-exempt under section
501(a) as an organization described in: (1) any subsection of
section 501(c) (including social welfare and certain other
organizations described in section 501(c)(4)); or (2) section
501(d) (religious and apostolic organizations).
Effective Date
The provision is effective for pleadings filed after the
date of enactment (December 18, 2015).
7. Termination of employment of Internal Revenue Service employees for
taking official actions for political purposes (sec. 407 of the
Act and sec. 1203(b) of the Internal Revenue Service
Restructuring and Reform Act of 1998)
Present Law
The IRS Restructuring and Reform Act of 1998 (the
``Restructuring Act'') \1145\ requires the IRS to terminate an
employee for certain proven violations committed by the
employee in connection with the performance of official duties.
The violations include: (1) willful failure to obtain the
required approval signatures on documents authorizing the
seizure of a taxpayer's home, personal belongings, or business
assets; (2) providing a false statement under oath material to
a matter involving a taxpayer; (3) with respect to a taxpayer,
taxpayer representative, or other IRS employee, the violation
of any right under the U.S. Constitution, or any civil right
established under titles VI or VII of the Civil Rights Act of
1964, title IX of the Educational Amendments of 1972, the Age
Discrimination in Employment Act of 1967, the Age
Discrimination Act of 1975, sections 501 or 504 of the
Rehabilitation Act of 1973 and title I of the Americans with
Disabilities Act of 1990; (4) falsifying or destroying
documents to conceal mistakes made by any employee with respect
to a matter involving a taxpayer or a taxpayer representative;
(5) assault or battery on a taxpayer or other IRS employee, but
only if there is a criminal conviction or a final judgment by a
court in a civil case, with respect to the assault or battery;
(6) violations of the Internal Revenue Code, Treasury
Regulations, or policies of the IRS (including the Internal
Revenue Manual) for the purpose of retaliating or harassing a
taxpayer or other IRS employee; (7) willful misuse of section
6103 for the purpose of concealing data from a Congressional
inquiry; (8) willful failure to file any tax return required
under the Code on or before the due date (including extensions)
unless failure is due to reasonable cause; (9) willful
understatement of Federal tax liability, unless such
understatement is due to reasonable cause; and (10) threatening
to take an official action, such as an audit, or delay or fail
to take official action with respect to a taxpayer for the
purpose of extracting personal gain or benefit.
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\1145\ Pub. L. No. 105-206, sec. 1203(b), July 22, 1998.
---------------------------------------------------------------------------
The Act provides non-delegable authority to the
Commissioner to determine that mitigating factors exist, that,
in the Commissioner's sole discretion, mitigate against
terminating the employee. The Act also provides that the
Commissioner, in his sole discretion, may establish a procedure
to determine whether an individual should be referred for such
a determination by the Commissioner. The Treasury Inspector
General (``IG'') is required to track employee terminations and
terminations that would have occurred had the Commissioner not
determined that there were mitigation factors and include such
information in the IG's annual report to Congress.
Explanation of Provision
The provision amends the Restructuring Act to expand the
scope of the violation concerning an IRS employee threatening
to audit a taxpayer for the purpose of extracting personal gain
or benefit to include actions taken for political purposes. As
a result, the provision requires the IRS to terminate an
employee who, for political purposes or personal gain,
undertakes official action with respect to a taxpayer or,
depending on the circumstances, fails to do so, delays action
or threatens to perform, delay or omit such official action.
Official actions for purposes of this provision include audits
or examinations.
Effective Date
The provision is effective on the date of enactment
(December 18, 2015).
8. Gift tax not to apply to gifts made to certain exempt organizations
(sec. 408 of the Act and sec. 2501(a) of the Code) \1146\
---------------------------------------------------------------------------
\1146\ The House Committee on Ways and Means reported H.R. 1104 on
April 13, 2015 (H.R. Rep. 114-64). The House passed the bill on April
15, 2015.
---------------------------------------------------------------------------
Present Law
Overview
The Code imposes a tax for each calendar year on the
transfer of property by gift during such year by any
individual, whether a resident or nonresident of the United
States.\1147\ The amount of taxable gifts for a calendar year
is determined by subtracting from the total amount of gifts
made during the year: (1) the gift tax annual exclusion
(described below); and (2) allowable deductions.
---------------------------------------------------------------------------
\1147\ Sec. 2501(a).
---------------------------------------------------------------------------
Gift tax for the current taxable year is determined by: (1)
computing a tentative tax on the combined amount of all taxable
gifts for the current and all prior calendar years using the
common gift tax and estate tax rate table; (2) computing a
tentative tax only on all prior-year gifts; (3) subtracting the
tentative tax on prior-year gifts from the tentative tax
computed for all years to arrive at the portion of the total
tentative tax attributable to current-year gifts; and, finally,
(4) subtracting the amount of unified credit not consumed by
prior-year gifts.
Unified credit (exemption) and tax rates
Unified credit
A unified credit is available with respect to taxable
transfers by gift and at death.\1148\ The unified credit
offsets tax, computed using the applicable estate and gift tax
rates, on a specified amount of transfers, referred to as the
applicable exclusion amount, or exemption amount. The exemption
amount was set at $5 million for 2011 and is indexed for
inflation for later years.\1149\ For 2015, the inflation-
indexed exemption amount is $5.43 million.\1150\ Exemption used
during life to offset taxable gifts reduces the amount of
exemption that remains at death to offset the value of a
decedent's estate. An election is available under which
exemption that is not used by a decedent may be used by the
decedent's surviving spouse (exemption portability).
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\1148\ Sec. 2010.
\1149\ For 2011 and later years, the gift and estate taxes were
reunified, meaning that the gift tax exemption amount was increased to
equal the estate tax exemption amount.
\1150\ For 2015, the $5.43 exemption amount results in a unified
credit of $2,117,800, after applying the applicable rates set forth in
section 2001(c).
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Common tax rate table
A common tax-rate table with a top marginal tax rate of 40
percent is used to compute gift tax and estate tax. The 40-
percent rate applies to transfers in excess of $1 million (to
the extent not exempt). Because the exemption amount currently
shields the first $5.43 million in gifts and bequests from tax,
transfers in excess of the exemption amount generally are
subject to tax at the highest marginal 40-percent rate.
Transfers by gift
The gift tax applies to a transfer by gift regardless of
whether: (1) the transfer is made outright or in trust; (2) the
gift is direct or indirect; or (3) the property is real or
personal, tangible or intangible.\1151\ For gift tax purposes,
the value of a gift of property is the fair market value of the
property at the time of the gift.\1152\ Where property is
transferred for less than full consideration, the amount by
which the value of the property exceeds the value of the
consideration is considered a gift and is included in computing
the total amount of a taxpayer's gifts for a calendar
year.\1153\
---------------------------------------------------------------------------
\1151\ Sec. 2511(a).
\1152\ Sec. 2512(a).
\1153\ Sec. 2512(b).
---------------------------------------------------------------------------
For a gift to occur, a donor generally must relinquish
dominion and control over donated property. For example, if a
taxpayer transfers assets to a trust established for the
benefit of his or her children, but retains the right to revoke
the trust, the taxpayer may not have made a completed gift,
because the taxpayer has retained dominion and control over the
transferred assets. A completed gift made in trust, on the
other hand, often is treated as a gift to the trust
beneficiaries.
By reason of statute, certain transfers are not treated as
transfers by gift for gift tax purposes. These include, for
example, certain transfers for educational and medical purposes
\1154\ and transfers to section 527 political
organizations.\1155\
---------------------------------------------------------------------------
\1154\ Sec. 2503(e).
\1155\ Sec. 2501(a)(4).
---------------------------------------------------------------------------
Under present law, there is no explicit exception from the
gift tax for a transfer to a tax-exempt organization described
in section 501(c)(4) (generally, social welfare organizations),
501(c)(5) (generally, labor and certain other organizations),
or section 501(c)(6) (generally, trade associations and
business leagues).
Taxable gifts
As stated above, the amount of a taxpayer's taxable gifts
for the year is determined by subtracting from the total amount
of the taxpayer's gifts for the year the gift tax annual
exclusion and any available deductions.
Gift tax annual exclusion
Under present law, donors of lifetime gifts are provided an
annual exclusion of $14,000 per donee in 2015 (indexed for
inflation from the 1997 annual exclusion amount of $10,000) for
gifts of present interests in property during the taxable
year.\1156\ If the non-donor spouse consents to split the gift
with the donor spouse, then the annual exclusion is $28,000 per
donee in 2015. In general, unlimited transfers between U.S.
spouses are permitted without imposition of a gift tax. Special
rules apply to the contributions to a qualified tuition program
(``529 Plan'') including an election to treat a contribution
that exceeds the annual exclusion as a contribution made
ratably over a five-year period beginning with the year of the
contribution.\1157\
---------------------------------------------------------------------------
\1156\ Sec. 2503(b).
\1157\ Sec. 529(c)(2).
---------------------------------------------------------------------------
Transfers between spouses
A 100-percent marital deduction generally is permitted for
the value of property transferred between U.S. spouses.\1158\
---------------------------------------------------------------------------
\1158\ Sec. 2523.
---------------------------------------------------------------------------
Transfers to charity
Contributions to section 501(c)(3) charitable organizations
and certain other organizations may be deducted from the value
of a gift for Federal gift tax purposes.\1159\ The effect of
the deduction generally is to remove the full fair market value
of assets transferred to charity from the gift tax base; unlike
the income tax charitable deduction, there are no percentage
limits on the deductible amount. A charitable contribution of a
partial interest in property, such as a remainder or future
interest, generally is not deductible for gift tax
purposes.\1160\
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\1159\ Sec. 2522.
\1160\ Sec. 2522(c)(2).
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, the gift tax shall not apply to the
transfer of money or other property to an organization
described in section 501(c)(4), 501(c)(5), or 501(c)(6) and
exempt from tax under section 501(a) for the use of such
organization.
Effective Date
The provision is effective for gifts made after the date of
enactment (December 18, 2015). The provision shall not be
construed to create an inference with respect to whether any
transfer of property to such an organization, whether made
before, on, or after the date of enactment, is a transfer by
gift for gift tax purposes.
9. Extend the Internal Revenue Service authority to require a truncated
Social Security Number (``SSN'') on Form
W-2 (sec. 409 of the Act and sec. 6051 of the Code)
Present Law
Section 6051(a) generally requires that an employer provide
a written statement to each employee on or before January 31 of
the succeeding year showing the remuneration paid to that
employee during the calendar year and other information
including the employee's Social Security number. The Form W-2,
Wage and Tax Statement, is used to provide this information to
employees and contains the taxpayer's SSN, wages paid, taxes
withheld, and other information.
Other statements provided to taxpayers, such as Forms 1099,
generally issued to any individual or unincorporated business
paid in excess of $600 per calendar year for services rendered,
are subject to rules under section 6109 dealing with
identifying numbers. Section 6109 requires that the filer
provide the taxpayer's ``identifying number'' which is an
individual's SSN except as otherwise specified in
regulations.\1161\ Accordingly, for Forms 1099, the Department
of the Treasury has the authority to require or permit filers
to use a number other than a taxpayer's SSN, including a
truncated SSN (the last four numbers of the SSN).
---------------------------------------------------------------------------
\1161\ See Treas. Reg. sec. 301.6109-1.
---------------------------------------------------------------------------
Explanation of Provision
The provision revises section 6051 to require employers to
include an ``identifying number'' for each employee, rather
than an employee's SSN, on Form W-2. This change will permit
the Department of the Treasury to promulgate regulations
requiring or permitting a truncated SSN on Form W-2, under
authority currently provided in section 6109(d).
Effective Date
The provision is effective on the date of enactment
(December 18, 2015).
10. Clarification of enrolled agent credentials (sec. 410 of the Act)
Present Law
Treasury Department Circular No. 230 provides rules
relating to practice before the IRS by attorneys, certified
public accountants, enrolled agents, enrolled actuaries, and
others.
Explanation of Provision
The provision amends Title 31 of the U.S. Code to permit
enrolled agents meeting the Secretary's qualifications to use
the designation ``enrolled agent,'' ``EA,'' or ``E.A.''
Effective Date
The provision is effective on the date of enactment
(December 18, 2015).
11. Partnership audit rules (sec. 411 of the Act and secs. 6225, 6226,
6234, 6235, and 6031 of the Code)
Present Law
Under recent amendments to Chapter 63,\1162\ relating to
partnership audit rules, the returns filed for partnership
taxable years beginning after 2017 are subject to a centralized
system for audit, adjustment and collection of tax that applies
to all partnerships, except those eligible partnerships that
have filed a valid election out. The Secretary may initiate an
examination of a partnership by issuing a notice of
administrative proceeding to the partnership or its designated
representative.\1163\ Any adjustment to items of income, gain,
loss, deduction, or credit of a partnership for a partnership
taxable year, and any partner's distributive share thereof,
generally is determined at the partnership level.\1164\ The
Secretary is required to notify the partnership and the
partnership representative of any proposed partnership
adjustment before the Secretary may issue a notice of final
partnership adjustment.\1165\ A notice of proposed adjustment
issued to the partnership identifies both the substance of the
adjustment and informs the partnership of the amount of any
imputed underpayment that results. If the adjustments result in
any underpayment of tax attributable to these items, the tax is
generally imputed to the partnership and may be assessed and
collected at the partnership level in the year that the
partnership adjustment becomes final (the adjustment
year).\1166\ As an alternative to partnership payment of the
imputed underpayment, a partnership may elect to furnish a
statement of each partner's share of any adjustments (similar
to a Schedule K-1) to each reviewed-year partner, who is then
required to pay tax attributable to the partnership
adjustment.\1167\
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\1162\ Sections 6221 through 6241, as amended by section 1101,
``The Bipartisan Budget Act of 2015,'' Pub. L. 114-74. For years prior
to the effective date of the new provisions, there remain three sets of
rules for tax audits of partners and partnerships. Partnerships with
more than 100 partners may elect the electing large partnership audit
rules of sections 6240 through 6256. Partnerships with more than 10
partners (and that are not electing large partnerships) are subject to
the TEFRA partnership audit rules enacted in 1982, found in sections
6221 through 6234. Under these two sets of rules, partnership items
generally are determined at the partnership level under unified audit
procedures. All other partnerships (those with 10 or fewer partners
that have not elected the TEFRA audit rules) are subject to the audit
rules applicable generally, with the tax treatment of an adjustment to
a partnership's items of income, gain, loss, deduction, or credit
determined for each partner in separate proceedings, both
administrative and judicial.
\1163\ Sec. 6231(a)(1).
\1164\ Sec. 6221(a).
\1165\ Sec. 6231(a)(1) and (2).
\1166\ For purposes of the centralized system, the reviewed year
means the partnership taxable year to which the item being adjusted
relates (sec. 6225(d)(1)). The adjustment year means (1) in the case of
an adjustment pursuant to the decision of a court (under the
centralized system's judicial review provisions), the partnership
taxable year in which the decision becomes final; (2) in the case of an
administrative adjustment request, the partnership taxable year in
which it is made; or (3) in any other case, the partnership taxable
year in which the notice of final partnership adjustment is mailed
(sec. 6225(d)(2)).
\1167\ Sec. 6226.
---------------------------------------------------------------------------
An imputed underpayment of tax with respect to a
partnership adjustment for any reviewed year is determined by
netting all adjustments of items of income, gain, loss, or
deduction and multiplying the net amount by the highest rate of
Federal income tax applicable either to individuals or to
corporations that is in effect for the reviewed year.\1168\ Any
adjustments to items of credit are taken into account as an
increase or decrease of the product of this multiplication. Any
net increase or decrease in loss is treated as a decrease or
increase, respectively, in income. Netting is done taking into
account applicable limitations, restrictions, and special rules
under present law.
---------------------------------------------------------------------------
\1168\ Sec. 6225(b)(1).
---------------------------------------------------------------------------
Modification of an imputed underpayment generally
If the partnership disagrees with the computation of the
imputed underpayment during an administrative proceeding, it
may seek modification of the computation, subject to the
approval of the Secretary.\1169\ Modification procedures permit
redetermination of the imputed underpayment (1) to take into
account amounts paid with amended returns filed by reviewed
year partners, (2) to disregard the portion allocable to a tax-
exempt partner, and (3) to take into account a rate of tax
lower than the highest tax rate for individuals or corporations
for the reviewed year. In addition, regulations or guidance may
provide for additional procedures to modify imputed
underpayment amounts on the basis of other necessary or
appropriate factors. In the case of a publicly traded
partnership, such other appropriate factors could include
taking into account the present-law section 469(k) rule
requiring that deductions that exceed income (passive activity
losses) be carried forward and applied against income from the
publicly traded partnership, not against other income of the
partners.
---------------------------------------------------------------------------
\1169\ Sec. 6225(c).
---------------------------------------------------------------------------
Modifying an imputed underpayment based on applicable highest tax rates
The partnership may seek to modify an imputed underpayment
amount by demonstrating that a lower tax rate is applicable to
partners.\1170\ For example, the partnership may demonstrate
that a portion of an imputed underpayment is allocable to a
partner that is a C corporation, and for that C corporation
partner, the highest marginal rate of Federal income tax (35
percent in 2015, for example) for ordinary income for the
reviewed year is lower than the highest marginal rate of
Federal income tax for individuals (39.6 percent in 2015, for
example). The statutory language refers to ordinary income but
does not refer to capital gain of a corporation, which is
generally subject to tax at the same rate as ordinary income of
a corporation.
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\1170\ Sec. 6225(c)(4).
---------------------------------------------------------------------------
Limitations period for partnership adjustments
In general, the Secretary may adjust an item on a
partnership return at any time within three years of the date a
return is filed (or the return due date, if the return is not
filed) or an administrative adjustment request is made. The
time within which the adjustment is made by the Secretary may
be later if a notice of proposed adjustment \1171\ is issued,
because the issuance of a notice of proposed partnership
adjustment begins the running of a period of 270 days in which
the partnership may seek a modification of the imputed
underpayment. Although the partnership generally is limited to
270 days from the issuance of that notice to seek a
modification of the imputed underpayment, extensions may be
permitted by the IRS. During the 270-day period, the Secretary
may not issue a notice of final partnership adjustment.
---------------------------------------------------------------------------
\1171\ Sec. 6231.
---------------------------------------------------------------------------
After a notice of proposed adjustment resulting in an
imputed underpayment is issued, the final partnership notice
may be issued no later than either the date which is 270 days
after the partnership has completed its response seeking a
revision of an imputed underpayment, or, if the partnership
provides an incomplete or no response, no later than 270 days
after the date of a notice of proposed adjustment.
Forum for judicial review
A partnership may seek judicial review of a notice of final
partnership adjustment within 90 days after the notice is
mailed, in the U.S. Tax Court, the Court of Federal Claims or a
U.S. district court for the district in which the partnership
has its principal place of business. The statutory language
refers to the Claims Court rather than the Court of Federal
Claims.
Restriction on authority to amend partner information statements
Partner information returns (currently Schedules K-1)
required to be furnished by the partnership may not be amended
after the due date of the partnership return to which the
partner information returns relate.\1172\ A conforming
amendment inadvertently strikes newly added language relating
to the restriction on amended partner information statements.
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\1172\ After that date, a timely administrative adjustment request
may address Schedule K-1 errors. Sec. 6227.
---------------------------------------------------------------------------
Explanation of Provision
The provision corrects and clarifies several provisions
relating to partnership audits to express the intended rule.
Modifying an imputed underpayment based on applicable highest tax rates
The provision strikes the reference to ordinary income of
corporations in the rule that provides procedures for
modification of an imputed underpayment to make clear that a
lower rate of tax may be taken into account in the case of
either capital gain or ordinary income of a partner that is a C
corporation.
Modifying an imputed underpayment based on certain passive losses of
publicly traded partnerships
Under the provision, certain section 469(k) passive
activity losses can reduce the imputed underpayment of a
publicly traded partnership under the centralized system. The
imputed underpayment can be determined without regard to the
portion of the underpayment that the partnership demonstrates
is attributable to (i.e., would be offset by) specified passive
activity losses attributable to a specified partner. The amount
of the specified passive activity loss is concomitantly
decreased, and the partnership takes the net decrease into
account as an adjustment in the adjustment year with respect to
the specified partners to which the net decrease relates.
A specified passive activity loss for any specified partner
of a publicly traded partnership means the lesser of the
section 469(k) passive activity loss of that partner which is
separately determined with respect to the partnership (1) for
the partner's taxable year in which or with which the reviewed
year of the partnership ends, or (2) for the partner's taxable
year in which or with which the adjustment year of the
partnership ends. A specified partner is a person who
continuously meets each of three requirements for the period
starting with the partner's taxable year in which or with which
the partnership reviewed year ends through the partner's
taxable year in which or with which the partnership adjustment
year ends. These three requirements are that the person is a
partner of the publicly traded partnership; the person is an
individual, estate, trust, closely held C corporation, or
personal service corporation; and the person has a specified
passive activity loss with respect to the publicly traded
partnership.
Limitations period for partnership adjustments
The provision clarifies the unintended conflict between
section 6231 (barring the Secretary from issuing the notice of
final partnership adjustment earlier than the expiration of the
270 days after the notice of a proposed adjustment) and section
6235 (requiring that a notice of final partnership adjustment
be filed no later than 270 days after the notice of proposed
adjustment in the case of a partnership that does not seek
modification of the imputed underpayment). As amended, section
6235 provides that a notice of final partnership adjustment to
a partnership that does not seek modification of an
underpayment in response to a notice of proposed adjustment may
be issued up to 330 days (plus any additional number of days
that were agreed upon as an extension of time for taxpayer
response) after the notice of proposed adjustment.
Forum for judicial review
The provision correctly identifies the Court of Federal
Claims in section 6234.
The provision adds a cross reference within the alternative
payment rules \1173\ to the time period for seeking judicial
review,\1174\ clarifying that judicial review is available to a
partnership that has made the election \1175\ under the
alternative payment rules.
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\1173\ Sec. 6226.
\1174\ Sec. 6234(a).
\1175\ Sec. 6226(a)(1).
---------------------------------------------------------------------------
Restriction on authority to amend partner information statements
The provision corrects the conforming amendment so that it
correctly strikes the last sentence of section 6031(b) under
prior law, which sentence related to repealed provisions on
electing large partnerships.
Effective Date
The provision is effective as if included in section 1101
of the Bipartisan Budget Act of 2015.\1176\
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\1176\ Pub. L. No. 114-74, enacted November 2, 2015.
---------------------------------------------------------------------------
B. United States Tax Court \1177\
---------------------------------------------------------------------------
\1177\ The Senate Committee on Finance reported S. 903 on April 14,
2015 (S. Rep. No. 114-14).
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Part 1--Taxpayer Access to United States Tax Court
1. Filing period for interest abatement cases (sec. 421 of the Act and
sec. 6404 of the Code)
Present Law
The United States Tax Court (herein the ``Tax Court'') has
jurisdiction over actions brought by a taxpayer for review of a
denial of a request for interest abatement if (1) the taxpayer
meets certain net worth requirements, and (2) the petition is
filed within 180 days of mailing of a final determination by
the Secretary not to abate interest.\1178\ In the absence of
the mailing of a final determination by the Secretary, the Code
does not authorize the filing of a Tax Court petition, and the
taxpayer is unable to seek judicial review of the claim.
---------------------------------------------------------------------------
\1178\ Sec. 6404(h).
---------------------------------------------------------------------------
Explanation of Provision
The provision amends the Code to authorize a petition with
the Tax Court to seek review of a claim for interest abatement
upon the expiration of a 180-day period after the filing with
the IRS of a claim for abatement of interest, in instances in
which the Secretary has failed to issue a final determination
within that period.
Effective Date
The provision is effective for claims filed after the date
of enactment (December 18, 2015).
2. Small tax case election for interest abatement cases (sec. 422 of
the Act and secs. 6404 and 7463 of the Code)
Present Law
The Code provides certain proceedings for small tax cases,
generally those that involve disputes of $50,000 or less.\1179\
Under the Code, the Tax Court has exclusive jurisdiction to
review a failure by the Secretary to abate interest.\1180\
However, the Code presently does not authorize cases to be
conducted using small tax case procedures, unless the issue
arises as part of a request for review of collection
actions.\1181\
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\1179\ Sec. 7463. These cases are handled under less formal
procedures than regular cases. The Tax Court's decision in a small tax
case is final and cannot be appealed to any court by the IRS or by the
petitioner. See sec. 7463, Title XVII of the United States Tax Court
rules, and http://www.ustaxcourt.gov/forms/Petition_Kit.pdf.
\1180\ Sec. 6404(h). Hinck v. United States, 127 S.Ct. 2011 (2007).
\1181\ Secs. 7463, 6330.
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Explanation of Provision
The provision amends the Code to extend the small tax case
procedures to petitions brought under section 6404(h), for
review of a decision by the Secretary not to abate interest in
cases in which the total amount of interest for which abatement
is sought does not exceed $50,000.
Effective Date
The provision applies to cases pending as of the day after
the date of enactment (December 18, 2015), and cases commencing
after the date of enactment.
3. Venue for appeal of spousal relief and collection cases (sec. 423 of
the Act and sec. 7482 of the Code)
Present Law
The jurisdiction of the Tax Court includes authority to
render decisions on a taxpayer's entitlement to relief from
joint and several liability and collection of taxes by lien and
levy.\1182\
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\1182\ Secs. 6015, 6320, and 6330.
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Venue for appellate review of Tax Court decisions by the
U.S. Court of Appeals is determined for certain specified cases
by the taxpayer's legal residence, principal place of business,
or principal office or agency is located. A default rule
prescribes that venue for review of all other cases lies in the
U.S. Court of Appeals for the District of Columbia.\1183\ Cases
involving relief from joint or several liability or collection
by lien and levy are not among those expressly identified as
appealable to the circuit of residence or principal business/
office. However, routine practice since enactment, on the part
of both the litigants and the courts, has been to treat such
cases as appealable to the U.S. Court of Appeals for the
circuit corresponding to the petitioner's residence or
principal business or office.
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\1183\ Sec. 7482.
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Explanation of Provision
The provision amends section 7482(b) to clarify that Tax
Court decisions rendered in cases involving petitions under
sections 6015, 6320, or 6330 follow the generally applicable
rule for appellate review. That rule provides that the cases
are appealable to the U.S. Court of Appeals for the circuit in
which is located the petitioner's legal residence in the case
of an individual or the petitioner's principal place of
business or principal office of agency in the case of an entity
other than an individual.
Effective Date
The provision applies to petitions filed after the date of
enactment. No inference is intended with respect to the
application of section 7482 to petitions filed on or before the
date of enactment.
4. Suspension of running of period for filing petition of spousal
relief and collection cases (sec. 424 of the Act and secs. 6015
and 6330 of the Code)
Present Law
Section 6015(e) addresses procedures by which taxpayers may
petition the Tax Court to determine the appropriate relief
available to the individual in matters involving spousal relief
from joint and several liability and collection of taxes by
lien and levy. It also provides for suspension of the running
of a period of limitations \1184\ on the collection of
assessments that may apply, limits on tax court jurisdictions
in certain circumstances, and rules for providing adequate
notice of proceedings to the other spouse.
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\1184\ Sec. 6502.
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Section 6330 disallows levies to be made on property or
rights to property unless the Secretary has notified the
taxpayer in writing of their right to a hearing before such
levy is made. Under subsection (d), once a determination is
made, the taxpayer may appeal the determination to the Tax
Court within 30 days. Under subsection (e), the levy actions
which are the subject of the requested hearing and the running
of any relevant period of limitations \1185\ are suspended for
the period during which such hearing and appeals are pending.
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\1185\ Secs. 6502, 6531, and 6532.
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Neither section 6015 or 6330 includes a rule similar to the
coordination rule found in the general provisions regarding
filing a petition with the Tax Court for taxpayers in
bankruptcy.\1186\ Under that rule, the period of the automatic
stay in bankruptcy is disregarded, and the taxpayer may file
its petition with the Tax Court within 60 days after the stay
is lifted.
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\1186\ Sec. 6213(f).
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Explanation of Provision
The provision adds to existing rules a suspension of the
running of a period of limitations on filing a petition as
described in section 6015(e) for a taxpayer who is prohibited
from filing such a petition under U.S.C. Title 11. The
suspension is for the period during which the taxpayer is
prohibited from filing such a petition and for 60 days
thereafter.
The provision also adds to existing rules a suspension of
the running of a period of limitations on filing a petition as
described in section 6330(e) for a taxpayer who is prohibited
from filing such a petition under U.S.C. Title 11. The
suspension is for the period during which the taxpayer is
prohibited from filing such a petition and for 30 days
thereafter.
Effective Date
The provision applies to petitions filed under section
6015(e) of the Code after the date of enactment and to
petitions filed under section 6330 of the Code after the date
of enactment.
5. Application of Federal rules of evidence (sec. 425 of the Act and
sec. 7453 of the Code)
Present Law
In general, the Code provides that the proceedings of the
Tax Court shall be conducted in accordance with rules of
practice and procedure (other than rules of evidence) as
prescribed by the Tax Court, and in accordance with the rules
of evidence applicable in trials without a jury in the United
States District Court of the District of Columbia.\1187\ The
Tax Court has interpreted the Code to require the Tax Court to
apply the evidentiary precedent of the D.C. Circuit in all
cases \1188\, an exception to the Tax Court's regular practice
under Golsen v. Commissioner \1189\ of applying the precedent
of the circuit court of appeals to which its decision is
appealable (``the Golsen rule'').
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\1187\ Sec. 7453.
\1188\ All cases except those cases in which section 7453 does not
apply, e.g., small tax cases.
\1189\ 54 T.C. 742 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971).
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The Federal Rules of Evidence \1190\ are the applicable
rules of evidence for all Federal district courts in all
judicial districts, including the District of Columbia. In
addition, the United States Code includes specific rules and
procedures for evidence.\1191\ Rule 143 of the Rules of
Practice and Procedure promulgated by the Tax Court, states
``those rules include the rules of evidence in the Federal
Rules of Civil Procedure and any rules of evidence generally
applicable in the Federal courts (including the United States
District Court for the District of Columbia).''
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\1190\ The Federal Rules of Evidence, as amended through 2012,
under the authority of 28 U.S.C. sec. 2074, is available at http://
www.uscourts.gov/uscourts/rules/rules-evidence.pdf. ``The Act to
Establish Rules of Evidence for Certain Courts and Proceedings,'' Pub.
L. No. 93-595 (January 2, 1975).
\1191\ 28 U.S.C. secs. 1731 through 1828.
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Explanation of Provision
The provision amends the Code to provide that proceedings
of the Tax Court be conducted in accordance with rules of
practice and procedure as prescribed by the Tax Court, and in
accordance with Federal Rules of Evidence. Thus, under the
Golsen rule, the Tax Court will apply the evidentiary precedent
of the circuit court of appeals to which its decision is
appealable.
Effective Date
The provision applies to proceedings commenced after the
date of enactment, and to the extent that it is just and
practicable, to all proceedings pending on such date.
Part 2--United States Tax Court Administration
6. Judicial conduct and disability procedures (sec. 431 of the Act and
new sec. 7466 of the Code)
Present Law
Under Title 28 of the United States Code, any person is
authorized to file a complaint alleging that an Article III
Judge has engaged in conduct prejudicial to the effective and
expeditious administration of the business of the courts; the
law also permits any person to allege conduct reflecting a
covered Judge's inability to perform his or her duties because
of mental or physical disability.\1192\ A judicial council
exercises specific powers in investigating and taking action
with respect to such complaints, including paying certain fees
and allowances incurred in conducting hearings and awarding
reimbursement of reasonable expenses in appropriate
circumstances from appropriated funds.\1193\ Title 28 directs
other Article I courts, including the Court of Federal Claims
\1194\ and the Court of Appeals for Veterans Claims,\1195\ to
prescribe similar rules for the filing of complaints with
respect to the conduct or disability of any Judge and for the
investigation and resolution of such complaints.
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\1192\ Judicial Conduct and Disability Act of 1980, 28 U.S.C. secs.
351-364. On March 11, 2008, the Judicial Conference of the United
States promulgated rules governing such proceedings.
\1193\ 28 U.S.C. chapter 16.
\1194\ 28 U.S.C. sec. 363.
\1195\ 38 U.S.C. sec. 7253(g).
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Unlike the prescriptions of Title 28 for Article III courts
and other Article I courts, there is no statutory provision
related to complaints regarding the conduct or disability of a
Tax Court Judge, Senior Judge, or Special Trial Judge, although
they voluntarily agree to follow the rules contained in the
Code of Conduct for U.S. Judges.\1196\
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\1196\ Available at http://www.uscourts.gov/uscourts/
RulesAndPolicies/conduct/vol02a-ch02.pdf.
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Explanation of Provision
The provision authorizes the Tax Court to prescribe
procedures for the filing of complaints with respect to the
conduct of any judge or special trial judge of the Tax Court
and for the investigation and resolution of such complaints. In
investigating and taking action with respect to such a
complaint, the provision authorizes the Tax Court to exercise
the powers granted to a judicial council under Title 28.
Effective Date
The provision applies to proceedings commenced after the
date which is 180 days after the date of enactment, and to the
extent that it is just and practicable, to all proceedings
pending on such date.
7. Administration, judicial conference, and fees (sec. 432 of the Act;
Code sec. 7473 and new secs. 7470 and 7470A of the Code)
Present Law
Congress established the Tax Court as a court of law under
Article I with its governing provisions in the Code. However,
provisions governing most Federal courts are codified in Title
28 of the United States Code. Congress has, from time to time,
amended the governing laws of other Federal courts and the laws
that apply to the Administrative Office of the United States
Courts relating to administering certain authorities of the
judiciary.\1197\
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\1197\ These authorities are available to Article III courts either
directly or through the laws enacted for the Administrative Office of
the United States Court under U.S.C. title 28 (see e.g., 28 U.S.C.
secs. 601, et seq.) and to other Article I courts such as the U.S.
Court of Appeals for Veterans Claims under 38 U.S.C. sec. 7287.
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Federal courts, including Article I courts such as the
Court of Appeals for Veterans Claims, have express statutory
authority to conduct an annual judicial conference.\1198\ The
Tax Court has conducted periodic judicial conferences in order
to consider the business of the Tax Court and to discuss means
of improving the administration of justice within the Tax
Court's jurisdiction. The Tax Court's judicial conferences have
been attended by persons admitted to practice before the Tax
Court, including representatives of the Internal Revenue
Service, the Department of Justice, private practitioners, low-
income taxpayer clinics, and by other persons active in the
legal profession.
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\1198\ 38 U.S.C. sec. 7286.
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Federal courts are authorized to deposit certain court fees
into a special fund of the Treasury to be available to offset
funds appropriated for the operation and maintenance of the
courts.\1199\ The Tax Court's filing fees are statutorily set
at ``not in excess of $60'' and are covered into the Treasury
as miscellaneous receipts.\1200\
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\1199\ 28 U.S.C. secs. 1941(A) and 1931.
\1200\ Sec. 7473.
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Explanation of Provision
The provision amends the Code to provide the Tax Court with
the same general management, administrative, and expenditure
authorities that are available to other Article I courts.
The provision amends the Code to provide the Tax Court with
express authority to conduct an annual judicial conference and
charge a reasonable registration fee.
The provision amends the Code to authorize the Tax Court to
deposit certain fees into a special fund of the Treasury to be
available to offset funds appropriated for the operation and
maintenance of the Tax Court.
Effective Date
The provision is effective on the date of enactment.
Part 3--Clarification Relating to the United States Tax Court
8. Clarification relating to the United States Tax Court (sec. 441 of
the Act and sec. 7441 of the Code)
Present Law
The Tax Court was created in 1969 as a court of record
established under Article I of the U.S. Constitution with
jurisdiction over tax matters as conferred upon it under the
Code.\1201\ It superseded an independent agency of the
Executive Branch known as the Tax Court of the United States,
which itself superseded the Board of Tax Appeals.\1202\
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\1201\ Sec. 7441.
\1202\ The Board of Tax Appeals was created in 1924 to review
deficiency determinations. In 1942, it was renamed the Tax Court of the
United States.
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As judges of an Article I court, Tax Court judges do not
have lifetime tenure nor do they enjoy the salary protection
afforded judges in Article III courts. They are subject to
removal only for cause, by the President.\1203\ The authority
to remove a judge for cause was the basis for a recent
unsuccessful challenge to an order of the Tax Court, in which
the taxpayer invoked the separation of powers doctrine to argue
that the removal authority is an unconstitutional interference
of the executive branch with the exercise of judicial powers.
In rejecting that challenge, the Court of Appeals for the
District of Columbia held in Kuretski v. Commissioner \1204\
that the Tax Court is an independent Executive Branch agency,
while acknowledging that the Tax Court is a ``Court of Law''
for purposes of the Appointments Clause.\1205\
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\1203\ Section 7443(f) permits the President to remove a Tax Court
judge for inefficiency, neglect of duty, or malfeasance in office,
after notice and opportunity for a public hearing.
\1204\ Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014),
petition for cert. filed (U.S. Nov. 26, 2014) (No. 14-622), available
at http://www.procedurallytaxing.com/wp-content/uploads/2014/12/
Kuretski-Supreme-Court-Petition.pdf. For an explanation of the status
of Article I courts in comparison to the Article III judiciary, see,
Federal Courts: A Legal Overview (Report No. R43746), October 1, 2014,
available at http://www.fas.org/sgp/crs/misc/R43746.pdf.
\1205\ Kuretski v. Commissioner, p. 932, distinguishing Freytag v.
Commissioner, 501 U.S. 868 (1991).
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Explanation of Provision
To avoid confusion about the independence of the Tax Court
as an Article I court, the provision clarifies that the Tax
Court is not an agency of the Executive Branch.
Effective Date
The provision is effective on the date of enactment.
APPENDIX: ESTIMATED BUDGET EFFECTS OF TAX LEGISLATION ENACTED IN 2015
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]