[Senate Prints 108-32]
[From the U.S. Government Printing Office]
108th Congress 1st S. Prt.
Session COMMITTEE PRINT 108-32
_______________________________________________________________________
TECHNICAL EXPLANATION OF THE ENERGY TAX INCENTIVES ACT OF 2003
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TO ACCOMPANY SENATE AMENDMENT 1424
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COMMITTEE ON FINANCE
UNITED STATES SENATE
Charles E. Grassley, Chairman
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
JULY 2003
Printed for the use of the Committee on Finance
108th Congress S. Prt.
1st Session COMMITTEE PRINT 108-32
_______________________________________________________________________
TECHNICAL EXPLANATION OF THE ENERGY TAX INCENTIVES ACT OF 2003
__________
TO ACCOMPANY SENATE AMENDMENT 1424
__________
COMMITTEE ON FINANCE
UNITED STATES SENATE
Charles E. Grassley, Chairman
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
JULY 2003
Printed for the use of the Committee on Finance
COMMITTEE ON FINANCE
CHARLES E. GRASSLEY, Iowa, Chairman
ORRIN G. HATCH, Utah MAX BAUCUS, Montana
DON NICKLES, Oklahoma JOHN D. ROCKEFELLER IV, West
TRENT LOTT, Mississippi Virginia
OLYMPIA J. SNOWE, Maine TOM DASCHLE, South Dakota
JON KYL, Arizona JOHN BREAUX, Louisiana
CRAIG THOMAS, Wyoming KENT CONRAD, North Dakota
RICK SANTORUM, Pennsylvania BOB GRAHAM, Florida
BILL FRIST, Tennessee JAMES M. JEFFORDS (I), Vermont
GORDON SMITH, Oregon JEFF BINGAMAN, New Mexico
JIM BUNNING, Kentucky JOHN F. KERRY, Massachusetts
BLANCHE L. LINCOLN, Arkansas
Kolan Davis, Staff Director and Chief Counsel
Jeff Forbes, Democratic Staff Director
(ii)
C O N T E N T S
Page
I. Legislative Background............................................1
Title I--Renewable Electricity Production Tax Credit..............1
A. Extension and Modification of the Section 45
Electricity Production Credit (sec. 101 of the bill
and sec. 45 of the Code)............................. 1
Title II--Alternative Motor Vehicles and Fuel Incentives..........5
A. Modifications and Extensions of Provisions Relating to
Electric Vehicles, Clean-Fuel Vehicles, and Clean-
Fuel Vehicle Refueling Property (secs. 201, 202, 203,
and 204 of the bill and secs. 30 and 179A and new
secs. 30B, 30C, and 40A of the Code)................. 5
B. Modifications to Small Producer Ethanol Credit (sec.
205 of the bill and secs. 38, 40, 87, and 469 of the
Code)................................................ 13
C. Increased Flexibility in Alcohol Fuels Income Tax
Credit (sec. 206 of the bill and sec. 40 of the Code) 14
D. Income Tax Credit for Biodiesel Fuel Mixtures (sec.
207 of the bill and new sec. 40B of the Code)........ 15
E. Alcohol Fuel and Biodiesel Mixtures Excise Tax Credit
(sec. 208 of the bill, secs. 40, 4081, 6427, 9503,
and new sec. 6426 of the Code)....................... 17
F. Sale of Gasoline and Diesel Fuel at Duty-Free Sales
Enterprises (sec. 209 of the bill)................... 23
Title III--Conservation and Energy Efficiency Provisions.........24
A. Credit for Construction of New Energy-Efficient Home
(sec. 301 of the bill and new sec. 45G of the Code).. 24
B. Credit for Energy-Efficient Appliances (sec. 302 of
the bill and new sec. 45H of the Code)............... 26
C. Credit for Residential Energy Efficient Property (sec.
303 of the bill and new sec. 25C of the Code)........ 27
D. Credit for Business Installation of Qualified Fuel
Cells and Stationary Microturbine Power Plants (sec.
304 of the bill and sec. 48 of the Code)............. 29
E. Energy-Efficient Commercial Buildings Deduction (sec.
305 of the bill and new sec. 179B of the Code)....... 31
F. Three-Year Applicable Recovery Period for Depreciation
of Qualified Energy Management Devices (sec. 306 of
the bill and sec. 168 of the Code)................... 33
G. Three-Year Applicable Recovery Period for Depreciation
of Qualified Water Submetering Devices (sec. 307 of
the bill and sec. 168 of the Code)................... 34
H. Energy Credit for Combined Heat and Power System
Property (sec. 308 of the bill and sec. 48 of the
Code)................................................ 34
I. Credit for Energy Efficiency Improvements to Existing
Homes (sec. 309 of the bill and new sec. 25D of the
Code)................................................ 36
Title IV--Clean Coal Incentives..................................38
A. Investment and Production Credits for Clean Coal
Technology (secs. 401, 411, and 412 of the bill and
new secs. 45I, 45J, and 48A of the Code)............. 38
Title V--Oil and Gas Provisions..................................43
A. Tax Credit for Oil and Gas Production From Marginal
Wells (sec. 501 of the bill and sec. 45K of the Code) 43
B. Natural Gas Gathering Lines Treated as Seven-Year
Property (sec. 502 of the bill and sec. 168 of the
Code)................................................ 44
C. Expensing of Capital Costs Incurred and Credit for
Production in Complying With Environmental Protection
Agency Sulfur Regulations (secs. 503 and 504 of the
bill and new secs. 179C and 45L of the Code)......... 45
D. Determination of Small Refiner Exception to Oil
Depletion Deduction (sec. 505 of the bill and sec.
613A of the Code).................................... 46
E. Extension of Suspension of Taxable Income Limit With
Respect to Marginal Production (sec. 506 of the bill
and sec. 613A of the Code)........................... 47
F. Amortization of Delay Rental Payments (sec. 507 of the
bill and new sec. 199A of the Code).................. 49
G. Amortization of Geological and Geophysical
Expenditures (sec. 508 of the bill and new sec. 199
of the Code)......................................... 50
H. Extension and Modification of Credit for Producing
Fuel From a Non-Conventional Source (sec. 509 of the
bill and new sec. 45J of the Code)................... 52
I. Natural Gas Distribution Lines Treated as 15-Year
Property (sec. 510 of the bill and sec. 168 of the
Code)................................................ 56
J. Credit for Alaska Natural Gas (sec. 511 of the bill
and new sec. 45M of the Code)........................ 57
K. Certain Alaska Pipeline Systems Treated as Seven-Year
Property (sec. 512 of the bill and sec. 168 of the
Code)................................................ 59
L. Exempt Certain Prepayments for Natural Gas From Tax-
Exempt Bond Arbitrage Rules (sec. 513 of the bill and
sec. 148 of the Code)................................ 60
Title VI--Electric Utility Restructuring Provisions..............63
A. Modifications to Special Rules for Nuclear
Decommissioning Costs (sec. 601 of the bill and sec.
468A of the Code).................................... 63
B. Treatment of Certain Income of Cooperatives (sec. 602
of the bill and sec. 501 of the Code)................ 66
C. Sales or Dispositions To Implement Federal Energy
Regulatory Commission or State Electric Restructuring
Policy (sec. 603 of the bill and sec. 451 of the
Code)................................................ 71
Title VII--Additional Provisions.................................72
A. Extension of Accelerated Depreciation and Wage Credit
Benefits on Indian Reservations (sec. 701 of the bill
and secs. 45A and 168(j) of the Code)................ 72
B. GAO Study (sec. 702 of the bill)...................... 74
C. Repeal Certain Excise Taxes on Rail Diesel Fuel and
Inland Waterway Barge Fuels (sec. 703 of the bill and
secs. 4041 and 4042 of the Code)..................... 75
D. Modify Research Credit for Research Relating to Energy
(sec. 704 of the bill and sec. 41 of the Code)....... 76
Title VIII--Revenue Provisions...................................78
A. Provisions Designed To Curtail Tax Shelters........... 78
1. Penalty for failure to disclose reportable
transactions (sec. 801 of the bill and new sec.
6707A of the Code)............................... 78
2. Modifications to the accuracy-related penalties
for listed transactions and reportable
transactions having a significant tax avoidance
purpose (sec. 802 of the bill and new sec. 6662A
of the Code)..................................... 81
3. Tax shelter exception to confidentiality
privileges relating to taxpayer communications
(sec. 803 of the bill and sec. 7525 of the Code). 85
4. Disclosure of reportable transactions by material
advisors (secs. 804 and 805 of the bill and secs.
6111 and 6707 of the Code)....................... 86
5. Investor lists and modification of penalty for
failure to maintain investor lists (secs. 804 and
806 of the bill and secs. 6112 and 6708 of the
Code)............................................ 89
6. Penalties on promoters of tax shelters (sec. 807
of the bill and sec. 6700 of the Code)........... 91
B. Provisions to Discourage Corporate Expatriation....... 92
1. Tax treatment of inversion transactions (sec. 821
of the bill and new sec. 7874 of the Code)....... 92
2. Excise tax on stock compensation of insiders of
inverted corporations (sec. 822 of the bill and
new sec. 5000A and sec. 275(a) of the Code)...... 98
3. Reinsurance agreements (sec. 823 of the bill and
sec. 845(a) of the Code)......................... 102
C. Extension of IRS User Fees (sec. 831 of the bill and
new sec. 7529 of the Code)........................... 104
D. Add Vaccines Against Hepatitis A to the List of
Taxable Vaccines (sec. 832 of the bill and sec. 4132
of the Code)......................................... 104
E. Individual Expatriation To Avoid Tax (sec. 833 of the
bill and secs. 877, 2107, 2501, and 6039 of the Code) 105
II. Budget Effects of the Bill......................................111
A. Committee Estimates................................... 111
B. Budget Authority and Tax Expenditures................. 124
C. Consultation With Congressional Budget Office......... 124
III. Votes of the Committee..........................................129
IV. Regulatory Impact and Other Matters.............................130
A. Regulatory Impact..................................... 130
B. Unfunded Mandates Statement........................... 131
C. Tax Complexity Analysis............................... 131
V. Changes in Existing Law Made by the Bill, as Reported...........131
I. LEGISLATIVE BACKGROUND
The Senate Committee on Finance Marked up an original bill,
S. ____ the ``Energy Tax Incentives Act of 2003''), on April 2,
2003, and, with a quorum present, ordered the bill favorably
reported by a voice vote on that date.
[Note.--This bill was converted into Senate Amendment 1424]
TITLE I--RENEWABLE ELECTRICITY PRODUCTION TAX CREDIT
A. Extension and Modification of the Section 45 Electricity Production
Credit
(Sec. 101 of the Bill and Sec. 45 of the Code)
present law
An income tax credit is allowed for the production of
electricity from either qualified wind energy, qualified
``closed-loop'' biomass, or qualified poultry waste facilities
(sec. 45). The amount of the credit is 1.5 cents per kilowatt
hour (indexed for inflation) of electricity produced. The
amount of the credit was 1.8 cents per kilowatt hour for 2002.
The credit is reduced for grants, tax-exempt bonds, subsidized
energy financing, and other credits.
The credit applies to electricity produced by a wind energy
facility placed in service after December 31, 1993, and before
January 1, 2004, to electricity produced by a closed-loop
biomass facility placed in service after December 31, 1992, and
before January 1, 2004, and to a poultry waste facility placed
in service after December 31, 1999, and before January 1, 2004.
The credit is allowable for production during the 10-year
period after a facility is originally placed in service. In
order to claim the credit, a taxpayer must own the facility and
sell the electricity produced by the facility to an unrelated
party. In the case of a poultry waste facility, the taxpayer
may claim the credit as a lessee/operator of a facility owned
by a governmental unit.
Closed-loop biomass is plant matter, where the plants are
grown for the sole purpose of being used to generate
electricity. It does not include waste materials (including,
but not limited to, scrap wood, manure, and municipal or
agricultural waste). The credit also is not available to
taxpayers who use standing timber to produce electricity.
Poultry waste means poultry manure and litter, including wood
shavings, straw, rice hulls, and other bedding material for the
disposition of manure.
The credit for electricity produced from wind, closed-loop
biomass, or poultry waste is a component of the general
business credit (sec. 38(b)(8)). The credit, when combined with
all other components of the general business credit, generally
may not exceed for any taxable year the excess of the
taxpayer's net income tax over the greater of (1) 25 percent of
net regular tax liability above $25,000, or (2) the tentative
minimum tax. For credits arising in taxable years beginning
after December 31, 1997, an unused general business credit
generally may be carried back one year and carried forward 20
years (sec. 39). To coordinate the carryback with the period of
application for this credit, the credit for electricity
produced from closed-loop biomass facilities may not be carried
back to a tax year ending before 1993 and the credit for
electricity produced from wind energy may not be carried back
to a tax year ending before 1994 (sec. 39).
reasons for change
The Committee recognizes that the section 45 production
credit has fostered additional electricity generation capacity
in the form of non-polluting wind power. The Committee believes
it is important to continue this tax credit by extending the
placed in service date for such facilities to bring more wind
energy to the United States electric grid. The Committee also
believes it is important to extend the placed in service date
for closed-loop biomass facilities to give those potential fuel
sources an opportunity in the market place. The Committee also
believes it is appropriate to include in qualifying facilities
those facilities that co-fire closed-loop biomass fuels with
coal, with other biomass, or with coal and other biomass.
Based on the success of the section 45 credit in the
development of wind power as an alternative source of
electricity generation, the committee further believes the
country will benefit from the expansion of the production
credit to certain other ``environmentally friendly'' sources of
electricity generation such as open-loop biomass and
agricultural waste nutrients, geothermal power, solar power,
biosolids and sludge, small irrigation systems, and trash
combustion. While not all of these additional facilities are
pollution free, they do address environmental concerns related
to waste disposal. In addition, these potential power sources
further diversify the nation's energy supply.
In the current electricity market, the Committee believes
that a subsidy via a tax credit of 1.8 cents per kilowatt-hour
should provide sufficient incentive to investors to enter the
market with alternative sources of electricity. Therefore the
Committee believes indexing of the credit amounts for years
after 2003 is unwarranted.
Because tax-exempt persons such as public power systems and
cooperatives provide a significant percentage of electricity in
the United States, the Committee believes it is important to
provide the incentive for production from renewable resources
to these persons in addition to taxable persons.
Lastly, the Committee believes that certain pre-existing
facilities should qualify for the section 45 production credit,
albeit at a reduced rate. These facilities previously received
explicit subsidies, or implicit subsidies provided through rate
regulation. In a deregulated electricity market, these
facilities, and the environmental benefits they yield, may be
uneconomic without additional economic incentive. The Committee
believes the benefits provided by such existing facilities
warrant their inclusion in the section 45 production credit.
explanation of provision
The provision extends the placed in service date for wind
facilities, and closed-loop biomass facilities to facilities
placed in service after December 31, 1993 (December 31, 1992 in
the case of closed-loop biomass) and before January 1, 2007.
The provision provides that, for facilities placed in
service after the date of enactment, the amount of the credit
will be 1.8 cents per kilowatt hour with no adjustment for
inflation for production in years after 2003.
The provision also defines six new qualifying energy
resources: biomass (including agricultural livestock waste
nutrients), geothermal energy, solar energy, small irrigation
power, biosolids and sludge, and municipal solid waste.
Qualifying biomass facilities are facilities using biomass
to produce electricity that are placed in service prior to
January 1, 2005. Qualifying agricultural livestock waste
nutrient facilities are facilities using agricultural livestock
waste nutrients to produce electricity that are placed in
service after the date of enactment and before January 1, 2007.
For a facility placed in service after the date of
enactment, the ten-year credit period commences when the
facility is placed in service. In the case of a biomass
facility originally placed in service before the date of
enactment, the ten-year credit period is reduced to a five-year
period and commences after December 31, 2003 and the otherwise
allowable 1.8 cent-per-kilowatt-hour credit is reduced to a 1.2
cent-per-kilowatt-hour credit.\1\
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\1\ As is the case for the 1.8 cents-per-kilowatt-hour credit, the
1.2 cents-per-kiowatt-hour credit is not indexed for future inflation.
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The provision modifies present law to provide that
qualifying closed-loop biomass facilities include any facility
originally placed in service before December 31, 1992 and
modified to use closed-loop biomass to co-fire with coal, to
co-fire with other biomass, or to co-fire with coal and other
biomass, before January 1, 2007. The taxpayer may claim credit
for electricity produced at such qualifying facilities with the
credit amount equal to the otherwise allowable credit
multiplied by the ratio of the thermal content of the closed-
loop biomass fuel burned in the facility to the thermal content
of all fuels burned in the facility.
Qualifying geothermal energy facilities are facilities
using geothermal deposits to produce electricity that are
placed in service after the date of enactment and before
January 1, 2007. Qualifying solar energy facilities are
facilities using solar energy to generate electricity that are
placed in service after the date of enactment and before
January 1, 2007. In the case of qualifying geothermal energy
facilities and qualifying solar energy facilities, taxpayers
may claim the otherwise allowable credit for the five-year
period commencing when the facility is placed in service.
A qualified small irrigation power facility is a facility
originally placed in service after the date of enactment and
before January 1, 2007. A small irrigation power facility is a
facility that generates electric power through an irrigation
system canal or ditch without any dam or impoundment of water.
The installed capacity of a qualified facility is less than
five megawatts.
A qualified biosolids and sludge facility is a facility
originally placed in service after the date of enactment and
before January 1, 2007. A biosolids and sludge facility is a
facility that uses the waste heat from the incineration of
biosolids and sludge to produce electricity. For example, if
the taxpayer conveys biosolids and sludge into a glass furnace
for the purpose of stabilizing the inorganic contents of the
biosolids and sludge in an amorphous glass matrix (and
potentially selling the resulting glass aggregates), and the
taxpayer uses the waste heat from the glass furnace to generate
steam to power a turbine and produce electricity, the
electricity produced would be from a qualified biosolids and
sludge facility. In addition, a qualifying biosolids and sludge
facility is a facility for which the taxpayer has not claimed
credit as a combined heat and power system property as defined
elsewhere in this bill.
Municipal solid waste facilities (or units) are facilities
(or units) that burn municipal solid waste (garbage) to produce
steam to drive a turbine for the production of electricity.
Qualifying municipal solid waste facilities (or units) include
facilities (or units \2\) placed in service after the date of
enactment and before January 1, 2007. In the case of qualifying
municipal solid waste facilities (or units), taxpayers may
claim the otherwise allowable credit for the five-year period
commencing when the facility (or unit) is placed in service.\3\
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\2\ For this purpose a unit eligible under the bill would comprise
a new burner, boiler and turbine system installed on the site of an
existing municipal solid waste facility.
\3\ No credit is permitted during the taxable year if, during any
portion of the taxable year, there is a certification in effect by the
Administrator of the Environmental Protection Agency that the facility
was permitted to operate in a manner inconsistent with section 4003(d)
of the Solid Waste Disposal Act.
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Biomass is defined as any solid, nonhazardous, cellulosic
waste material which is segregated from other waste materials
and which is derived from any of forest-related resources,
solid wood waste materials, or agricultural sources. Eligible
forest-related resources are mill and harvesting residues,
precommercial thinnings, slash, and brush. Solid wood waste
materials include waste pallets, crates, dunnage, manufacturing
and construction wood wastes (other than pressure-treated,
chemically-treated, or painted wood wastes), and landscape or
right-of-way tree trimmings. Agricultural sources include
orchard tree crops, vineyard, grain, legumes, sugar, and other
crop by-products or residues. However, qualifying biomass for
purposes of this provision does not include municipal solid
waste (garbage), gas derived from biodegradation of solid
waste, or paper that is commonly recycled. Agricultural waste
nutrients are defined as livestock manure and litter, including
bedding material for the disposition of manure. Agricultural
livestock comprise bovine, swine, poultry,\4\ and sheep among
others.
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\4\ The provision deletes poultry litter as a separate qualifying
facility for facilities placed in service after the effective date.
Poultry litter facilities remain qualifying facilities as agricultural
waste nutrient facilities. Any poultry litter facility placed in
service on or prior to the date of enactment is unaffected by the
modifications made by this provision. For example, the value of the
credit that may be claimed for production from such a facility would
continue to be indexed for inflation.
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Geothermal energy is energy derived from a geothermal
deposit which is a geothermal reservoir consisting of natural
heat which is stored in rocks or in an aqueous liquid or vapor
(whether or not under pressure).
Biosolids and sludge are the residue or solids removed
during the treatment of commercial, industrial, or municipal
wastewater.
Municipal solid waste is ``solid waste'' as defined in
section 2(27) of the Solid Waste Disposal Act.
The provision provides that certain persons (public power
systems, electric cooperatives, rural electric cooperatives,
and Indian tribes) may sell, trade, or assign to any taxpayer
any credits that would otherwise be allowable to that person,
if that person were a taxpayer, for production of electricity
from a qualified facility owned by such person. However, any
credit sold, traded, or assigned may only be sold, traded, or
assigned once. Subsequent transfers are not permitted. In
addition, any credits that would otherwise be allowable to such
person, to the extent provided by the Administrator of the
Rural Electrification Administration, may be applied as a
prepayment to certain loans or obligations undertaken by such
person under the Rural Electrification Act of 1936.
In the case of qualifying open-loop biomass facilities,
qualifying closed-loop biomass facilities modified to use
closed-loop biomass to co-fire with coal, with other biomass,
or with coal and other biomass, and qualifying municipal solid
waste facilities, the provision permits a lessee or operator to
claim the credit in lieu of the owner of the facilities.
Lastly, the provision repeals the present-law reduction in
allowable credit for facilities financed with tax-exempt bonds
or with certain loans received under the Rural Electrification
Act of 1936. In the case of qualifying closed-loop biomass
facilities modified to use closed-loop biomass to co-fire with
coal, with other biomass, or with coal and other biomass, the
provision repeals the present-law reduction in allowable credit
for facilities that receive any subsidy.
EFFECTIVE DATE
The provision generally is effective for electricity
produced and sold from qualifying facilities after the date of
enactment. For electricity produced from qualifying open-loop
biomass facilities originally placed in service prior to the
date of enactment, the provision is effective January 1, 2004.
TITLE II--ALTERNATIVE MOTOR VEHICLES AND FUEL INCENTIVES
A. Modifications and Extensions of Provisions Relating to Electric
Vehicles, Clean Fuel Vehicles, and Clean-Fuel Vehicle Refueling
Property
(Secs. 201, 202, 203, and 204 of the Bill and Secs. 30 and 179A and new
Secs. 30B, 30C, and 40A of the Code)
PRESENT LAW
Electric vehicles
A 10-percent tax credit is provided for the cost of a
qualified electric vehicle, up to a maximum credit of $4,000
(sec. 30). A qualified electric vehicle is a motor vehicle that
is powered primarily by an electric motor drawing current from
rechargeable batteries, fuel cells, or other portable sources
of electrical current, the original use of which commences with
the taxpayer, and that is acquired for the use by the taxpayer
and not for resale. The full amount of the credit is available
for purchases prior to 2002. The credit phases down in the
years 2004 through 2006, and is unavailable for purchases after
December 31, 2006.
Clean-fuel vehicles
Certain costs of qualified clean-fuel vehicles may be
expensed and deducted when such property is placed in service
(sec. 179A). Qualified clean fuel vehicle property includes
motor vehicles that use certain clean-burning fuels (natural
gas, liquefied natural gas, liquefied petroleum gas, hydrogen,
electricity and any other fuel at least 85 percent of which is
methanol, ethanol, any other alcohol or ether). The maximum
amount of the deduction is $50,000 for a truck or van with a
gross vehicle weight over 26,000 pounds or a bus with seating
capacities of at least 20 adults; $5,000 in the case of a truck
or van with a gross vehicle weight between 10,000 and 26,000
pounds; and $2,000 in the case of any other motor vehicle.
Qualified electric vehicles do not qualify for the clean-fuel
vehicle deduction. The deduction phases down in the years 2004
through 2006, and is unavailable for purchases after December
31, 2006.
Clean-fuel vehicle refueling property
Clean-fuel vehicle refueling property may be expensed and
deducted when such property is placed in service (sec. 179A).
Clean-fuel vehicle refueling property comprises property for
the storage or dispensing of a clean-burning fuel, if the
storage or dispensing is the point at which the fuel is
delivered into the fuel tank of a motor vehicle. Clean-fuel
vehicle refueling property also includes property for the
recharging of electric vehicles, but only if the property is
located at a point where the electric vehicle is recharged. Up
to $100,000 of such property at each location owned by the
taxpayer may be expensed with respect to that location. The
deduction is unavailable for costs incurred after December 31,
2006.
REASONS FOR CHANGE
The Committee believes that further investments in
alternative fuel and advanced technology vehicles are necessary
to transform automotive transportation in the United States to
be cleaner, more fuel efficient, and less reliant on petroleum
fuels.
Tax benefits provided directly to the consumer to lower the
cost of new technology and alternative-fueled vehicles can help
lower consumer resistance to these technologies by making the
vehicles more price competitive with purely petroleum-based
fuel vehicles and creating increased demand for manufacturers
to produce the technologies. The eventual goal is mass
production and mass-market acceptance of new technology
vehicles. The Committee recognizes that creating a number of
different credits tailored to each different automotive
technology adds complexity to the Internal Revenue Code, but no
one technology has established that it alone provides the
solution. Therefore, it is appropriate to provide tax benefits
tailored to specific vehicle technologies, as long as the
vehicle's engine technology directly replaces gasoline and
diesel fuel with an alternative energy source.
The Committee expects that hybrid motor vehicles and
dedicated alternative fuel vehicles are the near-term
technological advancement that will replace gasoline- and
diesel-burning engines with alternative-powered engines, and
electrical and fuel cell vehicles will be the long-term
technological advancement.
Applying these technologies to medium and heavy-duty trucks
and buses is also important for transforming the transportation
sector to a cleaner, more fuel-efficient sector less reliant on
petroleum-based fuels. Therefore, it is appropriate to use tax
incentives to encourage the introduction of advanced vehicle
technologies in large trucks and buses.
In addition, because new vehicle technologies require new
fuels and infrastructure to deliver those fuels, investments in
new technology automobiles alone are not sufficient to
transform the market to accept these vehicles. Therefore,
substantial investments in new refueling stations and new fuels
are also necessary to make alternative vehicle technologies
feasible.
EXPLANATION OF PROVISION
Alternative motor vehicle credits
The bill provides a credit for the purchase of a new
qualified fuel cell motor vehicle, a new qualified hybrid motor
vehicle, and a new qualified alternative fuel motor vehicle. In
general the provision provides that the buyer claims the
credit, unless the buyer is a tax-exempt entity in which case
the seller or lessor of the vehicle may claim the credit. The
taxpayer may carry forward unused credits for 20 years or carry
unused credits back for three years (but not to any taxable
year beginning before the date of enactment). Qualified
vehicles are vehicles placed in service before 2007 (2012 in
the case of fuel cell vehicles). Any deduction otherwise
allowable under sec. 179A is reduced by the amount of credit
allowable.
Fuel cell vehicles
A qualifying fuel cell vehicle is a motor vehicle that is
propelled by power derived from one or more cells which convert
chemical energy directly into electricity by combining oxygen
with hydrogen fuel which is stored on board the vehicle and may
or may not require reformation prior to use. The amount of
credit for the purchase of a fuel cell vehicle is determined by
a base credit amount that depends upon the weight class of the
vehicle and, in the case of automobiles or light trucks, an
additional credit amount that depends upon the rated fuel
economy of the vehicle compared to a base fuel economy. For
these purposes the base fuel economy is the 2002 model year
city fuel economy rating for vehicles of various weight classes
(see below). Table 1, below, shows the base credit amounts.
TABLE 1.--BASE CREDIT AMOUNT FOR FUEL CELL VEHICLES
------------------------------------------------------------------------
Credit
Vehicle gross weight rating in pounds amount
------------------------------------------------------------------------
Vehicle 8,500............................................... $4,000
8,500 < vehicle 14,000...................................... 10,000
14,000 < vehicle 26,000..................................... 20,000
26,000 < vehicle............................................. 40,000
------------------------------------------------------------------------
Table 2, below, shows the additional credits for passenger
automobiles or light trucks.
TABLE 2.--CREDIT FOR QUALIFYING FUEL CELL VEHICLES
------------------------------------------------------------------------
If fuel economy of the fuel cell
vehicle is:
Credit ---------------------------------------
at least but less than
------------------------------------------------------------------------
$1,000.......................... 150% of base fuel 175% of base fuel
economy. economy.
$1,500.......................... 175% of base fuel 200% of base fuel
economy. economy.
$2,000.......................... 200% of base fuel 225% of base fuel
economy. economy.
$2,500.......................... 225% of base fuel 250% of base fuel
economy. economy.
$3,000.......................... 250% of base fuel 275% of base fuel
economy. economy.
$3,500.......................... 275% of base fuel 300% of base fuel
economy. economy.
$4,000.......................... 300% of base fuel economy.
------------------------------------------------------------------------
Hybrid vehicles
A qualifying hybrid vehicle is a motor vehicle that draws
propulsion energy from on-board sources of stored energy which
include both an internal combustion engine or heat engine using
combustible fuel and a rechargeable energy storage system
(e.g., batteries). The amount of credit for the purchase of a
hybrid vehicle is the sum of two components. In the case of an
automobile or light truck, the amount of credit is the sum of a
base credit amount that varies with the amount of power
available from the rechargeable storage system and a fuel
economy credit amount that varies with the rated fuel economy
of the vehicle compared to a 2002 model year standard. In
addition, the vehicle must meet or exceed the EPA Tier II, bin
5 emissions standards. In the case of a heavy duty hybrid motor
vehicle (a vehicle weighing more than 8,500 pounds),\5\ the
amount of credit is the sum of a base credit amount that
varies, by vehicle weight class, with the amount of power
available from the rechargeable storage system and an
additional credit for early adoption of the technology that
varies with the model year of the vehicle purchased.
---------------------------------------------------------------------------
\5\ Medium duty passenger vehicles as defined in 40 CFR 86.1830-01
are treated as a passenger automobile or light truck for the purpose of
determining the allowable credit. However, medium duty passenger
vehicles are only eligible for the base credit amount. There is not an
additional fuel economy credit for medium duty passenger vehicles.
---------------------------------------------------------------------------
For these purposes, a vehicle's power available from its
rechargeable energy storage system as a percentage of maximum
available power is calculated as the maximum value available
from the battery or other energy storage device during a
standard power test, divided by the sum of the battery or other
energy storage device and the SAE net power of the heat engine.
Table 3, below, shows the base credit amounts for
automobiles and light trucks.
TABLE 3.--HYBRID VEHICLE BASE CREDIT AMOUNT FOR AUTOMOBILES AND LIGHT
TRUCKS, DEPENDENT UPON THE POWER AVAILABLE FROM THE RECHARGEABLE ENERGY
STORAGE SYSTEM AS A PERCENTAGE OF THE VEHICLE'S MAXIMUM AVAILABLE POWER
------------------------------------------------------------------------
If rechargeable energy storage system
provides:
Base credit amount ---------------------------------------
at least but less than
------------------------------------------------------------------------
$250............................ 4% of maximum 10% of maximum
available power. available power.
$500............................ 10% of maximum 20% of maximum
available power. available power.
$750............................ 20% of maximum 30% of maximum
available power. available power.
$1,000.......................... 30% of maximum available power.
------------------------------------------------------------------------
Table 4, below, shows the additional fuel economy credit
available to a hybrid passenger automobile or light truck whose
fuel economy (on a gasoline gallon equivalent basis) exceeds
that of a base fuel economy. For these purposes the base fuel
economy is the 2002 model year city fuel economy rating for
vehicles of various weight classes (see below).
TABLE 4.--ADDITIONAL FUEL ECONOMY CREDIT FOR HYBRID VEHICLES
------------------------------------------------------------------------
If fuel economy of the hybrid vehicle
is:
Credit ---------------------------------------
at least but less than
------------------------------------------------------------------------
$500............................ 125% of base fuel 150% of base fuel
economy. economy.
$1,000.......................... 150% of base fuel 175% of base fuel
economy. economy.
$1,500.......................... 175% of base fuel 200% of base fuel
economy. economy.
$2,000.......................... 200% of base fuel 225% of base fuel
economy. economy.
$2,500.......................... 225% of base fuel 250% of base fuel
economy. economy.
$3,000.......................... 250% of base fuel economy
------------------------------------------------------------------------
Table 5 below, shows the base credit amounts for heavy duty
hybrid vehicles weighing 14,000 pounds or less.
TABLE 5.--HYBRID VEHICLE BASE CREDIT AMOUNT FOR HEAVY DUTY VEHICLES
WEIGHING NOT MORE THAN 14,000 POUNDS
------------------------------------------------------------------------
If rechargeable energy storage system
provides:
Base credit amount ---------------------------------------
at least but less than
------------------------------------------------------------------------
$1,000.......................... 20% of maximum 30% of maximum
available power. available power.
$1,750.......................... 30% of maximum 40% of maximum
available power. available power.
$2,000.......................... 40% of maximum 50% of maximum
available power. available power.
$2,250.......................... 50% of maximum 60% of maximum
available power. available power.
$2,500.......................... 60% of maximum available power
------------------------------------------------------------------------
In the case of heavy duty hybrid vehicles weighing not more
than 14,000 pounds, the additional credit amount for early
adoption of the 2007 enission standards technology is $3,000
for model year 2003 vehicles, $2,500 for model year 2004
vehicles, $2,000 for model year 2005 vehicles, and $1,500 or
model year 2006 vehicles.
Table 6, below, shows the base credit amounts for heavy
duty hybrid vehicles weighing more than 14,000 pounds but not
more than 26,000 pounds.
TABLE 6.--HYBRID VEHICLE BASE CREDIT AMOUNT FOR HEAVY DUTY HYBRID
VEHICLES WEIGHING MORE THAN 14,000 POUNDS, BUT NOT MORE THAN 26,000
POUNDS
------------------------------------------------------------------------
If rechargeable energy storage system
provides:
Base credit amount ---------------------------------------
at least but less than
------------------------------------------------------------------------
$4,000.......................... 20% of maximum 30% of maximum
available power. available power.
$4,500.......................... 30% of maximum 40% of maximum
available power. available power.
$5,000.......................... 40% of maximum 50% of maximum
available power. available power.
$5,500.......................... 50% of maximum 60% of maximum
available power. available power.
$6,000.......................... 60% of maximum available power
------------------------------------------------------------------------
In the case of heavy duty hybrid vehicles weighing more
than 14,000 pounds but not more than 26,000 pounds, the
additional credit amount for early adoption of the 2007
emission standards technology is $7,750 for model year 2003
vehicles, $6,500 for model year 2004 vehicles, $5,250 for model
year 2005 vehicles, and $4,000 for model year 2006 vehicles.
Table 7, below, shows the base credit amounts for heavy
duty hybrid vehicles weighing more than 26,000 pounds.
TABLE 7.--HYBRID VEHICLE BASE CREDIT AMOUNT FOR HEAVY DUTY HYBRID
VEHICLES WEIGHING MORE THAN 26,000 POUNDS
------------------------------------------------------------------------
If rechargeable energy storage system
provides:
Base credit amount ---------------------------------------
at least but less than
------------------------------------------------------------------------
$6,000.......................... 20% of maximum 30% of maximum
available power. available power.
$7,000.......................... 30% of maximum 40% of maximum
available power. available power.
$8,000.......................... 40% of maximum 50% of maximum
available power. available power.
$9,000.......................... 50% of maximum 60% of maximum
available power. available power.
$10,000......................... 60% of maximum available power
------------------------------------------------------------------------
In the case of heavy duty hybrid vehicles weighing more
than 26,000 pounds, the additional credit amount for early
adoption of the 2007 emission standards technology is $12,000
for model year 2003 vehicles, $10,000 for model year 2004
vehicles, $8,000 for model year 2005 vehicles, and $6,000 for
model year 2006 vehicles.
Alternative fuel vehicle
The credit for the purchase of a new alternative fuel
vehicle is 40 percent of the incremental cost of such vehicle,
plus an additional 30 percent if the vehicle meets certain
emissions standards, but not more than between $5,000 and
$40,000 depending upon the weight of the vehicle. Table 8,
below, shows the maximum permitted incremental cost for the
purpose of calculating the credit for alternative fuel vehicles
by vehicle weight class.
TABLE 8.--MAXIMUM ALLOWABLE INCREMENTAL COST FOR CALCULATION OF
ALTERNATIVE FUEL VEHICLE CREDIT
------------------------------------------------------------------------
Maximum
allowable
Vehicle gross weight rating in pounds incremental
cost
------------------------------------------------------------------------
Vehicle = 8,500............................................ $5,000
8,500 < vehicle = 14,000................................... 10,000
14,000 < vehicle = 26,000.................................. 25,000
26,000 < vehicle........................................... 40,000
------------------------------------------------------------------------
Alternative fuels comprise compressed natural gas,
liquefied natural gas, liquefied petroleum gas, hydrogen, and
any liquid fuel that is at least 85 percent methanol.
Qualifying alternative fuel motor vehicles are vehicles that
operate only on qualifying alternative fuels and are incapable
of operating on gasoline or diesel (except in the extent
gasoline or diesel fuel is part of a qualified mixed fuel,
described below).
Certain mixed fuel vehicles, that is vehicles that use a
combination of an alternative fuel and a petroleum-based fuel,
are eligible for a reduced credit. If the vehicle operates on a
mixed fuel that is at least 75 percent alternative fuel, the
vehicle is eligible for 70 percent of the otherwise allowable
alternative fuel vehicle credit. If the vehicle operates on a
mixed fuel that is at least 90 percent alternative fuel, the
vehicle is eligible for 90 percent of the otherwise allowable
alternative fuel vehicle credit.
Base fuel economy
The base fuel economy is the Environmental Protection
Agency's unadjusted 2002 model year city fuel economy for
vehicles by inertia weight class by vehicle type. The ``vehicle
inertia weight class'' is that defined in regulations
prescribed by the Environmental Protection Agency for purposes
of Title II of the Clean Air Act. Table 9, below, shows the
2002 model year city fuel economy for vehicles by type and by
inertia weight class.
TABLE 9.--2002 MODEL YEAR CITY FUEL ECONOMY
------------------------------------------------------------------------
Passenger
automobile Light truck
Vehicle inertia weight class (pounds) (miles per (miles per
gallon) gallon)
------------------------------------------------------------------------
1,500......................................... 45.2 39.4
1,750......................................... 45.2 39.4
2,000......................................... 39.6 35.2
2,250......................................... 35.2 31.8
2,500......................................... 31.7 29.0
2,750......................................... 28.8 26.8
3,000......................................... 26.4 24.9
3,500......................................... 22.6 21.8
4,000......................................... 19.8 19.4
4,500......................................... 17.6 17.6
5,000......................................... 15.9 16.1
5,500......................................... 14.4 14.8
6,000......................................... 13.2 13.7
6,500......................................... 12.2 12.8
7,000......................................... 11.3 12.1
8,500......................................... 11.3 12.1
------------------------------------------------------------------------
Modification of credit for qualified electric vehicles
The bill repeals the phaseout of the credit for electric
vehicles under present law. The provision also modifies present
law to provide for a credit equal to the lesser of $1,500 or 10
percent of the manufacturer's suggested retail price of certain
vehicles that conform to the Motor Vehicle Safety Standard 500.
For all other electric vehicles, Table 10, below describes the
credit.
TABLE 10.--CREDIT FOR QUALIFYING BATTERY ELECTRIC VEHICLES
------------------------------------------------------------------------
Credit
Vehicle gross weight rating in pounds amount
------------------------------------------------------------------------
Vehicle = 8,500.............................................. $3,500
8,500 < vehicle = 14,000..................................... 10,000
14,000 < vehicle = 26,000.................................... 20,000
26,000 < vehicle............................................. 40,000
------------------------------------------------------------------------
If an electric vehicle weighing not more than 8,500 pounds
has an estimated driving range of at least 100 miles on a
single charge of the vehicle's batteries or if it is capable of
a payload capacity of at least 1,000 pounds, then the credit
amount in Table 10 is $6,000.
In the case of property purchased by tax-exempt persons,
the seller may claim the credit. The provision allows taxpayers
to carry forward unused credits for 20 years or carry unused
credits back for three (but not to any taxable year before the
date of enactment).
Extension of present-law section 179A
The bill extends the sunset date of the present law
deduction for costs of qualified clean-fuel vehicle and clean-
fuel vehicle refueling property through December 31, 2007
(December 31, 2011 in the case of property relating to
hydrogen). The provision modifies the definition of refueling
property in the case of property relating to hydrogen to
include property for the production of hydrogen.
The phase-down of present law for clean fuel vehicles is
modified such that the taxpayer may claim 75 percent of the
otherwise allowable deductible in 2004 and 2005 (2004 through
2009 in the case of property relating to hydrogen), 50 percent
of the otherwise allowable deduction in 2006 (2010 in the case
of property relating to hydrogen), and 25 percent of the
otherwise allowable deduction in 2007 (2011 in the case of
property relating to hydrogen).
Credit for installation of alternative fueling stations
The bill permits taxpayers to claim a 50-percent credit for
the cost of installing clean-fuel vehicle refueling property
\6\ to be used in a trade or business of the taxpayer or
installed at the principal residence of the taxpayer. In the
case of retail clean-fuel vehicle refueling property the
allowable credit may not exceed $30,000. In the case of
residential clean-fuel vehicle refueling property the allowable
credit may not exceed $1,000. The taxpayer's basis in the
property is reduced by the amount of the credit and the
taxpayer may not claim deductions under section 179A with
respect to property for which the credit is claimed. In the
case of refueling property installed on property owned or used
by a tax-exempt person, the taxpayer that installs the property
may claim the credit. To be eligible for the credit, the
property must be placed in service before January 1, 2008
(January 1, 2012 in the case of hydrogen). The credit allowable
in the taxable year cannot exceed the difference between the
taxpayer's regular tax (reduced by certain other credits) and
the taxpayer's tentative minimum tax. The taxpayer may carry
forward unused credits for 20 years.
---------------------------------------------------------------------------
\6\ For the purpose of the credit for refueling property, refueling
property is defined as in present-law section 179A as modified by this
bill to include property for the production of hydrogen.
---------------------------------------------------------------------------
Credit for retail sale of alternative fuels
The bill permits taxpayers to claim a credit equal to the
gasoline gallon equivalent of 30 cents per gallon of
alternative fuel sold in 2003, 40 cents per gallon in 2004, 50
cents per gallon in 2005, and 50 cents per gallon in 2006.
Qualifying alternative fuels are compressed natural gas,
liquefied natural gas, liquefied petroleum gas, hydrogen, and
any liquid mixture consisting of at least 85 percent methanol
or ethanol. The gasoline gallon equivalency of any alternative
fuel is determined by reference to the British thermal unit
content of the alternative fuel compared to a gallon of
gasoline. The credit may be claimed for sales prior to January
1, 2007. Under the provision, the credit is part of the general
business credit.
EFFECTIVE DATE
The provisions relating to the credit for new fuel cell
motor vehicles, hybrid motor vehicles, and alternative fuel
motor vehicles, the credit for battery electric vehicles, the
credit for alternative fuel vehicle refueling property, and
deductions for clean fuel vehicles and clean fuel refueling
property are effective for property placed in service after the
date of enactment, in taxable years ending after the date of
enactment. The credit for retail sales of alternative fuels is
effective for sales of fuels after the date of enactment, in
taxable years ending after the date of enactment.
B. Modifications to Small Producer Ethanol Credit
(Sec. 205 of the Bill and Secs. 38, 40, 87, and 469 of the Code)
PRESENT LAW
Small producer credit
Present law provides several tax benefits for ethanol and
methanol produced from renewable sources (e.g., biomass) that
are used as a motor fuel or that are blended with other fuels
(e.g., gasoline) for such a use. In the case of ethanol, a
separate 10-cents-per-gallon credit for small producers,
defined generally as persons whose production does not exceed
15 million gallons per year and whose production capacity does
not exceed 30 million gallons per year. The alcohol fuels tax
credits are includible in income. This credit, like tax credits
generally, may not be used to offset alternative minimum tax
liability. The credit is treated as a general business credit,
subject to the ordering rules and carryforward/carryback rules
that apply to business credits generally. The alcohol fuels tax
credit is scheduled to expire after December 31, 2007.
Taxation of cooperatives and their patrons
Under present law, cooperatives in essence are treated as
pass-through entities in that the cooperative is not subject to
corporate income tax to the extent the cooperative timely pays
patronage dividends. Under present law, the only excess credits
that may be flowed-through to cooperative patrons are the
rehabilitation credit (sec. 47), the energy property credit
(sec. 48(a)), and the reforestation credit (sec. 48(b)).
REASONS FOR CHANGE
The Committee believes provisions allowing greater
flexibility in utilizing the benefits of the small ethanol
producer credit are consistent with the objective of the bill
to increase availability of alternative fuels.
EXPLANATION OF PROVISION
The provision makes several modifications to the rules
governing the small producer ethanol credit. First, the
provision liberalizes the definition of an eligible small
producer to include persons whose production capacity does not
exceed 60 million gallons. Second, the provision allows
cooperatives to elect to pass-through the small ethanol
producer credits to its patrons. The credit allowed to a
particular patron is that proportion of the credit that the
cooperative elects to pass-through for that year as the amount
of patronage of that patron for that year bears to total
patronage of all patrons for that year.
Third, the provision repeals the rule that includes the
small producer credit in income of taxpayers claiming it and
liberalizes the ordering and carryforward/carryback rules for
the small producer ethanol credit. Fourth, the provision allows
the small producer credit to be claimed against the alternative
minimum tax. Finally, the provision provides that the small
producer ethanol credit is not treated as derived from a
passive activity under the Code rules restricting credits and
deductions attributable to such activities.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after date of enactment.
C. Increased Flexibility in Alcohol Fuels Income Tax Credit
(Sec. 206 of the Bill and Sec. 40 of the Code)
PRESENT LAW
An 18.4 cents-per-gallon excise tax is imposed on gasoline.
The tax is imposed when the fuel is removed from a refinery
unless the removal is to a bulk transportation facility (e.g.,
removal by pipeline or barge to a registered terminal). In the
case gasoline removed in bulk by registered parties, tax is
imposed when the gasoline is removed from the terminal
facility, typically by truck (i.e., ``breaks bulk''). If
gasoline is sold to an unregistered party before it is removed
from a terminal, tax is imposed on that sale. When the gasoline
subsequently breaks bulk, a second tax is imposed. The payor of
the second tax may file a refund claim if it can prove payment
of the first tax. The party liable for payment of the gasoline
excise tax is called a ``position holder,'' defined as the
owner of record inside the refinery or terminal facility.
A 52-cents-per-gallon income tax credit is allowed for
ethanol used as a motor fuel (the ``alcohol fuels credit'').
The benefit of the alcohol fuels tax credit may be claimed as a
reduction in excise tax payments when the ethanol is blended
with gasoline (``gasohol''). The reduction is based on the
amount of ethanol contained in the gasohol. The excise tax
benefits apply to gasohol blends of 90 percent gasoline/10
percent ethanol, 92.3 percent gasoline/7.7 percent ethanol, or
94.3 percent gasoline/5.7 percent ethanol. The income tax
credit is based on the amount of alcohol contained in the
blended fuel.
Ethyl tertiary butyl ether (``ETBE'') is an ether that is
manufactured using ethanol. Unlike ethanol, ETBE can be blended
with gasoline before the gasoline enters a pipeline because
ETBE does not result in contamination of fuel with water while
in transport. Treasury Department regulations provide that
gasohol blenders may claim the income tax credit and excise tax
rate reductions for ethanol used in the production of ETBE. The
regulations also provide a special election allowing refiners
to claim the benefit of the excise tax rate reduction even
though the fuel being removed from terminals does not contain
the requisite percentages of ethanol for claiming the excise
tax rate reduction.
REASONS FOR CHANGE
The Committee believes the tax benefits currently available
to ethanol used in the production of ETBE should be clarified
statutorily. In addition, the Committee believes it appropriate
to increase the flexibility by which the alcohol fuels credit
may be claimed for alcohol used in the production of ETBE.
EXPLANATION OF PROVISION
The provision permits a taxpayer to transfer the alcohol
fuels credit with respect to alcohol used in the production of
ETBE to any registered position holder liable for excise taxes
imposed under section 4081. Such position holder also must
obtain from the transferor taxpayer a certificate that
identifies the amount of alcohol used in the production of
ETBE. The Secretary is to prescribe regulations as necessary to
ensure that the credit is claimed once and not reassigned by
the position holder.
EFFECTIVE DATE
The provision is effective date of enactment.
D. Income Tax Credit for Biodiesel Fuel Mixtures
(Sec. 207 of the Bill and new Sec. 40B of the Code)
PRESENT LAW
No income tax credit or excise tax rate reduction is
provided for biodiesel fuels under present law. However, a 52-
cents-per-gallon income tax credit (the ``alcohol fuels
credit'') is allowed for ethanol and methanol (derived from
renewable sources) when the alcohol is used as a highway motor
fuel. The benefit of this income tax credit may be claimed
through reductions in excise taxes paid on alcohol fuels. In
the case of alcohol blended with other fuels (e.g., gasoline),
the excise tax rate reductions are allowable only for blends of
90 percent gasoline/ 10 percent alcohol, 92.3 percent gasoline/
7.7 percent alcohol, or 94.3 percent gasoline/5.7 percent
alcohol. These present law provisions are scheduled to expire
in 2007.
REASONS FOR CHANGE
The Committee believes that providing a new income tax
credit for biodiesel fuel will promote energy self-sufficiency
and also is consistent with the environmental objectives of the
bill.
EXPLANATION OF PROVISION
The provision provides a new income tax credit for
qualified biodiesel mixtures. A qualified biodiesel mixture is
a mixture of diesel fuel and biodiesel 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. Biodiesel is monoalkyl esters of long chain fatty
acids for use in diesel-powered engines and which meet the
registration requirements of the Environmental Protection
Agency under section 211 of the Clean Air Act (42 U.S.C. sec.
7545) and the American Society of Testing and Materials D6751.
Agri-biodiesel means biodiesel derived solely from virgin oils,
including esters derived from corn, soybeans, sunflower seeds,
cottonseeds, canola, crambe, rapeseeds, safflowers, flaxseeds,
rice bran, mustard seeds, or animal fats. Recycled biodiesel is
biodiesel derived from nonvirgin vegetable oils or nonvirgin
animal fats. Virgin vegetable oils or animal fats mixed with
recycled biodiesel will be treated as recycled biodiesel.
The biodiesel mixture credit is the sum of the products of
the biodiesel mixture rate for each qualified biodiesel mixture
and the number of gallons of such mixture of the taxpayer for
the taxable year. The per gallon biodiesel mixture rate for
agri-biodiesel equals one cent for each percentage point of
biodiesel in the qualified biodiesel mixture, subject to a
maximum credit of 20 cents per blended gallon of fuel. Agri-
biodiesel used in the production of a qualified biodiesel
mixture is taken into account only if a certification from the
producer of the agribiodiesel which identifies the product
produced is obtained. The per gallon biodiesel mixture rate for
recycled biodiesel equals 0.5 cent for each percentage point of
biodiesel in the qualified biodiesel mixture, subject to a
maximum credit of 10 cents per blended gallon of fuel.
The amount of the biodiesel mixture credit is includible in
income. The credit may not be carried back to a taxable year
beginning before date of enactment.
EFFECTIVE DATE
The biodiesel mixture credit is effective for biodiesel
fuel sold after date of enactment, and before January 1, 2006.
E. Alcohol Fuel and Biodiesel Mixtures Excise Tax Credit
(Sec. 208 of the Bill, Secs. 40, 4081, 6427, 9503, and new Sec. 6426 of
the Code)
PRESENT LAW
Alcohol fuels income tax credit
The alcohol fuels credit is the sum of three credits: the
alcohol mixture credit, the alcohol credit and the small
ethanol producer credit. Generally, the alcohol fuels credit
expires after December 31, 2007.\7\
---------------------------------------------------------------------------
\7\ The alcohol fuels credit is unavailable when, for any period
before January 1, 2008, the tax rates for gasoline and diesel fuels
drop to 4.3 cents per gallon.
---------------------------------------------------------------------------
A taxpayer (generally a petroleum refiner, distributor, or
marketer) who mixes ethanol with gasoline (or a special fuel
\8\ ) is an ``ethanol blender.'' Ethanol blenders are eligible
for an income tax credit of 52 cents per gallon of ethanol used
in the production of a qualified mixture (the ``alcohol mixture
credit''). A qualified mixture means a mixture of alcohol and
gasoline, (or of alcohol and a special fuel) sold by the
blender as fuel, or used as fuel by the blender in producing
the mixture. The term alcohol includes methanol and ethanol but
does not include (1) alcohol produced from petroleum, natural
gas, or coal (including peat), or (2) alcohol with a proof of
less than 150. Businesses also may reduce their income taxes by
52 cents for each gallon of ethanol (not mixed with gasoline or
other special fuel) that they sell at the retail level as
vehicle fuel or use themselves as a fuel in their trade or
business (``the alcohol credit''). The 52-cents-per-gallon
income tax credit rate is scheduled to decline to 51 cents per
gallon during the period 2005 through 2007. For blenders using
an alcohol other than ethanol, the rate is 60 cents per
gallon.\9\
---------------------------------------------------------------------------
\8\ A special fuel includes any liquid (other than gasoline) that
is suitable for use in an internal combustion engine.
\9\ In the case of any alcohol (other than ethanol) with a proof
that is at least 150 but less than 190, the credit is 45 cents per
gallon (the ``low-proof blender amount''). For ethanol with a proof
that is at least 150 but less than 190, the low-proof blender amount is
38.52 cents for sales or uses during calendar year 2003 and 2004, and
37.78 cents for calendar years 2005, 2006, and 2007.
---------------------------------------------------------------------------
A separate income tax credit is available for small ethanol
producers (the ``small ethanol producer credit''). A small
ethanol producer is defined as a person whose ethanol
production capacity does not exceed 30 million gallons per
year. The small ethanol producer credit is 10 cents per gallon
of ethanol produced during the taxable year for up to a maximum
of 15 million gallons.
The credits that comprise alcohol fuels tax credit are
includible in income. The credit may not be used to offset
alternative minimum tax liability. The credit is treated as a
general business credit, subject to the ordering rules and
carryforward/carryback rules that apply to business credits
generally.
Excise tax reductions for alcohol mixture fuels
Generally, motor fuels tax rates are as follows: \10\
---------------------------------------------------------------------------
\10\ These rates include an additional 0.1 cent-per-gallon excise
tax to fund the Leaking Underground Storage Tank Trust Fund. See secs.
4041(d) and 4081(a)(2)(B). In addition, the basic fuel tax rate will
drop to 4.3 cents per gallon beginning on October 1, 2005.
Gasoline.................................... 18.4 cents per gallon.
Diesel fuel and kerosene.................... 24.4 cents per gallon.
Special motor fuels......................... 18.4 cents per gallon generally.
Alcohol-blended fuels are subject to a reduced rate of tax.
The benefits provided by the alcohol fuels income tax credit
and the excise tax reduction are integrated such that the
alcohol fuels credit is reduced to take into account the
benefit of any excise tax reduction.
Gasohol
Registered ethanol blenders may forgo the full income tax
credit and instead pay reduced rates of excise tax on gasoline
that they purchase for blending with ethanol. Most of the
benefit of the alcohol fuels credit is claimed through the
excise tax system.
The reduced excise tax rates apply to gasohol upon its
removal or entry. Gasohol is defined as a gasoline/ethanol
blend that contains 5.7 percent ethanol, 7.7 percent ethanol,
or 10 percent ethanol. The Federal excise tax on gasoline is
18.4 cents per gallon. For the calendar year 2003, the
following reduced rates apply to gasohol: \11\
---------------------------------------------------------------------------
\11\ These rates include the additional 0.1 cent-per-gallon excise
tax to fund the Leaking Underground Storage Tank Trust Fund. These
special rates will terminate on September 30, 2007 (sec. 4081(c)(8)).
5.7 percent ethanol............ 15.436 cents per gallon.
7.7 percent ethanol............ 14.396 cents per gallon.
10.0 percent ethanol........... 13.200 cents per gallon.
Reduced excise tax rates also apply when gasoline is being
purchased for the production of ``gasohol.'' When gasoline is
purchased for blending into gasohol, the rates above are
multiplied by a fraction (e.g., 10/9 for 10-percent gasohol) so
that the increased volume of motor fuel will be subject to tax.
The reduced tax rates apply if the person liable for the tax is
registered with the IRS and (1) produces gasohol with gasoline
within 24 hours of removing or entering the gasoline or (2)
gasoline is sold upon its removal or entry and such person has
an unexpired certificate from the buyer and has no reason to
believe the certificate is false.\12\
---------------------------------------------------------------------------
\12\ Treas. Reg. sec. 48.4081-6(c). A certificate from the buyer
assures that the gasoline will be used to produce gasohol within 24
hours after purchase. A copy of the registrant's letter of registration
cannot be used as a gasohol blender's certificate.
---------------------------------------------------------------------------
Qualified methanol and ethanol fuels
Alcohol produced from a substance other than petroleum or
natural gas
Qualified methanol or ethanol fuel is any liquid that
contains at least 85 percent methanol or ethanol or other
alcohol produced from a substance other than petroleum or
natural gas. These fuels are taxed at reduced rates.\13\ The
rate of tax on qualified methanol is 12.35 cents per gallon.
The rate on qualified ethanol in 2003 and 2004 is 13.15 cents.
From January 1, 2005 through September 30, 2007, the rate of
tax on qualified ethanol is 13.25 cents.\14\
---------------------------------------------------------------------------
\13\ A 0.05-cent-per-gallon Leaking Underground Storage Tank Trust
Fund tax is imposed on such fuel. This provision expires on October 1,
2007 (sec. 4041(b)(2)).
\14\ These reduced rates terminate after September 30, 2007.
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Alcohol produced from natural gas
A mixture of methanol, ethanol, or other alcohol produced
from natural gas that consists of at least 85 percent alcohol
is also taxed at reduced rates.\15\ For mixtures not containing
ethanol, the applicable rate of tax is 9.25 cents per gallon
before October 1, 2005. In all other cases, the rate is 11.4
cents per gallon. After September 31, 2005, the rate is reduced
to 2.15 cents per gallon when the mixture does not contain
ethanol and 4.3 cents per gallon in all other cases.
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\15\ These rates include the additional 0.1 cent-per-gallon excise
tax to fund the Leaking Underground Storage Tank Trust Fund (sec.
4041(d)(1)).
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Blends of alcohol and diesel fuel or special motor fuels
A reduced rate of tax applies to diesel fuel or kerosene
that is combined with alcohol as long as at least 10 percent of
the finished mixture is alcohol. If none of the alcohol in the
mixture is ethanol, the rate of tax is 18.4 cents per gallon.
For alcohol mixtures containing ethanol, the rate of tax in
2003 and 2004 is 19.2 cents per gallon and for 2005 through
September 30, 2007, the rate for ethanol mixtures is 19.3 cents
per gallon. Fuel removed or entered for use in producing a 10
percent diesel-alcohol fuel mixture (without ethanol), is
subject to a tax of 20.44 cents. The rate of tax for fuel
removed or entered to produce a 10 percent diesel-ethanol fuel
mixture is 21.333 cents per gallon for 2003 and 2004 and 21.444
cents per gallon for the period January 1, 2005 through
September 30, 2007.
Special motor fuel (nongasoline) mixtures with alcohol also
are taxed at reduced rates.
Aviation fuel
Noncommercial aviation fuel is subject to a tax of 21.9
cents per gallon.\16\ Fuel mixtures containing at least 10
percent alcohol are taxed at lower rates.\17\ In the case of 10
percent ethanol mixtures, any sale or use during 2003 and 2004,
the 21.9 cents is reduced by 13.2 cents (for a tax of 8.7 cents
per gallon), for 2005, 2006, and 2007 the reduction is 13.1
cents (for a tax of 8.8 cents per gallon) and is reduced by
13.4 cents in the case of any sale during 2008 or thereafter.
For mixtures not containing ethanol, the 21.9 cents is reduced
by 14 cents for a tax of 7.9 cents. These reduced rates expire
after September 30, 2007.\18\
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\16\ This rate includes the additional 0.1 cent-per-gallon tax for
the Leaking Underground Storage Tank Trust fund.
\17\ Sec. 4041(k)(1) and 4091(c).
\18\ Sec. 4091(c)(1). In the case of aviation fuel for use in
producing an aviation alcohol fuel mixture, the rate of tax is 10/9 of
the rate that would have been applicable to such mixture had such
mixture been created prior to sale.
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When aviation fuel is purchased for blending with alcohol,
the rates above are multiplied by a fraction (10/9) so that the
increased volume of aviation fuel will be subject to tax.
Refunds and payments
If fully taxed gasoline (or other taxable fuel) is used to
produce a qualified alcohol mixture, the Code permits the
blender to file a claim for a quick excise tax refund. The
refund is equal to the difference between the gasoline (or
other taxable fuel) excise tax that was paid and the tax that
would have been paid by a registered blender on the alcohol
fuel mixture being produced. Generally, the IRS pays these
quick refunds within 20 days. Interest accrues if the refund is
paid more than 20 days after filing. A claim may be filed by
any person with respect to gasoline, diesel fuel, or kerosene
used to produce a qualified alcohol fuel mixture for any period
for which $200 or more is payable and which is not less than
one week.
Ethyl tertiary butyl ether (ETBE)
Ethyl tertiary butyl ether (``ETBE'') is an ether that is
manufactured using ethanol. Unlike ethanol, ETBE can be blended
with gasoline before the gasoline enters a pipeline because
ETBE does not result in contamination of fuel with water while
in transport. Treasury Department regulations provide that
gasohol blenders may claim the income tax credit and excise tax
rate reductions for ethanol used in the production of ETBE. The
regulations also provide a special election allowing refiners
to claim the benefit of the excise tax rate reduction even
though the fuel being removed from terminals does not contain
the requisite percentages of ethanol for claiming the excise
tax rate reduction.
Highway Trust Fund
With certain exceptions, the taxes imposed by section 4041
(relating to retail taxes on diesel fuels and special motor
fuels) and section 4081 (relating to tax on gasoline, diesel
fuel and kerosene) are credited to the Highway Trust Fund. In
the case of alcohol fuels, 2.5 cents per gallon of the tax
imposed is retained in the General Fund.\19\ In the case of a
taxable fuel taxed at a reduced rate upon removal or entry
prior to mixing with alcohol, 2.8 cents of the reduced rate is
retained in the General Fund.\20\
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\19\ Sec. 9503(b)(4)(E).
\20\ Sec. 9503(b)(4)(F).
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Biodiesel
If biodiesel is used in the production of blended taxable
fuel, the Code imposes tax on the removal or sale of the
blended taxable fuel.\21\ In addition, the Code imposes tax on
any liquid other than gasoline sold for use or used as a fuel
in a diesel-powered highway vehicle or diesel powered train
unless tax was previously imposed and not refunded or
credited.\22\ If biodiesel that was not previously taxed or
exempt is sold for use or used as a fuel in a diesel-powered
highway vehicle or a diesel-powered train, tax is imposed.\23\
There are no reduced excise tax rates for biodiesel.
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\21\ Sec. 4081(b); Rev. Rul. 2002-76, 2002-46 I.R.B. 841 (2002).
``Taxable fuels'' are gasoline, diesel and kerosene (sec. 4083).
Biodiesel, although suitable for use as a fuel in a diesel-powered
highway vehicle or diesel-powered train, contains less than four
percent normal paraffins and, therefore, is not treated as diesel fuel
under the applicable Treasury regulations. Treas. Reg. secs. 48.4081-
1(c)(2)(i) and (ii), and 48.4081-1(b); Rev. Rul. 2002-76, 2002-46
I.R.B. 841 (2002). As a result, biodiesel alone is not a taxable fuel
for purposes of section 4081. As noted above, however, tax is imposed
upon the removal or entry of blended taxable fuel made with biodiesel.
\22\ Sec. 4041. The tax imposed under section 4041 also will not
apply if an exemption from tax applies.
\23\ Rev. Rul. 2002-76, 2002-46 I.R.B. 841 (2002).
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REASONS FOR CHANGE
The United States seeks to reduce its dependence on foreign
oil through, among other means, the use of alternative fuels.
The Committee believes that the goal of promoting the use of
alternative fuels can be achieved without decreasing the
revenues available for improving the nation's highway and
bridge network. As a result, the Committee believes that it is
appropriate that the entire amount of alcohol fuel taxes be
devoted to the Highway Trust Fund. Highway vehicles using
alcohol-blended fuels contribute to the wear and tear of the
same highway system used by gasoline or diesel vehicles.
Therefore, the Committee believes that alcohol-blended fuels
should be taxed at rates equal to gasoline or diesel.
EXPLANATION OF PROVISION
Overview
The provision eliminates reduced rates of excise tax for
most alcohol-blended fuels. In place of reduced rates, the
provision creates two new credits: the alcohol fuel mixture
credit and the biodiesel mixture credit. The sum of these
credits may be taken against the tax imposed on taxable fuels
(by section 4081). Alternatively, in lieu of a credit against
tax, the provision allows taxpayers to file a claim for payment
equal to the amount of these credits. The provision also
eliminates the General Fund retention of certain taxes on
alcohol fuels, and credits these taxes to the Highway Trust
Fund and extends the present-law alcohol fuels credit through
December 31, 2010.
Alcohol fuel mixture excise tax credit
The provision eliminates the reduced rates of excise tax
for most alcohol-blended fuels.\24\ Under the provision, the
full rate of tax for taxable fuels is imposed on both alcohol
fuel mixtures and the taxable fuel used to produce an alcohol
fuel mixture.
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\24\ The provision does not change the present-law treatment of
alcohol aviation fuels, fuels blended with alcohol derived from natural
gas (under sec. 4041(m)) or alcohol derived from coal or peat (under
sec. 4041(b)(2)). In general, the provision does not change the taxes
imposed to fund the Leaking Underground Storage Tank Trust Fund.
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In lieu of the reduced excise tax rates, the provision
provides for an excise tax credit, the alcohol fuel mixture
credit. The alcohol fuel mixture credit is 52 cents for each
gallon of alcohol used by a person in producing an alcohol fuel
mixture. The credit declines to 51 cents per gallon after
calendar year 2004. For mixtures not containing ethanol
(renewable source methanol), the credit is 60 cents per gallon.
Equivalent amounts of these credits are to be credited to the
Highway Trust Fund.
For purposes of the alcohol fuel mixture credit, an
``alcohol fuel mixture'' is (1) a mixture of alcohol and a
taxable fuel and (2) sold for use or used as a fuel by the
taxpayer producing the mixture. Alcohol for this purpose
includes methanol, ethanol, and alcohol gallon equivalents of
ETBE or other ethers produced from such alcohol. It does not
include alcohol produced from petroleum, natural gas or coal
(including peat), or alcohol with a proof of less than 190
(determined without regard to any added denaturants). Taxable
fuel is gasoline, diesel and kerosene.\25\
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\25\ Sec. 4083(a)(1).
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The excise tax credit is coordinated with the alcohol fuels
income tax credit and is available through December 31, 2010.
Biodiesel mixture excise tax credit
The provision provides an excise tax credit for agri-
biodiesel mixtures. The credit is one dollar for the first
gallon of agri-biodiesel used by the taxpayer in producing at
least five gallons of qualified biodiesel mixture.\26\ The
credit is not available for any sale or use for any period
after December 31, 2005. This excise tax credit is coordinated
with income tax credit for biodiesel such that credit for the
same biodiesel cannot be claimed for both income and excise tax
purposes.
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\26\ Agri-biodiesel is monoalkyl esters of long chain fatty acids
for use in diesel-powered engines that is derived from virgin oils,
including that from corn, soybeans, sunflower seeds, cottonseeds,
canola, crambe, rapeseeds, safflowers, flaxseeds, rice bran, mustard
seeds, or animal fats. The excise tax credit employs the same
definitions as the biodiesel income tax credit created by section 207
of the bill.
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Payments with respect to tax-paid fuel used to produce qualified
mixtures
When tax-paid fuel is used to produce an alcohol fuel
mixture or qualified biodiesel mixture that is sold or used in
the trade or business of the person who makes such a mixture, a
payment in an amount equal to the alcohol fuel mixture credit
or biodiesel mixture credit is available. This refund provision
is available to persons using gasoline, diesel fuel or kerosene
to make an alcohol fuel mixture or qualified biodiesel mixture.
Specifically, if any gasoline, diesel fuel, or kerosene on
which tax was imposed by section 4081 is used by any person in
producing an alcohol fuel mixture or qualified biodiesel
mixture which is sold or used in such person's trade or
business, the Secretary is to pay to such person an amount
equal to the alcohol fuel mixture credit or the biodiesel
mixture credit with respect to such gasoline, diesel fuel or
kerosene.
If such claims are not paid within 45 days, the claim is to
be paid with interest. The provision also provides that in the
case of an electronic claim, if such claim is not paid within
20 days, the claim is to be paid with interest. The refund
provision is coordinated with other refund provisions and the
excise tax credits for alcohol fuel mixtures and biodiesel
mixtures. The provision does not apply with respect to alcohol
fuel mixtures sold or used after December 31, 2010 or qualified
biodiesel mixtures sold or used after December 31, 2005.
Highway Trust Fund
The provision eliminates the requirement that 2.5 and 2.8
cents per gallon of excise taxes be retained in the General
Fund so that the full amount of tax on alcohol fuels is
credited to the Highway Trust Fund. The provision also
authorizes the full amount of fuel taxes to be appropriated to
the Highway Trust Fund without reduction for amounts equivalent
to the excise tax credits allowed for alcohol fuel mixtures and
biodiesel mixtures.
Alcohol fuels income tax credit
The provision extends the alcohol fuels credit (sec. 40)
through December 31, 2010.
EFFECTIVE DATE
The provision is effective for fuel sold or used after
September 30, 2003.
F. Sale of Gasoline and Diesel Fuel at Duty-Free Sales Enterprises
(Sec. 209 of the Bill)
PRESENT LAW
A duty-free sales enterprise that meets certain conditions
may sell and deliver for export from the customs territory of
the United States duty-free merchandise. Duty-free merchandise
is merchandise sold by a duty-free sales enterprise on which
neither federal duty nor federal tax has been assessed pending
exportation from the customs territory of the United States.
Conditions for qualifying as a duty-free enterprise include
(but are limited to) locations within a specified distance from
a port of entry, establishment of procedures for ensuring that
merchandise is exported from the United States, and prominent
posting of rules concerning duty-free treatment of merchandise.
The duty-free statute does not contain any limitation on what
goods may qualify for duty-free treatment.
REASONS FOR CHANGE
The Committee understands that in some circumstances
individuals purchase motor fuels at a duty free facility that
is located in the United States, drive briefly outside of the
United States, and return to the United States. The Committee
believes that motor fuel sold at duty-free enterprises should
support the financing of the U.S. highway system as do other
motor fuel sales in the United States.
EXPLANATION OF PROVISION
The provision amends Section 555(b) of the Tariff Act of
1930 (19 U.S.C. 1555(b)) to provide that gasoline or diesel
fuel sold at duty-free enterprises shall be considered to be
entered for consumption into the United States and thus
ineligible for classification as duty-free merchandise.
EFFECTIVE DATE
The provision is effective on the date of enactment.
TITLE III--CONSERVATION AND ENERGY EFFICIENCY PROVISIONS
A. Credit for Construction of New Energy-Efficient Home
(Sec. 301 of the Bill and new Sec. 45G of the Code)
PRESENT LAW
A nonrefundable, 10-percent business energy credit is
allowed for the cost of new property that is equipment (1) that
uses solar energy to generate electricity, to heat or cool a
structure, or to provide solar process heat, or (2) 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.
The business energy tax credits are components of the
general business credit (sec. 38(b)(1)). The business energy
tax credits, when combined with all other components of the
general business credit, generally may not exceed for any
taxable year the excess of the taxpayer's net income tax over
the greater of (1) 25 percent of net regular tax liability
above $25,000 or (2) the tentative minimum tax. For credits
arising in taxable years beginning after December 31, 1997, an
unused general business credit generally may be carried back
one year and carried forward 20 years (sec. 39).
A taxpayer may exclude from income the value of any subsidy
provided by a public utility for the purchase or installation
of an energy conservation measure. An energy conservation
measure means any installation or modification primarily
designed to reduce consumption of electricity or natural gas or
to improve the management of energy demand with respect to a
dwelling unit (sec. 136).
There is no present-law credit for the construction of new
energy-efficient homes.
REASONS FOR CHANGE
The Committee recognizes that residential energy use for
heating and cooling represents a large share of national energy
consumption, and accordingly believes that measures to reduce
heating and cooling energy requirements have the potential to
substantially reduce national energy consumption. The Committee
further recognizes that the most cost-effective time to
properly insulate a home is when it is under construction and
that the most effective mechanism to encourage the utilization
of energy-efficient components in the construction of new homes
is through an incentive to the builder. Accordingly, the
Committee believes that a tax credit for the use of energy-
efficiency components in a home's envelope (exterior windows
(including skylights) and doors and insulation) or heating and
cooling appliances will encourage contractors to produce highly
energy-efficient homes, which in turn will reduce national
energy consumption. Reduced energy consumption will in turn
reduce reliance on foreign suppliers of oil and will reduce
pollution in general.
EXPLANATION OF PROVISION
The provision provides a credit to an eligible contractor
of an amount equal to the aggregate adjusted bases of all
energy-efficient property installed in a qualified new energy-
efficient home during construction. The credit cannot exceed
$1,000 ($2,000) in the case of a new home that has a projected
level of annual heating and cooling costs that is 30 percent
(50 percent) less than a comparable dwelling constructed in
accordance with Chapter 4 of the 2000 International Energy
Conservation Code.
The eligible contractor is the person who constructed the
home, or in the case of a manufactured home, the producer of
such home. Energy efficiency property is any energy-efficient
building envelope component (insulation materials or system
designed to reduce heat loss or gain, and exterior windows,
including skylights, and doors) and any energy-efficient
heating or cooling appliance that can, individually or in
combination with other components, meet the standards for the
home.
To qualify as an energy-efficient new home, the home must
be: (1) a dwelling located in the United States; (2) the
principal residence of the person who acquires the dwelling
from the eligible contractor; and (3) certified to have a
projected level of annual heating and cooling energy
consumption that meets the standards for either the 30-percent
or 50-percent reduction in energy usage. The home may be
certified according to a component-based method or an energy
performance based method. Additionally, manufactured homes
certified by the Environmental Protection Agency's Energy Star
Labeled Homes program are eligible for the $1,000 credit
provided criteria (1) and (2) are met.
The component-based method of certification shall be based
on applicable energy-efficiency specifications or ratings,
including current product labeling requirements. The Secretary
shall develop component-based packages that are equivalent in
energy performance to properties that qualify for the credit.
The standard for certifying homes through the component based
method shall be based on the same standards for plan check and
physical inspections as are used for energy code compliance.
The certification shall be provided by a local building
regulatory authority, a utility, a manufactured home primary
inspection agency, or a home energy rating organization. Such
provider of the certification must be financially independent
of the eligible contractor.
The performance-based method of certification shall be
based on an evaluation of the home in reference to a home which
uses the same energy source and system heating type, and is
constructed in accordance with Chapter 4 of the 2000
International Energy Conservation Code. The certification shall
be provided by an individual recognized by the Secretary for
such purposes.
The certification process requires that energy savings to
the consumer be measured in terms of energy costs. To ensure
consistent and reasonable energy cost analyses, the Department
of Energy shall include in its rulemaking related to this bill
specific reference data to be used for qualification for the
credit.
In the case of manufactured homes, certification shall be
by the Energy Star Labeled Homes program.
The credit will be part of the general business credit. No
credits attributable to energy efficient homes may be carried
back to any taxable year ending on or before the effective date
of the credit.
EFFECTIVE DATE
The credit applies to homes whose construction is
substantially completed after the date of enactment and which
are purchased during the period beginning on the date of
enactment and ending on December 31, 2007 (December 31, 2005 in
the case of the $1,000 credit).
B. Credit for Energy-Efficient Appliances
(Sec. 302 of the Bill and new Sec. 45H of the Code)
PRESENT LAW
A nonrefundable, 10-percent business energy credit is
allowed for the cost of new property that is equipment: (1)
that uses solar energy to generate electricity, to heat or cool
a structure, or to provide solar process heat; or (2) 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.
The business energy tax credits are components of the
general business credit (sec. 38(b)(1)). The business energy
tax credits, when combined with all other components of the
general business credit, generally may not exceed for any
taxable year the excess of the taxpayer's net income tax over
the greater of: (1) 25 percent of net regular tax liability
above $25,000 or (2) the tentative minimum tax. For credits
arising in taxable years beginning after December 31, 1997, an
unused general business credit generally may be carried back
one year and carried forward 20 years (sec. 39).
A taxpayer may exclude from income the value of any subsidy
provided by a public utility for the purchase or installation
of an energy conservation measure. An energy conservation
measure means any installation or modification primarily
designed to reduce consumption of electricity or natural gas or
to improve the management of energy demand with respect to a
dwelling unit (sec. 136).
There is no present-law credit for the manufacture of
energy-efficient appliances.
REASONS FOR CHANGE
The Committee believes that providing a tax credit for the
production of energy-efficient clothes washers and
refrigerators will encourage manufacturers to produce such
products currently and to invest in technologies to achieve
higher energy-efficiency standards for the future. In addition,
the Committee intends to encourage those manufacturers already
producing energy-efficient clothes washers and refrigerators to
accelerate production.
EXPLANATION OF PROVISION
The provision provides a credit for the production of
certain energy-efficient clothes washers and refrigerators. The
credit would equal $50 per appliance for energy-efficient
clothes washers produced with a modified energy factor
(``MEF'') of 1.42 MEF or greater for washers produced before
2007 and for refrigerators produced before 2005 that consume 10
percent less kilowatt-hours per year than the energy
conservation standards promulgated by the Department of Energy
that took effect on July 1, 2001. The credit equals $100 for
energy-efficient clothes washers produced with a MEF of 1.5 or
greater and for refrigerators produced that consume at least 15
percent less kilowatt-hours per year (at least 20 percent less
for production in 2007) than the energy conservation standards
promulgated by the Department of Energy that took effect on
July 1, 2001. The credit is $150 in the case of a refrigerator
that consumes at least 20 percent less kilowatt-hours per year
than such standards and is produced before 2007. A refrigerator
must be an automatic defrost refrigerator-freezer with an
internal volume of at least 16.5 cubic feet to qualify for the
credit. A clothes washer is any residential clothes washer,
including a residential style coin operated washer, that
satisfies the relevant efficiency standard.
For each category of appliances (e.g., washers that meet
the lower MEF standard, washers that meet the higher MEF
standard, refrigerators that meet the 10 percent standard,
refrigerators that meet the 15 percent standard), only
production in excess of average production for each such
category during calendar years 2000-2002 would be eligible for
the credit. For 2003, only production after the date of
enactment is eligible for the credit, and special rules apply
to determine if production exceeds the average of the base
period. The taxpayer may not claim credits in excess of $60
million for all taxable years, and may not claim credits in
excess of $30 million with respect to appliances that only
qualify for the $50 credit. Additionally, the credit allowed
for all appliances may not exceed two percent of the average
annual gross receipts of the taxpayer for the three taxable
years preceding the taxable year in which the credit is
determined.
The credit will be part of the general business credit. No
credits attributable to energy-efficient appliances may be
carried back to taxable years ending before January 1, 2003.
EFFECTIVE DATE
The credit applies to appliances produced after the date of
enactment and prior to January 1, 2008.
C. Credit for Residential Energy Efficient Property
(Sec. 303 of the Bill and new Sec. 25C of the Code)
PRESENT LAW
A taxpayer may exclude from income the value of any subsidy
provided by a public utility for the purchase or installation
of an energy conservation measure. An energy conservation
measure means any installation or modification primarily
designed to reduce consumption of electricity or natural gas or
to improve the management of energy demand with respect to a
dwelling unit (sec. 136).
There is no present-law personal tax credit for energy
efficient residential property.
REASONS FOR CHANCE
The Committee believes that allowing a credit for the
purchase of certain energy efficient appliances and systems
that generate electricity through renewable and pollution-free
alternative energy sources will encourage the purchase of these
products. The Committee believes that the use of these products
will help reduce reliance on conventional energy sources and
reduce atmospheric pollutants. The Committee believes that the
on-site generation of electricity and solar hot water will
reduce reliance on the United States' electricity grid and on
natural gas pipelines. Furthermore, the Committee believes that
the use of highly efficient residential equipment will lead to
decreased energy consumption in households, resulting in
significant energy savings.
EXPLANATION OF PROVISION
The provision provides a personal tax credit for the
purchase of qualified wind energy property, qualified
photovoltaic 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 15
percent for solar water heating property and photovoltaic
property, and 30 percent for wind energy property. The maximum
credit for each of these systems of property is $2,000. The
provision also provides a 30 percent credit for the purchase of
qualified fuel cell power plants. The credit for any fuel cell
may not exceed $500 for each 0.5 kilowatt of capacity.
Qualifying solar water heating property means an
expenditure for property 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. Qualified photovoltaic property is
property that uses solar energy to generate electricity for use
in a dwelling unit. Solar panels are treated as qualified
photovoltaic property. Qualified wind energy property is
property that uses wind energy to generate electricity for use
in a dwelling unit. A qualified fuel cell power plant is an
integrated system comprised of a fuel cell stack assembly and
associated balance of plant components that converts a fuel
into electricity using electrochemical means, and which has an
electricity-only generation efficiency of greater than 30
percent and that generates at least 0.5 kilowatts of
electricity. 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.
The provision also provides a credit for the purchase of
other qualified energy efficient property, as described below:
Electric heat pump hot water heaters with an Energy Factor
of at least 1.7. The maximum credit is $75 per unit.
Electric heat pumps with a heating efficiency of at least 9
HSPF (Heating Seasonal Performance Factor) and a cooling
efficiency of at least 15 SEER (Seasonal Energy Efficiency
Rating) and an energy efficiency ratio (EER) of 12.5 or
greater. The maximum credit is $250 per unit.
Natural gas, oil, or propane furnace which achieves 95
percent annual fuel utilization efficiency. The maximum credit
is $250 per unit.
Central air conditioners with an efficiency of at least 15
SEER and an EER of 12.5 or greater. The maximum credit is $250
per unit.
Natural gas, oil, or propane water heaters with an Energy
Factor of at least 0.8. The maximum credit is $75 per unit.
Geothermal heat pumps which have an EER of at least 21. The
maximum credit is $250 per unit.
The credit is nonrefundable, and 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. The credit is allowed against
the regular and alternative minimum tax.
Certain equipment safety requirements need to be met to
qualify for the credit. Special proration rules apply in the
case of jointly owned property, condominiums, and tenant-
stockholders in cooperative housing corporations. With the
exception of wind energy property, 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.
EFFECTIVE DATE
The credit applies to purchases after the date of enactment
and before January 1, 2008.
D. Credit for Business Installation of Qualified Fuel Cells and
Stationary Microturbine Power Plants
(Sec. 304 of the Bill and Sec. 48 of the Code)
PRESENT LAW
A nonrefundable, 10-percent business energy credit is
allowed for the cost of new property that is equipment (1) that
uses solar energy to generate electricity, to heat or cool a
structure, or to provide solar process heat, or (2) 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.
The business energy tax credits are components of the
general business credit (sec. 38(b)(1)). The business energy
tax credits, when combined with all other components of the
general business credit, generally may not exceed for any
taxable year the excess of the taxpayer's net income tax over
the greater of (1) 25 percent of net regular tax liability
above $25,000 or (2) the tentative minimum tax. An unused
general business credit generally may be carried back one year
and carried forward 20 years (sec. 39).
A taxpayer may exclude from income the value of any subsidy
provided by a public utility for the purchase or installation
of an energy conservation measure. An energy conservation
measure means any installation or modification primarily
designed to reduce consumption of electricity or natural gas or
to improve the management of energy demand with respect to a
dwelling unit (sec. 136).
There is no present-law credit for fuel cell power plant or
microturbine property.
REASONS FOR CHANGE
The Committee believes that investments in qualified fuel
cell power plants represent a promising means to produce
electricity through non-polluting means and from
nonconventional energy sources. Furthermore, the on-site
generation of electricity provided by fuel cell power plants,
as well as that by microturbines, will reduce reliance on the
United States' electricity grid. The Committee believes that
providing a tax credit for investment in qualified fuel cell
and microturbine power plants will encourage investments in
such systems.
EXPLANATION OF PROVISION
The provision provides a 30 percent business energy credit
for the purchase of qualified fuel cell power plants for
businesses. A qualified fuel cell power plant is an integrated
system comprised of a fuel cell stack assembly and associated
balance of plant components that converts a fuel into
electricity using electrochemical means, and which has an
electricity-only generation efficiency of greater than 30
percent and generates at least 0.5 kilowatts of electricity
using an electrochemical process. The credit for any fuel cell
may not exceed $500 for each 0.5 kilowatts of capacity.
Additionally, the provision provides a 10 percent credit
for the purchase of qualifying stationary microturbine power
plants. 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 which
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 that 26
percent at International Standard Organization conditions and a
capacity of less than 2,000 kilowatts. The credit is limited to
the lesser of 10 percent of the basis of the property or $200
for each kilowatt of capacity.
The credit is nonrefundable. The taxpayer's basis in the
property is reduced by the amount of the credit claimed.
EFFECTIVE DATE
The credit for businesses applies to property placed in
service after the date of enactment and before January 1, 2008
(January 1, 2007 in the case of microturbines), under rules
similar to rules of section 48(m) of the Internal Revenue Code
of 1986 (as in effect on the day before the date of enactment
of the Revenue Reconciliation Act of 1990).
E. Energy-Efficient Commercial Buildings Deduction
(Sec. 305 of the Bill and new Sec. 179B of the Code)
PRESENT LAW
No special deduction is currently provided for expenses
incurred for energy-efficient commercial building property.
REASONS FOR CHANGE
The Committee recognizes that commercial buildings consume
a significant amount of energy resources and that reductions in
commercial energy use have the potential to significantly
reduce national energy consumption. Accordingly, the Committee
believes that a special deduction for commercial building
property (lighting, heating, cooling, ventilation, and hot
water supply systems) that meets a high energy-efficiency
standard will encourage construction of buildings that are
significantly more energy efficient than the norm. The
Committee further believes that the special deduction will
encourage innovation to reduce the costs of meeting the energy-
efficiency standard.
EXPLANATION OF PROVISION
The provision provides a deduction equal to energy-
efficient commercial building property expenditures made by the
taxpayer. Energy-efficient commercial building property
expenditures are defined as amounts paid or incurred for
energy-efficient property installed in connection with the new
construction or reconstruction of property: (1) which is
depreciable property; (2) which is located in the United
States, and (3) which is the type of structure to which the
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'') is applicable. The deduction is limited to an amount
equal to $2.25 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.
Energy-efficient commercial building property generally
means any property that reduces total annual energy and power
costs with respect to the lighting, heating, cooling,
ventilation, and hot water supply systems of the building by 50
percent or more in comparison to a building which minimally
meets the requirements of Standard 90.1-2001 of ASHRAE/IESNA.
Because of the requirement that in order to qualify, a building
must fall within the scope of the ASHRAE/IESNA Standard 90.1-
2001, residential rental property that is less than four
stories does not qualify.
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. The methods for calculation shall be fuel neutral, such
that the same energy efficiency features shall qualify a
building for the deduction under this subsection regardless of
whether the heating source is a gas or oil furnace or an
electric heat pump. To allow proper calculations of cost, the
Secretary shall prescribe the costs per unit of energy and
power, such as kilowatt hour, kilowatt, gallon of fuel oil, and
cubic foot or Btu of natural gas, which may be dependent on
time of usage. If a State has developed annual energy usage and
cost reduction procedures based on time of usage costs for use
in the performance standards of the State's building energy
code before the effective date of this section, the Secretary
may allow taxpayers in that State to use those annual energy
usage and cost reduction procedures in lieu of those adopted by
the Secretary.
The Secretary shall promulgate 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 Home Energy Rating Standards. Individuals
qualified to determine compliance shall only be those
recognized by one or more organizations certified by the
Secretary for such purposes. In order that the deduction is
available immediately, it is expected that the Secretary will
promptly issue interim guidance with respect to the methods of
calculating and verifying energy and power costs that relies on
provisions of ASHRAE/IESNA Standard 90.1-2001 and of the 2001
California Nonresidential Alternative Calculation Method
Approval Manual or the 2001 California Residential Alternative
Calculation Method Approval Manual. The methods for calculation
need not comply fully with section 11 of ASHRAE/IESNA Standard
90.1-2001. Such interim guidance will include interim guidance
as to the qualified computer software and qualified individuals
necessary to certify eligibility for the deduction.
When final regulations are adopted, such regulations
additionally may, with respect to methods of calculating and
verifying energy and power costs, take into consideration
appropriate energy savings from design methodologies and
technologies not otherwise credited in ASHRAE/IESNA Standard
90.1-2001, the 2001 California Nonresidential Alternative
Calculation Method Approval Manual, or the 2001 California
Residential Alternative Calculation Method Approval Manual,
including the following: (1) natural ventilation, (2)
evaporative cooling, (3) automatic lighting controls such as
occupancy sensors, photocells, and timeclocks, (4) daylighting,
(5) designs utilizing semi-conditioned spaces which maintain
adequate comfort conditions without air conditioning or without
heating, (6) improved fan system efficiency, including
reductions in static pressure, and (7) advanced unloading
mechanisms for mechanical cooling, such as multiple or variable
speed compressors. Additionally, the calculation methods may
take into account the extent of commissioning in the building,
and allow the taxpayer to take into account measured
performance which exceeds typical performance.
For energy-efficient commercial building property public
property expenditures made by a public entity, such as public
schools, the interim guidance, as well as final regulations,
will allow the value of the deduction (determined without
regard to the tax-exempt status of such entity) to be allocated
to the person primarily responsible for designing the property
in lieu of the public entity.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after the date of enactment for expenditures in connection with
a building whose construction is completed on or before
December 31, 2009.
F. Three-Year Applicable Recovery Period for Depreciation of Qualified
Energy Management Devices
(Sec. 306 of the Bill and Sec. 168 of the Code)
PRESENT LAW
No special recovery period is currently provided for
depreciation of qualified energy management devices.
REASONS FOR CHANGE
The Committee believes that consumers could better manage
their electricity use if they had better information concerning
their usage habits by time of day. In the case of electricity,
if time-of-day pricing is used, energy management devices that
provide information to consumers regarding their peak
electrical use could encourage consumers to defer certain
electrical use, such as use of a washing machine, to periods of
the day when electricity prices are lower. In addition to
potentially reducing consumers' electricity bill, spreading the
demand for electricity more evenly throughout the day will
reduce the need for utility investments in generation capacity
to satisfy peak demand periods.
The Committee believes that providing a 3-year recovery
period for qualified energy management devices will provide
sufficient incentive for utilities to establish time-of-day
pricing options that will encourage consumers to adjust their
electricity usage in such a manner to dampen utilities' peak
load capacity needs and thus reduce the need for investment in
new capacity to meet peak load demand.
EXPLANATION OF PROVISION
The provision provides a three-year recovery period for
qualified new energy management devices placed in service by
any taxpayer who is a supplier of electric energy or is a
provider of electric energy services. A qualified energy
management device is any meter or metering device eligible for
accelerated depreciation under code section 168 and which is
used by the taxpayer
(1) To measure and record electricity usage data on a
time-differentiated basis in at least 4 separate time
segments per day, and
(2) To provide such data on at least a monthly basis
to both consumers and the taxpayer.
EFFECTIVE DATE
The provision is effective for any qualified energy
management device placed in service after the date of enactment
of the Act and before January 1, 2008.
G. Three-Year Applicable Recovery Period for Depreciation of Qualified
Water Submetering Devices
(Sec. 307 of the Bill and Sec. 168 of the Code)
PRESENT LAW
No special recovery period is currently provided for
depreciation of qualified water submetering devices.
REASONS FOR CHANGE
The Committee believes that consumers would better manage
their water use if they paid for water in proportion to the
water that they actually used. In many cases in multi-unit
properties, there is not unit by unit metering of water use.
Rather, the landlord's average per-unit costs for water are
reflected in rental rates. Thus, individual units have
virtually no financial incentive to conserve on water use, as
the cost of any individual's increased water usage is borne by
all dwellers. The Committee believes that a tax incentive for
the installation of submeters to enable unit by unit charges
that reflect water usage will rationalize water use and help to
conserve water resources.
EXPLANATION OF PROVISION
The provision provides a three-year recovery period for
qualified new water submetering devices placed in service by
any taxpayer who is an eligible resupplier. An eligible
resupplier is any taxpayer who purchases and installs qualified
water submetering devices in every unit in any multi-unit
property. A qualified water submetering device is anywater
submetering device eligible for accelerated depreciation under
code section 168 and which is used by the taxpayer
(1) To measure and record water usage data, and
(2) To provide such data on at least a monthly basis
to both consumers and the taxpayer.
EFFECTIVE DATE
The provision is effective for any qualified water
submetering device placed in service after the date of
enactment of the Act and before January 1, 2008.
H. Energy Credit for Combined Heat and Power System Property
(Sec. 308 of the Bill and Sec. 48 of the Code)
PRESENT LAW
A nonrefundable, 10-percent business energy credit is
allowed for the cost of new property that is equipment (1) that
uses solar energy to generate electricity, to heat or cool a
structure, or to provide solar process heat, or (2) 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.
The business energy tax credits are components of the
general business credit (sec. 38(b)(1)). The business energy
tax credits, when combined with all other components of the
general business credit, generally may not exceed for any
taxable year the excess of the taxpayer's net income tax over
the greater of (1) 25 percent of net regular tax liability
above $25,000 or (2) the tentative minimum tax. For credits
arising in taxable years beginning after December 31, 1997, an
unused general business credit generally may be carried back
one year and carried forward 20 years (sec. 39).
A taxpayer may exclude from income the value of any subsidy
provided by a public utility for the purchase or installation
of an energy conservation measure. An energy conservation
measure means any installation or modification primarily
designed to reduce consumption of electricity or natural gas or
to improve the management of energy demand with respect to a
dwelling unit (sec. 136).
There is no present-law credit for combined heat and power
(``CHP'') property.
REASONS FOR CHANGE
The Committee believes that investments in combined heat
and power systems represent a promising means to achieve
greater national energy efficiency by encouraging the dual use
of the energy from the burning of fossil fuels. Furthermore,
the on-site generation of electricity provided by CHP systems
will reduce reliance on the United States' electricity grid.
The Committee believes that providing a tax credit for
investment in combined heat and power property will encourage
investments in such systems.
EXPLANATION OF PROVISION
The provision provides a 10-percent credit for the purchase
of combined heat and power property. CHP property as defined as
property: (1) which 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) which has an
electrical capacity of more than 50 kilowatts or a mechanical
energy capacity of more than 67 horsepower or an equivalent
combination of electrical and mechanical energy capacities; (3)
which produces at least 20 percent of its total useful energy
in the form of thermal energy and at least 20 percent in the
form of electrical or mechanical power (or a combination
thereof); and (4) the energy efficiency percentage of which
exceeds 60 percent (70 percent in the case of a system with an
electrical capacity in excess of 50 megawatts or a mechanical
energy capacity in excess of 67,000 horsepower, or an
equivalent combination of electrical and mechanical
capacities.) Also, for purposes of determining whether CHP
property includes technologies which generate electricity or
mechanical power using backpressure steam turbines in place of
existing pressure-reducing valves, or which make use of waste
heat from industrial processes such as by using organic
rankine, stirling, or kalina heat engine systems, the general
requirements of clause (1), the energy output requirements
related to heat versus power described under (3), and the
energy efficiency requirements of (4), above, may be
disregarded.
CHP property does include property used to transport the
energy source to the generating facility or to distribute
energy produced by the facility.
If a taxpayer is allowed a credit for CHP property, and the
property would ordinarily have a depreciation class life of 15
years or less, the depreciation period for the property is
treated as having a 22-year class life. The present-law carry
back rules of the general business credit generally would apply
except that no credits attributable to combined heat and power
property may be carried back before the effective date of this
provision.
EFFECTIVE DATE
The credit applies to property placed in service after the
date of enactment and before January 1, 2007.
I. Credit for Energy Efficiency Improvements to Existing Homes
(Sec. 309 of the Bill and new Sec. 25D of the Code)
PRESENT LAW
A taxpayer may exclude from income the value of any subsidy
provided by a public utility for the purchase or installation
of an energy conservation measure. An energy conservation
measure means any installation or modification primarily
designed to reduce consumption of electricity or natural gas or
to improve the management of energy demand with respect to a
dwelling unit (sec. 136).
There is no present law credit for energy efficiency
improvements to existing homes.
REASONS FOR CHANGE
Since residential energy consumption represents a large
fraction of national energy use, the Committee believes that
energy savings in this sector of the economy have the potential
to significantly impact national energy consumption, which will
reduce reliance on foreign suppliers of oil and reduce
pollution in general. The Committee further recognizes that
many existing homes are inadequately insulated. Accordingly,
the Committee believes that a tax credit for certain energy-
efficiency improvements related to a home's envelope (exterior
windows (including skylights) and doors, insulation, and
certain roofing systems) will encourage homeowners to improve
the insulation of their homes, which in turn will reduce
national energy consumption.
EXPLANATION OF PROVISION
The provision would provide a 10-percent nonrefundable
credit for the purchase of qualified energy efficiency
improvements. The maximum credit for a taxpayer with respect to
the same dwelling for all taxable years is $300. A qualified
energy efficiency improvement would be any energy efficiency
building envelope component that is certified to meet or exceed
the prescriptive criteria for such a component established by
the 2000 International Energy Conservation Code, or any
combination of energy efficiency measures that is certified to
achieve at least a 30-percent reduction in heating and cooling
energy usage for the dwelling and (1) that is installed in or
on a dwelling located in the United States; (2) owned and used
by the taxpayer as the taxpayer's principal residence; (3) the
original use of which commences with the taxpayer; and (4) such
component can reasonably be expected to remain in use for at
least five years.
Building envelope components would be: (1) insulation
materials or systems which are specifically and primarily
designed to reduce the heat loss or gain for a dwelling, and
(2) exterior windows (including skylights) and doors.
Homes shall be certified according to a component-based
method or a performance-based method. The component-based
method shall be based on applicable energy-efficiency ratings,
including current product labeling requirements. Certification
by the component method shall be provided by a third party,
such as a local building regulatory authority, a utility, a
manufactured home production inspection primary inspection
agency, or a home energy rating organization.
The performance-based method shall be based on a comparison
of the projected energy consumption of the dwelling in its
original condition and after the completion of energy
efficiency measures. The performance-based method of
certification shall be conducted by an individual or
organization recognized by the Secretary of the Treasury for
such purposes.
The certification process requires that energy savings to
the consumer be measured in terms of energy costs. To ensure
consistent and reasonable energy cost analyses, the Department
of Energy shall include in its rulemaking related to this bill
specific reference data to be used for qualification for the
credit.
The taxpayer's basis in the property would be reduced by
the amount of the credit. Special rules would apply in the case
of condominiums and tenant-stockholders in cooperative housing
corporations.
The credit is allowed against the regular and alternative
minimum tax.
EFFECTIVE DATE
The credit is effective for qualified energy efficiency
improvements installed on or after the date of enactment and
before January 1, 2007.
TITLE IV--CLEAN COAL INCENTIVES
A. Investment and Production Credits for Clean Coal Technology
(Secs. 401, 411, and 412 of the Bill and new Secs. 451, 45J, and 48A of
the Code)
PRESENT LAW
Present law does not provide an investment credit for
electricity generating units that use coal as a fuel. Nor does
present law provide a production credit for electricity
generated at units that use coal as a fuel. However, a
nonrefundable, 10-percent investment tax credit (``business
energy credit'') is allowed for the cost of new property that
is equipment (1) that uses solar energy to generate
electricity, to heat or cool a structure, or to provide solar
process heat, or (2) that 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 (sec. 48). Also, an income tax
credit is allowed for the production of electricity from either
qualified wind energy, qualified ``closed-loop'' biomass, or
qualified poultry waste units placed in service prior to
January 1, 2004 (sec. 45). The credit allowed equals 1.5 cents
per kilowatt-hour of electricity sold. The 1.5 cent figure is
indexed for inflation and equaled 1.8 cents for 2002. The
credit is allowable for production during the 10-year period
after a unit is originally placed in service. The business
energy tax credits and the production tax credit are components
of the general business credit (sec. 38(b)(1)).
REASONS FOR CHANGE
The Committee recognizes that coal is the nation's most
abundant fuel source. The Committee is also sensitive to the
environmental impact of burning coal for the production of
electricity. For coal to continue to be a viable fuel source,
the Committee seeks to encourage ways to burn coal in a more
efficient and environmentally friendly manner. Therefore, the
Committee supports the development and deployment of the most
advanced technologies for generating electricity from coal by
providing investment and production credits to a limited number
of experimental production-scale electricity generating units
to reduce the cost of building and operating units that
represent the frontier of thermal efficiency and pollution
control.
Tax-exempt organizations make up a significant percentage
of the electricity industry in the United States. The Committee
believes it is important to provide the incentives for
investment in, and production from, clean coal technologies to
all producers.
EXPLANATION OF PROVISION
In general
The bill creates three new credits: a production credit for
electricity produced from qualifying clean coal technology
units; a production credit for electricity produced from
qualifying advanced clean coal technology units; and a credit
for investments in qualifying advanced clean coal technology
units. Certain persons (public utilities, electric
cooperatives, Indian tribes, and the Tennessee Valley
Authority) will be eligible to obtain certifications from the
Secretary of the Treasury (as described below) for each of
these credits and sell, trade, or assign the credit to any
taxpayer. However, any credit sold, traded, or assigned may
only be sold, traded, or assigned once. Subsequent transfers
are not permitted.
Credit for investments in qualifying advanced clean coal technology
units
The bill provides a 10-percent investment tax credit for
qualified investments in advanced clean coal technology units.
A qualified investment is that amount that would otherwise be a
qualified investment multiplied by a fraction equal to the
amount of national megawatt capacity allocated to the taxpayer
(as described below) divided by the megawatt capacity of the
qualifying unit. Qualifying advanced clean coal technology
units must utilize advanced pulverized coal or atmospheric
fluidized bed combustion technology, pressurized fluidized bed
combustion technology, integrated gasification combined cycle
technology, or some other technology certified by the Secretary
of Energy. Any qualifying advanced clean coal technology unit
must meet certain capacity standards, thermal efficiency
standards, and emissions standards for SO2, nitrous
oxides, particulate emissions, and source emissions standards
as provided in the Clean Air Act. In addition, a qualifying
advanced clean coal technology unit must meet certain carbon
emissions requirements.
The proposal defines four types of qualifying advanced
clean coal technology units: (1) advanced pulverized coal or
atmospheric fluidized bed combustion technology units (2)
qualifying pressurized fluidized bed combustion technology
units; (3) integrated gasification combined cycle technology
units; and (3) other technology units.
(1) A qualifying advanced pulverized coal or atmospheric
fluidized bed combustion technology unit is a unit placed in
service after the date of enactment and before 2013 and having
a design net heat rate of not more than 8,500 Btu (8,900 Btu if
the unit is placed in service before 2009).
(2) A qualifying pressurized fluidized bed combustion
technology unit is a unit placed in service after the date of
enactment and before 2017 and having a design net heat rate of
not more than 7,720 Btu (8,900 Btu if the unit is placed in
service before 2009 and 8,500 Btu if the unit is placed in
service after 2008 and before 2013).
(3) A qualifying integrated gasification combined cycle
technology unit is a unit placed in service after the date of
enactment and before 2017 and having a design net heat rate of
not more than 7,720 Btu (8,900 Btu if the unit is placed in
service before 2009 and 8,500 Btu if the unit is placed in
service after 2008 and before 2013).
(4) A qualifying other technology unit use any other
technology and is placed in service after the date of enactment
and before 2017.
The provision provides that qualifying advanced clean coal
units must satisfy carbon emissions standards. For units using
design coal with a heat content of not more than 9,000 Btu per
pound, the carbon emission rate must be less than 0.60 pound of
carbon per kilowatt hour (0.51 if the unit qualifies as an
other technology unit). For units using design coal with a heat
content in excess of 9,000 Btu per pound, the carbon emission
rate must be less than 0.54 pound of carbon per kilowatt hour
(0.459 if the unit qualifies as an other technology unit).
To be a qualified investment in advanced clean coal
technology, the taxpayer must receive a certificate from the
Secretary of the Treasury. The Secretary may grant certificates
to investments only to the point that 4,000 megawatts of
electricity production capacity qualifies for the credit. From
the potential pool of 4,000 megawatts of capacity, not more
than 1,000 megawatts in total and not more than 500 megawatts
in years prior to 2009 shall be allocated to units using
advanced pulverized coal or atmospheric fluidized bed
combustion technology. From the potential pool of 4,000
megawatts of capacity, not more than 500 megawatts in total and
not more than 250 megawatts in years prior to 2009 shall be
allocated to units using pressurized fluidized bed combustion
technology. From the potential pool of 4,000 megawatts of
capacity, not more than 2,000 megawatts in total and not more
than 750 megawatts in years prior to 2009 shall be allocated to
units using integrated gasification combined cycle technology,
with or without fuel or chemical co-production. From the
potential pool of 4,000 megawatts of capacity, not more than
500 in total and not more than 250 megawatts in years prior to
2009 shall be allocated to any other technology certified by
the Secretary of Energy.
Production credit for electricity produced from qualifying clean coal
technology units
The bill provides a production credit for electricity
produced from certain units that have been retrofitted,
repowered, or replaced with a clean coal technology within ten
years of the date of enactment. The value of the credit is 0.34
cents per kilowatt-hour of electricity and the heat value of
other fuels or chemicals produced at the unit \27\ multiplied
by the fraction equal to the amount of national megawatt
capacity limitation (see below) allocated to the qualifying
unit divided by the total megawatt capacity of the unit. The
value of the credit is indexed for inflation occurring after
2003 with the first potential adjustment in 2005. The taxpayer
may claim the credit throughout the 10-year period commencing
from the date on which the qualifying unit is placed in
service.
---------------------------------------------------------------------------
\27\ Each 3,413 Btu of heat content of the fuel or chemical is
treated as equivalent to one kilowatt-hour of electricity.
---------------------------------------------------------------------------
A qualifying clean coal technology unit is a clean coal
technology unit that meets certain capacity standards, thermal
efficiency standards, and emissions standards for
SO2, nitrous oxides, particulate emissions, and
source emissions standards as provided in the Clean Air Act. In
addition, a qualifying clean coal technology unit cannot be a
unit that is receiving or is scheduled to receive funding under
the Clean Coal Technology Program, the Power Plant Improvement
Initiative, or the Clean Coal Power Initiative administered by
the Secretary of the Department of Energy. Lastly, to be a
qualified clean coal technology unit, the taxpayer must receive
a certificate from the Secretary of the Treasury. The Secretary
may grant certificates to units only to the point that 4,000
megawatts of electricity production capacity qualifies for the
credit. However, no qualifying unit would be eligible if the
unit's capacity exceeded 300 megawatts prior to having been
retrofitted, repowered, or replaced. The maximum eligible
allocation to any qualifying unit may not exceed 300 megawatts.
Production credit for electricity produced from qualifying advanced
clean coal technology
The bill also provides a production credit for electricity
produced from any qualified advanced clean coal technology
electricity generation unit that qualifies for the investment
credit for qualifying clean coal technology units, as described
above.\28\ The taxpayer may claim a production credit on the
sum of each kilowatt-hour of electricity produced and the heat
value of other fuels or chemicals produced by the taxpayer at
the unit.\29\ The taxpayer may claim the production credit for
the 10-year period commencing with the date the qualifying unit
is placed in service (or the date on which a conventional unit
was retrofitted or repowered). The value of the credit varies
depending upon the year the unit is placed in service, whether
the unit produces solely electricity or electricity and fuels
or chemicals, and the rated thermal efficiency of the unit.\30\
In addition, the value of the credit is reduced for the second
five years of eligible production. If a unit meets the more
stringent qualification standards of post-2008 in years before
2009, the taxpayer may claim the higher post-2008 credit
amounts. The value of the credit is indexed for inflation
occurring after 2003 with the first potential adjustment in
2005. The tables below specify the value of the credit (before
indexing is applied).
---------------------------------------------------------------------------
\28\ In the case of a taxpayer who received a megawatt allocation
for a qualifying advanced clean coal technology unit that is less than
the rated capacity of such unit, the taxpayer may claim credit on a
percentage of the electricity produced from the unit. The percentage is
the percentage that the taxpayer's megawatt allocation represents as a
percentage of the rated capacity of the unit.
\29\ Each 3,413 Btu of heat content of the fuel or chemical is
treated as equivalent to one kilowatt-hour of electricity.
\30\ Some of the tables in the bill, and below, express the unit's
efficiency in terms of the units net heat rate and other tables express
the unit's efficiency in percentage term. In practice, there is no
difference as one kilowhatt-hour of electricity generally is equivalent
to 3,413 Btu of heat. Therefore, if one divides 3,413 Btu by the
efficiency rate one obtains the heat rate. Likewise, given a heat rate,
the one calculates the efficiency by dividing 3,413 Btu by the heat
rate.
---------------------------------------------------------------------------
Advanced clean coal technology units producing solely
electricity
TABLE 11.--UNITS PLACED IN SERVICE BEFORE 2009
------------------------------------------------------------------------
Credit amount per
kilowatt-hour
---------------------
The unit net heat rate, Btu/kWh adjusted for the For the For the
heat content for the design coal is equal to: first second
five five
years years
------------------------------------------------------------------------
Not more than 8,500............................... $.0060 $.0038
More than 8,500 but not more than 8,750........... $.0025 $.0010
More than 8,750 but less than 8,900............... $.0010 $.0010
------------------------------------------------------------------------
TABLE 12.--UNITS PLACED IN SERVICE AFTER 2008 AND BEFORE 2013
------------------------------------------------------------------------
Credit amount per
kilowatt-hour
---------------------
The unit net heat rate, Btu/kWh adjusted for the For the For the
heat content for the design coal is equal to: first second
five five
years years
------------------------------------------------------------------------
Not more than 7,770............................... $.0105 $.0090
More than 7,770 but not more than 8,125........... $.0085 $.0068
More than 8,125 but less than 8,500............... $.0075 $.0055
------------------------------------------------------------------------
TABLE 13.--UNITS PLACED IN SERVICE AFTER 2012 AND BEFORE 2017
------------------------------------------------------------------------
Credit amount per
kilowatt-hour
---------------------
The unit net heat rate, Btu/kWh adjusted for the For the For the
heat content for the design coal is equal to: first second
five five
years years
------------------------------------------------------------------------
Not more than 7,380............................... $.0140 $.0115
More than 7,380 but not more than 7,720........... $.0120 $.0090
------------------------------------------------------------------------
Advanced clean coal technology units producing electricity
and a fuel or chemical
TABLE 14.--UNITS PLACED IN SERVICE BEFORE 2009
------------------------------------------------------------------------
Credit amount per
kilowatt-hour
---------------------
The unit design net thermal efficiency is equal For the For the
to: first second
five five
years years
------------------------------------------------------------------------
Not less than 40.6%............................... $.0060 $.0038
Less than 40.6% but not less than 40%............. $.0025 $.0010
Less than 40% but not less than 38.4%............. $.0010 $.0010
------------------------------------------------------------------------
TABLE 15.--UNITS PLACED IN SERVICE AFTER 2008 AND BEFORE 2013
------------------------------------------------------------------------
Credit amount per
kilowatt-hour
---------------------
The unit design net thermal efficiency is equal For the For the
to: first second
five five
years years
------------------------------------------------------------------------
Not less than 43.6%............................... $.0105 $.0090
Less than 43.6% but not less than 42%............. $.0085 $.0068
Less than 42% but not less than 40.2%............. $.0075 $.0055
------------------------------------------------------------------------
TABLE 16.--UNITS PLACED IN SERVICE AFTER 2012 AND BEFORE 2017
------------------------------------------------------------------------
Credit amount per
kilowatt-hour
---------------------
The unit design net thermal efficiency is equal For the For the
to: first second
five five
years years
------------------------------------------------------------------------
Not less than 44.2%............................... $.0140 $.0115
Less than 44.2% but not less than 43.9%........... $.0120 $.0090
------------------------------------------------------------------------
The credits are part of the general business credit. No
credit may be carried back to taxable years ending on or before
the date of enactment.
EFFECTIVE DATE
The provision relating to investment credits for advanced
clean coal technology units is effective after the date of
enactment. The provisions relating to production credits are
effective after the date of enactment.
TITLE V--OIL AND GAS PROVISIONS
A. Tax Credit for Oil and Gas Production From Marginal Wells
(Sec. 501 of the Bill and Sec. 45K of the Code)
PRESENT LAW
There is no credit for the production of oil and gas from
marginal wells. The costs of such production may be recovered
under the Code's depreciation and depletion rules and in other
cases as a deduction for ordinary and necessary business
expenses.
REASONS FOR CHANGE
The highly volatile price of oil and gas can result in lost
production during periods when prices are low. The Committee
has learned that once a marginally producing well is shut down,
that source of supply may be forever lost. To increase domestic
supply, the Committee determined that a tax credit will help
ensure that supply is not lost as a result of low market
prices.
EXPLANATION OF PROVISION
The provision would create a new, $3 per barrel credit for
qualified crude oil production and a $0.50 credit per 1,000
cubic feet of qualified natural gas production. The maximum
amount of production on which credit could be claimed is 1,095
barrels or barrel equivalents. In both cases, the credit is
available only for qualified production from a ``qualified
marginal well.'' The credit is not available to production
occurring if the reference price of oil exceeded $18 ($2.00 for
natural gas). The credit is reduced proportionately as for
reference prices between $15 and $18 ($1.67 and $2.00 for
natural gas). Reference prices are determined on a one-year
lookback basis.
The terms ``qualified crude oil production'' and
``qualified natural gas production'' mean domestic crude oil or
natural gas which is produced from a qualified marginal well.
Production from a marginal well that is not in compliance with
the applicable Federal pollution prevention, control and permit
requirements for any period of time is not considered qualified
crude oil production or qualified natural gas production. A
qualified marginal well is defined as (1) a well production
from which was marginal production for purposes of the Code
percentage depletion rules or (2) a well that during the
taxable year had (a) average daily production of not more than
25 barrel equivalents and (b) produced water at a rate of not
less than 95 percent of total well effluent.
The credit is treated as part of the general business
credit. The credit cannot be carried back to a taxable year
ending on or before the date of enactment of the provision.
EFFECTIVE DATE
The provision is effective for production in taxable years
beginning after the date of enactment.
B. Natural Gas Gathering Lines Treated as Seven-Year Property
(Sec. 502 of the Bill and Sec. 168 of the Code)
PRESENT LAW
The applicable recovery period for assets placed in service
under the Modified Accelerated Cost Recovery System is based on
the ``class life of the property.'' The class lives of assets
placed in service after 1986 are generally set forth in Revenue
Procedure 87-56.\31\ Revenue Procedure 87-56 includes two asset
classes that could describe natural gas gathering lines owned
by nonproducers of natural gas. Asset class 46.0, describing
pipeline transportation, provides a class life of 22 years and
a recovery period of 15 years. Asset class 13.2, describing
assets used in the exploration for and production of petroleum
and natural gas deposits, provides a class life of 14 years and
a depreciation recovery period of seven years. The uncertainty
regarding the appropriate recovery period of natural gas
gathering lines has resulted in litigation between taxpayers
and the IRS. The 10th Circuit Court of Appeals held that
natural gas gathering lines owned by nonproducers falls within
the scope of Asset class 13.2 (i.e., seven-year recovery
period).\32\ More recently, the Tax Court and the U.S. District
Court for the Eastern District of Michigan, Southern Division,
held that natural gas gathering lines owned by nonproducers
falls within the scope of Asset class 46.0 (i.e., 15-year
recovery period).\33\
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\31\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
\32\ Duke Energy v. Commissioner, 172 F.3d 1255 (10th Cir. 1999),
rev'g 109 T.C. 416 (1997). See also True v. United States, 97-2 U.S.
Tax Cas. (CCH) par. 50,946 (D. Wyo. 1997).
\33\ Clajon Gas Co., L.P. v. Commissioner, 119 T.C. 197 (2002) and
Saginaw Bay Pipeline Co. v. United States, 124 F. Supp. 2d 465 (E.D.
Mich. 2001).
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REASONS FOR CHANGE
The Committee believes the appropriate recovery period for
natural gas gathering lines is seven years.
EXPLANATION OF PROVISION
The provision establishes a statutory seven-year recovery
period and a class life of 10 years for natural gas gathering
lines. A natural gas gathering line is defined to include any
pipe, equipment, and appurtenance that is (1) determined to be
a gathering line by the Federal Energy Regulatory Commission,
or (2) used to deliver natural gas from the wellhead or a
common point to the point at which such gas first reaches (a) a
gas processing plant, (b) an interconnection with an interstate
transmission line, (c) an interconnection with an intrastate
transmission line, or (d) a direct interconnection with a local
distribution company, a gas storage facility, or an industrial
consumer.
EFFECTIVE DATE
The provision is effective for property placed in service
after the date of enactment. No inference is intended as to the
proper treatment of natural gas gathering lines placed in
service before the date of enactment.
C. Expensing of Capital Costs Incurred and Credit for Production in
Complying With Environmental Protection Agency Sulfur Regulations
(Secs. 503 and 504 of the Bill and new Secs. 179C and 45L of the Code)
PRESENT LAW
Taxpayers generally may recover the costs of investments in
refinery property through annual depreciation deductions.
Present law does not provide a credit for the production of
lowsulfur diesel fuel.
REASONS FOR CHANGE
The Committee believes it is important for all refiners to
meet applicable pollution control standards. However, the
Committee is concerned that the cost of complying with the
Highway Diesel Fuel Sulfur Control Requirement of the
Environmental Protection Agency may force some small refiners
out of business. To maintain this refining capacity and to
foster compliance with pollution control standards the
Committee believes it is appropriate to modify cost recovery
provisions for small refiners to reduce their capital costs of
complying with the Highway Diesel Fuel Sulfur Control
Requirement of the Environmental Protection Agency.
EXPLANATION OF PROVISION
The provision generally permits small business refiners to
claim an immediate deduction (i.e., expensing) for up to 75
percent of the qualified capital costs paid or incurred for the
purpose of complying with the Highway Diesel Fuel Sulfur
Control Requirements of the Environmental Protection Agency.
Qualified capital costs are those costs paid or incurred and
otherwise chargeable to the taxpayer's capital account that are
necessary for the refinery to come into compliance with the EPA
diesel fuel requirements.
In addition, the provision provides that a small business
refiner may claim a credit equal to five cents per gallon for
each gallon of low sulfur diesel fuel produced at a facility of
a small business refiner. The total production credit claimed
by the taxpayer generally is limited to 25 percent of the
qualified capital costs incurred with respect to expenditures
at the refinery during the period beginning after the date of
enactment and ending with the date that is one year after the
date on which the taxpayer must comply with applicable EPA
regulations. No deduction is allowed to the taxpayer for
expenses otherwise allowable as a deduction in an amount equal
to the amount of production credit claimed during the taxable
year.
For these purposes a small business refiner is a taxpayer
who within the business of refining petroleum products employs
not more than 1,500 employees directly in refining on business
days during a taxable year in which the deduction or production
credit is claimed and had an average daily refinery run (or
retained production) not exceeding 205,000 barrels per day \34\
for the year prior to enactment.
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\34\ The refining capacities of all persons that are part of a
related group are aggregated for purposes of this definition. In
addition, in any case where refinery through-put or retained production
of the refinery differs substantially from its average daily output of
refined product, the Committee intends that capacity be measured by
reference to the average daily output of refined product.
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For taxpayers with an average daily refinery run in the
year prior to enactment in excess of 155,000 and not greater
than 205,000 barrels per day, the provision limits otherwise
qualifying small business refiners to an immediate deduction
for a percentage of qualifying capital costs equal to 75
percent less the percentage points determined by the excess of
the average daily refinery runs over 155,000 barrels per day
divided by 50,000 barrels per day. In addition, for these
taxpayers, the limitation on the total production credit that
may be claimed also is reduced proportionately.
In the case of a qualifying small business refiner that is
owned by a cooperative, the cooperative is allowed to elect to
pass any production credits to patrons of the organization.
EFFECTIVE DATE
The provision is effective for expenses paid or incurred
after December 31, 2002.
D. Determination of Small Refiner Exception to Oil Depletion Deduction
(Sec. 505 of the Bill and Sec. 613A of the Code)
PRESENT LAW
Present law classifies oil and gas producers as independent
producers or integrated companies. The Code provides numerous
special tax rules for operations by independent producers. One
such rule allows independent producers to claim percentage
depletion deductions rather than deducting the costs of their
asset, a producing well, based on actual production from the
well (i.e., cost depletion).
A producer is an independent producer only if its refining
and retail operations are relatively small. For example, an
independent producer may not have refining operations the runs
from which exceed 50,000 barrels on any day in the taxable year
during which independent producer status is claimed.
REASONS FOR CHANGE
The Committee believes that the goal of present law, to
identify producers without significant refining capacity, can
be achieved while permitting more flexibility to refinery
operations.
EXPLANATION OF PROVISION
The provision increases the current 50,000-barrel-per-day
limitation to 60,000. In addition, the provision changes the
refinery limitation on claiming independent producer status
from a limit based on actual daily production to a limit based
on average daily production for the taxable year. Accordingly,
the average daily refinery run for the taxable year cannot
exceed 60,000 barrels. For this purpose, the taxpayer
calculates average daily refinery run by dividing total
production for the taxable year by the total number of days in
the taxable year.
EFFECTIVE DATE
The provision is effective for taxable years ending after
the date of enactment.
E. Extension of Suspension of Taxable Income Limit With Respect to
Marginal Production
(Sec. 506 of the Bill and Sec. 613A of the Code)
PRESENT LAW
In general
Depletion, like depreciation, is a form of capital cost
recovery. In both cases, the taxpayer is allowed a deduction in
recognition of the fact that an asset--in the case of depletion
for oil or gas interests, the mineral reserve itself--is being
expended in order to produce income. Certain costs incurred
prior to drilling an oil or gas property are recovered through
the depletion deduction. These include costs of acquiring the
lease or other interest in the property and geological and
geophysical costs (in advance of actual drilling).
Depletion is available to any person having an economic
interest in a producing property. An economic interest is
possessed in every case in which the taxpayer has acquired by
investment any interest in minerals in place, and secures, by
any form of legal relationship, income derived from the
extraction of the mineral, to which it must look for a return
of its capital.\35\ Thus, for example, both working interests
and royalty interests in an oil- or gasproducing property
constitute economic interests, thereby qualifying the interest
holders for depletion deductions with respect to the property.
A taxpayer who has no capital investment in the mineral deposit
does not possess an economic interest merely because it
possesses an economic or pecuniary advantage derived from
production through a contractual relation.
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\35\ Treas. Reg. sec. 1.611-1(b)(1).
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Cost depletion
Two methods of depletion are currently allowable under the
Internal Revenue Code (the ``Code''): (1) the cost depletion
method, and (2) the percentage depletion method (secs. 611-
613). Under the cost depletion method, the taxpayer deducts
that portion of the adjusted basis of the depletable property
which is equal to the ratio of units sold from that property
during the taxable year to the number of units remaining as of
the end of taxable year plus the number of units sold during
the taxable year. Thus, the amount recovered under cost
depletion may never exceed the taxpayer's basis in the
property.
Percentage depletion and related income limitations
The Code generally limits the percentage depletion method
for oil and gas properties to independent producers and royalty
owners.\36\ Generally, under the percentage depletion method 15
percent of the taxpayer's gross income from an oil- or gas-
producing property is allowed as a deduction in each taxable
year (sec. 613A(c)). The amount deducted generally may not
exceed 100 percent of the net income from that property in any
year (the ``net income limitation'') (sec. 613(a)). By
contrast, for any other mineral qualifying for the percentage
depletion deduction, such deduction may not exceed 50 percent
of the taxpayer's taxable income from the depletable property.
A similar 50-percent net income limitation applied to oil and
gas properties for taxable years beginning before 1991. Section
11522(a) of the Omnibus Budget Reconciliation Act of 1990
prospectively changed the net-income limitation threshold to
100 percent only for oil and gas properties, effective for
taxable years beginning after 1990. The 100-percent net-income
limitation for marginal wells has been suspended for taxable
years beginning after December 31, 1997, and before January 1,
2004.
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\36\ Sec. 613A.
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Additionally, the percentage depletion deduction for all
oil and gas properties may not exceed 65 percent of the
taxpayer's overall taxable income (determined before such
deduction and adjusted for certain loss carrybacks and trust
distributions) (sec. 613A(d)(1)).\37\ Because percentage
depletion, unlike cost depletion, is computed without regard to
the taxpayer's basis in the depletable property, cumulative
depletion deductions may be greater than the amount expended by
the taxpayer to acquire or develop the property.
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\37\ Amounts disallowed as a result of this rule may be carried
forward and deducted in subsequent taxable years, subject to the 65-
percent taxable income limitation for those years.
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A taxpayer is required to determine the depletion deduction
for each oil or gas property under both the percentage
depletion method (if the taxpayer is entitled to use this
method) and the cost depletion method. If the cost depletion
deduction is larger, the taxpayer must utilize that method for
the taxable year in question (sec. 613(a)).
Limitation of oil and gas percentage depletion to independent producers
and royalty owners
Generally, only independent producers and royalty owners
(as contrasted to integrated oil companies) are allowed to
claim percentage depletion. Percentage depletion for eligible
taxpayers is allowed only with respect to up to 1,000 barrels
of average daily production of domestic crude oil or an
equivalent amount of domestic natural gas (sec. 613A(c)). For
producers of both oil and natural gas, this limitation applies
on a combined basis.
In addition to the independent producer and royalty owner
exception, certain sales of natural gas under a fixed contract
in effect on February 1, 1975, and certain natural gas from
geopressured brine,\38\ are eligible for percentage depletion,
at rates of 22 percent and 10 percent, respectively. These
exceptions apply without regard to the 1,000-barrel-per-day
limitation and regardless of whether the producer is an
independent producer or an integrated oil company.
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\38\ This exception is limited to wells, the drilling of which
began between September 30, 1978, and January 1, 1984.
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REASONS FOR CHANGE
The Committee is concerned that, while current oil and gas
operations may be profitable, the highly volatile nature of oil
and gas prices could quickly create economic hardships in the
industry. Thus, to help minimize the adverse effects of future
price fluctuations, the Committee believes it is appropriate to
extend the suspension of the 100-percent net-income limitation
for marginal wells.
EXPLANATION OF PROVISION
The suspension of the 100-percent net income limitation for
marginal wells is extended through taxable years beginning
before January 1, 2007.
EFFECTIVE DATE
The provision is effective on date of enactment.
F. Amortization of Delay Rental Payments
(Sec. 507 of the Bill and new Sec. 199A of the Code)
PRESENT LAW
Present law generally requires costs associated with
inventory and property held for resale to be capitalized rather
than currently deducted as they are incurred. (sec. 263). Oil
and gas producers typically contract for mineral production in
exchange for royalty payments. If mineral production is
delayed, these contracts provide for ``delay rental payments''
as a condition of their extension. In proposed regulations
issued in 2000, the Treasury Department took the position that
the uniform capitalization rules of section 263A require delay
rental payments to be capitalized.\39\
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\39\ 65 Fed. Reg, 6090 (2000).
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REASONS FOR CHANGE
The Committee believes that substantial simplification for
taxpayers and significant gains in taxpayer compliance and
reductions in administrative cost can be contained by
establishing the simple rule that all delay rental payments may
be amortized over two years, including the basis of abandoned
property.
EXPLANATION OF PROVISION
The provision allows delay rental payments incurred in
connection with the development of oil or gas within the United
States to be amortized over two years. In the case of abandoned
property, remaining basis may no longer be recovered in the
year of abandonment of a property as all basis is recovered
over the two-year amortization period.
EFFECTIVE DATE
The provision applies to delay rental payments paid or
incurred in taxable years beginning after the date of
enactment. No inference is intended from the prospective
effective date of this proposal as to the proper treatment of
pre-effective date delay rental payments.
G. Amortization of Geological and Geophysical Expenditures
(Sec. 508 of the Bill and new Sec. 199 of the Code)
PRESENT LAW
In general
Geological and geophysical expenditures are costs incurred
by a taxpayer for the purpose of obtaining and accumulating
data that will serve as the basis for the acquisition and
retention of mineral properties by taxpayers exploring for
minerals. A key issue with respect to the tax treatment of such
expenditures is whether or not they are capital in nature.
Capital expenditures are not currently deductible as ordinary
and necessary business expenses, but are allocated to the cost
of the property.\40\
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\40\Under section 263, capital expenditures are defined generally
as any amount paid for new buildings or for permanent improvements or
betterments made to increase the value of any property or estate.
Treasury regulations define capital expenditures to include amounts
paid or incurred (1) to add to the value, or substantially prolong the
useful life, of property owned by the taxpayer or (2) to adapt property
to a new or different use. Treas. Reg. sec. 1.263(a)-1(b).
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Courts have held that geological and geophysical costs are
capital, and therefore are allocable to the cost of the
property \41\ acquired or retained.\42\ The costs attributable
to such exploration are allocable to the cost of the property
acquired or retained. As described further below, IRS
administrative rulings have provided further guidance regarding
the definition and proper tax treatment of geological and
geophysical costs.
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\41\ ``Property'' means an interest in a property as defined in
section 614 of the Code, and includes an economic interest in a tract
or parcel of land notwithstanding that a mineral deposit has not been
established or proved at the time the costs are incurred.
\42\ See, e.g., Schermerhorn Oil Corporation v. Commissioner, 46
B.T.A. 151 (1942). By contrast, section 617 of the Code permits a
taxpayer to elect to deduct certain expenditures incurred for the
purpose of ascertaining the existence, location, extent, or quality of
any deposit of ore or other mineral (but not oil and gas). These
deductions are subject to recapture if the mine with respect to which
the expenditures were incurred reaches the producing stage.
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Revenue Ruling 77-188
In Revenue Ruling 77-188 \43\ (hereinafter referred to as
the ``1977 ruling''), the IRS provided guidance regarding the
proper tax treatment of geological and geophysical costs. The
ruling describes a typical geological and geophysical
exploration program as containing the following elements:
---------------------------------------------------------------------------
\43\ 1977-1 C.B. 76.
---------------------------------------------------------------------------
It is customary in the search for mineral
producing properties for a taxpayer to conduct an exploration
program in one or more identifiable project areas. Each project
area encompasses a territory that the taxpayer determines can
be explored advantageously in a single integrated operation.
This determination is made after analyzing certain variables
such as (1) the size and topography of the project area to be
explored, (2) the existing information available with respect
to the project area and nearby areas, and (3) the quantity of
equipment, the number of personnel, and the amount of money
available to conduct a reasonable exploration program over the
project area.
The taxpayer selects a specific project area from
which geological and geophysical data are desired and conducts
a reconnaissance-type survey utilizing various geological and
geophysical exploration techniques. These techniques are
designed to yield data that will afford a basis for identifying
specific geological features with sufficient mineral potential
to merit further exploration.
Each separable, noncontiguous portion of the
original project area in which such a specific geological
feature is identified is a separate ``area of interest.'' The
original project area is subdivided into as many small projects
as there are areas of interest located and identified within
the original project area. If the circumstances permit a
detailed exploratory survey to be conducted without an initial
reconnaissance-type survey, the project area and the area of
interest will be coextensive.
The taxpayer seeks to further define the
geological features identified by the prior reconnaissance-type
surveys by additional, more detailed, exploratory surveys
conducted with respect to each area of interest. For this
purpose, the taxpayer engages in more intensive geological and
geophysical exploration employing methods that are designed to
yield sufficiently accurate sub-surface data to afford a basis
for a decision to acquire or retain properties within or
adjacent to a particular area of interest or to abandon the
entire area of interest as unworthy of development by mine or
well.
The 1977 ruling provides that if, on the basis of data
obtained from the preliminary geological and geophysical
exploration operations, only one area of interest is located
and identified within the original project area, then the
entire expenditure for those exploratory operations is to be
allocated to that one area of interest and thus capitalized
into the depletable basis of that area of interest. On the
other hand, if two or more areas of interest are located and
identified within the original project area, the entire
expenditure for the exploratory operations is to be allocated
equally among the various areas of interest.
If no areas of interest are located and identified by the
taxpayer within the original project area, then the 1977 ruling
states that the entire amount of the geological and geophysical
costs related to the exploration is deductible as a loss under
section 165. The loss is claimed in the taxable year in which
that particular project area is abandoned as a potential source
of mineral production.
A taxpayer may acquire or retain a property within or
adjacent to an area of interest, based on data obtained from a
detailed survey that does not relate exclusively to any
discrete property within a particular area of interest.
Generally, under the 1977 ruling, the taxpayer allocates the
entire amount of geological and geophysical costs to the
acquired or retained property as a capital cost under section
263(a). If more than one property is acquired, it is proper to
determine the amount of the geological and geophysical costs
allocable to each such property by allocating the entire amount
of the costs among the properties on the basis of comparative
acreage.
If, however, no property is acquired or retained within or
adjacent to that area of interest, the entire amount of the
geological and geophysical costs allocable to the area of
interest is deductible as a loss under section 165 for the
taxable year in which such area of interest is abandoned as a
potential source of mineral production.
In 1983, the IRS issued Revenue Ruling 83-105,\44\ which
elaborates on the positions set forth in the 1977 ruling by
setting forth seven factual situations and applying the
principles of the 1977 ruling to those situations. In addition,
Revenue Ruling 83-105 explains what constitutes ``abandonment
as a potential source of mineral production.''
---------------------------------------------------------------------------
\44\1983-2 C.B. 51.
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REASONS FOR CHANGE
The Committee believes that substantial simplification for
taxpayers, significant gains in taxpayer compliance, and
reductions in administrative cost can be obtained by
establishing the simple rule that all geological and
geophysical costs may be amortized over two years, including
the basis of abandoned property.
The Committee recognizes that, on average, a two-year
amortization period accelerates recovery of geological and
geophysical expenses. The Committee believes that more rapid
recovery of such expenses will foster increased exploration for
new sources of supply.
EXPLANATION OF PROVISION
The provision allows geological and geophysical costs
incurred in connection with oil and gas exploration in the
United States to be amortized over two years. In the case of
abandoned property, remaining basis may no longer be recovered
in the year of abandonment of a property as all basis is
recovered over the two-year amortization period.
EFFECTIVE DATE
The provision is effective for geological and geophysical
costs paid or incurred in taxable years beginning after the
date of enactment. No inference is intended from the
prospective effective date of this proposal as to the proper
treatment of pre-effective date geological and geophysical
costs.
H. Extension and Modification of Credit for Producing Fuel From a Non-
Conventional Source
(Sec. 509 of the Bill and new Sec. 45J of the Code)
PRESENT LAW
Certain fuels produced from ``non-conventional sources''
and sold to unrelated parties are eligible for an income tax
credit equal to $3 (generally adjusted for inflation) \45\ per
barrel or BTU oil barrel equivalent (sec. 29). Qualified fuels
must be produced within the United States.
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\45\ The value of the section 29 credit for production in 2002 was
$6.35 per barrel of oil equivalent.
---------------------------------------------------------------------------
Qualified fuels include:
(5) Oil produced from shale and tar sands; as
produced from geopressured brine, Devonian shale, coal
seams, tight formations (``tight sands''), or biomass;
and
(6) Liquid, gaseous, or solid synthetic fuels
produced from coal (including lignite).
In general, the credit is available only with respect to
fuels produced from wells drilled or facilities placed in
service after December 31, 1979, and before January 1, 1993. An
exception extends the January 1, 1993 expiration date for
facilities producing gas from biomass and synthetic fuel from
coal if the facility producing the fuel is placed in service
before July 1, 1998, pursuant to a binding contract entered
into before January 1, 1997.
The credit may be claimed for qualified fuels produced and
sold before January 1, 2003 (in the case of non-conventional
sources subject to the January 1, 1993 expiration date) or
January 1, 2008 (in the case of biomass gas and synthetic fuel
facilities eligible for the extension period).
REASONS FOR CHANGE
The Committee concludes that the section 29 credit, on the
margins, has increased production of oil and natural gas from
domestic sources and that in the absence of these non-
conventional sources the demand for imported fuels may have
increased. To increase domestic sources of supply, the
Committee believes it is appropriate to extend the section 29
credit to help foster new domestic fuel sources. The Committee
is also concerned that, without the implicit subsidy of the
production credit due to the higher extraction costs of certain
``viscous oil,'' entrepreneurs would not otherwise exploit this
domestic energy source. Therefore, the Committee believes it is
appropriate to extend the credit for viscous oil produced from
new wells or facilities.
The Committee also recognizes that the credit for
production of synthetic fuels from coal has been interpreted to
include fuels that are merely chemical changes to coal that do
not necessarily enhance the value or environmental performance
of the feedstock coal. Therefore, the Committee believes it is
appropriate to extend the section 29 credit only to fuels
produced from coal that achieve significant environmental and
value-added improvements. Methane in coal mines is a serious
safety hazard. In many coal mining operations, the cost of
collection exceeds the value of the recovered methane so the
methane is vented directly into the atmosphere. Methane is an
extremely potent and long-lived greenhouse gas. Therefore, the
Committee seeks to encourage capture of methane from coal mines
in particular.
The Committee recognizes that the world price of oil as the
nation enters the 21st century has not risen to levels forecast
in 1978. Therefore, the Committee believes it is appropriate to
restart the section 29 credit at a level lower than that
currently available to existing production.
The Committee believes it is important to study the
efficacy of the section 29 credit in the case of methane
recovered from coal seams or so-called ``coal beds.''
EXPLANATION OF PROVISION
The provision extends the placed in service date for
certain facilities that would otherwise qualify for the section
29 credit under present law and modifies the amount of the
credit to equal $3.00 unindexed for inflation. The provision
also expands the class of facilities that are eligible for the
credit. In addition, under the provision, the taxpayer would
not be able to claim any credit for production in excess of a
daily average of 200,000 cubic feet of gas (or barrel of oil
equivalent) from a qualifying well or facility.\46\
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\46\ The daily average would be computed as total production
divided by the total number of days the well or facility was in
production during the year.
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Clarification of definition of when a facility is placed in service
The provision clarifies the definition of when a landfill
gas facility is placed in service, both for facilities
originally placed in service on or before the date of enactment
and for facilities placed in service after the date of
enactment. In general, a landfill gas facility includes wells,
pipes, and the related components to collect landfill gas
(i.e., the gas produced from biomass and derived from the bio-
degradation on municipal solid waste). The production of
landfill gas attributable to wells, pipes, and related
components placed in service after the date of enactment is
considered produced from a facility placed in service after the
date of enactment. Production of landfill gas attributable to
those wells, pipes, and related components placed in service on
or before the date of enactment is considered produced from a
facility placed in service on or before the date of enactment.
That is, all of the landfill gas produced from a landfill is
not considered to be from a facility placed in service on the
date on which the first set of wells, pipes, and related
components drew gas from the landfill. Rather, as a landfill
expands and additional integrated sets of wells, pipes, and
related components are installed to draw off landfill gas, the
landfill gas drawn from each additional integrated set of
wells, pipes, and related components is to be considered to be
produced from a facility placed in service on the date each
additional integrated set of wells, pipes, and related
components is placed in service. Thus, a single landfill may
have several ``facilities'' eligible for the section 29 credit,
each placed in service on a different date.
Extension for certain non-conventional fuels
The provision permits taxpayers to claim the section 29
credit for production of certain non-conventional fuels
produced at wells placed in service after the date of enactment
and before January 1, 2007.\47\ Under the provision, qualifying
fuels are oil from shale or tar sands, and gas from
geopressured brine, Devonian shale, coal seams, a tight
formation, or biomass. The value of the credit is re-based to
$3.00 and the amount is not indexed for inflation. Taxpayers
may claim the credit for production from the well for each of
the first three years of production from the qualifying well.
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\47\ The provision does not apply to liquid, gaseous, or solid
synthetic fuels produced from coal as described under present law
section 29(c)(1)(C), but does provide credit for a new category,
refined coal, described below.
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Expansion for fuels from agricultural and animal waste
The provision adds facilities producing liquid, gaseous, or
solid fuels, from agricultural and animal waste placed in
service after the date of enactment and before January 1, 2007,
to the list of qualified facilities for purposes of the non-
conventional fuel credit. The amount of the credit is equal to
$3.00 (unindexed) per barrel or Btu oil barrel equivalent, for
three years of production commencing on the date the facility
is placed in service. Agricultural and animal waste includes
by-products, packaging, and any materials associated with
processing, feeding, selling, transporting, or disposal of
agricultural or animal products or wastes.
Expansion for ``viscous oil''
The provision expands section 29 to permit taxpayers to
claim the section 29 credit for production of certain viscous
oil produced at wells placed in service after the date of
enactment and before January 1, 2007. The provision defines
``viscous oil'' as domestic crude oil produced from any
property if the crude oil has a weighted average gravity of 22
degrees API or less (corrected to 60 degrees Fahrenheit). The
value of the credit for viscous oil also is $3.00 per barrel.
Taxpayers may claim the credit for production from the well for
each of the first three years of production from the time the
well is placed in service. The provision provides that
qualifying sales to related parties for consumption not in the
immediate vicinity of the wellhead qualify for the credit.
Expansion for ``refined coal''
The provision also expands section 29 to include certain
``refined coal'' as a qualified non-conventional fuel.
``Refined coal'' is a qualifying liquid, gaseous, or solid
synthetic fuel produced from coal (including lignite) from
facilities placed in service after date of enactment and before
January 1, 2007. Refined coal also would include a qualifying
fuel derived from high carbon fly ash produced from facilities
placed in service after the date of enactment and before
January 1, 2007.\48\ A qualifying fuel is a fuel that when
burned emits 20 percent less nitrogen oxide and either sulfur
dioxide or mercury than the burning of feedstock coal or
comparable coal predominantly available in the marketplace as
of January 1, 2003, and if the fuel sells at prices at least 50
percent greater than the prices of the feedstock coal or
comparable coal. However, no fuel produced at a qualifying
advanced clean coal facility (as defined elsewhere in the
committee bill) would be a qualifying fuel. The amount of
credit for refined coal also is $3.00 per barrel equivalent.
Taxpayers may claim the credit for fuel produced during the
five-year period beginning on the date the facility is placed
in service.
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\48\ No inference is intended that high-carbon fly ash qualified
previous to the date of enactment.
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Expansion for coalmine gas
In addition, the provision permits taxpayers to claim
credit for coalmine gas captured by the taxpayer and utilized
as a fuel source or sold by or on behalf of the taxpayer to an
unrelated person. The term ``coalmine gas'' means any methane
gas which is being liberated during qualified coal mining
operations or as a result of past qualified coal mining
operations, or which is captured 10 years in advance of
qualified coal mining operations as part of specific plan to
mine a coal deposit. In the case of coalmine gas that is
captured in advance of qualified coal mining operations, the
credit is allowed only after the date the coal extraction
occurs in the immediate area where the coalmine gas was
removed. The value of the credit for coalmine methane also is
$3.00 per Btu oil barrel equivalent (51.7 cents per million Btu
of heat value in the gas) for gas captured and utilized or
sold. Taxpayers may claim the credit for gas captured and
utilized or sold after the date of enactment and before January
1, 2007.
Extension of credit for certain existing facilities
The provision extends the present-law credit through
December 31, 2005 for production from existing facilities
producing coke, coke gas, or natural gas and by-products
produced by coal gasification from lignite. The provision
provides that the credit amount will be $3.00 per Btu oil
barrel equivalent for production from such facilities after
December 31, 2002.
Study of coal bed methane gas
Lastly, the provision directs the Secretary of the Treasury
to undertake a study of the effect section 29 has had on the
production of coal bed methane. The study should estimate the
total amount of credit claimed annually and in aggregate
related to the production of coal bed methane since the
enactment of section 29. The study should report the annual
value of the credit allowable for coal bed methane compared to
the average annual wellhead price of natural gas (per thousand
cubic feet of natural gas). The study should estimate the
incremental increase in production of coal bed methane that has
resulted from the enactment of section 29. The study should
estimate the cost to the Federal government, in terms of the
net tax benefits claimed, per thousand cubic feet of
incremental coal bed methane produced annually and in aggregate
since the enactment of section 29.
EFFECTIVE DATE
The provisions apply to fuels sold from qualifying wells
and facilities after the date of enactment.
I. Natural Gas Distribution Lines Treated as 15-Year Property
(Sec. 510 of the Bill and Sec. 168 of the Code)
PRESENT LAW
The applicable recovery period for assets placed in service
under the Modified Accelerated Cost Recovery System is based on
the ``class life of the property.'' The class lives of assets
placed in service after 1986 are generally set forth in Revenue
Procedure 87-56.\49\ Natural gas distribution pipelines are
assigned a 20-year recovery period and a class life of 35
years.
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\49\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
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REASONS FOR CHANGE
The Committee recognizes the importance of modernizing our
aging energy infrastructure to meet the demands of the twenty-
first century, and the Committee also recognizes that both
short-term and long-term solutions are required to meet this
challenge. The Committee understands that investment in our
energy infrastructure has not kept pace with the nation's
needs. In light of this, the Committee believes it is
appropriate to reduce the recovery period for investment in
certain energy infrastructure property to encourage investment
in such property.
EXPLANATION OF PROVISION
The provision establishes a statutory 15-year recovery
period and a class life of 20 years for natural gas
distribution lines.
EFFECTIVE DATE
The provision is effective for property placed in service
after the date of enactment.
J. Credit for Alaska Natural Gas
(Sec. 511 of the Bill and new Sec. 45M of the Code)
PRESENT LAW
Present law does not provide a credit for conventional
production of natural gas or delivery of fuels to a pipeline.
However, certain fuels produced from ``non-conventional
sources'' and sold to unrelated parties are eligible for an
income tax credit equal to $3 (generally adjusted for
inflation) per barrel or Btu oil barrel equivalent (sec. 29).
Qualified fuels must be produced within the United States.
Qualified fuels include:
(1) gas produced from geopressured brine, Devonian
shale, coal seams, tight formations (``tight sands''),
or biomass; and
(2) liquid, gaseous, or solid synthetic fuels
produced from coal (including lignite).
In general, the credit is available only with respect to
fuels produced from wells drilled or facilities placed in
service after December 31, 1979, and before January 1, 1993. An
exception extends the January 1, 1993 expiration date for
facilities producing gas from biomass and synthetic fuel from
coal if the facility producing the fuel is placed in service
before July 1, 1998, pursuant to a binding contract entered
into before January 1, 1997.
The credit may be claimed for qualified fuels produced and
sold before January 1, 2003 (in the case of non-conventional
sources subject to the January 1, 1993 expiration date) or
January 1, 2008 (in the case of biomass gas and synthetic fuel
facilities eligible for the extension period).
REASONS FOR CHANGE
The Committee recognizes the natural gas in Alaska is an
important natural resource that can expand domestic energy
supplies. However, due to the volatility of energy prices, the
private sector may be unwilling to make the substantial
investment in a pipeline to bring some of the natural gas to
the lower 48 States. The Committee believes it is important to
make this natural gas resource available to the lower 48 States
and to provide an economic stimulus to the Alaskan economy. The
Committee believes that a credit against income taxes for
delivery of natural gas to a transmission pipeline will provide
a minimum return and the reduced volatility necessary to induce
the private sector to invest in the pipeline to bring Alaska
natural gas to the rest of the U.S. market.
Explanation of Provision
The provision provides a credit per million British thermal
units (Btu) of natural gas for Alaska natural gas entering a
pipelines \50\ during the 15-year period beginning the later of
January 1, 2010 or the initial date for the interstate
transportation of Alaska natural gas. Taxpayers may claim the
credit against both the regular and minimum tax.
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\50\ Natural gas entering a gas processing facility is not
considered to have entered a pipeline. Rather, the credit applies only
to pipeline quality gas at the time of entry into the pipeline.
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The credit amount for any month is a maximum of 52 cents
per million Btu of natural gas. The credit phases out as the
reference price of Alaska natural gas rises above 83 cents per
million Btu, at a rate of one cent of credit lost per each cent
by which the reference price of Alaska natural gas exceeds 83
cents per million Btu. The credit is not available if the
reference price of Alaska natural gas rises above $1.35 per
million Btu. The 52-cent and 83-cent figures are indexed for
inflation after 2002, with the first adjustment for calendar
year 2004.\51\
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\51\ In practice, the $1.35 figure also is indexed for inflation,
as $1.35 is the sum of the 52-cent credit and the 83-cent price.
The bill provides that the Secretary can compute the inflation
adjustment factor for a calendar year in the fourth quarter of the
preceding year. For example, the adjustment for 2004 is calculated as
the 2003 GDP deflator over the 2002 GDP deflator, where the 2002 GDP
deflator is the value of the GDP deflator on June 30, 2002 (as
determined by the latest available revision from the Department of
Commerce prior to October 1, 2002). Likewise, the 2003 deflator is the
value of the GDP deflator on June 30, 2003.
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The bill provides that the Secretary of the Treasury
calculate the reference price of Alaska natural gas as the
average price of natural gas delivered in the lower 48 States
less certain transportation costs and gas processing costs. The
Committee intends that an appropriate measure of the price of
natural gas delivered to the lower 48 States be the monthly
Chicago city gate price for natural gas as reliably reported in
one or more trade publications or as reported by the Secretary
of Energy. Because qualifying natural gas is likely to be
transported across both the United States and Canada, the
Committee intends that transportation costs be measured as such
costs as determined (pursuant to approved tariffs) by the
appropriate national regulatory body. At the present time, the
appropriate national regulatory body for transportation of
natural gas in the United States is the Federal Energy
Regulatory Commission. At the present time, the Committee
understands the appropriate national regulatory body for
transportation of natural gas in Canada is the Canadian
National Energy Board. The Committee further intends that gas
processing costs include all rates and charges of whatever kind
for firm service assessed with respect to the processing of
Alaska natural gas as calculated pursuant to approved tariffs
under the Natural Gas Act (15 U.S.C. 717), if such costs are
regulated by the Federal government, or as calculated under the
principles of sec. 482 of the Code, if such costs are not
regulated by the Federal government.
Alaska natural gas is any gas derived from an area of the
State of Alaska lying north of 64 degrees North latitude, but
not including the Alaska National Wildlife Refuge.
The credit is part of the general business credit.
EFFECTIVE DATE
The proposal is effective on the date of enactment.
K. Certain Alaska Pipeline Systems Treated as Seven-Year Property
(Sec. 512 of the Bill and Sec. 168 of the Code)
PRESENT LAW
The applicable recovery period for assets placed in service
under the Modified Accelerated Cost Recovery System is based on
the ``class life of the property.'' The class lives of assets
placed in service after 1986 are generally set forth in Revenue
Procedure 87-56.\52\ Assets used in the private, commercial,
and contract carrying of petroleum, gas and other products by
means of pipes and conveyors are assigned a 15-year recovery
period and a class life of 22 years.
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\52\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
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REASONS FOR CHANGE
The Committee recognizes that, on our present course, the
nation will be ever more reliant on foreign governments, that
do not always have America's interest at heart, for oil and
natural gas. The Committee recognizes that even with
conservation efforts and alternative sources of energy that our
nation's long-term security depends on reducing our reliance on
foreign energy sources. In light of this, the Committee
believes it is appropriate to reduce the recovery period, and
thus the cost of capital, for investment in natural gas
pipeline systems in Alaska that meet certain requirements.
EXPLANATION OF PROVISION
The provision establishes a statutory seven-year recovery
period and a class life of 10 years for any natural gas
pipeline system, located in Alaska, that has a capacity greater
than five hundred billion Btu of natural gas per day and is
placed in service after 2014. For purposes of the proposal, a
natural gas pipeline system is defined as any system used in
the carrying of natural gas by means of pipes, including pipe,
trunk lines, related equipment, and appurtenances. It does not
include any gas treatment plant related to such pipeline.
EFFECTIVE DATE
The proposal is effective on the date of enactment.
L. Exempt Certain Prepayments for Natural Gas From Tax-Exempt Bond
Arbitrage Rules
(Sec. 513 of the Bill and Sec. 148 of the Code)
PRESENT LAW
Interest on bonds issued by States or local governments to
finance activities carried out or paid for by those entities
generally is exempt from income tax (sec. 103). Restrictions
are imposed on the ability of States or local governments to
invest the proceeds of these bonds for profit (the ``arbitrage
restrictions''). One such restriction limits the use of bond
proceeds to acquire ``investment type property.'' A prepayment
for property or services may give rise to investment-type
property. A prepayment can produce prohibited arbitrage profits
when the discount received for prepaying the costs exceeds the
yield on the tax-exempt bonds. In general, prohibited
prepayments include all prepayments that are not customary in
an industry by both beneficiaries of tax-exempt bonds and other
persons using taxable financing for the same transaction.
On April 17, 2002, the Department of the Treasury issued
proposed regulations regarding arbitrage and private activity
restrictions applicable to tax-exempt bonds issued by State and
local governments. The proposed regulations add an exception to
the definition of investment type property for certain natural
gas prepayments that are made by or for one or more utilities
that are owned by a governmental person.\53\ The exception
applies if at least 95 percent of the natural gas purchased
with the prepayment is to be (1) consumed by retail customers
in the service area of a municipal gas utility, or (2) used to
produce electricity that will be furnished to retail customers
that a municipal electric utility is obligated to serve under
State or Federal law. An obligation that arises solely because
of a contract is not an obligation to serve under State or
Federal law. For this purpose, the service area of a municipal
gas utility is defined as (1) any area throughout which the
municipal utility provided (at all times during the five-year
period ending on the issue date) gas transmission or
distribution service, and any area that is contiguous to such
an area, or (2) any area where the municipal utility is
obligated under State or Federal law to provide gas
distribution services as provided in such law. Issuers may
apply principles similar to the rules governing private use to
cure a violation of the 95 percent requirement.\54\
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\53\ Prop. Treas. Reg. sec. 1.148-1(e)(2)(ii).
\54\ See Treas. Reg. 1.141-12.
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A prepayment will not fail to meet the requirements for
prepaid gas contracts by reason of any commodity swap contract
that may be entered into between the issuer and an unrelated
party (other than the gas supplier), or between the gas
supplier and an unrelated party (other than the issuer), so
long as each swap contract is an independent contract. A swap
contract is an independent contract if the obligation of each
party to perform under the swap contract is not dependent on
performance by any person (other than the other party to the
swap contract) under another contract (for example, a gas
contract or another swap contract). A natural gas commodity
swap contract will not fail to be an independent contract
solely because the swap contract may terminate in the event of
a failure of a gas supplier to deliver gas for which the swap
contract is a hedge.\55\ The Commissioner may, by published
guidance, set forth additional circumstances in which a
prepayment does not give rise to investment type property.
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\55\ Internal Revenue Service, Clarification of Proposed
Regulations Relating to Tax-Exempt Bonds Issued by State or Local
Governments, Notice 2002-52, 2002-30 IRB 1 (July 03, 2002).
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REASONS FOR CHANGE
The Committee determined that it was appropriate to
complement the proposed Treasury regulations with a safe harbor
that provides certainty on the date of issuance that
prepayments for natural gas within the safe harbor will not
violate the arbitrage rules. This provision will ensure
adequate supplies of natural gas at predictable prices for
natural gas utility customers without sacrificing to a great
degree the appropriate present-law limitations regarding tax-
exempt bond issuance for the purchase of investment property.
The Committee believes that this proposal strikes an
appropriate balance between these two competing policies. The
creation of this safe harbor is not intended to limit the
Secretary's regulatory authority to identify other situations
in which prepayments do not give rise to investment type
property.
EXPLANATION OF PROVISION
In general
The provision creates a safe harbor exception to the
general rule that tax-exempt bondfinanced prepayments violate
the arbitrage restrictions. The term ``investment type
property'' does not include a prepayment under a qualified
natural gas supply contract. The provision also provides that
such prepayments are not treated as private loans for purposes
of the private business tests.
Under the provision, a prepayment financed with tax-exempt
bond proceeds for the purpose of obtaining a supply of natural
gas for service area customers of a governmental utility is not
treated as the acquisition of investment-type property. A
contract is a qualified natural gas supply contract if the
volume of natural gas secured for any year covered by the
prepayment does not exceed the sum of (1) the average annual
natural gas purchased (other than for resale) by customers of
the utility within the service area of the utility (``retail
natural gas consumption'') during the testing period, and (2)
the amount of natural gas that is needed to fuel transportation
of the natural gas to the governmental utility. The testing
period is the 5-calendar-year period immediately preceding the
calendar year in which the bonds are issued. A retail customer
is one who does not purchase natural gas for resale. Natural
gas used to generate electricity by a governmental utility is
counted as retail natural gas consumption if the electricity
was sold to retail customers within the service area of the
governmental electric utility.
With respect to qualified natural gas supply contracts
entered into by joint action agencies acting for or on behalf
of one or more governmental utilities, the requirements of the
safe harbor are tested at the utility level. A joint action
agency shall be treated as the agent of the utility when
selling directly to a retail customer within that utility's
service area.
Adjustments
The volume of gas permitted by the general rule is reduced
by natural gas otherwise available on the date of issuance.
Specifically, the amount of natural gas permitted to be
acquired under a qualified natural gas supply contract for any
period is to be reduced by the applicable share of natural gas
held by the utility on the date of issuance of the bonds and
natural gas that the utility has a right to acquire for the
prepayment period (determined as of the date of issuance).\56\
For purposes of the preceding sentence, applicable share means,
with respect to any period, the natural gas allocable to such
period if the gas were allocated ratably over the period to
which the prepayment relates.
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\56\ For example, natural gas otherwise available on the date the
bonds are issued includes supply covered by other prepayment contracts
for the period, and supply held in storage or subject to an option to
purchase by such utility that is available for retail natural gas
consumption during the period covered by the prepayment. It does not
include supply that could be purchased on the open market during the
prepayment period.
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For purposes of the safe harbor, if after the close of the
testing period and before the issue date of the bonds (1) the
governmental utility enters into a contract to supply natural
gas (other than for resale) for use by a business at a property
within the service area of such utility and (2) the gas
consumption for such property was not included in the testing
period or the ratable amount of natural gas to be supplied
under the contract is significantly greater than the ratable
amount of gas supplied to such property during the testing
period, then the amount of gas permitted to be purchased may be
increased to accommodate the contract.
The average annual retail natural gas consumption
calculation for purposes of the safe harbor, however, is not to
exceed the annual amount of natural gas reasonably expected to
be purchased (other than for resale) by persons who are located
within the service area of such utility and who, as of the date
of issuance of the issue, are customers of such utility.
Intentional acts
The safe harbor does not apply if the utility engages in
intentional acts to render the volume of natural gas covered by
the prepayment to be in excess of that needed for (1) retail
natural gas consumption, and (2) the amount of natural gas that
is needed to fuel transportation of the natural gas to the
governmental utility. Sales to dispose of excess gas outside
the service area that are necessitated by circumstances beyond
the control of the utility, such as weather conditions, are not
considered intentional acts to render the prepaid gas supply in
excess of the utility's needs.
Definition of service area
Service area is defined as (1) any area throughout which
the governmental utility provided (at all times during the
testing period) in the case of a natural gas utility, natural
gas transmission or distribution service, or in the case of an
electric utility, electric distribution service; (2) limited
areas contiguous to such areas, and (3) any area recognized as
the service area of the governmental utility under State or
Federal law. Contiguous areas are limited to any area within a
county contiguous to the area described in (1) in which retail
customers of the utility are located if such area is not also
served by another utility providing the same service.
Ruling request for higher prepayment amounts
Upon written request, the Secretary may allow an issuer to
prepay for an amount of gas greater than that allowed by the
safe harbor based on objective evidence of growth in gas
consumption or population that demonstrates that the amount
permitted by the exception is insufficient.
EFFECTIVE DATE
The provision is effective for obligations issued after the
date of enactment.
TITLE VI--ELECTRIC UTILITY RESTRUCTURING PROVISIONS
A. Modifications to Special Rules for Nuclear Decommissioning Costs
(Sec. 601 of the Bill and Sec. 468A of the Code)
PRESENT LAW
Overview
Special rules dealing with nuclear decommissioning reserve
funds were adopted by Congress in the Deficit Reduction Act of
1984 (``1984 Act''), when tax issues regarding the time value
of money were addressed generally. Under general tax accounting
rules, a deduction for accrual basis taxpayers is deferred
until there is economic performance for the item for which the
deduction is claimed. However, the 1984 Act contains an
exception under which a taxpayer responsible for nuclear
powerplant decommissioning may elect to deduct contributions
made to a qualified nuclear decommissioning fund for future
decommissioning costs. Taxpayers who do not elect this
provision are subject to general tax accounting rules.
Qualified nuclear decommissioning fund
A qualified nuclear decommissioning fund (a ``qualified
fund'') is a segregated fund established by a taxpayer that is
used exclusively for the payment of decommissioning costs,
taxes on fund income, management costs of the fund, and for
making investments. The income of the fund is taxed at a
reduced rate of 20 percent for taxable years beginning after
December 31, 1995.\57\
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\57\ As originally enacted in 1984, a qualified fund paid tax on
its earnings at the top corporate rate and, as a result, there was no
present-value tax benefit of making deductible contributions to a
qualified fund. Also, as originally enacted, the funds in the trust
could be invested only in certain low risk investments. Subsequent
amendments to the provision have reduced the rate of tax on a qualified
fund to 20 percent and removed the restrictions on the types of
permitted investments that a qualified fund can make.
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Contributions to a qualified fund are deductible in the
year made to the extent that these amounts were collected as
part of the cost of service to ratepayers (the ``cost of
service requirement'').\58\ Funds withdrawn by the taxpayer to
pay for decommissioning costs are included in the taxpayer's
income, but the taxpayer also is entitled to a deduction for
decommissioning costs as economic performance for such costs
occurs.
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\58\ Taxpayers are required to include in gross income customer
charges for decommissioning costs (sec. 88).
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Accumulations in a qualified fund are limited to the amount
required to fund decommissioning costs of a nuclear powerplant
for the period during which the qualified fund is in existence
(generally post-1984 decommissioning costs of a nuclear
powerplant). For this purpose, decommissioning costs are
considered to accrue ratably over a nuclear powerplant's
estimated useful life. In order to prevent accumulations of
funds over the remaining life of a nuclear powerplant in excess
of those required to pay future decommissioning costs of such
nuclear powerplant and to ensure that contributions to a
qualified fund are not deducted more rapidly than level funding
(taking into account an appropriate discount rate), taxpayers
must obtain a ruling from the IRS to establish the maximum
annual contribution that may be made to a qualified fund (the
``ruling amount''). In certain instances (e.g., change in
estimates), a taxpayer is required to obtain a new ruling
amount to reflect updated information.
A qualified fund may be transferred in connection with the
sale, exchange or other transfer of the nuclear powerplant to
which it relates. If the transferee is a regulated public
utility and meets certain other requirements, the transfer will
be treated as a nontaxable transaction. No gain or loss will be
recognized on the transfer of the qualified fund and the
transferee will take the transferor's basis in the fund.\59\
The transferee is required to obtain a new ruling amount from
the IRS or accept a discretionary determination by the IRS.\60\
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\59\ Treas. reg. sec. 1.468A-6.
\60\ Treas. reg. sec. 1.468A-6(f).
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Nonqualified nuclear decommissioning funds
Federal and State regulators may require utilities to set
aside funds for nuclear decommissioning costs in excess of the
amount allowed as a deductible contribution to a qualified
fund. In addition, taxpayers may have set aside funds prior to
the effective date of the qualified fund rules.\61\ The
treatment of amounts set aside for decommissioning costs prior
to 1984 varies. Some taxpayers may have received no tax benefit
while others may have deducted such amounts or excluded such
amounts from income. Since 1984, taxpayers have been required
to include in gross income customer charges for decommissioning
costs (sec. 88), and a deduction has not been allowed for
amounts set aside to pay for decommissioning costs except
through the use of a qualified fund. Income earned in a
nonqualified fund is taxable to the fund's owner as it is
earned.
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\61\ These funds are generally referred to as ``nonqualified
funds.''
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REASONS FOR CHANGE
The Committee does not believe a utility should be denied
the opportunity to contribute to a qualified fund simply
because it operates in a deregulated environment. The Committee
also believes that it is appropriate to permit all
decommissioning costs associated with a nuclear powerplant to
be funded through a qualified fund. In addition, the Committee
recognizes the importance of providing clear and concise rules
to minimize disputes between taxpayers and the IRS.
EXPLANATION OF PROVISION
Repeal of cost of service requirement
The provision repeals the cost of service requirement for
deductible contributions to a nuclear decommissioning fund.
Thus, all taxpayers, including unregulated taxpayers, would be
allowed a deduction for amounts contributed to a qualified
fund.
Permit contributions to a qualified fund for pre-1984 decommissioning
costs
The proposal also repeals the limitation that a qualified
fund only accumulate an amount sufficient to pay for a nuclear
powerplant's decommissioning costs incurred during the period
that the qualified fund is in existence (generally post-1984
decommissioning costs). Thus, any taxpayer is permitted to
accumulate an amount sufficient to cover the present value of
100 percent of a nuclear powerplant's estimated decommissioning
costs in a qualified fund. The proposal does not change the
requirement that contributions to a qualified fund not be
deducted more rapidly than level funding.
Clarify treatment of transfers of qualified funds
The provision clarifies the Federal income tax treatment of
the transfer of a qualified fund. No gain or loss would be
recognized to the transferor or the transferee (or the
qualified fund) as a result of the transfer of a qualified fund
in connection with the transfer of the powerplant with respect
to which such fund was established.
Exception to ruling amount for certain decommissioning costs
The provision permits a taxpayer to make contributions to a
qualified fund in excess of the ruling amount in one
circumstance. Specifically, a taxpayer is permitted to
contribute up to the present value of the amount required to
fund a nuclear powerplant's decommissioning costs which under
present law section 468A(d)(2)(A) is not permitted to be
accumulated in a qualified fund (generally pre-1984
decommissioning costs).\62\ It is anticipated that an amount
that is permitted to be contributed under this special rule
shall be determined using the estimate of total decommissioning
costs used for purposes of determining the taxpayer's most
recent ruling amount. Any amount transferred to the qualified
fund under this special rule that has not previously been
deducted, or excluded from gross income is allowed as a
deduction over the remaining useful life of the nuclear
powerplant.\63\ If a qualified fund that has received amounts
under this rule is transferred to another person, that person
will be entitled to the deduction at the same time and in the
same manner as the transferor. Thus, if the transferor was not
subject to tax at the time and thus would have been unable to
use the deduction, the transferee will similarly not be able to
utilize the deduction.
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\62\ The ability to transfer property into a qualified fund under
this special rule is available only to the extent the taxpayer has not
obtained a new ruling amount incorporating the repeal of the limitation
that a qualified fund only accumulate an amount sufficient to pay for
decommissioning costs of a nuclear powerplant incurred during the
period that the fund is in existence (generally post 1984
decommissioning costs).
\63\ A taxpayer recognizes no gain or loss on the contribution of
property to a qualified fund under this special rule. The qualified
fund will take a transferred (carryover) basis in such property.
Correspondingly, a taxpayer's deduction (over the estimated life of the
nuclear powerplant) is to be based on the adjusted tax basis of the
property contributed rather than the fair market value of such
property.
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EFFECTIVE DATE
The provision is effective for taxable years beginning
after date of enactment.
B. Treatment of Certain Income of Cooperatives
(Sec. 602 of the Bill and Sec. 501 of the Code)
PRESENT LAW
In general
Under present law, an entity must be operated on a
cooperative basis in order to be treated as a cooperative for
Federal income tax purposes. Although not defined by statute or
regulation, the two principal criteria for determining whether
an entity is operating on a cooperative basis are: (1)
ownership of the cooperative by persons who patronize the
cooperative; and (2) return of earnings to patrons in
proportion to their patronage. The IRS requires that
cooperatives must operate under the following principles: (1)
subordination of capital in control over the cooperative
undertaking and in ownership of the financial benefits from the
cooperative; (2) democratic control by the members of the
cooperative; (3) vesting in and allocation among the members of
all excess of operating revenues over the expenses incurred to
generate revenues in proportion to their participation in the
cooperative (patronage); and (4) operation at cost (not
operating for profit or below cost).\64\
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\64\ Announcement 96-24, Proposed Examination Guidelines Regarding
Rural Electric Cooperatives, 1996-16 I.R.B. 35.
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In general, cooperative members are those who participate
in the management of the cooperative and who share in patronage
capital. As described below, income from the sale of electric
energy by an electric cooperative may be member or non-member
income to the cooperative, depending on the membership status
of the purchaser. A municipal corporation may be a member of a
cooperative.
For Federal income tax purposes, a cooperative generally
computes its income as if it were a taxable corporation, with
one exception--the cooperative may exclude from its taxable
income distributions of patronage dividends. In general,
patronage dividends are the profits of the cooperative that are
rebated to its patrons pursuant to a pre-existing obligation of
the cooperative to do so. The rebate must be made in some
equitable fashion on the basis of the quantity or value of
business done with the cooperative.
Except for tax-exempt farmers' cooperatives, cooperatives
that are subject to the cooperative tax rules of subchapter T
of the Code (sec. 1381, et seq.) are permitted a deduction for
patronage dividends from their taxable income only to the
extent of net income that is derived from transactions with
patrons who are members of the cooperative (sec. 1382). The
availability of such deductions from taxable income has the
effect of allowing the cooperative to be treated like a conduit
with respect to profits derived from transactions with patrons
who are members of the cooperative.
Cooperatives that qualify as tax-exempt farmers'
cooperatives are permitted to exclude patronage dividends from
their taxable income to the extent of all net income, including
net income that is derived from transactions with patrons who
are not members of the cooperative, provided the value of
transactions with patrons who are not members of the
cooperative does not exceed the value of transactions with
patrons who are members of the cooperative (sec. 521).
Taxation of electric cooperatives exempt from subchapter T
In general, the cooperative tax rules of subchapter T apply
to any corporation operating on a cooperative basis (except
mutual savings banks, insurance companies, other tax-exempt
organizations, and certain utilities), including tax-exempt
farmers' cooperatives (described in sec. 521(b)). However,
subchapter T does not apply to an organization that is
``engaged in furnishing electric energy, or providing telephone
service, to persons in rural areas'' (sec. 1381(a)(2)(C)).
Instead, electric cooperatives are taxed under rules that were
generally applicable to cooperatives prior to the enactment of
subchapter T in 1962. Under these rules, an electric
cooperative can exclude patronage dividends from taxable income
to the extent of all net income of the cooperative, including
net income derived from transactions with patrons who are not
members of the cooperative.\65\
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\65\ See Rev. Rul. 83-135, 1983-2 C.B. 149.
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Tax exemption of rural electric cooperatives
Section 501(c)(12) provides an income tax exemption for
rural electric cooperatives if at least 85 percent of the
cooperative's income consists of amounts collected from members
for the sole purpose of meeting losses and expenses of
providing service to its members. The IRS takes the position
that rural electric cooperatives also must comply with the
fundamental cooperative principles described above in order to
qualify for tax exemption under section 501(c)(12).\66\ The 85-
percent test is determined without taking into account any
income from qualified pole rentals and cancellation of
indebtedness income from the prepayment of a loan under
sections 306A, 306B, or 311 of the Rural Electrification Act of
1936 (as in effect on January 1, 1987). The exclusion for
cancellation of indebtedness income applies to such income
arising in 1987, 1988, or 1989 on debt that either originated
with, or is guaranteed by, the Federal Government. Rural
electric cooperatives generally are subject to the tax on
unrelated trade or business income under section 511.
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\66\ Rev. Rul. 72-36, 1972-1 C.B. 151.
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REASONS FOR CHANGE
The purpose of the 85-percent test under section 501(c)(12)
is to ensure that the primary activities of a tax-exempt
electric cooperative fulfill the statutory purpose of providing
electricity services to the members of the cooperative.
Similarly, the fundamental cooperative principles described
above are the defining characteristics of a cooperative upon
which the Federal tax rules condition conduit treatment.
The Committee believes that the nature of an electric
cooperative's activities does not change because it has income
from open access transactions with non-members or from nuclear
decommissioning transactions (as these terms are defined in the
bill). Accordingly, the Committee believes that the 85-percent
test for tax exemption under present law should be applied
without regard to such income. The Committee intends that the
term ``open access transaction'' shall be applied in a manner
that allows an electric cooperative to carry out its statutory
purpose in a restructured electric energy market environment
without adversely impacting its tax-exempt status.
For similar reasons, the Committee believes that the 85-
percent test for tax exemption under present law should be
applied without regard to cancellation of indebtedness income
from the prepayment of certain loans that are provided,
insured, or guaranteed by the Federal government, as well as
income from certain transactions that would otherwise qualify
for deferred gain recognition under section 1031 or 1033.
The Committee further believes that electric energy sales
to nonmembers should not result in a loss of tax-exempt status
or cooperative status to the extent that such sales are
necessary to replace lost sales of electric energy to members
as a result of restructuring of the electric energy industry.
Accordingly, the Committee believes that replacement electric
energy sales to nonmembers (defined as ``load loss
transactions'' in the bill) should be treated, for a limited
period of time, as member income in applying the 85-percent
test for tax exemption of rural electric cooperatives. The
Committee believes that such treatment also should apply for
purposes of determining whether tax-exempt and taxable electric
cooperatives comply with the fundamental cooperative
principles. Finally, the Committee believes that income from
replacement electric energy sales should not be subject to the
tax on unrelated trade or business income under Code section
511.
EXPLANATION OF PROVISION
Treatment of income from open access transactions
The bill provides that income received or accrued by a
rural electric cooperative from any ``open access transaction''
(other than income received or accrued directly or indirectly
from a member of the cooperative) is excluded in determining
whether a rural electric cooperative satisfies the 85-percent
test for tax exemption under section 501(c)(12). The term
``open access transaction'' is defined as--
(1) The provision or sale of electric energy
transmission services or ancillary services on a
nondiscriminatory open access basis: (i) pursuant to an
open access transmission tariff filed with and approved
by the Federal Energy Regulatory Commission (``FERC'')
(including acceptable reciprocity tariffs), but only if
(in the case of a voluntarily filed tariff) the
cooperative files a report with FERC within 90 days of
enactment of this provision relating to whether or not
the cooperative will join a regional transmission
organization (``RTO''); or (ii) under an RTO agreement
approved by FERC (including an agreement providing for
the transfer of control--but not ownership--of
transmission facilities); \67\
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\67\ Under this provision, references to FERC are treated as
including references to the Public Utility Commission of Texas or the
Rural Utilities Service.
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(2) The provision or sale of electric energy
distribution services or ancillary services on a
nondiscriminatory open access basis to end-users served
by distribution facilities owned by the cooperative or
its members; or
(3) The delivery or sale of electric energy on a
nondiscriminatory open access basis, provided that such
electric energy is generated by a generation facility
that is directly connected to distribution facilities
owned by the cooperative (or its members) which owns
the generation facility.
For purposes of the 85-percent test, the bill also provides
that income received or accrued by a rural electric cooperative
from any ``open access transaction'' is treated as an amount
collected from members for the sole purpose of meeting losses
and expenses if the income is received or accrued indirectly
from a member of the cooperative.
Treatment of income from nuclear decommissioning transactions
The bill provides that income received or accrued by a
rural electric cooperative from any ``nuclear decommissioning
transaction'' also is excluded in determining whether a rural
electric cooperative satisfies the 85-percent test for tax
exemption under section 501(c)(12). The term ``nuclear
decommissioning transaction'' is defined as--
(1) Any transfer into a trust, fund, or instrument
established to pay any nuclear decommissioning costs if
the transfer is in connection with the transfer of the
cooperative's interest in a nuclear powerplant or
nuclear powerplant unit;
(2) Any distribution from a trust, fund, or
instrument established to pay any nuclear
decommissioning costs; or
(3) Any earnings from a trust, fund, or instrument
established to pay any nuclear decommissioning costs.
Treatment of income from asset exchange or conversion transactions
The bill provides that gain realized by a tax-exempt rural
electric cooperative from a voluntary exchange or involuntary
conversion of certain property is excluded in determining
whether a rural electric cooperative satisfies the 85-percent
test for tax exemption under section 501(c)(12). This provision
only applies to the extent that: (1) the gain would qualify for
deferred recognition under section 1031 (relating to exchanges
of property held for productive use or investment) or section
1033 (relating to involuntary conversions); and (2) the
replacement property that is acquired by the cooperative
pursuant to section 1031 or section 1033 (as the case may be)
constitutes property that is used, or to be used, for the
purpose of generating, transmitting, distributing, or selling
electricity or methane-based natural gas.
Treatment of cancellation of indebtedness income from prepayment of
certain loans
The bill provides that income from the prepayment of any
loan, debt, or obligation of a tax-exempt rural electric
cooperative that is originated, insured, or guaranteed by the
Federal Government under the Rural Electrification Act of 1936
is excluded in determining whether the cooperative satisfies
the 85-percent test for tax exemption under section 501(c)(12)
Treatment of income from load loss transactions
Tax-exempt rural electric cooperatives.--The bill provides
that income received or accrued by a tax-exempt rural electric
cooperative from a ``load loss transaction'' is treated under
501(c)(12) as income collected from members for the sole
purpose of meeting losses and expenses of providing service to
its members. Therefore, income from load loss transactions is
treated as member income in determining whether a rural
electric cooperative satisfies the 85-percent test for tax
exemption under section 501(c)(12). The bill also provides that
income from load loss transactions does not cause a tax-exempt
electric cooperative to fail to be treated for Federal income
tax purposes as a mutual or cooperative company under the
fundamental cooperative principles described above.
The term ``load loss transaction'' is generally defined as
any wholesale or retail sale of electric energy (other than to
a member of the cooperative) to the extent that the aggregate
amount of such sales during a seven-year period beginning with
the ``start-up year'' does not exceed the reduction in the
amount of sales of electric energy during such period by the
cooperative to members. The ``start-up year'' is defined as the
calendar year which includes the date of enactment of this
provision or, if later, at the election of the cooperative: (1)
the first year that the cooperative offers nondiscriminatory
open access; or (2) the first year in which at least 10 percent
of the cooperative's sales of electric energy are to patrons
who are not members of the cooperative.
The bill also excludes income received or accrued by rural
electric cooperatives from load loss transactions from the tax
on unrelated trade or business income.
Taxable electric cooperatives.--The bill provides that the
receipt or accrual of income from load loss transactions by
taxable electric cooperatives is treated as income from patrons
who are members of the cooperative. Thus, income from a load
loss transaction is excludible from the taxable income of a
taxable electric cooperative if the cooperative distributes
such income pursuant to a pre-existing contract to distribute
the income to a patron who is not a member of the cooperative.
The bill also provides that income from load loss transactions
does not cause a taxable electric cooperative to fail to be
treated for Federal income tax purposes as a mutual or
cooperative company under the fundamental cooperative
principles described above.
EFFECTIVE DATE
This provision is effective for taxable years beginning
after the date of enactment.
C. Sales or Dispositions to Implement Federal Energy Regulatory
Commission or State Electric Restructuring Policy
(Sec. 603 of the Bill and Sec. 451 of the Code)
PRESENT LAW
Generally, a taxpayer recognizes gain to the extent the
sales price (and any other consideration received) exceeds the
seller's basis in the property. The recognized gain is subject
to current income tax unless the gain is deferred or not
recognized under a special tax provision.
REASONS FOR CHANGE
The Committee recognizes that electric deregulation has
been occurring, and is continuing to occur, at both the Federal
and State level. Federal and state energy regulators are
calling for the ``unbundling'' of electric transmission assets
held by vertically integrated utilities, with the transmission
assets ultimately placed under the ownership or control of
independent transmission providers (or other similarly-approved
operators). This policy is intended to improve transmission
management and facilitate the formation of competitive markets.
To facilitate the implementation of these policy objectives,
the Committee believes it is appropriate to assist taxpayers in
moving forward with industry restructuring by providing a tax
deferral for gain associated with certain dispositions of
electric transmission assets.
EXPLANATION OF PROVISION
The provision permits a taxpayer to elect to recognize gain
from a qualifying electric transmission transaction ratably
over an eight-year period beginning in the year of sale. A
qualifying electric transmission transaction is the sale or
other disposition of property used by the taxpayer in the trade
or business of providing electric transmission services, or an
ownership interest in such an entity, to an independent
transmission company \68\ prior to January 1, 2008.
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\68\ In general, an independent transmission company is defined as:
(1) a regional transmission organization approved by the FERC; (2) a
person (i) who the FERC determines under section 203 of the Federal
Power Act is not a ``market participant'' and (ii) whose transmission
facilities are placed under the operational control of a FERC-approved
regional transmission organization before the close of the period
specified in such authorization, but not later than January 1, 2008; or
(3) in the case of facilities subject to the exclusive jurisdiction of
the Public Utility Commission of Texas, a person who is approved by
that commission as consistent with Texas state law regarding an
independent transmission organization.
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A taxpayer electing the application of the provision is
required to attach a statement to that effect in the tax return
for the taxable year in which the transaction takes place in
the manner as the Secretary shall prescribe. The election shall
be binding for that taxable year and all subsequent taxable
years.\69\
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\69\ The provision also provides that the installment sale rules
shall not apply to any qualifying electric transmission transaction
that elects the application of this provision.
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EFFECTIVE DATE
The provision is effective for transactions occurring after
the date of enactment.
TITLE VII--ADDITIONAL PROVISIONS
A. Extension of Accelerated Depreciation and Wage Credit Benefits on
Indian Reservations
(Sec. 701 of the Bill and Secs. 45A and 168(j) of the Code)
PRESENT LAW
Present law includes the following tax incentives for
businesses located within Indian reservations.
Accelerated depreciation
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) will
be 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
``Qualified Indian reservation property'' eligible for
accelerated depreciation includes property 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 (within the meaning of section
465(b)(3)(C)), and (4) described in the recovery-period table
above. In addition, property is not ``qualified Indian
reservation property'' if it is placed in service for purposes
of conducting gaming activities. 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).
The depreciation deduction allowed for regular tax purposes
is also allowed for purposes of the alternative minimum tax.
The accelerated depreciation for Indian reservations is
available with respect to property placed in service on or
after January 1, 1994, and before January 1, 2005.
Indian employment credit
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 (sec. 45A).
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.
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 employee will not be 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 (adjusted for
inflation after 1993).
The wage credit is available for wages paid or incurred on
or after January 1, 1994, in taxable years that begin before
December 31, 2004.
REASONS FOR CHANGE
The Committee recognizes the significant potential on
Indian lands for development of energy resources and other
projects. The special nature of Native American tribes and high
poverty rates in certain areas in some circumstances create
unique barriers to development that these incentives help
overcome. The Committee understands that a significant portion
of these incentives are used in development of energy projects.
The Committee concluded that extending the accelerated
depreciation and wage credit tax incentives within Indian
reservations will both increase the supply of energy and expand
business and employment opportunities in these areas.
EXPLANATION OF PROVISION
Accelerated depreciation
The provision extends the accelerated depreciation
incentive for one year (to property placed in service before
January 1, 2006).
Indian employment credit
The provision extends the Indian employment credit
incentive for one year (to taxable years beginning before
January 1, 2006).
EFFECTIVE DATE
The provision is effective on the date of enactment.
B. GAO Study
(Sec. 702 of the Bill)
PRESENT LAW
Present law does not require study of the present law
provisions relating to clean fuel vehicles and electric
vehicles.
REASONS FOR CHANGE
The Committee believes it is important to gain information
on the value of benefits compared to costs in order to make
informed decisions regarding the propriety of special tax
treatment of various products or technologies designed to
reduce dependence on petroleum, reduce emissions of pollutants,
or to promote energy conservation. The Committee believes it is
important to have measures of the amount of conservation or
reduction in pollution that results from provisions designed to
achieve such results.
EXPLANATION OF PROVISION
The bill directs the Comptroller General to undertake an
ongoing analysis of the effectiveness of the tax credits
allowed to alternative motor vehicles and the tax credits
allowed to various alternative fuels under Title II of the bill
and the tax credits and enhanced deductions allowed for energy
conservation and efficiency under Title III of the bill. The
studies should estimate the energy savings and reductions in
pollutants achieved from taxpayer utilization of these
provisions. The studies should estimate the dollar value of the
benefits of reduced energy consumption and reduced air
pollution in comparison to estimates of the revenue cost of
these provisions to the U.S. Treasury. The studies should
include an analysis of the distribution of the taxpayers who
utilize these provisions by income and other relevant
characteristics.
The bill directs the Comptroller General to submit annual
reports to Congress beginning not later than December 31, 2004.
EFFECTIVE DATE
The provision is effective on the date of enactment.
C. Repeal Certain Excise Taxes on Rail Diesel Fuel and Inland Waterway
Barge Fuels
(Sec. 703 of the Bill and Secs. 4041 and 4042 of the Code)
PRESENT LAW
Under present law, diesel fuel used in trains is subject to
a 4.4-cents-per-gallon excise tax. Revenues from 4.3 cents per
gallon of this excise tax are retained in the General Fund of
the Treasury. The remaining 0.1 cent per gallon is deposited in
the Leaking Underground Storage Tank (``LUST'') Trust Fund.\70\
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\70\ The 0.1 cent per gallon for the LUST Trust Fund applies so
long as there is a tax imposed on rail diesel and the LUST Trust Fund
tax is in effect (secs. 4041(d)(1) and (3), and 4081(d)(3)).
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Similarly, fuel used in barges operating on the designated
inland waterways system is subject to a 4.3-cents-per-gallon
General Fund excise tax. This tax is in addition to the 20.1-
cents-per-gallon tax rates that is imposed on fuels used in
these barges to fund the Inland Waterways Trust Fund and the
Leaking Underground Storage Tank Trust Fund.
In both cases, the 4.3-cents-per-gallon excise tax rates
are permanent. The LUST Trust Fund tax is scheduled to expire
after March 31, 2005.
REASONS FOR CHANGE
The Committee notes that in 1993, the Congress enacted the
present-law 4.3-cents-per-gallon excise tax on motor fuels as a
deficit reduction measure, with the receipts payable to the
General Fund. Since that time, the Congress has diverted the
4.3-cents-per-gallon excise tax for most uses to specified
trust funds that provide benefits for those motor fuel users
who ultimately bear the burden of these taxes. As a result, the
Committee finds that generally only rail and barge operators
remain as motor fuel users subject to the 4.3-cents-per-gallon
excise tax who receive no benefits from a dedicated trust fund
as a result of their tax burden. The Committee observes that
rail and barge operators compete with other transportation
service providers who benefit from expenditures paid from
dedicated trust funds. The Committee concludes that it is
inequitable and distortive of transportation decisions to
continue to impose the 4.3-cents-per-gallon excise tax on
diesel fuel used in trains and barges.
EXPLANATION OF PROVISION
The 4.3-cents-per-gallon General Fund excise tax rate on
diesel fuel used in trains and fuels used in barges operating
on the designated inland waterways system is repealed. The 0.1
cent per gallon for the Leaking Underground Storage Tank
(``LUST'') Trust Fund is unchanged by the provision.
EFFECTIVE DATE
The proposal is effective on January 1, 2004.
D. Modify Research Credit for Research Relating to Energy
(Sec. 704 of the Bill and Sec. 41 of the Code)
PRESENT LAW
General rule
Section 41 provides for a research tax credit equal to 20
percent of the amount by which a taxpayer's qualified research
expenses for a taxable year exceed its base amount for that
year. The research tax credit is scheduled to expire and
generally will not apply to amounts paid or incurred after June
30, 2004.
A 20-percent research tax credit also applied 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. This separate credit
computation is commonly referred to as the university basic
research credit (see sec. 41(e)).
Alternative incremental research credit regime
Taxpayers are allowed to elect an alternative incremental
research credit regime.\71\ If a taxpayer elects to be subject
to this alternative regime, the taxpayer is assigned a three-
tiered fixed-base percentage (that is lower than the fixed-base
percentage otherwise applicable under present law) and the
credit rate likewise is reduced. Under the alternative credit
regime, a credit rate of 2.65 percent applies to the extent
that a taxpayer's current-year research expenses exceed a base
amount computed by using a fixed-base percentage of one percent
(i.e., the base amount equals one percent of the taxpayer's
average gross receipts for the four preceding years) but do not
exceed a base amount computed by using a fixed-base percentage
of 1.5 percent. A credit rate of 3.2 percent applies to the
extent that a taxpayer's current-year research expenses exceed
a base amount computed by using a fixed-base percentage of 1.5
percent but do not exceed a base amount computed by using a
fixed-base percentage of two percent. A credit rate of 3.75
percent applies to the extent that a taxpayer's current-year
research expenses exceed a base amount computed by using a
fixed-base percentage of two percent. An election to be subject
to this alternative incremental credit regime may be made for
any taxable year beginning after June 30, 1996, and such an
election applies to that taxable year and all subsequent years
unless revoked with the consent of the Secretary of the
Treasury.
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\71\ Sec. 41(c)(4).
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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). In the case of amounts paid to a research
consortium, 75 percent of amounts paid for qualified research
is treated as qualified research expenses eligible for the
research credit (rather than 65 percent under the general rule)
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.
To be eligible for the credit, the research must not only
satisfy the requirements of present-law section 174 for the
deduction for research expenses, but 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 must
constitute elements of a process of experimentation for
functional aspects, performance, reliability, or quality of a
business component.
REASONS FOR CHANGE
The Committee believes that research into energy production
and energy conservation will help reduce pollution and enhance
energy independence in the future.
EXPLANATION OF PROVISION
The bill modifies the present-law research credit as it
applies to qualified energy research. In particular, the
provision provides that the taxpayer may claim a credit equal
to 20 percent of the taxpayer's expenditures on qualified
energy research undertaken by an energy research
consortium.\72\ The amount of credit claimed is determined only
by regard to such expenditures by the taxpayer within the
taxable year. Unlike the general rule for the research credit,
the 20-percent credit for research by an energy research
consortium applies to all such expenditures, not only those in
excess of a base amount however determined. An energy research
consortium is a qualified research consortium as under present
law that also is organized and operated primarily to conduct
energy research and development in the public interest and to
which at least five unrelated persons paid, or incurred
amounts, to such organization within the calendar year. In
addition, to be a qualified energy research consortium no
single person shall pay or incur more than 50 percent of the
total amounts received by the research consortium during the
calendar year.
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\72\ Allowable expenditures for the purpose of the credit include
contributions to an energy research consortium.
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The bill also provides that 100 percent of amounts paid or
incurred by the taxpayer to eligible small businesses,
universities, and Federal for qualified energy research would
constitute qualified research expenses as contract research
expenses, rather than 65 percent of qualified research
expenditures allowed under present law. An eligible small
business for this purpose is a business in which the taxpayer
does not own a 50 percent or greater interest and the business
has employed, on average, 500 or fewer employees in the two
preceding calendar years.
Qualified energy research expenditures are expenditures
that would otherwise qualify for the research credit under
present law and relate to the production, supply, and
conservation of energy, including otherwise qualifying research
expenditures related to alternative energy sources or the use
of alternative energy sources. For example, research relating
to hydrogen fuel cell vehicles would qualify under this
provision, if the research expenditures otherwise satisfy the
criteria of present-law sec. 41. Likewise, otherwise qualifying
research undertaken to improve the energy-efficiency of
lighting would qualify under this provision.
EFFECTIVE DATE
The provision is effective for amounts paid or incurred
after the date of enactment in taxable years ending after such
date.
TITLE VIII--REVENUE PROVISIONS
A. Provisions Designed To Curtail Tax Shelters
1. Penalty for failure to disclose reportable transactions (Sec. 801 of
the Bill and new Sec. 6707A of the Code)
PRESENT LAW
Regulations under section 6011 require a taxpayer to
disclose with its tax return certain information with respect
to each ``reportable transaction'' in which the taxpayer
participates.\73\
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\73\ On February 27, 2003, the Treasury Department and the IRS
released final regulations regarding the disclosure of reportable
transactions. In general, the regulations are effective for
transactions entered into on or after February 28, 2003.
The discussion of present law refers to the new regulations. The
rules that apply with respect to transactions entered into on or before
February 28, 2003, are contained in Treas. Reg. sec. 1.6011-4T in
effect on the date the transaction was entered into.
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There are six categories of reportable transactions. The
first category is any transaction that is the same as (or
substantially similar to) \74\ a transaction that is specified
by the Treasury Department as a tax avoidance transaction whose
tax benefits are subject to disallowance under present law
(referred to as a ``listed transaction'').\75\
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\74\ The regulations clarify that the term ``substantially
similar'' includes any transaction that is expected to obtain the same
or similar types of tax consequences and that is either factually
similar or based on the same or similar tax strategy. Further, the term
must be broadly construed in favor of disclosure. Treas. Reg. sec. 1-
6011-4(c)(4).
\75\ Treas. Reg. sec. 1.6011-4(b)(2).
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The second category is any transaction that is offered
under conditions of confidentiality. In general, if a
taxpayer's disclosure of the structure or tax aspects of the
transaction is limited in any way by an express or implied
understanding or agreement with or for the benefit of any
person who makes or provides a statement, oral or written, as
to the potential tax consequences that may result from the
transaction, it is considered offered under conditions of
confidentiality (whether or not the understanding is legally
binding).\76\
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\76\ Treas. Reg. sec. 1.6011-4(b)(3).
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The third category of reportable transactions is any
transaction for which (1) the taxpayer has the right to a full
or partial refund of fees if the intended tax consequences from
the transaction are not sustained or, (2) the fees are
contingent on the intended tax consequences from the
transaction being sustained.\77\
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\77\ Treas. Reg. sec. 1.6011-4(b)(4).
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The fourth category of reportable transactions relates to
any transaction resulting in a taxpayer claiming a loss (under
section 165) of at least (1) $10 million in any single year or
$20 million in any combination of years by a corporate taxpayer
or a partnership with only corporate partners; (2) $2 million
in any single year or $4 million in any combination of years by
all other partnerships, S corporations, trusts, and
individuals; or (3) $50,000 in any single year for individuals
or trusts if the loss arises with respect to foreign currency
translation losses.\78\
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\78\ Treas. Reg. sec. 1.6011-4(b)(5). IRS Rev. Proc. 2003-24, 2003-
11 I.R.B. 599, exempts certain types of losses from this reportable
transaction category.
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The fifth category of reportable transactions refers to any
transaction done by certain taxpayers \79\ in which the tax
treatment of the transaction differs (or is expected to differ)
by more than $10 million from its treatment for book purposes
(using generally accepted accounting principles) in any
year.\80\
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\79\ The significant book-tax category applies only to taxpayers
that are reporting companies under the Securities Exchange Act of 1934
or business entities that have $250 million or more in gross assets.
\80\ Treas. Reg. sec. 1.6011-4(b)(6). IRS Rev. Proc. 2003-25, 2003-
11 I.R.B. 601, exempts certain types of transactions from this
reportable transition category.
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The final category of reportable transactions is any
transaction that results in a tax credit exceeding $250,000
(including a foreign tax credit) if the taxpayer holds the
underlying asset for less than 45 days.\81\
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\81\ Treas. Reg. sec. 1.6011-4(b)(7).
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Under present law, there is no specific penalty for failing
to disclose a reportable transaction; however, such a failure
may jeopardize a taxpayer's ability to claim that any income
tax understatement attributable to such undisclosed transaction
is due to reasonable cause, and that the taxpayer acted in good
faith.\82\
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\82\ Section 6664(c) provides that a taxpayer can avoid the
imposition of a section 6662 accuracy-related penalty in cases where
the taxpayer can demonstrate that there was reasonable cause for the
underpayment and that the taxpayer acted in good faith. On December 31,
2002, the Treasury Department and IRS issued proposed regulations under
sections 6662 and 6664 (REG-126016-01) that limit the defenses
available to the imposition of an accuracy-related penalty in
connection with a reportable transaction when the transaction is not
disclosed.
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REASONS FOR CHANGE
The Committee is aware that individuals and corporations
are increasingly using sophisticated transactions to avoid or
evade Federal income tax.\83\ Such a phenomenon could pose a
serious threat to the efficacy of the tax system because of
both the potential loss of revenue and the potential threat to
the integrity and perceived fairness of the self-assessment
system.
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\83\ In this regard, the Committee has concerns with the outcomes
and rationales used by courts in some recent decisions involving tax-
motivated transactions. For a more detailed discussion of recent court
decisions and other developments regarding tax shelters, see Joint
Committee on Taxation, Background and Present Law Relating to Tax
Shelters (JCX 19-02), March 19, 2002.
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The Committee over two years ago began working on
legislation to address this significant compliance problem. In
addition, the Treasury Department, using the tools available,
issued regulations requiring disclosure of certain transactions
and requiring organizers and promoters of tax-engineered
transactions to maintain customer lists and make these lists
available to the IRS. Nevertheless, the Committee believes that
additional legislation is needed to provide the Treasury
Department with additional tools to assist its efforts to
curtail abusive transactions. Moreover, the Committee believes
that a penalty for failing to make the required disclosures,
when the imposition of such penalty is not dependent on the tax
treatment of the underlying transaction ultimately being
sustained, will provide an additional incentive for taxpayers
to satisfy their reporting obligations under the new disclosure
provisions.
EXPLANATION OF PROVISION
In general
The bill creates a new penalty for any person who fails to
include with any return or statement any required information
with respect to a reportable transaction. The new penalty
applies without regard to whether the transaction ultimately
results in an understatement of tax, and applies in addition to
any accuracy-related penalty that may be imposed.
Transactions to be disclosed
The bill does not define the terms ``listed transaction''
\84\ or ``reportable transaction,'' nor does the bill explain
the type of information that must be disclosed in order to
avoid the imposition of a penalty. Rather, the bill authorizes
the Treasury Department to define a ``listed transaction'' and
a ``reportable transaction'' under section 6011.
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\84\ The provision states that, except as provided in regulations,
a listed transaction means a reportable transaction, which is the same
as, or substantially similar to, a transaction specifically identified
by the Secretary as a tax avoidance transaction for purposes of section
6011. For this purpose, it is expected that the definition of
``substantially similar'' will be the definition used in Treas. Reg.
sec. 1.6011-4(c)(4). However, the Secretary may modify this definition
(as well as the definitions of ``listed transaction'' and ``reportable
transactions'') as appropriate.
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Penalty rate
The penalty for failing to disclose a reportable
transaction is $50,000. The amount is increased to $100,000 if
the failure is with respect to a listed transaction. For large
entities and high net worth individuals, the penalty amount is
doubled (i.e., $100,000 for a reportable transaction and
$200,000 for a listed transaction). The penalty cannot be
waived with respect to a listed transaction. As to reportable
transactions, the penalty can be rescinded (or abated) only if:
(1) the taxpayer on whom the penalty is imposed has a history
of complying with the Federal tax laws, (2) it is shown that
the violation is due to an unintentional mistake of fact, (3)
imposing the penalty would be against equity and good
conscience, and (4) rescinding the penalty would promote
compliance with the tax laws and effective tax administration.
The authority to rescind the penalty can only be exercised by
the IRS Commissioner personally or the head of the Office of
Tax Shelter Analysis. Thus, the penalty cannot be rescinded by
a revenue agent, an Appeals officer, or any other IRS
personnel. The decision to rescind a penalty must be
accompanied by a record describing the facts and reasons for
the action and the amount rescinded. There will be no taxpayer
right to appeal a refusal to rescind a penalty. The IRS also is
required to submit an annual report to Congress summarizing the
application of the disclosure penalties and providing a
description of each penalty rescinded under this provision and
the reasons for the rescission.
A ``large entity'' is defined as any entity with gross
receipts in excess of $10 million in the year of the
transaction or in the preceding year. A ``high net worth
individual'' is defined as any individual whose net worth
exceeds $2 million, based on the fair market value of the
individual's assets and liabilities immediately before entering
into the transaction.
A public entity that is required to pay a penalty for
failing to disclose a listed transaction (or is subject to an
understatement penalty attributable to a non-disclosed listed
transaction or a non-disclosed reportable avoidance
transaction) \85\ must disclose the imposition of the penalty
in reports to the Securities and Exchange Commission for such
period as the Secretary shall specify. The bill applies without
regard to whether the taxpayer determines the amount of the
penalty to be material to the reports in which the penalty must
appear, and treats any failure to disclose a transaction in
such reports as a failure to disclose a listed transaction. A
taxpayer must disclose a penalty in reports to the Securities
and Exchange Commission once the taxpayer has exhausted its
administrative and judicial remedies with respect to the
penalty (or if earlier, when paid).
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\85\ A reportable avoidance transaction is a reportable transaction
with a significant tax avoidance purpose.
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EFFECTIVE DATE
The bill is effective for returns and statements the due
date for which is after the date of enactment.
2. Modifications to the accuracy-related penalties for listed
transactions and reportable transactions having a significant
tax avoidance purpose (Sec. 802 of the Bill and new Sec. 6662A
of the Code)
PRESENT LAW
The accuracy-related penalty applies to the portion of any
underpayment that is attributable to (1) negligence, (2) any
substantial understatement of income tax, (3) any substantial
valuation misstatement, (4) any substantial overstatement of
pension liabilities, or (5) any substantial estate or gift tax
valuation understatement. If the correct income tax liability
exceeds that reported by the taxpayer by the greater of 10
percent of the correct tax or $5,000 ($10,000 in the case of
corporations), then a substantial understatement exists and a
penalty may be imposed equal to 20 percent of the underpayment
of tax attributable to the understatement.\86\ The amount of
any understatement generally is reduced by any portion
attributable to an item if (1) the treatment of the item is
supported by substantial authority, or (2) facts relevant to
the tax treatment of the item were adequately disclosed and
there was a reasonable basis for its tax treatment.\87\
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\86\ Sec. 6662.
\87\ Sec. 6662(d)(2)(B).
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Special rules apply with respect to tax shelters.\88\ For
understatements by non-corporate taxpayers attributable to tax
shelters, the penalty may be avoided only if the taxpayer
establishes that, in addition to having substantial authority
for the position, the taxpayer reasonably believed that the
treatment claimed was more likely than not the proper treatment
of the item. This reduction in the penalty is unavailable to
corporate tax shelters.
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\88\ Sec. 6662(d)(2)(C).
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The understatement penalty generally is abated (even with
respect to tax shelters) in cases in which the taxpayer can
demonstrate that there was ``reasonable cause'' for the
underpayment and that the taxpayer acted in good faith.\89\ The
relevant regulations provide that reasonable cause exists where
the taxpayer ``reasonably relies in good faith on an opinion
based on a professional tax advisor's analysis of the pertinent
facts and authorities [that] * * * unambiguously concludes that
there is a greater than 50-percent likelihood that the tax
treatment of the item will be upheld if challenged'' by the
IRS.\90\
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\89\ Sec. 6664(c).
\90\ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec.
1.6664-4(c).
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REASONS FOR CHANGE
Because the Treasury shelter initiative emphasizes
combating abusive tax avoidance transactions by requiring
increased disclosure of such transactions by all parties
involved, the Committee believes that taxpayers should be
subject to a strict liability penalty on an understatement of
tax that is attributable to non-disclosed listed transactions
or non-disclosed reportable transactions that have a
significant purpose of tax avoidance. Furthermore, in order to
deter taxpayers from entering into tax avoidance transactions,
the Committee believes that a more meaningful (but less
stringent) accuracy-related penalty should apply to such
transactions even when disclosed.
EXPLANATION OF PROVISION
In general
The bill modifies the present-law accuracy related penalty
by replacing the rules applicable to tax shelters with a new
accuracy-related penalty that applies to listed transactions
and reportable transactions with a significant tax avoidance
purpose (hereinafter referred to as a ``reportable avoidance
transaction'').\91\ The penalty rate and defenses available to
avoid the penalty vary depending on whether the transaction was
adequately disclosed.
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\91\ The terms ``reportable transaction'' and ``listed
transaction'' have the same meanings as used for purposes of the
penalty for failing to disclose reportable transactions.
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Disclosed transactions
In general, a 20-percent accuracy-related penalty is
imposed on any understatement attributable to an adequately
disclosed listed transaction or reportable avoidance
transaction. The only exception to the penalty is if the
taxpayer satisfies a more stringent reasonable cause and good
faith exception (hereinafter referred to as the ``strengthened
reasonable cause exception''), which is described below. The
strengthened reasonable cause exception is available only if
the relevant facts affecting the tax treatment are adequately
disclosed, there is or was substantial authority for the
claimed tax treatment, and the taxpayer reasonably believed
that the claimed tax treatment was more likely than not the
proper treatment.
Undisclosed transactions
If the taxpayer does not adequately disclose the
transaction, the strengthened reasonable cause exception is not
available (i.e., a strict-liability penalty applies), and the
taxpayer is subject to an increased penalty rate equal to 30
percent of the understatement.
In addition, a public entity that is required to pay the
30-percent penalty must disclose the imposition of the penalty
in reports to the SEC for such periods as the Secretary shall
specify. The disclosure to the SEC applies without regard to
whether the taxpayer determines the amount of the penalty to be
material to the reports in which the penalty must appear, and
any failure to disclose such penalty in the reports is treated
as a failure to disclose a listed transaction. A taxpayer must
disclose a penalty in reports to the SEC once the taxpayer has
exhausted its administrative and judicial remedies with respect
to the penalty (or if earlier, when paid).
Once the 30-percent penalty has been included in the
Revenue Agent Report, the penalty cannot be compromised for
purposes of a settlement without approval of the Commissioner
personally or the head of the Office of Tax Shelter Analysis.
Furthermore, the IRS is required to submit an annual report to
Congress summarizing the application of this penalty and
providing a description of each penalty compromised under this
provision and the reasons for the compromise.
Determination of the understatement amount
The penalty is applied to the amount of any understatement
attributable to the listed or reportable avoidance transaction
without regard to other items on the tax return. For purposes
of this bill, the amount of the understatement is determined as
the sum of (1) the product of the highest corporate or
individual tax rate (as appropriate) and the increase in
taxable income resulting from the difference between the
taxpayer's treatment of the item and the proper treatment of
the item (without regard to other items on the tax return),\92\
and (2) the amount of any decrease in the aggregate amount of
credits which results from a difference between the taxpayer's
treatment of an item and the proper tax treatment of such item.
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\92\ For this purpose, any reduction in the excess of deductions
allowed for the taxable year over gross income for such year, and any
reduction in the amount of capital losses which would (without regard
to section 1211) be allowed for such year, shall be treated as an
increase in taxable income.
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Except as provided in regulations, a taxpayer's treatment
of an item shall not take into account any amendment or
supplement to a return if the amendment or supplement is filed
after the earlier of when the taxpayer is first contacted
regarding an examination of the return or such other date as
specified by the Secretary.
Strengthened reasonable cause exception
A penalty is not imposed under the bill with respect to any
portion of an understatement if it shown that there was
reasonable cause for such portion and the taxpayer acted in
good faith. Such a showing requires (1) adequate disclosure of
the facts affecting the transaction in accordance with the
regulations under section 6011,\93\ (2) that there is or was
substantial authority for such treatment, and (3) that the
taxpayer reasonably believed that such treatment was more
likely than not the proper treatment. For this purpose, a
taxpayer will be treated as having a reasonable belief with
respect to the tax treatment of an item only if such belief (1)
is based on the facts and law that exist at the time the tax
return (that includes the item) is filed, and (2) relates
solely to the taxpayer's chances of success on the merits and
does not take into account the possibility that (a) a return
will not be audited, (b) the treatment will not be raised on
audit, or (c) the treatment will be resolved through settlement
if raised.
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\93\ See the previous discussion regarding the penalty for failing
to disclose a reportable transaction.
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A taxpayer may (but is not required to) rely on an opinion
of a tax advisor in establishing its reasonable belief with
respect to the tax treatment of the item. However, a taxpayer
may not rely on an opinion of a tax advisor for this purpose if
the opinion (1) is provided by a ``disqualified tax advisor,''
or (2) is a ``disqualified opinion.''
Disqualified tax advisor
A disqualified tax advisor is any advisor who (1) is a
material advisor \94\ and who participates in the organization,
management, promotion or sale of the transaction or is related
(within the meaning of section 267 or 707) to any person who so
participates, (2) is compensated directly or indirectly \95\ by
a material advisor with respect to the transaction, (3) has a
fee arrangement with respect to the transaction that is
contingent on all or part of the intended tax benefits from the
transaction being sustained, or (4) as determined under
regulations prescribed by the Secretary, has a continuing
financial interest with respect to the transaction.
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\94\ The term ``material advisor'' (defined below in connection
with the new information filing requirements for material advisors)
means any person who provides any material aid, assistance, or advice
with respect to organizing, promoting, selling, implementing, or
carrying out any reportable transaction, and who derives gross income
in excess of $50,000 in the case of a reportable transaction
substantially all of the tax benefits from which are provided to
natural persons ($250,000 in any other case).
\95\ This situation could arise, for example, when an advisor has
an arrangement or understanding (oral or written) with an organizer,
manager, or promoter of a reportable transaction that such party will
recommend or refer potential participants to the advisor for an opinion
regarding the tax treatment of the transaction.
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Organization, management, promotion or sale of a
transaction.--A material advisor is considered as participating
in the ``organization'' of a transaction if the advisor
performs acts relating to the development of the transaction.
This may include, for example, preparing documents (1)
establishing a structure used in connection with the
transaction (such as a partnership agreement), (2) describing
the transaction (such as an offering memorandum or other
statement describing the transaction), or (3) relating to the
registration of the transaction with any federal, state or
local government body.\96\ Participation in the ``management''
of a transaction means involvement in the decision-making
process regarding any business activity with respect to the
transaction. Participation in the ``promotion or sale'' of a
transaction means involvement in the marketing or solicitation
of the transaction to others. Thus, an advisor who provides
information about the transaction to a potential participant is
involved in the promotion or sale of a transaction, as is any
advisor who recommends the transaction to a potential
participant.
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\96\ An advisor should not be treated as participating in the
organization of a transaction if the advisor's only involvement with
respect to the organization of the transaction is the rendering of an
opinion regarding the tax consequences of such transaction. However,
such an advisor may be a ``disqualified tax advisor'' with respect to
the transaction if the advisor participates in the management,
promotion or sale of the transaction (or if the advisor is compensated
by a material advisor, has a fee arrangement that is contingent on the
tax benefits of the transaction, or as determined by the Secretary, has
a continuing financial interest with respect to the transaction).
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Disqualified opinion
An opinion may not be relied upon if the opinion (1) is
based on unreasonable factual or legal assumptions (including
assumptions as to future events), (2) unreasonably relies upon
representations, statements, finding or agreements of the
taxpayer or any other person, (3) does not identify and
consider all relevant facts, or (4) fails to meet any other
requirement prescribed by the Secretary.
Coordination with other penalties
Any understatement upon which a penalty is imposed under
this bill is not subject to the accuracy-related penalty under
section 6662. However, such understatement is included for
purposes of determining whether any understatement (as defined
in sec. 6662(d)(2)) is a substantial understatement as defined
under section 6662(d)(1).
The penalty imposed under this provision shall not apply to
any portion of an understatement to which a fraud penalty is
applied under section 6663.
EFFECTIVE DATE
The bill is effective for taxable years ending after the
date of enactment.
3. Tax shelter exception to confidentiality privileges relating to
taxpayer communications (Sec. 803 of the Bill and Sec. 7525 of
the Code)
PRESENT LAW
In general, a common law privilege of confidentiality
exists for communications between an attorney and client with
respect to the legal advice the attorney gives the client. The
Code provides that, with respect to tax advice, the same common
law protections of confidentiality that apply to a
communication between a taxpayer and an attorney also apply to
a communication between a taxpayer and a federally authorized
tax practitioner to the extent the communication would be
considered a privileged communication if it were between a
taxpayer and an attorney. This rule is inapplicable to
communications regarding corporate tax shelters.
REASONS FOR CHANGE
The Committee believes that the rule currently applicable
to corporate tax shelters should be applied to all tax
shelters, regardless of whether or not the participant is a
corporation.
EXPLANATION OF PROVISION
The bill modifies the rule relating to corporate tax
shelters by making it applicable to all tax shelters, whether
entered into by corporations, individuals, partnerships, tax-
exempt entities, or any other entity. Accordingly,
communications with respect to tax shelters are not subject to
the confidentiality provision of the Code that otherwise
applies to a communication between a taxpayer and a federally
authorized tax practitioner.
EFFECTIVE DATE
The bill is effective with respect to communications made
on or after the date of enactment.
4. Disclosure of reportable transactions by material advisors (Secs.
804 and 805 of the Bill and Secs. 6111 and 6707 of the Code)
PRESENT LAW
Registration of tax shelter arrangements
An organizer of a tax shelter is required to register the
shelter with the Secretary not later than the day on which the
shelter is first offered for sale.\97\ A ``tax shelter'' means
any investment with respect to which the tax shelter ratio \98\
for any investor as of the close of any of the first five years
ending after the investment is offered for sale may be greater
than two to one and which is: (1) required to be registered
under Federal or State securities laws, (2) sold pursuant to an
exemption from registration requiring the filing of a notice
with a Federal or State securities agency, or (3) a substantial
investment (greater than $250,000 and at least five
investors).\99\
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\97\ Sec. 6111(a).
\98\ The tax shelter ratio is, with respect to any year, the ratio
that the aggregate amount of the deductions and 350 percent of the
credits, which are represented to be potentially allowable to any
investor, bears to the investment base (money plus basis of assets
contributed) as of the close of the tax year.
\99\ Sec. 6111(c).
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Other promoted arrangements are treated as tax shelters for
purposes of the registration requirement if: (1) a significant
purpose of the arrangement is the avoidance or evasion of
Federal income tax by a corporate participant; (2) the
arrangement is offered under conditions of confidentiality; and
(3) the promoter may receive fees in excess of $100,000 in the
aggregate.\100\
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\100\ Sec. 6111(d).
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In general, a transaction has a ``significant purpose of
avoiding or evading Federal income tax'' if the transaction:
(1) is the same as or substantially similar to a ``listed
transaction,'' \101\ or (2) is structured to produce tax
benefits that constitute an important part of the intended
results of the arrangement and the promoter reasonably expects
to present the arrangement to more than one taxpayer.\102\
Certain exceptions are provided with respect to the second
category of transactions.\103\
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\101\ Treas. Reg. sec. 301.6111-2(b)(2).
\102\ Treas. Reg. sec. 301.6111-2(b)(3).
\103\ Treas. Reg. sec. 301.6111-2(b)(4).
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An arrangement is offered under conditions of
confidentiality if: (1) an offeree has an understanding or
agreement to limit the disclosure of the transaction or any
significant tax features of the transaction; or (2) the
promoter knows, or has reason to know that the offeree's use or
disclosure of information relating to the transaction is
limited in any other manner.\104\
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\104\ The regulations provide that the determination of whether an
arrangement is offered under conditions of confidentiality is based on
all the facts and circumstances surrounding the offer. If an offeree's
disclosure of the structure or tax aspects of the transaction are
limited in any way by an express or implied understanding or agreement
with or for the benefit of a tax shelter promoter, an offer is
considered made under conditions of confidentiality, whether or not
such understanding or agreement is legally binding. Treas. Reg. sec.
301.6111-2(c)(1).
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Failure to register tax shelter
The penalty for failing to timely register a tax shelter
(or for filing false or incomplete information with respect to
the tax shelter registration) generally is the greater of one
percent of the aggregate amount invested in the shelter or
$500.\105\ However, if the tax shelter involves an arrangement
offered to a corporation under conditions of confidentiality,
the penalty is the greater of $10,000 or 50 percent of the fees
payable to any promoter with respect to offerings prior to the
date of late registration. Intentional disregard of the
requirement to register increases the penalty to 75 percent of
the applicable fees.
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\105\ Sec. 6707.
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Section 6707 also imposes (1) a $100 penalty on the
promoter for each failure to furnish the investor with the
required tax shelter identification number, and (2) a $250
penalty on the investor for each failure to include the tax
shelter identification number on a return.
REASONS FOR CHANGE
The Committee has been advised that the current promoter
registration rules have not proven particularly effective, in
part because the rules are not appropriate for the kinds of
abusive transactions now prevalent, and because the limitations
regarding confidential corporate arrangements have proven easy
to circumvent.
The Committee believes that providing a single, clear
definition regarding the types of transactions that must be
disclosed by taxpayers and material advisors, coupled with more
meaningful penalties for failing to disclose such transactions,
are necessary tools if the effort to curb the use of abusive
tax avoidance transactions is to be effective.
EXPLANATION OF PROVISION
Disclosure of reportable transactions by material advisors
The bill repeals the present law rules with respect to
registration of tax shelters. Instead, the bill requires each
material advisor with respect to any reportable transaction
(including any listed transaction)\106\ to timely file an
information return with the Secretary (in such form and manner
as the Secretary may prescribe). The return must be filed on
such date as specified by the Secretary.
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\106\ The terms ``reportable transaction'' and ``listed
transaction'' have the same meaning as previously described in
connection with the taxpayer-related provisions.
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The information return will include (1) information
identifying and describing the transaction, (2) information
describing any potential tax benefits expected to result from
the transaction, and (3) such other information as the
Secretary may prescribe. It is expected that the Secretary may
seek from the material advisor the same type of information
that the Secretary may request from a taxpayer in connection
with a reportable transaction.\107\
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\107\ See the previous discussion regarding the disclosure
requirements under new section 6707A.
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A ``material advisor'' means any person (1) who provides
material aid, assistance, or advice with respect to organizing,
promoting, selling, implementing, or carrying out any
reportable transaction, and (2) who directly or indirectly
derives gross income in excess of $250,000 ($50,000 in the case
of a reportable transaction substantially all of the tax
benefits from which are provided to natural persons) for such
advice or assistance.
The Secretary may prescribe regulations which provide (1)
that only one material advisor has to file an information
return in cases in which two or more material advisors would
otherwise be required to file information returns with respect
to a particular reportable transaction, (2) exemptions from the
requirements of this section, and (3) other rules as may be
necessary or appropriate to carry out the purposes of this
section (including, for example, rules regarding the
aggregation of fees in appropriate circumstances).
Penalty for failing to furnish information regarding reportable
transactions
The bill repeals the present law penalty for failure to
register tax shelters. Instead, the bill imposes a penalty on
any material advisor who fails to file an information return,
or who files a false or incomplete information return, with
respect to a reportable transaction (including a listed
transaction).\108\ The amount of the penalty is $50,000. If the
penalty is with respect to a listed transaction, the amount of
the penalty is increased to the greater of (1) $200,000, or (2)
50 percent of the gross income of such person with respect to
aid, assistance, or advice which is provided with respect to
the transaction before the date the information return that
includes the transaction is filed. Intentional disregard by a
material advisor of the requirement to disclose a listed
transaction increases the penalty to 75 percent of the gross
income.
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\108\ The terms ``reportable transaction'' and ``listed
transaction'' have the same meaning as previously described in
connection with the taxpayer-related provisions.
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The penalty cannot be waived with respect to a listed
transaction. As to reportable transactions, the penalty can be
rescinded (or abated) only in exceptional circumstances.\109\
All or part of the penalty may be rescinded only if: (1) the
material advisor on whom the penalty is imposed has a history
of complying with the Federal tax laws, (2) it is shown that
the violation is due to an unintentional mistake of fact, (3)
imposing the penalty would be against equity and good
conscience, and (4) rescinding the penalty would promote
compliance with the tax laws and effective tax administration.
The authority to rescind the penalty can only be exercised by
the Commissioner personally or the head of the Office of Tax
Shelter Analysis; this authority to rescind cannot otherwise be
delegated by the Commissioner. Thus, the penalty cannot be
rescinded by a revenue agent, an Appeals officer, or other IRS
personnel. The decision to rescind a penalty must be
accompanied by a record describing the facts and reasons for
the action and the amount rescinded. There will be no right to
appeal a refusal to rescind a penalty. The IRS also is required
to submit an annual report to Congress summarizing the
application of the disclosure penalties and providing a
description of each penalty rescinded under this provision and
the reasons for the rescission.
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\109\ The Secretary's present-law authority to postpone certain
tax-related deadlines because of Presidentially-declared disasters
(sec. 7508A) will also encompass the authority to postpone the
reporting deadlines established by the provision.
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EFFECTIVE DATE
The provision requiring disclosure of reportable
transactions by material advisors applies to transactions with
respect to which material aid, assistance or advice is provided
after the date of enactment.
The provision imposing a penalty for failing to disclose
reportable transactions applies to returns the due date for
which is after the date of enactment.
5. Investor lists and modification of penalty for failure to maintain
investor lists (Secs. 804 and 806 of the Bill and Secs. 6112
and 6708 of the Code)
PRESENT LAW
Investor lists
Any organizer or seller of a potentially abusive tax
shelter must maintain a list identifying each person who was
sold an interest in any such tax shelter with respect to which
registration was required under section 6111 (even though the
particular party may not have been subject to confidentiality
restrictions).\110\ Recently issued regulations under section
6112 contain rules regarding the list maintenance
requirements.\111\ In general, the regulations apply to
transactions that are potentially abusive tax shelters entered
into, or acquired after, February 28, 2003.\112\
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\110\ Sec. 6112.
\111\ Treas. Reg. sec. 301-6112-1.
\112\ A special rule applies the list maintenance requirements to
transactions entered into after February 28, 2000 if the transaction
becomes a listed transaction (as defined in Treas. Reg. 1.6011-4) after
February 28, 2003.
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The regulations provide that a person is an organizer or
seller of a potentially abusive tax shelter if the person is a
material advisor with respect to that transaction.\113\ A
material advisor is defined as any person who is required to
register the transaction under section 6111, or expects to
receive a minimum fee of (1) $250,000 for a transaction that is
a potentially abusive tax shelter if all participants are
corporations, or (2) $50,000 for any other transaction that is
a potentially abusive tax shelter.\114\ For listed transactions
(as defined in the regulations under section 6011), the minimum
fees are reduced to $25,000 and $10,000, respectively.
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\113\ Treas. Reg. sec. 301.6112-1(c)(1).
\114\ Treas. Reg. sec. 301.6112-1(c)(2) and (3).
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A potentially abusive tax shelter is any transaction that
(1) is required to be registered under section 6111, (2) is a
listed transaction (as defined under the regulations under
section 6011), or (3) any transaction that a potential material
advisor, at the time the transaction is entered into, knows is
or reasonably expects will become a reportable transaction (as
defined under the new regulations under section 6011).\115\
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\115\ Treas. Reg. sec. 301.6112-1(b).
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The Secretary is required to prescribe regulations which
provide that, in cases in which two or more persons are
required to maintain the same list, only one person would be
required to maintain the list.\116\
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\116\ Sec. 6112(c)(2).
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Penalties for failing to maintain investor lists
Under section 6708, the penalty for failing to maintain the
list required under section 6112 is $50 for each name omitted
from the list (with a maximum penalty of $100,000 per year).
REASONS FOR CHANGE
The Committee has been advised that the present-law
penalties for failure to maintain customer lists are not
meaningful and that promoters often have refused to provide
requested information to the IRS. The Committee believes that
requiring material advisors to maintain a list of advisees with
respect to each reportable transaction, coupled with more
meaningful penalties for failing to maintain an investor list,
are important tools in the ongoing efforts to curb the use of
abusive tax avoidance transactions.
EXPLANATION OF PROVISION
Investor lists
Each material advisor \117\ with respect to a reportable
transaction (including a listed transaction) \118\ is required
to maintain a list that (1) identifies each person with respect
to whom the advisor acted as a material advisor with respect to
the reportable transaction, and (2) contains other information
as may be required by the Secretary. In addition, the bill
authorizes (but does not require) the Secretary to prescribe
regulations which provide that, in cases in which 2 or more
persons are required to maintain the same list, only one person
would be required to maintain the list.
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\117\ The term ``material advisor'' has the same meaning as when
used in connection with the requirement to file an information return
under section 6111.
\118\ The terms ``reportable transaction'' and ``listed
transaction'' have the same meaning as previously described in
connection with the taxpayer-related provisions.
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Penalty for failing to maintain investor lists
The bill modifies the penalty for failing to maintain the
required list by making it a time-sensitive penalty. Thus, a
material advisor who is required to maintain an investor list
and who fails to make the list available upon written request
by the Secretary within 20 business days after the request will
be subject to a $10,000 per day penalty. The penalty applies to
a person who fails to maintain a list, maintains an incomplete
list, or has in fact maintained a list but does not make the
list available to the Secretary. The penalty can be waived if
the failure to make the list available is due to reasonable
cause.\119\
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\119\ In no event will failure to maintain a list be considered
reasonable cause for failing to make a list available to the Secretary.
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EFFECTIVE DATE
The provision requiring a material advisor to maintain an
investor list applies to transactions with respect to which
material aid, assistance or advice is provided after the date
of enactment.
The provision imposing a penalty for failing to maintain
investor lists applies to requests made after the date of
enactment.
6. Penalties on promoters of tax shelters (Sec. 807 of the Bill and
Sec. 6700 of the Code)
PRESENT LAW
A penalty is imposed on any person who organizes, assists
in the organization of, or participates in the sale of any
interest in, a partnership or other entity, any investment plan
or arrangement, or any other plan or arrangement, if in
connection with such activity the person makes or furnishes a
qualifying false or fraudulent statement or a gross valuation
overstatement.\120\ A qualified false or fraudulent statement
is any statement with respect to the allowability of any
deduction or credit, the excludability of any income, or the
securing of any other tax benefit by reason of holding an
interest in the entity or participating in the plan or
arrangement which the person knows or has reason to know is
false or fraudulent as to any material matter. A ``gross
valuation overstatement'' means any statement as to the value
of any property or services if the stated value exceeds 200
percent of the correct valuation, and the value is directly
related to the amount of any allowable income tax deduction or
credit.
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\120\ Sec. 6700.
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The amount of the penalty is $1,000 (or, if the person
establishes that it is less, 100 percent of the gross income
derived or to be derived by the person from such activity). A
penalty attributable to a gross valuation misstatement can be
waived on a showing that there was a reasonable basis for the
valuation and it was made in good faith.
REASONS FOR CHANGE
The Committee believes that the present-law penalty rate is
insufficient to deter the type of conduct that gives rise to
the penalty.
EXPLANATION OF PROVISION
The bill modifies the penalty amount to equal 50 percent of
the gross income derived by the person from the activity for
which the penalty is imposed. The new penalty rate applies to
any activity that involves a statement regarding the tax
benefits of participating in a plan or arrangement if the
person knows or has reason to know that such statement is false
or fraudulent as to any material matter. The enhanced penalty
does not apply to a gross valuation overstatement.
EFFECTIVE DATE
The bill is effective for activities after the date of
enactment.
B. Provisions To Discourage Corporate Expatriation
1. Tax treatment of inversion transactions (Sec. 821 of the Bill and
new Sec. 7874 of the Code)
PRESENT LAW
Determination of corporate residence
The U.S. tax treatment of a multinational corporate group
depends significantly on whether the top-tier ``parent''
corporation of the group is domestic or foreign. For purposes
of U.S. tax law, a corporation is treated as domestic if it is
incorporated under the law of the United States or of any
State. All other corporations (i.e., those incorporated under
the laws of foreign countries) are treated as foreign. Thus,
place of incorporation determines whether a corporation is
treated as domestic or foreign for purposes of U.S. tax law,
irrespective of other factors that might be thought to bear on
a corporation's ``nationality,'' such as the location of the
corporation's management activities, employees, business
assets, operations, or revenue sources, the exchanges on which
the corporation's stock is traded, or the residence of the
corporation's managers and shareholders.
U.S. taxation of domestic corporations
The United States employs a ``worldwide'' tax system, under
which domestic corporations generally are taxed on all income,
whether derived in the United States or abroad. In order to
mitigate the double taxation that may arise from taxing the
foreign-source income of a domestic corporation, a foreign tax
credit for income taxes paid to foreign countries is provided
to reduce or eliminate the U.S. tax owed on such income,
subject to certain limitations.
Income earned by a domestic parent corporation from foreign
operations conducted by foreign corporate subsidiaries
generally is subject to U.S. tax when the income is distributed
as a dividend to the domestic corporation. Until such
repatriation, the U.S. tax on such income is generally
deferred. However, certain anti-deferral regimes may cause the
domestic parent corporation to be taxed on a current basis in
the United States with respect to certain categories of passive
or highly mobile income earned by its foreign subsidiaries,
regardless of whether the income has been distributed as a
dividend to the domestic parent corporation. The main
antideferral regimes in this context are the controlled foreign
corporation rules of subpart F \121\ and the passive foreign
investment company rules. \122\ A foreign tax credit is
generally available to offset, in whole or in part, the U.S.
tax owed on this foreign-source income, whether repatriated as
an actual dividend or included under one of the anti-deferral
regimes.
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\121\ Secs. 951-964.
\122\ Secs. 1291-1298.
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U.S. taxation of foreign corporations
The United States taxes foreign corporations only on income
that has a sufficient nexus to the United States. Thus, a
foreign corporation is generally subject to U.S. tax only on
income that is ``effectively connected'' with the conduct of a
trade or business in the United States. Such ``effectively
connected income'' generally is taxed in the same manner and at
the same rates as the income of a U.S. corporation. An
applicable tax treaty may limit the imposition of U.S. tax on
business operations of a foreign corporation to cases in which
the business is conducted through a ``permanent establishment''
in the United States.
In addition, foreign corporations generally are subject to
a gross-basis U.S. tax at a flat 30-percent rate on the receipt
of interest, dividends, rents, royalties, and certain similar
types of income derived from U.S. sources, subject to certain
exceptions. The tax generally is collected by means of
withholding by the person making the payment. This tax may be
reduced or eliminated under an applicable tax treaty.
U.S. tax treatment of inversion transactions
Under present law, U.S. corporations may reincorporate in
foreign jurisdictions and thereby replace the U.S. parent
corporation of a multinational corporate group with a foreign
parent corporation. These transactions are commonly referred to
as ``inversion'' transactions. Inversion transactions may take
many different forms, including stock inversions, asset
inversions, and various combinations of and variations on the
two. Most of the known transactions to date have been stock
inversions. In one example of a stock inversion, a U.S.
corporation forms a foreign corporation, which in turn forms a
domestic merger subsidiary. The domestic merger subsidiary then
merges into the U.S. corporation, with the U.S. corporation
surviving, now as a subsidiary of the new foreign corporation.
The U.S. corporation's shareholders receive shares of the
foreign corporation and are treated as having exchanged their
U.S. corporation shares for the foreign corporation shares. An
asset inversion reaches a similar result, but through a direct
merger of the top-tier U.S. corporation into a new foreign
corporation, among other possible forms. An inversion
transaction may be accompanied or followed by further
restructuring of the corporate group. For example, in the case
of a stock inversion, in order to remove income from foreign
operations from the U.S. taxing jurisdiction, the U.S.
corporation may transfer some or all of its foreign
subsidiaries directly to the new foreign parent corporation or
other related foreign corporations.
In addition to removing foreign operations from the U.S.
taxing jurisdiction, the corporate group may derive further
advantage from the inverted structure by reducing U.S. tax on
U.S.-source income through various ``earnings stripping'' or
other transactions. This may include earnings stripping through
payment by a U.S. corporation of deductible amounts such as
interest, royalties, rents, or management service fees to the
new foreign parent or other foreign affiliates. In this
respect, the post-inversion structure enables the group to
employ the same tax reduction strategies that are available to
other multinational corporate groups with foreign parents and
U.S. subsidiaries, subject to the same limitations. These
limitations under present law include section 163(j), which
limits the deductibility of certain interest paid to related
parties, if the payor's debt-equity ratio exceeds 1.5 to 1 and
the payor's net interest expense exceeds 50 percent of its
``adjusted taxable income.'' More generally, section 482 and
the regulations thereunder require that all transactions
between related parties be conducted on terms consistent with
an ``arm's length'' standard, and permit the Secretary of the
Treasury to reallocate income and deductions among such parties
if that standard is not met.
Inversion transactions may give rise to immediate U.S. tax
consequences at the shareholder and/or the corporate level,
depending on the type of inversion. In stock inversions, the
U.S. shareholders generally recognize gain (but not loss) under
section 367(a), based on the difference between the fair market
value of the foreign corporation shares received and the
adjusted basis of the domestic corporation stock exchanged. To
the extent that a corporation's share value has declined, and/
or it has many foreign or tax-exempt shareholders, the impact
of this section 367(a) ``toll charge'' is reduced. The transfer
of foreign subsidiaries or other assets to the foreign parent
corporation also may give rise to U.S. tax consequences at the
corporate level (e.g., gain recognition and earnings and
profits inclusions under sections 1001, 311(b), 304, 367, 1248
or other provisions). The tax on any income recognized as a
result of these restructurings may be reduced or eliminated
through the use of net operating losses, foreign tax credits,
and other tax attributes.
In asset inversions, the U.S. corporation generally
recognizes gain (but not loss) under section 367(a) as though
it had sold all of its assets, but the shareholders generally
do not recognize gain or loss, assuming the transaction meets
the requirements of a reorganization under section 368.
REASONS FOR CHANGE
The Committee believes that inversion transactions
resulting in a minimal presence in a foreign country of
incorporation are a means of avoiding U.S. tax and should be
curtailed. In particular, these transactions permit
corporations and other entities to continue to conduct business
in the same manner as they did prior to the inversion, but with
the result that the inverted entity avoids U.S. tax on foreign
operations and may engage in earnings-stripping techniques to
avoid U.S. tax on domestic operations. The Committee believes
that certain inversion transactions (involving 80 percent or
greater identity of stock ownership) have little or no non-tax
effect or purpose and should be disregarded for U.S. tax
purposes. The Committee believes that other inversion
transactions (involving greater than 50 but less than 80
percent identity of stock ownership) may have sufficient non-
tax effect and purpose to be respected, but warrant heightened
scrutiny and other restrictions to ensure that the U.S. tax
base is not eroded through related-party transactions.
EXPLANATION OF PROVISION
In general
The provision defines two different types of corporate
inversion transactions and establishes a different set of
consequences for each type. Certain partnership transactions
also are covered.
Transactions involving at least 80 percent identity of stock ownership
The first type of inversion is a transaction in which,
pursuant to a plan or a series of related transactions: (1) a
U.S. corporation becomes a subsidiary of a foreign-incorporated
entity or otherwise transfers substantially all of its
properties to such an entity; \123\ (2) the former shareholders
of the U.S. corporation hold (by reason of holding stock in the
U.S. corporation) 80 percent or more (by vote or value) of the
stock of the foreign-incorporated entity after the transaction;
and (3) the foreign-incorporated entity, considered together
with all companies connected to it by a chain of greater than
50 percent ownership (i.e., the ``expanded affiliated group''),
does not have substantial business activities in the entity's
country of incorporation, compared to the total worldwide
business activities of the expanded affiliated group. The
provision denies the intended tax benefits of this type of
inversion by deeming the top-tier foreign corporation to be a
domestic corporation for all purposes of the Code.\124\
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\123\ It is expected that the Treasury Secretary will issue
regulations applying the term ``substantially all'' in this context and
will not be bound in this regard by interpretations of the term in
other contexts under the Code.
\124\ Since the top-tier foreign corporation is treated for all
purposes of the Code as domestic, the shareholder-level ``toll charge''
of sec. 367(a) does not apply to these inversion transactions. However,
with respect to inversion transactions completed before 2004, regulated
investment companies and certain similar entities are allowed to elect
to recognize gain as if sec. 367(a) did apply.
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Except as otherwise provided in regulations, the provision
does not apply to a direct or indirect acquisition of the
properties of a U.S. corporation no class of the stock of which
was traded on an established securities market at any time
within the four-year period preceding the acquisition. In
determining whether a transaction would meet the definition of
an inversion under the provision, stock held by members of the
expanded affiliated group that includes the foreign
incorporated entity is disregarded. For example, if the former
top-tier U.S. corporation receives stock of the foreign
incorporated entity (e.g., so-called ``hook'' stock), the stock
would not be considered in determining whether the transaction
meets the definition. Stock sold in a public offering (whether
initial or secondary) or private placement related to the
transaction also is disregarded for these purposes.
Acquisitions with respect to a domestic corporation or
partnership are deemed to be ``pursuant to a plan'' if they
occur within the four-year period beginning on the date which
is two years before the ownership threshold under the provision
is met with respect to such corporation or partnership.
Transfers of properties or liabilities as part of a plan a
principal purpose of which is to avoid the purposes of the
provision are disregarded. In addition, the Treasury Secretary
is granted authority to prevent the avoidance of the purposes
of the provision, including avoidance through the use of
related persons, pass-through or other noncorporate entities,
or other intermediaries, and through transactions designed to
qualify or disqualify a person as a related person, a member of
an expanded affiliated group, or a publicly traded corporation.
Similarly, the Treasury Secretary is granted authority to treat
certain non-stock instruments as stock, and certain stock as
not stock, where necessary to carry out the purposes of the
provision.
Transactions involving greater than 50 percent but less than 80 percent
identity of stock ownership
The second type of inversion is a transaction that would
meet the definition of an inversion transaction described
above, except that the 80-percent ownership threshold is not
met. In such a case, if a greater-than-50-percent ownership
threshold is met, then a second set of rules applies to the
inversion. Under these rules, the inversion transaction is
respected (i.e., the foreign corporation is treated as
foreign), but: (1) any applicable corporate-level ``toll
charges'' for establishing the inverted structure may not be
offset by tax attributes such as net operating losses or
foreign tax credits; (2) the IRS is given expanded authority to
monitor related-party transactions that may be used to reduce
U.S. tax on U.S.-source income going forward; and (3) section
163(j), relating to ``earnings stripping'' through related-
party debt, is strengthened. These measures generally apply for
a 10-year period following the inversion transaction. In
addition, inverting entities are required to provide
information to shareholders or partners and the IRS with
respect to the inversion transaction.
With respect to ``toll charges,'' any applicable corporate-
level income or gain required to be recognized under sections
304, 311(b), 367, 1001, 1248, or any other provision with
respect to the transfer of controlled foreign corporation stock
or other assets by a U.S. corporation as part of the inversion
transaction or after such transaction to a related foreign
person is taxable, without offset by any tax attributes (e.g.,
net operating losses or foreign tax credits). To the extent
provided in regulations, this rule will not apply to certain
transfers of inventory and similar transactions conducted in
the ordinary course of the taxpayer's business.
In order to enhance IRS monitoring of related-party
transactions, the provision establishes a new pre-filing
procedure. Under this procedure, the taxpayer will be required
annually to submit an application to the IRS for an agreement
that all return positions to be taken by the taxpayer with
respect to related-party transactions comply with all relevant
provisions of the Code, including sections 163(j), 267(a)(3),
482, and 845. The Treasury Secretary is given the authority to
specify the form, content, and supporting information required
for this application, as well as the timing for its submission.
The IRS will be required to take one of the following three
actions within 90 days of receiving a complete application from
a taxpayer: (1) conclude an agreement with the taxpayer that
the return positions to be taken with respect to related-party
transactions comply with all relevant provisions of the Code;
(2) advise the taxpayer that the IRS is satisfied that the
application was made in good faith and substantially complies
with the requirements set forth by the Treasury Secretary for
such an application, but that the IRS reserves substantive
judgment as to the tax treatment of the relevant transactions
pending the normal audit process; or (3) advise the taxpayer
that the IRS has concluded that the application was not made in
good faith or does not substantially comply with the
requirements set forth by the Treasury Secretary.
In the case of a compliance failure described in (3) above
(and in cases in which the taxpayer fails to submit an
application), the following sanctions will apply for the
taxable year for which the application was required: (1) no
deductions or additions to basis or cost of goods sold for
payments to foreign related parties will be permitted; (2) any
transfers or licenses of intangible property to related foreign
parties will be disregarded; and (3) any cost sharing
arrangements will not be respected. In such a case, the
taxpayer may seek direct review by the U.S. Tax Court of the
IRS's determination of compliance failure.
If the IRS fails to act on the taxpayer's application
within 90 days of receipt, then the taxpayer will be treated as
having submitted in good faith an application that
substantially complies with the above-referenced requirements.
Thus, the deduction disallowance and other sanctions described
above will not apply, but the IRS will be able to examine the
transactions at issue under the normal audit process. The IRS
is authorized to request that the taxpayer extend this 90-day
deadline in cases in which the IRS believes that such an
extension might help the parties to reach an agreement.
The ``earnings stripping'' rules of section 163(j), which
deny or defer deductions for certain interest paid to foreign
related parties, are strengthened for inverted corporations.
With respect to such corporations, the provision eliminates the
debt-equity threshold generally applicable under section 163(j)
and reduces the 50-percent thresholds for ``excess interest
expense'' and ``excess limitation'' to 25 percent.
In cases in which a U.S. corporate group acquires
subsidiaries or other assets from an unrelated inverted
corporate group, the provisions described above generally do
not apply to the acquiring U.S. corporate group or its related
parties (including the newly acquired subsidiaries or assets)
by reason of acquiring the subsidiaries or assets that were
connected with the inversion transaction. The Treasury
Secretary is given authority to issue regulations appropriate
to carry out the purposes of this provision and to prevent its
abuse.
Partnership transactions
Under the proposal, both types of inversion transactions
include certain partnership transactions. Specifically, both
parts of the provision apply to transactions in which a
foreign-incorporated entity acquires substantially all of the
properties constituting a trade or business of a domestic
partnership (whether or not publicly traded), if after the
acquisition at least 80 percent (or more than 50 percent but
less than 80 percent, as the case may be) of the stock of the
entity is held by former partners of the partnership (by reason
of holding their partnership interests), and the ``substantial
business activities'' test is not met. For purposes of
determining whether these tests are met, all partnerships that
are under common control within the meaning of section 482 are
treated as one partnership, except as provided otherwise in
regulations. In addition, the modified ``toll charge''
provisions apply at the partner level.
EFFECTIVE DATE
The regime applicable to transactions involving at least 80
percent identity of ownership applies to inversion transactions
completed after March 20, 2002. The rules for inversion
transactions involving greater-than-50-percent identity of
ownership apply to inversion transactions completed after 1996
that meet the 50-percent test and to inversion transactions
completed after 1996 that would have met the 80-percent test
but for the March 20, 2002 date.
2. Excise tax on stock compensation of insiders of inverted
corporations (Sec. 822 of the Bill and new Sec. 5000A and Sec.
275(a) of the Code)
PRESENT LAW
The income taxation of a nonstatutory \125\ compensatory
stock option is determined under the rules that apply to
property transferred in connection with the performance of
services (sec. 83). If a nonstatutory stock option does not
have a readily ascertainable fair market value at the time of
grant, which is generally the case unless the option is
actively traded on an established market, no amount is included
in the gross income of the recipient with respect to the option
until the recipient exercises the option.\126\ Upon exercise of
such an option, the excess of the fair market value of the
stock purchased over the option price is included in the
recipient's gross income as ordinary income in such taxable
year.
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\125\ Nonstatutory stock options refer to stock options other than
incentive stock options and employee stock purchase plans, the taxation
of which is determined under sections 421-424.
\126\ If an individual receives a grant of a nonstatutory option
that has a readily ascertainable fair market value at the time the
option is granted, the excess of the fair market value of the option
over the amount paid for the option is included in the recipient's
gross income as ordinary income in the first taxable year in which the
option is either transferable or not subject to a substantial risk of
forfeiture.
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The tax treatment of other forms of stock-based
compensation (e.g., restricted stock and stock appreciation
rights) is also determined under section 83. The excess of the
fair market value over the amount paid (if any) for such
property is generally includable in gross income in the first
taxable year in which the rights to the property are
transferable or are not subject to substantial risk of
forfeiture.
Shareholders are generally required to recognize gain upon
stock inversion transactions. An inversion transaction is
generally not a taxable event for holders of stock options and
other stock-based compensation.
REASONS FOR CHANGE
The Committee believes that certain inversion transactions
are a means of avoiding U.S. tax and should be curtailed. The
Committee is concerned that, while shareholders are generally
required to recognize gain upon stock inversion transactions,
executives holding stock options and certain stock-based
compensation are not taxed upon such transactions. Since such
executives are often instrumental in deciding whether to engage
in inversion transactions, the Committee believes that, upon
certain inversion transactions, it is appropriate to impose an
excise tax on certain executives holding stock options and
stock-based compensation.
EXPLANATION OF PROVISION
Under the provision, specified holders of stock options and
other stock-based compensation are subject to an excise tax
upon certain inversion transactions. The provision imposes a 20
percent excise tax on the value of specified stock compensation
held (directly or indirectly) by or for the benefit of a
disqualified individual, or a member of such individual's
family, at any time during the 12-month period beginning six
months before the corporation's inversion date. Specified stock
compensation is treated as held for the benefit of a
disqualified individual if such compensation is held by an
entity, e.g., a partnership or trust, in which the individual,
or a member of the individual's family, has an ownership
interest.
A disqualified individual is any individual who, with
respect to a corporation, is, at any time during the 12-month
period beginning on the date which is six months before the
inversion date, subject to the requirements of section 16(a) of
the Securities and Exchange Act of 1934 with respect to the
corporation, or any member of the corporation's expanded
affiliated group,\127\ or would be subject to such requirements
if the corporation (or member) were an issuer of equity
securities referred to in section 16(a). Disqualified
individuals generally include officers (as defined by section
16(a)) \128\ directors, and 10-percent owners of private and
publicly-held corporations.
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\127\ An expanded affiliated group is an affiliated group (under
section 1504) except that such group is determined without regard to
the exceptions for certain corporations and is determined applying a
greater than 50 percent threshold, in lieu of the 80 percent test.
\128\ An officer is defined as the president, principal financial
officer, principal accounting officer (or, if there is no such
accounting officer, the controller), any vice-president in charge of a
principal business unit, division or function (such as sales,
administration or finance), any other officer who performs a policy-
making function, or any other person who performs similar policy-making
functions.
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The excise tax is imposed on a disqualified individual of
an inverted corporation only if gain (if any) is recognized in
whole or part by any shareholder by reason of either the 80
percent or 50 percent identity of stock ownership corporate
inversion transactions previously described in the provision.
Specified stock compensation subject to the excise tax
includes any payment \129\ (or right to payment) granted by the
inverted corporation (or any member of the corporation's
expanded affiliated group) to any person in connection with the
performance of services by a disqualified individual for such
corporation (or member of the corporation's expanded affiliated
group) if the value of the payment or right is based on, or
determined by reference to, the value or change in value of
stock of such corporation (or any member of the corporation's
expanded affiliated group). In determining whether such
compensation exists and valuing such compensation, all
restrictions, other than non-lapse restrictions, are ignored.
Thus, the excise tax applies, and the value subject to the tax
is determined, without regard to whether such specified stock
compensation is subject to a substantial risk of forfeiture or
is exercisable at the time of the inversion transaction.
Specified stock compensation includes compensatory stock and
restricted stock grants, compensatory stock options, and other
forms of stock based compensation, including stock appreciation
rights, phantom stock, and phantom stock options. Specified
stock compensation also includes nonqualified deferred
compensation that is treated as though it were invested in
stock or stock options of the inverting corporation (or
member). For example, the provision applies to a disqualified
individual's deferred compensation if company stock is one of
the actual or deemed investment options under the nonqualified
deferred compensation plan.
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\129\ Under the provision, any transfer of property is treated as a
payment and any right to a transfer of property is treated as a right
to a payment.
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Specified stock compensation includes a compensation
arrangement that gives the disqualified individual an economic
stake substantially similar to that of a corporate shareholder.
Thus, the excise tax does not apply where a payment is simply
triggered by a target value of the corporation's stock or where
a payment depends on a performance measure other than the value
of the corporation's stock. Similarly, the tax does not apply
if the amount of the payment is not directly measured by the
value of the stock or an increase in the value of the stock.
For example, an arrangement under which a disqualified
individual is paid a cash bonus of $500,000 if the
corporation's stock increased in value by 25 percent over two
years or $1,000,000 if the stock increased by 33 percent over
two years is not specified stock compensation, even though the
amount of the bonus generally is keyed to an increase in the
value of the stock. By contrast, an arrangement under which a
disqualified individual is paid a cash bonus equal to $10,000
for every $1 increase in the share price of the corporation's
stock is subject to the provision because the direct connection
between the compensation amount and the value of the
corporation's stock gives the disqualified individual an
economic stake substantially similar to that of a shareholder.
The excise tax applies to any such specified stock
compensation previously granted to a disqualified individual
but cancelled or cashed-out within the six-month period ending
with the inversion transaction, and to any specified stock
compensation awarded in the six-month period beginning with the
inversion transaction. As a result, for example, if a
corporation were to cancel outstanding options three months
before the transaction and then reissue comparable options
three months after the transaction, the tax applies both to the
cancelled options and the newly granted options. It is intended
that the Treasury Secretary issue guidance to avoid double
counting with respect to specified stock compensation that is
cancelled and then regranted during the applicable twelve-month
period.
Specified stock compensation subject to the tax does not
include a statutory stock option or any payment or right from a
qualified retirement plan or annuity, a tax sheltered annuity,
a simplified employee pension, or a simple retirement account.
In addition, under the provision, the excise tax does not apply
to any stock option that is exercised during the six-month
period before the inversion or to any stock acquired pursuant
to such exercise. The excise tax also does not apply to any
specified stock compensation which is sold, exchanged,
distributed or cashed-out during such period in a transaction
in which gain or loss is recognized in full.
For specified stock compensation held on the inversion
date, the amount of the tax is determined based on the value of
the compensation on such date. The tax imposed on specified
stock compensation cancelled during the six-month period before
the inversion date is determined based on the value of the
compensation on the day before such cancellation, while
specified stock compensation granted after the inversion date
is valued on the date granted. Under the provision, the
cancellation of a non-lapse restriction is treated as a grant.
The value of the specified stock compensation on which the
excise tax is imposed is the fair value in the case of stock
options (including warrants and other similar rights to acquire
stock) and stock appreciation rights and the fair market value
for all other forms of compensation. For purposes of the tax,
the fair value of an option (or a warrant or other similar
right to acquire stock) or a stock appreciation right is
determined using an appropriate option-pricing model, as
specified or permitted by the Treasury Secretary, that takes
into account the stock price at the valuation date; the
exercise price under the option; the remaining term of the
option; the volatility of the underlying stock and the expected
dividends on it; and the risk-free interest rate over the
remaining term of the option. Options that have no intrinsic
value (or ``spread'') because the exercise price under the
option equals or exceeds the fair market value of the stock at
valuation nevertheless have a fair value and are subject to tax
under the provision. The value of other forms of compensation,
such as phantom stock or restricted stock, are the fair market
value of the stock as of the date of the inversion transaction.
The value of any deferred compensation that could be valued by
reference to stock is the amount that the disqualified
individual would receive if the plan were to distribute all
such deferred compensation in a single sum on the date of the
inversion transaction (or the date of cancellation or grant, if
applicable). It is expected that the Treasury Secretary issue
guidance on valuation of specified stock compensation,
including guidance similar to the revenue procedures issued
under section 280G, except that the guidance would not permit
the use of a term other than the full remaining term. Pending
the issuance of guidance, it is intended that taxpayers could
rely on the revenue procedures issued under section 280G
(except that the full remaining term must be used).
The excise tax also applies to any payment by the inverted
corporation or any member of the expanded affiliated group made
to an individual, directly or indirectly, in respect of the
tax. Whether a payment is made in respect of the tax is
determined under all of the facts and circumstances. Any
payment made to keep the individual in the same after-tax
position that the individual would have been in had the tax not
applied is a payment made in respect of the tax. This includes
direct payments of the tax and payments to reimburse the
individual for payment of the tax. It is expected that the
Treasury Secretary issue guidance on determining when a payment
is made in respect of the tax and that such guidance would
include certain factors that give rise to a rebuttable
presumption that a payment is made in respect of the tax,
including a rebuttable presumption that if the payment is
contingent on the inversion transaction, it is made in respect
to the tax. Any payment made in respect of the tax is
includible in the income of the individual, but is not
deductible by the corporation.
To the extent that a disqualified individual is also a
covered employee under section 162(m), the $1,000,000 limit on
the deduction allowed for employee remuneration for such
employee is reduced by the amount of any payment (including
reimbursements) made in respect of the tax under the provision.
As discussed above, this includes direct payments of the tax
and payments to reimburse the individual for payment of the
tax.
The payment of the excise tax has no effect on the
subsequent tax treatment of any specified stock compensation.
Thus, the payment of the tax has no effect on the individual's
basis in any specified stock compensation and no effect on the
tax treatment for the individual at the time of exercise of an
option or payment of any specified stock compensation, or at
the time of any lapse or forfeiture of such specified stock
compensation. The payment of the tax is not deductible and has
no effect on any deduction that might be allowed at the time of
any future exercise or payment.
Under the provision, the Treasury Secretary is authorized
to issue regulations as may be necessary or appropriate to
carry out the purposes of the section.
EFFECTIVE DATE
The provision is effective as of July 11, 2002, except that
periods before July 11, 2002, are not taken into account in
applying the tax to specified stock compensation held or
cancelled during the six-month period before the inversion
date.
3. Reinsurance agreements (Sec. 823 of the Bill and Sec. 845(a) of the
Code)
PRESENT LAW
In the case of a reinsurance agreement between two or more
related persons, present law provides the Treasury Secretary
with authority to allocate among the parties or recharacterize
income (whether investment income, premium or otherwise),
deductions, assets, reserves, credits and any other items
related to the reinsurance agreement, or make any other
adjustment, in order to reflect the proper source and character
of the items for each party.\130\ For this purpose, related
persons are defined as in section 482. Thus, persons are
related if they are organizations, trades or businesses
(whether or not incorporated, whether or not organized in the
United States, and whether or not affiliated) that are owned or
controlled directly or indirectly by the same interests. The
provision may apply to a contract even if one of the related
parties is not a domestic company.\131\ In addition, the
provision also permits such allocation, recharacterization, or
other adjustments in a case in which one of the parties to a
reinsurance agreement is, with respect to any contract covered
by the agreement, in effect an agent of another party to the
agreement, or a conduit between related persons.
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\130\ Sec. 845(a).
\131\ See S. Rep. No. 97-494, ``Tax Equity and Fiscal
Responsibility Act of 1982,'' July 12, 1982, 337 (describing provisions
relating to the repeal of modified coinsurance provisions).
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REASONS FOR CHANGE
The Committee is concerned that reinsurance transactions
are being used to allocate income, deductions, or other items
inappropriately among U.S. and foreign related persons. The
Committee is concerned that foreign related party reinsurance
arrangements may be a technique for eroding the U.S. tax base.
The Committee believes that the provision of present law
permitting the Treasury Secretary to allocate or recharacterize
items related to a reinsurance agreement should be applied to
prevent misallocation, improper characterization, or to make
any other adjustment in the case of such reinsurance
transactions between U.S. and foreign related persons (or
agents or conduits). The Committee also wishes to clarify that,
in applying the authority with respect to reinsurance
agreements, the amount, source or character of the items may be
allocated, recharacterized or adjusted.
EXPLANATION OF PROVISION
The provision clarifies the rules of section 845, relating
to authority for the Treasury Secretary to allocate items among
the parties to a reinsurance agreement, recharacterize items,
or make any other adjustment, in order to reflect the proper
source and character of the items for each party. The proposal
authorizes such allocation, recharacterization, or other
adjustment, in order to reflect the proper source, character or
amount of the item. It is intended that this authority \132\ be
exercised in a manner similar to the authority under section
482 for the Treasury Secretary to make adjustments between
related parties. It is intended that this authority be applied
in situations in which the related persons (or agents or
conduits) are engaged in crossborder transactions that require
allocation, recharacterization, or other adjustments in order
to reflect the proper source, character or amount of the item
or items. No inference is intended that present law does not
provide this authority with respect to reinsurance agreements.
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\132\ The authority to allocate, recharacterize or make other
adjustments was granted in connection with the repeal of provisions
relating to modified coinsurance transactions.
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No regulations have been issued under section 845(a). It is
expected that the Treasury Secretary will issue regulations
under section 845(a) to address effectively the allocation of
income (whether investment income, premium or otherwise) and
other items, the recharacterization of such items, or any other
adjustment necessary to reflect the proper amount, source or
character of the item.
EFFECTIVE DATE
The provision is effective for any risk reinsured after
April 11, 2002.
C. Extension of IRS User Fees
(Sec. 831 of the Bill and new Sec. 7529 of the Code)
PRESENT LAW
The IRS provides written responses to questions of
individuals, corporations, and organizations relating to their
tax status or the effects of particular transactions for tax
purposes. The IRS generally charges a fee for requests for a
letter ruling, determination letter, opinion letter, or other
similar ruling or determination. Public Law 104-117 \133\
extended the statutory authorization for these user fees \134\
through September 30, 2003.
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\133\ An Act to provide that members of the Armed Forces performing
services for the peacekeeping efforts in Bosnia and Herzegovina,
Croatia, and Macedonia shall be entitled to tax benefits in the same
manner as if such services were performed in a combat zone, and for
other purposes (March 20, 1996).
\134\ These user fees were originally enacted in section 10511 of
the Revenue Act of 1987 (Pub. Law No. 100-203, December 22, 1987).
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REASONS FOR CHANGE
The Committee believes that it is appropriate to provide a
further extension of these user fees.
EXPLANATION OF PROVISION
The bill extends the statutory authorization for these user
fees through September 30, 2013. The bill also moves the
statutory authorization for these fees into the Code.\135\
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\135\ The proposal also moves into the Code the user fee provision
relating to pension plans that was enacted in section 620 of the
Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. L. 107-
16, June 7, 2001).
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EFFECTIVE DATE
The provision, including moving the statutory authorization
for these fees into the Code and repealing the off-Code
statutory authorization for these fees, is effective for
requests made after the date of enactment.
D. Add Vaccines Against Hepatitis A to the List of Taxable Vaccines
(Sec. 842 of the Bill and Sec. 4132 of the Code)
PRESENT LAW
A manufacturer's excise tax is imposed at the rate of 75
cents per dose \136\ on the following vaccines routinely
recommended for administration to children: diphtheria,
pertussis, tetanus, measles, mumps, rubella, polio, HIB
(haemophilus influenza type B), hepatitis B, varicella (chicken
pox), rotavirus gastroenteritis, and streptococcus pneumoniae.
The tax applied to any vaccine that is a combination of vaccine
components equals 75 cents times the number of components in
the combined vaccine.
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\136\ Sec. 4131
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Amounts equal to net revenues from this excise tax are
deposited in the Vaccine Injury Compensation Trust Fund to
finance compensation awards under the Federal Vaccine Injury
Compensation Program for individuals who suffer certain
injuries following administration of the taxable vaccines. This
program provides a substitute Federal, ``no fault'' insurance
system for the State-law tort and private liability insurance
systems otherwise applicable to vaccine manufacturers. All
persons immunized after September 30, 1988, with covered
vaccines must pursue compensation under this Federal program
before bringing civil tort actions under State law.
REASONS FOR CHANGE
The Committee is aware that the Centers for Disease Control
and Prevention have recommended that children in 17 highly
endemic States be inoculated with a hepatitis A vaccine. The
population of children in the affected States exceeds 20
million. Several of the affected States mandate childhood
vaccination against hepatitis A. The Committee is aware that
the Advisory Commission on Childhood Vaccines has recommended
that the vaccine excise tax be extended to cover vaccines
against hepatitis A. For these reasons, the Committee believes
it is appropriate to include vaccines against hepatitis A as
part of the Vaccine Injury Compensation Program. Making the
hepatitis A vaccine taxable is a first step.\137\ In the
unfortunate event of an injury related to this vaccine,
families of injured children are eligible for the no-fault
arbitration system established under the Vaccine Injury
Compensation Program rather than going to Federal Court to seek
compensatory redress.
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\137\ The Committee recognizes that, to become covered under the
Vaccine Injury Compensation Program, the Secretary of Health and Human
Services also must list the hepatitis A vaccine on the Vaccine Injury
Table.
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EXPLANATION OF PROVISION
The bill adds any vaccine against hepatitis A to the list
of taxable vaccines. The bill also makes a conforming amendment
to the trust fund expenditure purposes.
EFFECTIVE DATE
The provision is effective for vaccines sold beginning on
the first day of the first month beginning more than four weeks
after the date of enactment.
E. Individual Expatriation To Avoid Tax
(Sec. 833 of the Bill and Secs. 877, 2107, 2501, and 6039 of the Code)
PRESENT LAW
U.S. citizens and residents generally are subject to U.S
income taxation on their worldwide income. The U.S. tax may be
reduced or offset by a credit allowed for foreign income taxes
paid with respect to foreign source income. Nonresidents who
are not U.S. citizens are taxed at a flat rate of 30 percent
(or a lower treaty rate) on certain types of passive income
derived from U.S. sources, and at regular graduated rates on
net profits derived from a U.S. trade or business.
An individual who relinquishes his or her U.S. citizenship
or terminates his or her U.S. residency \138\ with a principal
purpose of avoiding U.S. taxes is subject to an alternative
method of income taxation for the 10 taxable years ending after
the citizenship relinquishment or residency termination (the
``alternative tax regime''). The alternative tax regime
modifies the rules generally applicable to the taxation of
nonresident noncitizens. For the 10-year period, the individual
is subject to tax only on U.S.-source income at the rates
applicable to U.S. citizens, rather than the rates applicable
to nonresident noncitizens. However, for this purpose, U.S.-
source income has a broader scope than it does for normal U.S.
Federal tax purposes and includes, for example, gain from the
sale of U.S. corporate stock or debt obligations. The
alternative tax regime applies only if it results in a higher
U.S. tax liability than the liability that would result if the
individual were taxed as a nonresident noncitizen.
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\138\ The alternative tax regime applies to long-term residents of
the United States that have terminated their residency with a principal
purpose of avoiding U.S. tax. A ``long-term resident'' is any
individual who was a lawful permanent resident of the United States for
at least 8 out of the 15 taxable years ending with the year in which
such termination occurs. In applying the 8-year test, an individual is
not considered to be a lawful permanent resident for any year in which
the individual is treated as a resident of another country under a
treaty tiebreaker rule (and the individual does not elect to waive the
benefits of such treaty).
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In addition, the alternative tax regime includes special
estate and gift tax rules. Under present law, estates of
nonresident noncitizens are subject to U.S. estate tax on U.S.-
situated property. For these purposes, stock in a foreign
corporation generally is not treated as U.S.-situated property,
even if the foreign corporation itself owns U.S.-situated
property. However, a special estate tax rule (sec. 2107)
applies to former citizens and former long-term residents who
are subject to the alternative tax regime. Under this rule,
certain closely-held foreign stock owned by the former citizen
or former long-term resident is includible in his or her gross
estate to the extent that the foreign corporation owns U.S.-
situated assets, if the former citizen or former long-term
resident dies within 10 years of citizenship relinquishment or
residency termination. This rule prevents former citizens and
former long-term residents who are subject to the alternative
tax regime from avoiding U.S. estate tax through the expedient
of transferring U.S.-situated assets to a foreign corporation
(subject to income tax on any appreciation under section 367).
In addition, under the alternative tax regime, the individual
is subject to gift tax on gifts of U.S.-situated intangibles,
such as U.S. stock, made during the 10 years following
citizenship relinquishment or residency termination.
Anti-abuse rules are provided to prevent the circumvention
of the alternative tax regime. Accordingly, the alternative tax
regime generally applies to exchanges of property that give
rise to U.S.-source income for property that gives rise to
foreign source income. In addition, amounts earned by former
citizens and former long-term residents through controlled
foreign corporations are subject to the alternative tax regime,
and the 10-year liability period is suspended during any time
at which a former citizen's or former long-term resident's risk
of loss with respect to property subject to the alternative tax
regime is substantially diminished, among other measures.
A U.S. citizen who relinquishes citizenship or a long-term
resident who terminates residency is treated as having done so
with a principal purpose of tax avoidance (and, thus, generally
is subject to the alternative tax regime described above) if:
(1) the individual's average annual U.S. Federal income tax
liability for the five taxable years preceding citizenship
relinquishment or residency termination exceeds $100,000; or
(2) the individual's net worth on the date of citizenship
relinquishment or residency termination equals or exceeds
$500,000. These amounts are adjusted annually for inflation.
Certain categories of individuals may avoid being deemed to
have a tax avoidance purpose for relinquishing citizenship or
terminating residency by submitting a ruling request to the IRS
regarding whether the individual relinquished citizenship or
terminated residency principally for tax reasons.
Under present law, the Immigration and Nationality Act
governs the determination of when a U.S. citizen is treated for
U.S. Federal tax purposes as having relinquished citizenship.
Similarly, an individual's U.S. residency is considered
terminated for U.S. Federal tax purposes when the individual
ceases to be a lawful permanent resident under the immigration
law (or is treated as a resident of another country under a tax
treaty and does not waive the benefits of such treaty). In view
of this reliance on immigration-law status, it is possible in
many instances for a U.S. citizen or resident to convert his or
her Federal tax status to that of a nonresident noncitizen
without notifying the IRS.
Individuals subject to the alternative tax regime are
required to provide certain tax information, including tax
identification numbers, upon relinquishment of citizenship or
termination of residency (on IRS Form 8854, Expatriation
Initial Information Statement). In the case of an individual
with a net worth of at least $500,000, the individual also must
provide detailed information about the individual's assets and
liabilities. The penalty for the failure to provide the
required tax information is the greater of $1,000 or five
percent of the tax imposed under the alternative tax regime for
the year.\139\ In addition, the U.S. Department of State and
other governmental agencies are required to provide this
information to the IRS.
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\139\ The penalty applies for each year of the 10-year period
beginning on the date the individual ceases to be a U.S. citizen or
resident.
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Former citizens and former long-term residents who are
subject to the alternative tax regime also are required to file
annual income tax returns, but only in the event that they owe
U.S. Federal income tax. If a tax return is required, the
former citizen or former long-term resident is required to
provide the IRS with a statement setting forth (generally by
category) all items of U.S.-source and foreign-source gross
income, but no detailed information with respect to all assets
held by the individual.
REASONS FOR CHANGE
There are several difficulties in administering the
present-law alternative tax regime. One such difficulty is that
the IRS is required to determine the subjective intent of
taxpayers who relinquish citizenship or terminate residency.
The present-law presumption of a tax avoidance purpose in cases
in which objective income tax liability or net worth thresholds
are exceeded mitigates this problem to some extent. However,
the present-law rules still require the IRS to make subjective
determinations of intent in cases involving taxpayers who fall
below these thresholds, as well for certain taxpayers who
exceed these thresholds but are nevertheless allowed to seek a
ruling from the IRS to the effect that they did not have a
principal purpose of tax avoidance. The Committee believes that
the replacement of the subjective determination of tax
avoidance as a principal purpose for citizenship relinquishment
or residency termination with objective rules will result in
easier administration of the tax regime for individuals who
relinquish their citizenship or terminate residency.
Similarly, present-law information-reporting and return-
filing provisions do not provide the IRS with the information
necessary to administer the alternative tax regime. Although
individuals are required to file tax information statements
upon the relinquishment of their citizenship or termination of
their residency, difficulties have been encountered in
enforcing this requirement. The Committee believes that the tax
benefits of citizenship relinquishment or residency termination
should be denied an individual until he or she provides the
information necessary for the IRS to enforce the alternative
tax regime. The Committee also believes an annual report
requirement and a penalty for the failure to comply with such
requirement are needed to provide the IRS with sufficient
information to monitor the compliance of former U.S. citizens
and long-term residents.
Individuals who relinquish citizenship or terminate
residency for tax reasons often do not want to fully sever
their ties with the United States; they hope to retain some of
the benefits of citizenship or residency without being subject
to the U.S. tax system as a U.S. citizen or resident. These
individuals generally may continue to spend significant amounts
of time in the United States following citizenship
relinquishment or residency termination--approximately four
months every year--without being treated as a U.S. resident.
The Committee believes that provisions in the bill that impose
full U.S. taxation if the individual is present in the United
States for more than 30 days in a calendar year will
substantially reduce the incentives to relinquish citizenship
or terminate residency for individuals who desire to maintain
significant ties to the United States.
With respect to the estate and gift tax rules, the
Committee is concerned that present-law does not adequately
address opportunities for the avoidance of tax on the value of
assets held by a foreign corporation whose stock the individual
transfers. Thus, the provision imposes gift tax under the
alternative tax regime in the case of gifts of certain stock of
a closely held foreign corporation.
EXPLANATION OF PROVISION
In general
The provision provides: (1) objective standards for
determining whether former citizens or former long-term
residents are subject to the alternative tax regime; (2) tax
based (instead of immigration-based) rules for determining when
an individual is no longer a U.S. citizen or long term resident
for U.S. Federal tax purposes; (3) the imposition of full U.S.
taxation for individuals who are subject to the alternative tax
regime and who return to the United States for extended
periods; (4) imposition of U.S. gift tax on gifts of stock of
certain closely-held foreign corporations that hold U.S.-
situated property; and (5) an annual return-filing requirement
for individuals who are subject to the alternative tax regime,
for each of the 10 years following citizenship relinquishment
or residency termination.\140\
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\140\ These provisions reflect recommendations contained in Joint
Committee on Taxation, Review of the Present Law Tax and Immigration
Treatment of Relinquishment of Citizenship and Termination of Long-Term
Residency, (JCS-2-03), February 2003.
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Objective rules for the alternative tax regime
The provision replaces the subjective determination of tax
avoidance as a principal purpose for citizenship relinquishment
or residency termination under present law with objective
rules. Under the provision, a former citizen or former long-
term resident would be subject to the alternative tax regime
for a 10-year period following citizenship relinquishment or
residency termination, unless the former citizen or former
long-term resident: (1) establishes that his or her average
annual net income tax liability for the five preceding years
does not exceed $122,000 (adjusted for inflation) and his or
her net worth does not exceed $2 million, or alternatively
satisfies limited, objective exceptions for dual citizens and
minors who have had no substantial contact with the United
States; and (2) certifies under penalties of perjury that he or
she has complied with all U.S. Federal tax obligations for the
preceding five years and provides such evidence of compliance
as the Secretary of the Treasury may require.
The monetary thresholds under the provision replace the
present-law inquiry into the taxpayer's intent. In addition,
the provision eliminates the present-law process of IRS ruling
requests.
If a former citizen exceeds the monetary thresholds, that
person is excluded from the alternative tax regime if he or she
falls within the exceptions for certain dual citizens and
minors (provided that the requirement of certification and
proof of compliance with Federal tax obligations is met). These
exceptions provide relief to individuals who have never had
substantial connections with the United States, as measured by
certain objective criteria, and eliminate IRS inquiries as to
the subjective intent of such taxpayers.
In order to be excepted from the application of the
alternative tax regime under the provision, whether by reason
of falling below the net worth and income tax liability
thresholds or qualifying for the dual-citizen or minor
exceptions, the former citizen or former long-term resident
also is required to certify, under penalties of perjury, that
he or she has complied with all U.S. Federal tax obligations
for the five years preceding the relinquishment of citizenship
or termination of residency and to provide such documentation
as the Secretary of the Treasury may require evidencing such
compliance (e.g., tax returns, proof of tax payments). Until
such time, the individual remains subject to the alternative
tax regime. It is intended that the IRS should continue to
verify that the information submitted was accurate, and it is
intended that the IRS should randomly audit such persons to
assess compliance.
Termination of U.S. citizen or long-term resident status for U.S.
Federal income tax purposes
Under the provision, an individual continues to be treated
as a U.S. citizen or long-term resident for U.S. Federal tax
purposes, including for purposes of section 7701(b)(10), until
the individual: (1) gives notice of an expatriating act or
termination of residency (with the requisite intent to
relinquish citizenship or terminate residency) to the Secretary
of State or the Secretary of Homeland Security, respectively;
and (2) provides a statement in accordance with section 6039G.
Sanction for individuals subject to the individual tax regime who
return to the United States for extended periods
The alternative tax regime does not apply to any individual
for any taxable year during the 10-year period following
citizenship relinquishment or residency termination if such
individual is present in the United States for more than 30
days in the calendar year ending in such taxable year. Such
individual is treated as a U.S. citizen or resident for such
taxable year.
Similarly, if an individual subject to the alternative tax
regime is present in the United States for more than 30 days in
any calendar year ending during the 10-year period following
citizenship relinquishment or residency termination, and the
individual dies during that year, he or she is treated as a
U.S. resident, and the individual's worldwide estate is subject
to U.S. estate tax. Likewise, if an individual subject to the
alternative tax regime is present in the United States for more
than 30 days in any year during the 10-year period following
citizenship relinquishment or residency termination, the
individual is subject to U.S. gift tax on any transfer of his
or her worldwide assets by gift during that taxable year.
For purposes of these rules, an individual is treated as
present in the United States on any day if such individual is
physically present in the United States at any time during that
day, with no exceptions. The present-law exceptions from being
treated as present in the United States for residency
purposes\141\ do not apply for this purpose.
---------------------------------------------------------------------------
\141\ Sections 7701(b)(3)(D), 7701(b)(5) and 7701(b)(7)(B)-(D).
---------------------------------------------------------------------------
Imposition of gift tax with respect to stock of certain closely held
foreign corporations
Gifts of stock of certain closely-held foreign corporations
by a former citizen or former long-term resident who is subject
to the alternative tax regime are subject to gift tax under
this provision, if the gift is made within the 10-year period
after citizenship relinquishment or residency termination. The
gift tax rule applies if: (1) the former citizen or former
long-term resident, before making the gift, directly or
indirectly owns 10 percent or more of the total combined voting
power of all classes of stock entitled to vote of the foreign
corporation; and (2) directly or indirectly, is considered to
own more than 50 percent of (a) the total combined voting power
of all classes of stock entitled to vote in the foreign
corporation, or (b) the total value of the stock of such
corporation. If this stock ownership test is met, then taxable
gifts of the former citizen or former long-term resident
include that proportion of the fair market value of the foreign
stock transferred by the individual, at the time of the gift,
which the fair market value of any assets owned by such foreign
corporation and situated in the United States (at the time of
gift) bears to the total fair market value of all assets owned
by such foreign corporation (at the time of gift).
This gift tax rule applies to a former citizen or former
long-term resident who is subject to the alternative tax regime
and who owns stock in a foreign corporation at the time of the
gift, regardless of how such stock was acquired (e.g., whether
issued originally to the donor, purchased, or received as a
gift or bequest).
Annual return
The provision requires former citizens and former long-term
residents to file an annual return for each year following
citizenship relinquishment or residency termination in which
they are subject to the alternative tax regime. The annual
return is required even if no U.S. Federal income tax is due.
The annual return requires certain information, including
information on the permanent home of the individual, the
individual's country of residency, the number of days the
individual was present in the United States for the year, and
detailed information about the individual's income and assets
that are subject to the alternative tax regime. This
requirement includes information relating to foreign stock
potentially subject to the special estate tax rule of section
2107(b) and the gift tax rules of this provision.
If the individual fails to file the statement in a timely
manner or fails correctly to include all the required
information, the individual is required to pay a penalty of
$5,000. The $5,000 penalty does not apply if it is shown that
the failure is due to reasonable cause and not to willful
neglect.
EFFECTIVE DATE
The provisions apply to individuals who relinquish
citizenship or terminate long-term residency after February 27,
2003.
II. BUDGET EFFECTS OF THE BILL
A. Committee Estimates
In compliance with paragraph 11(a) of rule XXVI of the
Standing Rules of the Senate, the following statement is made
concerning the estimated budget effects of the revenue
provisions of the ``Energy Tax Incentives Act of 2003'' as
reported.
ESTIMATED REVENUE EFFECTS OF MODIFICATIONS TO S. 1149, THE ``ENERGY TAX INCENTIVES ACT OF 2003,'' FOR CONSIDERATION ON THE SENATE FLOOR
[Fiscal years 2004-2013, in millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Provision Effective 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004-08 2004-13
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Extension and Modification of esfqfa DOE.................... -111 -205 -298 -387 -384 -354 -326 -303 -287 -277 -1,381 -2,928
Renewable Electricity Production Tax
Credit--Extend (property placed in
service before 1/1/07 (1/1/05 in the
case of open-loop)) and modify the
section 45 credit for producing
electricity from certain sources
(credit is equal to 1.8 cents per
kilowatt hour for production from
post-enactment facilities after 12/31/
03).
Alternative Motor Vehicles and Fuel
Incentives:
1. Credits for purchase of ppisa DOE..................... -151 -428 -649 -550 -17 38 -19 -2 -11 -19 -1,795 -1,767
alternative motor vehicles,
modifications to credit for
electric vehicles, and extension of
deduction for qualified clean fuel
vehicles and property (deduction
for property placed in service
before 1/1/08 (1/1/12 in the case
of hydrogen fuel)); credit for
alternative and electric vehicles
purchased before 1/1/07 (1/1/12 in
the case of hydrogen).
2. Credit for installation of ppisa DOE..................... -2 -3 -3 -3 -1 (\1\) (\1\) (\1\) (\1\) (\1\) -11 -10
alternative fueling stations credit
for property placed in service
before 1/1/08 (1/1/12 in the case
of hydrogen).
3. Credit for retail sale of DOE........................... -83 -169 -215 -90 -1 -1 -1 -1 ........ ........ -558 -563
alternative fuels (30 cents/gallon
in 2003, 40 cents in 2004, 50 cents
in 2005 and 2006).
4. Modifications to small ethanol tyba DOE...................... -16 -34 -34 -34 -41 -49 -50 -29 -3 ........ -159 -290
producer credit and extension of
section 40 credit (through 12/31/
10).
5. Tax incentives for biodiesel fsa DOE....................... -20 -29 -8 ........ ........ ........ ........ ........ ........ ........ -57 -57
(sunset 12/31/05) \3\ \4\.
6. Alcohol fuel and biodiesel fsa 9/30/03................... 31 46 49 48 45 43 40 36 33 30 221 402
mixtures excise tax credit \4\.
7. Sale of gasoline and diesel fuel DOE........................... No Revenue Effect
at duty-free sales enterprises.
-------------------------------------------------------------------------------------------------------------------------
Total of Alternative Motor .............................. -241 -617 -860 -629 -15 29 8 8 19 11 -2,359 -2,285
Vehicles and Fuel Incentives.
=========================================================================================================================
Conservation and Energy Efficiency
Provisions:
1. Business credit for construction ppb DOE & 12/31/07............ -63 -102 -98 -108 -68 -21 -4 ........ ........ ........ -440 -465
of new energy efficient homes.
2. Credit for energy efficient apb DOE & 12/31/07............ -58 -82 -68 -46 -23 -8 -2 (\2\) ........ ........ -277 -288
appliances.
3. Credit for residential fuel cell, ppb 1/1/04 & 12/31/07......... -30 -54 -61 -71 -62 ........ ........ ........ ........ ........ -278 -278
solar, and other energy efficient
property.
4. Business tax incentives for ppisb DOE & 12/31/07.......... -5 -9 -14 -9 -4 -3 -1 (\5\) (\5\) (\5\) -43 -46
qualifying fuel cells and
microturbines (sunset 12/31/06).
5. Allowance of deduction for tyba DOE & ccb 1/1/10......... -28 -51 -74 -101 -130 -139 -41 10 9 8 -385 -537
certain energy efficient commercial
building property.
6. Three-year applicable recovery
period for qualified energy
management devices (excluding
ancillary equipment):.
a. Electric devices (sunset for ppsia DOE..................... -9 -20 -42 -70 -61 -13 16 26 22 14 -202 -137
property placed in service after
12/31/07).
b. Water submetering devices ppisa DOE..................... -4 -11 -21 -31 -24 -1 12 15 11 5 -91 -49
(sunset for property placed in
service after 12/31/07).
7. Energy credit for combined heat ppisa DOE & ppisb 1/1/07...... -68 -79 -78 -51 -24 -11 -1 4 6 6 -300 -296
and power system property.
8. Credit for energy efficiency tyba DOE & tybb 1/1/07........ -55 -78 -78 -63 -62 ........ ........ ........ ........ ........ -274 -274
improvements to existing homes.
-------------------------------------------------------------------------------------------------------------------------
Total of Conservation and Energy .............................. -320 -486 -534 -550 -396 -196 -21 55 48 33 -2,290 -2,370
Efficiency Provisions.
=========================================================================================================================
Clean Coal Incentives--Investment and
Production Credits for Clean Coal
Technology:
1. Credit for production from pa DOE........................ -31 -58 -70 -80 -87 -90 -92 -94 -97 -97 -326 -797
qualifying clean coal technology
units.
2. Credit for investment in ppsia DOE..................... -20 -47 -49 -41 -27 -111 -94 -39 -28 -18 -184 -475
qualifying advanced clean coal
technology (for property placed in
service after the date of enactment
and before 1/1/17 (1/1/13 in the
case of advanced pulverized coal or
atmospheric fluidized bed)).
3. Credit for production of pa DOE........................ -4 -17 -36 -55 -70 -96 -132 -153 -162 -168 -183 -895
electricity from qualifying
advanced clean coal technology
units.
-------------------------------------------------------------------------------------------------------------------------
Total of Clean Coal Incentives-- .............................. -55 -122 -155 -176 -184 -297 -318 -286 -287 -283 -693 -2,167
Investment and Production Credit
for Clean Coal Technology.
=========================================================================================================================
Oil and Gas Provisions:
1. Credit for marginal domestic oil DOE........................... No Revenue Effect
and natural gas well production.
2. Natural gas gathering pipelines ppsia DOE..................... -3 -5 -8 -12 -41 -49 -58 -66 -77 -88 -69 -407
treated as 7-year property.
3. Expensing of capital costs epoia 1/1/03.................. -9 -7 -8 -12 -27 -52 -21 3 4 5 -63 -125
incurred and credit for production
in complying with Environmental
Protection Agency sulfur
regulations for small refiners.
4. Determination of small refiner tyea DOE...................... -6 -7 -8 -8 -8 -8 -8 -8 -9 -9 -37 -81
exception to oil depletion
deduction--modify definition of
independent refiner from daily
maximum run less than 50,000
barrels to average daily run less
than 60,000 barrels.
5. Extension of suspension of 100% DOE........................... -22 -35 -36 -13 ........ ........ ........ ........ ........ ........ -106 -106
of taxable income limit with
respect to marginal production
(through 12/31/06).
6. Amortize all geological and cpoii tyba DOE................ 234 -212 -449 -428 -320 -261 -226 -194 -188 -194 -1,175 -2,238
geophysical (``G&G'') expenditures
over 2 years.
7. Amortize all delay rental apoii tyba DOE................ 85 11 -64 -62 -35 -9 -1 -1 -1 -1 -65 -77
payments over 2 years.
8. Extension and modification of DOE........................... -189 -134 -509 -601 -469 -230 -50 (\2\) ........ ........ -2,083 -2,363
section 27 credit for facilities
placed in service after the date of
enactment and before 1/1//07,
including viscous oil, coalmine
gas, agricultural and animal waste,
and refined coal; extension and
modification of section 29 credit
certain coal gasification and coke
production from 1/1/02 through 12/
31/05; clarification of definition
of landfill gas facility; study of
coal bed methane; for new
facilities described in section 29
(c)(1)(A) & (B), credit rate is
equal to $3.00 Barrel of Oil
Equivalent; and 200,000 cubic feet
per day limit \6\.
9. Natural gas distribution lines ppisa DOE..................... -16 -38 -60 -90 -119 -145 -171 -200 -228 -242 -323 -1,309
treated as 15-year property.
10. Provisions Relating to Alaska
Natural Gas:.
a. Credit for Alaska Natural Gas:. (\7\)......................... No Revenue Effect
b. Treat certain Alaska pipeline generally..................... ........ ........ ........ ........ ........ ........ ........ ........ ........ -150 ......... -150
property as 7-year property. ppisa 12/31/12................
11. Exempt certain prepayments for oia DOE....................... (\2\) -1 -1 -2 -3 -3 -4 -5 -5 -6 -7 -31
natural gas from tax-exempt
arbitrage rules.
-------------------------------------------------------------------------------------------------------------------------
Total of Oil and Gas Provisions... .............................. 74 -608 -1,143 -1,228 -1,022 -757 -539 -472 -504 -685 -3,928 -6,887
=========================================================================================================================
Electric Utility Restructuring
Provisions:
1. Modification to special rules for tyba DOE...................... -47 -69 -76 -85 -94 -103 -113 -125 -137 -151 -371 -1,000
nuclear decommissioning costs--
transfer of non-qualified funds
(buyer gets deduction over life of
plant); eliminate cost of service
requirement; and clarify treatment
of fund transfers.
2. Treatment of certain income of tyba DOE...................... -8 -18 -21 -23 -25 -27 -30 -33 -35 -38 -95 -258
electric cooperatives.
3. Sales or dispositions to ta DOE........................ -1,321 -1,183 -1,273 -817 476 1,013 1,033 1,012 818 580 -4,118 338
Implement Federal Energy Regulatory
Commission or State electric
restructuring policy prior to 1/1/
08.
-------------------------------------------------------------------------------------------------------------------------
Total of Electric Utility .............................. -1,376 -1,270 -1,370 -925 357 883 890 854 646 391 -4,584 -920
Restructuring Provisions.
=========================================================================================================================
Additional Provisions:
1. Extension of accelerated DOE........................... 2 -172 -290 -104 21 72 113 92 50 6 -543 -210
depreciation and wage credit
benefits for businesses on Indian
reservations (through 12/31/05).
2. Study of effectiveness of certain DOE........................... No Revenue Effect
provisions by GAO.
3. Repeal of the 4.3 cent tax on 1/1/04........................ -107 -156 -161 -166 -171 -176 -182 -187 -192 -197 -761 -1,695
rail and barge diesel \8\.
4. Modify research credit with ea DOE........................ -3 -7 -4 -2 -1 -1 (\2\) ........ ........ ........ -18 -18
respect to energy research.
-------------------------------------------------------------------------------------------------------------------------
Total of Additional Provisions.... .............................. -108 -335 -455 -272 -151 -105 -69 -95 -142 -191 -1,322 -1,932
=========================================================================================================================
Revenue Provisions:
1. Provisions relating to reportable various dates after DOE \9\... 92 115 119 120 124 131 139 150 164 179 570 1,333
transactions and tax shelters.
2. Provisions to Discourage
Corporate Expatriation:
a. Tax treatment of inversion (\10\)........................ 193 117 140 168 202 242 290 348 418 493 820 2,611
transactions.
b. Excise tax on stock generally 7/11/02............. 35 10 10 10 10 10 10 10 10 10 75 125
compensation of insiders in
inverted corporations.
c. Reinsurance agreements......... rra 4/11/02................... (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 2 5
3. Extend IRS User Fee (through 9/30/ DOE........................... 33 34 35 36 38 39 41 42 44 45 176 386
13) \11\.
4. Add Hepatitis A to the list of (\12\)........................ 8 9 9 9 9 9 9 9 9 9 44 89
taxable vaccines (including
outlay effects).
5. Modification of the tax (\13\)........................ 19 18 21 24 28 32 37 43 49 56 100 328
treatment of individual
expatriation and residency
termination.
-------------------------------------------------------------------------------------------------------------------------
Total of Revenue Provisions....... .............................. 380 303 334 367 411 463 526 602 694 792 1,797 4,877
=========================================================================================================================
Net total......................... .............................. -1,757 -3,340 -4,481 -3,800 -1,384 -334 151 363 187 -209 -14,760 -14,603
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Gain of less than $1 million.
\2\ Loss of less than $500,000.
\3\ This provision may also have indirect effects on Federal outlays for certain farm programs. Outlay effects will be estimated by the Congressional Budget Office.
\4\ This is a preliminary estimate of the revenue effects of this provision. This preliminary estimate assumes that all of the ethanol and biodiesel subsidies would be provided through excise
tax credits and refunds and income tax credits. If a portion of the subsidies is obtained in the form of outlay payments, the overall budget effect could be significantly greater than this
preliminary estimate of revenue effects. The outlay effects of this provision will be estimated by the Congressional Budget Office.
\5\ Gain of less than $500,000.
\6\ Qualified facilities would be given credit for three years of production (five years in the case of refined coal).
\7\ Effective the later of January 1, 2010, or initial date of interstate transportation of qualifying gas.
\8\ Estimate assumes that the rail diesel LUST tax of 0.1 cents per gallon would be retained.
\9\ Effective dates for provisions relating to reportable transactions and tax shelters: the penalty for failure to disclose reportable transactions is effective for returns and statements the
due date of which is after the date of enactment; the modification to the accuracy-related penalty for listed or reportable transactions is effective for taxable years ending after the date
of enactment; the tax shelter exception to confidentiality privileges is effective for communications made on or after the date of enactment; the material advisor disclosure provision
applies to transactions with respect to which material aid, assistance or advice is provided after the date of enactment; the investor list provision applies to transactions with respect to
which material aid, assistance or advice is provided after the date of enactment, and the penalty on promoters of tax shelters is effective for activities after the date of enactment.
\10\ Effective for certain transactions completed after March 20, 2002, and would also affect certain taxpayers who completed transactions before March 21, 2002.
\11\ Estimate provided by the Congressional Budget Office.
\12\ Effective for vaccines sold beginning on the first day of the first month beginning more than four weeks after the date of enactment.
\13\ Effective for individuals who expatriate or terminate long-term residency after February 27, 2003.
Legend for ``Effective'' column: apoii=amounts paid or incurred in; apb=appliances produced between; ccb=construction completed by; cpoii=costs paid or incurred in; DOE=date of enactment;
ea=expenditure after; epoia=expenses paid or incurred after; esfqfa=electricity sold from qualifying facilities after; fsa=fuel sold after; oia=obligation issued after; pa=production after;
ppb=property purchased between; ppisa=property placed in service after; ppisb=property placed in service between; rra=risk reinsured after; ta=transactions after; tyba=taxable years
beginning after; tybb=taxable years beginning before.
Note.--Details may not add to totals due to rounding. Date of enactment is assumed to be November 1, 2003.
B. Budget Authority and Tax Expenditures
Budget authority
In compliance with section 308(a)(1) of the Budget Act, the
Committee states that the revenue provisions of the bill as
reported involve no new or increased budget authority.
Tax expenditures
In compliance with section 308(a)(2) of the Budget Act, the
Committee states that the revenue-reducing provisions of the
bill involve increased tax expenditures (see revenue table in
Part III. A., above).
C. Consultation With Congressional Budget Office
In accordance with section 403 of the Budget Act, the
Committee advises that the Congressional Budget Office
submitted the following statement on this bill:
U.S. Congress,
Congressional Budget Office,
Washington, DC, June 10, 2003.
Hon. Charles E. Grassley,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: At the request of the Senate Budget
Committee, the Congressional Budget Office has prepared the
enclosed revised cost estimate for S. 1149, the Energy Tax
Incentives Act of 2003. This revised estimate supersedes the
estimate transmitted on May 23, 2003, and it reflects a change
in estimated revenues that was provided by the Joint Committee
on Taxation on June 6, 2003, as well as a revision to CBO's
estimate of direct spending.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Annie
Bartsch (for revenues) and Lisa Cash Driskill (for spending)
Sincerely,
Douglas Holtz-Eakin,
Director.
Enclosure.
S. 1149--Energy Tax Incentives Act of 2003
Summary: The Energy Tax Incentives Act would amend numerous
provisions of tax law mainly relating to energy. The bill would
enhance and create credits for the use and development of
energy-efficient technologies, amend tax rules to provide
deductions for certain devices and credits for businesses that
provide energy, and enhance and create credits and deductions
for the production of oil, gas, and other types of fuel. The
bill also would provide tax credits for production of biodiesel
fuels, which would result in changes in the subsidies provided
through the U.S. Department of Agriculture (USDA) for certain
crops. Certain tax credits would be available to the Tennessee
Valley Authority (TVA) and rural electric cooperatives in the
form of credits that could be used as payments owed to the
Treasury. The bill also would raise revenue by changing the tax
treatment of inversion transactions and altering requirements
for reportable transactions and tax shelters. Provisions of the
bill would generally take effect upon enactment (assumed to be
July 1, 2003).
The Congressional Budget Office (CBO) and the Joint
Committee on Taxation (JCT) estimate that enacting the bill
would decrease governmental receipts by $457 million in 2003,
by about $15.8 billion over the 2003-2008 period, and by about
$15.7 billion over the 2003-2013 period. CBO estimates that
provisions in the bill affecting TVA, rural electric
cooperatives, and USDA would result in an increase in direct
spending of $20 million in 2003, an increase of $11 million
over the 2003-2008 period, and a decrease of $80 million over
the 2003-2013 period. CBO also estimates that extending IRS
user fees would increase spending subject to appropriation by
$18 million over the 2003-2008 period and by $39 million over
the 2003-2013 period.
CBO has reviewed section 702 and found no intergovernmental
mandates as defined in the Unfunded Mandates Reform Act (UMRA).
That section would require the General Accounting Office (GAO)
to analyze the effectiveness of alternative vehicle and fuel
creditsand would impose no costs on state, local, or tribal
governments. JCT has determined that the remaining provisions contain
no intergovernmental mandates as defined in UMRA.
JCT has determined that the provisions relating to the tax
treatment of corporate inversion transactions, tax shelters,
the alternative tax regime for individuals who expatriate,
reinsurance agreements, the excise tax on stock compensation of
insiders of inverted corporations, and the excise tax on
vaccines against hepatitis A all contain private sector
mandates as defined in UMRA. The cost of complying with the
mandates would not exceed the threshold established by UMRA
($117 million in 2003, adjusted annually for inflation). CBO
has determined that sections 702 and 831 of the bill contain no
new private-sector mandates as defined in UMRA.
Estimated cost to the Federal Government: The estimated
budgetary impact of S. 1149 is shown in the table on the
following page. These estimates are based on an assumption that
the bill will be enacted on July 1, 2003; however, if the bill
is enacted after this date, the revenue effects could be
smaller. All revenue estimates were provided by JCT except for
two provisions. For the years after 2006, CBO estimated the
revenue effects of the provision providing income and excise
tax credits for biodiesel fuel mixtures. In addition, CBO
estimated the effect of the provision extending IRS user fees.
Basis of estimate
Revenues
Several provisions would compose a significant portion of
the effect on revenues if enacted. Those provisions would
extend the credit for producing energy from certain sources,
extend the credit for purchase of alternative motor vehicles,
and modify the credit for purchase of electric vehicles. They
also would allow geological and geophysical expenditures to be
amortized over two years, establish a statutory 15-year
recovery period for natural gas distribution lines, expand the
credit for certain qualifying fuels produced from coal to fuels
produced in facilities placed in service after the date of
enactment, provide credits for biodiesel fuel purchases, and
modify the rules governing certain requirements for
contributions to, and transfers of, qualified nuclear
decommissioning funds. The bill also contains several
provisions relating to tax shelters and reportable
transactions. JCT estimates that these provisions would, if
enacted, reduce revenues by $457 million in 2002, about $15.8
billion over the 2003-2008 period, and by about $15.5 billion
over the 2003-2013 period.
----------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-----------------------------------------------------------
2003 2004 2005 2006 2007 2008
----------------------------------------------------------------------------------------------------------------
CHANGES IN REVENUES
Estimated Revenues.................................. -457 -2,187 -3,619 -4,519 -3,692 -1,299
CHANGES IN DIRECT SPENDING
Tax Credits for TVA:
Estimated Budget Authority...................... 0 0 10 10 10 10
Estimated Outlays............................... 0 0 10 10 10 10
Tax Credits for Rural Electric Cooperatives:
Estimated Budget Authority...................... 20 0 0 0 0 0
Estimated Outlays............................... 20 0 0 0 0 0
Biodiesel Farm Program Savings:
Estimated Budget Authority...................... 0 -2 -4 -11 -14 -18
Estimated Outlays............................... 0 -2 -4 -11 -14 -18
Total Changes in Direct Spending:
Estimated Budget Authority...................... 20 -2 6 -1 -4 -8
Estimated Outlays............................... 20 -2 6 -1 -4 -8
SPENDING SUBJECT TO APPROPRIATION \1\
Extension of IRS User Fees:
Estimated Authorization Level................... 0 3 3 4 4 4
Estimated Outlays............................... 0 3 3 4 4 4
----------------------------------------------------------------------------------------------------------------
\1\ S. 1149 would also require in preparation of certain annual reports by GAO and the Department of the
Treasury, which CBO estimates would cost less than $500,000 per year.
Sources: CBO and the Joint Committee on Taxation.
The bill would provide income and excise tax credits for
purchases of biodiesel fuel mixtures (a combination of diesel
fuel and vegetable oil or animal fat). The provision would
expire on December 31, 2005, and JCT estimated the effects of
the provision assuming that expiration date. However, budget
law requires CBO to treat excise taxes dedicated to trust funds
as permanent, even if they expire during the projection period.
Thus, CBO estimates that the provision would reduce revenues by
an additional $522 million from 2006 through 2013.
In addition, the bill would extend the period during which
IRS may charge fees on businesses for providing ruling,
opinion, and determination letters. Under current law,
IRS'sauthority to charge such fees will expire at the end of fiscal
year 2003. The bill would extend the authority to charge such fees
until September 30, 2013. Based on the amount of fees collected in
recent years and on information from IRS, CBO estimates that extending
the fees would increase governmental receipts by $176 million over the
2004-2008 period and $386 million over the 2004-2013 period.
Direct spending
Effect of Biodiesel Tax Credits on Farm Programs. Because
of the bill's incentives to sell and use biodiesel fuels, JCT
and CBO have estimated that use of these fuel mixtures would
increase. Because the vegetable oil in the mixtures is expected
to be primarily derived from soybeans and a few other oilseeds,
the price of these oilseeds would increase. (Qualifying
vegetable oils may be derived from corn, soybeans, and a list
of other oil seeds.) Higher commodity prices would result in
lower costs of farm price-support and income-support programs
administered by USDA. CBO estimates these changes in the demand
for soybeans and other sources of vegetable oils would reduce
federal spending by about $50 million over the 2004-2008
period, and by $190 million over the 2004-2013 period.
Use of Credits for Federal Payments by TVA and Rural
Electric Cooperatives. The bill would establish tax credits for
electric power producers using certain clean coal and renewable
technologies. Although exempt from taxation, TVA and rural
electric cooperatives would be eligible to take such credits in
the form of cash-equivalent credits that could be used to repay
amounts they owe to the Treasury. We estimate that the
provisions would cost $20 million in 2003, $100 million over
the 2003-2008 period, and $110 million over the 2003-2013
period.
CBO expects that TVA will make significant investments in
pollution control and clean coal technologies over the next 10
years and thus would be eligible for the cash-equivalent
credits authorized by the bill. TVA could use such credits to
reduce its payment to the Treasury for past appropriations. TVA
could then pass such savings on to its customers by lowering
the price it charges for electricity. We estimate that this
price adjustment would reduce TVA's power revenues by an
average of $10 million a year beginning in 2005, when we expect
the agency would revise its rates. Hence, CBO estimates that
this provision would cost a total of about $90 million over the
2003-2013 period.
Rural electric cooperatives would be eligible for both the
clean coal technology and renewable energy tax credits offered
under the bill. Based on information from industry analysts,
CBO expects that rural electric cooperatives would make
investments in technologies that would qualify for such credits
over the next several years. The bill would allow the credits
to be sold or traded to certain other taxable entities, or used
to prepay loans held by the federal government. For this
estimate, we assume that around 15 percent of eligible
cooperatives would prepay their federal loans with the Rural
Utilities Service, rather than trade the credits.
The authority provided by the bill to prepay federal loans
with non-cash credits would be considered a loan modification.
Under the Federal Credit Reform Act, the cost of a loan
modification is the change in the subsidy cost of the loan (on
a present-value basis) because of the modified loan terms. CBO
estimates that the cost of this provision would be about $20
million and would be recorded in 2003, the assumed year of
enactment.
Spending subject to appropriation
Section 831 would adjust and extend the authority of the
IRS to charge taxpayers fees for certain rulings, opinion
letters, and determinations through September 30, 2013. The
bill would authorize the IRS to retain and spend a small
portion of the fees collected, subject to appropriation. CBO
estimates that implementing this provision would cost $18
million over the 2004-2008 period and $39 million over the
2004-2013 period, subject to the appropriation of the estimated
amounts.
The bill also would require GAO and the Department of the
Treasury to provide annual reports on energy tax incentives.
Based on information from these agencies, CBO expects that
preparing the reports would cost less than $500,000 per year,
assuming availability of appropriated funds.
Summary of the effect on revenues and direct spending: The
overall effects of the bill on revenues and direct spending
over the 2003-2013 period are shown in the following table.
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By fiscal year, in millions of dollars--
-------------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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Changes in receipts....................... -457 -2,187 -3,619 -4,519 -3,692 -1,299 -275 177 283 82 -147
Changes in outlays........................ 20 -2 6 -1 -4 -8 -12 -15 -18 -22 -24
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Sources: CBO and the Joint Committee on Taxation.
Impact on state, local, and tribal governments: CBO has
reviewed section 702 and found no intergovernmental mandates as
defined in UMRA. That section would require GAO to analyze the
effectiveness of alternative vehicle and fuel credits and would
impose no costs on state, local, or tribal governments. JCT has
determined that the remaining provisions contain no
intergovernmental mandates as defined in UMRA.
Impact on the private sector: JCT has determined that the
provisions relating to the tax treatment of corporate inversion
transactions, tax shelters, the alternative tax regime for
individuals who expatriate, agreements, the excise tax on stock
compensation of insiders of inverted corporations, reinsurance,
and the excise tax on vaccines against hepatitis A all contain
private-sector mandates as defined in UMRA. The cost of
complying with the mandates would not exceed the threshold
established by UMRA ($117 million in 2003, adjusted annually
for inflation). CBO has determined that sections 702 and 831 of
the bill contain no new private-sector mandates as defined in
UMRA.
Previous CBO estimate: On May 23, 2003, CBO transmitted a
cost estimate for an unnumbered version of the Energy Tax
Incentives Act of 2003, as ordered reported by the Senate
Committee on Finance on April 2, 2003. This revised cost
estimate supersedes that previous estimate, and it reflects a
change in the estimated effect on federal revenues for the
provision pertaining to the sale of gasoline and diesel fuel at
duty-free sales enterprises as provided by JCT on June 6, 2003.
The previous estimate included a $9 million increase in federal
revenues over the 2003-2013 period resulting from this
provision; however, JCT now estimates this provision to have a
negligible effect on revenues. In addition, this estimate
reflects a revision to CBO's estimate of direct spending. The
previous estimate included a $39 million increase in direct
spending over the 2003-2013 period as a result of the provision
extending IRS user fees. This revised estimate shows that
spending as subject to appropriation.
Estimate prepared by: Federal Revenues: Annie Bartsch.
Federal Spending: Lisa Cash Driskill, Dave Hull, and Matthew
Pickford. Impact on State, Local, and Tribal Governments: Greg
Waring. Impact on the Private Sector: Paige Piper/Bach.
Estimate approved by: G. Thomas Woodward, Assistant
Director for Tax Analysis; and Peter H. Fontaine, Deputy
Assistant Director for Budget Analysis.
III. VOTES OF THE COMMITTEE
In compliance with paragraph 7(b) of Rule XXVI of the
standing rules of the Senate, the following statements are made
concerning the roll call votes in the Committee's consideration
of the ``Energy Tax Incentives Act of 2003.''
Motion to report the Bill
An original bill, the ``Energy Tax Incentives Act of
2003,'' was ordered favorably reported, by a record vote on
April 2, 2003.
Yeas.--Senators Grassley, Hatch, Lott, Snowe, Thomas,
Santorum (proxy), Frist (proxy), Smith, Bunning, Baucus,
Rockefeller (proxy), Daschle (proxy), Breaux, Conrad (proxy),
Jeffords (proxy), Bingaman (proxy), Kerry (proxy), Lincoln.
Nays.--Senators Nickles, Kyl.
Votes on other amendments
The Committee accepted an amendment by Senator Bingaman to
expand the research credit to 100 percent of expenses for
energy related research by universities and 20 percent for
payments to research consortiums for energy research. The
Committee rejected a motion by Senators Baucus and Graham, to
extend Superfund taxes, by record vote.
Yeas.--Senators Snowe, Baucus, Rockefeller, Daschle,
Conrad, Graham (proxy), Jeffords, Bingaman, Kerry (proxy).
Nays.--Senators Grassley, Hatch, Nickles, Lott, Kyl,
Thomas, Santorum, Frist (proxy), Smith, Bunning, Breaux,
Lincoln.
The Committee rejected a motion by Senators Baucus,
Rockefeller, Daschle, Breaux, Conrad, Graham, Jeffords,
Bingaman, Kerry and Lincoln regarding tax shelter transparency
and enforcement, by record vote.
Yeas.--Baucus, Rockefeller, Daschle, Breaux, Conrad, Graham
(proxy), Jeffords, Bingaman, Kerry (proxy), Lincoln.
Nays.--Senators Grassley, Hatch, Nickles, Lott, Snowe, Kyl,
Thomas, Santorum, Frist (proxy), Smith, Bunning.
The Committee rejected a modified amendment by Senator
Jeffords, regarding the motor fuel excise tax on diesel fuel
used by railroads, by record vote.
Yeas.--Baucus, Rockefeller (proxy), Jeffords, Kerry
(proxy).
Nays.--Grassley, Hatch (proxy), Nickles, Lott, Snowe, Kyl,
Thomas, Santorum (proxy), Frist (proxy), Smith, Bunning,
Daschle, Breaux, Conrad, Bingaman, Lincoln.
The Committee accepted an amendment by Senator Lott
regarding the immediate repeal of 4.3 cents tax on diesel used
by rails and barges, by voice vote.
The Committee accepted an amendment by Senator Conrad to
provide credit for business installations of stationary
microturbine power plants. (Senator Kyl objected.)
The Committee rejected an amendment by Senator Nickles to
strike section 29 of the Chairman's mark, by roll call vote.
Ayes.--Senators Nickles, Lott, Kyl, Bunning.
Nays.--Senators Grassley, Hatch (proxy), Snowe, Thomas,
Santorum (proxy), Frist (proxy), Smith, Baucus, Rockefeller
(proxy), Daschle (proxy), Breaux, Conrad (proxy), Graham
(proxy), Jeffords (proxy), Bingaman (proxy), Kerry (proxy),
Lincoln.
The Committee accepted an amendment by Senator Lincoln to
modify section 29 of the Internal Revenue Code with respect to
the definition of a landfill gas facility and to modify section
45 of the Internal Revenue Code for the production of
electricity to include electricity produced from facilities
that burn municipal solid waste. The amendment was modified to
include the President's Budget Proposal of definition change
for landfill gas placed in service date and to amend the
extension of Internal Revenue Service user fees.
IV. REGULATORY IMPACT AND OTHER MATTERS
A. Regulatory Impact
Pursuant to paragraph 11(b) of Rule XXVI of the Standing
Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact that might be
incurred in carrying out the provisions of the bill as amended.
Impact on individuals and businesses
With respect to individuals and businesses, the bill
modifies the rules relating to (1) tax benefits for alternative
fuels; (2) coal production; (3) oil and gas production; (4)
energy conservation; and (5) electric industry participants
involved in industry restructuring activities. Taxpayers may
elect whether to avail themselves of the provisions of the
bill. Thus, the provisions do not impose increased regulatory
burdens on individuals or businesses. Certain provisions of the
bill, such as the provision relating to transfers of
decommissioning funds associated with nuclear generating
facilities, simplify the present-law rules and, therefore,
reduce burdens on taxpayers electing to utilize the provision.
Thus, the bill does not impose increased regulatory burdens on
individuals and businesses.
Impact on personal privacy and paperwork
The provisions of the bill do not impact personal privacy.
Individuals may elect whether to avail themselves of the
provisions of the bill. Thus, the bill does not impose
increased paperwork burdens on individuals. Individuals who
elect to take advantage of the bill may in some cases need to
keep records in order to demonstrate that they qualify for the
tax treatment provided by the bill. In some cases the bill
simplifies present law, thus reducing recordkeeping
requirements.
B. Unfunded Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
The Committee has determined that four of the revenue
provisions of the bill impose Federal mandates on the private
sector. The four provisions are (1) the provisions to curtail
tax shelters; (2) tax treatment of corporate inversion
transactions; (3) the excise tax on stock compensation of
insiders of inverted corporations; and (4) the revisions to the
alternative tax regime for individuals who expatriate. The
Committee has determined that the remaining revenue provisions
of the bill do not impose a Federal intergovernmental mandate
on State, local, or tribal governments.
C. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the
Joint Committee on Taxation (in consultation with the Internal
Revenue Service and the Department of the Treasury) to provide
a tax complexity analysis. The complexity analysis is required
for all legislation reported by the Senate Committee on
Finance, the House Committee on Ways and Means, or any
committee of conference if the legislation includes a provision
that directly or indirectly amends the Internal Revenue Code
(the ``Code'') and has widespread applicability to individuals
or small businesses.
The staff of the Joint Committee on Taxation has determined
that a complexity analysis is not required under section
4022(b) of the IRS Reform Act because the bill contains no
provisions that amend the Internal Revenue Code and that have
``widespread applicability'' to individuals or small
businesses.
V. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In the opinion of the Committee, it is necessary in order
to expedite the business of the Senate, to dispense with the
requirements of paragraph 12 of Rule XXVI of the Standing Rules
of the Senate (relating to the showing of changes in existing
law made by the bill as reported by the Committee).