[Senate Report 112-152]
[From the U.S. Government Printing Office]


                                                       Calendar No. 327 
112th Congress }                                              {  Report
  2d Session   }              SENATE                          { 112-152 
======================================================================= 
 
   HIGHWAY INVESTMENT, JOB CREATION, AND ECONOMIC GROWTH ACT OF 2012 

                                _______
                                

               February 27, 2012.--Ordered to be printed

                                _______
                                

              Mr. Baucus, from the Committee on Finance, 
                        submitted the following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                         [To accompany S. 2132]

    The Committee on Finance, having considered original 
legislation to amend the Internal Revenue Code of 1986 to 
provide for the exclusion of highway-related taxes and trust 
fund expenditures, to provide revenues for highway programs, 
and for other purposes, having considered the same, reports 
favorably thereon and recommends that the bill, do pass.

                                CONTENTS

                                                                   Page
  I.  LEGISLATIVE BACKGROUND..........................................2
 II.  EXPLANATION OF THE BILL.........................................3
      TITLE I.--EXTENSION OF TAXES AND TRUST FUNDS...............     3
          A. Extension of Highway Trust Fund Expenditure 
              Authority and Related Taxes (secs. 101 and 102 of 
              the bill and secs. 4041, 4051, 4071, 4081, 4221, 
              4481 4483, 6412, 9503, 9504, and 9508 of the Code).     3
      TITLE II.--OTHER PROVISIONS................................     6
          A. Small Issuer Exception to Tax-Exempt Interest 
              Expense Allocation Rules for Financial Institutions 
              (sec. 201 of the bill and sec. 265 of the Code)....     6
          B. Temporary Modification of Alternative Minimum Tax 
              Limitations on Tax-Exempt Bonds (sec. 202 of the 
              bill and secs. 56 and 57 of the Code)..............     8
          C. Issuance of TRIP Bonds by State Infrastructure Banks 
              (sec. 203 of the bill).............................     9
          D. Extension of Parity for Exclusion From Income for 
              Employer-Provided Mass Transit and Parking Benefits 
              (sec. 204 of the bill and sec. 132 of the Code)....    10
          E. Private Activity Volume Cap Exemption for Sewage and 
              Water Facility Bonds (sec. 205 of the bill and sec. 
              146(g) of the Code)................................    11
      TITLE III.--REVENUE PROVISIONS.............................    13
          A. Leaking Underground Storage Tank Trust Fund (secs. 
              301 and 302 of the bill, and secs. 9503 and 9508 of 
              the Code)..........................................    13
          B. Claims and Credit Carryovers Related to Unprocessed 
              and Excluded Fuels (sec. 303 of the bill and secs. 
              40(a) and 9503(b) of the Code).....................    14
          C. Dedication of Gas Guzzler Tax to the Highway Trust 
              Fund (sec. 304 of the bill and sec. 9503 of the 
              Code)..............................................    16
          D. Revocation or Denial of Passport in Case of Certain 
              Unpaid Taxes (sec. 305 of the bill and new secs. 
              7345 and 6103(l)(23) of the Code)..................    17
          E. 100 Percent Continuous Levy on Payments to Medicare 
              Providers and Supplier (sec. 306 of the bill and 
              sec. 6331(h) of the Code)..........................    19
          F. Appropriation to the Highway Trust Fund of Amounts 
              Attributable to Certain Duties on Imported Vehicles 
              (sec. 307 of the bill).............................    21
          G. Treatment of Securities of a Controlled Corporation 
              Exchanged for Assets in Certain Reorganizations 
              (sec. 308 of the bill and sec. 361 of the Code)....    21
          H. Internal Revenue Service Levies and Thrift Savings 
              Plan Accounts (sec. 309 of the bill)...............    24
          I. Modification of Required Distribution Rules for 
              Pension Plans (sec. 310 of the bill and sec. 
              401(a)(9) of the Code).............................    25
          J. Depreciation and Amortization Rules for Highway and 
              Related Property Subject to Long-Term Leases (sec. 
              311 of the bill and secs. 168, 197, and 147 of the 
              Code)..............................................    31
          K. Transfer of Excess Pension Assets (secs. 312 and 313 
              of the bill and sec. 420 of the Code)..............    33
III.  BUDGET EFFECTS OF THE BILL.....................................37
 IV.  VOTES OF THE COMMITTEE.........................................44
  V.  REGULATORY IMPACT AND OTHER MATTERS............................45
 VI.  CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED..........46
VII.  ADDITIONAL VIEWS...............................................47

                       I. LEGISLATIVE BACKGROUND

    The taxes dedicated to the Highway Trust Fund generally do 
not apply after March 31, 2012. The Highway Trust Fund 
expenditure authority also terminates on March 31, 2012. On May 
17, 2011, the Committee on Finance held a hearing on highway 
taxes. The Committee heard from a variety of witness regarding 
the financing for the Highway Trust Fund, including 
representatives from industry and government. With respect to 
the Highway Trust Fund, the Committee has been advised that a 
shortfall of $5.6 billion is forecast for fiscal year 2013.
    The Senate Committee on Finance marked up original 
legislation (the ``Highway Investment, Job Creation, and 
Economic Growth Act of 2012'') on February 7, 2012, to be 
included in S. 1813 (the ``Moving Ahead for Progress in the 
21st Century Act'') and, with a majority and quorum present, 
ordered the bill favorably reported, with amendments on that 
date.\1\ This report describes the provisions of the bill.
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    \1\It is the understanding of the Committee that the Chairman will 
work with Members of the Committee to replace the provisions explained 
in sections III.B. and III.I (infra) with alternative revenue 
provisions that are sufficient to meet or exceed the revenue total in 
the Reported legislation.
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                      II. EXPLANATION OF THE BILL


              TITLE I.--EXTENSION OF TAXES AND TRUST FUNDS


 A. Extension of Highway Trust Fund Expenditure Authority and Related 
Taxes (secs. 101 and 102 of the bill and secs. 4041, 4051, 4071, 4081, 
        4221, 4481 4483, 6412, 9503, 9504, and 9508 of the Code)


              PRESENT LAW HIGHWAY TRUST FUND EXCISE TAXES

In general

    Six separate excise taxes are imposed to finance the 
Federal Highway Trust Fund program. Three of these taxes are 
imposed on highway motor fuels. The remaining three are a 
retail sales tax on heavy highway vehicles, a manufacturers' 
excise tax on heavy vehicle tires, and an annual use tax on 
heavy vehicles. A substantial majority of the revenues produced 
by the Highway Trust Fund excise taxes are derived from the 
taxes on motor fuels. The annual use tax on heavy vehicles 
expires October 1, 2012. Except for 4.3 cents per gallon of the 
Highway Trust Fund fuels tax rates, the remaining taxes are 
scheduled to expire after March 31, 2012. The 4.3-cents-per-
gallon portion of the fuels tax rates is permanent.\2\ The six 
taxes are summarized below.
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    \2\This portion of the tax rates was enacted as a deficit reduction 
measure in 1993. Receipts from it were retained in the General Fund 
until 1997 legislation provided for their transfer to the Highway Trust 
Fund.
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Highway motor fuels taxes

    The Highway Trust Fund motor fuels tax rates are as 
follows:\3\
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    \3\Secs. 4081(a)(2)(A)(i), 4081(a)(2)(A)(iii), 4041(a)(2), 
4041(a)(3), and 4041(m). Some of these fuels also are subject to an 
additional 0.1-cent-per-gallon excise tax to fund the Leaking 
Underground Storage Tank Trust Fund (secs. 4041(d) and 4081(a)(2)(B)).

------------------------------------------------------------------------

------------------------------------------------------------------------
Gasoline                                          18.3 cents per gallon
Diesel fuel and kerosene                          24.3 cents per gallon
Special motor fuels                               18.3 cents per gallon
                                                   generally\4\
------------------------------------------------------------------------

Non-fuel Highway Trust Fund excise taxes

    In addition to the highway motor fuels excise tax revenues, 
the Highway Trust Fund receives revenues produced by three 
excise taxes imposed exclusively on heavy highway vehicles or 
tires. These taxes are:
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    \4\See secs. 4041(a)(2), 4041(a)(3), and 4041(m).
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          1. A 12-percent excise tax imposed on the first 
        retail sale of heavy highway vehicles, tractors, and 
        trailers (generally, trucks having a gross vehicle 
        weight in excess of 33,000 pounds and trailers having 
        such a weight in excess of 26,000 pounds);\5\
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    \5\Sec. 4051.
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          2. An excise tax imposed on highway tires with a 
        rated load capacity exceeding 3,500 pounds, generally 
        at a rate of 0.945 cents per 10 pounds of excess;\6\ 
        and
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    \6\Sec. 4071.
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          3. An annual use tax imposed on highway vehicles 
        having a taxable gross weight of 55,000 pounds or 
        more.\7\ (The maximum rate for this tax is $550 per 
        year, imposed on vehicles having a taxable gross weight 
        over 75,000 pounds.)
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    \7\Sec. 4481.
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    The taxable year for the annual use tax is from July 1st 
through June 30th of the following year. For the period July 1, 
2012, through September 30, 2012, the amount of the annual use 
tax is reduced by 75 percent.\8\
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    \8\Sec. 4482(c)(4) and (d).
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         PRESENT LAW HIGHWAY TRUST FUND EXPENDITURE PROVISIONS

In general

    Under present law, revenues from the highway excise taxes, 
as imposed through March 31, 2012, generally are dedicated to 
the Highway Trust Fund. Dedication of excise tax revenues to 
the Highway Trust Fund and expenditures from the Highway Trust 
Fund are governed by the Code.\9\ The Code authorizes 
expenditures (subject to appropriations) from the Highway Trust 
Fund through March 31, 2012, for the purposes provided in 
authorizing legislation, as such legislation was in effect on 
the date of enactment of the Surface Transportation Extension 
Act of 2011, Part II.
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    \9\Sec. 9503. The Highway Trust Fund statutory provisions were 
placed in the Internal Revenue Code in 1982.
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Highway Trust Fund expenditure purposes

    The Highway Trust Fund has a separate account for mass 
transit, the Mass Transit Account.\10\ The Highway Trust Fund 
and the Mass Transit Account are funding sources for specific 
programs.
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    \10\Sec. 9503(e)(1).
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    Highway Trust Fund expenditure purposes have been revised 
with each authorization Act enacted since establishment of the 
Highway Trust Fund in 1956. In general, expenditures authorized 
under those Acts (as the Acts were in effect on the date of 
enactment of the most recent such authorizing Act) are 
specified by the Code as Highway Trust Fund expenditure 
purposes.\11\ The Code provides that the authority to make 
expenditures from the Highway Trust Fund expires after March 
31, 2012. Thus, no Highway Trust Fund expenditures may occur 
after March 31, 2012, without an amendment to the Code.
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    \11\The authorizing Acts that currently are referenced in the 
Highway Trust Fund provisions of the Code are: the Highway Revenue Act 
of 1956; Titles I and II of the Surface Transportation Assistance Act 
of 1982; the Surface Transportation and Uniform Relocation Act of 1987; 
the Intermodal Surface Transportation Efficiency Act of 1991; the 
Transportation Equity Act for the 21st Century, the Surface 
Transportation Extension Act of 2003, the Surface Transportation 
Extension Act of 2004; the Surface Transportation Extension Act of 
2004, Part II; the Surface Transportation Extension Act of 2004, Part 
III; the Surface Transportation Extension Act of 2004, Part IV; the 
Surface Transportation Extension Act of 2004, Part V; the Safe, 
Accountable, Flexible, Efficient Transportation Equity Act: A Legacy 
for Users; the SAFETEA-LU Technical Corrections Act of 2008; the 
Surface Transportation Extension Act of 2010; the Surface 
Transportation Extension Act of 2010, Part II; the Surface 
Transportation Extension Act of 2011; and the Surface Transportation 
Extension Act of 2011, Part II.
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    As noted above, section 9503 appropriates to the Highway 
Trust Fund amounts equivalent to the taxes received from the 
following: the taxes on diesel, gasoline, kerosene and special 
motor fuel, the tax on tires, the annual heavy vehicle use tax, 
and the tax on the retail sale of heavy trucks and 
trailers.\12\ Section 9601 provides that amounts appropriated 
to a trust fund pursuant to sections 9501 through 9511, are to 
be transferred at least monthly from the General Fund of the 
Treasury to such trust fund on the basis of estimates made by 
the Secretary of the Treasury of the amounts referred to in the 
Code section appropriating the amounts to such trust fund. The 
Code requires that proper adjustments be made in amounts 
subsequently transferred to the extent prior estimates were in 
excess of, or less than, the amounts required to be 
transferred.
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    \12\Sec. 9503(b)(1).
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        S. 1813, MOVING AHEAD FOR PROGRESS FOR THE 21ST CENTURY 
                                (MAP-21)

    On November 9, 2011, the Senate Environment and Public 
Works Committee passed MAP-21, a two-year reauthorization of 
Highway Trust Fund programs. Among other purposes, the bill 
reauthorizes the Federal highway, public transportation, 
highway safety, and motor carrier safety programs for fiscal 
year 2012 through fiscal year 2013.

                           REASONS FOR CHANGE

    Communities and business depend on effective transportation 
to help them grow. The projects funded by the Highway Trust 
Fund ensure safety and mobility, sustain and create jobs, 
reduce traffic congestion, improve air quality and fund 
infrastructure projects of regional and national significance 
across the country. Therefore, the Committee believes it is 
appropriate to reauthorize Highway Trust Fund expenditures 
through September 30, 2013, and to extend current Federal taxes 
payable to the Highway Trust Fund.

                        EXPLANATION OF PROVISION

    The expenditure authority for the Highway Trust Fund is 
extended through September 30, 2013. The Code provisions 
governing the purposes for which monies in the Highway Trust 
Fund may be spent are updated to include the reauthorization 
bill, S. 1813, Moving Ahead for Progress for the 21st Century 
(MAP-21).\13\
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    \13\The provision also replaces cross-references to the Surface 
Transportation Extension Act of 2011, Part II, with MAP-21, and 
replaces April 1, 2012 references with October 1, 2013 in the Code 
provisions governing the Leaking Underground Storage Tank Trust Fund, 
and the Sport Fish Restoration and Boating Trust Fund.
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    The provision extends the motor fuel taxes, and all three 
non-fuel excise taxes at their current rates through September 
30, 2015.\14\ The provision resolves the projected deficit in 
the Highway Trust Fund, assures a cushion of $2.8 billion in 
each account of the Highway Trust Fund, and creates a solvency 
account available for use by either highways or mass transit. 
Specifically, the Secretary of the Treasury is to transfer the 
excess of (1) any amount appropriated to the Highway Trust Fund 
before October 1, 2013, by reason of the provisions of this 
bill, over (2) the amount necessary to meet the required 
expenditures from the Highway Trust Fund as authorized in 
section 9503(c) of the Code (which provides expenditure 
authority from the Highway Trust Fund) for the period ending 
before October 1, 2013. Amounts in the solvency account are 
available for transfers to the Highway Account and the Mass 
Transit Account in such amounts as determined necessary by the 
Secretary to ensure that each account has a surplus balance of 
$2.8 billion on September 30, 2013. The solvency account 
terminates on September 30, 2013 and any remainder in the 
solvency account remains in the Highway Trust Fund. The 
Committee expects that the Secretary of the Treasury will 
consult with the Secretary of Transportation in making 
determinations concerning amounts necessary to meet required 
expenditures and amounts necessary to ensure the cushion of 
$2.8 billion.
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    \14\The Leaking Underground Storage Tank Trust Fund financing rate 
of 0.1 cent per gallon also is extended through September 30, 2015.
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                             EFFECTIVE DATE

    The provision is effective on April 1, 2012.

                      TITLE II.--OTHER PROVISIONS


  A. Small Issuer Exception to Tax-Exempt Interest Expense Allocation 
Rules for Financial Institutions (sec. 201 of the bill and sec. 265 of 
                               the Code)


                              PRESENT LAW

    Present law disallows a deduction for interest on 
indebtedness incurred or continued to purchase or carry 
obligations the interest on which is exempt from tax.\15\ In 
general, an interest deduction is disallowed only if the 
taxpayer has a purpose of using borrowed funds to purchase or 
carry tax-exempt obligations; a determination of the taxpayer's 
purpose in borrowing funds is made based on all of the facts 
and circumstances.\16\
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    \15\Sec. 265(a).
    \16\See Rev. Proc. 72-18, 1972-1 C.B. 740.
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            Financial institutions
    In the case of a financial institution, the Code generally 
disallows that portion of the taxpayer's interest expense that 
is allocable to tax-exempt interest.\17\ The amount of interest 
that is disallowed is an amount which bears the same ratio to 
such interest expense as the taxpayer's average adjusted bases 
of tax-exempt obligations acquired after August 7, 1986, bears 
to the average adjusted bases for all assets of the taxpayer.
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    \17\Sec. 265(b)(1). A ``financial institution'' is any person that 
(1) accepts deposits from the public in the ordinary course of such 
person's trade or business and is subject to Federal or State 
supervision as a financial institution or (2) is a corporation 
described by section 585(a)(2). Sec. 265(b)(5).
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            Exception for certain obligations of qualified small 
                    issuers
    The general rule in section 265(b), denying financial 
institutions' interest expense deductions allocable to tax-
exempt obligations, does not apply to ``qualified tax-exempt 
obligations.''\18\ Instead, as discussed in the next section, 
only 20 percent of the interest expense allocable to 
``qualified tax-exempt obligations'' is disallowed.\19\ A 
``qualified tax-exempt obligation'' is a tax-exempt obligation 
that is (1) issued after August 7, 1986, by a qualified small 
issuer, (2) not a private activity bond, and (3) designated by 
the issuer as qualifying for the exception from the general 
rule of section 265(b).
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    \18\Sec. 265(b)(3).
    \19\Secs. 265(b)(3)(A), 291(a)(3) and 291(e)(1).
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    A ``qualified small issuer'' is an issuer that reasonably 
anticipates that the amount of tax-exempt obligations that it 
will issue during the calendar year will be $10 million or 
less.\20\ The Code specifies the circumstances under which an 
issuer and all subordinate entities are aggregated.\21\ For 
purposes of the $10 million limitation, an issuer and all 
entities that issue obligations on behalf of such issuer are 
treated as one issuer. All obligations issued by a subordinate 
entity are treated as being issued by the entity to which it is 
subordinate. An entity formed (or availed of) to avoid the $10 
million limitation and all entities benefiting from the device 
are treated as one issuer.
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    \20\Sec. 265(b)(3)(C).
    \21\Sec. 265(b)(3)(E).
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    Composite issues (i.e., combined issues of bonds for 
different entities) qualify for the ``qualified tax-exempt 
obligation'' exception only if the requirements of the 
exception are met with respect to (1) the composite issue as a 
whole (determined by treating the composite issue as a single 
issue) and (2) each separate lot of obligations that is part of 
the issue (determined by treating each separate lot of 
obligations as a separate issue).\22\ Thus a composite issue 
may qualify for the exception only if the composite issue 
itself does not exceed $10 million, and if each issuer 
benefitting from the composite issue reasonably anticipates 
that it will not issue more than $10 million of tax-exempt 
obligations during the calendar year, including through the 
composite arrangement.
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    \22\Sec. 265(b)(3)(F).
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            Special rules providing modifications to qualified small 
                    issuer exception for certain issues in 2009 and 
                    2010
    With respect to tax-exempt obligations issued during 2009 
and 2010, the special rules increased from $10 million to $30 
million the annual limit for qualified small issuers.
    In addition, in the case of a ``qualified financing issue'' 
issued in 2009 or 2010, the special rules applied the $30 
million annual volume limitation at the borrower level (rather 
than at the level of the pooled financing issuer). Thus, for 
the purpose of applying the requirements of the section 
265(b)(3) qualified small issuer exception, the portion of the 
proceeds of a qualified financing issue that are loaned to a 
``qualified borrower'' that participates in the issue were 
treated as a separate issue with respect to which the qualified 
borrower is deemed to be the issuer.
    A ``qualified financing issue'' was any composite, pooled, 
or other conduit financing issue the proceeds of which were 
used directly or indirectly to make or finance loans to one or 
more ultimate borrowers all of whom are qualified borrowers. A 
``qualified borrower'' meant (1) a State or political 
subdivision of a State or (2) an organization described in 
section 501(c)(3) and exempt from tax under section 501(a). 
Thus, for example, a $100 million pooled financing issue that 
was issued in 2009 would qualify for the section 265(b)(3) 
exception if the proceeds of such issue were used to make four 
equal loans of $25 million to four qualified borrowers. 
However, if (1) more than $30 million were loaned to any 
qualified borrower, (2) any borrower were not a qualified 
borrower, or (3) any borrower would, if it were the issuer of a 
separate issue in an amount equal to the amount loaned to such 
borrower, fail to meet any of the other requirements of section 
265(b)(3), the entire $100 million pooled financing issue 
failed to qualify for the exception.
    For purposes of determining whether an issuer meets the 
requirements of the small issuer exception, under the special 
rules, qualified 501(c)(3) bonds issued in 2009 or 2010 were 
treated as if they were issued by the 501(c)(3) organization 
for whose benefit they were issued (and not by the actual 
issuer of such bonds). In addition, in the case of an 
organization described in section 501(c)(3) and exempt from 
taxation under section 501(a), requirements for ``qualified 
financing issues'' were applied as if the section 501(c)(3) 
organization were the issuer. Thus, in any event, an 
organization described in section 501(c)(3) and exempt from 
taxation under section 501(a) was limited to the $30 million 
per issuer cap for qualified tax exempt obligations described 
in section 265(b)(3).

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to increase 
the volume limitation for qualified small issuers and make 
other modifications to the aggregation rules, for several 
reasons. For example, because the $10 million volume limit was 
not indexed for inflation when it was enacted in 1986, the real 
value of $10 million of such bond proceeds is less than half of 
what it was in 1986. Regarding the aggregation rules, today 
more borrowers are aggregating their bond issues or issuing 
bonds through State-wide financing authorities; this pooling 
increases economic efficiency and decreases borrowing costs for 
small issuers.

                        EXPLANATION OF PROVISION

    The provision extends the special rules providing 
modifications to the qualified small issuer exception to bonds 
issued after the date of enactment and before January 1, 2013.

                             EFFECTIVE DATE

    The provision is effective for obligations issued after the 
date of its enactment.

  B. Temporary Modification of Alternative Minimum Tax Limitations on 
Tax-Exempt Bonds (sec. 202 of the bill and secs. 56 and 57 of the Code)


                              PRESENT LAW

    Present law imposes an alternative minimum tax (``AMT'') on 
individuals and corporations. AMT is the amount by which the 
tentative minimum tax exceeds the regular income tax. The 
tentative minimum tax is computed based upon a taxpayer's 
alternative minimum taxable income (``AMTI''). AMTI is the 
taxpayer's taxable income modified to take into account certain 
preferences and adjustments. One of the preference items is 
tax-exempt interest on certain tax-exempt bonds issued for 
private activities.\23\ Also, in the case of a corporation, an 
adjustment based on current earnings is determined, in part, by 
taking into account 75 percent of certain items, including tax-
exempt interest, excluded from taxable income but included in 
the corporation's earnings and profits.\24\
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    \23\Sec. 57(a)(5).
    \24\Sec. 56(g)(4)(B).
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    The American Recovery and Reinvestment Act of 2009 provided 
that tax-exempt interest on private activity bonds issued in 
2009 and 2010 is not an item of tax preference for purposes of 
the AMTI and interest on tax exempt bonds issued in 2009 and 
2010 is not included in the corporate adjustment based on 
current earnings.
    For these purposes, a refunding bond generally is treated 
as issued on the date of the issuance of the refunded bond (or 
in the case of a series of refundings, the original bond). 
However, the Act provided that tax-exempt interest on private 
activity bonds issued in 2009 and 2010 to currently refund a 
private activity bond issued after December 31, 2003, and 
before January 1, 2009, is not an item of tax preference for 
purposes of the AMT and is not included in the corporate 
adjustment based on current earnings.

                           REASONS FOR CHANGE

    The Committee believes that the AMT treatment of interest 
on tax-exempt bonds restricts the number of persons willing to 
hold tax-exempt bonds, resulting in higher financing costs. 
Accordingly, the bill eliminates the AMT adjustments for 
interest on tax-exempt bonds issued in the portion of calendar 
year 2012 after the date of enactment.

                        EXPLANATION OF PROVISION

    The provision provides that tax-exempt interest on private 
activity bonds issued after the date of enactment and before 
January 1, 2013, is not an item of tax preference for purposes 
of the AMT and interest on tax exempt bonds issued during this 
period is not included in the corporate adjustment based on 
current earnings. For these purposes, a refunding bond is 
treated as issued on the date of the issuance of the refunded 
bond (or in the case of a series of refundings, the original 
bond).

                             EFFECTIVE DATE

    The provision applies to interest on bonds issued after the 
date of enactment.

 C. Issuance of TRIP Bonds by State Infrastructure Banks (sec. 203 of 
                               the bill)


                              PRESENT LAW

    There are no Code provisions for the issuance of 
transportation and regional infrastructure project (``TRIP'') 
bonds.

                           REASONS FOR CHANGE

    The Committee believes that this provision, which amends 
Title 23, provides an opportunity for the Congress to consider, 
at a later date, the further development of the framework for 
the TRIP bond program.

                        EXPLANATION OF PROVISION

    The provision amends Title 23 to provide that a State, 
through a State infrastructure bank, may issue TRIP bonds and 
deposit the proceeds from such bonds into a TRIP bond account 
of the bank. A ``TRIP bond'' means any bond issued as part of 
an issue if (1) 100 percent of the available project proceeds 
of such issue are to be used for expenditures incurred after 
the date of enactment for one or more qualified projects 
pursuant to an allocation of such proceeds to such project or 
projects by a State infrastructure bank, (2) the bond is issued 
by a State infrastructure bank and is in registered form 
(within the meaning of section 149 of the Internal Revenue 
Code), (3) the State infrastructure bank designates such bond 
for purposes of the provision and (4) the term of each bond 
that is part of such issue does not exceed 30 years. A 
``qualified project'' means the capital improvements to any 
transportation infrastructure project of any governmental unit 
or other person, including roads, bridges, rail and transit 
systems, ports and, inland waterways proposed and approved by a 
State infrastructure bank, but does not include costs of 
operations or maintenance with respect to such project.
    The provision requires a State to develop a transparent and 
competitive process for the award of funds deposited into the 
TRIP bond account that considers the impact of qualified 
projects on the economy, the environment, state of good repair, 
and equity. The requirements of any Federal law, including 
Title 23 and Titles 40 and 49, which would otherwise apply to 
projects to which the United States is a party or to funds made 
available under such law and projects assisted with those funds 
shall apply to (1) funds made available under the TRIP bond 
account for similar qualified projects and (2) similar 
qualified projects assisted through the use of such funds.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

D. Extension of Parity for Exclusion From Income for Employer-Provided 
Mass Transit and Parking Benefits (sec. 204 of the bill and sec. 132 of 
                               the Code)


                              PRESENT LAW

    Qualified transportation fringe benefits provided by an 
employer are excluded from an employee's gross income for 
income tax purposes and from an employee's wages for payroll 
tax purposes.\25\ Qualified transportation fringe benefits 
include parking, transit passes, vanpool benefits, and 
qualified bicycle commuting reimbursements. No amount is 
includible in the income of an employee merely because the 
employer offers the employee a choice between cash and 
qualified transportation fringe benefits (other than a 
qualified bicycle commuting reimbursement). Qualified 
transportation fringe benefits also include a cash 
reimbursement by an employer to an employee. In the case of 
transit passes, however, a cash reimbursement is considered a 
qualified transportation fringe benefit only if a voucher or 
similar item which may be exchanged only for a transit pass is 
not readily available for direct distribution by the employer 
to the employee.
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    \25\Secs. 132(f), 3121(b)(2), and 3306(b)(16) and 3401(a)(19).
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    Prior to February 17, 2009, the amount that could be 
excluded as qualified transportation fringe benefits was 
limited to $100 per month in combined vanpooling and transit 
pass benefits and $175 per month in qualified parking benefits. 
All limits are adjusted annually for inflation, using 1998 as 
the base year (for 2012 the limits are $125 and $240, 
respectively). The American Recovery and Reinvestment Act of 
2009,\26\ however, provided parity in qualified transportation 
fringe benefits by temporarily increasing the monthly exclusion 
for employer-provided vanpool and transit pass benefits to the 
same level as the exclusion for employer-provided parking, 
effective for months beginning on or after the date of 
enactment (February 17, 2009) and before January 1, 2011. The 
Tax Relief, Unemployment Insurance Reauthorization, and Job 
Creation Act of 2010\27\ extended the parity in qualified 
transportation fringe benefits through December 31, 2011.
---------------------------------------------------------------------------
    \26\Pub. L. No. 111-5.
    \27\Pub. L. No. 111-312.
---------------------------------------------------------------------------
    Effective January 1, 2012, the amount that could be 
excluded as qualified transportation fringe benefits is limited 
to $125 per month in combined vanpooling and transit pass 
benefits and $240 per month in qualified parking benefits.

                           REASONS FOR CHANGE

    Maintaining parity in transportation benefits provides 
American workers with an incentive to use public transportation 
and vanpools for their commute rather than driving to work in 
their personal vehicles. The Committee believes that this 
provision will help to ease traffic congestion and reduce 
America's dependence on foreign sources of oil.

                        EXPLANATION OF PROVISION

    The provision extends the parity in qualified 
transportation fringe benefits for the entire 2012. In order 
for the extension to be effective retroactive to January 1, 
2012, the Committee intends that expenses incurred prior to 
enactment by an employee for employer-provided vanpool and 
transit benefits may be reimbursed by employers on a tax free 
basis to the extent they exceed $125 per month and are less 
than $240 per month, but only to the extent that such amount 
has not already been excluded from such employee's taxable 
compensation.

                             EFFECTIVE DATE

    The provision is effective for months after December 31, 
2011.

E. Private Activity Volume Cap Exemption for Sewage and Water Facility 
        Bonds (sec. 205 of the bill and sec. 146(g) of the Code)


In general

    Subject to certain Code restrictions, interest on bonds 
issued by State and local government generally is excluded from 
gross income for Federal income tax purposes. Bonds issued by 
State and local governments may be classified as either 
governmental bonds or private activity bonds. Governmental 
bonds are bonds the proceeds of which are primarily used to 
finance governmental functions or which are repaid with 
governmental funds. Private activity bonds are bonds in which 
the State or local government serves as a conduit providing 
financing to nongovernmental persons. For this purpose, the 
term ``nongovernmental person'' generally includes the Federal 
Government and all other individuals and entities other than 
State or local governments. The exclusion from income for 
interest on State and local bonds does not apply to private 
activity bonds, unless the bonds are issued for certain 
permitted purposes (``qualified private activity bonds'') and 
other Code requirements are met.

Qualified private activity bonds

    Interest on private activity bonds is taxable unless the 
bonds meet the requirements for qualified private activity 
bonds. Qualified private activity bonds permit States or local 
governments to act as conduits providing tax-exempt financing 
for certain private activities. The definition of qualified 
private activity bonds includes an exempt facility bond, or 
qualified mortgage, veterans' mortgage, small issue, 
redevelopment, qualified 501(c)(3), or student loan bond.\28\ 
The definition of exempt facility bond includes bonds issued to 
finance certain transportation facilities (airports, ports, 
mass commuting, and high-speed intercity rail facilities); 
qualified residential rental projects; privately owned and/or 
operated utility facilities (sewage, water, solid waste 
disposal, and local district heating and cooling facilities, 
certain private electric and gas facilities, and hydroelectric 
dam enhancements); public/private educational facilities; 
qualified green building and sustainable design projects; and 
qualified highway or surface freight transfer facilities.\29\
---------------------------------------------------------------------------
    \28\Sec. 141(e).
    \29\Sec. 142(a).
---------------------------------------------------------------------------
    In most cases, the aggregate volume of these tax-exempt 
private activity bonds is restricted by annual aggregate volume 
limits imposed on bonds issued by issuers within each State. 
Certain types of private activity bonds are exempted from the 
annual volume limits.
    For calendar year 2012, the State volume cap, which is 
indexed for inflation, equals $95 per resident of the State, or 
$284,560,000, whichever is greater.

                           REASONS FOR CHANGE

    The Committee believes that the types of infrastructure 
projects funded by the proceeds of these bonds are important in 
the current economic circumstances. It is anticipated that 
exempting these types of bonds from the volume limitation will 
encourage issuers to undertake more infrastructure spending for 
sewage and water facilities.

                        EXPLANATION OF PROVISION

    The provision exempts two types of exempt facility bonds 
from the annual private activity volume limits. The newly-
exempted bonds are exempt facility bonds for sewage and water 
facilities.
    The provision only applies to bonds issued before January 
1, 2018.

                             EFFECTIVE DATE

    The provision is effective for bonds issued after the date 
of enactment.

                     TITLE III.--REVENUE PROVISIONS


 A. Leaking Underground Storage Tank Trust Fund (secs. 301 and 302 of 
             the bill, and secs. 9503 and 9508 of the Code)


                              PRESENT LAW

Leaking Underground Storage Tank Trust Fund financing rate

    Fuels of a type subject to other trust fund excise taxes 
generally are subject to an add-on excise tax of 0.1-cent-per-
gallon to fund the Leaking Underground Storage Tank (``LUST'') 
Trust Fund.\30\ For example, the LUST excise tax applies to 
gasoline, diesel fuel, kerosene, and most alternative fuels 
subject to highway and aviation fuels excise taxes, and to 
fuels subject to the inland waterways fuel excise tax. This 
excise tax is imposed on both uses and parties subject to the 
other taxes, and to situations (other than export) in which the 
fuel otherwise is tax-exempt. For example, off-highway business 
use of gasoline and off-highway use of diesel fuel and kerosene 
generally are exempt from highway motor fuels excise tax. 
Similarly, States and local governments and certain other 
parties are exempt from such tax. Nonetheless, all such uses 
and parties are subject to the 0.1-cent-per-gallon LUST excise 
tax.
---------------------------------------------------------------------------
    \30\Secs. 4041, 4042, and 4081.
---------------------------------------------------------------------------
    Liquefied natural gas, compressed natural gas, and 
liquefied petroleum gas are exempt from the LUST tax. 
Additionally, methanol and ethanol fuels produced from coal 
(including peat) are taxed at a reduce rate of 0.05 cents per 
gallon.
    The LUST tax is scheduled to expire after March 31, 
2012.\31\
---------------------------------------------------------------------------
    \31\For Federal budget scorekeeping purposes, the LUST Trust Fund 
tax, like other excise taxes dedicated to trust funds, is assumed to be 
permanent.
---------------------------------------------------------------------------

Overview of Leaking Underground Storage Tank Trust Fund expenditure 
        provisions

    Amounts in the LUST Trust Fund are available, as provided 
in appropriations Acts, for purposes of making expenditures to 
carry out sections 9003(h)-(j), 9004(f), 9005(c), and 9010-9013 
of the Solid Waste Disposal Act as in effect on the date of 
enactment of Public Law 109-168. Any claim filed against the 
LUST Trust Fund may be paid only out of such fund, and the 
liability of the United States for claims is limited to the 
amount in the fund.
    The monies in the LUST Trust Fund are used to pay expenses 
incurred by the Environmental Protection Agency (the ``EPA'') 
and the States for preventing, detecting, and cleaning up leaks 
from petroleum underground storage tanks, as well as programs 
to evaluate the compatibility of fuel storage tanks with 
alternative fuels, MTBE additives, and ethanol and biodiesel 
blends.
    The EPA makes grants to States to implement the program, 
and States use cleanup funds primarily to oversee and enforce 
corrective actions by responsible parties. States and EPA also 
use cleanup funds to conduct corrective actions where no 
responsible party has been identified, where a responsible 
party fails to comply with a cleanup order, in the event of an 
emergency, and to take cost recovery actions against parties. 
In 2005, Congress authorized the EPA and States to use trust 
fund monies for non-cleanup purposes as well, specifically for 
administration and enforcement of the leak prevention 
requirements of the UST program.\32\
---------------------------------------------------------------------------
    \32\Pub. L. No. 109-58.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Revenues deposited in the LUST Trust Fund have exceeded 
outlays and the Fund has a surplus balance. The Highway Trust 
Fund primarily relies on motor fuel excise taxes for its 
revenues. The Committee believes that since the LUST tax is 
collected on motor fuels, it is appropriate to fund highway 
projects with a portion of such motor fuel tax receipts.

                        EXPLANATION OF PROVISION

    The provision transfers $3 billion from the LUST Trust Fund 
to the Highway Trust Fund. The provision also provides that 
.033 cent of the 0.1 cent LUST Trust Fund financing rate is 
dedicated to the Highway Trust Fund.\33\
---------------------------------------------------------------------------
    \33\As noted above, the Leaking Underground Storage Tank Trust Fund 
financing rate of 0.1 cent per gallon is also extended through 
September 30, 2015.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

  B. Claims and Credit Carryovers Related to Unprocessed and Excluded 
  Fuels (sec. 303 of the bill and secs. 40(a) and 9503(b) of the Code)


                              PRESENT LAW

Cellulosic biofuel producer credit

    The ``cellulosic biofuel producer credit'' is a 
nonrefundable income tax credit for each gallon of qualified 
cellulosic fuel production of the producer for the taxable 
year. The amount of the credit is generally $1.01 per 
gallon.\34\
---------------------------------------------------------------------------
    \34\In the case of cellulosic biofuel that is alcohol, the $1.01 
credit amount is reduced by the credit amount of the alcohol mixture 
credit, and for ethanol, the credit amount for small ethanol producers, 
as in effect at the time the cellulosic biofuel fuel is produced.
---------------------------------------------------------------------------
    ``Qualified cellulosic biofuel production'' is any 
cellulosic biofuel which is produced by the taxpayer and which 
is: (1) sold by the taxpayer to another person (a) for use by 
such other person in the production of a qualified cellulosic 
biofuel mixture in such person's trade or business (other than 
casual off-farm production), (b) for use by such other person 
as a fuel in a trade or business, or (c) who sells such 
cellulosic biofuel at retail to another person and places such 
cellulosic biofuel in the fuel tank of such other person; or 
(2) used by the producer for any purpose described in (1)(a), 
(b), or (c).
    ``Cellulosic biofuel'' means any liquid fuel that (1) is 
produced in the United States and used as fuel in the United 
States, (2) is derived from any lignocellulosic or 
hemicellulosic matter that is available on a renewable or 
recurring basis, and (3) meets the registration requirements 
for fuels and fuel additives established by the EPA under 
section 211 of the Clean Air Act. Cellulosic biofuel does not 
include fuels that (1) are more than four percent (determined 
by weight) water and sediment in any combination, (2) have an 
ash content of more than one percent (determined by weight), or 
(3) have an acid number greater than 25 (``unprocessed or 
excluded fuels'').\35\
---------------------------------------------------------------------------
    \35\Section 40(b)(6)(e)(iii). Water content (including both free 
water and water in solution with dissolved solids) is determined by 
distillation, using for example ASTM method D95 or a similar method 
suitable to the specific fuel being tested. Sediment consists of solid 
particles that are dispersed in the liquid fuel and is determined by 
centrifuge or extraction using, for example, ASTM method D1796 or D473 
or similar method that reports sediment content in weight percent. Ash 
is the residue remaining after combustion of the sample using a 
specified method, such as ASTM D3174 or a similar method suitable for 
the fuel being tested.
---------------------------------------------------------------------------
    The cellulosic biofuel producer credit cannot be claimed 
unless the taxpayer is registered by the Internal Revenue 
Service (``IRS'') as a producer of cellulosic biofuel. The IRS 
permits a taxpayer to register as a cellulosic biofuel producer 
after the cellulosic biofuel has been produced. Thus, a person 
may register as a cellulosic biofuel producer in 2010 for 
cellulosic biofuel produced in 2009 and then claim the credit.
    Cellulosic biofuel eligible for the section 40 credit is 
precluded from qualifying as biodiesel, renewable diesel, or 
alternative fuel for purposes of the applicable income tax 
credit, excise tax credit, or payment provisions relating to 
those fuels.\36\
---------------------------------------------------------------------------
    \36\See secs. 40A(d)(1), 40A(f)(3), and 6426(h).
---------------------------------------------------------------------------
    Because it is a credit under section 40(a), the cellulosic 
biofuel producer credit is part of the general business credits 
in section 38. However, the credit can only be carried forward 
three taxable years after the termination of the credit. The 
credit is also allowable against the alternative minimum tax. 
Under section 87, the credit is included in gross income. The 
cellulosic biofuel producer credit terminates on December 31, 
2012.
    The kraft process for making paper produces a byproduct 
called black liquor, which has been used for decades by paper 
manufacturers as a fuel in the papermaking process. Black 
liquor is composed of water, lignin, and the spent chemicals 
used to break down the wood. The amount of the biomass in black 
liquor varies. The portion of the black liquor that is not 
consumed as a fuel source for the paper mills is recycled back 
into the papermaking process. Black liquor has ash content 
(mineral and other inorganic matter) significantly above that 
of other fuels.
    In informal guidance, the IRS concluded that black liquor 
is a liquid fuel from biomass and may qualify for the 
cellulosic biofuel producer credit, as well as the refundable 
alternative fuel mixture credit.\37\ A taxpayer cannot claim 
both the alternative fuel mixture credit and the cellulosic 
biofuel producer credit. The alternative fuel credits and 
payment provisions expired December 31, 2011.
---------------------------------------------------------------------------
    \37\Chief Counsel Advice 200941011 (June 30, 2009).
---------------------------------------------------------------------------

Alternative fuel mixture credit and payment

    The Code provided for a tax credit of 50 cents for each 
gallon of alternative fuel used to produce an alternative fuel 
mixture that is used or sold for use as a fuel.\38\ Under 
Notice 2006-92, an alternative fuel mixture is a mixture of 
alternative fuel and a taxable fuel (such as diesel) that 
contains at least 0.1 percent taxable fuel. Liquid fuel derived 
from biomass is an alternative fuel.\39\ Diesel fuel has been 
added to black liquor to qualify for the alternative fuel 
mixture credit and the mixture is burned in a recovery boiler 
as fuel. Persons that have an alternative fuel mixture credit 
amount in excess of their taxable fuel excise tax liability may 
make a claim for payment from the Treasury in the amount of the 
excess under section 6427 for black liquor fuel mixtures 
produced before January 1, 2010.\40\ If a timely claim has not 
been made under section 6427, alternatively, a taxpayer may use 
section 34 (a refundable income tax credit) to make a claim in 
the amount of the alternative fuel mixture credit payable under 
section 6427(e).
---------------------------------------------------------------------------
    \38\Sec. 6426(e).
    \39\Sec. 6426(d)(2)(G).
    \40\For fuel sold or used after December 31, 2009, alternative fuel 
does not include any fuel derived from the production of paper or pulp. 
Sec. 6426(d)(2) (flush language).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The kraft process for making paper produces a byproduct 
called black liquor, which has been used for more than seven 
decades by paper manufacturers as a fuel in the papermaking 
process. Congress's intent in creating the alternative fuel 
mixture tax credit and the cellulosic biofuels tax credit was 
to give taxpayers an additional financial incentive to create 
new fuels, in part to displace imported petroleum. However, in 
an unintended outcome, black liquor qualified for the 
alternative fuel mixture tax credit and the cellulosic biofuels 
tax credit. Congress never intended for black liquor to qualify 
for these credits and, in 2010, prohibited the credits for 
black liquor sold or used on or after January 1, 2010. This 
provision further closes the unintended black liquor loophole 
by preventing taxpayers from claiming the cellulosic biofuels 
credit on any new or amended tax returns.

                        EXPLANATION OF PROVISION

    The provision prohibits taxpayers from claiming the 
cellulosic biofuels credit (including any portion of the unused 
general business credit carryover attributable to such credit) 
for unprocessed or excluded fuels, as defined in section 
40(b)(6)(e)(iii),\41\ such as black liquor, sold or used before 
January 1, 2010. However, taxpayers will be permitted to claim 
the 50 cents-per-gallon alternative fuel mixture credit or 
payment for these fuels sold or used before January 1, 2010. As 
under present law, a taxpayer may use section 34, in 
conjunction with section 6427(e) to claim the 50-cents-per-
gallon benefit of the alternative fuel mixture credit.
---------------------------------------------------------------------------
    \41\Section 1408(a) of the Health Care and Education Reconciliation 
Act of 2010, Pub. L. No. 111-152, added section 40(e)(6)(E)(iii)(I) and 
(II), excluding from the definition of cellulosic biofuel any fuel 
having in any combination water and sediment of more than 4 percent of 
such fuel, and any fuel with an ash content of more than 1 percent. 
Section 2121(a) of the Small Business Jobs Act of 2010, Pub. L. No. 
111-240, added section 40(e)(6)(iii)(III), which excluded any fuel with 
an acid number greater than 25 from the definition of cellulosic 
biofuel. Together, these amendments comprise section 40(e)(6)(iii).
---------------------------------------------------------------------------
    Under the provision, out of money in the Treasury not 
otherwise appropriated, amounts equivalent to the revenue 
resulting from the provision are transferred to the Highway 
Trust Fund.

                             EFFECTIVE DATE

    The provision is effective for claims (including returns 
and amended returns) filed on or after February 3, 2012.

C. Dedication of Gas Guzzler Tax to the Highway Trust Fund (sec. 304 of 
                  the bill and sec. 9503 of the Code)


                              PRESENT LAW

    Under present law, the Code imposes a tax (``the gas 
guzzler tax'') on automobiles that are manufactured primarily 
for use on public streets, roads, and highways and that are 
rated at 6,000 pounds unloaded gross vehicle weight or 
less.\42\ The tax is imposed on the sale by the manufacturer of 
each automobile of a model type with a fuel economy of 22.5 
miles per gallon or less. The tax range begins at $1,000 and 
increases to $7,700 for models with a fuel economy less than 
12.5 miles per gallon.
---------------------------------------------------------------------------
    \42\Sec. 4064.
---------------------------------------------------------------------------
    Emergency vehicles and non-passenger automobiles are exempt 
from the tax. The tax also does not apply to non-passenger 
automobiles. The Secretary of Transportation determines which 
vehicles are ``non-passenger'' automobiles, thereby exempting 
these vehicles from the gas guzzler tax based on regulations in 
effect on the date of enactment of the gas guzzler tax.\43\ 
Hence, vehicles defined in Title 49 C.F.R. sec. 523.5 (relating 
to light trucks) are exempt. These vehicles include those 
designed to transport property on an open bed (e.g., pick-up 
trucks) or provide greater cargo-carrying than passenger 
carrying volume including the expanded cargo-carrying space 
created through the removal of readily detachable seats (e.g., 
pick-up trucks, vans, and most minivans, sports utility 
vehicles, and station wagons). Additional vehicles that meet 
the ``non-passenger'' requirements are those with at least four 
of the following characteristics: (1) an angle of approach of 
not less than 28 degrees; (2) a breakover angle of not less 
than 14 degrees; (3) a departure angle of not less than 20 
degrees; (4) a running clearance of not less than 20 
centimeters; and (5) front and rear axle clearances of not less 
than 18 centimeters each. These vehicles would include many 
sports utility vehicles.
---------------------------------------------------------------------------
    \43\Sec. 4064(b)(1)(A).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The gas guzzler tax serves as a deterrent to purchasing 
fuel inefficient vehicles, thus encouraging the purchase of 
more fuel efficient vehicles, which in turn reduces motor fuel 
tax contributions to the Highway Trust Fund. Thus, to 
compensate for that underpayment, the Committee believes this 
tax on automobiles is appropriate to dedicate to the Highway 
Trust Fund.

                        EXPLANATION OF PROVISION

    The provision requires that amounts equivalent to the gas 
guzzler taxes received in the Treasury be transferred to the 
Highway Trust Fund.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

  D. Revocation or Denial of Passport in Case of Certain Unpaid Taxes 
 (sec. 305 of the bill and new secs. 7345 and 6103(l)(23) of the Code)


                              PRESENT LAW

    The administration of passports is the responsibility of 
the Department of State.\44\ State may refuse to issue or renew 
a passport if the applicant owes child support in excess of 
$2,500 or owes certain types of Federal debts, such as expenses 
incurred in providing assistance to an applicant to return to 
the United States. The scope of this authority does not extend 
to rejection or revocation of a passport on the basis of 
delinquent Federal taxes. Issuance of a passport does not 
require the applicant to provide a social security number or 
taxpayer identification number.
---------------------------------------------------------------------------
    \44\``Passport Act of 1926,'' 22 U.S.C. sec. 211a et seq.
---------------------------------------------------------------------------
    Returns and return information are confidential and may not 
be disclosed by the IRS, other Federal employees, State 
employees, and certain others having access to such information 
except as provided in the Internal Revenue Code.\45\ There are 
a number of exceptions to the general rule of nondisclosure 
that authorize disclosure in specifically identified 
circumstances, including disclosure of information about 
federal tax debts for purposes of reviewing an application for 
a Federal loan\46\ and for purposes of enhancing the integrity 
of the Medicare program.\47\
---------------------------------------------------------------------------
    \45\Sec. 6103.
    \46\Sec. 6103(l)(3).
    \47\Sec. 6103(l)(22).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee is aware that the amount of unpaid Federal 
tax debts continues to present a challenge to the IRS. The 
Committee is also aware that a significant amount of unpaid 
Federal tax debt is owed by persons to whom passports have been 
issued. In 2011, for example, the Government Accountability 
Office reported that approximately 224,000 persons issued U.S. 
passports in 2008 owed in aggregate $5.8 billion.\48\ Federal 
law currently permits the Department of State to refuse an 
application for a passport or revoke a passport based on the 
existence of certain debts, including delinquent child support, 
but does not have authority to consider the existence of tax 
debt. In addition, the IRS is not authorized to provide 
information to the Department of State about persons who owe 
tax debts. The Committee believes that tax compliance will 
increase if issuance of a passport is linked to payment of 
one's tax debts.
---------------------------------------------------------------------------
    \48\Government Accountability Office, Potential for Using Passport 
Issuance to Increase Tax Compliance, (GAO-11-272), April, 2011.
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    If the Commissioner of Internal Revenue certifies to the 
Secretary of the Treasury the identity of persons who have 
seriously delinquent Federal taxes, the Secretary of the 
Treasury or his delegate is authorized to transmit such 
certification to the Secretary of State for use in determining 
whether to issue, renew, or revoke a passport. Applicants whose 
names are included on the certifications provided to the 
Secretary of State are ineligible for a passport. The provision 
bars the Secretary of State from issuing a passport to any 
individual who has a seriously delinquent tax debt. It also 
requires revocation of a passport previously issued to any such 
individual. Exceptions are permitted for emergency or 
humanitarian circumstances, as well as short term use of a 
passport for return travel to the United States by the 
delinquent taxpayer.
    A seriously delinquent tax debt generally includes any 
outstanding debt for Federal tax in excess of $50,000, 
including interest and any penalties, for which a notice of 
lien or a notice of levy has been filed. This amount is to be 
adjusted for inflation annually, using calendar year 2011, and 
a cost-of-living adjustment. Even if a tax debt otherwise meets 
the statutory threshold, it may not be considered seriously 
delinquent if (1) the debt is being paid in a timely manner 
pursuant to an installment agreement or offer-in-compromise, or 
(2) collection action with respect to the debt is suspended 
because a collection due process hearing or innocent spouse 
relief has been requested or is pending.

                             EFFECTIVE DATE

    The provision is effective on January 1, 2013.

 E. 100 Percent Continuous Levy on Payments to Medicare Providers and 
     Suppliers (sec. 306 of the bill and sec. 6331(h) of the Code)


                              PRESENT LAW

In general

    Levy is the administrative authority of the IRS to seize a 
taxpayer's property, or rights to property, to pay the 
taxpayer's tax liability.\49\ Generally, the IRS is entitled to 
seize a taxpayer's property by levy if a Federal tax lien has 
attached to such property,\50\ the property is not exempt from 
levy,\51\ and the IRS has provided both notice of intention to 
levy\52\ and notice of the right to an administrative hearing 
(the notice is referred to as a ``collections due process 
notice'' or ``CDP notice'' and the hearing is referred to as 
the ``CDP hearing'')\53\ at least 30 days before the levy is 
made. A levy on salary or wages generally is continuously in 
effect until released.\54\ A Federal tax lien arises 
automatically when: (1) a tax assessment has been made; (2) the 
taxpayer has been given notice of the assessment stating the 
amount and demanding payment; and (3) the taxpayer has failed 
to pay the amount assessed within 10 days after the notice and 
demand.\55\
---------------------------------------------------------------------------
    \49\Sec. 6331(a). Levy specifically refers to the legal process by 
which the IRS orders a third party to turn over property in its 
possession that belongs to the delinquent taxpayer named in a notice of 
levy.
    \50\Ibid.
    \51\Sec. 6334.
    \52\Sec. 6331(d).
    \53\Sec. 6330. The notice and the hearing are referred to 
collectively as the CDP requirements.
    \54\Secs. 6331(e) and 6343.
    \55\Sec. 6321.
---------------------------------------------------------------------------
    The notice of intent to levy is not required if the 
Secretary finds that collection would be jeopardized by delay. 
The standard for determining whether jeopardy exists is similar 
to the standard applicable when determining whether assessment 
of tax without following the normal deficiency procedures is 
permitted.\56\
---------------------------------------------------------------------------
    \56\Secs. 6331(d)(3), 6861.
---------------------------------------------------------------------------
    The CDP notice (and pre-levy CDP hearing) is not required 
if: (1) the Secretary finds that collection would be 
jeopardized by delay; (2) the Secretary has served a levy on a 
State to collect a Federal tax liability from a State tax 
refund; (3) the taxpayer subject to the levy requested a CDP 
hearing with respect to unpaid employment taxes arising in the 
two-year period before the beginning of the taxable period with 
respect to which the employment tax levy is served; or (4) the 
Secretary has served a Federal contractor levy. In each of 
these four cases, however, the taxpayer is provided an 
opportunity for a hearing within a reasonable period of time 
after the levy.\57\
---------------------------------------------------------------------------
    \57\Sec. 6330(f).
---------------------------------------------------------------------------

Federal payment levy program

    To help the IRS collect taxes more effectively, the 
Taxpayer Relief Act of 1997\58\ authorized the establishment of 
the Federal Payment Levy Program (``FPLP''), which allows the 
IRS to continuously levy up to 15 percent of certain 
``specified payments'' by the Federal government if the payees 
are delinquent on their tax obligations. With respect to 
payments to vendors of goods, services, or property sold or 
leased to the Federal government, the continuous levy may be up 
to 100 percent of each payment.\59\ The levy (either up to 15 
percent or up to 100 percent) generally continues in effect 
until the liability is paid or the IRS releases the levy.
---------------------------------------------------------------------------
    \58\Pub. L. No. 105-34.
    \59\Sec. 6331(h)(3). The word ``property'' was added to ``goods or 
services'' in section 301 of the ``3% Withholding Repeal and Job 
Creation Act,'' Pub. L. No. 112-56.
---------------------------------------------------------------------------
    Under FPLP, the IRS matches its accounts receivable records 
with Federal payment records maintained by the Department of 
the Treasury's Financial Management Service (``FMS''), such as 
certain Social Security benefit and Federal wage records. When 
these records match, the delinquent taxpayer is provided both 
the notice of intention to levy and the CDP notice. If the 
taxpayer does not respond after 30 days, the IRS can instruct 
FMS to levy the taxpayer's Federal payments. Subsequent 
payments are continuously levied until such time that the tax 
debt is paid or the IRS releases the levy.

Payments to Medicare providers

    In 2008, the Government Accountability Office (``GAO'') 
found that over 27,000 Medicare providers (i.e., about six 
percent of all such providers) owed more than $2 billion of tax 
debt, consisting largely of individual income and payroll 
taxes.\60\ In one case, a home health company received over $15 
million in Medicare payments but did not pay $7 million in 
federal taxes.\61\ As of 2008, the Centers for Medicare & 
Medicaid Services (``CMS'') had not incorporated most of its 
Medicare payments into the continuous levy program, despite the 
IRS authority to continuously levy up to 15 percent of these 
payments. Thus, for calendar year 2006, the government lost the 
chance to possibly collect over $140 million in unpaid Federal 
taxes.\62\ The GAO noted that CMS officials promised to 
incorporate about 60 percent of all Medicare fee-for-service 
payments into the levy program by October 2008 and the 
remaining 40 percent in the next several years.
---------------------------------------------------------------------------
    \60\Government Accountability Office, Medicare: Thousands of 
Medicare Providers Abuse the Federal Tax System, GAO-08-618 (June 13, 
2008).
    \61\Ibid., p. 4.
    \62\Ibid.
---------------------------------------------------------------------------
    Following the GAO study, Congress directed CMS to 
participate in the FPLP and ensure that all Medicare provider 
and supplier payments are processed through it, in specified 
graduated percentages, by the end of fiscal year 2011.\63\
---------------------------------------------------------------------------
    \63\Medicare Improvement for Patients and Providers Act of 2008, 
Pub. L. No. 110-275, sec. 189.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the rate of nonpayment of 
Federal taxes by Medicare providers is not acceptable. The 
Committee further believes that such payments should be subject 
to ongoing levy in full. Changing the levy provisions of the 
Code to ensure that payments to Medicare providers may be fully 
offset under the FPLP will improve the integrity of the 
Medicare program and improve tax compliance.

                        EXPLANATION OF PROVISION

    The provision allows Treasury to levy up to 100 percent of 
a payment to a Medicare provider to collect unpaid taxes.

                             EFFECTIVE DATE

    The provision is effective for payments made after the date 
of enactment.

 F. Appropriation to the Highway Trust Fund of Amounts Attributable to 
       Certain Duties on Imported Vehicles (sec. 307 of the bill)


                              PRESENT LAW

    Customs duties are deposited into the general fund of the 
Treasury of the United States. This includes customs duties 
collected on imported vehicles classified under Chapter 87 of 
the Harmonized Tariff Schedule of the United States.

                           REASONS FOR CHANGE

    The Congressional Budget Office has estimated that the 
Highway Trust Fund will exhaust its available revenues for 
highway projects in fiscal year 2013. To assist in keeping the 
Highway Trust Fund solvent, the Committee believes it is 
appropriate to dedicate certain customs duties collected on 
imported vehicles to the Highway Trust Fund.

                        EXPLANATION OF PROVISION

    The provision would appropriate from the General Fund and 
deposit into the Highway Trust Fund amounts equivalent to 
amounts received in the General Fund, for fiscal year 2012 
through fiscal year 2016, on articles classified under 
subheadings 8703.22.00 and 8703.24.00 of Chapter 87.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

 G. Treatment of Securities of a Controlled Corporation Exchanged for 
Assets in Certain Reorganizations (sec. 308 of the bill and sec. 361 of 
                               the Code)


                              PRESENT LAW

    The transfer of assets by a transferor corporation to 
another corporation, controlled (immediately after the 
transfer) by the transferor or one or more of its shareholders, 
qualifies as a tax-free reorganization if the transfer is made 
by one corporation (``distributing'') of a part of its assets 
consisting of an active trade or business meeting certain 
requirements to a controlled subsidiary corporation 
(``controlled''), followed by the distribution of the stock and 
securities of the controlled subsidiary in a divisive spin-off, 
split-off, or split-up which was not used principally as a 
device for the distribution of earnings and profits (``divisive 
D reorganization'').\64\
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    \64\Secs. 355 and 368(a)(1)(D). Section 355 imposes requirements 
for a qualified spin-off, split-off, or split-up. Among other 
requirements, in order for a transaction to qualify under section 355, 
the distributing corporation must either (i) distribute all of the 
stock and securities of the controlled corporation that it holds, or 
(ii) distribute at least an amount of stock constituting control under 
section 368(c) and establish to the satisfaction of the Secretary of 
the Treasury that the retention of stock (or stock and securities) was 
not in pursuance of a plan having as one of its principal purposes the 
avoidance of Federal income tax. Sec. 355(a)(1)(D). Section 355 imposes 
other requirements to avoid gain recognition at the corporate level 
with respect to the spin-off, split-up, or split-off, e.g., secs. 
355(d) and (e).
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    No gain or loss is recognized to a corporation if the 
corporation is a party to a reorganization and exchanges 
property, in pursuance of the plan of reorganization, solely 
for stock or securities in another corporation that is a party 
to the reorganization.\65\ If property other than stock or 
securities is received (``other property''), gain is recognized 
to the extent the other property is not distributed.\66\
---------------------------------------------------------------------------
    \65\Sec. 361(a).
    \66\Sec. 361(b).
---------------------------------------------------------------------------
    In addition, in the case of a transfer to the corporation's 
creditors of money or other property received in the exchange, 
in connection with the reorganization, gain is recognized to 
the extent the sum of the money and the fair market value of 
the other property exceeds the adjusted bases of the assets 
transferred (net of liabilities).\67\ Such a transfer to 
creditors is aggregated with other assumptions of the 
transferor corporation's liabilities by the transferee, which 
generally cause gain recognition if they exceed the adjusted 
basis of assets transferred.\68\
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    \67\The last sentence of sec. 361(b)(3).
    \68\Sec. 357(c).
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    For example, if in a divisive D reorganization the 
controlled corporation either (1) directly assumes the debt of 
the distributing corporation, or (2) borrows and distributes 
cash to the distributing corporation to pay the distributing 
corporation's creditors, such debt assumption or cash 
distribution is treated as money received by the distributing 
corporation, and is taxable to the extent it exceeds the 
distributing corporation's basis in the assets transferred to 
the controlled corporation. By contrast, if the controlled 
corporation leverages itself by issuing its debt securities to 
the distributing corporation, the controlled corporation's debt 
securities are not treated as money or other property received 
by the distributing corporation. Thus, the distributing 
corporation could use the controlled corporation's securities 
to retire the distributing corporation's own debt, recognize no 
gain, and be in the same economic position as if its debt had 
been directly assumed by the controlled corporation or as if it 
had retired its debt with cash received from the controlled 
corporation.

                           REASONS FOR CHANGE

    The Committee is concerned that securities of a controlled 
subsidiary corporation that are exchanged for assets in a 
divisive D reorganization may be used to provide an economic 
benefit to the distributing corporation that is equivalent to 
the subsidiary's direct assumption of the distributing 
corporation's indebtedness, without subjecting the distributing 
corporation to tax in the same manner as in the case of such an 
assumption. For example, securities of the controlled 
subsidiary corporation may be distributed to creditors of the 
distributing corporation, effectively relieving the 
distributing corporation of the obligation to such creditors 
and shifting the obligation to the controlled entity. 
Similarly, under present law, securities of the controlled 
corporation might be issued to and in some situations retained 
by the distributing corporation without treating such 
securities as equivalent to the receipt of taxable property.
    The Committee also is concerned that present law may 
encourage excessive leverage in some divisive D reorganization 
situations. For example, a controlled subsidiary could be 
distributed that is bearing excessive debt through its 
securities, from which the distributing corporation receives a 
tax-free economic benefit.

                        EXPLANATION OF PROVISION

    Under the provision, in the case of a divisive D 
reorganization, no gain or loss is recognized to a corporation 
if the corporation is a party to a reorganization and exchanges 
property, in pursuance of the plan of reorganization, solely 
for stock other than nonqualified preferred stock (as defined 
in section 351(g)(2)).\69\ Thus, under the provision, 
securities and nonqualified preferred stock are treated as 
``other property.''
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    \69\Section 351(g)(2) defines nonqualified preferred stock as 
preferred stock if (i) the holder has a right to require the issuer or 
a related person to redeem or purchase the stock, which right may be 
exercised within the 20-year period beginning on the issue date and is 
not subject to a contingency which, as of the issue date, makes remote 
the likelihood of redemption or purchase; (ii) the issuer or a related 
person is required to redeem or purchase the stock (within such 20-year 
period and not subject to such a contingency); (iii) the issuer or a 
related person has the right to redeem or purchase the stock (which 
right is exercisable within such 20-year period and not subject to such 
a contingency) and as of the issue date, it is more likely than not 
that such right will be exercised, or (iv) the dividend on such stock 
varies in whole or in part (directly or indirectly) with reference to 
interest rates, commodity prices, or other similar indices. There are 
exceptions for certain rights that are exercisable only on the death, 
disability or mental incompetency of the holder, or only upon the 
separation from service of a service provider who received the right as 
reasonable compensation for services, and for certain situations 
involving publicly traded stock. Nonqualified preferred stock is 
treated in the same manner as securities under section 351 and thus is 
not qualified consideration that may be received tax free by a 
contributing shareholder. Sections 354(a)(2)(C) and 356(e) treat 
nonqualified preferred stock as taxable consideration if received in 
exchange for stock by shareholders of a corporation that itself is a 
party to a reorganization (except to the extent received in exchange 
for other nonqualified preferred stock); and section 355 contains a 
similar rule (sec. 355(a)(3)(D)).
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    Under the provision, the transferor corporation's gain on 
the exchange is recognized to the extent of the sum of money 
and the value of other property, including securities and 
nonqualified preferred stock, not distributed in pursuance of 
the plan of reorganization. Also, gain on the exchange is 
recognized to the extent that the sum of money and the value of 
all property other than stock that is not nonqualified 
preferred stock which is transferred to creditors exceeds the 
adjusted bases of the assets transferred (net of liabilities).
    For example, under the provision, in a divisive D 
reorganization, the exchange of the controlled corporation's 
securities for the distributing corporation's securities would 
be treated in the same manner as (1) the assumption of the 
distributing corporation's debt by the controlled corporation, 
or (2) the use of a cash distribution from the controlled 
corporation to retire debt of the distributing corporation.

                             EFFECTIVE DATE

    The provision applies to exchanges occurring after the date 
of enactment.
    However, the provision does not apply to any exchange in 
connection with a transaction which is (1) made pursuant to a 
written agreement which was binding on February 6, 2012 and at 
all times thereafter, (2) described in a ruling request 
submitted to the IRS on or before such date, or (3) described 
on or before such date in a public announcement or in a filing 
with the Securities and Exchange Commission.

  H. Internal Revenue Service Levies and Thrift Savings Plan Accounts 
                         (sec. 309 of the bill)


                              PRESENT LAW

In general

    Levy is the IRS's administrative authority to seize a 
taxpayer's property, or rights to property, to pay the 
taxpayer's tax liability.\70\ Generally, the IRS is entitled to 
seize a taxpayer's property by levy if a Federal tax lien has 
attached to such property,\71\ the property is not exempt from 
levy,\72\ and the IRS has provided both notice of intention to 
levy\73\ and notice of the right to an administrative hearing 
(the notice is referred to as a ``collections due process 
notice'' or ``CDP notice'' and the hearing is referred to as 
the ``CDP hearing'')\74\ at least 30 days before the levy is 
made. A levy on salary or wages is generally continuously in 
effect until released.\75\ A Federal tax lien arises 
automatically when: (1) a tax assessment has been made; (2) the 
taxpayer has been given notice of the assessment stating the 
amount and demanding payment; and (3) the taxpayer has failed 
to pay the amount assessed within 10 days after the notice and 
demand.\76\
---------------------------------------------------------------------------
    \70\Sec. 6331(a). Levy specifically refers to the legal process by 
which the IRS orders a third party to turn over property in its 
possession that belongs to the delinquent taxpayer named in a notice of 
levy.
    \71\Ibid.
    \72\Sec. 6334.
    \73\Sec. 6331(d).
    \74\Sec. 6330. The notice and the hearing are referred to 
collectively as the CDP requirements.
    \75\Secs. 6331(e) and 6343.
    \76\Sec. 6321.
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    The notice of intent to levy is not required if the 
Secretary finds that collection would be jeopardized by delay. 
The standard for determining whether jeopardy exists is similar 
to the standard applicable when determining whether assessment 
of tax without following the normal deficiency procedures is 
permitted.\77\
---------------------------------------------------------------------------
    \77\Secs. 6331(d)(3) and 6861.
---------------------------------------------------------------------------
    The CDP notice (and pre-levy CDP hearing) is not required 
if: (1) the Secretary finds that collection would be 
jeopardized by delay; (2) the Secretary has served a levy on a 
State to collect a Federal tax liability from a State tax 
refund; (3) the taxpayer subject to the levy requested a CDP 
hearing with respect to unpaid employment taxes arising in the 
two-year period before the beginning of the taxable period with 
respect to which the employment tax levy is served; or (4) the 
Secretary has served a Federal contractor levy. In each of 
these four cases, however, the taxpayer is provided an 
opportunity for a hearing within a reasonable period of time 
after the levy.\78\
---------------------------------------------------------------------------
    \78\Sec. 6330(f).
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Thrift Savings Plan

    Present law includes an anti-alienation rule that provides 
that the balance of an employee's Thrift Savings Plan (``TSP'') 
Account is subject to taking only for the enforcement of one's 
obligations to provide for child support or alimony payments, 
restitution orders, certain forfeitures, or certain obligations 
of the Executive Director.\79\ The authority for the IRS to 
levy an employee's TSP Account to satisfy tax liabilities is 
not mentioned in the anti-alienation rule; TSP Accounts are not 
specifically enumerated in the Code provisions identifying 
property that is exempt from levy.
---------------------------------------------------------------------------
    \79\5 U.S.C. sec. 8437(e)(3).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    This amendment to title 5, United States Code, provides 
that monies in the Thrift Savings Fund accounts of Federal 
employees shall be subject to legal process by the IRS for 
payment of delinquent taxes, thus explicitly allowing the 
Thrift Investment Board to honor an IRS notice of levy. The 
Committee is aware that the Thrift Investment Board has 
previously taken the position that money in the TSP cannot be 
levied, and that the Thrift Investment Board cites in support 
an apparent conflict between the TSP authorizing statute and 
the Internal Revenue Code. The Committee believes that the 
continuing failure to honor levies on TSP Accounts of Federal 
employees or retirees after issuance of a legal opinion from 
the Office of Legal Counsel at the Department of Justice in May 
of 2010,\80\ concluding that TSP accounts are subject to levy, 
undermines the program integrity of tax administration 
generally and has an adverse affect on tax compliance. The 
Committee believes that this amendment resolves the perceived 
statutory conflict and will enhance respect for tax 
administration. Because this amendment is intended as a 
clarification of current law, it should not be interpreted as 
implying that property rights of taxpayers governed by Federal 
law are only subject to levy if the statute governing those 
rights expressly so provides. The Committee believes that 
Section 6334 of title 26 contains the exclusive list of 
exemptions from the federal tax levy.
---------------------------------------------------------------------------
    \80\Office of Legal Counsel, Dept. of Justice, ``Applicability of 
Tax Levies under 26 U.S.C. Sec. 6334 To Thrift Savings Plan Accounts,'' 
Opinions of Office of Legal Counsel, Vol. 34 (May 3, 2010), reprinted, 
Tax Analysts, Doc. 2012-2479.
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                        EXPLANATION OF PROVISION

    The provision amends the statutory provisions governing the 
TSP to clarify that the anti-alienation provisions therein do 
not bar the IRS from issuing a notice of levy on a TSP Account.

                             EFFECTIVE DATE

    The provision is effective upon date of enactment.

I. Modification of Required Distribution Rules for Pension Plans (sec. 
            310 of the bill and sec. 401(a)(9) of the Code)


                              PRESENT LAW

    Minimum distribution rules apply to employer-sponsored tax-
favored retirement plans and individual retirement arrangements 
(``IRA'').\81\ In general, under these rules, distribution of 
minimum benefits must begin no later than the required 
beginning date and a minimum amount must be distributed each 
year. Minimum distribution rules also apply to benefits payable 
with respect to an employee or IRA owner who has died. The 
regulations under section 401(a)(9) provide a methodology for 
calculating the required minimum distribution from an 
individual account under a defined contribution plan or from an 
IRA. In the case of annuity payments under a defined benefit 
plan or an annuity contract, the regulations provide 
requirements that the annuity stream of payments must satisfy. 
Failure to comply with the minimum distribution requirement 
results in an excise tax imposed on the individual who was 
required to be the distributee equal to 50 percent of the 
required minimum distribution not distributed for the year. The 
excise tax may be waived in certain cases.
---------------------------------------------------------------------------
    \81\There are two types of IRA, Roth and traditional. The lifetime 
and after-death minimum distribution requirements apply to traditional 
IRAs. Only the after-death requirements apply to Roth IRAs.
---------------------------------------------------------------------------

Required beginning date

    For traditional IRAs, the required beginning date is April 
1 following the calendar year in which the employee or IRA 
owner attains age 70\1/2\. For employer-sponsored tax-favored 
retirement plans, for an employee other than an employee who is 
a five-percent owner in the year the employee attains age 70\1/
2\, the employee's required beginning date is April 1 after the 
later of the calendar year in which the employee attains age 
70\1/2\ or retires. For an employee who is a five-percent owner 
under an employer-sponsored tax-favored retirement plan in the 
year the employee attains age 70\1/2\, the required beginning 
date is the same as for IRAs even if the employee continues to 
work past age 70\1/2\.

Lifetime rules

    While an employee or IRA owner is alive, distributions of 
the individual's interest are required to be made (in 
accordance with regulations) over the life or life expectancy 
of the employee or IRA owner, or over the joint lives or joint 
life expectancy of the employee or IRA owner and a designated 
beneficiary.\82\ For defined contribution plans and IRAs, the 
required minimum distribution for each year is determined by 
dividing the account balance as of the end of the prior year by 
a distribution period which, while the employee or IRA owner is 
alive, is the factor from the uniform lifetime table included 
in the regulations.\83\ This table is based on the joint life 
and last survivor expectancy of the individual and a 
hypothetical beneficiary 10 years younger.
---------------------------------------------------------------------------
    \82\Sec. 401(a)(9)(A).
    \83\Treas. Reg. sec. 1.401(a)(9)-5. For an individual with a spouse 
as designated beneficiary who is more than 10 years younger (and thus 
the number of years in the couple's joint life and last survivor 
expectancy is greater than the uniform lifetime table), the joint life 
expectancy and last survivor expectancy of the couple (calculated using 
the table in the regulations) is used.
---------------------------------------------------------------------------

Distributions after death

            Payments over a distribution period
    The after death rules vary depending on (1) whether an 
employee or IRA owner dies on or after the required beginning 
date or before the required beginning date, and (2) whether 
there is a designated beneficiary for the benefit.\84\ Under 
the regulations, a designated beneficiary is an individual 
designated as a beneficiary under the plan.\85\ Similar to the 
lifetime rules, for defined contribution plans and IRAs, the 
required minimum distribution for each year after the death of 
the employee or IRA owner is generally determined by dividing 
the account balance as of the end of the prior year by a 
distribution period.
---------------------------------------------------------------------------
    \84\Special rules apply if the beneficiary of the employee or IRA 
owner is the individual's surviving spouse. In that case, for example, 
distributions are not required to commence until the year in which the 
employee or IRA owner would have attained age 70\1/2\. Similarly, if 
the surviving spouse dies before the employee or IRA owner would have 
attained age 70\1/2\, the after-death rules for death before 
distributions have begun are applied as though the spouse were the 
employee or IRA owner. Further, there are rules that allow a surviving 
spouse to treat an IRA as the spouse's own IRA or roll over an amount 
received as a beneficiary to an IRA established in the spouse's own 
name.
    \85\Treas. Reg. sec. 1.401(a)(9)-4, A-1. The individual need not be 
named as long as the individual is identifiable under the terms of the 
plan. There are special rules for multiple beneficiaries and for trusts 
named as beneficiary (where the beneficiaries of the trust are 
individuals). However, if an individual is named as beneficiary through 
the employee or IRA owner's will or the estate is named as beneficiary, 
there is no designated beneficiary for purposes of the minimum 
distribution requirements.
---------------------------------------------------------------------------
    Under the Code, if an employee or IRA owner dies on or 
after the required beginning date, the remaining interest must 
be distributed at least as rapidly as under the minimum 
distribution method being used as of the date of death.\86\ 
Under the regulations, for individual accounts, if there is a 
designated beneficiary, the distribution period is the 
beneficiary's life expectancy calculated using the life 
expectancy table in the regulations, calculated in the year 
after the year of the death.\87\ If there is no designated 
beneficiary, the distribution period is equal to the remaining 
years of the employee or IRA owner's life, as of the year of 
death.\88\
---------------------------------------------------------------------------
    \86\Sec. 401(a)(9)(B)(i)
    \87\Treas. Reg. sec. 1.401(a)(9)-5, A-5(b).
    \88\Treas. Reg. sec. 1.401(a)(9)-5, A-5(a).
---------------------------------------------------------------------------
    If an employee or IRA owner dies before the required 
beginning date and any portion of the benefit is payable to a 
designated beneficiary, distributions are permitted to begin 
within one year of the employee's (or IRA owner's) death (or 
such later date as prescribed in regulations) and to be paid 
(in accordance with regulations) over the life or life 
expectancy of the designated beneficiary. Under the 
regulations, for individual accounts, the distribution period 
is measured by the designated beneficiary's life expectancy, 
calculated in the same manner as if the individual dies on or 
after the required beginning date.\89\
---------------------------------------------------------------------------
    \89\Treas. Reg. sec. 1.401(a)(9)-5, A-5(b).
---------------------------------------------------------------------------
    In all cases where distribution after death is based on 
life expectancy (either the remaining life expectancy of the 
employee or IRA owner or a designated beneficiary), the 
distribution period generally is fixed at death and then 
reduced by one for each year that elapses after the year in 
which it is calculated. If the designated beneficiary dies 
during the distribution period, distributions continue to the 
subsequent beneficiaries over the remaining years in the 
distribution period.\90\
---------------------------------------------------------------------------
    \90\If the distribution period is based on the surviving spouse's 
life expectancy (whether the employee or IRA owner's death is before or 
after the required beginning date), the spouse's life expectancy 
generally is recalculated each year while the spouse is alive and then 
fixed the year after the spouse's death.
---------------------------------------------------------------------------
            Five-year rule
    If an employee or IRA owner dies before the required 
beginning date and there is no designated beneficiary, then the 
entire remaining interest of the employee or IRA owner must 
generally be distributed by the end of the fifth year following 
the individual's death.\91\
---------------------------------------------------------------------------
    \91\Treas. Reg. sec. 1.401(a)(9)-3, A-2.
---------------------------------------------------------------------------

Defined benefit plans and annuity distributions

    The regulations provide rules for annuity distributions 
from a defined benefit plan or an annuity purchased from an 
insurance company paid over life or life expectancy. Annuity 
distributions generally are required to be nonincreasing with 
certain exceptions, which include, for example, increases to 
the extent of certain specified cost of living indexes, a 
constant percentage increase (for a qualified plan, the 
constant percentage cannot exceed five percent per year), 
certain accelerations of payments, increases to reflect when an 
annuity is converted to a single life annuity after the death 
of the beneficiary under a joint and survivor annuity or after 
termination of the survivor annuity under a qualified domestic 
relations order.\92\ If distributions are in the form of a 
joint and survivor annuity and the survivor annuitant both is 
not the surviving spouse and is younger than the employee or 
IRA owner, the survivor annuitant is limited to a percentage of 
the life annuity benefit for the employee or IRA owner.\93\ The 
survivor benefit as a percentage of the benefit of the primary 
annuitant is required to be smaller (but not required to be 
less than 52 percent) as the difference in the ages of the 
primary annuitant and the survivor annuitant become greater.
---------------------------------------------------------------------------
    \92\Treas. Reg. sec. 1.401(a)(9)-6, A-14.
    \93\Treas. Reg. sec. 1.401(a)(9)-6, A-2.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to allow 
extended distributions after the death of the employee or IRA 
owner only to certain types of beneficiaries, such as the 
employee's spouse (or other beneficiary close to the same age 
as the employee or IRA owner) or a beneficiary who is disabled 
or chronically ill. The Committee believes that, for other 
beneficiaries, tax deferral of benefits should not continue for 
an extended period after the death. Thus, it is appropriate for 
the benefits to be paid out within five years of the employee 
or IRA owner's death. Similarly, after the death of the 
beneficiary, any interest remaining should be paid out within 
five years of the beneficiary's death.

                        EXPLANATION OF PROVISION

Required beginning date

    Under the provision, if an employee becomes a five-percent 
owner after age 70\1/2\, but before retiring and thus before 
the employee's required beginning date with respect to tax 
favored retirement plans of the employee's employer, the 
required beginning date for that employee becomes April 1 
following the year that the employee becomes a five-percent 
owner.
    Other than the modification to the required beginning date 
for five-percent owners, the provision makes no change to the 
rules for required minimum distributions during the lifetime of 
the employee or IRA owner. Thus, for example, the provision is 
not expected to result in a change in the regulations for 
required minimum distributions during the lifetime of the 
employee or IRA owner under which the required minimum 
distribution for each year generally is determined by dividing 
the account balance as of the end of the prior year by a 
distribution period which is the number corresponding to the 
employee or IRA owner's age for the year from the uniform 
lifetime table included in the regulations.

After-death rules

    Under the provision, the five-year rule is the general rule 
for all distributions after death (regardless of whether the 
employee or IRA owner dies before, on, or after the required 
beginning date) unless the beneficiary is an eligible 
beneficiary as defined in the provision. Eligible beneficiaries 
include any beneficiary who, as of the date of death, is the 
surviving spouse of the employee or IRA owner, is disabled, is 
a chronically ill individual, is an individual who is not more 
than 10 years younger than the employee or IRA owner, or is a 
child who has not reached the age of majority.\94\ For these 
beneficiaries, the exception to the five-year rule (for death 
before the required beginning date) applies whether or not the 
IRA owner or employee dies before or after the required 
beginning date. That rule allows distributions over the life or 
life expectancy of the beneficiary beginning in the year 
following the year of death.
---------------------------------------------------------------------------
    \94\The provision does not change the rules that allow a surviving 
spouse to treat an IRA as the spouse's own IRA or roll over an amount 
received as a beneficiary to an IRA established in the spouse's own 
name.
---------------------------------------------------------------------------
    However, unlike present law, under the provision, the five-
year rule applies after the death of the eligible beneficiary. 
Thus, for example, if a disabled child is an eligible 
beneficiary of a parent who dies when the child is age 20 and 
the child dies at age 30, even though 52.1 years remain in the 
life expectancy of the child calculated for the child's age 
(21) in the year after the employee's death, the disabled 
child's remaining beneficiary interest must be distributed by 
the end of the fifth year following the death of the disabled 
child. If a child is an eligible beneficiary based on having 
not reached the age of majority before the employee or IRA 
owner's death, the five-year rule applies beginning with the 
date that the child reaches the age of majority. Thus the 
child's entire interest must be distributed by the end of the 
fifth year following that date.
            Definition of disabled and chronically ill individual
    Under the provision, disabled means unable to engage in any 
substantial gainful activity by reason of any medically 
determinable physical or mental impairment that can be expected 
to end in death or to be for long-continued and indefinite 
duration.\95\ Further, an individual is not considered to be 
disabled unless proof of the disability is furnished in such 
form and manner as the Secretary may require.
---------------------------------------------------------------------------
    \95\This is the definition under section 72(m)(7), which the 
provision incorporates by reference.
---------------------------------------------------------------------------
    Under the provision, a chronically ill individual is any 
individual who (1) is unable to perform (without substantial 
assistance from another individual) at least two activities of 
daily living for an indefinite period (expected to be lengthy 
in nature) due to a loss of functional capacity, (2) has a 
level of disability similar (as determined under regulations 
prescribed by the Secretary in consultation with the Secretary 
of Health and Human Services) to the level of disability 
described above requiring assistance with daily living based on 
loss of functional capacity, or (3) requires substantial 
supervision to protect the individual from threats to health 
and safety due to severe cognitive impairment.\96\ The 
activities of daily living for which assistance is needed for 
purposes of determining loss of functional capacity are eating, 
toileting, transferring, bathing, dressing, and continence.
---------------------------------------------------------------------------
    \96\This is generally the definition under section 7702B(c)(2), 
which the provision incorporates by reference, except that section 
7702B(c)(2)(A)(i) requires the period for which an individual is unable 
to perform at least two activities of daily living to be at least 90 
days.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

Required beginning date change for five-percent owners

    For the provision changing the definition of required 
beginning date for employees who become five-percent owners 
after age 70\1/2\, if an employee became a five-percent owner 
with respect to a plan year ending before January 1, 2012, and 
the employee has not retired before 2013, the employee is 
treated as having become a five-percent owner in 2013. Thus, 
the employee's required beginning date is April 1, 2014. 
Otherwise, the provision is effective upon date of enactment 
without regard to whether the employee became a five-percent 
owner before, on, or after the date of enactment.

Required distributions after death

    For determining minimum required distributions after the 
death of an employee or IRA owner, the provision is generally 
effective for distributions with respect to employees or IRA 
owners who die after December 31, 2012.
    In the case of an employee who dies before January 1, 2013, 
if the designated beneficiary of the employee or IRA owner dies 
after December 31, 2012, the provision applies to any 
beneficiary of the designated beneficiary as though the 
designated beneficiary were an eligible beneficiary. Thus, the 
entire interest must be distributed by the end of the fifth 
year after the death of the designated beneficiary.
    In the case of an employee who dies after December 31, 
2012, the provision does not apply to a qualified annuity which 
is a binding annuity contract in effect on the date of the 
enactment and at all times thereafter. To be a qualified 
annuity, the annuity must be a commercial annuity (as defined 
in section 3405(e)(6)) or an annuity payable by a defined 
benefit plan, and (2) an annuity under which the annuity 
payments are substantially equal periodic payments (not less 
frequently than annually) over the lives of such employee and a 
designated beneficiary (or over a period not extending beyond 
the life expectancy of such employee or the life expectancy of 
such employee and a designated beneficiary) in accordance with 
the required minimum distribution regulations for annuity 
payments (as in effect before enactment of this provision). In 
addition to these requirements, to be a qualified annuity, 
annuity payments to the employee (or IRA owner) must have begun 
before January 1, 2013, and the employee (or IRA owner) must 
have made an irrevocable election before that date as to the 
method and amount of the annuity payments to the employee or 
any designated beneficiaries. Alternatively, if an annuity is 
not a qualified annuity solely based on annuity payments not 
having begun irrevocably before January 1, 2013, an annuity can 
be a qualified annuity if the employee or IRA owner has made an 
irrevocable election before the date of enactment as to the 
method and amount of the annuity payments to the employee or 
any designated beneficiaries.

J. Depreciation and Amortization Rules for Highway and Related Property 
 Subject to Long-Term Leases (sec. 311 of the bill and secs. 168, 197, 
                          and 147 of the Code)


                              PRESENT LAW

Depreciation and amortization for highways and related property

    A taxpayer generally must capitalize the cost of property 
used in a trade or business and recover such cost over time 
through annual deductions for depreciation or amortization. 
Tangible property generally is depreciated under the modified 
accelerated cost recovery system (``MACRS''), which determines 
depreciation by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of 
various types of depreciable property.\97\ The alternative 
depreciation system (``ADS'') applies with respect to tangible 
property used predominantly outside the United States during 
the taxable year, tax-exempt use property, tax-exempt bond 
financed property, and certain other property. ADS generally 
requires the use of the straight-line method without regard to 
salvage value, and requires longer recovery periods than MACRS.
---------------------------------------------------------------------------
    \97\Sec. 168.
---------------------------------------------------------------------------
    Under MACRS, the cost of land improvements (such as roads 
and fences) is recovered over 15 years.\98\ Land improvements 
subject to ADS are recovered over 20 years using the straight-
line method.\99\
---------------------------------------------------------------------------
    \98\Rev. Proc. 87-56, 1987-42 I.R.B. 4.
    \99\Ibid. The longest MACRS recovery period is 50 years and applies 
to railroad gradings and tunnel bores. Sec. 168(c).
---------------------------------------------------------------------------

Amortization of intangible property

    The cost recovery of many intangible assets is governed by 
the rules of section 197. In particular, section 197 provides 
that any amortizable section 197 intangible, including rights 
granted by a governmental unit and franchise rights, is 
amortized over a 15-year period.\100\
---------------------------------------------------------------------------
    \100\Secs. 197(d)(1)(D) and (F). The 15-year amortization provision 
does not apply to various types of rights, including any interest in 
land. Sec. 197(e)(2).
---------------------------------------------------------------------------

Private activity bond financing for highways

    In general, interest on a private activity bond that is a 
qualified bond is excludable from taxable income.\101\ Under 
present law, a private activity bond is not a qualified bond, 
interest on which is tax-exempt, if any portion of the proceeds 
of the issue of which the bond is a part is used to provide any 
airplane, skybox, or other private luxury box, health club 
facility, facility primarily used for gambling, or store the 
principal business of which is the sale of alcoholic beverages 
for consumption off premises.\102\
---------------------------------------------------------------------------
    \101\Sec. 141.
    \102\Sec. 147(e).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee is concerned that, under present law, 
accelerated cost recovery methods provide a tax benefit to the 
private purchaser of a public road or highway which was 
originally financed and built with taxpayer money.\103\ To 
eliminate the Federal subsidy for public roads or highways that 
are privatized through a long-term lease, the Committee 
believes that the appropriate recovery period for the leased 
property is 45 years, using the straight-line method.
---------------------------------------------------------------------------
    \103\In practice, the privatization of public roads is often 
referred to as a ``brownfield'' project.
---------------------------------------------------------------------------
    The Committee also is concerned that the current 
amortization period for amounts paid or incurred for the right 
to operate and maintain the public road or highway and collect 
tolls (i.e., 15 years) does not relate to, and is frequently 
significantly shorter than, the term of the lease or 
arrangement under which the right is exercised. The Committee 
believes that the taxpayer who acquires the right to operate 
and maintain the public road or highway and collect tolls 
should recover the costs incurred for such rights over the term 
of the lease.
    Further, the Committee is concerned that tax-exempt private 
activity bonds might be issued to assist the private purchaser 
in acquiring the public road or highway. Thus, the Committee 
believes that the private activity bonds, any portion of the 
proceeds which is used to privatize the public road or highway, 
should not be tax-exempt.

                        EXPLANATION OF PROVISION

    Under this provision, the depreciation for applicable 
leased highway property is determined under ADS with a 
statutory 45-year recovery period and requirement to use the 
straight-line method. Further, this provision requires that any 
amortizable section 197 intangible acquired in connection with 
an applicable lease must be recovered over a period not less 
than the term of the applicable lease.
    Under this provision, private activity bonds are not 
qualified bonds, interest on which is tax-exempt, if the bonds 
are part of an issue, any portion of the proceeds of which is 
used to finance any applicable leased highway property.
    For purposes of this provision, applicable leased highway 
property is defined as property subject to an applicable lease 
and placed in service before the date of such lease. An 
applicable lease is defined as an arrangement between the 
taxpayer and a State or political subdivision thereof, or any 
agency or instrumentality of either, under which the taxpayer 
leases a highway and associated improvements, receives a right-
of-way on the public lands underlying such highway and 
improvements, and receives a grant of a franchise or other 
intangible right permitting the taxpayer to receive funds 
relating to the operation of such highway. As under present 
law, a contract that purports to be a service contract or other 
arrangement (including a partnership or other passthrough 
entity) is treated as a lease if the contract or arrangement is 
properly treated as a lease.\104\
---------------------------------------------------------------------------
    \104\Sec. 7701(e).
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective for leases entered into, and 
private activity bonds issued, after the date of enactment.

K. Transfer of Excess Pension Assets (secs. 312 and 313 of the bill and 
                         sec. 420 of the Code)


                              PRESENT LAW

Defined benefit pension plan reversions

    Defined benefit plan assets generally may not revert to an 
employer prior to termination of the plan and satisfaction of 
all plan liabilities.\105\ Upon plan termination, the accrued 
benefits of all plan participants are required to be 100-
percent vested. A reversion prior to plan termination may 
constitute a prohibited transaction and may result in plan 
disqualification. Any assets that revert to the employer upon 
plan termination are includible in the gross income of the 
employer and subject to an excise tax. The excise tax rate is 
20 percent if the employer maintains a replacement plan or 
makes certain benefit increases in connection with the 
termination; if not, the excise tax rate is 50 percent. Medical 
benefits and life insurance benefits provided under a pension 
plan
---------------------------------------------------------------------------
    \105\In addition, a reversion may occur only if the terms of the 
plan so provide.
---------------------------------------------------------------------------

Retiree medical accounts

    A pension plan may provide medical benefits to retired 
employees through a separate account that is part of a defined 
benefit plan (``retiree medical accounts'').\106\ Medical 
benefits provided through a retiree medical account are 
generally not includible in the retired employee's gross 
income.\107\
---------------------------------------------------------------------------
    \106\Sec. 401(h) and Treas. Reg. sec. 1.401-1(b).
    \107\Treas. Reg. sec. 1.72-15(h).
---------------------------------------------------------------------------

Transfers of excess pension assets

            In general
    A qualified transfer of excess assets of a defined benefit 
plan, including a multiemployer plan,\108\ to a retiree medical 
account within the plan may be made in order to fund retiree 
health benefits.\109\ A qualified transfer does not result in 
plan disqualification, is not a prohibited transaction, and is 
not treated as a reversion. Thus, transferred assets are not 
includible in the gross income of the employer and are not 
subject to the excise tax on reversions. No more than one 
qualified transfer may be made in any taxable year. No 
qualified transfer may be made after December 31, 2013.
---------------------------------------------------------------------------
    \108\The Pension Protection Act of 2006 (``PPA''), Pub. L. No. 109-
280, extended the application of the rules for qualified transfers to 
multiemployer plans with respect to transfers made in taxable years 
beginning after December 31, 2006. However, the rules for qualified 
future transfers and collectively bargained transfers do not apply to 
multiemployer plans.
    \109\Sec. 420.
---------------------------------------------------------------------------
    Excess assets generally means the excess, if any, of the 
value of the plan's assets\110\ over 125 percent of the sum of 
the plan's funding target and target normal cost for the plan 
year. In addition, excess assets transferred in a qualified 
transfer may not exceed the amount reasonably estimated to be 
the amount that the employer will pay out of such account 
during the taxable year of the transfer for qualified current 
retiree health liabilities. No deduction is allowed to the 
employer for (1) a qualified transfer, or (2) the payment of 
qualified current retiree health liabilities out of transferred 
funds (and any income thereon). In addition, no deduction is 
allowed for amounts paid other than from transferred funds for 
qualified current retiree health liabilities to the extent such 
amounts are not greater than the excess of (1) the amount 
transferred (and any income thereon), over (2) qualified 
current retiree health liabilities paid out of transferred 
assets (and any income thereon). An employer may not contribute 
any amount to a health benefits account or welfare benefit fund 
with respect to qualified current retiree health liabilities 
for which transferred assets are required to be used.
---------------------------------------------------------------------------
    \110\The value of plan assets for this purpose is the lesser of 
fair market value or actuarial value.
---------------------------------------------------------------------------
    Transferred assets (and any income thereon) must be used to 
pay qualified current retiree health liabilities for the 
taxable year of the transfer. Transferred amounts generally 
must benefit pension plan participants, other than key 
employees, who are entitled upon retirement to receive retiree 
medical benefits through the separate account. Retiree health 
benefits of key employees may not be paid out of transferred 
assets.
    Amounts not used to pay qualified current retiree health 
liabilities for the taxable year of the transfer are to be 
returned to the general assets of the plan. These amounts are 
not includible in the gross income of the employer, but are 
treated as an employer reversion and are subject to a 20-
percent excise tax.
    In order for the transfer to be qualified, accrued 
retirement benefits under the pension plan generally must be 
100-percent vested as if the plan terminated immediately before 
the transfer (or in the case of a participant who separated in 
the one-year period ending on the date of the transfer, 
immediately before the separation).
    In order for a transfer to be qualified, there is a 
maintenance of effort requirement under which, the employer 
generally must maintain retiree health benefits at the same 
level for the taxable year of the transfer and the following 
four years.
    In addition, the Employee Retirement Income Security Act of 
1974 (``ERISA'')\111\ provides that, at least 60 days before 
the date of a qualified transfer, the employer must notify the 
Secretary of Labor, the Secretary of the Treasury, employee 
representatives, and the plan administrator of the transfer, 
and the plan administrator must notify each plan participant 
and beneficiary of the transfer.\112\
---------------------------------------------------------------------------
    \111\Pub. L. No. 93-406.
    \112\ERISA sec. 101(e). ERISA also provides that a qualified 
transfer is not a prohibited transaction under ERISA or a prohibited 
reversion.
---------------------------------------------------------------------------
            Qualified future transfers and collectively bargained 
                    transfers
    If certain requirements are satisfied, transfers of excess 
pension assets under a single-employer plan to retiree medical 
accounts to fund the expected cost of retiree medical benefits 
are permitted for the current and future years (a ``qualified 
future transfer'') and such transfers are also allowed in the 
case of benefits provided under a collective bargaining 
agreement (a ``collectively bargained transfer'').\113\ 
Transfers must be made for at least a two-year period. An 
employer can elect to make a qualified future transfer or a 
collectively bargained transfer rather than a qualified 
transfer. A qualified future transfer or collectively bargained 
transfer must meet the requirements applicable to qualified 
transfers, except that the provision modifies the rules 
relating to: (1) the determination of excess pension assets; 
(2) the limitation on the amount transferred; and (3) the 
maintenance of effort requirement. The general sunset 
applicable to qualified transfer applies (i.e., no transfers 
can be made after December 31, 2013).
---------------------------------------------------------------------------
    \113\The rules for qualified future transfers and collectively 
bargained transfers were added by the PPA and apply to transfers after 
the date of enactment (August 17, 2006).
---------------------------------------------------------------------------
    Qualified future transfers and collectively bargained 
transfers can be made to the extent that plan assets exceed 120 
percent of the sum of the plan's funding target and the normal 
cost for the plan year. During the transfer period, the plan's 
funded status must be maintained at the minimum level required 
to make transfers. If the minimum level is not maintained, the 
employer must make contributions to the plan to meet the 
minimum level or an amount required to meet the minimum level 
must be transferred from the health benefits account. The 
transfer period is the period not to exceed a total of ten 
consecutive taxable years beginning with the taxable year of 
the transfer. As previously discussed, the period must be not 
less than two consecutive years.

Employer provided group-term life insurance

    Group-term life insurance coverage provided under a policy 
carried by an employer is includible in the gross income of an 
employee (including a former employee) but only to the extent 
that the cost exceeds the sum of the cost of $50,000 of such 
insurance plus the amount, if any, paid by the employee toward 
the purchase of such insurance.\114\ Special rules apply for 
determining the cost of group-term life insurance that is 
includible in gross income under a discriminatory group-term 
life insurance plan.
---------------------------------------------------------------------------
    \114\Sec. 79.
---------------------------------------------------------------------------
    A pension plan may provide life insurance benefits for 
employees (including retirees) but only to the extent that the 
benefits are incidental to the retirement benefits provided 
under the plan.\115\ The cost of term life insurance provided 
through a pension plan is includible in the employee's gross 
income.\116\
---------------------------------------------------------------------------
    \115\Treas. Reg. sec. 1.401-1(b).
    \116\Secs. 72(m)(3) and 79(b)(3).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to provide a 
temporary extension of the present law rules permitting an 
employer to make a qualified transfer, a qualified future 
transfer, or a collectively bargained transfer of excess 
pension assets to a retiree medical account as long as the 
security of employees' pensions is not threatened. The 
Committee also believes it is appropriate to permit an employer 
to make such a transfer to a separate account under a defined 
benefit plan to fund group-term life insurance and, for group-
term life insurance policies purchased with transferred assets, 
to provide the same tax treatment for the life insurance 
benefits as is provided under the plan.

                        EXPLANATION OF PROVISION

Extension of existing provisions

    The provision allows qualified transfers, qualified future 
transfers, and collectively bargained transfers to retiree 
medical accounts to be made through December 31, 2021. No 
transfers are permitted after that date.

Transfers to fund retiree group-term life insurance permitted

    The provision allows qualified transfers, qualified future 
transfers, and collectively bargained transfers to be made to 
fund the purchase of retiree group-term life insurance. The 
assets transferred for the purchase of group-term life 
insurance must be maintained in a separate account within the 
plan (``retiree life insurance account''), which must be 
separate both from the assets in the retiree medical account 
and from the other assets in the defined benefit plan.
    Under the provision, the general rule that the cost of 
group-term life insurance coverage provided under a defined 
benefit plan is includable in gross income of the participant 
does not apply to group-term life insurance provided through a 
retiree life insurance account. Instead, the general rule for 
determining the amount of employer-provided group-term life 
insurance that is includible in gross income applies. However, 
group-term life insurance coverage is permitted to be provided 
through a retiree life insurance account only to the extent 
that it is not includible in gross income. Thus, generally, 
only group-term life insurance not in excess of $50,000 may be 
purchased with such transferred assets.
    Generally, the present law rules for transfers of excess 
pension assets to retiree medical accounts to fund retiree 
health benefits also apply to transfers to retiree life 
insurance accounts to fund retiree group-term life. However, 
generally, the rules are applied separately. Thus, for example, 
the one-transfer-a-year rule generally applies separately to 
transfers to retiree life insurance accounts and transfers to 
retiree medical accounts. Further, the maintenance of effort 
requirement for qualified transfers applies separately to life 
insurance benefits and health benefits. Similarly, for 
qualified future transfers and collectively bargained transfers 
for retiree group-term life insurance, the maintenance of 
effort and other special rules are applied separately to 
transfers to retiree life insurance accounts and retiree 
medical accounts.
    Reflecting the inherent differences between life insurance 
coverage and health coverage, certain rules are not applied to 
transfers to retiree life insurance accounts, such as the 
special rules allowing the employer to elect to the determine 
the applicable employer cost for health coverage during the 
cost maintenance period separately for retirees eligible for 
Medicare and retirees not eligible for Medicare. However, a 
separate test is allowed for the cost of retiree group-term 
life insurance for retirees under age 65 and those retirees who 
have reached age 65.
    The provision makes other technical and conforming changes 
to the rules for transfers to fund retiree health benefits and 
removes certain obsolete (``deadwood'') rules.
    The same sunset applicable to qualified transfers, 
qualified future transfers, and collectively bargained 
transfers to retiree medical accounts applies to transfers to 
retiree life insurance accounts (i.e., no transfers can be made 
after December 31, 2021).

                             EFFECTIVE DATE

    The provision applies to transfers made after the date of 
enactment.

                    III. 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 ``Highway Investment, Job Creation, and 
Economic Growth Act of 2012'' as reported.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                B. Budget Authority and Tax Expenditures


Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that no provisions of the bill as reported 
involve 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 A., above). The revenue-increasing provisions of the bill 
involve reduced tax expenditures (see revenue table in part 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 has not 
submitted a statement on the bill. The letter from the 
Congressional Budget Office will be provided separately.

                      IV. VOTES OF THE COMMITTEE 

    In compliance with paragraph 7(b) of rule XXVI of the 
standing rules of the Senate, the Committee states that, with a 
majority and quorum present, the ``Highway Investment, Job 
Creation, and Economic Growth Act of 2012,'' as amended, was 
ordered favorably reported on February 7, 2012 as follows:
    The Chairman's Mark and Modification were amended as 
follows:

Amendment #7, Bingaman, #1:
The Transportation Access for All Americans Act (S. 836), as 
        modified
Approved by Voice Vote

Amendment #42, Thune #1:
To ensure the Solvency of the Highway Trust Fund
Failed by roll call vote, 11 ayes, 13 nays.
    Ayes: Hatch, Grassley (proxy), Snowe, Kyl (proxy), Crapo 
(proxy), Roberts (proxy), Enzi, Cornyn (proxy), Coburn, Thune, 
Burr (proxy)
    Nays: Baucus, Rockefeller, Conrad (proxy), Bingaman, Kerry, 
Wyden (proxy), Schumer, Stabenow, Cantwell, Nelson, Menendez, 
Carper, Cardin

Amendment #27, Menendez #1:
Sustainable water infrastructure act
Approved by voice vote

Thune #3 (as modified):
To strike tax extender items included in the Chairman's 
        modification to the Mark
Failed, Roll Call Vote, 11 ayes, 13 nays
    Ayes: Hatch, Grassley (proxy), Snowe, Kyl (proxy), Crapo 
(proxy), Roberts (proxy), Enzi, Cornyn (proxy), Coburn (proxy), 
Thune, Burr (proxy)
    Nays: Baucus, Rockefeller, Conrad (proxy), Bingaman, Kerry 
(Proxy), Wyden, Schumer, Stabenow, Cantwell, Nelson, Menendez, 
Carper, Cardin

Final Passage of the Highway Investment, Job Creation, and 
        Economic Growth Act of 2012 Approved by Roll Call Vote, 
        17 ayes, 6 nays, and 1 present
    Ayes: Baucus, Rockefeller, Conrad (proxy), Bingaman, Kerry 
(proxy), Wyden, Schumer, Stabenow, Cantwell, Nelson, Menendez, 
Carper, Cardin, Snowe, Crapo (proxy), Roberts (proxy), Thune
    Nays: Hatch, Grassley (proxy), Enzi, Cornyn (proxy), Coburn 
(proxy), Burr (proxy)
    Present: Kyl (proxy)

                V. 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, personal privacy and paperwork

    The bill extends: (1) the highway motor fuels excise taxes; 
(2) the 12-percent excise tax imposed on the first retail sale 
of heavy highway vehicles, tractors, and trailers; (3) the 
excise tax imposed on highway tires with a rated load capacity 
exceeding 3,500 pounds, generally at a rate of 0.945 cents per 
pound of excess; and (4) the annual use tax imposed on highway 
vehicles having a taxable gross weight of 55,000 pounds or 
more. For individuals and businesses engaged in activities 
subject to these taxes, the provisions should not result in 
additional recordkeeping responsibilities beyond that required 
for present law. The provisions increasing revenues to the 
Highway Trust Fund will fund improvements to the nation's 
highway and mass transit system from which individuals and 
businesses using such system will benefit. The bill does not 
have any impact on personal privacy.

                     B. Unfunded Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
    The Committee has determined that the following tax 
provisions of the reported bill contain Federal private sector 
mandates within the meaning of Public Law 104-4, the Unfunded 
Mandates Reform Act of 1995: (1) claims and credit carryovers 
related to unprocessed and excluded fuels; (2) revocation or 
denial of passport in the case of certain tax delinquencies; 
and (3) modification of required minimum distribution rules for 
pension plans.
    The tax provisions of the reported bill do not impose a 
Federal intergovernmental mandate on State, local, or tribal 
governments within the meaning of Public Law 104-4, the 
Unfunded Mandates Reform Act of 1995.
    The costs required to comply with each Federal private 
sector mandate generally are no greater than the aggregate 
estimated budget effects of the provision.

                       C. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service 
Restructuring and Reform 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 have ``widespread applicability'' to 
individuals or small businesses.

       VI. 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).

                         VII. ADDITIONAL VIEWS

                              ----------                              


  Additional Views of Senators Hatch, Grassley, Kyl, Roberts, Cornyn, 
                        Coburn, Thune, and Burr 

    We are pleased that the Finance Committee is maintaining 
its key role in reauthorizing the highway program. It is 
critical to the functioning of the Senate that its committees 
be allowed to perform their work. As members of the committee, 
we fulfill our obligations to our constituents to put all the 
highway program financing issues on the record. Taking this 
bill through the Finance Committee process allows for a full 
examination of the funding stream for the current program. The 
formality of this process, with the opportunity to debate and 
amend the Chairman's mark, ensures that the policy is properly 
vetted for everyone to see.
    The authorizing committees' actions place a heavy burden on 
the Finance Committee. In 2004, the Finance Committee found 
roughly $24 billion in additional revenue for the next six 
years of the program. Some of that revenue consisted of 
permanent policy changes that raised revenue in the trust fund 
and did not impair the trust fund. Other policy changes grossed 
up the trust fund and then used unrelated general fund revenue 
raisers to hold harmless the general fund.
    In the meantime, demands on the trust fund grew. What's 
more, the recession and other factors caused highway revenues 
to decline. The combination of these events compounded the 
difficulties the committee experienced in reaching resolution 
of the funding gap for the trust fund regarding the two year 
reauthorization bill (2012/2013).
    What we found during consideration of the financing title 
was this: the meeting of the minds that led to the 2005 highway 
bill--with this committee in the lead--will shortly reach a 
dead end. Trust fund spending far outpaces trust fund revenues, 
and there is no getting around the fact that we need to find a 
new path that directly aligns trust fund revenues and trust 
fund spending.
    A consensus product is not enough if it does not 
fundamentally address this critical shortcoming with current 
federal surface transportation financing.
    Senator Hatch referred to a quote from former British Prime 
Minister Margaret Thatcher that bears on the dilemmas this 
committee faced. This is what Lady Thatcher said:

          For me, pragmatism is not enough. Nor is that 
        fashionable word consensus. . . .
          To me consensus seems to be the process of abandoning 
        all beliefs, principles, values and policies in search 
        of something in which no one believes, but to which no 
        one objects--the process of avoiding the very issues 
        that have to be solved, merely because you cannot get 
        agreement on the way ahead. . .

    For those of us concerned about the integrity of the 
highway trust fund, consensus on highway funding is not enough 
unless it addresses costs and benefits in a meaningful way that 
provides the foundation for lasting and sustainable federal 
transportation investment policy.
    When the Finance Committee last acted on highway funding, 
in 2005, we reached a basic agreement. Some of us dissented and 
still others supported it, but with reservations. For a short 
while that consensus worked. We provided more trust fund 
revenue for the authorizers to spend. And they spent it. Today, 
we are maintaining that level of spending and patching the hole 
that opened in the trust fund.
    We fear this committee has strayed from the principles that 
formed the basis of trust in the highway trust fund. These 
principles were articulated in a letter sent by Republican 
members of this committee last year. The amendments we filed 
follow-up on that letter.
    What are the principles Republican members put forward?
     The first principle is that users of the highway 
trust fund pay for the building and maintenance of the roads.
     The second principle is that revenues and spending 
should line up on a year-by-year basis.
     The third principle is that we should avoid 
spending down the balance of the trust fund. That is, we should 
keep a healthy cushion to ensure against funding crises and 
disruption.
     The fourth principle is we should provide for as 
long a multi-year authorization as possible.
     The fifth principle is that since the Finance 
Committee moved the revenue level up significantly in 2005, we 
should preserve it and not raise taxes now.
    Chairman Baucus worked hard to meet these principles. We 
appreciate the Chairman's efforts. We also appreciate the 
commitment he made during the markup to replace two of the more 
objectionable offsets in the mark with more acceptable ones. 
The reported bill will include the objectionable offsets. The 
Chairman, however, has indicated he will replace the 
objectionable offsets with acceptable ones in the Finance 
Committee amendment when that amendment is considered by the 
full Senate. But in our view, we can do better. That is why we 
filed a few amendments--far fewer than the members on the other 
side.
    One amendment filed on the Republican side and debated in 
committee was designed to insure that the traditional 
allocation of funds in the Highway Trust Fund was maintained. 
Unfortunately, that amendment was rejected on a party-line 
vote. For us, that action shows a risk of sliding down a 
slippery slope to a place where the highway trust fund is no 
longer a trust fund of roads and is further disadvantaged by 
users who don't contribute to the highway trust fund. We also 
felt strongly that, given the short window of time to prepare 
and debate the financing title, the markup should have focused 
on the shortfall in the trust fund. We did not believe that the 
financing title of the highways bill was the appropriate place 
to consider, on a selective basis, proposals such as expired 
tax provisions. The majority chose to single out for special 
treatment one traditional tax extender--the tax-free treatment 
of mass transit benefits--and two expired items from the 2009 
stimulus bill. Cherry-picking these three items while ignoring 
the other 58 extender provisions is bad policy. It was 
unfortunate that decision was upheld on a party-line vote.
    We were glad to debate the merits of the Chairman's mark 
during the markup. We were not successful in changing the basic 
direction of the funding proposal. The Finance Committee 
approved a short-term measure. We look forward to again 
considering a change in direction in the financing of the 
highway program. When this committee next considers financing 
of the highway program, we hope to reach a consensus that will 
result in a sustainable long-term highway financing system.