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                                                       Calendar No. 499
112th Congress                                                   Report
                                 SENATE
 2d Session                                                     112-208

======================================================================



 
           FAMILY AND BUSINESS TAX CUT CERTAINTY ACT OF 2012

                                _______
                                

                August 28, 2012.--Ordered to be printed

  Filed, under authority of the order of the Senate of August 2, 2012

                                _______
                                

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

                              R E P O R T

                             together with

                             MINORITY VIEWS

                         [To accompany S. 3521]

    The Committee on Finance, having considered an original 
bill (S. 3521) to amend the Internal Revenue Code of 1986 to 
extend certain expiring provisions, having considered the same, 
reports favorably thereon and recommends that the bill do pass.

                                CONTENTS

                                                                   Page
  I. LEGISLATIVE BACKGROUND...........................................4
 II. EXPLANATION OF PROVISIONS........................................4
TITLE I--INDIVIDUAL TAX PROVISIONS...............................     4
          A. Alternative Minimum Tax Relief......................     4
              1. Alternative minimum tax relief for individuals 
                  (secs. 101 and 102 of the bill and secs. 26 and 
                  55 of the Code)................................     4
          B. Other Individual Tax Provisions.....................     6
              1. Deduction for certain expenses of elementary and 
                  secondary school teachers (sec. 111 of the bill 
                  and sec. 62(a)(2)(D) of the Code)..............     6
              2. Exclude discharges of acquisition indebtedness 
                  on principal residences from gross income (sec. 
                  112 of the bill and sec. 108 of the Code)......     7
              3. Parity for mass transit and parking benefits 
                  (sec. 113 of the bill and sec. 132(f) of the 
                  Code)..........................................     8
              4. Mortgage insurance premiums (sec. 114 of the 
                  bill and sec. 163 of the Code).................    10
              5. Deduction for State and local sales taxes (sec. 
                  115 of the bill and sec. 164 of the Code)......    11
              6. Contributions of capital gain real property made 
                  for conservation purposes (sec. 116 of the bill 
                  and sec. 170 of the Code)......................    13
              7. Deduction for qualified tuition and related 
                  expenses (sec. 117 of the bill and sec. 222 of 
                  the Code)......................................    16
              8. Tax-free distributions from individual 
                  retirement plans for charitable purposes (sec. 
                  118 of the bill and sec. 408 of the Code)......    17
          C. Tax Administration..................................    21
              1. Improve and make permanent the provision 
                  authorizing the Internal Revenue Service to 
                  disclose certain return and return information 
                  to certain prison officials (sec. 121 of the 
                  bill and sec. 6103 of the Code)................    21
              2. Refunds disregarded in the administration of 
                  Federal programs and Federally assisted 
                  programs (sec. 122 of the bill and sec. 6409 of 
                  the Code)......................................    23
TITLE II--BUSINESS TAX EXTENDERS.................................    23
              1. Research credit (sec. 201 of the bill and sec. 
                  41 of the Code)................................    23
              2. Determination of applicable percentage for the 
                  low-income housing tax credit (sec. 202 of the 
                  bill and sec. 42 of the Code)..................    27
              3. Treatment of basic housing allowances for 
                  purposes of income eligibility rules (sec. 203 
                  of the bill and sec. 42 of the Code)...........    28
              4. Indian employment tax credit (sec. 204 of the 
                  bill and sec. 45A of the Code).................    30
              5. New markets tax credit (sec. 205 of the bill and 
                  sec. 45D of the Code)..........................    31
              6. Railroad track maintenance credit (sec. 206 of 
                  the bill and sec. 45G of the Code).............    33
              7. Mine rescue team training credit (sec. 207 of 
                  the bill and sec. 45N of the Code).............    34
              8. Employer wage credit for employees who are 
                  active duty members of the uniformed Services 
                  (sec. 208 of the bill and sec. 45P of the Code)    35
              9. Work opportunity tax credit (sec. 209 of the 
                  bill and secs. 51 and 52 of the Code)..........    37
              10. Qualified zone academy bonds (sec. 210 of the 
                  bill and sec. 54E of the Code).................    43
              11. 15-year straight-line cost recovery for 
                  qualified leasehold improvements, qualified 
                  restaurant buildings and improvements, and 
                  qualified retail improvements (sec. 211 of the 
                  bill and sec. 168 of the Code).................    45
              12. 7-year recovery period for motorsports 
                  entertainment complexes (sec. 212 of the bill 
                  and sec. 168 of the Code)......................    48
              13. Accelerated depreciation for business property 
                  on an Indian reservation (sec. 213 of the bill 
                  and sec. 168(j) of the Code)...................    49
              14. Enhanced charitable deduction for contributions 
                  of food inventory (sec. 214 of the bill and 
                  sec. 170 of the Code)..........................    50
              15. Increased expensing for small business 
                  depreciable assets (sec. 215 of the bill and 
                  sec. 179 of the Code)..........................    52
              16. Election to expense mine safety equipment (sec. 
                  216 of the bill and sec. 179E of the Code).....    55
              17. Special expensing rules for certain film and 
                  television productions (sec. 217 of the bill 
                  and sec. 181 of the Code)......................    56
              18. Deduction allowable with respect to income 
                  attributable to domestic production activities 
                  in Puerto Rico (sec. 218 of the bill and sec. 
                  199 of the Code)...............................    58
              19. Modification of tax treatment of certain 
                  payments to controlling exempt organizations 
                  (sec. 219 of the bill and sec. 512 of the Code)    60
              20. Treatment of certain dividends of regulated 
                  investment companies (sec. 220 of the bill and 
                  sec. 871(k) of the Code).......................    61
              21. RIC qualified investment entity treatment under 
                  FIRPTA (sec. 221 of the bill and secs. 897 and 
                  1445 of the Code)..............................    62
              22. Exceptions for active financing income (sec. 
                  222 of the bill and secs. 953 and 954 of the 
                  Code)..........................................    63
              23. Look-thru treatment of payments between related 
                  controlled foreign corporations under foreign 
                  personal holding company rules (sec. 223 of the 
                  bill and sec. 954(c)(6) of the Code)...........    65
              24. Exclusion of 100 percent of gain on certain 
                  small business stock (sec. 224 of the bill and 
                  sec. 1202 of the Code).........................    67
              25. Basis adjustment to stock of S corporations 
                  making charitable contributions of property 
                  (sec. 225 of the bill and sec. 1367 of the 
                  Code)..........................................    69
              26. Reduction in recognition period for S 
                  corporation built-in gains tax (sec. 226 of the 
                  bill and sec. 1374 of the Code)................    69
              27. Empowerment zone tax incentives (sec. 227 of 
                  the bill and secs. 1202 and 1391 of the Code)..    72
              28. New York Liberty Zone tax-exempt bond financing 
                  (sec. 228 of the bill and sec. 1400L of the 
                  Code)..........................................    77
              29. Extension of temporary increase in limit on 
                  cover over of rum excise taxes to Puerto Rico 
                  and the Virgin Islands (sec. 229 of the bill 
                  and sec. 7652(f) of the Code)..................    78
              30. Extension and Modification of American Samoa 
                  Economic Development Credit (sec. 230 of the 
                  bill and sec. 119 of Pub. L. No. 109-432)......    79
TITLE III--ENERGY TAX EXTENDERS..................................    81
              1. Credit for nonbusiness energy property (sec. 301 
                  of the bill and sec. 25C of the Code)..........    81
              2. Alternative fuel vehicle refueling property 
                  (sec. 302 of the bill and sec. 30C of the Code)    83
              3. Credit for electric motorcycles and three-
                  wheeled vehicles (sec. 303 of the bill and sec. 
                  30D of the Code)...............................    84
              4. Extension and modification of cellulosic biofuel 
                  producer credit (sec. 304 of the bill and sec. 
                  40 of the Code)................................    84
              5. Incentives for biodiesel and renewable diesel 
                  (sec. 305 of the bill and secs. 40A, 6426, and 
                  6427 of the Code)..............................    86
              6. Credit for the production of Indian coal (sec. 
                  306 of the bill and sec. 45 of the Code).......    89
              7. Extension and modification of incentives for 
                  renewable electricity property (sec. 307 of the 
                  bill and secs. 45 and 48 of the Code)..........    89
              8. New energy efficient home credit (sec. 308 of 
                  the bill and sec. 45L of the Code).............    91
              9. Energy efficient appliance credit (sec. 309 of 
                  the bill and sec. 45M of the Code).............    92
              10. Extension of special depreciation allowance for 
                  cellulosic biofuel plant property (sec. 310 of 
                  the bill and sec. 168(l) of the Code)..........    95
              11. Special rule for sales or dispositions to 
                  implement FERC or State electric restructuring 
                  policy for qualified electric utilities (sec. 
                  311 of the bill and sec. 451(i) of the Code)...    96
              12. Alternative fuel and alternative fuel mixtures 
                  (sec. 312 of the bill and 6426 and 6427(e) of 
                  the Code)......................................    98
TITLE IV--OTHER PROVISIONS.......................................   100
              1. Sense of the Senate that reducing tax 
                  expenditures in order to lower tax rates should 
                  be the focus of comprehensive tax reform in the 
                  113th Congress (sec. 401 of the bill)..........   100
III.  BUDGET EFFECTS OF THE BILL....................................100
 IV.  VOTES OF THE COMMITTEE........................................106
  V.  REGULATORY IMPACT AND OTHER MATTERS...........................107
 VI.  CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED.........111
VII.  MINORITY VIEWS................................................112

                       I. LEGISLATIVE BACKGROUND

    The Senate Committee on Finance marked up original 
legislation (the ``Family and Business Tax Cut Certainty Act of 
2012'') on August 2, 2012, and, with a majority and quorum 
present, ordered the bill favorably reported, with amendments 
on that date. This report describes the provisions of the bill.

                     II. EXPLANATION OF PROVISIONS


                   TITLE I--INDIVIDUAL TAX PROVISIONS


                   A. Alternative Minimum Tax Relief


1. Alternative minimum tax relief for individuals (Secs. 101 and 102 of 
        the bill and secs. 26 and 55 of the Code)

                              PRESENT LAW

    Present law imposes an alternative minimum tax (``AMT'') on 
individuals. The AMT is the amount by which the tentative 
minimum tax exceeds the regular income tax. An individual's 
tentative minimum tax is the sum of (1) 26 percent of so much 
of the taxable excess as does not exceed $175,000 ($87,500 in 
the case of a married individual filing a separate return) and 
(2) 28 percent of the remaining taxable excess. The taxable 
excess is so much of the alternative minimum taxable income 
(``AMTI'') as exceeds the exemption amount. The maximum tax 
rates on net capital gain and dividends used in computing the 
regular tax are used in computing the tentative minimum tax. 
AMTI is the individual's taxable income adjusted to take 
account of specified preferences and adjustments.
    The exemption amounts are: (1) $74,450 for taxable years 
beginning in 2011 and $45,000 in taxable years beginning 
thereafter in the case of married individuals filing a joint 
return and surviving spouses; (2) $48,450 for taxable years 
beginning in 2011 and $33,750 in taxable years beginning 
thereafter in the case of other unmarried individuals; (3) 
$37,225 for taxable years beginning in 2011 $22,500 in taxable 
years thereafter in the case of married individuals filing 
separate returns; and (4) $22,500 in the case of an estate or 
trust. The exemption amounts are phased out by an amount equal 
to 25 percent of the amount by which the individual's AMTI 
exceeds (1) $150,000 in the case of married individuals filing 
a joint return and surviving spouses, (2) $112,500 in the case 
of other unmarried individuals, and (3) $75,000 in the case of 
married individuals filing separate returns or an estate or a 
trust. These amounts are not indexed for inflation.
    Present law provides for certain nonrefundable personal tax 
credits. These credits include the dependent care credit, the 
credit for the elderly and disabled, the adoption credit, the 
child credit, the credit for interest on certain home 
mortgages, the Hope Scholarship and Lifetime Learning credits, 
the credit for savers, the credit for certain nonbusiness 
energy property, the credit for residential energy efficient 
property, the credit for alternative motor vehicles, the credit 
for alternative fuel vehicle refueling property, the credit for 
new qualified plug-in electric drive motor vehicles, and 
carryforwards of the D.C. first-time homebuyer credit.
    For taxable years beginning before 2012, the nonrefundable 
personal credits are allowed to the extent of the full amount 
of the individual's regular tax and alternative minimum tax.
    For taxable years beginning after 2011, the dependent care 
credit, the credit for the elderly and disabled, the adoption 
credit (other than for taxable years beginning in 2012), the 
child credit (other than for taxable years beginning in 2012), 
the credit for interest on certain home mortgages, the Hope 
Scholarship credit (other than for taxable years beginning in 
2012), the Lifetime Learning credit, the credit for certain 
nonbusiness energy property, the credit for residential energy 
efficient property, the credit for alternative fuel vehicle 
refueling property, and carryforwards of the D.C. first-time 
homebuyer credit are allowed only to the extent that the 
individual's regular income tax liability exceeds the 
individual's tentative minimum tax, determined without regard 
to the minimum tax foreign tax credit. The other nonrefundable 
personal are allowed to the full extent of the individual's 
regular tax and alternative minimum tax.

                           REASONS FOR CHANGE

    The Committee is concerned about the projected increase in 
the number of individuals who will be affected by the 
individual alternative minimum tax and the projected increase 
in tax liability for those who are affected by the tax. The 
provision will reduce the number of individuals who would 
otherwise be affected by the alternative minimum tax and will 
reduce the tax liability of the families that continue to be 
affected by the alternative minimum tax.

                        EXPLANATION OF PROVISION

    The provision provides that the individual AMT exemption 
amount for taxable years beginning in 2012 is (1) $78,750, in 
the case of married individuals filing a joint return and 
surviving spouses; (2) $50,600 in the case of other unmarried 
individuals; and (3) $39,375 in the case of married individuals 
filing separate returns.
    The provision provides that the individual AMT exemption 
amount for taxable years beginning in 2013 is (1) $79,850, in 
the case of married individuals filing a joint return and 
surviving spouses; (2) $51,150 in the case of other unmarried 
individuals; and (3) $39,975 in the case of married individuals 
filing separate returns.
    The provision allows an individual to offset the entire 
regular tax liability and alternative minimum tax liability by 
the nonrefundable personal credits for taxable years beginning 
in 2012 and 2013.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2011.

                   B. Other Individual Tax Provisions


1. Deduction for certain expenses of elementary and secondary school 
        teachers (Sec. 111 of the bill and sec. 62(a)(2)(D) of the 
        Code)

                              PRESENT LAW

    In general, ordinary and necessary business expenses are 
deductible. However, unreimbursed employee business expenses 
generally are deductible only as an itemized deduction and only 
to the extent that the individual's total miscellaneous 
deductions (including employee business expenses) exceed two 
percent of adjusted gross income. For taxable years beginning 
after 2012, an individual's otherwise allowable itemized 
deductions may be further limited by the overall limitation on 
itemized deductions, which reduces itemized deductions for 
taxpayers with adjusted gross income in excess of a threshold 
amount. In addition, miscellaneous itemized deductions are not 
allowable under the alternative minimum tax.
    Certain expenses of eligible educators are allowed as an 
above-the-line deduction. Specifically, for taxable years 
beginning prior to January 1, 2012, an above-the-line deduction 
is allowed for up to $250 annually of expenses paid or incurred 
by an eligible educator for books, supplies (other than 
nonathletic supplies for courses of instruction in health or 
physical education), computer equipment (including related 
software and services) and other equipment, and supplementary 
materials used by the eligible educator in the classroom.\1\ To 
be eligible for this deduction, the expenses must be otherwise 
deductible under section 162 as a trade or business expense. A 
deduction is allowed only to the extent the amount of expenses 
exceeds the amount excludable from income under section 135 
(relating to education savings bonds), 529(c)(1) (relating to 
qualified tuition programs), and section 530(d)(2) (relating to 
Coverdell education savings accounts).
---------------------------------------------------------------------------
    \1\Sec. 62(a)(2)(D).
---------------------------------------------------------------------------
    An eligible educator is a kindergarten through grade twelve 
teacher, instructor, counselor, principal, or aide in a school 
for at least 900 hours during a school year. A school means any 
school that provides elementary education or secondary 
education (kindergarten through grade 12), as determined under 
State law.
    The above-the-line deduction for eligible educators is not 
allowed for taxable years beginning after December 31, 2011.

                           REASONS FOR CHANGE

    The Committee recognizes that many elementary and secondary 
school teachers provide substantial classroom resources at 
their own expense, and believe that it is appropriate to extend 
the present law deduction for such expenses in order to 
continue to partially offset the substantial costs such 
educators incur for the benefit of their students.

                        EXPLANATION OF PROVISION

    The provision extends the deduction for eligible educator 
expenses for two years, through December 31, 2013.

                             EFFECTIVE DATE

    The provision is effective for expenses paid or incurred in 
taxable years beginning after December 31, 2011.

2. Exclude discharges of acquisition indebtedness on principal 
        residences from gross income (Sec. 112 of the bill and sec. 108 
        of the Code)

                              PRESENT LAW

In general

    Gross income includes income that is realized by a debtor 
from the discharge of indebtedness, subject to certain 
exceptions for debtors in Title 11 bankruptcy cases, insolvent 
debtors, certain student loans, certain farm indebtedness, and 
certain real property business indebtedness (secs. 61(a)(12) 
and 108).\2\ In cases involving discharges of indebtedness that 
are excluded from gross income under the exceptions to the 
general rule, taxpayers generally reduce certain tax 
attributes, including basis in property, by the amount of the 
discharge of indebtedness.
---------------------------------------------------------------------------
    \2\A debt cancellation which constitutes a gift or bequest is not 
treated as income to the donee debtor (sec. 102).
---------------------------------------------------------------------------
    The amount of discharge of indebtedness excluded from 
income by an insolvent debtor not in a Title 11 bankruptcy case 
cannot exceed the amount by which the debtor is insolvent. In 
the case of a discharge in bankruptcy or where the debtor is 
insolvent, any reduction in basis may not exceed the excess of 
the aggregate bases of properties held by the taxpayer 
immediately after the discharge over the aggregate of the 
liabilities of the taxpayer immediately after the discharge 
(sec. 1017).
    For all taxpayers, the amount of discharge of indebtedness 
generally is equal to the difference between the adjusted issue 
price of the debt being cancelled and the amount used to 
satisfy the debt. These rules generally apply to the exchange 
of an old obligation for a new obligation, including a 
modification of indebtedness that is treated as an exchange (a 
debt-for-debt exchange).

Qualified principal residence indebtedness

    An exclusion from gross income is provided for any 
discharge of indebtedness income by reason of a discharge (in 
whole or in part) of qualified principal residence 
indebtedness. Qualified principal residence indebtedness means 
acquisition indebtedness (within the meaning of section 
163(h)(3)(B), except that the dollar limitation is $2,000,000) 
with respect to the taxpayer's principal residence. Acquisition 
indebtedness with respect to a principal residence generally 
means indebtedness which is incurred in the acquisition, 
construction, or substantial improvement of the principal 
residence of the individual and is secured by the residence. It 
also includes refinancing of such indebtedness to the extent 
the amount of the indebtedness resulting from such refinancing 
does not exceed the amount of the refinanced indebtedness. For 
these purposes, the term ``principal residence'' has the same 
meaning as under section 121 of the Code.
    If, immediately before the discharge, only a portion of a 
discharged indebtedness is qualified principal residence 
indebtedness, the exclusion applies only to so much of the 
amount discharged as exceeds the portion of the debt which is 
not qualified principal residence indebtedness. Thus, assume 
that a principal residence is secured by an indebtedness of $1 
million, of which $800,000 is qualified principal residence 
indebtedness. If the residence is sold for $700,000 and 
$300,000 debt is discharged, then only $100,000 of the amount 
discharged may be excluded from gross income under the 
qualified principal residence indebtedness exclusion.
    The basis of the individual's principal residence is 
reduced by the amount excluded from income under the provision.
    The qualified principal residence indebtedness exclusion 
does not apply to a taxpayer in a Title 11 case; instead the 
general exclusion rules apply. In the case of an insolvent 
taxpayer not in a Title 11 case, the qualified principal 
residence indebtedness exclusion applies unless the taxpayer 
elects to have the general exclusion rules apply instead.
    The exclusion does not apply to the discharge of a loan if 
the discharge is on account of services performed for the 
lender or any other factor not directly related to a decline in 
the value of the residence or to the financial condition of the 
taxpayer.
    The exclusion for qualified principal residence 
indebtedness is effective for discharges of indebtedness before 
January 1, 2013.

                           REASONS FOR CHANGE

    The Committee believes that where a lender discharges 
acquisition debt on a principal residence such as is the case 
of a short sale or when a taxpayer loses their principal 
residence through a foreclosure, it is inappropriate to treat 
discharges of indebtedness as income.

                        EXPLANATION OF PROVISION

    The provision extends for one additional year (through 
December 31, 2013) the exclusion from gross income for 
discharges of qualified principal residence indebtedness.

                             EFFECTIVE DATE

    The provision is effective for discharges of indebtedness 
on or after January 1, 2013.

3. Parity for mass transit and parking benefits (Sec. 113 of the bill 
        and sec. 132(f) 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 employment 
tax purposes.\3\ 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 for parking, 
transit passes, or vanpooling. In the case of transit passes, 
however, a cash reimbursement is considered a qualified 
transportation fringe benefit only if a voucher or similar item 
that may be exchanged only for a transit pass is not readily 
available for direct distribution by the employer to the 
employee.
---------------------------------------------------------------------------
    \3\Secs. 132(a)(5) and (f), 3121(a)(20), 3231(e)(5), 3306(b)(16) 
and 3401(a)(19).
---------------------------------------------------------------------------
    Before February 17, 2009, the amount that could be excluded 
as qualified transportation fringe benefits was limited to $100 
per month in combined transit pass and vanpool benefits and 
$175 per month in qualified parking benefits. These 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\4\ provided 
parity in qualified transportation fringe benefits by 
temporarily increasing the monthly exclusion for combined 
employer-provided transit pass and vanpool 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\5\ extended parity in qualified transportation fringe 
benefits through December 31, 2011.
---------------------------------------------------------------------------
    \4\Pub. L. No. 111-5.
    \5\Pub. L. No. 111-312.
---------------------------------------------------------------------------
    Effective January 1, 2012, the amount that can be excluded 
as qualified transportation fringe benefits is limited to $125 
per month in combined transit pass and vanpool benefits and 
$240 per month in qualified parking benefits.

                           REASONS FOR CHANGE

    Maintaining parity in transportation benefits provides 
employees with an incentive to use public transportation and 
vanpools for their commute rather than driving to work in their 
personal vehicles, thus potentially easing traffic congestion 
and pollution.

                        EXPLANATION OF PROVISION

    The provision extends parity in qualified transportation 
fringe benefits through December 31, 2013. Thus, for 2012, the 
monthly limit on the exclusion for combined transit pass and 
vanpool benefits is $240.
    In order for the extension to be effective retroactive to 
January 1, 2012, 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. 
The Committee intends that the rule that an employer 
reimbursement is excludible only if vouchers are not available 
to provide the benefit shall continue to apply, except in the 
case of reimbursements for vanpool or transit benefits between 
$125 and $240 only for months beginning after December 31, 2011 
and before enactment. Further, the Committee intends that 
reimbursements for expenses incurred for months prior to 
enactment may be made in addition to the provision of benefits 
or reimbursements of up to $240 per month for expenses incurred 
after enactment.

                             EFFECTIVE DATE

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

4. Mortgage insurance premiums (Sec. 114 of the bill and sec. 163 of 
        the Code)

                              PRESENT LAW

In general

    Present law provides that qualified residence interest is 
deductible notwithstanding the general rule that personal 
interest is nondeductible (sec. 163(h)).

Acquisition indebtedness and home equity indebtedness

    Qualified residence interest is interest on acquisition 
indebtedness and home equity indebtedness with respect to a 
principal and a second residence of the taxpayer. The maximum 
amount of home equity indebtedness is $100,000. The maximum 
amount of acquisition indebtedness is $1 million. Acquisition 
indebtedness means debt that is incurred in acquiring, 
constructing, or substantially improving a qualified residence 
of the taxpayer, and that is secured by the residence. Home 
equity indebtedness is debt (other than acquisition 
indebtedness) that is secured by the taxpayer's principal or 
second residence, to the extent the aggregate amount of such 
debt does not exceed the difference between the total 
acquisition indebtedness with respect to the residence, and the 
fair market value of the residence.

Private mortgage insurance

    Certain premiums paid or accrued for qualified mortgage 
insurance by a taxpayer during the taxable year in connection 
with acquisition indebtedness on a qualified residence of the 
taxpayer are treated as interest that is qualified residence 
interest and thus deductible. The amount allowable as a 
deduction is phased out ratably by 10 percent for each $1,000 
by which the taxpayer's adjusted gross income exceeds $100,000 
($500 and $50,000, respectively, in the case of a married 
individual filing a separate return). Thus, the deduction is 
not allowed if the taxpayer's adjusted gross income exceeds 
$110,000 ($55,000 in the case of a married individual filing a 
separate return).
    For this purpose, qualified mortgage insurance means 
mortgage insurance provided by the Veterans Administration, the 
Federal Housing Administration,\6\ or the Rural Housing 
Administration, and private mortgage insurance (defined in 
section two of the Homeowners Protection Act of 1998 as in 
effect on the date of enactment of the provision).
---------------------------------------------------------------------------
    \6\The Veterans Administration and the Rural Housing Administration 
have been succeeded by the Department of Veterans Affairs and the Rural 
Housing Service, respectively.
---------------------------------------------------------------------------
    Amounts paid for qualified mortgage insurance that are 
properly allocable to periods after the close of the taxable 
year are treated as paid in the period to which they are 
allocated. No deduction is allowed for the unamortized balance 
if the mortgage is paid before its term (except in the case of 
qualified mortgage insurance provided by the Department of 
Veterans Affairs or Rural Housing Service).
    The provision does not apply with respect to any mortgage 
insurance contract issued before January 1, 2007. The provision 
terminates for any amount paid or accrued after December 31, 
2011, or properly allocable to any period after that date.
    Reporting rules apply under the provision.

                           REASONS FOR CHANGE

    The Committee believes it is appropriate to extend the 
present-law temporary provision. The Committee understands that 
the purpose of the provisions permitting deduction of home 
mortgage interest is to encourage home ownership while limiting 
significant disincentives to saving. The Committee believes 
that it would be consistent with the purpose of the provisions 
permitting deduction of home mortgage interest to permit the 
deduction of mortgage insurance premiums. While these premiums 
are not in the nature of interest, the Committee notes that 
purchase of such insurance is often demanded by lenders in 
order for home buyers to obtain financing (depending on the 
size of the buyer's down payment). The Committee believes that 
permitting deductibility of premiums for this type of insurance 
connected with home purchases will foster home ownership. In 
the case of higher income taxpayers who may not purchase 
mortgage insurance, however, the Committee believes the 
incentive of deductibility becomes unnecessary, and a phase-out 
is appropriate. It is not intended that prepayments be 
currently deductible, but rather, that they be deductible only 
in the period to which they relate. Reporting of payments is 
generally necessary to administer the provision.

                        EXPLANATION OF PROVISION

    The provision extends the deduction for private mortgage 
insurance premiums for two years (with respect to contracts 
entered into after December 31, 2006). Thus, the provision 
applies to amounts paid or accrued in 2012 and 2013 (and not 
properly allocable to any period after 2013).\7\
---------------------------------------------------------------------------
    \7\The provision corrects the names of the Department of Veterans 
Affairs and the Rural Housing Service.
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                             EFFECTIVE DATE

    The provision is effective for amounts paid or accrued 
after December 31, 2011.

5. Deduction for State and local sales taxes (Sec. 115 of the bill and 
        sec. 164 of the Code)

                              PRESENT LAW

    For purposes of determining regular tax liability, an 
itemized deduction is permitted for certain State and local 
taxes paid, including individual income taxes, real property 
taxes, and personal property taxes. The itemized deduction is 
not permitted for purposes of determining a taxpayer's 
alternative minimum taxable income. For taxable years beginning 
before 2012, at the election of the taxpayer, an itemized 
deduction may be taken for State and local general sales taxes 
in lieu of the itemized deduction provided under present law 
for State and local income taxes. As is the case for State and 
local income taxes, the itemized deduction for State and local 
general sales taxes is not permitted for purposes of 
determining a taxpayer's alternative minimum taxable income. 
Taxpayers have two options with respect to the determination of 
the sales tax deduction amount. Taxpayers may deduct the total 
amount of general State and local sales taxes paid by 
accumulating receipts showing general sales taxes paid. 
Alternatively, taxpayers may use tables created by the 
Secretary that show the allowable deduction. The tables are 
based on average consumption by taxpayers on a State-by-State 
basis taking into account number of dependents, modified 
adjusted gross income and rates of State and local general 
sales taxation. Taxpayers who live in more than one 
jurisdiction during the tax year are required to prorate the 
table amounts based on the time they live in each jurisdiction. 
Taxpayers who use the tables created by the Secretary may, in 
addition to the table amounts, deduct eligible general sales 
taxes paid with respect to the purchase of motor vehicles, 
boats, and other items specified by the Secretary. Sales taxes 
for items that may be added to the tables are not reflected in 
the tables themselves.
    A general sales tax is a tax imposed at one rate with 
respect to the sale at retail of a broad range of classes of 
items.\8\ No deduction is allowed for any general sales tax 
imposed with respect to an item at a rate other than the 
general rate of tax. However, in the case of food, clothing, 
medical supplies, and motor vehicles, the above rules are 
relaxed in two ways. First, if the tax does not apply with 
respect to some or all of such items, a tax that applies to 
other such items can still be considered a general sales tax. 
Second, the rate of tax applicable with respect to some or all 
of these items may be lower than the general rate. However, in 
the case of motor vehicles, if the rate of tax exceeds the 
general rate, such excess is disregarded and the general rate 
is treated as the rate of tax.
---------------------------------------------------------------------------
    \8\Sec. 164(b)(5)(B).
---------------------------------------------------------------------------
    A compensating use tax with respect to an item is treated 
as a general sales tax, provided such tax is complementary to a 
general sales tax and a deduction for sales taxes is allowable 
with respect to items sold at retail in the taxing jurisdiction 
that are similar to such item.

                           REASONS FOR CHANGE

    The Committee believes an extension of the option to deduct 
State and local sales taxes in lieu of deducting State and 
local income taxes is appropriate to continue to provide 
similar Federal tax treatment to residents of States that rely 
on sales taxes, rather than income taxes, to fund State and 
local governmental functions.

                        EXPLANATION OF PROVISION

    The provision allowing taxpayers to elect to deduct State 
and local sales taxes in lieu of State and local income taxes 
is extended for two years, through 2013.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2011.

6. Contributions of capital gain real property made for conservation 
        purposes (Sec. 116 of the bill and sec. 170 of the Code)

                              PRESENT LAW

Charitable contributions generally

    In general, a deduction is permitted for charitable 
contributions, subject to certain limitations that depend on 
the type of taxpayer, the property contributed, and the donee 
organization. The amount of deduction generally equals the fair 
market value of the contributed property on the date of the 
contribution. Charitable deductions are provided for income, 
estate, and gift tax purposes.\9\
---------------------------------------------------------------------------
    \9\Secs. 170, 2055, and 2522, respectively.
---------------------------------------------------------------------------
    In general, in any taxable year, charitable contributions 
by a corporation are not deductible to the extent the aggregate 
contributions exceed 10 percent of the corporation's taxable 
income computed without regard to net operating or capital loss 
carrybacks. For individuals, the amount deductible is a 
percentage of the taxpayer's contribution base, (i.e., 
taxpayer's adjusted gross income computed without regard to any 
net operating loss carryback). The applicable percentage of the 
contribution base varies depending on the type of donee 
organization and property contributed. Cash contributions by an 
individual taxpayer to public charities, private operating 
foundations, and certain types of private nonoperating 
foundations may not exceed 50 percent of the taxpayer's 
contribution base. Cash contributions to private foundations 
and certain other organizations generally may be deducted up to 
30 percent of the taxpayer's contribution base.
    In general, a charitable deduction is not allowed for 
income, estate, or gift tax purposes if the donor transfers an 
interest in property to a charity while also either retaining 
an interest in that property or transferring an interest in 
that property to a noncharity for less than full and adequate 
consideration. Exceptions to this general rule are provided 
for, among other interests, remainder interests in charitable 
remainder annuity trusts, charitable remainder unitrusts, and 
pooled income funds, present interests in the form of a 
guaranteed annuity or a fixed percentage of the annual value of 
the property, and qualified conservation contributions.

Capital gain property

    Capital gain property means any capital asset or property 
used in the taxpayer's trade or business the sale of which at 
its fair market value, at the time of contribution, would have 
resulted in gain that would have been long-term capital gain. 
Contributions of capital gain property to a qualified charity 
are deductible at fair market value within certain limitations. 
Contributions of capital gain property to charitable 
organizations described in section 170(b)(1)(A) (e.g., public 
charities, private foundations other than private non-operating 
foundations, and certain governmental units) generally are 
deductible up to 30 percent of the taxpayer's contribution 
base. An individual may elect, however, to bring all these 
contributions of capital gain property for a taxable year 
within the 50-percent limitation category by reducing the 
amount of the contribution deduction by the amount of the 
appreciation in the capital gain property. Contributions of 
capital gain property to charitable organizations described in 
section 170(b)(1)(B) (e.g., private non-operating foundations) 
are deductible up to 20 percent of the taxpayer's contribution 
base.
    For purposes of determining whether a taxpayer's aggregate 
charitable contributions in a taxable year exceed the 
applicable percentage limitation, contributions of capital gain 
property are taken into account after other charitable 
contributions. Contributions of capital gain property that 
exceed the percentage limitation may be carried forward for 
five years.

Qualified conservation contributions

    Qualified conservation contributions are not subject to the 
``partial interest'' rule, which generally bars deductions for 
charitable contributions of partial interests in property.\10\ 
A qualified conservation contribution is a contribution of a 
qualified real property interest to a qualified organization 
exclusively for conservation purposes. A qualified real 
property interest is defined as: (1) the entire interest of the 
donor other than a qualified mineral interest; (2) a remainder 
interest; or (3) a restriction (granted in perpetuity) on the 
use that may be made of the real property. Qualified 
organizations include certain governmental units, public 
charities that meet certain public support tests, and certain 
supporting organizations. Conservation purposes include: (1) 
the preservation of land areas for outdoor recreation by, or 
for the education of, the general public; (2) the protection of 
a relatively natural habitat of fish, wildlife, or plants, or 
similar ecosystem; (3) the preservation of open space 
(including farmland and forest land) where such preservation 
will yield a significant public benefit and is either for the 
scenic enjoyment of the general public or pursuant to a clearly 
delineated Federal, State, or local governmental conservation 
policy; and (4) the preservation of an historically important 
land area or a certified historic structure.
---------------------------------------------------------------------------
    \10\Secs. 170(f)(3)(B)(iii) and 170(h).
---------------------------------------------------------------------------
    Qualified conservation contributions of capital gain 
property are subject to the same limitations and carryover 
rules as other charitable contributions of capital gain 
property.

Temporary rules regarding contributions of capital gain real property 
        for conservation purposes

            In general
    Under a temporary provision\11\ the 30-percent contribution 
base limitation on contributions of capital gain property by 
individuals does not apply to qualified conservation 
contributions (as defined under present law). Instead, 
individuals may deduct the fair market value of any qualified 
conservation contribution to an organization described in 
section 170(b)(1)(A) to the extent of the excess of 50 percent 
of the contribution base over the amount of all other allowable 
charitable contributions. These contributions are not taken 
into account in determining the amount of other allowable 
charitable contributions.
---------------------------------------------------------------------------
    \11\Sec. 170(b)(1)(E).
---------------------------------------------------------------------------
    Individuals are allowed to carry over any qualified 
conservation contributions that exceed the 50-percent 
limitation for up to 15 years.
    For example, assume an individual with a contribution base 
of $100 makes a qualified conservation contribution of property 
with a fair market value of $80 and makes other charitable 
contributions subject to the 50-percent limitation of $60. The 
individual is allowed a deduction of $50 in the current taxable 
year for the non-conservation contributions (50 percent of the 
$100 contribution base) and is allowed to carry over the excess 
$10 for up to 5 years. No current deduction is allowed for the 
qualified conservation contribution, but the entire $80 
qualified conservation contribution may be carried forward for 
up to 15 years.
            Farmers and ranchers
    In the case of an individual who is a qualified farmer or 
rancher for the taxable year in which the contribution is made, 
a qualified conservation contribution is allowable up to 100 
percent of the excess of the taxpayer's contribution base over 
the amount of all other allowable charitable contributions.
    In the above example, if the individual is a qualified 
farmer or rancher, in addition to the $50 deduction for non-
conservation contributions, an additional $50 for the qualified 
conservation contribution is allowed and $30 may be carried 
forward for up to 15 years as a contribution subject to the 
100-percent limitation.
    In the case of a corporation (other than a publicly traded 
corporation) that is a qualified farmer or rancher for the 
taxable year in which the contribution is made, any qualified 
conservation contribution is allowable up to 100 percent of the 
excess of the corporation's taxable income (as computed under 
section 170(b)(2)) over the amount of all other allowable 
charitable contributions. Any excess may be carried forward for 
up to 15 years as a contribution subject to the 100-percent 
limitation.\12\
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    \12\Sec. 170(b)(2)(B).
---------------------------------------------------------------------------
    As an additional condition of eligibility for the 100 
percent limitation, with respect to any contribution of 
property in agriculture or livestock production, or that is 
available for such production, by a qualified farmer or 
rancher, the qualified real property interest must include a 
restriction that the property remain generally available for 
such production. (There is no requirement as to any specific 
use in agriculture or farming, or necessarily that the property 
be used for such purposes, merely that the property remain 
available for such purposes.)
    A qualified farmer or rancher means a taxpayer whose gross 
income from the trade or business of farming (within the 
meaning of section 2032A(e)(5)) is greater than 50 percent of 
the taxpayer's gross income for the taxable year.
            Termination
    The temporary rules regarding contributions of capital gain 
real property for conservation purposes do not apply to 
contributions made in taxable years beginning after December 
31, 2011.\13\
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    \13\Secs. 170(b)(1)(E)(vi) and 170(b)(2)(B)(iii).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the special rule that provides 
an increased incentive to make charitable contributions of 
partial interests in real property for conservation purposes is 
an important way of encouraging conservation and preservation, 
and should be extended for two additional years.

                        EXPLANATION OF PROVISION

    The provision extends the temporary rules regarding 
contributions of capital gain real property for conservation 
purposes for two years for contributions made in taxable years 
beginning before January 1, 2014.

                             EFFECTIVE DATE

    The provision is effective for contributions made in 
taxable years beginning after December 31, 2011.

7. Deduction for qualified tuition and related expenses (Sec. 117 of 
        the bill and sec. 222 of the Code)

                              PRESENT LAW

    An individual is allowed a deduction for qualified tuition 
and related expenses for higher education paid by the 
individual during the taxable year.\14\ The deduction is 
allowed in computing adjusted gross income. The term qualified 
tuition and related expenses is defined in the same manner as 
for the Hope and Lifetime Learning credits, and includes 
tuition and fees required for the enrollment or attendance of 
the taxpayer, the taxpayer's spouse, or any dependent of the 
taxpayer with respect to whom the taxpayer may claim a personal 
exemption, at an eligible institution of higher education for 
courses of instruction of such individual at such 
institution.\15\ The expenses must be in connection with 
enrollment at an institution of higher education during the 
taxable year, or with an academic period beginning during the 
taxable year or during the first three months of the next 
taxable year. The deduction is not available for tuition and 
related expenses paid for elementary or secondary education.
---------------------------------------------------------------------------
    \14\Sec. 222.
    \15\The deduction generally is not available for expenses with 
respect to a course or education involving sports, games, or hobbies, 
and is not available for student activity fees, athletic fees, 
insurance expenses, or other expenses unrelated to an individual's 
academic course of instruction.
---------------------------------------------------------------------------
    The maximum deduction is $4,000 for an individual whose 
adjusted gross income for the taxable year does not exceed 
$65,000 ($130,000 in the case of a joint return), or $2,000 for 
other individuals whose adjusted gross income does not exceed 
$80,000 ($160,000 in the case of a joint return). No deduction 
is allowed for an individual whose adjusted gross income 
exceeds the relevant adjusted gross income limitations, for a 
married individual who does not file a joint return, or for an 
individual with respect to whom a personal exemption deduction 
may be claimed by another taxpayer for the taxable year. The 
deduction is not available for taxable years beginning after 
December 31, 2011.
    The amount of qualified tuition and related expenses must 
be reduced by certain scholarships, educational assistance 
allowances, and other amounts paid for the benefit of such 
individual,\16\ and by the amount of such expenses taken into 
account for purposes of determining any exclusion from gross 
income of: (1) income from certain U.S. savings bonds used to 
pay higher education tuition and fees; and (2) income from a 
Coverdell education savings account.\17\ Additionally, such 
expenses must be reduced by the earnings portion (but not the 
return of principal) of distributions from a qualified tuition 
program if an exclusion under section 529 is claimed with 
respect to expenses eligible for the qualified tuition 
deduction. No deduction is allowed for any expense for which a 
deduction is otherwise allowed or with respect to an individual 
for whom a Hope or Lifetime Learning credit is elected for such 
taxable year.
---------------------------------------------------------------------------
    \16\Secs. 222(d)(1) and 25A(g)(2).
    \17\Sec. 222(c). These reductions are the same as those that apply 
to the Hope and Lifetime Learning credits.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee observes that the cost of a college education 
continues to rise, and thus believes that the extension of the 
qualified tuition deduction is appropriate to mitigate the 
impact of rising tuition costs on students and their families. 
The Committee further believes that the tuition deduction 
provides an important financial incentive for individuals to 
pursue higher education.

                        EXPLANATION OF PROVISION

    The provision extends the qualified tuition deduction for 
two years, through 2013.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2011.

8. Tax-free distributions from individual retirement plans for 
        charitable purposes (Sec. 118 of the bill and sec. 408 of the 
        Code)

                              PRESENT LAW

In general

    If an amount withdrawn from a traditional individual 
retirement arrangement (``IRA'') or a Roth IRA is donated to a 
charitable organization, the rules relating to the tax 
treatment of withdrawals from IRAs apply to the amount 
withdrawn and the charitable contribution is subject to the 
normally applicable limitations on deductibility of such 
contributions. An exception applies in the case of a qualified 
charitable distribution.

Charitable contributions

    In computing taxable income, an individual taxpayer who 
itemizes deductions generally is allowed to deduct the amount 
of cash and up to the fair market value of property contributed 
to the following entities: (1) a charity described in section 
501(c)(3); (2) certain veterans' organizations, fraternal 
societies, and cemetery companies;\18\ and (3) a Federal, 
State, or local governmental entity, but only if the 
contribution is made for exclusively public purposes.\19\ The 
deduction also is allowed for purposes of calculating 
alternative minimum taxable income.
---------------------------------------------------------------------------
    \18\Secs. 170(c)(3)-(5).
    \19\Sec. 170(c)(1).
---------------------------------------------------------------------------
    The amount of the deduction allowable for a taxable year 
with respect to a charitable contribution of property may be 
reduced depending on the type of property contributed, the type 
of charitable organization to which the property is 
contributed, and the income of the taxpayer.\20\
---------------------------------------------------------------------------
    \20\Secs. 170(b) and (e).
---------------------------------------------------------------------------
    A taxpayer who takes the standard deduction (i.e., who does 
not itemize deductions) may not take a separate deduction for 
charitable contributions.\21\
---------------------------------------------------------------------------
    \21\Sec. 170(a).
---------------------------------------------------------------------------
    A payment to a charity (regardless of whether it is termed 
a ``contribution'') in exchange for which the donor receives an 
economic benefit is not deductible, except to the extent that 
the donor can demonstrate, among other things, that the payment 
exceeds the fair market value of the benefit received from the 
charity. To facilitate distinguishing charitable contributions 
from purchases of goods or services from charities, present law 
provides that no charitable contribution deduction is allowed 
for a separate contribution of $250 or more unless the donor 
obtains a contemporaneous written acknowledgement of the 
contribution from the charity indicating whether the charity 
provided any good or service (and an estimate of the value of 
any such good or service provided) to the taxpayer in 
consideration for the contribution.\22\ In addition, present 
law requires that any charity that receives a contribution 
exceeding $75 made partly as a gift and partly as consideration 
for goods or services furnished by the charity (a ``quid pro 
quo'' contribution) is required to inform the contributor in 
writing of an estimate of the value of the goods or services 
furnished by the charity and that only the portion exceeding 
the value of the goods or services may be deductible as a 
charitable contribution.\23\
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    \22\Sec. 170(f)(8). For any contribution of cash, check, or other 
monetary gift, no deduction is allowed unless the donor maintains as a 
record of such contribution a bank record or written communication from 
the donee charity showing the name of the donee organization, the date 
of the contribution, and the amount of the contribution. Sec. 
170(f)(17).
    \23\Sec. 6115.
---------------------------------------------------------------------------
    Under present law, total deductible contributions of an 
individual taxpayer to public charities, private operating 
foundations, and certain types of private nonoperating 
foundations generally may not exceed 50 percent of the 
taxpayer's contribution base, which is the taxpayer's adjusted 
gross income for a taxable year (disregarding any net operating 
loss carryback). To the extent a taxpayer has not exceeded the 
50-percent limitation, (1) contributions of capital gain 
property to public charities generally may be deducted up to 30 
percent of the taxpayer's contribution base, (2) contributions 
of cash to private foundations and certain other charitable 
organizations generally may be deducted up to 30 percent of the 
taxpayer's contribution base, and (3) contributions of capital 
gain property to private foundations and certain other 
charitable organizations generally may be deducted up to 20 
percent of the taxpayer's contribution base.
    Contributions by individuals in excess of the 50-percent, 
30-percent, and 20-percent limits generally may be carried over 
and deducted over the next five taxable years, subject to the 
relevant percentage limitations on the deduction in each of 
those years.
    In general, a charitable deduction is not allowed for 
income, estate, or gift tax purposes if the donor transfers an 
interest in property to a charity (e.g., a remainder) while 
also either retaining an interest in that property (e.g., an 
income interest) or transferring an interest in that property 
to a noncharity for less than full and adequate 
consideration.\24\ Exceptions to this general rule are provided 
for, among other interests, remainder interests in charitable 
remainder annuity trusts, charitable remainder unitrusts, and 
pooled income funds, and present interests in the form of a 
guaranteed annuity or a fixed percentage of the annual value of 
the property.\25\ For such interests, a charitable deduction is 
allowed to the extent of the present value of the interest 
designated for a charitable organization.
---------------------------------------------------------------------------
    \24\Secs. 170(f), 2055(e)(2), and 2522(c)(2).
    \25\Sec. 170(f)(2).
---------------------------------------------------------------------------

IRA rules

    Within limits, individuals may make deductible and 
nondeductible contributions to a traditional IRA. Amounts in a 
traditional IRA are includible in income when withdrawn (except 
to the extent the withdrawal represents a return of 
nondeductible contributions). Certain individuals also may make 
nondeductible contributions to a Roth IRA (deductible 
contributions cannot be made to Roth IRAs). Qualified 
withdrawals from a Roth IRA are excludable from gross income. 
Withdrawals from a Roth IRA that are not qualified withdrawals 
are includible in gross income to the extent attributable to 
earnings. Includible amounts withdrawn from a traditional IRA 
or a Roth IRA before attainment of age 59\1/2\ are subject to 
an additional 10-percent early withdrawal tax, unless an 
exception applies. Under present law, minimum distributions are 
required to be made from tax-favored retirement arrangements, 
including IRAs. Minimum required distributions from a 
traditional IRA must generally begin by April 1 of the calendar 
year following the year in which the IRA owner attains age 
70\1/2\.\26\
---------------------------------------------------------------------------
    \26\Minimum distribution rules also apply in the case of 
distributions after the death of a traditional or Roth IRA owner.
---------------------------------------------------------------------------
    If an individual has made nondeductible contributions to a 
traditional IRA, a portion of each distribution from an IRA is 
nontaxable until the total amount of nondeductible 
contributions has been received. In general, the amount of a 
distribution that is nontaxable is determined by multiplying 
the amount of the distribution by the ratio of the remaining 
nondeductible contributions to the account balance. In making 
the calculation, all traditional IRAs of an individual are 
treated as a single IRA, all distributions during any taxable 
year are treated as a single distribution, and the value of the 
contract, income on the contract, and investment in the 
contract are computed as of the close of the calendar year.
    In the case of a distribution from a Roth IRA that is not a 
qualified distribution, in determining the portion of the 
distribution attributable to earnings, contributions and 
distributions are deemed to be distributed in the following 
order: (1) regular Roth IRA contributions; (2) taxable 
conversion contributions;\27\ (3) nontaxable conversion 
contributions; and (4) earnings. In determining the amount of 
taxable distributions from a Roth IRA, all Roth IRA 
distributions in the same taxable year are treated as a single 
distribution, all regular Roth IRA contributions for a year are 
treated as a single contribution, and all conversion 
contributions during the year are treated as a single 
contribution.
---------------------------------------------------------------------------
    \27\Conversion contributions refer to conversions of amounts in a 
traditional IRA to a Roth IRA.
---------------------------------------------------------------------------
    Distributions from an IRA (other than a Roth IRA) are 
generally subject to withholding unless the individual elects 
not to have withholding apply.\28\ Elections not to have 
withholding apply are to be made in the time and manner 
prescribed by the Secretary.
---------------------------------------------------------------------------
    \28\Sec. 3405.
---------------------------------------------------------------------------

Qualified charitable distributions

    For taxable years beginning before January 1, 2012, 
otherwise taxable IRA distributions from a traditional or Roth 
IRA are excluded from gross income to the extent they are 
qualified charitable distributions.\29\ The exclusion may not 
exceed $100,000 per taxpayer per taxable year. Special rules 
apply in determining the amount of an IRA distribution that is 
otherwise taxable. The otherwise applicable rules regarding 
taxation of IRA distributions and the deduction of charitable 
contributions continue to apply to distributions from an IRA 
that are not qualified charitable distributions. A qualified 
charitable distribution is taken into account for purposes of 
the minimum distribution rules applicable to traditional IRAs 
to the same extent the distribution would have been taken into 
account under such rules had the distribution not been directly 
distributed under the qualified charitable distribution 
provision. An IRA does not fail to qualify as an IRA as a 
result of qualified charitable distributions being made from 
the IRA.
---------------------------------------------------------------------------
    \29\Sec. 408(d)(8). The exclusion does not apply to distributions 
from employer-sponsored retirement plans, including SIMPLE IRAs and 
simplified employees pensions (``SEPs'').
---------------------------------------------------------------------------
    A qualified charitable distribution is any distribution 
from an IRA directly by the IRA trustee to an organization 
described in section 170(b)(1)(A) (other than an organization 
described in section 509(a)(3) or a donor advised fund (as 
defined in section 4966(d)(2)). Distributions are eligible for 
the exclusion only if made on or after the date the IRA owner 
attains age 70\1/2\ and only to the extent the distribution 
would be includible in gross income (without regard to this 
provision).
    The exclusion applies only if a charitable contribution 
deduction for the entire distribution otherwise would be 
allowable (under present law), determined without regard to the 
generally applicable percentage limitations. Thus, for example, 
if the deductible amount is reduced because of a benefit 
received in exchange, or if a deduction is not allowable 
because the donor did not obtain sufficient substantiation, the 
exclusion is not available with respect to any part of the IRA 
distribution.
    If the IRA owner has any IRA that includes nondeductible 
contributions, a special rule applies in determining the 
portion of a distribution that is includible in gross income 
(but for the qualified charitable distribution provision) and 
thus is eligible for qualified charitable distribution 
treatment. Under the special rule, the distribution is treated 
as consisting of income first, up to the aggregate amount that 
would be includible in gross income (but for the qualified 
charitable distribution provision) if the aggregate balance of 
all IRAs having the same owner were distributed during the same 
year. In determining the amount of subsequent IRA distributions 
includible in income, proper adjustments are to be made to 
reflect the amount treated as a qualified charitable 
distribution under the special rule.
    Distributions that are excluded from gross income by reason 
of the qualified charitable distribution provision are not 
taken into account in determining the deduction for charitable 
contributions under section 170.
    The exclusion for qualified charitable distributions 
applies to distributions made in taxable years beginning after 
December 31, 2005. Under present law, the exclusion does not 
apply to distributions made in taxable years beginning after 
December 31, 2011.

                           REASONS FOR CHANGE

    The Committee believes that facilitating charitable 
contributions from IRAs will increase giving to charitable 
organizations. Therefore, the Committee believes that the 
exclusion for qualified charitable distributions should be 
extended for two years.

                        EXPLANATION OF PROVISION

    The provision extends the exclusion for qualified 
charitable distributions to distributions made in taxable years 
beginning after December 31, 2011, and before January 1, 2014.

                             EFFECTIVE DATE

    The provision is effective for distributions made in 
taxable years beginning after December 31, 2011.

                         C. Tax Administration


1. Improve and make permanent the provision authorizing the Internal 
        Revenue Service to disclose certain return and return 
        information to certain prison officials (Sec. 121 of the bill 
        and sec. 6103 of the Code)

                              PRESENT LAW

    Section 6103 provides that 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 the information except as provided in the Code.\30\ A 
``return'' is any tax or information return, declaration of 
estimated tax, or claim for refund required by, or permitted 
under, the Code, that is filed with the Secretary by, on behalf 
of, or with respect to any person.\31\ ``Return'' also includes 
any amendment or supplement thereto, including supporting 
schedules, attachments, or lists which are supplemental to, or 
part of, the return so filed.
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    \30\Sec. 6103(a).
    \31\Sec. 6103(b)(1).
---------------------------------------------------------------------------
    The definition of ``return information'' is very broad and 
includes any information gathered by the IRS with respect to a 
person's liability or possible liability under the Code.\32\
---------------------------------------------------------------------------
    \32\Sec. 6103(b)(2). Return information is:
     a taxpayer's identity, the nature, source, or amount of 
his income, payments, receipts, deductions, exemptions, credits, 
assets, liabilities, net worth, tax liability, tax withheld, 
deficiencies, overassessments, or tax payments, whether the taxpayer's 
return was, is being, or will be examined or subject to other 
investigation or processing, or any other data, received by, recorded 
by, prepared by, furnished to, or collected by the Secretary with 
respect to a return or with respect to the determination of the 
existence, or possible existence, of liability (or the amount thereof) 
of any person under this title for any tax, penalty, interest, fine, 
forfeiture, or other imposition, or offense,
     any part of any written determination or any background 
file document relating to such written determination (as such terms are 
defined in section 6110(b)) which is not open to public inspection 
under section 6110,
     any advance pricing agreement entered into by a taxpayer 
and the Secretary and any background information related to such 
agreement or any application for an advance pricing agreement, and
     any closing agreement under section 7121, and any similar 
agreement, and any background information related to such an agreement 
or request for such an agreement.
---------------------------------------------------------------------------
    However, data in a form that cannot be associated with, or 
otherwise identify, directly or indirectly, a particular 
taxpayer is not ``return information'' for section 6103 
purposes.
    Section 6103 contains a number of exceptions to the general 
rule of confidentiality, which permit disclosure in 
specifically identified circumstances when certain conditions 
are satisfied.\33\ For example, one exception permits 
disclosure to officers and employees of the Federal Bureau of 
Prisons and State prisons of return information with respect to 
prisoners whom the Secretary has determined may have filed or 
facilitated the filing of false or fraudulent tax returns. The 
Secretary may disclose only such information as is necessary to 
permit effective tax administration with respect to prisoners. 
The disclosure authority expired December 31, 2011.
---------------------------------------------------------------------------
    \33\Sec. 6103(c)-(o). Such exceptions include disclosures by 
consent of the taxpayer, disclosures to State tax officials, 
disclosures to the taxpayer and persons having a material interest, 
disclosures to Committees of Congress, disclosures to the President, 
disclosures to Federal employees for tax administration purposes, 
disclosures to Federal employees for nontax criminal law enforcement 
purposes and to the Government Accountability Office, disclosures for 
statistical purposes, disclosures for miscellaneous tax administration 
purposes, disclosures for purposes other than tax administration, 
disclosures of taxpayer identity information, disclosures to tax 
administration contractors and disclosures with respect to wagering 
excise taxes.
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                           REASONS FOR CHANGE

    The Committee believes that sharing information with prison 
officials will allow the prison officials to take appropriate 
disciplinary and administrative action to deter prisoners from 
filing false Federal tax returns. As many State prisons are run 
on a contract basis, and the IRS has identified a number of 
these prisons as sources of false returns, the Committee 
believes that equal disclosure authority should be afforded to 
such prison officials to address the matter. Permitting the 
disclosure of information directly to the officers and 
employees responsible for disciplining prisoners could improve 
efficiency. In addition, providing prison officials with a full 
copy of the false return, showing the prisoner's signature, is 
more likely to satisfy the burden of proof that a prisoner 
filed the false return.

                        EXPLANATION OF PROVISION

    The provision makes permanent the authority of the IRS to 
disclose tax-related misconduct to the Federal Bureau of 
Prisons and State prison officials. In addition, the provision 
(1) authorizes the disclosure of actual returns (not just 
return information), (2) allows the disclosure to be made 
directly to officers and employees of the prison agency rather 
than through the head of such agency, (3) allows redisclosure 
of return information to contractors that operate prisons, and 
(4) clarifies the authority for the disclosure to, and use by, 
legal representatives in proceedings.

                             EFFECTIVE DATE

    The provision is effective for disclosures made on or after 
the date of enactment.

2. Refunds disregarded in the administration of Federal programs and 
        Federally assisted programs (Sec. 122 of the bill and sec. 6409 
        of the Code)

                              PRESENT LAW

    Any tax refund (or advance payment with respect to a 
refundable credit) made to any individual in calendar year 
2010, 2011, or 2012 is not taken into account as a resource for 
a period of 12 months from receipt for purposes of determining 
the eligibility of such individual (or any other individual) 
for benefits or assistance (or the amount or extent of benefits 
or assistance) under any Federal program or under any State or 
local program financed in whole or in part with Federal funds.

                           REASONS FOR CHANGE

    The Committee believes that it continues to be important to 
provide an explicit uniform rule regarding the treatment of tax 
refunds for purposes of determining eligibility for benefits 
under Federal programs (or State or local programs financed 
with Federal funds).

                        EXPLANATION OF PROVISION

    The provision extends the present law for any tax refund 
(or advance payment with respect to a refundable credit) made 
to any individual in calendar year 2013.

                             EFFECTIVE DATE

    The provision is effective for amounts received after 
December 31, 2012.

                    TITLE II--BUSINESS TAX EXTENDERS


1. Research credit (Sec. 201 of the bill and sec. 41 of the Code)

                              PRESENT LAW

General rule

    For general research expenditures, a taxpayer may claim a 
research credit equal to 20 percent of the amount by which the 
taxpayer's qualified research expenses for a taxable year 
exceed its base amount for that year.\34\ Thus, the research 
credit generally is available with respect to incremental 
increases in qualified research. An alternative simplified 
research credit (with a 14 percent rate and a different base 
amount) may be claimed in lieu of this credit.
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    \34\Sec. 41.
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    A 20-percent research credit is also available with respect 
to the excess of (1) 100 percent of corporate cash expenses 
(including grants or contributions) paid for basic research 
conducted by universities (and certain nonprofit scientific 
research organizations) over (2) the sum of (a) the greater of 
two minimum basic research floors plus (b) an amount reflecting 
any decrease in nonresearch giving to universities by the 
corporation as compared to such giving during a fixed-base 
period, as adjusted for inflation. This separate credit 
computation is commonly referred to as the university basic 
research credit.\35\
---------------------------------------------------------------------------
    \35\Sec. 41(e).
---------------------------------------------------------------------------
    Finally, a research credit is available for a taxpayer's 
expenditures on research undertaken by an energy research 
consortium. This separate credit computation is commonly 
referred to as the energy research credit. Unlike the other 
research credits, the energy research credit applies to all 
qualified expenditures, not just those in excess of a base 
amount.
    The research credit, including the university basic 
research credit and the energy research credit, is not 
available for amounts paid or incurred after December 31, 
2011.\36\
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    \36\Sec. 41(h).
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Computation of allowable credit

    Except for energy research payments and certain university 
basic research payments made by corporations, the research 
credit applies only to the extent that the taxpayer's qualified 
research expenses for the current taxable year exceed its base 
amount. The base amount for the current year generally is 
computed by multiplying the taxpayer's fixed-base percentage by 
the average amount of the taxpayer's gross receipts for the 
four preceding years. If a taxpayer both incurred qualified 
research expenses and had gross receipts during each of at 
least three years from 1984 through 1988, then its fixed-base 
percentage is the ratio that its total qualified research 
expenses for the 1984-1988 period bears to its total gross 
receipts for that period (subject to a maximum fixed-base 
percentage of 16 percent). Special rules apply to all other 
taxpayers (so called start-up firms).\37\ In computing the 
credit, a taxpayer's base amount cannot be less than 50 percent 
of its current-year qualified research expenses.
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    \37\The Small Business Job Protection Act of 1996 expanded the 
definition of start-up firms under section 41(c)(3)(B)(i) to include 
any firm if the first taxable year in which such firm had both gross 
receipts and qualified research expenses began after 1983. A special 
rule (enacted in 1993) is designed to gradually recompute a start-up 
firm's fixed-base percentage based on its actual research experience. 
Under this special rule, a start-up firm is assigned a fixed-base 
percentage of three percent for each of its first five taxable years 
after 1993 in which it incurs qualified research expenses. A start-up 
firm's fixed-base percentage for its sixth through tenth taxable years 
after 1993 in which it incurs qualified research expenses is a phased-
in ratio based on the firm's actual research experience. For all 
subsequent taxable years, the taxpayer's fixed-base percentage is its 
actual ratio of qualified research expenses to gross receipts for any 
five years selected by the taxpayer from its fifth through tenth 
taxable years after 1993. Sec. 41(c)(3)(B).
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    To prevent artificial increases in research expenditures by 
shifting expenditures among commonly controlled or otherwise 
related entities, a special aggregation rule provides that all 
members of the same controlled group of corporations or all 
members of a group of businesses under common control are 
treated as a single taxpayer.\38\ The credit allowable to each 
member is its proportionate share of the qualified research 
expenses, basic research payments, and energy research payments 
giving rise to the credit.
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    \38\Sec. 41(f)(1).
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    Under regulations prescribed by the Secretary, special 
rules apply for computing the research credit when a major 
portion of a trade or business (or unit thereof) changes hands. 
Under these rules, qualified research expenses and gross 
receipts arising in taxable years prior to the change of 
ownership of a trade or business are treated as transferred to 
the acquiring taxpayer with the trade or business that gave 
rise to those expenses and receipts for purposes of recomputing 
the acquiring taxpayer's fixed-base percentage.\39\ Qualified 
research expenses incurred during the taxable year including or 
ending with a change of ownership are treated as transferred to 
the acquiring taxpayer with the trade or business for purposes 
of determining the credit for the acquiring taxpayer's first 
taxable year including the acquisition.
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    \39\Sec. 41(f)(3).
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Alternative simplified credit

    The alternative simplified research credit is equal to 14 
percent of qualified research expenses that exceed 50 percent 
of the average qualified research expenses for the three 
preceding taxable years. The rate is reduced to six percent if 
a taxpayer has no qualified research expenses in any one of the 
three preceding taxable years. An election to use the 
alternative simplified credit applies to all succeeding taxable 
years unless revoked with the consent of the Secretary.

Eligible expenses

    Qualified research expenses eligible for the research tax 
credit consist of: (1) in-house expenses of the taxpayer for 
wages and supplies attributable to qualified research; (2) 
certain time-sharing costs for computer use in qualified 
research; and (3) 65 percent of amounts paid or incurred by the 
taxpayer to certain other persons for qualified research 
conducted on the taxpayer's behalf (so-called contract research 
expenses).\40\ Notwithstanding the limitation for contract 
research expenses, qualified research expenses include 100 
percent of amounts paid or incurred by the taxpayer to an 
eligible small business, university, or Federal laboratory for 
qualified energy research.
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    \40\Under a special rule, 75 percent of amounts paid to a research 
consortium for qualified research are treated as qualified research 
expenses eligible for the research credit (rather than 65 percent under 
the general rule under section 41(b)(3) governing contract research 
expenses) if (1) such research consortium is a tax-exempt organization 
that is described in section 501(c)(3) (other than a private 
foundation) or section 501(c)(6) and is organized and operated 
primarily to conduct scientific research, and (2) such qualified 
research is conducted by the consortium on behalf of the taxpayer and 
one or more persons not related to the taxpayer. Sec. 41(b)(3)(C).
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    To be eligible for the credit, the research not only has to 
satisfy the requirements of present-law section 174 (described 
below) but also must be undertaken for the purpose of 
discovering information that is technological in nature, the 
application of which is intended to be useful in the 
development of a new or improved business component of the 
taxpayer, and substantially all of the activities of which 
constitute elements of a process of experimentation for 
functional aspects, performance, reliability, or quality of a 
business component. Research does not qualify for the credit if 
substantially all of the activities relate to style, taste, 
cosmetic, or seasonal design factors.\41\ In addition, research 
does not qualify for the credit if: (1) conducted after the 
beginning of commercial production of the business component; 
(2) related to the adaptation of an existing business component 
to a particular customer's requirements; (3) related to the 
duplication of an existing business component from a physical 
examination of the component itself or certain other 
information; (4) related to certain efficiency surveys, 
management function or technique, market research, market 
testing, or market development, routine data collection or 
routine quality control; (5) related to software developed 
primarily for internal use by the taxpayer; (6) related to 
social sciences, arts, or humanities; or (7) funded by any 
grant, contract, or otherwise by another person (or 
governmental entity).\42\ Research does not qualify for the 
credit if it is conducted outside the United States, Puerto 
Rico, or any U.S. possession.
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    \41\Sec. 41(d)(3).
    \42\Sec. 41(d)(4).
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Relation to deduction

    Under section 174, taxpayers may elect to deduct currently 
the amount of certain research or experimental expenditures 
paid or incurred in connection with a trade or business, 
notwithstanding the general rule that business expenses to 
develop or create an asset that has a useful life extending 
beyond the current year must be capitalized.\43\ However, 
deductions allowed to a taxpayer under section 174 (or any 
other section) are reduced by an amount equal to 100 percent of 
the taxpayer's research tax credit determined for the taxable 
year.\44\ Taxpayers may alternatively elect to claim a reduced 
research tax credit amount under section 41 in lieu of reducing 
deductions otherwise allowed.\45\
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    \43\Taxpayers may elect 10-year amortization of certain research 
expenditures allowable as a deduction under section 174(a). Secs. 
174(f)(2) and 59(e).
    \44\Sec. 280C(c).
    \45\Sec. 280C(c)(3).
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                           REASONS FOR CHANGE

    The Committee acknowledges that research is important to 
the economy. Research is the basis of new products, new 
services, new industries, and new jobs for the domestic 
economy. There can be cases where an individual business may 
not find it profitable to invest in research as much as it 
otherwise might because it is difficult to capture the full 
benefits from the research and prevent such benefits from being 
used by competitors. At the same time, the research may create 
great benefits that spill over to society at large. To 
encourage activities that will result in these spillover 
benefits to society at large, the government does act to 
promote research. Therefore the Committee believes it is 
appropriate to extend the present-law research credit.
    The Committee further believes that technical changes are 
necessary (1) to ensure that when a business changes hands, the 
disposing business entity receives the research credit for 
expenses incurred prior to the date of a change in ownership, 
and (2) to simplify the allocation of research expenses among 
commonly controlled groups of businesses.

                        EXPLANATION OF PROVISION

    The provision extends the research credit for two years 
(through 2013). Under the provision, the special rules for 
taxpayers under common control and the special rules for 
computing the credit when a major portion of a trade or 
business (or unit thereof) changes hands are modified. 
Qualified research expenses paid or incurred by the disposing 
taxpayer in a taxable year that includes or ends with a change 
in ownership are treated as current year qualified research 
expenses of the disposing taxpayer. Further, such expenses are 
not treated as current year qualified research expenses of the 
acquiring taxpayer. In addition, the credit allowable to each 
member of a controlled group of corporations or each member of 
a group of businesses under common control is determined on a 
proportionate basis to its share of the aggregate qualified 
research expenses.

                             EFFECTIVE DATE

    The extension of the credit is effective for amounts paid 
or incurred after December 31, 2011. The modification to the 
special rules is effective for taxable years beginning after 
December 31, 2011.

2. Determination of applicable percentage for the low-income housing 
        tax credit (Sec. 202 of the bill and sec. 42 of the Code)

                              PRESENT LAW

In general

    The low-income housing credit may be claimed over a 10-year 
credit period after each low-income building is placed-in-
service. The amount of the credit for any taxable year in the 
credit period is the applicable percentage of the qualified 
basis of each qualified low-income building.

Present value credit

    The calculation of the applicable percentage is designed to 
produce a credit equal to: (1) 70 percent of the present value 
of the building's qualified basis in the case of newly 
constructed or substantially rehabilitated housing that is not 
Federally subsidized (the ``70-percent credit''); or (2) 30 
percent of the present value of the building's qualified basis 
in the case of newly constructed or substantially rehabilitated 
housing that is Federally subsidized and existing housing that 
is substantially rehabilitated (the ``30-percent credit''). 
Where existing housing is substantially rehabilitated, the 
existing housing is eligible for the 30-percent credit and the 
qualified rehabilitation expenses (if not Federally subsidized) 
are eligible for the 70-percent credit.

Calculation of the applicable percentage

            In general
    The credit percentage for a low-income building is set for 
the earlier of: (1) the month the building is placed in 
service; or (2) at the election of the taxpayer, (a) the month 
the taxpayer and the housing credit agency enter into a binding 
agreement with respect to such building for a credit 
allocation, or (b) in the case of a tax-exempt bond-financed 
project for which no credit allocation is required, the month 
in which the tax-exempt bonds are issued.
    These credit percentages (used for the 70-percent credit 
and 30-percent credit) are adjusted monthly by the IRS on a 
discounted after-tax basis (assuming a 28-percent tax rate) 
based on the average of the Applicable Federal Rates for mid-
term and long-term obligations for the month the building is 
placed in service. The discounting formula assumes that each 
credit is received on the last day of each year and that the 
present value is computed on the last day of the first year. In 
a project consisting of two or more buildings placed in service 
in different months, a separate credit percentage may apply to 
each building.
            Special rule
    Under this rule the applicable percentage is set at a 
minimum of 9 percent for newly constructed non-Federally 
subsidized buildings placed in service after July 30, 2008, and 
before December 31, 2013.

                           REASONS FOR CHANGE

    Historically low Federal interest rates result in lower 
credit amounts for low-income housing tax credit properties. To 
reduce uncertainty and financial risk in the adjustable rate, 
the Committee believes that an extension of the temporary 
minimum applicable percentage for newly constructed non-
Federally subsidized building is warranted.

                        EXPLANATION OF PROVISION

    The provision extends the temporary minimum applicable 
percentage of 9 percent for newly constructed non-Federally 
subsidized buildings with respect to which credit allocations 
are made before January 1, 2014.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

3. Treatment of basic housing allowances for purposes of income 
        eligibility rules (Sec. 203 of the bill and sec. 42 of the 
        Code)

                              PRESENT LAW

In general

    In order to be eligible for the low-income housing credit, 
a qualified low-income building must be part of a qualified 
low-income housing project. In general, a qualified low-income 
housing project is defined as a project that satisfies one of 
two tests at the election of the taxpayer. The first test is 
met if 20 percent or more of the residential units in the 
project are both rent-restricted, and occupied by individuals 
whose income is 50 percent or less of area median gross income 
(the ``20-50 test''). The second test is met if 40 percent or 
more of the residential units in such project are both rent-
restricted, and occupied by individuals whose income is 60 
percent or less of area median gross income (the ``40-60 
test''). These income figures are adjusted for family size.

Rule for income determinations before July 30, 2008 and on or after 
        January 1, 2012

    The recipients of the military basic housing allowance must 
include these amounts for purposes of low-income credit 
eligibility income test, as described above.

Special rule for income determination before January 1, 2012

    Under the provision the basic housing allowance (i.e., 
payments under 37 U.S.C. sec. 403) is not included in income 
for the low-income credit income eligibility rules. The 
provision is limited in application to qualified buildings. A 
qualified building is defined as any building located:
    1. any county which contains a qualified military 
installation to which the number of members of the Armed Forces 
assigned to units based out of such qualified military 
installation has increased by 20 percent or more as of June 1, 
2008, over the personnel level on December 31, 2005; and
    2. any counties adjacent to county described in (1), above.
    For these purposes, a qualified military installation is 
any military installation or facility with at least 1000 
members of the Armed Forces assigned to it.
    The provision applies to income determinations: (1) made 
after July 30, 2008, and before January 1, 2012, in the case of 
qualified buildings which received credit allocations on or 
before July 30, 2008, or qualified buildings placed in service 
on or before July 30, 2008, to the extent a credit allocation 
was not required with respect to such building by reason of 
42(h)(4) (i.e. such qualified building was at least 50 percent 
tax-exempt bond financed with bonds subject to the private 
activity bond volume cap) but only with respect to bonds issued 
before July 30, 2008; and (2) made after July 30, 2008, in the 
case of qualified buildings which received credit allocations 
after July 30, 2008 and before January 1, 2012, or qualified 
buildings placed in service after July 30, 2008, and before 
January 1, 2012, to the extent a credit allocation was not 
required with respect to such qualified building by reason of 
42(h)(4) (i.e. such qualified building was at least 50 percent 
tax-exempt bond financed with bonds subject to the private 
activity bond volume cap) but only with respect to bonds issued 
after July 30, 2008, and before January 1, 2012.

                           REASONS FOR CHANGE

    The Committee believes that more time is necessary for 
market forces to create adequate housing in communities 
affected by the base closing legislation. In the meantime, the 
Committee believes that encouraging owners of low-income 
housing credit properties to rent such subsidized units to 
military families is appropriate.

                        EXPLANATION OF PROVISION

    The provision extends the special rule for two additional 
years (through December 31, 2013).

                             EFFECTIVE DATE

    The provision is effective for income determinations on or 
after January 1, 2012.

4. Indian employment tax credit (Sec. 204 of the bill and sec. 45A of 
        the Code)

                              PRESENT LAW

    In general, a credit against income tax liability is 
allowed to employers for the first $20,000 of qualified wages 
and qualified employee health insurance costs paid or incurred 
by the employer with respect to certain employees.\46\ The 
credit is equal to 20 percent of the excess of eligible 
employee qualified wages and health insurance costs during the 
current year over the amount of such wages and costs incurred 
by the employer during 1993. The credit is an incremental 
credit, such that an employer's current-year qualified wages 
and qualified employee health insurance costs (up to $20,000 
per employee) are eligible for the credit only to the extent 
that the sum of such costs exceeds the sum of comparable costs 
paid during 1993. No deduction is allowed for the portion of 
the wages equal to the amount of the credit.
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    \46\Sec. 45A.
---------------------------------------------------------------------------
    Qualified wages means wages paid or incurred by an employer 
for services performed by a qualified employee. A qualified 
employee means any employee who is an enrolled member of an 
Indian tribe or the spouse of an enrolled member of an Indian 
tribe, who performs substantially all of the services within an 
Indian reservation, and whose principal place of abode while 
performing such services is on or near the reservation in which 
the services are performed. An ``Indian reservation'' is a 
reservation as defined in section 3(d) of the Indian Financing 
Act of 1974\47\ or section 4(10) of the Indian Child Welfare 
Act of 1978.\48\ For purposes of the preceding sentence, 
section 3(d) is applied by treating ``former Indian 
reservations in Oklahoma'' as including only lands that are (1) 
within the jurisdictional area of an Oklahoma Indian tribe as 
determined by the Secretary of the Interior, and (2) recognized 
by such Secretary as an area eligible for trust land status 
under 25 C.F.R. Part 151 (as in effect on August 5, 1997).
---------------------------------------------------------------------------
    \47\Pub. L. No. 93-262.
    \48\Pub. L. No. 95-608.
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    An employee is not treated as a qualified employee for any 
taxable year of the employer if the total amount of wages paid 
or incurred by the employer with respect to such employee 
during the taxable year exceeds an amount determined at an 
annual rate of $30,000 (which after adjusted for inflation is 
$45,000 for 2011). In addition, an employee will not be treated 
as a qualified employee under certain specific circumstances, 
such as where the employee is related to the employer (in the 
case of an individual employer) or to one of the employer's 
shareholders, partners, or grantors. Similarly, an employee 
will not be treated as a qualified employee where the employee 
has more than a five percent ownership interest in the 
employer. Finally, an employee will not be considered a 
qualified employee to the extent the employee's services relate 
to gaming activities or are performed in a building housing 
such activities.
    The wage credit is available for wages paid or incurred in 
taxable years that begin before January 1, 2012.

                           REASONS FOR CHANGE

    To further encourage employment on Indian reservations, the 
Committee believes it is appropriate to extend the Indian 
employment credit an additional two years.

                        EXPLANATION OF PROVISION

    The provision extends for two years the present-law 
employment credit provision (through taxable years beginning on 
or before December 31, 2013).

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2011.

5. New markets tax credit (Sec. 205 of the bill and sec. 45D of the 
        Code)

                              PRESENT LAW

    Section 45D provides a new markets tax credit for qualified 
equity investments made to acquire stock in a corporation, or a 
capital interest in a partnership, that is a qualified 
community development entity (``CDE'').\49\ The amount of the 
credit allowable to the investor (either the original purchaser 
or a subsequent holder) is (1) a five-percent credit for the 
year in which the equity interest is purchased from the CDE and 
for each of the following two years, and (2) a six-percent 
credit for each of the following four years.\50\ The credit is 
determined by applying the applicable percentage (five or six 
percent) to the amount paid to the CDE for the investment at 
its original issue, and is available to the taxpayer who holds 
the qualified equity investment on the date of the initial 
investment or on the respective anniversary date that occurs 
during the taxable year.\51\ The credit is recaptured if at any 
time during the seven-year period that begins on the date of 
the original issue of the investment the entity (1) ceases to 
be a qualified CDE, (2) the proceeds of the investment cease to 
be used as required, or (3) the equity investment is 
redeemed.\52\
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    \49\Section 45D was added by section 121(a) of the Community 
Renewal Tax Relief Act of 2000, Pub. L. No. 106-554.
    \50\Sec. 45D(a)(2).
    \51\Sec. 45D(a)(3).
    \52\Sec. 45D(g).
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    A qualified CDE is any domestic corporation or partnership: 
(1) whose primary mission is serving or providing investment 
capital for low-income communities or low-income persons; (2) 
that maintains accountability to residents of low-income 
communities by their representation on any governing board of 
or any advisory board to the CDE; and (3) that is certified by 
the Secretary as being a qualified CDE.\53\ A qualified equity 
investment means stock (other than nonqualified preferred 
stock) in a corporation or a capital interest in a partnership 
that is acquired directly from a CDE for cash, and includes an 
investment of a subsequent purchaser if such investment was a 
qualified equity investment in the hands of the prior 
holder.\54\ Substantially all of the investment proceeds must 
be used by the CDE to make qualified low-income community 
investments. For this purpose, qualified low-income community 
investments include: (1) capital or equity investments in, or 
loans to, qualified active low-income community businesses; (2) 
certain financial counseling and other services to businesses 
and residents in low-income communities; (3) the purchase from 
another CDE of any loan made by such entity that is a qualified 
low-income community investment; or (4) an equity investment 
in, or loan to, another CDE.\55\
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    \53\Sec. 45D(c).
    \54\Sec. 45D(b).
    \55\Sec. 45D(d).
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    A ``low-income community'' is a population census tract 
with either (1) a poverty rate of at least 20 percent or (2) 
median family income which does not exceed 80 percent of the 
greater of metropolitan area median family income or statewide 
median family income (for a non-metropolitan census tract, does 
not exceed 80 percent of statewide median family income). In 
the case of a population census tract located within a high 
migration rural county, low-income is defined by reference to 
85 percent (as opposed to 80 percent) of statewide median 
family income.\56\ For this purpose, a high migration rural 
county is any county that, during the 20-year period ending 
with the year in which the most recent census was conducted, 
has a net out-migration of inhabitants from the county of at 
least 10 percent of the population of the county at the 
beginning of such period.
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    \56\Sec. 45D(e).
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    The Secretary is authorized to designate ``targeted 
populations'' as low-income communities for purposes of the new 
markets tax credit.\57\ For this purpose, a ``targeted 
population'' is defined by reference to section 103(20) of the 
Riegle Community Development and Regulatory Improvement Act of 
1994\58\ (the ``Act'') to mean individuals, or an identifiable 
group of individuals, including an Indian tribe, who are low-
income persons or otherwise lack adequate access to loans or 
equity investments. Section 103(17) of the Act provides that 
``low-income'' means (1) for a targeted population within a 
metropolitan area, less than 80 percent of the area median 
family income; and (2) for a targeted population within a non-
metropolitan area, less than the greater of--80 percent of the 
area median family income, or 80 percent of the statewide non-
metropolitan area median family income.\59\ A targeted 
population is not required to be within any census tract. In 
addition, a population census tract with a population of less 
than 2,000 is treated as a low-income community for purposes of 
the credit if such tract is within an empowerment zone, the 
designation of which is in effect under section 1391 of the 
Code, and is contiguous to one or more low-income communities.
---------------------------------------------------------------------------
    \57\Sec. 45D(e)(2).
    \58\Pub. L. No. 103-325.
    \59\Pub. L. No. 103-325.
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    A qualified active low-income community business is defined 
as a business that satisfies, with respect to a taxable year, 
the following requirements: (1) at least 50 percent of the 
total gross income of the business is derived from the active 
conduct of trade or business activities in any low-income 
community; (2) a substantial portion of the tangible property 
of the business is used in a low-income community; (3) a 
substantial portion of the services performed for the business 
by its employees is performed in a low-income community; and 
(4) less than five percent of the average of the aggregate 
unadjusted bases of the property of the business is 
attributable to certain financial property or to certain 
collectibles.\60\
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    \60\Sec. 45D(d)(2).
---------------------------------------------------------------------------
    The maximum annual amount of qualified equity investments 
was $3.5 billion for calendar years 2010 and 2011. The new 
markets tax credit expired on December 31, 2011.

                           REASONS FOR CHANGE

    The Committee believes that the new markets tax credit has 
proved to be an effective means of providing equity and other 
investments to benefit businesses in low income communities, 
and that it is appropriate to provide for the allocation of 
additional tax credit authority for another two calendar years.

                        EXPLANATION OF PROVISION

    The provision extends the new markets tax credit for two 
years, through 2013, permitting up to $3.5 billion in qualified 
equity investments for each of the 2012 and 2013 calendar 
years. The provision also extends for two years, through 2018, 
the carryover period for unused new markets tax credits.

                             EFFECTIVE DATE

    The provision applies to calendar years beginning after 
December 31, 2011.

6. Railroad track maintenance credit (Sec. 206 of the bill and sec. 45G 
        of the Code)

                              PRESENT LAW

    Present law provides a 50-percent business tax credit for 
qualified railroad track maintenance expenditures paid or 
incurred by an eligible taxpayer during taxable years beginning 
before January 1, 2012.\61\ The credit is limited to the 
product of $3,500 times the number of miles of railroad track 
(1) owned or leased by an eligible taxpayer as of the close of 
its taxable year, and (2) assigned to the eligible taxpayer by 
a Class II or Class III railroad that owns or leases such track 
at the close of the taxable year.\62\ Each mile of railroad 
track may be taken into account only once, either by the owner 
of such mile or by the owner's assignee, in computing the per-
mile limitation. The credit also may reduce a taxpayer's tax 
liability below its tentative minimum tax.\63\
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    \61\Secs. 45G(a), (f).
    \62\Sec. 45G(b)(1).
    \63\Sec. 38(c)(4).
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    Qualified railroad track maintenance expenditures are 
defined as gross expenditures (whether or not otherwise 
chargeable to capital account) for maintaining railroad track 
(including roadbed, bridges, and related track structures) 
owned or leased as of January 1, 2005, by a Class II or Class 
III railroad (determined without regard to any consideration 
for such expenditure given by the Class II or Class III 
railroad which made the assignment of such track).\64\
---------------------------------------------------------------------------
    \64\Sec. 45G(d).
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    An eligible taxpayer means any Class II or Class III 
railroad, and any person who transports property using the rail 
facilities of a Class II or Class III railroad or who furnishes 
railroad-related property or services to a Class II or Class 
III railroad, but only with respect to miles of railroad track 
assigned to such person by such railroad under the 
provision.\65\
---------------------------------------------------------------------------
    \65\Sec. 45G(c).
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    The terms Class II or Class III railroad have the meanings 
given by the Surface Transportation Board.\66\
---------------------------------------------------------------------------
    \66\Sec. 45G(e)(1).
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                           REASONS FOR CHANGE

    The Committee believes that Class II and Class III 
railroads are an important part of the nation's railway system. 
Therefore, the Committee believes that this incentive for 
railroad track maintenance expenditures should be extended.

                        EXPLANATION OF PROVISION

    The provision extends the present law credit for two years, 
for qualified railroad track maintenance expenses paid or 
incurred during taxable years beginning after December 31, 2011 
and before January 1, 2014.

                             EFFECTIVE DATE

    The provision is effective for expenses paid or incurred in 
taxable years beginning after December 31, 2011.

7. Mine rescue team training credit (Sec. 207 of the bill and sec. 45N 
        of the Code)

                              PRESENT LAW

    An eligible employer may claim a general business credit 
against income tax with respect to each qualified mine rescue 
team employee equal to the lesser of: (1) 20 percent of the 
amount paid or incurred by the taxpayer during the taxable year 
with respect to the training program costs of the qualified 
mine rescue team employee (including the wages of the employee 
while attending the program); or (2) $10,000. A qualified mine 
rescue team employee is any full-time employee of the taxpayer 
who is a miner eligible for more than six months of a taxable 
year to serve as a mine rescue team member by virtue of either 
having completed the initial 20 hour course of instruction 
prescribed by the Mine Safety and Health Administration's 
Office of Educational Policy and Development, or receiving at 
least 40 hours of refresher training in such instruction. The 
credit is not allowable for purposes of computing the 
alternative minimum tax.\67\
---------------------------------------------------------------------------
    \67\Sec. 38(c).
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    An eligible employer is any taxpayer which employs 
individuals as miners in underground mines in the United 
States. The term ``wages'' has the meaning given to such term 
by section 3306(b)\68\ (determined without regard to any dollar 
limitation contained in that section).
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    \68\Section 3306(b) defines wages for purposes of Federal 
Unemployment Tax.
---------------------------------------------------------------------------
    No deduction is allowed for the portion of the expenses 
otherwise deductible that is equal to the amount of the 
credit.\69\ The credit does not apply to taxable years 
beginning after December 31, 2011. Additionally, the credit may 
not offset the alternative minimum tax.
---------------------------------------------------------------------------
    \69\Sec. 280C(e).
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                           REASONS FOR CHANGE

    The Committee believes that training mine rescue team 
employees will help ensure a positive outcome for individuals 
operating in and around a mine in the event of an accident. 
Therefore, the Committee believes that this incentive for costs 
incurred to train mine rescue teams should be extended.

                        EXPLANATION OF PROVISION

    The provision extends the credit for two years through 
taxable years beginning on or before December 31, 2013.

                             EFFECTIVE DATE

    The provision generally is effective for taxable years 
beginning after December 31, 2011.

8. Employer wage credit for employees who are active duty members of 
        the uniformed Services (Sec. 208 of the bill and sec. 45P of 
        the Code)

                              PRESENT LAW

Differential pay

    In general, compensation paid by an employer to an employee 
is deductible by the employer under section 162(a)(1), unless 
the expense must be capitalized. In the case of an employee who 
is called to active duty with respect to the armed forces of 
the United States, some employers voluntarily pay the employee 
the difference between the compensation that the employer would 
have paid to the employee during the period of military service 
less the amount of pay received by the employee from the 
military. This payment by the employer is often referred to as 
``differential pay.''

Wage credit for differential pay

    If an employer qualifies as an eligible small business 
employer, the employer is allowed to take a credit against its 
income tax liability for a taxable year in an amount equal to 
20 percent of the sum of the eligible differential wage 
payments for each of the employer's qualified employees for the 
taxable year.\70\
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    \70\Sec. 45P.
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    An eligible small business employer means, with respect to 
a taxable year, any taxpayer which: (1) employed on average 
less than 50 employees on business days during the taxable 
year; and (2) under a written plan of the taxpayer, provides 
eligible differential wage payments to every qualified employee 
of the taxpayer. Taxpayers under common control are aggregated 
for purposes of determining whether a taxpayer is an eligible 
small business employer. The credit is not available with 
respect to a taxpayer who has failed to comply with the 
employment and reemployment rights of members of the uniformed 
services (as provided under Chapter 43 of Title 38 of the 
United States Code).
    Differential wage payment means any payment which: (1) is 
made by an employer to an individual with respect to any period 
during which the individual is performing service in the 
uniformed services of the United States while on active duty 
for a period of more than 30 days; and (2) represents all or a 
portion of the wages that the individual would have received 
from the employer if the individual were performing services 
for the employer. The term eligible differential wage payments 
means so much of the differential wage payments paid to a 
qualified employee as does not exceed $20,000. A qualified 
employee is an individual who has been an employee for the 91-
day period immediately preceding the period for which any 
differential wage payment is made.
    No deduction may be taken for that portion of compensation 
which is equal to the credit. In addition, the amount of any 
other credit against the income tax otherwise allowable with 
respect to compensation paid to an employee must be reduced by 
the differential wage payment credit allowed with respect to 
such employee.
    The differential wage payment credit is part of the general 
business credit, and thus this credit is subject to the rules 
applicable to business credits. For example, an unused credit 
generally may be carried back to the taxable year that precedes 
an unused credit year or carried forward to each of the 20 
taxable years following the unused credit year. Further, the 
credit is not allowable against a taxpayer's alternative 
minimum tax liability.
    Rules similar to the rules in section 52(c), which bars the 
work opportunity tax credit for tax-exempt organizations other 
than certain farmer's cooperatives, apply to the differential 
wage payment credit. Additionally, rules similar to the rules 
in section 52(e), which limits the work opportunity tax credit 
allowable to regulated investment companies, real estate 
investment trusts, and certain cooperatives, apply to the 
differential wage payment credit.
    The credit is available with respect to amounts paid after 
June 17, 2008\71\ and before January 1, 2012.
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    \71\This date is the date of enactment of the Heroes Earnings 
Assistance and Relief Tax Act of 2008, Pub. L. No. 110-245.
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                           REASONS FOR CHANGE

    The Committee believes that it is still appropriate to 
encourage small employers to make differential wage payments to 
employees during any period that the employee is called to duty 
for a period of more than 30 days in the uniform services.

                        EXPLANATION OF PROVISION

    The provision extends the availability of the credit for 
two years to amounts paid before January 1, 2014.

                             EFFECTIVE DATE

    The provision applies to payments made after December 31, 
2011.

9. Work opportunity tax credit (Sec. 209 of the bill and secs. 51 and 
        52 of the Code)

                              PRESENT LAW

In general

    The work opportunity tax credit is available on an elective 
basis for employers hiring individuals from one or more of nine 
targeted groups. The amount of the credit available to an 
employer is determined by the amount of qualified wages paid by 
the employer. Generally, qualified wages consist of wages 
attributable to service rendered by a member of a targeted 
group during the one-year period beginning with the day the 
individual begins work for the employer (two years in the case 
of an individual in the long-term family assistance recipient 
category).

Targeted groups eligible for the credit

    Generally, an employer is eligible for the credit only for 
qualified wages paid to members of a targeted group.
            (1) Families receiving TANF
    An eligible recipient is an individual certified by a 
designated local employment agency (e.g., a State employment 
agency) as being a member of a family eligible to receive 
benefits under the Temporary Assistance for Needy Families 
Program (``TANF'') for a period of at least nine months part of 
which is during the 18-month period ending on the hiring date. 
For these purposes, members of the family are defined to 
include only those individuals taken into account for purposes 
of determining eligibility for the TANF.
            (2) Qualified veteran
    Prior to enactment of the ``VOW to Hire Heroes Act of 
2011'' (the ``VOW Act''),\72\ there were two subcategories of 
qualified veterans to whom wages paid by an employer were 
eligible for the credit. Employers who hired veterans who were 
eligible to receive assistance under a supplemental nutritional 
assistance program were entitled to a maximum credit of 40 
percent of $6,000 of qualified first-year wages paid to such 
individual.\73\ Employers who hired veterans who were entitled 
to compensation for a service-connected disability were 
entitled to a maximum wage credit of 40 percent of $12,000 of 
qualified first-year wages paid to such individual.\74\
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    \72\Pub. L. No. 112-56 (Nov. 21, 2011).
    \73\For these purposes, a qualified veteran must be certified by 
the designated local agency as a member of a family receiving 
assistance under a supplemental nutrition assistance program under the 
Food and Nutrition Act of 2008 for a period of at least three months 
part of which is during the 12-month period ending on the hiring date. 
For these purposes, members of a family are defined to include only 
those individuals taken into account for purposes of determining 
eligibility for a supplemental nutrition assistance program under the 
Food and Nutrition Act of 2008.
    \74\The qualified veteran must be certified as entitled to 
compensation for a service-connected disability and (1) have a hiring 
date which is not more than one year after having been discharged or 
released from active duty in the Armed Forces of the United States; or 
(2) have been unemployed for six months or more (whether or not 
consecutive) during the one-year period ending on the date of hiring. 
For these purposes, being entitled to compensation for a service-
connected disability is defined with reference to section 101 of Title 
38, U.S. Code, which means having a disability rating of 10 percent or 
higher for service connected injuries.
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    The VOW Act modified the work opportunity credit with 
respect to qualified veterans, by adding additional 
subcategories. There are now five subcategories of qualified 
veterans: (1) in the case of veterans who were eligible to 
receive assistance under a supplemental nutritional assistance 
program (for at least a three month period during the year 
prior to the hiring date) the employer is entitled to a maximum 
credit of 40 percent of $6,000 of qualified first-year wages; 
(2) in the case of a qualified veteran who is entitled to 
compensation for a service connected disability, who is hired 
within one year of discharge, the employer is entitled to a 
maximum credit of 40 percent of $12,000 of qualified first-year 
wages; (3) in the case of a qualified veteran who is entitled 
to compensation for a service connected disability, and who has 
been unemployed for an aggregate of at least six months during 
the one year period ending on the hiring date, the employer is 
entitled to a maximum credit of 40 percent of $24,000 of 
qualified first-year wages; (4) in the case of a qualified 
veteran unemployed for at least four weeks but less than six 
months (whether or not consecutive) during the one-year period 
ending on the date of hiring, the maximum credit equals 40 
percent of $6,000 of qualified first-year wages; and (5) in the 
case of a qualified veteran unemployed for at least six months 
(whether or not consecutive) during the one-year period ending 
on the date of hiring, the maximum credit equals 40 percent of 
$14,000 of qualified first-year wages.
    A veteran is an individual who has served on active duty 
(other than for training) in the Armed Forces for more than 180 
days or who has been discharged or released from active duty in 
the Armed Forces for a service-connected disability. However, 
any individual who has served for a period of more than 90 days 
during which the individual was on active duty (other than for 
training) is not a qualified veteran if any of this active duty 
occurred during the 60-day period ending on the date the 
individual was hired by the employer. This latter rule is 
intended to prevent employers who hire current members of the 
armed services (or those departed from service within the last 
60 days) from receiving the credit.
            (3) Qualified ex-felon
    A qualified ex-felon is an individual certified as: (1) 
having been convicted of a felony under any State or Federal 
law; and (2) having a hiring date within one year of release 
from prison or the date of conviction.
            (4) Designated community resident
    A designated community resident is an individual certified 
as being at least age 18 but not yet age 40 on the hiring date 
and as having a principal place of abode within an empowerment 
zone, enterprise community, renewal community or a rural 
renewal community. For these purposes, a rural renewal county 
is a county outside a metropolitan statistical area (as defined 
by the Office of Management and Budget) which had a net 
population loss during the five-year periods 1990-1994 and 
1995-1999. Qualified wages do not include wages paid or 
incurred for services performed after the individual moves 
outside an empowerment zone, enterprise community, renewal 
community or a rural renewal community.
            (5) Vocational rehabilitation referral
    A vocational rehabilitation referral is an individual who 
is certified by a designated local agency as an individual who 
has a physical or mental disability that constitutes a 
substantial handicap to employment and who has been referred to 
the employer while receiving, or after completing: (a) 
vocational rehabilitation services under an individualized, 
written plan for employment under a State plan approved under 
the Rehabilitation Act of 1973; (b) under a rehabilitation plan 
for veterans carried out under Chapter 31 of Title 38, U.S. 
Code; or (c) an individual work plan developed and implemented 
by an employment network pursuant to subsection (g) of section 
1148 of the Social Security Act. Certification will be provided 
by the designated local employment agency upon assurances from 
the vocational rehabilitation agency that the employee has met 
the above conditions.
            (6) Qualified summer youth employee
    A qualified summer youth employee is an individual: (1) who 
performs services during any 90-day period between May 1 and 
September 15; (2) who is certified by the designated local 
agency as being 16 or 17 years of age on the hiring date; (3) 
who has not been an employee of that employer before; and (4) 
who is certified by the designated local agency as having a 
principal place of abode within an empowerment zone, enterprise 
community, or renewal community. As with designated community 
residents, no credit is available on wages paid or incurred for 
service performed after the qualified summer youth moves 
outside of an empowerment zone, enterprise community, or 
renewal community. If, after the end of the 90-day period, the 
employer continues to employ a youth who was certified during 
the 90-day period as a member of another targeted group, the 
limit on qualified first-year wages will take into account 
wages paid to the youth while a qualified summer youth 
employee.
            (7) Qualified supplemental nutrition assistance program 
                    benefits recipient
    A qualified supplemental nutrition assistance program 
benefits recipient is an individual at least age 18 but not yet 
age 40 certified by a designated local employment agency as 
being a member of a family receiving assistance under a food 
and nutrition program under the Food and Nutrition Act of 2008 
for a period of at least six months ending on the hiring date. 
In the case of families that cease to be eligible for food and 
nutrition assistance under section 6(o) of the Food and 
Nutrition Act of 2008, the six-month requirement is replaced 
with a requirement that the family has been receiving food and 
nutrition assistance for at least three of the five months 
ending on the date of hire. For these purposes, members of the 
family are defined to include only those individuals taken into 
account for purposes of determining eligibility for a food and 
nutrition assistance program under the Food and Nutrition Act 
of 2008.
            (8) Qualified SSI recipient
    A qualified SSI recipient is an individual designated by a 
local agency as receiving supplemental security income 
(``SSI'') benefits under Title XVI of the Social Security Act 
for any month ending within the 60-day period ending on the 
hiring date.
            (9) Long-term family assistance recipient
    A qualified long-term family assistance recipient is an 
individual certified by a designated local agency as being: (1) 
a member of a family that has received family assistance for at 
least 18 consecutive months ending on the hiring date; (2) a 
member of a family that has received such family assistance for 
a total of at least 18 months (whether or not consecutive) 
after August 5, 1997 (the date of enactment of the welfare-to-
work tax credit)\75\ if the individual is hired within two 
years after the date that the 18-month total is reached; or (3) 
a member of a family who is no longer eligible for family 
assistance because of either Federal or State time limits, if 
the individual is hired within two years after the Federal or 
State time limits made the family ineligible for family 
assistance.
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    \75\ The welfare-to-work tax credit was consolidated into the work 
opportunity tax credit in the Tax Relief and Health Care Act of 2006, 
Pub. L. No. 109-432, for qualified individuals who begin to work for an 
employer after December 31, 2006.
---------------------------------------------------------------------------

Qualified wages

    Generally, qualified wages are defined as cash wages paid 
by the employer to a member of a targeted group. The employer's 
deduction for wages is reduced by the amount of the credit.
    For purposes of the credit, generally, wages are defined by 
reference to the FUTA definition of wages contained in sec. 
3306(b) (without regard to the dollar limitation therein 
contained). Special rules apply in the case of certain 
agricultural labor and certain railroad labor.

Calculation of the credit

    The credit available to an employer for qualified wages 
paid to members of all targeted groups except for long-term 
family assistance recipients equals 40 percent (25 percent for 
employment of 400 hours or less) of qualified first-year wages. 
Generally, qualified first-year wages are qualified wages (not 
in excess of $6,000) attributable to service rendered by a 
member of a targeted group during the one-year period beginning 
with the day the individual began work for the employer. 
Therefore, the maximum credit per employee is $2,400 (40 
percent of the first $6,000 of qualified first-year wages). 
With respect to qualified summer youth employees, the maximum 
credit is $1,200 (40 percent of the first $3,000 of qualified 
first-year wages). Except for long-term family assistance 
recipients, no credit is allowed for second-year wages.
    In the case of long-term family assistance recipients, the 
credit equals 40 percent (25 percent for employment of 400 
hours or less) of $10,000 for qualified first-year wages and 50 
percent of the first $10,000 of qualified second-year wages. 
Generally, qualified second-year wages are qualified wages (not 
in excess of $10,000) attributable to service rendered by a 
member of the long-term family assistance category during the 
one-year period beginning on the day after the one-year period 
beginning with the day the individual began work for the 
employer. Therefore, the maximum credit per employee is $9,000 
(40 percent of the first $10,000 of qualified first-year wages 
plus 50 percent of the first $10,000 of qualified second-year 
wages).
    In the case of a qualified veteran who is entitled to 
compensation for a service connected disability, the credit 
equals 40 percent of $12,000 of qualified first-year wages. 
This expanded definition of qualified first-year wages does not 
apply to the veterans qualified with reference to a food and 
nutrition assistance program, as defined under present law.

Certification rules

    Generally, an individual is not treated as a member of a 
targeted group unless: (1) on or before the day on which an 
individual begins work for an employer, the employer has 
received a certification from a designated local agency that 
such individual is a member of a targeted group; or (2) on or 
before the day an individual is offered employment with the 
employer, a pre-screening notice is completed by the employer 
with respect to such individual, and not later than the 28th 
day after the individual begins work for the employer, the 
employer submits such notice, signed by the employer and the 
individual under penalties of perjury, to the designated local 
agency as part of a written request for certification. For 
these purposes, a pre-screening notice is a document (in such 
form as the Secretary may prescribe) which contains information 
provided by the individual on the basis of which the employer 
believes that the individual is a member of a targeted group.
    An otherwise qualified unemployed veteran is treated as 
certified by the designated local agency as having aggregate 
periods of unemployment (whichever is applicable under the 
qualified veterans rules described above) if such veteran is 
certified by such agency as being in receipt of unemployment 
compensation under a State or Federal law for such applicable 
periods. The Secretary of the Treasury is authorized to provide 
alternative methods of certification for unemployed veterans.

Minimum employment period

    No credit is allowed for qualified wages paid to employees 
who work less than 120 hours in the first year of employment.

Qualified tax-exempt organizations employing qualified veterans

    The credit is not available to qualified tax-exempt 
organizations other than those employing qualified veterans. 
The special rules, described below, were enacted in the VOW 
Act.
    If a qualified tax-exempt organization employs a qualified 
veteran (as described above) a tax credit against the FICA 
taxes of the organization is allowed on the wages of the 
qualified veteran which are paid for the veteran's services in 
furtherance of the activities related to the function or 
purpose constituting the basis of the organization's exemption 
under section 501.
    The credit available to such tax-exempt employer for 
qualified wages paid to a qualified veteran equals 26 percent 
(16.25 percent for employment of 400 hours or less) of 
qualified first-year wages. The amount of qualified first-year 
wages eligible for the credit is the same as those for non-tax-
exempt employers (i.e., $6,000, $12,000, $14,000 or $24,000, 
depending on the category of qualified veteran).
    A qualified tax-exempt organization means an employer that 
is described in section 501(c) and exempt from tax under 
section 501(a).
    The Social Security Trust Funds are held harmless from the 
effects of this provision by a transfer from the Treasury 
General Fund.

Treatment of possessions

    The VOW Act provided a reimbursement mechanism for the U.S. 
possessions (American Samoa, Guam, the Commonwealth of the 
Northern Mariana Islands, the Commonwealth of Puerto Rico, and 
the United States Virgin Islands). The Treasury Secretary is to 
pay to each mirror code possession (Guam, the Commonwealth of 
the Northern Mariana Islands, and the United States Virgin 
Islands) an amount equal to the loss to that possession as a 
result of the VOW Act changes to the qualified veterans rules. 
Similarly, the Treasury Secretary is to pay to each non-mirror 
Code possession (American Samoa and the Commonwealth of Puerto 
Rico) the amount that the Secretary estimates as being equal to 
the loss to that possession that would have occurred as a 
result of the VOW Act changes if a mirror code tax system had 
been in effect in that possession. The Secretary will make this 
payment to a non-mirror Code possession only if that possession 
establishes to the satisfaction of the Secretary that the 
possession has implemented (or, at the discretion of the 
Secretary, will implement) an income tax benefit that is 
substantially equivalent to the qualified veterans credit 
allowed under the VOW Act modifications.
    An employer that is allowed a credit against U.S. tax under 
the VOW Act changes with respect to a qualified veteran must 
reduce the amount of the credit claimed by the amount of any 
credit (or, in the case of a non-mirror Code possession, 
another tax benefit) that the employer claims against its 
possession income tax.

Other rules

    The work opportunity tax credit is not allowed for wages 
paid to a relative or dependent of the taxpayer. No credit is 
allowed for wages paid to an individual who is a more than 
fifty-percent owner of the entity. Similarly, wages paid to 
replacement workers during a strike or lockout are not eligible 
for the work opportunity tax credit. Wages paid to any employee 
during any period for which the employer received on-the-job 
training program payments with respect to that employee are not 
eligible for the work opportunity tax credit. The work 
opportunity tax credit generally is not allowed for wages paid 
to individuals who had previously been employed by the 
employer. In addition, many other technical rules apply.

Expiration

    Generally, the work opportunity tax credit is not available 
for individuals who begin work for an employer after December 
31, 2011. The work opportunity tax credit for employers of 
qualified veterans is not available for such individuals who 
begin work for an employer after December 31, 2012.

                           REASONS FOR CHANGE

    Given the level of unemployment and general economic 
conditions, the Committee believes that the credit should be 
extended.

                        EXPLANATION OF PROVISION

    The credit is extended for all eligible categories through 
December 31, 2013.

                             EFFECTIVE DATE

    The provision is effective for individuals who begin work 
for the employer after December 31, 2011 (in the case of 
certain qualified veterans after December 31, 2012).

10. Qualified zone academy bonds (Sec. 210 of the bill and sec. 54E of 
        the Code)

                              PRESENT LAW

Tax-exempt bonds

    Interest on State and local governmental bonds generally is 
excluded from gross income for Federal income tax purposes if 
the proceeds of the bonds are used to finance direct activities 
of these governmental units or if the bonds are repaid with 
revenues of the governmental units. These can include tax-
exempt bonds which finance public schools.\76\ An issuer must 
file with the Internal Revenue Service certain information 
about the bonds issued in order for that bond issue to be tax-
exempt.\77\ Generally, this information return is required to 
be filed no later the 15th day of the second month after the 
close of the calendar quarter in which the bonds were issued.
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    \76\Sec. 103.
    \77\Sec. 149(e).
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    The tax exemption for State and local bonds does not apply 
to any arbitrage bond.\78\ An arbitrage bond is defined as any 
bond that is part of an issue if any proceeds of the issue are 
reasonably expected to be used (or intentionally are used) to 
acquire higher yielding investments or to replace funds that 
are used to acquire higher yielding investments.\79\ In 
general, arbitrage profits may be earned only during specified 
periods (e.g., defined ``temporary periods'') before funds are 
needed for the purpose of the borrowing or on specified types 
of investments (e.g., ``reasonably required reserve or 
replacement funds''). Subject to limited exceptions, investment 
profits that are earned during these periods or on such 
investments must be rebated to the Federal Government.
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    \78\Sec. 103(a) and (b)(2).
    \79\Sec. 148.
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Qualified zone academy bonds

    As an alternative to traditional tax-exempt bonds, States 
and local governments were given the authority to issue 
``qualified zone academy bonds.''\80\ A total of $400 million 
of qualified zone academy bonds is authorized to be issued 
annually in calendar years 1998 through 2008, $1,400 million in 
2009 and 2010, and $400 million in 2011. Each calendar years 
bond limitation is allocated to the States according to their 
respective populations of individuals below the poverty line. 
Each State, in turn, allocates the credit authority to 
qualified zone academies within such State.
---------------------------------------------------------------------------
    \80\See secs. 54E and 1397E.
---------------------------------------------------------------------------
    A taxpayer holding a qualified zone academy bond on the 
credit allowance date is entitled to a credit. The credit is 
includible in gross income (as if it were a taxable interest 
payment on the bond), and may be claimed against regular income 
tax and alternative minimum tax liability.
    Qualified zone academy bonds are a type of qualified tax 
credit bond and subject to the general rules applicable to 
qualified tax credit bonds.\81\ The Treasury Department sets 
the credit rate at a rate estimated to allow issuance of 
qualified zone academy bonds without discount and without 
interest cost to the issuer.\82\ The Secretary determines 
credit rates for tax credit bonds based on general assumptions 
about credit quality of the class of potential eligible issuers 
and such other factors as the Secretary deems appropriate. The 
Secretary may determine credit rates based on general credit 
market yield indexes and credit ratings. The maximum term of 
the bond is determined by the Treasury Department, so that the 
present value of the obligation to repay the principal on the 
bond is 50 percent of the face value of the bond.
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    \81\Sec. 54A.
    \82\Given the differences in credit quality and other 
characteristics of individual issuers, the Secretary cannot set credit 
rates in a manner that will allow each issuer to issue tax credit bonds 
at par.
---------------------------------------------------------------------------
    ``Qualified zone academy bonds'' are defined as any bond 
issued by a State or local government, provided that (1) at 
least 100 percent of the available project proceeds are used 
for the purpose of renovating, providing equipment to, 
developing course materials for use at, or training teachers 
and other school personnel in a ``qualified zone academy'' and 
(2) private entities have promised to contribute to the 
qualified zone academy certain equipment, technical assistance 
or training, employee services, or other property or services 
with a value equal to at least 10 percent of the bond proceeds.
    A school is a ``qualified zone academy'' if (1) the school 
is a public school that provides education and training below 
the college level, (2) the school operates a special academic 
program in cooperation with businesses to enhance the academic 
curriculum and increase graduation and employment rates, and 
(3) either (a) the school is located in an empowerment zone or 
enterprise community designated under the Code, or (b) it is 
reasonably expected that at least 35 percent of the students at 
the school will be eligible for free or reduced-cost lunches 
under the school lunch program established under the National 
School Lunch Act.
    Under section 6431 of the Code, an issuer of specified tax 
credit bonds , may elect to receive a payment in lieu of a 
credit being allowed to the holder of the bond. This provision 
is not available for qualified zone academy bond allocations 
from the 2011 national limitation or any carry forward of the 
2011 allocation.\83\
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    \83\Sec. 6431(f)(3)(A)(iii).
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                           REASONS FOR CHANGE

    The Committee believes that the past experience with the 
program warrants its extension.

                        EXPLANATION OF PROVISION

    The provision extends the qualified zone academy bond 
program for two years. The proposal authorizes issuance of up 
to $400 million of qualified zone academy bonds per year for 
2012 and 2013.
    The issuer election to receive a payment in lieu of 
providing a tax credit to the holder of the qualified zone 
academy bond is not available for bonds issued with the 2012 or 
2013 national limitations. The proposal has no effect on bonds 
issued with limitation carried forward from 2009 or 2010.

                             EFFECTIVE DATE

    The provision applies to obligations issued after December 
31, 2011.

11. 15-year straight-line cost recovery for qualified leasehold 
        improvements, qualified restaurant buildings and improvements, 
        and qualified retail improvements (Sec. 211 of the bill and 
        sec. 168 of the Code)

                              PRESENT LAW

In general

    A taxpayer generally must capitalize the cost of property 
used in a trade or business and recover such cost over time 
through annual deductions for depreciation or amortization. 
Tangible property generally is depreciated under the modified 
accelerated cost recovery system (``MACRS''), which determines 
depreciation by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of 
various types of depreciable property.\84\ The cost of 
nonresidential real property is recovered using the straight-
line method of depreciation and a recovery period of 39 years. 
Nonresidential real property is subject to the mid-month 
placed-in-service convention. Under the mid-month convention, 
the depreciation allowance for the first year property is 
placed in service is based on the number of months the property 
was in service, and property placed in service at any time 
during a month is treated as having been placed in service in 
the middle of the month.
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    \84\Sec. 168.
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Depreciation of leasehold improvements

    Generally, depreciation allowances for improvements made on 
leased property are determined under MACRS, even if the MACRS 
recovery period assigned to the property is longer than the 
term of the lease. This rule applies regardless of whether the 
lessor or the lessee places the leasehold improvements in 
service. If a leasehold improvement constitutes an addition or 
improvement to nonresidential real property already placed in 
service, the improvement generally is depreciated using the 
straight-line method over a 39-year recovery period, beginning 
in the month the addition or improvement was placed in service. 
However, exceptions exist for certain qualified leasehold 
improvements, qualified restaurant property, and qualified 
retail improvement property.

Qualified leasehold improvement property

    Section 168(e)(3)(E)(iv) provides a statutory 15-year 
recovery period for qualified leasehold improvement property 
placed in service before January 1, 2012. Qualified leasehold 
improvement property is any improvement to an interior portion 
of a building that is nonresidential real property, provided 
certain requirements are met.\85\ The improvement must be made 
under or pursuant to a lease either by the lessee (or 
sublessee), or by the lessor, of that portion of the building 
to be occupied exclusively by the lessee (or sublessee). The 
improvement must be placed in service more than three years 
after the date the building was first placed in service. 
Qualified leasehold improvement property does not include any 
improvement for which the expenditure is attributable to the 
enlargement of the building, any elevator or escalator, any 
structural component benefiting a common area, or the internal 
structural framework of the building. If a lessor makes an 
improvement that qualifies as qualified leasehold improvement 
property, such improvement does not qualify as qualified 
leasehold improvement property to any subsequent owner of such 
improvement. An exception to the rule applies in the case of 
death and certain transfers of property that qualify for non-
recognition treatment.
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    \85\Sec. 168(e)(6).
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    Qualified leasehold improvement property is recovered using 
the straight-line method and a half-year convention. Qualified 
leasehold improvement property placed in service after December 
31, 2011 is subject to the general rules described above.

Qualified restaurant property

    Section 168(e)(3)(E)(v) provides a statutory 15-year 
recovery period for qualified restaurant property placed in 
service before January 1, 2012. Qualified restaurant property 
is any section 1250 property that is a building or an 
improvement to a building, if more than 50 percent of the 
building's square footage is devoted to the preparation of, and 
seating for on-premises consumption of, prepared meals.\86\ 
Qualified restaurant property is recovered using the straight-
line method and a half-year convention. Additionally, qualified 
restaurant property is not eligible for bonus depreciation.\87\ 
Qualified restaurant property placed in service after December 
31, 2011 is subject to the general rules described above.
---------------------------------------------------------------------------
    \86\Sec. 168(e)(7).
    \87\Property that satisfies the definition of both qualified 
leasehold improvement property and qualified restaurant property is 
eligible for bonus depreciation.
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Qualified retail improvement property

    Section 168(e)(3)(E)(ix) provides a statutory 15-year 
recovery period and for qualified retail improvement property 
placed in service before January 1, 2012. Qualified retail 
improvement property is any improvement to an interior portion 
of a building which is nonresidential real property if such 
portion is open to the general public\88\ and is used in the 
retail trade or business of selling tangible personal property 
to the general public, and such improvement is placed in 
service more than three years after the date the building was 
first placed in service.\89\ Qualified retail improvement 
property does not include any improvement for which the 
expenditure is attributable to the enlargement of the building, 
any elevator or escalator, any structural component benefiting 
a common area, or the internal structural framework of the 
building. In the case of an improvement made by the owner of 
such improvement, the improvement is a qualified retail 
improvement only so long as the improvement is held by such 
owner.
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    \88\Improvements to portions of a building not open to the general 
public (e.g., stock room in back of retail space) do not qualify under 
the provision.
    \89\Sec. 168(e)(8).
---------------------------------------------------------------------------
    Retail establishments that qualify for the 15-year recovery 
period include those primarily engaged in the sale of goods. 
Examples of these retail establishments include, but are not 
limited to, grocery stores, clothing stores, hardware stores 
and convenience stores. Establishments primarily engaged in 
providing services, such as professional services, financial 
services, personal services, health services, and 
entertainment, do not qualify. It is generally intended that 
businesses defined as a store retailer under the current North 
American Industry Classification System (industry sub-sectors 
441 through 453) qualify while those in other industry classes 
do not qualify.
    Qualified retail improvement property is recovered using 
the straight-line method and a half-year convention. 
Additionally, qualified retail improvement property is not 
eligible for bonus depreciation.\90\ Qualified retail 
improvement property placed in service after December 31, 2011 
is subject to the general rules described above.
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    \90\Property that satisfies the definition of both qualified 
leasehold improvement property and qualified retail property is 
eligible for bonus depreciation.
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                           REASONS FOR CHANGE

    The Committee believes that taxpayers should not be 
required to recover the costs of certain leasehold improvements 
beyond the useful life of the investment. The 39-year recovery 
period for leasehold improvements for property placed in 
service after December 31, 2007, extends beyond the useful life 
of many such investments. Although lease terms differ, the 
Committee believes that lease terms for commercial real estate 
are also typically shorter than the 39-year recovery period. In 
the interests of simplicity and administrability, a uniform 
period for recovery of leasehold improvements is desirable. 
Therefore, the provision extends the 15-year recovery period 
for leasehold improvements.
    The Committee also believes that unlike other commercial 
buildings, restaurant buildings generally are more specialized 
structures. Restaurants also experience considerably more 
traffic, and remain open longer than most commercial 
properties. This daily use causes rapid deterioration of 
restaurant properties and forces restaurateurs to constantly 
repair and upgrade their facilities. As such, restaurant 
facilities generally have a shorter life span than other 
commercial establishments. The provision extends the 15-year 
recovery period for improvements made to restaurant buildings 
and continues to apply the 15-year recovery period to new 
restaurants, to more accurately reflect the true economic life 
of such properties.
    The Committee believes that taxpayers should not be 
required to recover the costs of certain improvements beyond 
the useful life of the investment. The 39-year recovery period 
for improvements to owner occupied (i.e., not leased) retail 
property extends beyond the useful life of many such 
investments. Additionally, the Committee believes that 
retailers should not be treated differently based on whether 
the building in which they operate is owned or leased. As many 
small business retailers own the building in which they operate 
their business, the Committee believes this provision will 
provide relief to small businesses. Therefore, the provision 
extends the 15-year recovery period for qualified retail 
improvements.

                        EXPLANATION OF PROVISION

    The present law provisions for qualified leasehold 
improvement property, qualified restaurant property, and 
qualified retail improvement property are extended for two 
years to apply to property placed in service on or before 
December 31, 2013.

                             EFFECTIVE DATE

    The provision is effective for property placed in service 
after December 31, 2011.

12. 7-year recovery period for motorsports entertainment complexes 
        (Sec. 212 of the bill and sec. 168 of the Code)

                              PRESENT LAW

    A taxpayer generally must capitalize the cost of property 
used in a trade or business and recover such cost over time 
through annual deductions for depreciation or amortization. 
Tangible property generally is depreciated under the modified 
accelerated cost recovery system (``MACRS''), which determines 
depreciation by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of 
various types of depreciable property.\91\ The cost of 
nonresidential real property is recovered using the straight-
line method of depreciation and a recovery period of 39 years. 
Nonresidential real property is subject to the mid-month 
placed-in-service convention. Under the mid-month convention, 
the depreciation allowance for the first year property is 
placed in service is based on the number of months the property 
was in service, and property placed in service at any time 
during a month is treated as having been placed in service in 
the middle of the month. Land improvements (such as roads and 
fences) are recovered over 15 years. An exception exists for 
the theme and amusement park industry, whose assets are 
assigned a recovery period of seven years. Additionally, a 
motorsports entertainment complex placed in service on or 
before December 31, 2011 is assigned a recovery period of seven 
years.\92\ For these purposes, a motorsports entertainment 
complex means a racing track facility which is permanently 
situated on land and which during the 36-month period following 
its placed-in-service date hosts a racing event.\93\ The term 
motorsports entertainment complex also includes ancillary 
facilities, land improvements (e.g., parking lots, sidewalks, 
fences), support facilities (e.g., food and beverage retailing, 
souvenir vending), and appurtenances associated with such 
facilities (e.g., ticket booths, grandstands).
---------------------------------------------------------------------------
    \91\Sec. 168.
    \92\Sec. 168(e)(3)(C)(ii).
    \93\Sec. 168(i)(15).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that extending the depreciation 
incentive will encourage economic development. Thus, the 
provision extends the seven-year recovery period for 
motorsports entertainment complex property.

                        EXPLANATION OF PROVISION

    The provision extends the present-law seven-year recovery 
period for motorsports entertainment complexes for two years to 
apply to property placed in service before January 1, 2014.

                             EFFECTIVE DATE

    The provision is effective for property placed in service 
after December 31, 2011.

13. Accelerated depreciation for business property on an Indian 
        reservation (Sec. 213 of the bill and sec. 168(j) of the Code)

                              PRESENT LAW

    With respect to certain property used in connection with 
the conduct of a trade or business within an Indian 
reservation, depreciation deductions under section 168(j) are 
determined using the following recovery periods:
          3-year property  2 years
          5-year property  3 years
          7-year property  4 years
          10-year property  6 years
          15-year property  9 years
          20-year property  12 years
          Nonresidential real property  22 years
    ``Qualified Indian reservation property'' eligible for 
accelerated depreciation includes property described in the 
table above which is: (1) used by the taxpayer predominantly in 
the active conduct of a trade or business within an Indian 
reservation; (2) not used or located outside the reservation on 
a regular basis; (3) not acquired (directly or indirectly) by 
the taxpayer from a person who is related to the taxpayer;\94\ 
and (4) not property placed in service for purposes of 
conducting gaming activities.\95\ Certain ``qualified 
infrastructure property'' may be eligible for the accelerated 
depreciation even if located outside an Indian reservation, 
provided that the purpose of such property is to connect with 
qualified infrastructure property located within the 
reservation (e.g., roads, power lines, water systems, railroad 
spurs, and communications facilities).\96\
---------------------------------------------------------------------------
    \94\For these purposes, related persons is defined in Sec. 
465(b)(3)(C).
    \95\Sec. 168(j)(4)(A).
    \96\Sec. 168(j)(4)(C).
---------------------------------------------------------------------------
    An ``Indian reservation'' means a reservation as defined in 
section 3(d) of the Indian Financing Act of 1974\97\ or section 
4(10) of the Indian Child Welfare Act of 1978 (25 U.S.C. 
1903(10)).\98\ For purposes of the preceding sentence, section 
3(d) is applied by treating ``former Indian reservations in 
Oklahoma'' as including only lands that are (1) within the 
jurisdictional area of an Oklahoma Indian tribe as determined 
by the Secretary of the Interior, and (2) recognized by such 
Secretary as an area eligible for trust land status under 25 
CFR Part 151 (as in effect on August 5, 1997).
---------------------------------------------------------------------------
    \97\Pub. L. No. 93-262.
    \98\Pub. L. No. 95-608.
---------------------------------------------------------------------------
    The depreciation deduction allowed for regular tax purposes 
is also allowed for purposes of the alternative minimum tax. 
The accelerated depreciation for qualified Indian reservation 
property is available with respect to property placed in 
service before January 1, 2012.

                           REASONS FOR CHANGE

    The Committee believes that extending the depreciation 
incentive will encourage economic development within Indian 
reservations and expand employment opportunities on such 
reservations.

                        EXPLANATION OF PROVISION

    The provision extends for two years the present-law 
accelerated MACRS recovery periods for qualified Indian 
reservation property to apply to property placed in service 
before January 1, 2014.

                             EFFECTIVE DATE

    The provision is effective for property placed in service 
after December 31, 2011.

14. Enhanced charitable deduction for contributions of food inventory 
        (Sec. 214 of the bill and sec. 170 of the Code)

                              PRESENT LAW

Charitable contributions in general

    In general, an income tax deduction is permitted for 
charitable contributions, subject to certain limitations that 
depend on the type of taxpayer, the property contributed, and 
the donee organization.\99\
---------------------------------------------------------------------------
    \99\Sec. 170.
---------------------------------------------------------------------------
    Charitable contributions of cash are deductible in the 
amount contributed. In general, contributions of capital gain 
property to a qualified charity are deductible at fair market 
value with certain exceptions. Capital gain property means any 
capital asset or property used in the taxpayer's trade or 
business the sale of which at its fair market value, at the 
time of contribution, would have resulted in gain that would 
have been long-term capital gain. Contributions of other 
appreciated property generally are deductible at the donor's 
basis in the property. Contributions of depreciated property 
generally are deductible at the fair market value of the 
property.

General rules regarding contributions of inventory

    Under present law, a taxpayer's deduction for charitable 
contributions of inventory generally is limited to the 
taxpayer's basis (typically, cost) in the inventory, or if 
less, the fair market value of the inventory.
    For certain contributions of inventory, C corporations may 
claim an enhanced deduction equal to the lesser of (1) basis 
plus one-half of the item's appreciation (i.e., basis plus one-
half of fair market value in excess of basis) or (2) two times 
basis.\100\ In general, a C corporation's charitable 
contribution deductions for a year may not exceed 10 percent of 
the corporation's taxable income.\101\ To be eligible for the 
enhanced deduction, the contributed property generally must be 
inventory of the taxpayer, contributed to a charitable 
organization described in section 501(c)(3) (except for private 
nonoperating foundations), and the donee must (1) use the 
property consistent with the donee's exempt purpose solely for 
the care of the ill, the needy, or infants, (2) not transfer 
the property in exchange for money, other property, or 
services, and (3) provide the taxpayer a written statement that 
the donee's use of the property will be consistent with such 
requirements.\102\ In the case of contributed property subject 
to the Federal Food, Drug, and Cosmetic Act, as amended, the 
property must satisfy the applicable requirements of such Act 
on the date of transfer and for 180 days prior to the 
transfer.\103\
---------------------------------------------------------------------------
    \100\Sec. 170(e)(3).
    \101\Sec. 170(b)(2).
    \102\Sec. 170(e)(3)(A)(i)-(iii).
    \103\Sec. 170(e)(3)(A)(iv).
---------------------------------------------------------------------------
    A donor making a charitable contribution of inventory must 
make a corresponding adjustment to the cost of goods sold by 
decreasing the cost of goods sold by the lesser of the fair 
market value of the property or the donor's basis with respect 
to the inventory.\104\
---------------------------------------------------------------------------
    \104\Treas. Reg. sec. 1.170A-4A(c)(3).
---------------------------------------------------------------------------
    To use the enhanced deduction, the taxpayer must establish 
that the fair market value of the donated item exceeds basis. 
The valuation of food inventory has been the subject of 
disputes between taxpayers and the IRS.\105\
---------------------------------------------------------------------------
    \105\Lucky Stores Inc. v. Commissioner, 105 T.C. 420 (1995) 
(holding that the value of surplus bread inventory donated to charity 
was the full retail price of the bread rather than half the retail 
price, as the IRS asserted).
---------------------------------------------------------------------------

Temporary rule expanding and modifying the enhanced deduction for 
        contributions of food inventory

    Under a special temporary provision, any taxpayer, whether 
or not a C corporation, engaged in a trade or business is 
eligible to claim the enhanced deduction for donations of food 
inventory.\106\ For taxpayers other than C corporations, the 
total deduction for donations of food inventory in a taxable 
year generally may not exceed 10 percent of the taxpayer's net 
income for such taxable year from all sole proprietorships, S 
corporations, or partnerships (or other non C corporation) from 
which contributions of apparently wholesome food are made. For 
example, if a taxpayer is a sole proprietor, a shareholder in 
an S corporation, and a partner in a partnership, and each 
business makes charitable contributions of food inventory, the 
taxpayer's deduction for donations of food inventory is limited 
to 10 percent of the taxpayer's net income from the sole 
proprietorship and the taxpayer's interests in the S 
corporation and partnership. However, if only the sole 
proprietorship and the S corporation made charitable 
contributions of food inventory, the taxpayer's deduction would 
be limited to 10 percent of the net income from the trade or 
business of the sole proprietorship and the taxpayer's interest 
in the S corporation, but not the taxpayer's interest in the 
partnership.\107\
---------------------------------------------------------------------------
    \106\Sec. 170(e)(3)(C).
    \107\The 10 percent limitation does not affect the application of 
the generally applicable percentage limitations. For example, if 10 
percent of a sole proprietor's net income from the proprietor's trade 
or business was greater than 50 percent of the proprietor's 
contribution base, the available deduction for the taxable year (with 
respect to contributions to public charities) would be 50 percent of 
the proprietor's contribution base. Consistent with present law, such 
contributions may be carried forward because they exceed the 50 percent 
limitation. Contributions of food inventory by a taxpayer that is not a 
C corporation that exceed the 10 percent limitation but not the 50 
percent limitation could not be carried forward.
---------------------------------------------------------------------------
    Under the temporary provision, the enhanced deduction for 
food is available only for food that qualifies as ``apparently 
wholesome food.'' Apparently wholesome food is defined as food 
intended for human consumption that meets all quality and 
labeling standards imposed by Federal, State, and local laws 
and regulations even though the food may not be readily 
marketable due to appearance, age, freshness, grade, size, 
surplus, or other conditions.
    The temporary provision does not apply to contributions 
made after December 31, 2011.

                           REASONS FOR CHANGE

    The Committee believes that charitable organizations 
benefit from charitable contributions of food inventory by non 
C corporations and that the enhanced deduction is a useful 
incentive for the making of such contributions. Accordingly, 
the Committee believes it is appropriate to extend the special 
rule for charitable contributions of food inventory for two 
years.

                        EXPLANATION OF PROVISION

    The provision extends the expansion of, and modifications 
to, the enhanced deduction for charitable contributions of food 
inventory to contributions made before January 1, 2014.

                             EFFECTIVE DATE

    The provision is effective for contributions made after 
December 31, 2011.

15. Increased expensing for small business depreciable assets (Sec. 215 
        of the bill and sec. 179 of the Code)

                              PRESENT LAW

    A taxpayer may elect under section 179 to deduct (or 
``expense'') the cost of qualifying property, rather than to 
recover such costs through depreciation deductions, subject to 
limitation.\108\ For taxable years beginning in 2012, the 
maximum amount a taxpayer may expense is $125,000 of the cost 
of qualifying property placed in service for the taxable year. 
The $125,000 amount is reduced (but not below zero) by the 
amount by which the cost of qualifying property placed in 
service during the taxable year exceeds $500,000.\109\ The 
$125,000 and $500,000 amounts are indexed for inflation 
occurring since 2006.\110\ The indexed amounts for 2012 are 
$139,000 and $560,000. In general, qualifying property is 
defined as depreciable tangible personal property that is 
purchased for use in the active conduct of a trade or business.
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    \108\Additional section 179 incentives have been provided with 
respect to qualified property meeting applicable requirements that is 
used by a business in an empowerment zone (sec. 1397A), a renewal 
community (sec. 1400J), or the Gulf Opportunity Zone (sec. 1400N(e)). 
In addition, section 179(e) provides for an enhanced section 179 
deduction for qualified disaster assistance property. Off-the-shelf 
computer software placed in service in taxable years beginning before 
2013 also is treated as qualifying property.
    \109\Sec. 179(b)(2).
    \110\Sec. 179(b)(6).
---------------------------------------------------------------------------
    For taxable years beginning in 2010 and 2011, the maximum 
amount a taxpayer may expense is $500,000 of the cost of 
qualifying property placed in service for the taxable year. The 
$500,000 amount is reduced (but not below zero) by the amount 
by which the cost of qualifying property placed in service 
during the taxable year exceeds $2,000,000. For taxable years 
beginning in 2010 and 2011, qualifying property also includes 
certain real property (i.e., qualified leasehold improvement 
property, qualified restaurant property, and qualified retail 
improvement property).\111\ Of the $500,000 expense amount 
available under section 179 for 2010 and 2011, the maximum 
amount available with respect to qualified real property is 
$250,000 for each taxable year.
---------------------------------------------------------------------------
    \111\Sec. 179(f).
---------------------------------------------------------------------------
    For taxable years beginning in 2013 and thereafter, a 
taxpayer may elect to deduct up to $25,000 of the cost of 
qualifying property placed in service for the taxable year, 
subject to limitation. The $25,000 amount is reduced (but not 
below zero) by the amount by which the cost of qualifying 
property placed in service during the taxable year exceeds 
$200,000. The $25,000 and $200,000 amounts are not indexed for 
inflation. In general, qualifying property is defined as 
depreciable tangible personal property (not including off-the-
shelf computer software) that is purchased for use in the 
active conduct of a trade or business.
    The amount eligible to be expensed for a taxable year may 
not exceed the taxable income for such taxable year that is 
derived from the active conduct of a trade or business 
(determined without regard to this provision). Any amount that 
is not allowed as a deduction because of the taxable income 
limitation may be carried forward to succeeding taxable years 
(subject to limitations). However amounts attributable to 
qualified real property that are disallowed under the trade or 
business income limitation may only be carried over to taxable 
years in which the definition of eligible section 179 property 
includes qualified real property.\112\ Thus, if a taxpayer's 
section 179 deduction for 2010 with respect to qualified real 
property is limited by the taxpayer's active trade or business 
income, such disallowed amount may be carried over to 2011. Any 
such carryover amounts that are not used in 2011 are treated as 
property placed in service in 2011 for purposes of computing 
depreciation. That is, the unused carryover amount from 2010 is 
considered placed in service on the first day of the 2011 
taxable year.\113\
---------------------------------------------------------------------------
    \112\Section 179(f)(4) details the special rules that apply to 
disallowed amounts.
    \113\For example, assume that during 2010, a company's only asset 
purchases are section 179-eligible equipment costing $100,000 and 
qualifying leasehold improvements costing $200,000. Assume the company 
has no other asset purchases during 2010, and has a taxable income 
limitation of $150,000. The maximum section 179 deduction the company 
can claim for 2010 is $150,000, which is allocated pro rata between the 
properties, such that the carryover to 2011 is allocated $100,000 to 
the qualified leasehold improvements and $50,000 to the equipment.
    Assume further that in 2011, the company had no asset purchases and 
had taxable income of $-0-. The $100,000 carryover from 2010 
attributable to qualified leasehold improvements is treated as placed 
in service as of the first day of the company's 2011 taxable year. The 
$50,000 carryover allocated to equipment is carried over to 2012 under 
section 179(b)(3)(B).
---------------------------------------------------------------------------
    No general business credit under section 38 is allowed with 
respect to any amount for which a deduction is allowed under 
section 179. An expensing election is made under rules 
prescribed by the Secretary.\114\ In general, any election or 
specification made with respect to any property may not be 
revoked except with the consent of the Commissioner. However, 
an election or specification under section 179 may be revoked 
by the taxpayer without consent of the Commissioner for taxable 
years beginning after 2002 and before 2013.\115\
---------------------------------------------------------------------------
    \114\Sec. 179(c)(1).
    \115\Sec. 179(c)(2).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that section 179 expensing provides 
two important benefits for small businesses. First, it lowers 
the cost of capital for tangible property used in a trade or 
business. With a lower cost of capital, the Committee believes 
small businesses will invest in more equipment and employ more 
workers. Second, it eliminates depreciation recordkeeping 
requirements with respect to expensed property. In order to 
increase the value of these benefits and to increase the number 
of taxpayers eligible, the provision increases the amount 
allowed to be expensed under section 179 and increases the 
amount of the phase-out threshold.
    The Committee also believes that qualified real property 
(i.e., leasehold improvement property, restaurant property, and 
retail improvement property) should continue to be included in 
the section 179 expensing provision to encourage small 
businesses to invest in these types of real property. Further, 
the Committee believes that purchased computer software should 
continue to be included in the section 179 expensing provision 
so that it is not disadvantaged relative to developed software. 
In addition, the Committee believes that the process of making 
and revoking section 179 elections should continue to be 
simpler and more efficient for taxpayers by eliminating the 
requirement of the consent of the Commissioner.

                        EXPLANATION OF PROVISION

    The provision provides that the maximum amount a taxpayer 
may expense, for taxable years beginning in 2012 and 2013, is 
$500,000 of the cost of qualifying property placed in service 
for the taxable year. The $500,000 amount is reduced (but not 
below zero) by the amount by which the cost of qualifying 
property placed in service during the taxable year exceeds 
$2,000,000.
    In addition, the provision extends, for taxable years 
beginning in 2013, the treatment of off-the-shelf computer 
software as qualifying property. The provision also extends the 
treatment of qualified real property as eligible section 179 
property for taxable years beginning in 2012 and 2013, 
including the limitation on carryovers and the maximum amount 
of $250,000 for each taxable year. The provision makes a 
technical drafting correction by clarifying that for the last 
taxable year beginning in 2013, the taxable income 
limitation\116\ is computed without regard to any additional 
depreciation expense resulting from the application of the 
carryover limitation of section 179(f)(4). For taxable years 
beginning in 2013, the provision continues to permit a taxpayer 
to amend or irrevocably revoke an election for a taxable year 
under section 179 without the consent of the Commissioner.
---------------------------------------------------------------------------
    \116\Sec. 179(b)(3).
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2011.

16. Election to expense mine safety equipment (Sec. 216 of the bill and 
        sec. 179E of the Code)

                              PRESENT LAW

    A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. The amount 
of the depreciation deduction allowed with respect to tangible 
property for a taxable year is determined under the modified 
accelerated cost recovery system (``MACRS'').\117\ Under MACRS, 
different types of property generally are assigned applicable 
recovery periods and depreciation methods. The recovery periods 
applicable to most tangible personal property (generally 
tangible property other than residential rental property and 
nonresidential real property) range from three to 20 years. The 
depreciation methods generally applicable to tangible personal 
property are the 200-percent and 150-percent declining balance 
methods, switching to the straight-line method for the taxable 
year in which the depreciation deduction would be maximized.
---------------------------------------------------------------------------
    \117\Sec. 168.
---------------------------------------------------------------------------
    In lieu of depreciation, a taxpayer with a sufficiently 
small amount of annual investment may elect to deduct (or 
``expense'') such costs under section 179. Present law provides 
that the maximum amount a taxpayer may expense for taxable 
years beginning in 2012 is $125,000 of the cost of the 
qualifying property for the taxable year. In general, 
qualifying property is defined as depreciable tangible personal 
property that is purchased for use in the active conduct of a 
trade or business.\118\ The $125,000 amount is reduced (but not 
below zero) by the amount by which the cost of qualifying 
property placed in service during the taxable year exceeds 
$500,000.
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    \118\The definition of qualifying property was temporarily (for 
2010 and 2011) expanded to include up to $250,000 of qualified 
leasehold improvement property, qualified restaurant property, and 
qualified retail improvement property. See section 179(c).
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    A taxpayer may elect to treat 50 percent of the cost of any 
qualified advanced mine safety equipment property as an expense 
in the taxable year in which the equipment is placed in 
service.\119\ The deduction under section 179E is allowed for 
both regular and alternative minimum tax purposes, including 
adjusted current earnings. In computing earnings and profits, 
the amount deductible under section 179E is allowed as a 
deduction ratably over five taxable years beginning with the 
year the amount is deductible under section 179E.\120\
---------------------------------------------------------------------------
    \119\Sec. 179E(a).
    \120\Sec. 312(k)(3).
---------------------------------------------------------------------------
    ``Qualified advanced mine safety equipment property'' means 
any advanced mine safety equipment property for use in any 
underground mine located in the United States the original use 
of which commences with the taxpayer and which is placed in 
service before January 1, 2012.\121\
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    \121\Secs. 179E(c) and (g).
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    Advanced mine safety equipment property means any of the 
following: (1) emergency communication technology or devices 
used to allow a miner to maintain constant communication with 
an individual who is not in the mine; (2) electronic 
identification and location devices that allow individuals not 
in the mine to track at all times the movements and location of 
miners working in or at the mine; (3) emergency oxygen-
generating, self-rescue devices that provide oxygen for at 
least 90 minutes; (4) pre-positioned supplies of oxygen 
providing each miner on a shift the ability to survive for at 
least 48 hours; and (5) comprehensive atmospheric monitoring 
systems that monitor the levels of carbon monoxide, methane and 
oxygen that are present in all areas of the mine and that can 
detect smoke in the case of a fire in a mine.\122\
---------------------------------------------------------------------------
    \122\Sec. 179E(d).
---------------------------------------------------------------------------
    The portion of the cost of any property with respect to 
which an expensing election under section 179 is made may not 
be taken into account for purposes of the 50-percent deduction 
under section 179E.\123\ In addition, a taxpayer making an 
election under section 179E must file with the Secretary a 
report containing information with respect to the operation of 
the mines of the taxpayer as required by the Secretary.\124\
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    \123\Sec. 179E(e).
    \124\Sec. 179E(f).
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                           REASONS FOR CHANGE

    The Committee believes that mine safety equipment is vital 
to ensuring a safe workplace for the nation's underground mine 
workforce. Therefore, the Committee believes that this 
incentive for mine safety equipment property should be 
extended.

                        EXPLANATION OF PROVISION

    The provision extends for two years (through December 31, 
2013) the present-law placed in service date relating to 
expensing of mine safety equipment.

                             EFFECTIVE DATE

    The provision applies to property placed in service after 
December 31, 2011.

17. Special expensing rules for certain film and television productions 
        (Sec. 217 of the bill and sec. 181 of the Code)

                              PRESENT LAW

    The modified accelerated cost recovery system (``MACRS'') 
does not apply to certain property, including any motion 
picture film, video tape, or sound recording, or to any other 
property if the taxpayer elects to exclude such property from 
MACRS and the taxpayer properly applies a unit-of-production 
method or other method of depreciation not expressed in a term 
of years. Section 197, which allows amortization for certain 
intangible property, does not apply to some intangible 
property, including property produced by the taxpayer or any 
interest in a film, sound recording, video tape, book or 
similar property not acquired in a transaction (or a series of 
related transactions) involving the acquisition of assets 
constituting a trade or business or substantial portion 
thereof. Thus, the recovery of the cost of a film, video tape, 
or similar property that is produced by the taxpayer or is 
acquired on a ``stand-alone'' basis by the taxpayer may not be 
determined under either the MACRS depreciation provisions or 
under the section 197 amortization provisions. The cost 
recovery of such property may be determined under section 167, 
which allows a depreciation deduction for the reasonable 
allowance for the exhaustion, wear and tear, or obsolescence of 
the property. A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. Section 
167(g) provides that the cost of motion picture films, sound 
recordings, copyrights, books, and patents are eligible to be 
recovered using the income forecast method of depreciation.
    Under section 181, taxpayers may elect\125\ to deduct the 
cost of any qualifying film and television production, 
commencing prior to January 1, 2012, in the year the 
expenditure is incurred in lieu of capitalizing the cost and 
recovering it through depreciation allowances.\126\ Taxpayers 
may elect to deduct up to $15 million of the aggregate cost of 
the film or television production under this section.\127\ The 
threshold is increased to $20 million if a significant amount 
of the production expenditures are incurred in areas eligible 
for designation as a low-income community or eligible for 
designation by the Delta Regional Authority as a distressed 
county or isolated area of distress.\128\
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    \125\See Temp. Treas. Reg. section 1.181-2T for rules on making an 
election under this section.
    \126\For this purpose, a production is treated as commencing on the 
first date of principal photography.
    \127\Sec. 181(a)(2)(A).
    \128\Sec. 181(a)(2)(B).
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    A qualified film or television production means any 
production of a motion picture (whether released theatrically 
or directly to video cassette or any other format) or 
television program if at least 75 percent of the total 
compensation expended on the production is for services 
performed in the United States by actors, directors, producers, 
and other relevant production personnel.\129\ The term 
``compensation'' does not include participations and residuals 
(as defined in section 167(g)(7)(B)).\130\ With respect to 
property which is one or more episodes in a television series, 
each episode is treated as a separate production and only the 
first 44 episodes qualify under the provision.\131\ Qualified 
property does not include sexually explicit productions as 
defined by section 2257 of title 18 of the U.S. Code.\132\
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    \129\Sec. 181(d)(3)(A).
    \130\Sec. 181(d)(3)(B).
    \131\Sec. 181(d)(2)(B).
    \132\Sec. 181(d)(2)(C).
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    For purposes of recapture under section 1245, any deduction 
allowed under section 181 is treated as if it were a deduction 
allowable for amortization.\133\
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    \133\Sec. 1245(a)(2)(C).
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                           REASONS FOR CHANGE

    The Committee believes that section 181 encourages domestic 
film production and that the provision should be extended. The 
issue of runaway production affects all productions, regardless 
of cost, and therefore the Committee believes that it is 
appropriate to treat as an expense the first $15 million ($20 
million in certain cases) of production costs of otherwise 
qualified films.

                        EXPLANATION OF PROVISION

    The provision extends the present-law expensing provision 
for two years, to qualified film and television productions 
commencing prior to January 1, 2014.

                             EFFECTIVE DATE

    The provision applies to qualified film and television 
productions commencing after December 31, 2011.

18. Deduction allowable with respect to income attributable to domestic 
        production activities in Puerto Rico (Sec. 218 of the bill and 
        sec. 199 of the Code)

                              PRESENT LAW

General

    Present law provides a deduction from taxable income (or, 
in the case of an individual, adjusted gross income) that is 
equal to nine percent of the lesser of the taxpayer's qualified 
production activities income or taxable income for the taxable 
year. For taxpayers subject to the 35-percent corporate income 
tax rate, the nine-percent deduction effectively reduces the 
corporate income tax rate to slightly less than 32 percent on 
qualified production activities income.
    In general, qualified production activities income is equal 
to domestic production gross receipts reduced by the sum of: 
(1) the costs of goods sold that are allocable to those 
receipts; and (2) other expenses, losses, or deductions which 
are properly allocable to those receipts.
    Domestic production gross receipts generally are gross 
receipts of a taxpayer that are derived from: (1) any sale, 
exchange, or other disposition, or any lease, rental, or 
license, of qualifying production property\134\ that was 
manufactured, produced, grown or extracted by the taxpayer in 
whole or in significant part within the United States; (2) any 
sale, exchange, or other disposition, or any lease, rental, or 
license, of qualified film\135\ produced by the taxpayer; (3) 
any lease, rental, license, sale, exchange, or other 
disposition of electricity, natural gas, or potable water 
produced by the taxpayer in the United States; (4) construction 
of real property performed in the United States by a taxpayer 
in the ordinary course of a construction trade or business; or 
(5) engineering or architectural services performed in the 
United States for the construction of real property located in 
the United States.
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    \134\Qualifying production property generally includes any tangible 
personal property, computer software, and sound recordings.
    \135\Qualified film includes any motion picture film or videotape 
(including live or delayed television programming, but not including 
certain sexually explicit productions) if 50 percent or more of the 
total compensation relating to the production of the film (including 
compensation in the form of residuals and participations) constitutes 
compensation for services performed in the United States by actors, 
production personnel, directors, and producers.
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    The amount of the deduction for a taxable year is limited 
to 50 percent of the wages paid by the taxpayer, and properly 
allocable to domestic production gross receipts, during the 
calendar year that ends in such taxable year.\136\ Wages paid 
to bona fide residents of Puerto Rico generally are not 
included in the definition of wages for purposes of computing 
the wage limitation amount.\137\
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    \136\For purposes of the provision, ``wages'' include the sum of 
the amounts of wages as defined in section 3401(a) and elective 
deferrals that the taxpayer properly reports to the Social Security 
Administration with respect to the employment of employees of the 
taxpayer during the calendar year ending during the taxpayer's taxable 
year.
    \137\Section 3401(a)(8)(C) excludes wages paid to United States 
citizens who are bona fide residents of Puerto Rico from the term wages 
for purposes of income tax withholding.
---------------------------------------------------------------------------

Rules for Puerto Rico

    When used in the Code in a geographical sense, the term 
``United States'' generally includes only the States and the 
District of Columbia.\138\ A special rule for determining 
domestic production gross receipts, however, provides that in 
the case of any taxpayer with gross receipts from sources 
within the Commonwealth of Puerto Rico, the term ``United 
States'' includes the Commonwealth of Puerto Rico, but only if 
all of the taxpayer's Puerto Rico-sourced gross receipts are 
taxable under the Federal income tax for individuals or 
corporations.\139\ In computing the 50-percent wage limitation, 
the taxpayer is permitted to take into account wages paid to 
bona fide residents of Puerto Rico for services performed in 
Puerto Rico.\140\
---------------------------------------------------------------------------
    \138\Sec. 7701(a)(9).
    \139\Sec. 199(d)(8)(A).
    \140\Sec. 199(d)(8)(B).
---------------------------------------------------------------------------
    The special rules for Puerto Rico apply only with respect 
to the first six taxable years of a taxpayer beginning after 
December 31, 2005 and before January 1, 2012.

                           REASONS FOR CHANGE

    The Committee believes that, notwithstanding expiration of 
the Puerto Rico and possession tax credit and the Puerto Rico 
economic activity credit for taxable years beginning after 
2005, the Code should promote economic activity in Puerto Rico. 
Consequently, the Committee believes that it is appropriate to 
treat Puerto Rico as part of the United States for purposes of 
the domestic production activities deduction.

                        EXPLANATION OF PROVISION

    The provision extends the special domestic production 
activities rules for Puerto Rico to apply for the first eight 
taxable years of a taxpayer beginning after December 31, 2005 
and before January 1, 2014.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2011.

19. Modification of tax treatment of certain payments to controlling 
        exempt organizations (Sec. 219 of the bill and sec. 512 of the 
        Code)

                              PRESENT LAW

    In general, organizations exempt from Federal income tax 
are subject to the unrelated business income tax on income 
derived from a trade or business regularly carried on by the 
organization that is not substantially related to the 
performance of the organization's tax-exempt functions.\141\ In 
general, interest, rents, royalties, and annuities are excluded 
from the unrelated business income of tax-exempt 
organizations.\142\
---------------------------------------------------------------------------
    \141\Sec. 511.
    \142\Sec. 512(b).
---------------------------------------------------------------------------
    Section 512(b)(13) provides special rules regarding income 
derived by an exempt organization from a controlled subsidiary. 
In general, section 512(b)(13) treats otherwise excluded rent, 
royalty, annuity, and interest income as unrelated business 
taxable income if such income is received from a taxable or 
tax-exempt subsidiary that is 50-percent controlled by the 
parent tax-exempt organization to the extent the payment 
reduces the net unrelated income (or increases any net 
unrelated loss) of the controlled entity (determined as if the 
entity were tax exempt). However, a special rule provides that, 
for payments made pursuant to a binding written contract in 
effect on August 17, 2006 (or renewal of such a contract on 
substantially similar terms), the general rule of section 
512(b)(13) applies only to the portion of payments received or 
accrued in a taxable year that exceeds the amount of the 
payment that would have been paid or accrued if the amount of 
such payment had been determined under the principles of 
section 482 (i.e., at arm's length).\143\ In addition, the 
special rule imposes a 20-percent penalty on the larger of such 
excess determined without regard to any amendment or supplement 
to a return of tax, or such excess determined with regard to 
all such amendments and supplements.
---------------------------------------------------------------------------
    \143\Sec. 512(b)(13)(E).
---------------------------------------------------------------------------
    In the case of a stock subsidiary, ``control'' means 
ownership by vote or value of more than 50 percent of the 
stock. In the case of a partnership or other entity, 
``control'' means ownership of more than 50 percent of the 
profits, capital, or beneficial interests. In addition, present 
law applies the constructive ownership rules of section 318 for 
purposes of section 512(b)(13). Thus, a parent exempt 
organization is deemed to control any subsidiary in which it 
holds more than 50 percent of the voting power or value, 
directly (as in the case of a first-tier subsidiary) or 
indirectly (as in the case of a second-tier subsidiary).
    The special rule does not apply to payments received or 
accrued after December 31, 2011.

                           REASONS FOR CHANGE

    The Committee believes it is desirable to extend the 
special rule for an additional two years.

                        EXPLANATION OF PROVISION

    The provision extends the special rule for two years to 
payments received or accrued before January 1, 2014. 
Accordingly, under the provision, payments of rent, royalties, 
annuities, or interest income by a controlled organization to a 
controlling organization pursuant to a binding written contract 
in effect on August 17, 2006 (or renewal of such a contract on 
substantially similar terms), may be includible in the 
unrelated business taxable income of the controlling 
organization only to the extent the payment exceeds the amount 
of the payment determined under the principles of section 482 
(i.e., at arm's length). Any such excess is subject to a 20-
percent penalty on the larger of such excess determined without 
regard to any amendment or supplement to a return of tax, or 
such excess determined with regard to all such amendments and 
supplements.

                             EFFECTIVE DATE

    The provision is effective for payments received or accrued 
after December 31, 2011.

20. Treatment of certain dividends of regulated investment companies 
        (Sec. 220 of the bill and sec. 871(k) of the Code)

                              PRESENT LAW

In general

    A regulated investment company (``RIC'') is an entity that 
meets certain requirements (including a requirement that its 
income generally be derived from passive investments such as 
dividends and interest and a requirement that it distribute at 
least 90 percent of its income) and that elects to be taxed 
under a special tax regime. Unlike an ordinary corporation, an 
entity that is taxed as a RIC can deduct amounts paid to its 
shareholders as dividends. In this manner, tax on RIC income is 
generally not paid by the RIC but rather by its shareholders. 
Income of a RIC distributed to shareholders as dividends is 
generally treated as an ordinary income dividend by those 
shareholders, unless other special rules apply. Dividends 
received by foreign persons from a RIC are generally subject to 
gross-basis tax under sections 871(a) or 881, and the RIC payor 
of such dividends is obligated to withhold such tax under 
sections 1441 and 1442.
    Under a temporary provision of prior law, a RIC that earned 
certain interest income that generally would not be subject to 
U.S. tax if earned by a foreign person directly could, to the 
extent of such net interest income, designate a dividend it 
paid as derived from such interest income for purposes of the 
treatment of a foreign RIC shareholder. A foreign person who is 
a shareholder in the RIC generally could treat such a dividend 
as exempt from gross-basis U.S. tax. Also, subject to certain 
requirements, the RIC was exempt from withholding the gross-
basis tax on such dividends. Similar rules applied with respect 
to the designation of certain short-term capital gain 
dividends. However, these provisions relating to dividends with 
respect to interest income and short-term capital gain of the 
RIC have expired, and therefore do not apply to dividends with 
respect to any taxable year of a RIC beginning after December 
31, 2011.\144\
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    \144\Secs. 871(k), 881(e), 1441(c)(12), and 1441(a).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes it is desirable to extend the 
provision for an additional two years.

                        EXPLANATION OF PROVISION

    The provision extends the rules exempting from gross basis 
tax and from withholding tax the interest-related dividends and 
short-term capital gain dividends received from a RIC, to 
dividends with respect to taxable years of a RIC beginning 
before January 1, 2014.

                             EFFECTIVE DATE

    The provision applies to dividends paid with respect to any 
taxable year of the RIC beginning after December 31, 2011.

21. RIC qualified investment entity treatment under FIRPTA (Sec. 221 of 
        the bill and secs. 897 and 1445 of the Code)

                              PRESENT LAW

    Special U.S. tax rules apply to capital gains of foreign 
persons that are attributable to dispositions of interests in 
U.S. real property. In general, although a foreign person (a 
foreign corporation or a nonresident alien individual) is not 
generally taxed on U.S. source capital gains unless certain 
personal presence or active business requirements are met, a 
foreign person who sells a U.S. real property interest 
(``USRPI'') is subject to tax at the same rates as a U.S. 
person, under the Foreign Investment in Real Property Tax Act 
(``FIRPTA'') provisions codified in section 897 of the Code. 
Withholding tax is also imposed under section 1445.
    A USRPI includes stock or a beneficial interest in any 
domestic corporation unless such corporation has not been a 
U.S. real property holding corporation (as defined) during the 
testing period. A USRPI does not include an interest in a 
domestically controlled ``qualified investment entity.'' A 
distribution from a ``qualified investment entity'' that is 
attributable to the sale of a USRPI is also subject to tax 
under FIRPTA unless the distribution is with respect to an 
interest that is regularly traded on an established securities 
market located in the United States and the recipient foreign 
corporation or nonresident alien individual did not hold more 
than five percent of that class of stock or beneficial interest 
within the one-year period ending on the date of 
distribution.\145\ Special rules apply to situations involving 
tiers of qualified investment entities.
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    \145\Sections 857(b)(3)(F), 852(b)(3)(E), and 871(k)(2)(E) require 
dividend treatment, rather than capital gain treatment, for certain 
distributions to which FIRPTA does not apply by reason of this 
exception. See also section 881(e)(2).
---------------------------------------------------------------------------
    The term ``qualified investment entity'' includes a real 
estate investment trust (``REIT'') and also includes a 
regulated investment company (``RIC'') that meets certain 
requirements, although the inclusion of a RIC in that 
definition does not apply for certain purposes after December 
31, 2011.\146\
---------------------------------------------------------------------------
    \146\Section 897(h).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes it is desirable to extend the 
provision for an additional two years.

                        EXPLANATION OF PROVISION

    The provision extends the inclusion of a RIC within the 
definition of a ``qualified investment entity'' under section 
897 through December 31, 2013, for those situations in which 
that inclusion would otherwise have expired at the end of 2011.

                             EFFECTIVE DATE

    The provision is generally effective on January 1, 2012.
    The provision does not apply with respect to the 
withholding requirement under section 1445 for any payment made 
before the date of enactment, but a RIC that withheld and 
remitted tax under section 1445 on distributions made after 
December 31, 2011 and before the date of enactment is not 
liable to the distributee with respect to such withheld and 
remitted amounts.

22. Exceptions for active financing income (Sec. 222 of the bill and 
        secs. 953 and 954 of the Code)

                              PRESENT LAW

    Under the subpart F rules,\147\ 10-percent-or-greater U.S. 
shareholders of a controlled foreign corporation (``CFC'') are 
subject to U.S. tax currently on certain income earned by the 
CFC, whether or not such income is distributed to the 
shareholders. The income subject to current inclusion under the 
subpart F rules includes, among other things, insurance income 
and foreign base company income. Foreign base company income 
includes, among other things, foreign personal holding company 
income and foreign base company services income (i.e., income 
derived from services performed for or on behalf of a related 
person outside the country in which the CFC is organized).
---------------------------------------------------------------------------
    \147\Secs. 951-964.
---------------------------------------------------------------------------
    Foreign personal holding company income generally consists 
of the following: (1) dividends, interest, royalties, rents, 
and annuities; (2) net gains from the sale or exchange of (a) 
property that gives rise to the preceding types of income, (b) 
property that does not give rise to income, and (c) interests 
in trusts, partnerships, and real estate mortgage investment 
conduits (``REMICs''); (3) net gains from commodities 
transactions; (4) net gains from certain foreign currency 
transactions; (5) income that is equivalent to interest; (6) 
income from notional principal contracts; (7) payments in lieu 
of dividends; and (8) amounts received under personal service 
contracts.
    Insurance income subject to current inclusion under the 
subpart F rules includes any income of a CFC attributable to 
the issuing or reinsuring of any insurance or annuity contract 
in connection with risks located in a country other than the 
CFC's country of organization. Subpart F insurance income also 
includes income attributable to an insurance contract in 
connection with risks located within the CFC's country of 
organization, as the result of an arrangement under which 
another corporation receives a substantially equal amount of 
consideration for insurance of other country risks. Investment 
income of a CFC that is allocable to any insurance or annuity 
contract related to risks located outside the CFC's country of 
organization is taxable as subpart F insurance income.\148\
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    \148\Prop. Treas. Reg. sec. 1.953-1(a).
---------------------------------------------------------------------------
    Temporary exceptions from foreign personal holding company 
income, foreign base company services income, and insurance 
income apply for subpart F purposes for certain income that is 
derived in the active conduct of a banking, financing, or 
similar business, as a securities dealer, or in the conduct of 
an insurance business (so-called ``active financing income'').
    With respect to income derived in the active conduct of a 
banking, financing, or similar business, a CFC is required to 
be predominantly engaged in such business and to conduct 
substantial activity with respect to such business in order to 
qualify for the active financing exceptions. In addition, 
certain nexus requirements apply, which provide that income 
derived by a CFC or a qualified business unit (``QBU'') of a 
CFC from transactions with customers is eligible for the 
exceptions if, among other things, substantially all of the 
activities in connection with such transactions are conducted 
directly by the CFC or QBU in its home country, and such income 
is treated as earned by the CFC or QBU in its home country for 
purposes of such country's tax laws. Moreover, the exceptions 
apply to income derived from certain cross border transactions, 
provided that certain requirements are met. Additional 
exceptions from foreign personal holding company income apply 
for certain income derived by a securities dealer within the 
meaning of section 475 and for gain from the sale of active 
financing assets.
    In the case of a securities dealer, the temporary exception 
from foreign personal holding company income applies to certain 
income. The income covered by the exception is any interest or 
dividend (or certain equivalent amounts) from any transaction, 
including a hedging transaction or a transaction consisting of 
a deposit of collateral or margin, entered into in the ordinary 
course of the dealer's trade or business as a dealer in 
securities within the meaning of section 475. In the case of a 
QBU of the dealer, the income is required to be attributable to 
activities of the QBU in the country of incorporation, or to a 
QBU in the country in which the QBU both maintains its 
principal office and conducts substantial business activity. A 
coordination rule provides that this exception generally takes 
precedence over the exception for income of a banking, 
financing or similar business, in the case of a securities 
dealer.
    In the case of insurance, a temporary exception from 
foreign personal holding company income applies for certain 
income of a qualifying insurance company with respect to risks 
located within the CFC's country of creation or organization. 
In the case of insurance, temporary exceptions from insurance 
income and from foreign personal holding company income also 
apply for certain income of a qualifying branch of a qualifying 
insurance company with respect to risks located within the home 
country of the branch, provided certain requirements are met 
under each of the exceptions. Further, additional temporary 
exceptions from insurance income and from foreign personal 
holding company income apply for certain income of certain CFCs 
or branches with respect to risks located in a country other 
than the United States, provided that the requirements for 
these exceptions are met. In the case of a life insurance or 
annuity contract, reserves for such contracts are determined 
under rules specific to the temporary exceptions. Present law 
also permits a taxpayer in certain circumstances, subject to 
approval by the IRS through the ruling process or in published 
guidance, to establish that the reserve of a life insurance 
company for life insurance and annuity contracts is the amount 
taken into account in determining the foreign statement reserve 
for the contract (reduced by catastrophe, equalization, or 
deficiency reserve or any similar reserve). IRS approval is to 
be based on whether the method, the interest rate, the 
mortality and morbidity assumptions, and any other factors 
taken into account in determining foreign statement reserves 
(taken together or separately) provide an appropriate means of 
measuring income for Federal income tax purposes.

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to extend the 
temporary provisions for an additional two years to provide 
certainty and to allow for business planning.

                        EXPLANATION OF PROVISION

    The provision extends for two years (for taxable years 
beginning before 2014) the present-law temporary exceptions 
from subpart F foreign personal holding company income, foreign 
base company services income, and insurance income for certain 
income that is derived in the active conduct of a banking, 
financing, or similar business, or in the conduct of an 
insurance business.

                             EFFECTIVE DATE

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2011, and for taxable 
years of U.S. shareholders with or within which such taxable 
years of such foreign corporations end.

23. Look-thru treatment of payments between related controlled foreign 
        corporations under foreign personal holding company rules (Sec. 
        223 of the bill and sec. 954(c)(6) of the Code)

                              PRESENT LAW

In general

    The rules of subpart F\149\ require U.S. shareholders with 
a 10-percent or greater interest in a controlled foreign 
corporation (``CFC'') to include certain income of the CFC 
(referred to as ``subpart F income'') on a current basis for 
U.S. tax purposes, regardless of whether the income is 
distributed to the shareholders.
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    \149\Secs. 951-964.
---------------------------------------------------------------------------
    Subpart F income includes foreign base company income. One 
category of foreign base company income is foreign personal 
holding company income. For subpart F purposes, foreign 
personal holding company income generally includes dividends, 
interest, rents, and royalties, among other types of income. 
There are several exceptions to these rules. For example, 
foreign personal holding company income does not include 
dividends and interest received by a CFC from a related 
corporation organized and operating in the same foreign country 
in which the CFC is organized, or rents and royalties received 
by a CFC from a related corporation for the use of property 
within the country in which the CFC is organized. Interest, 
rent, and royalty payments do not qualify for this exclusion to 
the extent that such payments reduce the subpart F income of 
the payor. In addition, subpart F income of a CFC does not 
include any item of income from sources within the United 
States that is effectively connected with the conduct by such 
CFC of a trade or business within the United States (``ECI'') 
unless such item is exempt from taxation (or is subject to a 
reduced rate of tax) pursuant to a tax treaty.

The ``look-thru rule''

    Under the ``look-thru rule'' (sec. 954(c)(6)), dividends, 
interest (including factoring income that is treated as 
equivalent to interest under section 954(c)(1)(E)), rents, and 
royalties received by one CFC from a related CFC are not 
treated as foreign personal holding company income to the 
extent attributable or properly allocable to income of the 
payor that is neither subpart F income nor treated as ECI. For 
this purpose, a related CFC is a CFC that controls or is 
controlled by the other CFC, or a CFC that is controlled by the 
same person or persons that control the other CFC. Ownership of 
more than 50 percent of the CFC's stock (by vote or value) 
constitutes control for these purposes.
    The Secretary is authorized to prescribe regulations that 
are necessary or appropriate to carry out the look-thru rule, 
including such regulations as are appropriate to prevent the 
abuse of the purposes of such rule.
    The look-thru rule is effective for taxable years of 
foreign corporations beginning before January 1, 2012, and for 
taxable years of U.S. shareholders with or within which such 
taxable years of foreign corporations end.

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to extend the 
look-through provision for an additional two years\150\ in 
order to assist the competitiveness of U.S. companies with 
overseas operations.
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    \150\The provision was originally enacted in the Tax Increase 
Prevention and Reconciliation Act of 2005 (Pub. L. No. 109-222), for 
taxable years beginning before January 1, 2009, and extended for one 
year in the Tax Extenders and Alternative Minimum Tax Relief Act of 
2008 (Div. C of Pub. L. No. 110-343). It was most recently extended by 
the Tax Relief, Unemployment Insurance Reauthorization, and Job 
Creation Act of 2010 (Pub. L. No. 111-312) through December 31, 2011.
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                        EXPLANATION OF PROVISION

    The provision extends for two years the application of the 
look-thru rule, to taxable years of foreign corporations 
beginning before January 1, 2014, and for taxable years of U.S. 
shareholders with or within which such taxable years of foreign 
corporations end.

                             EFFECTIVE DATE

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2011, and for taxable 
years of U.S. shareholders with or within which such taxable 
years of foreign corporations end.

24. Exclusion of 100 percent of gain on certain small business stock 
        (Sec. 224 of the bill and sec. 1202 of the Code)

                              PRESENT LAW

In general

    A taxpayer other than a corporation may exclude 50 percent 
(60 percent for certain empowerment zone businesses) of the 
gain from the sale of certain small business stock acquired at 
original issue and held for at least five years.\151\ The 
amount of gain eligible for the exclusion by an individual with 
respect to the stock of any corporation is the greater of (1) 
ten times the taxpayer's basis in the stock or (2) $10 million 
(reduced by the amount of gain eligible for exclusion in prior 
years). To qualify as a small business, when the stock is 
issued, the aggregate gross assets (i.e., cash plus aggregate 
adjusted basis of other property) held by the corporation may 
not exceed $50 million. The corporation also must meet certain 
active trade or business requirements.
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    \151\Sec. 1202.
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    The portion of the gain includible in taxable income is 
taxed at a maximum rate of 28 percent under the regular 
tax.\152\ A percentage of the excluded gain is an alternative 
minimum tax preference;\153\ the portion of the gain includible 
in alternative minimum taxable income is taxed at a maximum 
rate of 28 percent under the alternative minimum tax.
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    \152\Sec. 1(h).
    \153\Sec. 57(a)(7). In the case of qualified small business stock, 
the percentage of gain excluded from gross income which is an 
alternative minimum tax preference is (i) seven percent in the case of 
stock disposed of in a taxable year beginning before 2013; (ii) 42 
percent in the case of stock acquired before January 1, 2001, and 
disposed of in a taxable year beginning after 2012; and (iii) 28 
percent in the case of stock acquired after December 31, 2000, and 
disposed of in a taxable year beginning after 2012.
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    Gain from the sale of qualified small business stock 
generally is taxed at effective rates of 14 percent under the 
regular tax\154\ and (i) 14.98 percent under the alternative 
minimum tax for dispositions in a taxable year beginning before 
January 1, 2013; (ii) 19.88 percent under the alternative 
minimum tax for dispositions in a taxable year beginning after 
December 31, 2012, in the case of stock acquired before January 
1, 2001; and (iii) 17.92 percent under the alternative minimum 
tax for dispositions in a taxable year beginning after December 
31, 2012, in the case of stock acquired after December 31, 
2000.\155\
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    \154\The 50 percent of gain included in taxable income is taxed at 
a maximum rate of 28 percent.
    \155\The amount of gain included in alternative minimum tax is 
taxed at a maximum rate of 28 percent. The amount so included is the 
sum of (i) 50 percent (the percentage included in taxable income) of 
the total gain and (ii) the applicable preference percentage of the 
one-half gain that is excluded from taxable income.
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Special rules for certain stock issued in 2009, 2010, and 2011

    For stock issued after February 17, 2009, and before 
September 28, 2010, the percentage exclusion for qualified 
small business stock sold by an individual is increased to 75 
percent.
    As a result of the increased exclusion, gain from the sale 
of qualified small business stock to which the provision 
applies is taxed at maximum effective rates of seven percent 
under the regular tax\156\ and 12.88 percent under the 
AMT.\157\
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    \156\The 25 percent of gain included in taxable income is taxed at 
a maximum rate of 28 percent.
    \157\The 46 percent of gain included in AMTI is taxed at a maximum 
rate of 28 percent. Forty-six percent is the sum of 25 percent (the 
percentage of total gain included in taxable income) plus 21 percent 
(the percentage of total gain which is an alternative minimum tax 
preference).
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    For stock issued after September 27, 2010, and before 
January 1, 2012, the percentage exclusion for qualified small 
business stock sold by an individual is increased to 100 
percent and the minimum tax preference does not apply.

Rollover of gain

    An individual may elect to rollover gain from the sale of 
qualified small business stock held more than six months where 
other qualified small business stock is purchased during the 
60-day period beginning on the date of sale.\158\ The holding 
period for the replacement stock includes the period the 
original stock was held.\159\
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    \158\Sec. 1045.
    \159\Sec. 1223(13). Under present law, it is unclear whether the 
tacked-holding period applies for purposes of determining when the 
replacement stock was acquired for purposes of determining the 
exclusion percentage. One commentator has suggested ``it appears that 
1223(13)'s tacked-holding-period should apply for this latter purpose 
[i.e., determining the date the replacement stock was acquired] as 
well.'' Ginsburg, Levin, and Rocap, Mergers, Acquisitions, and Buyouts, 
p. 2-399 (Feb. 2012).
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                           REASONS FOR CHANGE

    The Committee believes that extending the increased 
exclusion and the elimination of the minimum tax preference for 
small business stock gain will encourage and reward investment 
in qualified small business stock.

                        EXPLANATION OF PROVISION

    The provision extends the 100-percent exclusion and the 
exception from minimum tax preference treatment for two years 
(for stock acquired before January 1, 2014).
    The provision clarifies that in the case of any stock 
acquired (determined without regard to the tacked-holding 
period) after February 17, 2009, and before January 1, 2014, 
the date of acquisition for purposes of determining the 
exclusion percentage is the date the holding period for the 
stock begins. Thus, for example, if an individual (i) acquires 
qualified small business stock at its original issue for $1 
million on July 1, 2006, (ii) sells the stock on March 1, 2012, 
for $2 million in a transaction in which gain is not recognized 
by reason of section 1045, (iii) acquires qualified replacement 
stock at its original issue on March 15, 2012, for $2 million, 
and (iv) sells the replacement stock for $3 million, 50 percent 
of the $2 million gain on the sale of the replacement stock is 
excluded from gross income.\160\
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    \160\This example assumes all the requirements of section 1202 are 
met with respect to the original stock and the replacement stock.
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                             EFFECTIVE DATE

    The provision is generally effective for stock acquired 
after December 31, 2011.
    The clarification applies to stock acquired after February 
17, 2009.

25. Basis adjustment to stock of S corporations making charitable 
        contributions of property (Sec. 225 of the bill and sec. 1367 
        of the Code)

                              PRESENT LAW

    Under present law, if an S corporation contributes money or 
other property to a charity, each shareholder takes into 
account the shareholder's pro rata share of the contribution in 
determining its own income tax liability.\161\ A shareholder of 
an S corporation reduces the basis in the stock of the S 
corporation by the amount of the charitable contribution that 
flows through to the shareholder.\162\
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    \161\Sec. 1366(a)(1)(A).
    \162\Sec. 1367(a)(2)(B).
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    In the case of contributions made in taxable years 
beginning before January 1, 2012, the amount of a shareholder's 
basis reduction in the stock of an S corporation by reason of a 
charitable contribution made by the corporation is equal to the 
shareholder's pro rata share of the adjusted basis of the 
contributed property. For contributions made in taxable years 
beginning after December 31, 2011, the amount of the reduction 
is the shareholder's pro rata share of the fair market value of 
the contributed property.

                           REASONS FOR CHANGE

    The Committee believes that the treatment of contributions 
of property by S corporations that applied to contributions 
made in certain taxable years beginning before January 1, 2012, 
is appropriate and should be extended.

                        EXPLANATION OF PROVISION

    The provision extends the rule relating to the basis 
reduction on account of charitable contributions of property 
for two years to contributions made in taxable years beginning 
before January 1, 2014.

                             EFFECTIVE DATE

    The provision applies to contributions made in taxable 
years beginning after December 31, 2011.

26. Reduction in recognition period for S corporation built-in gains 
        tax (Sec. 226 of the bill and sec. 1374 of the Code)

                              PRESENT LAW

    A ``small business corporation'' (as defined in section 
1361(b)) may elect to be treated as an S corporation. Unlike C 
corporations, S corporations generally pay no corporate-level 
tax. Instead, items of income and loss of an S corporation pass 
through to its shareholders. Each shareholder takes into 
account separately its share of these items on its individual 
income tax return.\163\
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    \163\Sec. 1366.
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    Under section 1374, a corporate level built-in gains tax, 
at the highest marginal rate applicable to corporations 
(currently 35 percent), is imposed on an S corporation's net 
recognized built-in gain\164\ that arose prior to the 
conversion of the C corporation to an S corporation and is 
recognized by the S corporation during the recognition period, 
i.e., the 10-year period beginning with the first day of the 
first taxable year for which the S election is in effect.\165\ 
If the taxable income of the S corporation is less than the 
amount of net recognized built-in gain in the year such built-
in gain is recognized (for example, because of post- conversion 
losses), no tax under section 1374 is imposed on the excess of 
such built-in gain over taxable income for that year. However 
the untaxed excess of net recognized built-in gain over taxable 
income for that year is treated as recognized built-in gain in 
the succeeding taxable year.\166\ Treasury regulations provide 
that if a corporation sells an asset before or during the 
recognition period and reports the income from the sale using 
the installment method under section 453 during or after the 
recognition period, that income is subject to tax under section 
1374.\167\
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    \164\Certain built-in income items are treated as recognized built-
in gain for this purpose. Sec. 1374(d)(5).
    \165\Sec. 1374(d)(7)(A). The 10-year period refers to ten calendar 
years from the first day of the first taxable year for which the 
corporation was an S corporation. A regulated investment company (RIC) 
or a real estate investment trust (REIT) that was formerly a C 
corporation (or that acquired assets from a C corporation) may elect to 
be subject to the rules of section 1374 ``as if the RIC or REIT were an 
S corporation.'' Treas. Reg. sec. 1.337(d)-7(b)(1).
    \166\Sec. 1374(d)(2).
    \167\Treas. Reg. sec. 1.1374-4(h).
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    Under a temporary rule, for any taxable year beginning in 
2009 and 2010, no tax was imposed on an S corporation under 
section 1374 if the seventh taxable year in the corporation's 
recognition period preceded such taxable year.\168\ Thus, with 
respect to gain that arose prior to the conversion of a C 
corporation to an S corporation, for taxable years beginning in 
2009 and 2010, no tax was imposed under section 1374 after the 
seventh taxable year the S corporation election was in effect. 
For any taxable year beginning in 2011, a similar rule applied, 
substituting 5 years for 7 years.
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    \168\Sec. 1374(d)(7)(B).
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    The built-in gain tax also applies to net recognized built-
in gain attributable to any asset received by an S corporation 
from a C corporation in a transaction in which the S 
corporation's basis in the asset is determined (in whole or in 
part) by reference to the basis of such asset (or other 
property) in the hands of the C corporation.\169\ In the case 
of built-in gain attributable to an asset received by an S 
corporation from a C corporation in such a transaction, the 
recognition period rules are applied by substituting the date 
such asset was acquired by the S corporation in lieu of the 
beginning of the first taxable year for which the corporation 
was an S corporation.\170\
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    \169\Sec. 1374(d)(8). With respect to such assets, the recognition 
period runs from the day on which such assets were acquired (in lieu of 
the beginning of the first taxable year for which the corporation was 
an S corporation). Sec. 1374(d)(8)(B).
    \170\Shareholders continue to take into account all items of gain 
and loss under section 1366.
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    The amount of the built-in gain tax under section 1374 is 
treated as a loss taken into account by the shareholders in 
computing their individual income tax.\171\
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    \171\Sec. 1366(f)(2).
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                           REASONS FOR CHANGE

    The Committee believes it is desirable to continue to 
provide a shortened period for purposes of the built-in gain 
tax, for an additional 2 years. The bill also makes technical 
changes to insure the provision operates as intended.

                        EXPLANATION OF PROVISION

    For dispositions of property in taxable years beginning in 
2012 and 2013, the provision applies the term ``recognition 
period'' in section 1374, for purposes of computing the built-
in gain tax, by substituting a five-year period\172\ for the 
otherwise applicable 10-year period. Thus, for such 
dispositions, the recognition period is the 5-year period 
beginning with the first day of the first taxable year for 
which the corporation was an S corporation (or beginning with 
the date of acquisition of assets if the rules applicable to 
assets acquired from a C corporation apply). Thus, in the case 
of a C corporation that elects S status, if property is 
disposed of in a taxable year beginning in 2012 or 2013 more 
than five years after the first day of the first taxable year 
the corporation was an S corporation, gain or loss on the 
disposition will not be taken into account in computing the net 
recognized built-in gain.
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    \172\The five-year period refers to five calendar years from the 
first day of the first taxable year for which the corporation was an S 
corporation.
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    A technical amendment, addressing the temporary period of 
the new rule, provides that the rule requiring the excess of 
net recognized built-in gain over taxable income for a taxable 
year to be carried forward and treated as recognized built-in 
gain in the succeeding taxable year applies only to gain 
recognized within the recognition period. Thus, for example, 
built-in gain recognized in a taxable year beginning in 2013, 
from a disposition in that year that occurs beyond the end of 
the temporary 5-year recognition period, will not be carried 
forward under the income limitation rule and treated as 
recognized built-in gain in the taxable year beginning in 2014 
(after the temporary provision has expired and the recognition 
period is again 10 years).
    It is intended that under the provision Treasury 
regulations providing for the treatment of installment sales 
(as well as other Treasury regulations under section 1374) will 
continue to apply for taxable years beginning in 2012 and 2013 
in the same manner as under the law in effect for taxable years 
beginning prior to 2009, but applying the temporary 5-year 
recognition period in place of the 10-year recognition period 
in the case of dispositions of property during the temporary 
period. Thus, for example, if a corporation sold an asset in 
2008 in a sale occurring on or before the recognition period in 
effect at that time, and reported the gain using the 
installment method under section 453, gain recognized under 
that method in 2012 or 2013 (including, for example, any gain 
under section 453B from a disposition of the installment 
obligation in those years)\173\ is subject to 1374 tax. On the 
other hand, if a corporation sold an asset in a taxable year 
beginning in 2012 or 2013, and the sale occurred beyond the end 
of the then-effective 5-year recognition period (but not beyond 
the end of the otherwise applicable 10-year recognition 
period), then gain reported using the installment method under 
section 453 in a taxable year beginning in 2014 (after the 
temporary provision expires) is not subject to tax under 
section 1374, because the sale was made after the end of the 
recognition period applicable to that sale.
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    \173\Section 453B requires gain or loss to be recognized on 
disposition of an installment obligation and treated as gain or loss 
resulting from the sale or exchange of the property in respect of which 
the installment obligation was received.
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                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2011.

27. Empowerment zone tax incentives (Sec. 227 of the bill and secs. 
        1202 and 1391 of the Code)

                              PRESENT LAW

    The Omnibus Budget Reconciliation Act of 1993 (``OBRA 
93'')\174\ authorized the designation of nine empowerment zones 
(``Round I empowerment zones'') to provide tax incentives for 
businesses to locate within certain targeted areas\175\ 
designated by the Secretaries of the Department of Housing and 
Urban Development (``HUD'') and the U.S Department of 
Agriculture (``USDA''). The Taxpayer Relief Act of 1997\176\ 
authorized the designation of two additional Round I urban 
empowerment zones, and 20 additional empowerment zones (``Round 
II empowerment zones''). The Community Renewal Tax Relief Act 
of 2000 (``2000 Community Renewal Act'')\177\ authorized a 
total of ten new empowerment zones (``Round III empowerment 
zones''), bringing the total number of authorized empowerment 
zones to 40.\178\ In addition, the 2000 Community Renewal Act 
conformed the tax incentives that are available to businesses 
in the Round I, Round II, and Round III empowerment zones, and 
extended the empowerment zone incentives through December 31, 
2009.\179\ The Tax Relief, Unemployment Insurance 
Reauthorization, and Job Creation Act of 2010 extended the 
empowerment zone incentives through December 31, 2011.\180\
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    \174\Pub. L. No. 103-66.
    \175\The targeted areas are those that have pervasive poverty, high 
unemployment, and general economic distress, and that satisfy certain 
eligibility criteria, including specified poverty rates and population 
and geographic size limitations.
    \176\Pub. L. No. 105-34.
    \177\Pub. L. No. 106-554.
    \178\The urban part of the program is administered by the HUD and 
the rural part of the program is administered by the USDA. The eight 
Round I urban empowerment zones are Atlanta, GA; Baltimore, MD; 
Chicago, IL; Cleveland, OH; Detroit, MI; Los Angeles, CA; New York, NY; 
and Philadelphia, PA/Camden, NJ. Atlanta relinquished its empowerment 
zone designation in Round III. The three Round I rural empowerment 
zones are Kentucky Highlands, KY; Mid-Delta, MI; and Rio Grande Valley, 
TX. The 15 Round II urban empowerment zones are Boston, MA; Cincinnati, 
OH; Columbia, SC; Columbus, OH; Cumberland County, NJ; El Paso, TX; 
Gary/Hammond/East Chicago, IN; Ironton, OH/Huntington, WV; Knoxville, 
TN; Miami/Dade County, FL; Minneapolis, MN; New Haven, CT; Norfolk/
Portsmouth, VA; Santa Ana, CA; and St. Louis, Missouri/East St. Louis, 
IL. The five Round II rural empowerment zones are Desert Communities, 
CA; Griggs-Steele, ND; Oglala Sioux Tribe, SD; Southernmost Illinois 
Delta, IL; and Southwest Georgia United, GA. The eight Round III urban 
empowerment zones are Fresno, CA; Jacksonville, FL; Oklahoma City, OK; 
Pulaski County, AR; San Antonio, TX; Syracuse, NY; Tucson, AZ; and 
Yonkers, NY. The two Round III rural empowerment zones are Aroostook 
County, ME; and Futuro, TX.
    \179\If an empowerment zone designation were terminated prior to 
December 31, 2009, the tax incentives would cease to be available as of 
the termination date.
    \180\Pub. L. No. 111-312.
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    The tax incentives available within the designated 
empowerment zones include a Federal income tax credit for 
employers who hire qualifying employees, accelerated 
depreciation deductions on qualifying equipment, tax-exempt 
bond financing, deferral of capital gains tax on sale of 
qualified assets sold and replaced, and partial exclusion of 
capital gains tax on certain sales of qualified small business 
stock.
    The following is a description of the tax incentives.

Wage credit

    A 20-percent wage credit is available to employers for the 
first $15,000 of qualified wages paid to each employee (i.e., a 
maximum credit of $3,000 with respect to each qualified 
employee) who (1) is a resident of the empowerment zone, and 
(2) performs substantially all employment services within the 
empowerment zone in a trade or business of the employer.\181\
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    \181\Sec. 1396. The $15,000 limit is annual, not cumulative such 
that the limit is the first $15,000 of wages paid in a calendar year 
which ends with or within the taxable year.
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    The wage credit rate applies to qualifying wages paid 
before January 1, 2012. Wages paid to a qualified employee who 
earns more than $15,000 are eligible for the wage credit 
(although only the first $15,000 of wages is eligible for the 
credit). The wage credit is available with respect to a 
qualified full-time or part-time employee (employed for at 
least 90 days), regardless of the number of other employees who 
work for the employer. In general, any taxable business 
carrying out activities in the empowerment zone may claim the 
wage credit, regardless of whether the employer meets the 
definition of an ``enterprise zone business.''\182\
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    \182\Secs. 1397C(b) and 1397C(c). However, the wage credit is not 
available for wages paid in connection with certain business activities 
described in section 144(c)(6)(B), including a golf course, country 
club, massage parlor, hot tub facility, suntan facility, racetrack, or 
liquor store, or certain farming activities. In addition, wages are not 
eligible for the wage credit if paid to: (1) a person who owns more 
than five percent of the stock (or capital or profits interests) of the 
employer, (2) certain relatives of the employer, or (3) if the employer 
is a corporation or partnership, certain relatives of a person who owns 
more than 50 percent of the business.
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    An employer's deduction otherwise allowed for wages paid is 
reduced by the amount of wage credit claimed for that taxable 
year.\183\ Wages are not to be taken into account for purposes 
of the wage credit if taken into account in determining the 
employer's work opportunity tax credit under section 51 or the 
welfare-to-work credit under section 51A.\184\ In addition, the 
$15,000 cap is reduced by any wages taken into account in 
computing the work opportunity tax credit or the welfare-to-
work credit.\185\ The wage credit may be used to offset up to 
25 percent of alternative minimum tax liability.\186\
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    \183\Sec. 280C(a).
    \184\Secs. 1396(c)(3)(A) and 51A(d)(2).
    \185\Secs. 1396(c)(3)(B) and 51A(d)(2).
    \186\Sec. 38(c)(2).
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Increased section 179 expensing limitation

    An enterprise zone business is allowed an additional 
$35,000 of section 179 expensing (for a total of up to $535,000 
in 2010 and 2011)\187\ for qualified zone property placed in 
service before January 1, 2012.\188\ The section 179 expensing 
allowed to a taxpayer is phased out by the amount by which 50 
percent of the cost of qualified zone property placed in 
service during the year by the taxpayer exceeds 
$2,000,000.\189\ The term ``qualified zone property'' is 
defined as depreciable tangible property (including buildings) 
provided that (i) the property is acquired by the taxpayer 
(from an unrelated party) after the designation took effect, 
(ii) the original use of the property in an empowerment zone 
commences with the taxpayer, and (iii) substantially all of the 
use of the property is in an empowerment zone in the active 
conduct of a trade or business by the taxpayer. Special rules 
are provided in the case of property that is substantially 
renovated by the taxpayer.
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    \187\The Small Business Jobs Act of 2010, Pub. L. No. 111-240, sec. 
2021.
    \188\Secs. 1397A, 1397D.
    \189\Sec. 1397A(a)(2), 179(b)(2). For 2012 the limit is $500,000. 
For taxable years beginning after 2012, the limit is $200,000.
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    An enterprise zone business means any qualified business 
entity and any qualified proprietorship. A qualified business 
entity means, any corporation or partnership if for such year: 
(1) every trade or business of such entity is the active 
conduct of a qualified business within an empowerment zone; (2) 
at least 50 percent of the total gross income of such entity is 
derived from the active conduct of such business; (3) a 
substantial portion of the use of the tangible property of such 
entity (whether owned or leased) is within an empowerment zone; 
(4) a substantial portion of the intangible property of such 
entity is used in the active conduct of any such business; (5) 
a substantial portion of the services performed for such entity 
by its employees are performed in an empowerment zone; (6) at 
least 35 percent of its employees are residents of an 
empowerment zone; (7) less than five percent of the average of 
the aggregate unadjusted bases of the property of such entity 
is attributable to collectibles other than collectibles that 
are held primarily for sale to customers in the ordinary course 
of such business; and (8) less than five percent of the average 
of the aggregate unadjusted bases of the property of such 
entity is attributable to nonqualified financial property.\190\
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    \190\Sec. 1397C(b).
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    A qualified proprietorship is any qualified business 
carried on by an individual as a proprietorship if for such 
year: (1) at least 50 percent of the total gross income of such 
individual from such business is derived from the active 
conduct of such business in an empowerment zone; (2) a 
substantial portion of the use of the tangible property of such 
individual in such business (whether owned or leased) is within 
an empowerment zone; (3) a substantial portion of the 
intangible property of such business is used in the active 
conduct of such business; (4) a substantial portion of the 
services performed for such individual in such business by 
employees of such business are performed in an empowerment 
zone; (5) at least 35 percent of such employees are residents 
of an empowerment zone; (6) less than five percent of the 
average of the aggregate unadjusted bases of the property of 
such individual which is used in such business is attributable 
to collectibles other than collectibles that are held primarily 
for sale to customers in the ordinary course of such business; 
and (7) less than five percent of the average of the aggregate 
unadjusted bases of the property of such individual which is 
used in such business is attributable to nonqualified financial 
property.\191\
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    \191\Sec. 1397C(c).
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    A qualified business is defined as any trade or business 
other than a trade or business that consists predominantly of 
the development or holding of intangibles for sale or license 
or any business prohibited in connection with the employment 
credit.\192\ In addition, the leasing of real property that is 
located within the empowerment zone is treated as a qualified 
business only if (1) the leased property is not residential 
property, and (2) at least 50 percent of the gross rental 
income from the real property is from enterprise zone 
businesses. The rental of tangible personal property is not a 
qualified business unless at least 50 percent of the rental of 
such property is by enterprise zone businesses or by residents 
of an empowerment zone.
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    \192\Sec. 1397C(d). Excluded businesses include any private or 
commercial golf course, country club, massage parlor, hot tub facility, 
sun tan facility, racetrack, or other facility used for gambling or any 
store the principal business of which is the sale of alcoholic 
beverages for off-premises consumption. Sec. 144(c)(6).
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Expanded tax-exempt financing for certain zone facilities

    States or local governments can issue enterprise zone 
facility bonds to raise funds to provide an enterprise zone 
business with qualified zone property.\193\ These bonds can be 
used in areas designated enterprise communities as well as 
areas designated empowerment zones. To qualify, 95 percent (or 
more) of the net proceeds from the bond issue must be used to 
finance: (1) qualified zone property whose principal user is an 
enterprise zone business, and (2) certain land functionally 
related and subordinate to such property.
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    \193\Sec. 1394.
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    The term enterprise zone business is the same as that used 
for purposes of the increased section 179 deduction limitation 
(discussed above) with certain modifications for start-up 
businesses. First, a business will be treated as an enterprise 
zone business during a start-up period if (1) at the beginning 
of the period, it is reasonable to expect the business to be an 
enterprise zone business by the end of the start-up period, and 
(2) the business makes bona fide efforts to be an enterprise 
zone business. The start-up period is the period that ends with 
the start of the first tax year beginning more than two years 
after the later of (1) the issue date of the bond issue 
financing the qualified zone property, and (2) the date this 
property is first placed in service (or, if earlier, the date 
that is three years after the issue date).\194\
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    \194\Sec. 1394(b)(3).
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    Second, a business that qualifies as at the end of the 
start-up period must continue to qualify during a testing 
period that ends three tax years after the start-up period 
ends. After the three-year testing period, a business will 
continue to be treated as an enterprise zone business as long 
as 35 percent of its employees are residents of an empowerment 
zone or enterprise community.
    The face amount of the bonds may not exceed $60 million for 
an empowerment zone in a rural area, $130 million for an 
empowerment zone in an urban area with zone population of less 
than 100,000, and $230 million for an empowerment zone in an 
urban area with zone population of at least 100,000.

Elective roll over of capital gain from the sale or exchange of any 
        qualified empowerment zone asset

    Taxpayers can elect to defer recognition of gain on the 
sale of a qualified empowerment zone asset\195\ held for more 
than one year and replaced within 60 days by another qualified 
empowerment zone asset in the same zone.\196\ The deferral is 
accomplished by reducing the basis of the replacement asset by 
the amount of the gain recognized on the sale of the asset.
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    \195\The term ``qualified empowerment zone asset'' means any 
property which would be a qualified community asset (as defined in 
section 1400F, relating to certain tax benefits for renewal 
communities) if in section 1400F: (i) references to empowerment zones 
were substituted for references to renewal communities, (ii) references 
to enterprise zone businesses (as defined in section 1397C) were 
substituted for references to renewal community businesses, and (iii) 
the date of the enactment of this paragraph were substituted for 
``December 31, 2001'' each place it appears. Sec. 1397B(b)(1)(A).
    A ``qualified community asset'' includes: (1) qualified community 
stock (meaning original-issue stock purchased for cash in an enterprise 
zone business), (2) a qualified community partnership interest (meaning 
a partnership interest acquired for cash in an enterprise zone 
business), and (3) qualified community business property (meaning 
tangible property originally used in a enterprise zone business by the 
taxpayer) that is purchased or substantially improved after the date of 
the enactment of this paragraph.
    For the definition of ``enterprise zone business,'' see text 
accompanying supra note 190. For the definition of ``qualified 
business,'' see text accompanying supra note 190.
    \196\Sec. 1397B.
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Partial exclusion of capital gains on certain small business stock

    Generally, individuals may exclude a percentage of gain 
from the sale of certain small business stock acquired at 
original issue and held at least five years.\197\ For stock 
acquired prior to February 18, 2009, or after December 31, 
2011, the percentage is generally 50 percent, except that for 
empowerment zone stock the percentage is 60 percent. For stock 
acquired after February 17, 2009, and before January 1, 2012, a 
higher percentage applies to all small business stock with no 
additional percentage for empowerment zone stock.\198\
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    \197\Sec. 1202.
    \198\Section 224 of the bill extends the higher percentage for two 
years (for stock acquired before January 1, 2014). For a more detailed 
description of the present law exclusion, see the explanation in this 
report to that section of the bill.
---------------------------------------------------------------------------

Other tax incentives

    Other incentives not specific to empowerment zones but 
beneficial to these areas include the work opportunity tax 
credit for employers based on the first year of employment of 
certain targeted groups, including empowerment zone residents 
(up to $2,400 per employee), and qualified zone academy bonds 
for certain public schools located in an empowerment zone, or 
expected (as of the date of bond issuance) to have at least 35 
percent of its students receiving free or reduced lunches.

                           REASONS FOR CHANGE

    The Committee believes that it continues to be important to 
provide tax incentives to individuals and businesses in 
empowerment zones and that it is appropriate to extend such 
incentives for an additional two years.

                        EXPLANATION OF PROVISION

    The provision extends for two years, through December 31, 
2013, the period for which the designation of an empowerment 
zone is in effect, thus extending for two years the empowerment 
zone tax incentives, including the wage credit, increased 
section 179 expensing for qualifying equipment, tax-exempt bond 
financing, and deferral of capital gains tax on sale of 
qualified assets replaced with other qualified assets.
    The provision extends for two years, through December 31, 
2018, the period for which the percentage exclusion for 
qualified small business stock (of a corporation which is a 
qualified business entity) acquired on or before February 17, 
2009 is 60 percent. Gain attributable to periods after December 
31, 2018 for qualified small business stock acquired on or 
before February 17, 2009 or after December 31, 2013 is subject 
to the general rule which provides for a percentage exclusion 
of 50 percent.

                             EFFECTIVE DATE

    The provision relating to the designation of an empowerment 
zone and the provision relating to the exclusion of gain from 
the sale or exchange of qualified small business stock held for 
more than five years applies to periods after December 31, 
2011.

28. New York Liberty Zone tax-exempt bond financing (Sec. 228 of the 
        bill and sec. 1400L of the Code)

                              PRESENT LAW

    An aggregate of $8 billion in tax-exempt private activity 
bonds is authorized for the purpose of financing the 
construction and repair of infrastructure in New York City 
(``Liberty Zone bonds''). The bonds must be issued before 
January 1, 2012.

                           REASONS FOR CHANGE

    The Committee believes that one additional extension will 
enable these bonds to be issued.

                        EXPLANATION OF PROVISION

    The provision extends authority to issue Liberty Zone bonds 
for two years (through December 31, 2013).

                             EFFECTIVE DATE

    The provision is effective for bonds issued after December 
31, 2011.

29. Extension of temporary increase in limit on cover over of rum 
        excise taxes to Puerto Rico and the Virgin Islands (Sec. 229 of 
        the bill and sec. 7652(f) of the Code)

                              PRESENT LAW

    A $13.50 per proof gallon\199\ excise tax is imposed on 
distilled spirits produced in or imported into the United 
States.\200\ The excise tax does not apply to distilled spirits 
that are exported from the United States, including exports to 
U.S. possessions (e.g., Puerto Rico and the Virgin 
Islands).\201\
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    \199\A proof gallon is a liquid gallon consisting of 50 percent 
alcohol. See sec. 5002(a)(10) and (11).
    \200\Sec. 5001(a)(1).
    \201\Secs. 5214(a)(1)(A), 5002(a)(15), 7653(b) and (c).
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    The Code provides for cover over (payment) to Puerto Rico 
and the Virgin Islands of the excise tax imposed on rum 
imported (or brought) into the United States, without regard to 
the country of origin.\202\ The amount of the cover over is 
limited under Code section 7652(f) to $10.50 per proof gallon 
($13.25 per proof gallon before January 1, 2012).
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    \202\Secs. 7652(a)(3), (b)(3), and (e)(1). One percent of the 
amount of excise tax collected from imports into the United States of 
articles produced in the Virgin Islands is retained by the United 
States under section 7652(b)(3).
---------------------------------------------------------------------------
    Tax amounts attributable to shipments to the United States 
of rum produced in Puerto Rico are covered over to Puerto Rico. 
Tax amounts attributable to shipments to the United States of 
rum produced in the Virgin Islands are covered over to the 
Virgin Islands. Tax amounts attributable to shipments to the 
United States of rum produced in neither Puerto Rico nor the 
Virgin Islands are divided and covered over to the two 
possessions under a formula.\203\ Amounts covered over to 
Puerto Rico and the Virgin Islands are deposited into the 
treasuries of the two possessions for use as those possessions 
determine.\204\ All of the amounts covered over are subject to 
the limitation.
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    \203\Sec. 7652(e)(2).
    \204\Secs. 7652(a)(3), (b)(3), and (e)(1).
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                           REASONS FOR CHANGE

    The Committee believes that the needs of Puerto Rico and 
the Virgin Islands justify the extension of the cover over 
amount of $13.25 per gallon through December 31, 2013.

                        EXPLANATION OF PROVISION

    The provision suspends for two years the $10.50 per proof 
gallon limitation on the amount of excise taxes on rum covered 
over to Puerto Rico and the Virgin Islands. Under the 
provision, the cover over limitation of $13.25 per proof gallon 
is extended for rum brought into the United States after 
December 31, 2011 and before January 1, 2014. After December 
31, 2013, the cover over amount reverts to $10.50 per proof 
gallon.

                             EFFECTIVE DATE

    The provision is effective for articles brought into the 
United States after December 31, 2011.

30. Extension and Modification of American Samoa Economic Development 
        Credit (Sec. 230 of the bill and sec. 119 of Pub. L. No. 109-
        432)

                              PRESENT LAW

    A domestic corporation that was an existing credit claimant 
with respect to American Samoa and that elected the application 
of section 936 for its last taxable year beginning before 
January 1, 2006 is allowed a credit based on the corporation's 
economic activity-based limitation with respect to American 
Samoa. The credit is not part of the Code but is computed based 
on the rules of sections 30A and 936. The credit is allowed for 
the first six taxable years of a corporation that begin after 
December 31, 2005, and before January 1, 2012.
    A corporation was an existing credit claimant with respect 
to a American Samoa if (1) the corporation was engaged in the 
active conduct of a trade or business within American Samoa on 
October 13, 1995, and (2) the corporation elected the benefits 
of the possession tax credit\205\ in an election in effect for 
its taxable year that included October 13, 1995.\206\ A 
corporation that added a substantial new line of business 
(other than in a qualifying acquisition of all the assets of a 
trade or business of an existing credit claimant) ceased to be 
an existing credit claimant as of the close of the taxable year 
ending before the date on which that new line of business was 
added.
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    \205\For taxable years beginning before January 1, 2006, certain 
domestic corporations with business operations in the U.S. possessions 
were eligible for the possession tax credit. Secs. 27(b), 936. This 
credit offset the U.S. tax imposed on certain income related to 
operations in the U.S. possessions. Subject to certain limitations, the 
amount of the possession tax credit allowed to any domestic corporation 
equaled the portion of that corporation's U.S. tax that was 
attributable to the corporation's non-U.S. source taxable income from 
(1) the active conduct of a trade or business within a U.S. possession, 
(2) the sale or exchange of substantially all of the assets that were 
used in such a trade or business, or (3) certain possessions 
investment. No deduction or foreign tax credit was allowed for any 
possessions or foreign tax paid or accrued with respect to taxable 
income that was taken into account in computing the credit under 
section 936.
    Under the economic activity-based limit, the amount of the credit 
could not exceed an amount equal to the sum of (1) 60 percent of the 
taxpayer's qualified possession wages and allocable employee fringe 
benefit expenses, (2) 15 percent of depreciation allowances with 
respect to short-life qualified tangible property, plus 40 percent of 
depreciation allowances with respect to medium-life qualified tangible 
property, plus 65 percent of depreciation allowances with respect to 
long-life qualified tangible property, and (3) in certain cases, a 
portion of the taxpayer's possession income taxes. A taxpayer could 
elect, instead of the economic activity-based limit, a limit equal to 
the applicable percentage of the credit that otherwise would have been 
allowable with respect to possession business income, beginning in 
1998, the applicable percentage was 40 percent.
    To qualify for the possession tax credit for a taxable year, a 
domestic corporation was required to satisfy two conditions. First, the 
corporation was required to derive at least 80 percent of its gross 
income for the three-year period immediately preceding the close of the 
taxable year from sources within a possession. Second, the corporation 
was required to derive at least 75 percent of its gross income for that 
same period from the active conduct of a possession business. Sec. 
936(a)(2). The section 936 credit generally expired for taxable years 
beginning after December 31, 2005.
    \206\A corporation will qualify as an existing credit claimant if 
it acquired all the assets of a trade or business of a corporation that 
(1) actively conducted that trade or business in a possession on 
October 13, 1995, and (2) had elected the benefits of the possession 
tax credit in an election in effect for the taxable year that included 
October 13, 1995.
---------------------------------------------------------------------------
    The amount of the credit allowed to a qualifying domestic 
corporation under the provision is equal to the sum of the 
amounts used in computing the corporation's economic activity-
based limitation with respect to American Samoa, except that no 
credit is allowed for the amount of any American Samoa income 
taxes. Thus, for any qualifying corporation the amount of the 
credit equals the sum of (1) 60 percent of the corporation's 
qualified American Samoa wages and allocable employee fringe 
benefit expenses and (2) 15 percent of the corporation's 
depreciation allowances with respect to short-life qualified 
American Samoa tangible property, plus 40 percent of the 
corporation's depreciation allowances with respect to medium-
life qualified American Samoa tangible property, plus 65 
percent of the corporation's depreciation allowances with 
respect to long-life qualified American Samoa tangible 
property.
    The section 936(c) rule denying a credit or deduction for 
any possessions or foreign tax paid with respect to taxable 
income taken into account in computing the credit under section 
936 does not apply with respect to the credit allowed by the 
provision.
    The credit applies to the first six taxable years of a 
taxpayer which begin after December 31, 2005, and before 
January 1, 2012.

                           REASONS FOR CHANGE

    The Committee believes that, notwithstanding expiration of 
the Puerto Rico and possession tax credit for taxable years 
beginning after 2005, the U.S. Federal tax law should encourage 
economic activity in American Samoa. The Committee believes 
that a tax incentive for economic activity in American Samoa 
should be available to some domestic corporations that did not 
claim the possession tax credit but that a domestic 
corporation, whether or not an existing credit claimant, should 
be eligible for the incentive only if it has manufacturing 
income in American Samoa. Consequently, the Committee believes 
it is appropriate to extend and modify (in the manner described 
below) the American Samoa economic development credit.

                        EXPLANATION OF PROVISION

    The provision extends the credit to apply to the first 
eight taxable years of a taxpayer beginning after December 31, 
2005, and before January 1, 2014. For taxable years of a 
taxpayer beginning after December 31, 2011, the provision 
modifies the credit in two ways. First, the provision allows 
domestic corporations with operations in American Samoa to 
claim the credit even if those corporations are not existing 
credit claimants. Second, the credit is available to a domestic 
corporation (either an existing credit claimant or a new credit 
claimant) only if, in addition to satisfying all the present 
law requirements for claiming the credit, the corporation also 
has qualified production activities income (as defined in 
section 199(c) by substituting ``American Samoa'' for ``the 
United States'' in each place that latter term appears).

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2011.

                    TITLE III--ENERGY TAX EXTENDERS


1. Credit for nonbusiness energy property (Sec. 301 of the bill and 
        sec. 25C of the Code)

                              PRESENT LAW

    Section 25C provides a 10-percent credit for the purchase 
of qualified energy efficiency improvements to existing homes. 
A qualified energy efficiency improvement is any energy 
efficiency building envelope component (1) that meets or 
exceeds the prescriptive criteria for such a component 
established by the 2009 International Energy Conservation Code 
as such Code (including supplements) is in effect on the date 
of the enactment of the American Recovery and Reinvestment Tax 
Act of 2009 (February 17, 2009) (or, in the case of windows, 
skylights and doors, and metal roofs with appropriate pigmented 
coatings or asphalt roofs with appropriate cooling granules, 
meets the Energy Star program requirements); (2) that is 
installed in or on a dwelling located in the United States and 
owned and used by the taxpayer as the taxpayer's principal 
residence; (3) the original use of which commences with the 
taxpayer; and (4) that reasonably can be expected to remain in 
use for at least five years. The credit is nonrefundable.
    Building envelope components are: (1) insulation materials 
or systems which are specifically and primarily designed to 
reduce the heat loss or gain for a dwelling and which meet the 
prescriptive criteria for such material or system established 
by the 2009 International Energy Conservation Code, as such 
Code (including supplements) is in effect on the date of the 
enactment of the American Recovery and Reinvestment Tax Act of 
2009 (February 17, 2009); (2) exterior windows (including 
skylights) and doors; and (3) metal or asphalt roofs with 
appropriate pigmented coatings or cooling granules that are 
specifically and primarily designed to reduce the heat gain for 
a dwelling.
    Additionally, section 25C provides specified credits for 
the purchase of specific energy efficient property originally 
placed in service by the taxpayer during the taxable year. The 
allowable credit for the purchase of certain property is (1) 
$50 for each advanced main air circulating fan, (2) $150 for 
each qualified natural gas, propane, or oil furnace or hot 
water boiler, and (3) $300 for each item of energy efficient 
building property.
    An advanced main air circulating fan is a fan used in a 
natural gas, propane, or oil furnace and which has an annual 
electricity use of no more than two percent of the total annual 
energy use of the furnace (as determined in the standard 
Department of Energy test procedures).
    A qualified natural gas, propane, or oil furnace or hot 
water boiler is a natural gas, propane, or oil furnace or hot 
water boiler with an annual fuel utilization efficiency rate of 
at least 95.
    Energy-efficient building property is: (1) an electric heat 
pump water heater which yields an energy factor of at least 2.0 
in the standard Department of Energy test procedure, (2) an 
electric heat pump which achieves the highest efficiency tier 
established by the Consortium for Energy Efficiency, as in 
effect on January 1, 2009,\207\ (3) a central air conditioner 
which achieves the highest efficiency tier established by the 
Consortium for Energy Efficiency as in effect on Jan. 1, 
2009,\208\ (4) a natural gas, propane, or oil water heater 
which has an energy factor of at least 0.82 or thermal 
efficiency of at least 90 percent, and (5) biomass fuel 
property.
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    \207\These standards are a seasonal energy efficiency ratio 
(``SEER'') greater than or equal to 15, an energy efficiency ratio 
(``EER'') greater than or equal to 12.5, and heating seasonal 
performance factor (``HSPF'') greater than or equal to 8.5 for split 
heat pumps, and SEER greater than or equal to 14, EER greater than or 
equal to 12, and HSPF greater than or equal to 8.0 for packaged heat 
pumps.
    \208\These standards are a SEER greater than or equal to 16 and EER 
greater than or equal to 13 for split systems, and SEER greater than or 
equal to 14 and EER greater than or equal to 12 for packaged systems.
---------------------------------------------------------------------------
    Biomass fuel property is a stove that burns biomass fuel to 
heat a dwelling unit located in the United States and used as a 
principal residence by the taxpayer, or to heat water for such 
dwelling unit, and that has a thermal efficiency rating of at 
least 75 percent. Biomass fuel is any plant-derived fuel 
available on a renewable or recurring basis, including 
agricultural crops and trees, wood and wood waste and residues 
(including wood pellets), plants (including aquatic plants), 
grasses, residues, and fibers.
    The credit is available for property placed in service 
prior to January 1, 2012. The maximum credit for a taxpayer for 
all taxable years is $500, and no more than $200 of such credit 
may be attributable to expenditures on windows.
    The taxpayer's basis in the property is reduced by the 
amount of the credit. Special proration rules apply in the case 
of jointly owned property, condominiums, and tenant-
stockholders in cooperative housing corporations. If less than 
80 percent of the property is used for nonbusiness purposes, 
only that portion of expenditures that is used for nonbusiness 
purposes is taken into account.
    For purposes of determining the amount of expenditures made 
by any individual with respect to any dwelling unit, 
expenditures which are made from subsidized energy financing 
are not taken into account. The term ``subsidized energy 
financing'' means financing provided under a Federal, State, or 
local program a principal purpose of which is to provide 
subsidized financing for projects designed to conserve or 
produce energy.

                           REASONS FOR CHANGE

    The Committee believes that extending the credit for energy 
efficient improvements and property expenditures will encourage 
homeowners to make their homes more energy efficient, thus 
helping to reduce residential energy consumption.

                        EXPLANATION OF PROVISION

    The provision extends the credit for two years, through 
December 31, 2013.

                             EFFECTIVE DATE

    The provision applies to property placed in service after 
December 31, 2011.

2. Alternative fuel vehicle refueling property (Sec. 302 of the bill 
        and sec. 30C of the Code)

                              PRESENT LAW

    Taxpayers may claim a 30-percent credit for the cost of 
installing qualified clean-fuel vehicle refueling property to 
be used in a trade or business of the taxpayer or installed at 
the principal residence of the taxpayer.\209\ The credit may 
not exceed $30,000 per taxable year per location, in the case 
of qualified refueling property used in a trade or business and 
$1,000 per taxable year per location, in the case of qualified 
refueling property installed on property which is used as a 
principal residence.
---------------------------------------------------------------------------
    \209\Sec. 30C.
---------------------------------------------------------------------------
    Qualified refueling property is property (not including a 
building or its structural components) for the storage or 
dispensing of a clean-burning fuel or electricity into the fuel 
tank or battery of a motor vehicle propelled by such fuel or 
electricity, but only if the storage or dispensing of the fuel 
or electricity is at the point of delivery into the fuel tank 
or battery of the motor vehicle. The original use of such 
property must begin with the taxpayer.
    Clean-burning fuels are any fuel at least 85 percent of the 
volume of which consists of ethanol, natural gas, compressed 
natural gas, liquefied natural gas, liquefied petroleum gas, or 
hydrogen. In addition, any mixture of biodiesel and diesel 
fuel, determined without regard to any use of kerosene and 
containing at least 20 percent biodiesel, qualifies as a clean 
fuel.
    Credits for qualified refueling property used in a trade or 
business are part of the general business credit and may be 
carried back for one year and forward for 20 years. Credits for 
residential qualified refueling property cannot exceed for any 
taxable year the difference between the taxpayer's regular tax 
(reduced by certain other credits) and the taxpayer's tentative 
minimum tax. Generally, in the case of qualified refueling 
property sold to a tax-exempt entity, the taxpayer selling the 
property may claim the credit.
    A taxpayer's basis in qualified refueling property is 
reduced by the amount of the credit. In addition, no credit is 
available for property used outside the United States or for 
which an election to expense has been made under section 179.
    The credit is available for property placed in service 
after December 31, 2005, and (except in the case of hydrogen 
refueling property) before January 1, 2012. In the case of 
hydrogen refueling property, the property must be placed in 
service before January 1, 2015.

                           REASONS FOR CHANGE

    The Committee believes that continuing to provide 
incentives for alternative fuel refueling property furthers 
America's environmental and energy independence goals by 
reducing gasoline consumption.

                        EXPLANATION OF PROVISION

    The provision extends for two years (through 2013) the 30-
percent credit for alternative fuel refueling property (other 
than hydrogen refueling property, the credit for which 
continues under present law through 2014).

                             EFFECTIVE DATE

    The provision is effective for property placed in service 
after December 31, 2011.

3. Credit for electric motorcycles and three-wheeled vehicles (Sec. 303 
        of the bill and sec. 30D of the Code)

                              PRESENT LAW

    A 10-percent credit is available qualifying plug-in 
electric low-speed vehicles, motorcycles, and three-wheeled 
vehicles.\210\ Two or three-wheeled vehicles must have a 
battery capacity of at least 2.5 kilowatt-hours. Other vehicles 
must have a battery capacity of at least 4 kilowatt-hours. The 
maximum credit for all qualifying vehicles is $2,500. The 
credit is part of the general business credit. The credit is 
available for vehicles acquired after February 17, 2009, and 
before January 1, 2012.
---------------------------------------------------------------------------
    \210\Sec. 30.
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                           REASONS FOR CHANGE

    The Committee believes that continuing to provide 
incentives to electric motorcycles and three-wheeled vehicles 
furthers America's environmental and energy independence goals 
by reducing gasoline consumption.

                        EXPLANATION OF PROVISION

    The provision combines the credit for electric motorcycles 
and three-wheeled vehicles (but not low-speed vehicles) with 
the section 30D credit for plug-in electric drive motor 
vehicles. The new credit provides the same incentives as the 
existing credit and expires for vehicles acquired on or before 
December 31, 2013.

                             EFFECTIVE DATE

    The provision is effective for electric motorcycles 
acquired after December 31, 2011.

4. Extension and modification of cellulosic biofuel producer credit 
        (Sec. 304 of the bill and sec. 40 of the Code)

                              PRESENT LAW

    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.\211\
---------------------------------------------------------------------------
    \211\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. The 
alcohol mixture credit and small ethanol producer credits expired 
December 31, 2011, so there is no reduction for cellulosic biofuel that 
is alcohol if produced after December 31, 2011.
---------------------------------------------------------------------------
    ``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 Environmental 
Protection Agency (``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'').\212\
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    \212\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.\213\
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    \213\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.

                           REASONS FOR CHANGE

    The Committee believes that the cellulosic biofuel producer 
credit is an appropriate incentive to encourage the further 
development of biofuels on a commercial scale and that fuels 
from algae should be included within the scope of the 
incentive. Development of such fuels on a commercial scale will 
assist in securing energy independence by providing diversity 
in fuel sources.

                        EXPLANATION OF PROVISION

    The provision extends the income tax credit for cellulosic 
biofuel for one additional year (through December 31, 2013). 
The provision makes a technical drafting correction by 
separately restating, apart from the general section 40 
termination provisions, the rule that the cellulosic biofuel 
producer credit may only be carried forward three years after 
any termination of the cellulosic biofuel producer credit.
    The provision expands qualified cellulosic biofuel 
production to include algae-based fuel. Producers of fuel 
derived from cultivated algae, cyanobacteria, or lemna will 
qualify for the cellulosic biofuel producer credit, a $1.01 
income tax credit for each gallon of qualified cellulosic 
biofuel production. In addition, for algae-based fuel, the 
proposal expands qualified cellulosic biofuel production to 
include fuel derived from algae that is sold by the taxpayer to 
another person for refining by such other person into a fuel 
that meets the registration requirements for fuels and fuel 
additives under section 211 of the Clean Air Act. Thus, algae-
based fuel sold for further refining, not just as end use as a 
fuel, would qualify for the credit.

                             EFFECTIVE DATE

    The provision generally is effective on the date of 
enactment. The technical drafting correction is effective as if 
included in section 15321(b) of the Heartland, Habitat, 
Harvest, and Horticulture Act of 2008.

5. Incentives for biodiesel and renewable diesel (Sec. 305 of the bill 
        and secs. 40A, 6426, and 6427 of the Code)

                              PRESENT LAW

Biodiesel

    The Code provides an income tax credit for biodiesel fuels 
(the ``biodiesel fuels credit'').\214\ The biodiesel fuels 
credit is the sum of three credits: (1) the biodiesel mixture 
credit, (2) the biodiesel credit, and (3) the small agri-
biodiesel producer credit. The biodiesel fuels credit is 
treated as a general business credit. The amount of the 
biodiesel fuels credit is includible in gross income. The 
biodiesel fuels credit is coordinated to take into account 
benefits from the biodiesel excise tax credit and payment 
provisions discussed below. The credit does not apply to fuel 
sold or used after December 31, 2011.
---------------------------------------------------------------------------
    \214\Sec. 40A.
---------------------------------------------------------------------------
    Biodiesel is monoalkyl esters of long chain fatty acids 
derived from plant or animal matter that meet (1) the 
registration requirements established by the EPA under section 
211 of the Clean Air Act (42 U.S.C. sec. 7545) and (2) the 
requirements of the American Society of Testing and Materials 
(``ASTM'') D6751. Agri-biodiesel is biodiesel derived solely 
from virgin oils including oils from corn, soybeans, sunflower 
seeds, cottonseeds, canola, crambe, rapeseeds, safflowers, 
flaxseeds, rice bran, mustard seeds, camelina, or animal fats.
    Biodiesel may be taken into account for purposes of the 
credit only if the taxpayer obtains a certification (in such 
form and manner as prescribed by the Secretary) from the 
producer or importer of the biodiesel that identifies the 
product produced and the percentage of biodiesel and agri-
biodiesel in the product.
            Biodiesel mixture credit
    The biodiesel mixture credit is $1.00 for each gallon of 
biodiesel (including agri-biodiesel) used by the taxpayer in 
the production of a qualified biodiesel mixture. A qualified 
biodiesel mixture is a mixture of biodiesel and diesel fuel 
that is (1) sold by the taxpayer producing such mixture to any 
person for use as a fuel, or (2) used as a fuel by the taxpayer 
producing such mixture. The sale or use must be in the trade or 
business of the taxpayer and is to be taken into account for 
the taxable year in which such sale or use occurs. No credit is 
allowed with respect to any casual off-farm production of a 
qualified biodiesel mixture.
    Per IRS guidance a mixture need only contain 1/10th of one 
percent of diesel fuel to be a qualified mixture.\215\ Thus, a 
qualified biodiesel mixture can contain 99.9 percent biodiesel 
and 0.1 percent diesel fuel.
---------------------------------------------------------------------------
    \215\Notice 2005-62, I.R.B. 2005-35, 443 (2005). ``A biodiesel 
mixture is a mixture of biodiesel and diesel fuel containing at least 
0.1 percent (by volume) of diesel fuel. Thus, for example, a mixture of 
999 gallons of biodiesel and 1 gallon of diesel fuel is a biodiesel 
mixture.''
---------------------------------------------------------------------------
            Biodiesel credit (B-100)
    The biodiesel credit is $1.00 for each gallon of biodiesel 
that is not in a mixture with diesel fuel (100 percent 
biodiesel or B-100) and which during the taxable year is (1) 
used by the taxpayer as a fuel in a trade or business or (2) 
sold by the taxpayer at retail to a person and placed in the 
fuel tank of such person's vehicle.
            Small agri-biodiesel producer credit
    The Code provides a small agri-biodiesel producer income 
tax credit, in addition to the biodiesel and biodiesel mixture 
credits. The credit is 10 cents per gallon for up to 15 million 
gallons of agri-biodiesel produced by small producers, defined 
generally as persons whose agri-biodiesel production capacity 
does not exceed 60 million gallons per year. The agri-biodiesel 
must (1) be sold by such producer to another person (a) for use 
by such other person in the production of a qualified biodiesel 
mixture in such person's trade or business (other than casual 
off-farm production), (b) for use by such other person as a 
fuel in a trade or business, or, (c) who sells such agri-
biodiesel at retail to another person and places such agri-
biodiesel in the fuel tank of such other person; or (2) used by 
the producer for any purpose described in (a), (b), or (c).
            Biodiesel mixture excise tax credit
    The Code also provides an excise tax credit for biodiesel 
mixtures.\216\ The credit is $1.00 for each gallon of biodiesel 
used by the taxpayer in producing a biodiesel mixture for sale 
or use in a trade or business of the taxpayer. A biodiesel 
mixture is a mixture of biodiesel and diesel fuel that (1) is 
sold by the taxpayer producing such mixture to any person for 
use as a fuel or (2) is used as a fuel by the taxpayer 
producing such mixture. No credit is allowed unless the 
taxpayer obtains a certification (in such form and manner as 
prescribed by the Secretary) from the producer of the biodiesel 
that identifies the product produced and the percentage of 
biodiesel and agri-biodiesel in the product.\217\
---------------------------------------------------------------------------
    \216\Sec. 6426(c).
    \217\Sec. 6426(c)(4).
---------------------------------------------------------------------------
    The credit is not available for any sale or use for any 
period after December 31, 2011. This excise tax credit is 
coordinated with the income tax credit for biodiesel such that 
credit for the same biodiesel cannot be claimed for both income 
and excise tax purposes.
            Payments with respect to biodiesel fuel mixtures
    If any person produces a biodiesel fuel mixture in such 
person's trade or business, the Secretary is to pay such person 
an amount equal to the biodiesel mixture credit.\218\ The 
biodiesel fuel mixture credit must first be taken against tax 
liability for taxable fuels. To the extent the biodiesel fuel 
mixture credit exceeds such tax liability, the excess may be 
received as a payment. Thus, if the person has no section 4081 
liability, the credit is refundable. The Secretary is not 
required to make payments with respect to biodiesel fuel 
mixtures sold or used after December 31, 2011.
---------------------------------------------------------------------------
    \218\Sec. 6427(e).
---------------------------------------------------------------------------

Renewable diesel

    ``Renewable diesel'' is liquid fuel that (1) is derived 
from biomass (as defined in section 45K(c)(3)), (2) meets the 
registration requirements for fuels and fuel additives 
established by the EPA under section 211 of the Clean Air Act, 
and (3) meets the requirements of the ASTM D975 or D396, or 
equivalent standard established by the Secretary. ASTM D975 
provides standards for diesel fuel suitable for use in diesel 
engines. ASTM D396 provides standards for fuel oil intended for 
use in fuel-oil burning equipment, such as furnaces. Renewable 
diesel also includes fuel derived from biomass that meets the 
requirements of a Department of Defense specification for 
military jet fuel or an ASTM specification for aviation turbine 
fuel.
    For purposes of the Code, renewable diesel is generally 
treated the same as biodiesel. In the case of renewable diesel 
that is aviation fuel, kerosene is treated as though it were 
diesel fuel for purposes of a qualified renewable diesel 
mixture. Like biodiesel, the incentive may be taken as an 
income tax credit, an excise tax credit, or as a payment from 
the Secretary.\219\ The incentive for renewable diesel is $1.00 
per gallon. There is no small producer credit for renewable 
diesel. The incentives for renewable diesel expire after 
December 31, 2011.
---------------------------------------------------------------------------
    \219\Secs. 40A(f), 6426(c), and 6427(e).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that extending the biodiesel and 
renewable diesel incentives through 2013 will give the industry 
certainty and allow for business planning.

                        EXPLANATION OF PROVISION

    The provision extends the income tax credit, excise tax 
credit and payment provisions for biodiesel and renewable 
diesel for two years (through December 31, 2013).

                             EFFECTIVE DATE

    The provision is effective for sales and uses after 
December 31, 2011.

6. Credit for the production of Indian coal (Sec. 306 of the bill and 
        sec. 45 of the Code)

                              PRESENT LAW

    A credit is available for the production of Indian coal 
sold to an unrelated third party from a qualified facility for 
a seven-year period beginning January 1, 2006, and ending 
December 31, 2012. The amount of the credit for Indian coal is 
$1.50 per ton for the first four years of the seven-year period 
and $2.00 per ton for the last three years of the seven-year 
period. Beginning in calendar years after 2006, the credit 
amounts are indexed annually for inflation using 2005 as the 
base year. The credit amount for 2012 is $2.267 per ton.
    A qualified Indian coal facility is a facility placed in 
service before January 1, 2009, that produces coal from 
reserves that on June 14, 2005, were owned by a Federally 
recognized tribe of Indians or were held in trust by the United 
States for a tribe or its members.
    The credit is a component of the general business 
credit,\220\ allowing excess credits to be carried back one 
year and forward up to 20 years. The credit is also subject to 
the alternative minimum tax.
---------------------------------------------------------------------------
    \220\Sec. 38(b)(8).
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                           REASONS FOR CHANGE

    The Committee believes that extending the credit for Indian 
coal will encourage continued mining of coal resources on 
Indian lands.

                        EXPLANATION OF PROVISION

    The provision extends the credit for the production of 
Indian coal for 1 year (through December 31, 2013). The placed-
in-service date for qualified facilities is not extended.

                             EFFECTIVE DATE

    The provision is effective for Indian coal produced after 
December 31, 2012.

7. Extension and modification of incentives for renewable electricity 
        property (Sec. 307 of the bill and secs. 45 and 48 of the Code)

                              PRESENT LAW

Renewable electricity production credit

    An income tax credit is allowed for the production of 
electricity from qualified energy resources at qualified 
facilities (the ``renewable electricity production 
credit'').\221\ Qualified energy resources comprise wind, 
closed-loop biomass, open-loop biomass, geothermal energy, 
solar energy, small irrigation power, municipal solid waste, 
qualified hydropower production, and marine and hydrokinetic 
renewable energy. Qualified facilities are, generally, 
facilities that generate electricity using qualified energy 
resources. To be eligible for the credit, electricity produced 
from qualified energy resources at qualified facilities must be 
sold by the taxpayer to an unrelated person.
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    \221\Sec. 45. In addition to the renewable electricity production 
credit, section 45 also provides income tax credits for the production 
of Indian coal and refined coal at qualified facilities.

                   SUMMARY OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE RESOURCES
----------------------------------------------------------------------------------------------------------------
                                                                  Credit amount for
     Eligible electricity production activity (sec. 45)          2012\1\ (cents per           Expiration\2\
                                                                   kilowatt-hour)
----------------------------------------------------------------------------------------------------------------
Wind........................................................                      2.2         December 31, 2012
Closed-loop biomass.........................................                      2.2         December 31, 2013
Open-loop biomass (including agricultural livestock waste                         1.1         December 31, 2013
 nutrient facilities).......................................
Geothermal..................................................                      2.2         December 31, 2013
Solar (pre-2006 facilities only)............................                      2.2         December 31, 2005
Small irrigation power......................................                      1.1         December 31, 2013
Municipal solid waste (including landfill gas facilities and                      1.1         December 31, 2013
 trash combustion facilities)...............................
Qualified hydropower........................................                      1.1         December 31, 2013
Marine and hydrokinetic.....................................                      1.1        December 31, 2013
----------------------------------------------------------------------------------------------------------------
\1\In general, the credit is available for electricity produced during the first 10 years after a facility has
  been placed in service.
\2\Expires for property placed in service after this date.

Municipal solid waste

    One feedstock that can be used to generate credit-eligible 
renewable electricity is municipal solid waste. For this 
purpose, the term ``municipal solid waste'' has the meaning 
given the term ``solid waste'' under section 2(27) of the Solid 
Waste Disposal Act.\222\ Under that Act, the term ``solid 
waste'' generally means any garbage, refuse, or sludge from a 
waste treatment plant, water supply treatment plant, or air 
pollution control facility and other discarded material, 
including solid, liquid, semisolid, or contained gaseous 
material resulting from industrial, commercial, mining, and 
agricultural operations, and from community activities, but 
does not include solid or dissolved material in domestic 
sewage, or solid or dissolved materials in irrigation return 
flows or industrial discharges.
---------------------------------------------------------------------------
    \222\Sec. 45(c)(6).
---------------------------------------------------------------------------

Election to claim energy credit in lieu of renewable electricity 
        production credit

    A taxpayer may make an irrevocable election to have certain 
property which is part of a qualified renewable electricity 
production facility be treated as energy property eligible for 
a 30 percent investment credit under section 48. For this 
purpose, qualified facilities are facilities otherwise eligible 
for the renewable electricity production credit with respect to 
which no credit under section 45 has been allowed. A taxpayer 
electing to treat a facility as energy property may not claim 
the renewable electricity production credit. The eligible basis 
for the investment credit for taxpayers making this election is 
the basis of the depreciable (or amortizable) property that is 
part of a facility capable of generating electricity eligible 
for the renewable electricity production credit.

                           REASONS FOR CHANGE

    The Committee believes that building additional renewable 
energy infrastructure advances America's environmental and 
energy independence goals. The Committee believes that 
additional renewable energy infrastructure will be built if the 
tax incentives for renewable energy are extended. The Committee 
also believes that certain renewable power projects do not move 
forward because developers and investors are concerned that 
those projects cannot be completed before the renewable 
electricity production credit expires. The Committee intends to 
reduce this uncertainty by replacing the placed-in-service 
expiration date with an expiration date based on when 
construction begins on a particular project. Finally, the 
Committee is concerned that recyclable paper that has been 
segregated from the municipal solid waste stream may be 
diverted to trash combustion facilities. The Committee seeks to 
prevent this from happening by modifying the definition of 
municipal solid waste to exclude such paper.

                        EXPLANATION OF PROVISION

    The provision extends and modifies the expiration dates for 
the renewable electricity production credit and the 30-percent 
investment credit in lieu of such production credit. The 
provision extends the wind credits (production and investment) 
for one year, through December 31, 2013. In addition, the 
expiration date for all renewable power facilities (including 
wind facilities) is modified such that qualified facilities or 
property will be eligible for the renewable electricity 
production credit, or the investment credit in lieu of such 
credit, if the construction of such facilities or property 
begins before January 1, 2014.
    The provision also modifies the definition of municipal 
solid waste to exclude commonly recycled paper that has been 
segregated from such waste for purposes of this credit.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

8. New energy efficient home credit (Sec. 308 of the bill and sec. 45L 
        of the Code)

                              PRESENT LAW

    Present law provides a credit to an eligible contractor for 
each qualified new energy-efficient home that is constructed by 
the eligible contractor and acquired by a person from such 
eligible contractor for use as a residence during the taxable 
year. To qualify as a new energy-efficient home, the home must 
be: (1) a dwelling located in the United States, (2) 
substantially completed after August 8, 2005, and (3) certified 
in accordance with guidance prescribed by the Secretary to have 
a projected level of annual heating and cooling energy 
consumption that meets the standards for either a 30-percent or 
50-percent reduction in energy usage, compared to a comparable 
dwelling constructed in accordance with the standards of 
chapter 4 of the 2003 International Energy Conservation Code as 
in effect (including supplements) on August 8, 2005, and any 
applicable Federal minimum efficiency standards for equipment. 
With respect to homes that meet the 30-percent standard, one-
third of such 30-percent savings must come from the building 
envelope, and with respect to homes that meet the 50-percent 
standard, one-fifth of such 50-percent savings must come from 
the building envelope.
    Manufactured homes that conform to Federal manufactured 
home construction and safety standards are eligible for the 
credit provided all the criteria for the credit are met. The 
eligible contractor is the person who constructed the home, or 
in the case of a manufactured home, the producer of such home.
    The credit equals $1,000 in the case of a new home that 
meets the 30-percent standard and $2,000 in the case of a new 
home that meets the 50-percent standard. Only manufactured 
homes are eligible for the $1,000 credit.
    In lieu of meeting the standards of chapter 4 of the 2003 
International Energy Conservation Code, manufactured homes 
certified by a method prescribed by the Administrator of the 
Environmental Protection Agency under the Energy Star Labeled 
Homes program are eligible for the $1,000 credit provided 
criteria (1) and (2), above, are met.
    The credit applies to homes that are purchased prior to 
January 1, 2012. The credit is part of the general business 
credit.

                           REASONS FOR CHANGE

    The Committee believes that extending the credit for energy 
efficient new homes will provide incentives for contractors and 
home manufacturers to produce such housing, thus helping to 
reduce residential energy consumption.

                        EXPLANATION OF PROVISION

    The provision extends the credit to homes that are acquired 
prior to January 1, 2014.

                             EFFECTIVE DATE

    The provision applies to homes acquired after December 31, 
2011.

9. Energy efficient appliance credit (Sec. 309 of the bill and sec. 45M 
        of the Code)

                              PRESENT LAW

In general

    A credit is allowed for the eligible production of certain 
energy-efficient dishwashers, clothes washers, and 
refrigerators. The credit is part of the general business 
credit.
    The credits are as follows:
            Dishwashers
    $45 in the case of a dishwasher that is manufactured in 
calendar year 2008 or 2009 that uses no more than 324 kilowatt 
hours per year and 5.8 gallons per cycle, and
    $75 in the case of a dishwasher that is manufactured in 
calendar year 2008, 2009, or 2010 and that uses no more than 
307 kilowatt hours per year and 5.0 gallons per cycle (5.5 
gallons per cycle for dishwashers designed for greater than 12 
place settings).
    $25 in the case of a dishwasher which is manufactured in 
calendar year 2011 and which uses no more than 307 kilowatt 
hours per year and 5.0 gallons per cycle (5.5 gallons per cycle 
for dishwashers designed for greater than 12 place settings),
    $50 in the case of a dishwasher which is manufactured in 
calendar year 2011 and which uses no more than 295 kilowatt 
hours per year and 4.25 gallons per cycle (4.75 gallons per 
cycle for dishwashers designed for greater than 12 place 
settings), and
    $75 in the case of a dishwasher which is manufactured in 
calendar year 2011 and which uses no more than 280 kilowatt 
hours per year and 4 gallons per cycle (4.5 gallons per cycle 
for dishwashers designed for greater than 12 place settings).
            Clothes washers
    $75 in the case of a residential top-loading clothes washer 
manufactured in calendar year 2008 that meets or exceeds a 1.72 
modified energy factor and does not exceed a 8.0 water 
consumption factor, and
    $125 in the case of a residential top-loading clothes 
washer manufactured in calendar year 2008 or 2009 that meets or 
exceeds a 1.8 modified energy factor and does not exceed a 7.5 
water consumption factor,
    $150 in the case of a residential or commercial clothes 
washer manufactured in calendar year 2008, 2009, or 2010 that 
meets or exceeds a 2.0 modified energy factor and does not 
exceed a 6.0 water consumption factor, and
    $250 in the case of a residential or commercial clothes 
washer manufactured in calendar year 2008, 2009, or 2010 that 
meets or exceeds a 2.2 modified energy factor and does not 
exceed a 4.5 water consumption factor.
    $175 in the case of a top-loading clothes washer 
manufactured in calendar year 2011 which meets or exceeds a 2.2 
modified energy factor and does not exceed a 4.5 water 
consumption factor, and
    $225 in the case of a clothes washer manufactured in 
calendar year 2011 which (1) is a top-loading clothes washer 
and which meets or exceeds a 2.4 modified energy factor and 
does not exceed a 4.2 water consumption factor, or (2) is a 
front-loading clothes washer and which meets or exceeds a 2.8 
modified energy factor and does not exceed a 3.5 water 
consumption factor.
            Refrigerators
    $50 in the case of a refrigerator manufactured in calendar 
year 2008 that consumes at least 20 percent but not more than 
22.9 percent less kilowatt hours per year than the 2001 energy 
conservation standards,
    $75 in the case of a refrigerator that is manufactured in 
calendar year 2008 or 2009 that consumes at least 23 percent 
but not more than 24.9 percent less kilowatt hours per year 
than the 2001 energy conservation standards,
    $100 in the case of a refrigerator that is manufactured in 
calendar year 2008, 2009, or 2010 that consumes at least 25 
percent but not more than 29.9 percent less kilowatt hours per 
year than the 2001 energy conservation standards, and
    $200 in the case of a refrigerator manufactured in calendar 
year 2008, 2009, or 2010 that consumes at least 30 percent less 
energy than the 2001 energy conservation standards.
    $150 in the case of a refrigerator manufactured in calendar 
year 2011 which consumes at least 30 percent less energy than 
the 2001 energy conservation standards, and
    $200 in the case of a refrigerator manufactured in calendar 
year 2011 which consumes at least 35 percent less energy than 
the 2001 energy conservation standards.
            Definitions
    A dishwasher is any residential dishwasher subject to the 
energy conservation standards established by the Department of 
Energy. A refrigerator must be an automatic defrost 
refrigerator-freezer with an internal volume of at least 16.5 
cubic feet to qualify for the credit. A clothes washer is any 
residential clothes washer, including a residential style coin 
operated washer, that satisfies the relevant efficiency 
standard.
    The term ``modified energy factor'' means the modified 
energy factor established by the Department of Energy for 
compliance with the Federal energy conservation standard.
    The term ``gallons per cycle'' means, with respect to a 
dishwasher, the amount of water, expressed in gallons, required 
to complete a normal cycle of a dishwasher.
    The term ``water consumption factor'' means, with respect 
to a clothes washer, the quotient of the total weighted per-
cycle water consumption divided by the cubic foot (or liter) 
capacity of the clothes washer.

Other rules

    Appliances eligible for the credit include only those 
produced in the United States and that exceed the average 
amount of U.S. production from the two prior calendar years for 
each category of appliance. The aggregate credit amount allowed 
with respect to a taxpayer for all taxable years beginning 
after December 31, 2010, may not exceed $25 million, with the 
exception that the $200 refrigerator credit and the $225 
clothes washer credit are not limited. Additionally, the credit 
allowed in a taxable year for all appliances may not exceed 
four percent of the average annual gross receipts of the 
taxpayer for the three taxable years preceding the taxable year 
in which the credit is determined.

                           REASONS FOR CHANGE

    The Committee believes that extending the credit for energy 
efficient appliances will spur their production and use, thus 
helping to reduce residential energy consumption.

                        EXPLANATION OF PROVISION

    The provision extends the credits available for appliance 
production in 2011 for two additional years (through 2013), 
with the exception that the $25 dishwasher credit and the $175 
clothes washer credit are not extended.

                             EFFECTIVE DATE

    The provision applies to appliances produced after December 
31, 2011.

10. Extension of special depreciation allowance for cellulosic biofuel 
        plant property (Sec. 310 of the bill and sec. 168(l) of the 
        Code)

                              PRESENT LAW

    Section 168(l) allows an additional first-year depreciation 
deduction equal to 50 percent of the adjusted basis of 
qualified cellulosic biofuel plant property. In order to 
qualify, the property generally must be placed in service 
before January 1, 2013.
    Qualified cellulosic biofuel plant property means property 
used in the U.S. solely to produce cellulosic biofuel. For this 
purpose, cellulosic biofuel means any liquid fuel which is 
produced from any lignocellulosic or hemicellulosic matter that 
is available on a renewable or recurring basis.
    The additional first-year depreciation deduction is allowed 
for both regular tax and alternative minimum tax purposes for 
the taxable year in which the property is placed in service. 
The additional first-year depreciation deduction is subject to 
the general rules regarding whether an item is deductible under 
section 162 or subject to capitalization under section 263 or 
section 263A. The basis of the property and the depreciation 
allowances in the year of purchase and later years are 
appropriately adjusted to reflect the additional first-year 
depreciation deduction. In addition, there is no adjustment to 
the allowable amount of depreciation for purposes of computing 
a taxpayer's alternative minimum taxable income with respect to 
property to which the provision applies. A taxpayer is allowed 
to elect out of the additional first-year depreciation for any 
class of property for any taxable year.
    In order for property to qualify for the additional first-
year depreciation deduction, it must meet the following 
requirements. The original use of the property must commence 
with the taxpayer on or after December 20, 2006. The property 
must be acquired by purchase (as defined under section 179(d)) 
by the taxpayer after December 20, 2006, and placed in service 
before January 1, 2013. Property does not qualify if a binding 
written contract for the acquisition of such property was in 
effect on or before December 20, 2006.
    Property that is manufactured, constructed, or produced by 
the taxpayer for use by the taxpayer qualifies if the taxpayer 
begins the manufacture, construction, or production of the 
property after December 20, 2006, and the property is placed in 
service before January 1, 2013 (and all other requirements are 
met). Property that is manufactured, constructed, or produced 
for the taxpayer by another person under a contract that is 
entered into prior to the manufacture, construction, or 
production of the property is considered to be manufactured, 
constructed, or produced by the taxpayer.
    Property any portion of which is financed with the proceeds 
of a tax-exempt obligation under section 103 is not eligible 
for the additional first-year depreciation deduction.\223\ 
Recapture rules apply if the property ceases to be qualified 
cellulosic biofuel plant property.\224\
---------------------------------------------------------------------------
    \223\Sec. 168(l)(4)(C).
    \224\Sec. 168(l)(7).
---------------------------------------------------------------------------
    Property with respect to which the taxpayer has elected 50 
percent expensing under section 179C is not eligible for the 
additional first-year depreciation deduction.\225\
---------------------------------------------------------------------------
    \225\Sec. 168(l)(8).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee acknowledges that encouraging manufacturing 
of biofuels in the United States is important for fostering 
innovative new technology, encouraging energy independence, and 
creating manufacturing jobs in the United States. Further, 
expansion of the special depreciation allowance to include 
property related to algae-based fuels recognizes the potential 
of these fuels and supports their commercial production.

                        EXPLANATION OF PROVISION

    The provision extends the present law special depreciation 
allowance for one year, to qualified cellulosic biofuel plant 
property placed in service prior to January 1, 2014. The 
provision expands the definition of qualified cellulosic 
biofuel plant property to include property used in the U.S. 
solely to produce algae-based fuel, including fuel derived from 
cultivated algae, cyanobacteria, or lemna.

                             EFFECTIVE DATE

    The provision to extend the placed in service date is 
effective for property placed in service after December 31, 
2012. The provision to expand the definition of qualified 
cellulosic biofuel plant property is effective for property 
placed in service after the date of enactment.

11. Special rule for sales or dispositions to implement FERC or State 
        electric restructuring policy for qualified electric utilities 
        (Sec. 311 of the bill and sec. 451(i) of the Code)

                              PRESENT LAW

    A taxpayer selling property generally recognizes gain to 
the extent the sales price (and any other consideration 
received) exceeds the seller's basis in the property. The 
recognized gain is subject to current income tax unless the 
gain is deferred or not recognized under a special tax 
provision.
    One such special tax provision permits taxpayers to elect 
to recognize gain from qualifying electric transmission 
transactions ratably over an eight-year period beginning in the 
year of sale if the amount realized from such sale is used to 
purchase exempt utility property within the applicable 
period\226\ (the ``reinvestment property'').\227\ If the amount 
realized exceeds the amount used to purchase reinvestment 
property, any realized gain is recognized to the extent of such 
excess in the year of the qualifying electric transmission 
transaction.
---------------------------------------------------------------------------
    \226\The applicable period for a taxpayer to reinvest the proceeds 
is the four year period beginning on the date the qualifying electric 
transmission transaction occurs.
    \227\Sec. 451(i).
---------------------------------------------------------------------------
    A qualifying electric transmission transaction is the sale 
or other disposition of property used by a qualified electric 
utility to an independent transmission company prior to January 
1, 2012. A qualified electric utility is defined as an electric 
utility, which as of the date of the qualifying electric 
transmission transaction, is vertically integrated in that it 
is both (1) a transmitting utility (as defined in the Federal 
Power Act)\228\ with respect to the transmission facilities to 
which the election applies, and (2) an electric utility (as 
defined in the Federal Power Act).\229\
---------------------------------------------------------------------------
    \228\16 U.S.C. sec. 796 (23), defines ``transmitting utility'' as 
any electric utility, qualifying cogeneration facility, qualifying 
small power production facility, or Federal power marketing agency 
which owns or operates electric power transmission facilities which are 
used for the sale of electric energy at wholesale.
    \229\16 U.S.C. sec. 796 (22), defines ``electric utility'' as any 
person or State agency (including any municipality) which sells 
electric energy; such term includes the Tennessee Valley Authority, but 
does not include any Federal power marketing agency.
---------------------------------------------------------------------------
    In general, an independent transmission company is defined 
as: (1) an independent transmission provider\230\ approved by 
the Federal Energy Regulatory Commission (``FERC''); (2) a 
person (i) who the FERC determines under section 203 of the 
Federal Power Act (or by declaratory order) is not a ``market 
participant'' and (ii) whose transmission facilities are placed 
under the operational control of a FERC-approved independent 
transmission provider no later than four years after the close 
of the taxable year in which the transaction occurs; or (3) in 
the case of facilities subject to the jurisdiction of the 
Public Utility Commission of Texas, (i) a person which is 
approved by that Commission as consistent with Texas State law 
regarding an independent transmission organization, or (ii) a 
political subdivision, or affiliate thereof, whose transmission 
facilities are under the operational control of an organization 
described in (i).
---------------------------------------------------------------------------
    \230\For example, a regional transmission organization, an 
independent system operator, or an independent transmission company.
---------------------------------------------------------------------------
    Exempt utility property is defined as: (1) property used in 
the trade or business of generating, transmitting, 
distributing, or selling electricity or producing, 
transmitting, distributing, or selling natural gas, or (2) 
stock in a controlled corporation whose principal trade or 
business consists of the activities described in (1). Exempt 
utility property does not include any property that is located 
outside of the United States.
    If a taxpayer is a member of an affiliated group of 
corporations filing a consolidated return, the reinvestment 
property may be purchased by any member of the affiliated group 
(in lieu of the taxpayer).

                           REASONS FOR CHANGE

    The Committee believes that the ``unbundling'' of electric 
transmission assets held by vertically integrated utilities, 
with the transmission assets ultimately placed under the 
ownership or control of independent transmission providers (or 
other similarly-approved operators), continues to be an 
important policy. To facilitate the implementation of this 
policy, the Committee believes it is appropriate to assist 
taxpayers in moving forward with industry restructuring by 
providing a tax deferral for gain associated with certain 
dispositions of electric transmission assets.

                        EXPLANATION OF PROVISION

    The provision extends for two years the treatment under the 
present-law deferral provision to sales or dispositions by a 
qualified electric utility that occur prior to January 1, 2014.

                             EFFECTIVE DATE

    The provision applies to dispositions after December 31, 
2011.

12. Alternative fuel and alternative fuel mixtures (Sec. 312 of the 
        bill and secs. 6426 and 6427(e) of the Code)

                              PRESENT LAW

Fuel excise taxes

    Fuel excise taxes are imposed on taxable fuel (gasoline, 
diesel fuel or kerosene) under section 4081. In general, these 
fuels are taxed when removed from a refinery, terminal rack, 
upon entry into the United States, or upon sale to an 
unregistered person. A back-up tax under section 4041 is 
imposed on previously untaxed fuel and alternative fuel used or 
sold for use as fuel in a motor vehicle or motorboat to the 
supply tank of a highway vehicle. In general, the rates of tax 
are 18.3 cents per gallon (or in the case of compressed natural 
gas 18.3 cents per gasoline gallon equivalent), and in the case 
of liquefied natural gas, and liquid fuel derived from coal or 
biomass, 24.3 cents per gallon.

Alternative fuel and alternative fuel mixture credits and payments

    The Code provides two per-gallon excise tax credits with 
respect to alternative fuel: the alternative fuel credit, and 
the alternative fuel mixture credit. For this purpose, the term 
``alternative fuel'' means liquefied petroleum gas, P Series 
fuels (as defined by the Secretary of Energy under 42 U.S.C. 
sec. 13211(2)), compressed or liquefied natural gas, liquefied 
hydrogen, liquid fuel derived from coal through the Fischer-
Tropsch process (``coal-to-liquids''), compressed or liquefied 
gas derived from biomass, or liquid fuel derived from biomass. 
Such term does not include ethanol, methanol, or biodiesel.
    For coal-to-liquids produced after December 30, 2009, the 
fuel must be certified as having been derived from coal 
produced at a gasification facility that separates and 
sequesters 75 percent of such facility's total carbon dioxide 
emissions.
    The alternative fuel credit is allowed against section 4041 
liability, and the alternative fuel mixture credit is allowed 
against section 4081 liability. Neither credit is allowed 
unless the taxpayer is registered with the Secretary. The 
alternative fuel credit is 50 cents per gallon of alternative 
fuel or gasoline gallon equivalents\231\ of nonliquid 
alternative fuel sold by the taxpayer for use as a motor fuel 
in a motor vehicle or motorboat, sold for use in aviation or so 
used by the taxpayer.
---------------------------------------------------------------------------
    \231\``Gasoline gallon equivalent'' means, with respect to any 
nonliquid alternative fuel (for example, compressed natural gas), the 
amount of such fuel having a Btu (British thermal unit) content of 
124,800 (higher heating value).
---------------------------------------------------------------------------
    The alternative fuel mixture credit is 50 cents per gallon 
of alternative fuel used in producing an alternative fuel 
mixture for sale or use in a trade or business of the taxpayer. 
An ``alternative fuel mixture'' is a mixture of alternative 
fuel and taxable fuel (gasoline, diesel fuel or kerosene) that 
contains at least \1/10\ of one percent taxable fuel. The 
mixture must be sold by the taxpayer producing such mixture to 
any person for use as a fuel, or used by the taxpayer producing 
the mixture as a fuel. The credits generally expire after 
December 31, 2011 (September 30, 2014 for liquefied hydrogen).
    A person may file a claim for payment equal to the amount 
of the alternative fuel credit and alternative fuel mixture 
credits. The alternative fuel credit and alternative fuel 
mixture credit must first be applied to the applicable excise 
tax liability under section 4041 or 4081, and any excess credit 
may be taken as a payment. These payment provisions generally 
also expire after December 31, 2011. With respect to liquefied 
hydrogen, the payment provisions expire after September 30, 
2014.
    For purposes of the alternative fuel credit, alternative 
fuel mixture credit and related payment provisions, 
``alternative fuel'' does not include fuel (including lignin, 
wood residues, or spent pulping liquors) derived from the 
production of paper or pulp.

                           REASONS FOR CHANGE

    The Committee believes it is appropriate to extend the 
incentives for alternative fuel to provide certainty to the 
industry and allow for business planning. It has come to the 
attention of the Committee that the refundable aspect of the 
alternative fuel mixture credit, in combination with requiring 
only one-tenth of one percent of diesel fuel to qualify as a 
mixture, has encouraged taxpayers to be aggressive in making 
large and questionable claims for payment.\232\ Because the 
claims can be made weekly and are subject to interest if not 
paid timely, it is the understanding of the Committee that 
these circumstances result in the IRS often examining such 
claims after payment and having to recover an erroneous 
overpayment. If the payment cannot be recovered from the 
taxapayer, it results not only in administrative expenses to 
the Federal Government, but a loss of revenue as well. 
Therefore, the Committee believes that to deter abusive claims 
for payment, it is appropriate not to extend the outlay 
payments for alternative fuel mixtures.
---------------------------------------------------------------------------
    \232\For an example of aggressive claims relating to alternative 
fuel mixtures see IRS Chief Counsel Advice 201133010, 2011 WL 3636293 
(July 12, 2011).
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    The provision extends the alternative fuel excise tax 
credit, and related payment provisions (for non-hydrogen 
fuels), for two additional years (through December 31, 2013). 
The alternative fuel mixture excise tax credit is extended for 
two additional years (through December 31, 2013) but the 
companion payment (outlay) provision is not extended.

                             EFFECTIVE DATE

    The provision is effective for fuel sold or used after 
December 31, 2011.

                       TITLE IV--OTHER PROVISIONS


1. Sense of the Senate that reducing tax expenditures in order to lower 
        tax rates should be the focus of comprehensive tax reform in 
        the 113th Congress (Sec. 401 of the bill)

                              PRESENT LAW

    Congress last enacted fundamental tax reform in the Tax 
Reform Act of 1986.\233\
---------------------------------------------------------------------------
    \233\Pub L. No. 99-514.
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    The provision expresses the sense of the Senate that:
           Comprehensive tax reform is vital to 
        economic growth and U.S. competitiveness and should 
        begin next year;
           A major focus of comprehensive tax reform 
        should be broadening the tax base so as to lower tax 
        rates, including by reforming, eliminating or 
        significantly reducing tax expenditures, including 
        traditional tax extenders; and
           Whenever possible, Federal energy tax 
        expenditures should be responsibly phased-out in a 
        manner that allows these technologies to function 
        without a reliance on Federal subsidies.

                             EFFECTIVE DATE

    The provision is effective upon 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 ``Family and Business Tax Cut Certainty Act 
of 2012'' as reported.


                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

    Chairman's Mark, as modified, was accepted by unanimous 
consent.
    Amendment #10, Wyden #2: Electric Motorcycle Tax Credit 
Parity and Extension--approved by voice vote.
    Amendment #45, Kyl #9, as modified: To strike the extension 
of the refundable features of the biodiesel mixture credit, the 
alternative fuel credit, and the alternative fuel mixture 
credit--approved by voice vote
    Amendment 59, Coburn #7. To strike the ``Credit for Energy 
Efficient Appliances'' (Secs. 40A, 6426 and 6427 of the Code) 
from the bill--defeated by roll call vote, 9 Ayes, 15 nays.
    Ayes: Hatch, Kyl, Crapo, Roberts (proxy), Enzi, Cornyn, 
Coburn, Thune, Burr.
    Nays: Baucus, Rockefeller, Conrad, Bingaman, Kerry, Wyden 
(proxy), Schumer, Stabenow, Cantwell, Nelson, Menendez (proxy), 
Carper, Cardin, Grassley, Snowe
    Amendment #115, Thune #1, as modified: To express support 
for Comprehensive Tax Reform--approved by voice vote.
    Amendment #20, Cantwell, Snowe, Bingaman, Cardin, Kerry, 
Stabenow, Menendez #2: Ensure the utilization of the low income 
housing tax credit at a minimum 9% rate through 2013 by 
amendment section 42(b)(2)(A) to replace ``which is placed in 
service by the taxpayer'' with ``with respect to which an 
allocation is made''--approved by voice vote.
    Amendment 90, Coburn #37: To modify the section of the bill 
relating to Wind PTC--defeated by roll call vote, 9 ayes, 15 
nays.
    Ayes: Hatch, Snowe, Kyl (proxy), Crapo (proxy), Enzi, 
Cornyn (proxy), Coburn, Thune, Burr.
    Nays: Baucus, Rockefeller (proxy), Conrad (proxy), 
Bingaman, Kerry (proxy), Wyden (proxy), Schumer (proxy), 
Stabenow (proxy), Cantwell, Nelson (proxy), Menendez, Carper 
(proxy), Cardin (proxy), Grassley, Roberts (proxy).
    Amendment #96, Coburn #43: To require recipients of federal 
tax credits (not including individuals) and other tax benefits 
provided in this bill, to be included in the USAspending.gov 
website, as a recipient of federal funding--defeated by roll 
call vote, 10 ayes, 14 nays.
    Ayes: Carper, Hatch, Snowe, Kyl (proxy), Crapo, Roberts 
(proxy), Cornyn, Coburn, Thune, Burr.
    Nays: Baucus, Rockefeller, Conrad (proxy), Bingaman, Kerry, 
Wyden, Schumer, Stabenow, Cantwell, Nelson (proxy), Menendez, 
Cardin, Grassley (proxy), Enzi (proxy).
    Amendment #66, Coburn #14: To prohibit duplication in the 
New Markets Tax Credit--defeated by roll call vote, 10 ayes, 14 
nays.
    Ayes: Hatch, Grassley (proxy), Kyl (proxy), Crapo, Roberts 
(proxy), Enzi (proxy), Cornyn, Coburn, Thune, Burr.
    Nays: Baucus, Rockefeller, Conrad, Bingaman, Kerry, Wyden, 
Schumer, Stabenow, Cantwell, Nelson (proxy), Menendez, Carper, 
Cardin, Snowe.
    Final Passage of the Family and Business Tax Cut Certainty 
Act of 2012--approved by roll call vote, 19 ayes, 5 nays.
    Ayes: Baucus, Rockefeller, Conrad, Bingaman, Kerry, Wyden, 
Schumer, Stabenow, Cantwell, Nelson (proxy), Menendez, Carper, 
Cardin, Hatch, Grassley, Snowe, Crapo, Roberts (proxy), Thune.
    Nays: Kyl (proxy), Enzi (proxy), Cornyn, Coburn, Burr.

                 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 permanently extends the specific disclosure 
authority to prisons relating to tax-related misconduct. In 
addition, the bill: (1) authorizes the disclosure of actual 
returns (not just return information), (2) allows the 
disclosure to be made directly to officers and employees of the 
prison agency rather than through the head of such agency, (3) 
allows redisclosure of return information to contractors that 
operate prisons, and (4) clarifies the authority for the 
disclosure to, and use by, legal representatives in 
proceedings. The provision should not result in additional 
recordkeeping responsibilities for individuals and businesses 
beyond that required for present law. The provisions will 
benefit the administration of the tax system and only affects 
the personal privacy of prisoners.

                     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 tax provisions of the 
reported bill do not contain Federal private sector mandates or 
Federal intergovernmental mandates 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 Reform and 
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the 
staff of the Joint Committee on Taxation (in consultation with 
the Internal Revenue Service and the Treasury Department) 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 
and has widespread applicability to individuals or small 
businesses. For each such provision identified by the staff of 
the Joint Committee on Taxation a summary description of the 
provision is provided along with an estimate of the number and 
type of affected taxpayers, and a discussion regarding the 
relevant complexity and administrative issues.
    Following the analysis of the staff of the Joint Committee 
on Taxation are the comments of the IRS and Treasury regarding 
each of the provisions included in the complexity analysis.
    1. Extension of alternative minimum tax relief for 
individuals
            Summary description of the provision
    The bill allows an individual to offset the entire regular 
tax liability and alternative minimum tax liability by the 
nonrefundable personal credits for taxable years beginning in 
2012 and 2013.
    The bill provides that the individual AMT exemption amount 
for taxable years beginning in 2012 is (1) $78,750, in the case 
of married individuals filing a joint return and surviving 
spouses; (2) $50,600 in the case of other unmarried 
individuals; and (3) $39,375 in the case of married individuals 
filing separate returns. Also, the bill provides that the 
individual AMT exemption amount for taxable years beginning in 
2013 is $79,850 for married individuals filing a joint return 
and surviving spouses; (2) $51,150 in the case of other 
unmarried individuals; and (3) $39,925 in the case of married 
individuals filing separate returns.
            Number of affected taxpayers
    It is estimated that the provision will affect 
approximately 30 million individual tax returns.
            Discussion
    Many individuals will not have to compute their alternative 
minimum tax and file the IRS forms relating to that tax.


       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. MINORITY VIEWS

            Minority Views of Senators Kyl, Coburn, and Burr

    We respectfully file our dissenting views to the Family and 
Business Tax Cut Certainty Act of 2012, which was approved by 
the Senate Finance Committee on August 2, 2012. We appreciate 
the work of the chairman, ranking member, and committee staff 
to develop a framework that allowed the committee process to 
function and move forward with the legislation. We also agree 
that American families and businesses deserve certainty about 
tax policy. To that end, we are committed to permanent, pro-
growth tax reform that lowers rates, broadens the base, and 
makes America more competitive internationally.
    However, if this legislation was intended to be a prelude 
to tax reform, we believe it failed by not culling enough 
unwarranted provisions. The tax code should not be used as a 
tool for picking winners and losers, nor should it reward 
politically favored industries or penalize disfavored ones. 
Among the dozens of tax provisions that expired last year or 
will expire this year, this package extends too many that have 
little to do with sound tax policy and are actually harmful, 
market-distorting subsidies. For example, we are concerned that 
the relentless dedication to subsidizing so-called ``green 
energy'' will prevent the most efficient development of energy 
sources and cause a loss of jobs in the broader economy.
    In addition, it was our understanding that this package 
would only extend items that enjoyed broad consensus. We were 
disheartened to see provisions included that were supported 
only by members of one party. This continued during the 
amendment process, when members of the other party added back a 
subsidy for plug-in motorcycles that we previously believed the 
committee had decided to end.
    We are also deeply concerned about the impact of the 
committee's expansion of the production tax credit for wind 
energy on our budget deficit. Under current law, the tax code 
requires that wind facilities be operating and producing energy 
before the provision's expiration date in order to qualify for 
a 10-year tax credit of 2.2 cents per kilowatt hour. According 
to the Joint Committee on Taxation, a straightforward extension 
of this provision through 2013 would have cost $3.5 billion. 
But since the committee changed the credit to require only that 
construction begin--not be completed--by 2013, this provision 
will now cost nearly $12.2 billion, which is more than twice as 
large as all the other energy provisions in the package 
combined. We supported Senator Coburn's amendment to reduce 
this subsidy by 20% in 2013, but the committee unfortunately 
defeated it.
    For these reasons and others, we did not support the 
package the committee approved. As the legislative process 
continues, we hope our colleagues in the Senate and House of 
Representatives will carefully consider the wisdom of 
continuing market-distorting subsidies through the tax code, 
particularly at a time of trillion-dollar deficits.