The House December 8 approved, by a 367-45 vote, a $45 billion package (H.R. 6111) which includes an extension of certain expiring tax provisions, energy tax provisions, health savings account modifications, and other tax breaks. The Act also expands the jurisdiction of the Tax Court to include “stand alone” petitions for innocent spouse relief. The Senate, on December 9, passed the Act by a vote of 79-9. At press time, the President had not yet signed the Act, but was expected to do so on December 20.

The primary tax-related provisions of the Act are summarized below.

DIVISION A--EXTENSION AND EXPANSION OF CERTAIN TAX RELIEF PROVISIONS, AND OTHER TAX PROVISIONS

TITLE I--EXTENSION AND MODIFICATION OF CERTAIN PROVISIONS

Deduction for Qualified Tuition and
Related Expenses

[Act §101; Code §222]

The Act extends the above-the-line tuition deduction for two years, through December 31, 2007. Effective for taxable years beginning after December 31, 2005.

Extension and Modification of New Markets
Tax Credit

[Act §102; Code §45D]

The Act extends the new markets tax credit through 2008, permitting up to $3.5 billion in qualified equity investments for that calendar year. The Act also requires that the Secretary of the Treasury prescribe regulations to ensure that non-metropolitan counties receive a proportional allocation of qualified equity investments. Effective on the date of enactment.

Election to Deduct State and Local
General Sales Taxes

[Act §103; Code §164]

The Act allows taxpayers to elect to deduct state and local sales taxes in lieu of state and local income taxes for an additional two years (through December 31, 2007). Effective for taxable years beginning after December 31, 2005.

Extension and Modification of Research Credit

[Act §104; Code §41]

The Act extends the research credit two years (for amounts paid or incurred after December 31, 2005, and before January 1, 2008).

The Act also makes modifications to the research credit for one year (for amounts paid or incurred after December 31, 2006, and before January 1, 2008). The Act increases the rates of the alternative incremental credit: (1) a credit rate of 3% (rather than 2.65%) applies to the extent that a taxpayer's current-year research expenses exceed a base amount computed by using a fixed-base percentage of 1% (i.e., the base amount equals 1% of the taxpayer's average gross receipts for the four preceding years) but do not exceed a base amount computed by using a fixed-base percentage of 1.5%; (2) a credit rate of 4% (rather than 3.2%) applies to the extent that a taxpayer's current-year research expenses exceed a base amount computed by using a fixed-base percentage of 1.5% but do not exceed a base amount computed by using a fixed-base percentage of 2%; and (3) a credit rate of 5% (rather than 3.75%) applies to the extent that a taxpayer's current-year research expenses exceed a base amount computed by using a fixed-base percentage of 2%.

The Act also creates, at the election of the taxpayer, an alternative simplified credit for qualified research expenses. The alternative simplified research is equal to 12% of qualified research expenses that exceed 50% of the average qualified research expenses for the three preceding taxable years. The rate is reduced to 6% 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.

An election to use the alternative simplified credit may not be made for any taxable year for which an election to use the alternative incremental credit is in effect. A special transition rule applies which permits a taxpayer to elect to use the alternative simplified credit in lieu of the alternative incremental credit if such election is made during the taxable year which includes the date of enactment of the provision. The transition rule only applies to the taxable year which includes the date of enactment.

The extension of the research credit is effective to amounts paid or incurred after December 31, 2005. The modification of the alternative incremental credit and the creation of the alternative simplified credit is effective for amounts paid or incurred after December 31, 2006.

Work Opportunity Tax Credit and
Welfare-to-Work Credit

[Act §105; Code §§51, 51A]

The Act extends the work opportunity tax credit and welfare-to-work tax credit for one year without modification, respectively (for qualified individuals who begin work for an employer after December 31, 2005, and before January 1, 2007).

For qualified individuals who begin work for an employer after December 31, 2006, and before January 1, 2008, the Act combines and extends the two credits for a second year.

The combined credit (to be known as the work opportunity credit as the welfare-to-work credit is repealed) is available on an elective basis for employers hiring individuals from one or more of nine targeted groups. The nine targeted groups are the present-law eight groups under the work opportunity credit with the addition of the long-term family assistance recipient under the former welfare-to-work credit as the ninth targeted group. The Act repeals the requirement that a qualified ex-felon be an individual certified as a member of an economically disadvantaged family. The Act raises the age limit for the food stamp recipient category to include individuals aged 18 but not aged 40 on the hiring date.

Qualified first-year wages for the eight work opportunity tax credit categories remain capped at $6,000 ($3,000 for qualified summer youth employees). No credit is allowed for second-year wages. In the case of long-term family assistance recipients, the cap is $10,000 for both qualified first-year wages and qualified second-year wages. The combined credit follows the work opportunity tax credit definition of wages which does not include amounts paid by the employer for: (1) educational assistance excludible under a §127 program (or that is excludible but for the expiration of §127); (2) health plan coverage for the employee, but not more than the applicable premium defined under §4980B(f)(4); and (3) dependent care assistance excludible under §129. For all targeted groups, the employer's deduction for wages is reduced by the amount of the credit.

For purposes of calculating the credit for first-year wages, the Act provides that for the eight work opportunity tax credit categories, the credit equals 40% (25% for employment of 400 hours or less) of qualified first-year wages. In the case of second-year wages for long-term family assistance recipients the maximum credit is $5,000 (50% of the first $10,000 of qualified second-year wages).

The Act denies a credit if the employee works less than 120 hours in the first year of employment.

The extension of the credits is effective for wages paid or incurred to a qualified individual who begins work for an employer after December 31, 2005, and before January 1, 2008. The consolidation of the credits and other modifications are effective for wages paid or incurred to a qualified individual who begins work for an employer after December 31, 2006, and before January 1, 2008.

Election to Include Combat Pay as Earned Income for Purposes of Earned Income Credit

[Act §106; Code §32]

The Act extends for one year (through December 31, 2007) the availability of the election to treat combat pay that is otherwise excluded from gross income under §112 as earned income for purposes of the earned income credit. Effective in taxable years beginning after December 31, 2006.

Extension and Modification of Qualified Zone Academy Bonds

[Act §107; Code §1397E]

The Act extends the present-law QZAB provision for two years (through December 31, 2007). In addition, the Act imposes the arbitrage requirements of §148 that apply to interest-bearing tax-exempt bonds to qualified zone academy bonds. The Act also imposes new spending requirements for qualified zone academy bonds. In addition, issuers of qualified zone academy bonds are required to report issuance to the IRS in a manner similar to the information returns required for tax-exempt bonds.

The extension of issuance authority is effective for bonds issued after December 31, 2005. The imposition of arbitrage restrictions, reporting requirements, and spending requirements apply to bonds issued after the date of enactment with respect to allocations of the annual aggregate bond cap for calendar years after 2005.

Above-the-Line Deduction for Certain Expenses of Elementary and Secondary School Teachers

[Act §108; Code §62]

The Act extends the above-the-line teachers' deduction for two years, through December 31, 2007. Effective for expenses paid or incurred in taxable years beginning after December 31, 2005.

Extension and Expansion of Expensing of Brownfields Remediation Costs

[Act §109; Code §198]

The Act extends for two years the present-law provisions relating to environmental remediation expenditures (through December 31, 2007). In addition, the Act expands the definition of hazardous substance to include petroleum products (as defined by reference to §4612(a)(3), and thus include crude oil, crude oil condensates and natural gasoline). Effective for expenditures paid or incurred after December 31, 2005, and before January 1, 2008.

Tax Incentives for Investment in the
District of Columbia

[Act §110; Code §§1400, 1400A, 1400B, 1400C]

The Act extends the designation of the D.C. Zone for two years (through December 31, 2007). This, in turn, extends the wage credit and §179 expensing for two years. The Act extends the tax-exempt financing authority for two years, applying to bonds issued during the period beginning on January 1, 1998, and ending on December 31, 2007. The Act also extends the zero-percent capital gains rate applicable to capital gains from the sale of certain qualified D.C. Zone assets for two years. In addition, the Act extends the first-time homebuyer credit for two years, through December 31, 2007. Effective for periods beginning after, bonds issued after, acquisitions after, and property purchased after December 31, 2005.

Indian Employment Tax Credit

[Act §111; Code §45A]

The Act extends for two years the present-law employment credit provision (through taxable years beginning on or before December 31, 2007). Effective for taxable years beginning after December 31, 2005.

Accelerated Depreciation for Business Property on Indian Reservations

[Act §112; Code §168]

The Act extends for two years the present-law incentive relating to depreciation of qualified Indian reservation property (to apply to property placed in service through December 31, 2007). Effective for property placed in service after December 31, 2005.

Fifteen-Year Straight-Line Cost Recovery for Qualified Leasehold Improvements and Qualified
Restaurant Property

[Act §113; Code §168]

The Act extends for two years (through December 31, 2007) the MACRS recovery period for qualified leasehold improvement property and qualified restaurant property. Effective for property placed in service after December 31, 2005.

Cover Over of Tax on Distilled Spirits

[Act §114; Code §7652]

The Act temporarily suspends 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 Act, the cover over amount of $13.25 per proof gallon is extended for rum brought into the United States after December 31, 2005, and before January 1, 2008. After December 31, 2007, the cover over amount reverts to $10.50 per proof gallon. Effective for articles brought into the United States after December 31, 2005.

Parity in Application of Certain Limits to Mental Health Benefits

[Act §115; Code §9812]

The Act extends the present-law Code excise tax for failure to comply with the mental health parity requirements through December 31, 2007. It also extends the ERISA and PHSA requirements through December 31, 2007. Effective on the date of enactment.

Corporate Donations of Scientific Property Used for Research and of Computer Technology Equipment

[Act §116; Code §170]

The Act extends the present-law provision relating to the enhanced deduction for computer technology and equipment for two years to apply to contributions made during any taxable year beginning after December 31, 2005, and before January 1, 2008. Under the Act, property assembled by the taxpayer, in addition to property constructed by the taxpayer, is eligible for either the enhanced deduction relating to computer technology and equipment or to scientific property used for research. It is not intended that old or used components assembled by the taxpayer into scientific property or computer technology or equipment are eligible for the enhanced deduction. Effective for taxable years beginning after December 31, 2005.

Availability of Medical Savings Accounts

[Act §117; Code §220]

The Act extends the present-law Archer MSA provisions through December 31, 2007. The report required by Archer MSA trustees is treated as timely filed if made before the close of the 90-day period beginning on the date of enactment. Effective on the date of enactment.

[Act §118; Code §613A]

The Act extends for two years the present-law taxable income limitation suspension provision for marginal production (through taxable years beginning on or before December 31, 2007). Effective for taxable years beginning after December 31, 2005.

[Act §119; related to Code §§30A, 936]

The Act provides that a domestic corporation that is an existing credit claimant with respect to American Samoa and that elected the application of §936 for its last taxable year beginning before January 1, 2006, is allowed, for two taxable years, a credit using modified rules of §30A. The amount of the credit allowed to a qualifying domestic corporation under the Act is equal to the sum of the amounts used in computing the corporation's economic activity-based limitation (as defined in §30A) 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% of the corporation's qualified American Samoa wages and allocable employee fringe benefit expenses; and (2) 15% of the corporation's depreciation allowances with respect to shortlife qualified American Samoa tangible property, plus 40% of the corporation's depreciation allowances with respect to medium-life qualified American Samoa tangible property, plus 65% of the corporation's depreciation allowances with respect to long-life qualified American Samoa tangible property.

Under the Act, the §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 §936 does not apply with respect to the credit allowed by the provision.

Effective for the first two taxable years of a corporation which begin after December 31, 2005, and before January 1, 2008.

[Act §120; Code §1400N(d)]

The Act extends the placed-in-service deadline for specified Gulf Opportunity Zone extension property to qualify for the additional first-year depreciation deduction. Specified Gulf Opportunity Zone extension property is defined as property substantially all the use of which is in one or more specified portions of the Gulf Opportunity Zone and which is either: (1) nonresidential real property or residential rental property which is placed in service by the taxpayer on or before December 31, 2010; or (2) in the case of a taxpayer who places in service a building described in (1), above, property described in §168(k)(2)(A)(i) if substantially all the use of such property is in such building and such property is placed in service within 90 days of the date the building is placed in service. The specified portions of the Gulf Opportunity Zone are those portions of the Gulf Opportunity Zone which are in a county or parish which is identified by the Secretary of the Treasury (or his delegate) as being a county or parish in which hurricanes occurring in 2005 damaged (in the aggregate) more than 60% of the housing units in such county or parish which were occupied (determined according to the 2000 Census). However, in the case of nonresidential real property or residential rental property, only the adjusted basis of such property attributable to manufacture, construction, or production before January 1, 2010 (“progress expenditures") is eligible for the additional first-year depreciation.

Effective as if included in §101 of the Gulf Opportunity Zone Act of 2005, P.L. 109-73 (property placed in service on or after August 28, 2005, in taxable years ending on or after such date).

[Act §121; Code §7608]

The Act extends the authority of the IRS to conduct undercover operations until 2008.

[Act §122; Code §6103]

The Act: (1) extends the authority of the IRS to make disclosures to state tax officials and state and local law enforcement authorities through 2007 (§6013(d)(5)(B)); (2) extends the authority of the IRS to make disclosures relating to terrorist activities through 2007 (§6103(i)(3)(C)(iv) and (i)(7)(E)); and (3) extends the authority of the IRS to make disclosures to the Secretary of Education in connection with student loans through 2007 (§6013(l)(13)(D)).

[Act §123; Code §§41, 280C]

The Act provides that, in the case of any taxable year which ends after December 31, 2005 and before the date of enactment of the Act, an election under §41(c)(4), §280C(c)(3)(C), or any other expired provision of the Code which is extended by the Act is treated as timely if made not later than April 15, 2007, or such other time as the Secretary or his designee provide. The election must be made in the manner prescribed by the Secretary or his designee.

Effective on the date of enactment.

TITLE II--ENERGY TAX PROVISIONS

[Act §201; Code §45]

The Act extends the renewable energy credit to apply to qualified facilities placed in service before January 1, 2009.

[Act §202; Code §54]

The Act extends the clean renewable energy bonds credit to include bonds issued before January 1, 2009. It also raises the caps on the amount of bonds that may be issued and the amount that may be used to finance projects of governmental bodies.

This provision applies to bonds issued after December 31, 2006, or to allocations or reallocations after that date.

[Act §203 Code §48A]

The Act adds a performance standard for sulfur dioxide removal in electric generation units designed to use subbituminous coal.

This provision applies with respect to §46A(d)(2) applications for certification submitted after October 2, 2006.

[Act §204; Code §179D]

The Act extends the deduction for energy efficient commercial buildings for one year, to include property placed in service before January 1, 2009.

Effective for property placed in service after December 31, 2007.

[Act §205; Code §45L]

The Act extends the credit for new energy efficient homes for one year, for homes acquired by December 31, 2008.

Effective for qualified new energy efficient homes acquired after December 31, 2007.

[Act §206; Code §25D]

The Act extends the credit for residential energy efficient property for one year, through December 31, 2008. The Act also clarifies the term “qualified photovoltaic property expenditures” by replacing it with “qualified solar electric property expenditures,” but does not change the definition of the term.

Credit extension effective for property placed in service after December 31, 2007; clarification effective for property placed in service after December 31, 2005, in tax years ending after that date.

[Act §207; Code §48]

The Act extends for one year, through December 31, 2008, the energy credit for: (1) equipment that uses solar energy to generate electricity, to heat or cool a structure, or to provide solar process heat, (2) equipment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, (3) qualified fuel cell property, and (4) qualified microturbine property.

[Act §208; Code §4041]

The Act extends through December 31, 2008: (1) the reduced excise tax rate on qualified methanol or ethanol fuel sold for use in, or used in, a motor vehicle or motorboat; and (2) the special applicable blender rate for purposes of that reduced excise tax rate. Thus, for purposes of that reduced excise tax rate, the applicable blender rate for sales or uses during calendar years 2001 through 2008 is one-tenth of the blender amount applicable under the alcohol fuels credit for ethanol blenders.

[Act §209; Code §168]

The Act provides an additional first-year depreciation allowance for depreciable property used in the United States solely to produce cellulosic biomass ethanol, provided that the property's original use begins with the taxpayer after the date of enactment, the taxpayer acquires it by purchase after the date of the enactment, and it is placed in service by the taxpayer before 2013. This additional allowance, in the amount of 50% of the property's adjusted basis, is allowed for the taxable year in which the property is placed in service. The property's adjusted basis is reduced by the deduction amount before computing the otherwise allowable depreciation deduction for that taxable year and later taxable years. The allowance does not apply to alternative depreciation property or to tax-exempt bond financed property. Taxpayers may elect out of the additional allowance with respect to any class of property for any taxable year. For purposes of determining alternative minimum taxable income, the additional depreciation allowance is allowed in full.

Effective for property placed in service after the date of the enactment in taxable years ending after that date.

[Act §210; Code §9508]

The Act authorizes the 0.1 cent per-gallon Leaking Underground Storage Tank (“LUST") Trust Fund tax amounts to be used to carry out the following provisions of the Solid Waste Disposal Act (as in effect on January 10, 2006):

• §9003(i) (relating to measures to protect ground water);

• §9003(j) (relating to compliance of government-owned tanks);

• §9004(f) (relating to 80 percent distribution requirement for State enforcement efforts);

• §9005(c) (relating to inspection of underground storage tanks);

• §9010 (relating to operator training);

• §9011 (relating to funds for release prevention and compliance);

• §9012 (relating to the delivery prohibition for ineligible tanks/guidance/compliance); and

• §9013 (relating to strategy for addressing tanks on tribal lands).

The Code continues to authorize the use of amounts in the LUST Trust Fund to carry out the purposes of §9003(h) of the Solid Waste Disposal Act (as in effect on January 10, 2006, the date of enactment of P.L. 109-168).

Effective on the date of enactment.

[Act §211; Code §45K(g)(2)]

The Act provides that the phaseout provision of §45K (the nonconventional fuel source credit) is inapplicable to facilities producing coke or coke gas. Further, the Act carves out facilities producing coke or coke gas from petroleum based products from the definition of qualifying facilities. Effective as if included in the 2005 Energy Policy Act, P.L. 109-58, §1321.

TITLE III--HEALTH SAVINGS ACCOUNTS

[Act §302; Code §§106, 223]

The Act allows certain amounts in a health flexible spending account (FSA) or health reimbursement arrangement (HRA) to be distributed from the health FSA or HRA and contributed through a direct transfer to a health savings account (HSA) without violating the otherwise applicable requirements for such arrangements. Under the Act, the amount that can be distributed from a health FSA or HRA and contributed to an HSA may not exceed an amount equal to the lesser of (1) the balance in the health FSA or HRA as of September 21, 2006, or (2) the balance in the health FSA or HRA as of the date of the distribution. The Act provides that the balance in the health FSA or HRA as of any date is determined on a cash basis (i.e., expenses incurred that have not been reimbursed as of the date the determination is made are not taken into account). Under the Act, amounts contributed to an HSA under the provision are excludible from gross income and wages for employment tax purposes, are not taken into account in applying the maximum deduction limitation for other HSA contributions, and are not deductible. The Act requires that contributions be made directly to the HSA before January 1, 2012, and the provision is limited to one distribution with respect to each health FSA or HRA of the individual.

Under the Act, if an individual for whom a contribution is made under the provision does not remain an eligible individual during the testing period, the amount of the contribution is includible in gross income of the individual, but an exception applies if the employee ceases to be an eligible individual by reason of death or disability. According to the Act, the testing period is the period beginning with the month of the contribution and ending on the last day of the twelfth month following such month. The Act provides that the amount is includible for the taxable year of the first day during the testing period that the individual is not an eligible individual. Under the Act, a 10% additional tax also applies to the amount includible.

Under the Act, a modified comparability rule applies with respect to contributions under the provision: if the employer makes available to any employee the ability to make contributions to the HSA from distributions from a health FSA or HRA under the provision, all employees who are covered under a high deductible plan of the employer must be allowed to make such distributions and contributions; the §4980G excise tax applies if this requirement is not met. The legislative history under the Act provides the following example. Assume the balance in a health FSA as of September 21, 2006, is $2,000, and the balance in the account as January 1, 2008, is $3,000. Under the provision, a health FSA will not be considered to violate applicable rules if, as of January 1, 2008, an amount not to exceed $2,000 is distributed from the health FSA and contributed to an HSA of the individual. The $2,000 distribution is not includible in income, and the subsequent contribution is not deductible and does not count against the annual maximum tax deductible contribution that can be made to the HSA. If the individual ceases to be an eligible individual as of June 1, 2008, the $2,000 contribution amount is included in gross income and subject to a 10% additional tax. If, instead, the distribution and contribution are made as of June 30, 2008, when the balance in the health FSA is $1,500, the amount of the distribution and contribution is limited to $1,500.

Under the Act, the rule that an individual is not an eligible individual if the individual has coverage under a general purpose health FSA or HRA continues to apply. However, the Act provides that, for taxable years beginning after December 31, 2006, in certain cases, coverage under a health FSA during the period immediately following the end of a plan year during which unused benefits or contributions remaining at the end of such plan year may be paid or reimbursed to plan participants for qualified expenses is disregarded coverage. Under the Act, such coverage is disregarded if (1) the balance in the health FSA at the end of the plan year is zero, or (2) in accordance with rules prescribed by the Secretary of Treasury, the entire remaining balance in the health FSA at the end of the plan year is contributed to an HSA under the provisions discussed above. According to the legislative history, it is intended that the Secretary will provide guidance with respect to the timing of health FSA distributions contributed to an HSA in order to facilitate such rollovers and the establishment of HSAs in connection with high deductible plans.

The provision allowing rollovers from health FSAs and HRAs into HSAs is effective for distributions and contributions on or after the date of enactment and before January 1, 2012. The provision disregarding certain FSA coverage is effective after the date of enactment with respect to coverage for taxable years beginning after December 31, 2006.

[Act §303; Code §223]

The Act modifies the limit on the annual deductible contributions that can be made to an HSA so that the maximum deductible contribution is not limited to the annual deductible under the high deductible health plan.

Effective for taxable years beginning after December 31, 2006.

[Act §304; Code §223]

Under the Act, in the case of adjustments made for any taxable year beginning after 2007, the Consumer Price Index for a calendar year is determined as of the close of the 12-month period ending on March 31 of the calendar year (rather than August 31) for the purpose of making cost-of-living adjustments for the HSA dollar amounts that are indexed for inflation (i.e., the contribution limits and the high deductible health plan requirements). The Act also requires the Secretary of Treasury to publish the adjusted amounts for a year no later than June 1 of the preceding calendar year.

Effective for adjustments made for taxable years beginning after 2007.

[Act §305; Code §223]

The Act generally allows individuals who become covered under a high deductible plan in a month other than January to make the full deductible HSA contribution for the year. Under the Act, an individual who is an eligible individual during the last month of a taxable year is treated as having been an eligible individual during every month during the taxable year for purposes of computing the amount that may be contributed to the HSA for the year, and thus, such individual is allowed to make contributions for months before the individual was enrolled in a high deductible health plan. According to the Act, for the months preceding the last month of the taxable year that the individual is treated as an eligible individual solely by reason of this provision, the individual is treated as having been enrolled in the same high deductible health plan in which the individual was enrolled during the last month of the taxable year.

The Act provides that if an individual makes contributions and does not remain an eligible individual during the testing period, the amount of the contributions attributable to months preceding the month in which the individual was an eligible individual which could not have been made but for the provision are includible in gross income. Under the Act, an exception applies if the employee ceases to be an eligible individual by reason of death or disability. The Act provides that the testing period is the period beginning with the last month of the taxable year and ending on the last day of the twelfth month following such month. The Act further provides that the amount is includible for the taxable year of the first day during the testing period that the individual is not an eligible individual, and a 10% additional tax also applies to the amount includible.

The legislative history under the Act provides the following example. Assume individual T enrolls in high deductible plan H in December 2007 and is otherwise an eligible individual in that month. T was not an eligible individual in any other month in 2007. T may make HSA contributions as if he or she had been enrolled in plan H for all of 2007. If T ceases to be an eligible individual (e.g., if he or she ceases to be covered under the high deductible health plan) in June 2008, an amount equal to the HSA deduction attributable to treating T as an eligible individual for January through November 2007 is included in income in 2008. In addition, a 10% additional tax applies to the amount includible.

Effective for taxable years beginning after December 31, 2006.

[Act §306; Code §4980G]

The Act provides an exception to the comparable contribution requirements which allows employers to make larger HSA contributions for non-highly compensated employees than for highly compensated employees.

Effective for taxable years beginning after December 31, 2006.

[Act §307; Code §§408, 223]

The Act allows a one-time contribution to an HSA of amounts distributed from an individual retirement arrangement (IRA), which must be made in a direct trustee-to-trustee transfer. The Act provides that such amounts distributed from an IRA are not includible in income to the extent that the distribution would otherwise be includible in income, and further, such distributions are not subject to the 10% additional tax on early distributions. In determining the extent to which amounts distributed from the IRA would otherwise be includible in income, the Act provides that the aggregate amount distributed from the IRA is treated as includible in income to the extent of the aggregate amount which would have been includible if all amounts from all individual retirement plans were distributed.

Under the Act, the amount that can be distributed from the IRA and contributed to an HSA is limited to the otherwise maximum deductible contribution amount to the HSA computed on the basis of the type of coverage under the high deductible health plan at the time of the contribution, and further, the amount that can otherwise be contributed to the HSA for the year of the contribution from the IRA is reduced by the amount contributed from the IRA. Under the Act, no deduction is allowed for the amount contributed from an IRA to an HSA.

The Act provides that only one distribution and contribution under the provision may be made during the lifetime of the individual, except that if a distribution and contribution are made during a month in which an individual has self-only coverage as of the first day of the month, an additional distribution and contribution may be made during a subsequent month within the taxable year in which the individual has family coverage; the limit applies to the combination of both contributions.

Under the Act, if the individual does not remain an eligible individual during the testing period, the amount of the distribution and contribution is includible in gross income of the individual, but an exception applies if the employee ceases to be an eligible individual by reason of death or disability. The Act provides that the testing period is the period beginning with the month of the contribution and ending on the last day of the twelfth month following such month. Under the Act, the amount is includible for the taxable year of the first day during the testing period that the individual is not an eligible individual. The Act provides that a 10% additional tax also applies to the amount includible.

Under the Act, this provision does not apply to simplified employee pensions (SEPs) or to SIMPLE retirement accounts.

Effective for taxable years beginning after December 31, 2006.

TITLE IV--OTHER PROVISIONS

[Act §401; Code §199]

The Act includes in the definition of domestic production gross receipts taxable gross receipts from sources in Puerto Rico and does not exclude from the definition of W-2 wages remuneration paid (by taxpayers that have taxable gross receipts from sources in Puerto Rico) for services performed in Puerto Rico. Effective for the first two taxable years beginning after 2005 and before 2008.

[Act §402; Code §53]

The Act allows a refundable credit for a prior year minimum tax liability after a period of years. Specifically, the Act provides that if an individual has a long-term unused minimum tax credit for any taxable year beginning before January 1, 2013, the applicable credit limitation for the taxable year at issue will not be less than the AMT refundable amount.

The Act defines the AMT refundable amount as the amount equal to the greater of either of two amounts. The first amount is the amount of long-term unused minimum tax credit for that taxable year, not to exceed $5,000. The second amount is 20% of the amount of the credit.

The Act defines “long-term unused minimum tax credit” as the portion of the minimum tax credit as determined under §53(b) attributable to the adjusted net minimum tax for taxable years before the third taxable year immediately preceding the taxable year at issue. Finally, the Act applies a phase-out of the AMT refundable credit for individuals whose adjusted gross incomes for any taxable year exceeds the same threshold amount as that applicable to the phase-out of the personal exemption deduction.

Effective for taxable years beginning after the date of enactment.

[Act §403; Code §6039]

The Act provides that a corporation that transfers stock to a person exercising an incentive stock option or records the transfer of stock where the transferor acquired the stock under §423(c) (an employee stock purchase plan where the option price is between 85% and 100% of the stock value) is required to file a return with such information and also provide a written statement to the person exercising the option or the person transferring the stock acquired under §423(c).

Effective for calendar years beginning after the date of enactment.

[Act §404; Code §179E (new)]

The Act provides that a taxpayer may irrevocably elect to treat 50% of the cost of any qualified advanced mine safety equipment property as an expense which is not chargeable to capital account. Any cost that is treated as an expense is allowed as a deduction for the taxable year in which the qualified advanced mine safety equipment property is placed in service.

Advanced mine safety equipment property means any of the following: (1) emergency communication technology or devices; (2) electronic identification and location devices; (3) emergency oxygen-generating, self-rescue devices; (4) pre-positioned supplies of oxygen; and (5) comprehensive atmospheric monitoring systems.

To be treated as qualified advanced mine safety equipment property under the provision, the original use of the property must have commenced with the taxpayer.

The deduction does not apply to property placed in service after December 31, 2008. Effective for costs paid or incurred after the date of enactment.

[Act §405; Code §45N (new)]

The Act provides for a mine rescue team training credit with respect to each qualified mine rescue team employee of an eligible employer for any taxable year. The credit is an amount equal to the lesser of 20% of the amount paid or incurred by the taxpayer during the taxable year with respect to the training program costs of such qualified mine rescue team employee (including wages of such employee while attending such program), or $10,000. The credit is made part of the general business credit of §38. Effective for taxable years ending after December 31, 2005 and before January 1, 2009.

[Act §406; Code §§62, 7443A, 7623]

The Act provides for an award of 15% to 30% of the amount recovered by the IRS to an individual providing information that results in an administrative or judicial action brought against a taxpayer for underpayment of tax or fraud. In the case of a less substantial contribution, an award of up to 10% is made. The provision is limited to reporting any taxpayer if the tax, penalties, interest, additions to tax and additional amounts in dispute exceed $2,000,000, and in the case of an individual, if the gross income exceeds $200,000.

Such award is reduced if the individual whistleblower planned or initiated the underpayment or fraud, and be denied if the whistleblower is convicted of criminal conduct arising from the role played. The Act provides for an appeal of any determination regarding an award to the Tax Court within 30 days of the determination. The Act also provides that attorneys fees and court costs paid by the whistleblower in connection with the award are deductible.

The Act also provides for the establishment of “Whistleblower Office” within the IRS to administer the whistleblower program.

Effective for information provided on or after the date of enactment.

[Act §407; Code §§6320, 6330, 6702, 7122]

The Act amends §6702 to increase the penalty for filing a frivolous tax return from $500 to $5,000, and directs the IRS to develop a list of frivolous positions.

The Act also amends §6702 to impose a $5,000 penalty for “specified frivolous submissions,” i.e., a penalty applies to requests for a Collection Due Process (CDP) hearing under §6320 or §6330 that contain a frivolous position or reflect a desire to delay or impede the administration of the federal tax laws, and to applications for installment agreements (§6159), offers in compromise (§7122), or Taxpayer Assistance Orders (§7811) that contain a frivolous position or reflect a desire to delay or impede the administration of the federal tax laws. The penalty does not apply if a taxpayer withdraws a submission within 30 days after being notified by the IRS that the submission was frivolous, and the IRS could reduce a penalty if it determined that doing so would promote compliance with and administration of the tax laws.

Under the Act, the IRS also could treat frivolous CDP requests and applications for offers in compromise and installment agreements as if they had never been submitted and such requests or applications (or portions thereof) would not be subject to any further administrative or judicial review.

Effective for submissions made and issues raised after the date on which the Secretary first prescribes a list of frivolous positions.

[Act §408; Code §4132(a)]

The Act adds the meningococcal and human papillomavirus vaccines to the list of taxable vaccines.

Effective for sales and uses on or after the first day of the first month which begins more than 4 weeks after the date of the enactment. In the case of sales on or before the effective date for which delivery is made after such date, the delivery date is considered the sale date.

[Act §409; Code §468B]

The Act makes permanent the exemption from tax for certain settlement funds beneficially owned by the United States. The exemption was scheduled to terminate for funds created after December 31, 2010.

Effective as if it were included in §201 of the 2005 Tax Increase Prevention and Reconciliation Act.

[Act §410; Code §355]

The 2005 Tax Increase Prevention and Reconciliation Act, P.L. 109-222, §202, temporarily suspended the “substantially all” test of §355(b)(2), and instead, provided that in determining if the active trade or business test of §355 is satisfied, the test is applied on an affiliated group basis, making it irrelevant whether a business is owned directly or indirectly through a holding company, and removing the need for the restructuring that many companies undertake to satisfy the active trade or business requirement. The Act permanently removes the “substantially all” test, and makes permanent the affiliated group basis test in determining if the active trade or business test of §355 is satisfied. Effective as if included in the 2005 Tax Increase Prevention and Reconciliation Act, P.L. 109-222, §202.

[Act §411; Code §143]

The Act makes permanent changes to the definition of an eligible veteran and the state volume limits for qualified veterans' mortgage bonds issued by Alaska, Oregon, and Wisconsin made under the 2005 Tax Increase Prevention and Reconciliation Act, §203. The total volume of veterans' bonds that can be issued in each of these three states is $25 million for 2010 and each calendar year thereafter.

Effective as if it were included in §203 of the 2005 TIPRA.

[Act §412; Code §1221]

The Act makes permanent capital gains treatment for certain self-created musical works under §1221(b)(3). Effective as if included in the 2005 Tax Increase Prevention and Reconciliation Act, P.L. 109-222, §204.

[Act §413; Code §1355]

A qualifying vessel operator may elect to be subject to a tonnage tax in lieu of the corporate income tax on each qualifying vessel of at least 10,000 deadweight tons for periods during which the vessel is used exclusively in U.S. foreign trade. 2005 TIPRA lowered the minimum requirement for a qualifying vessel to 6,000 deadweight tons, thereby expanding the elective tonnage tax to a larger number of vessels, for taxable years beginning after December 31, 2005, and ending before January 1, 2011.

The Act makes permanent the reduction to 6,000 deadweight tons as the minimum requirement for a qualifying vessel.

Effective for taxable years beginning after December 31, 2005.

[Act §414; 2005 TIPRA §206]

The Act makes permanent an exception to the arbitrage restrictions, enacted under the 1984 Deficit Reduction Act, which provides that the pledge of income from investments in the Texas Permanent University Fund as security for a limited amount of tax-exempt bonds will not cause interest on those bonds to be taxable. Effective as if included in the 2005 Tax Increase Prevention and Reconciliation Act, P.L. 109-222, §206.

[Act §415; Code §1355]

A qualifying vessel operator may elect to be subject to a tonnage tax in lieu of the corporate income tax on each qualifying vessel for periods during which the vessel is used exclusively in U.S. foreign trade. For this purpose, “U.S. foreign trade” (defined as the transportation of goods or passengers between a place in the United States and a foreign place or between foreign places) does not include “U.S. domestic trade” (defined as the transportation of goods or passengers between places in the United States). An electing corporation is treated as continuing to use a qualifying vessel in U.S. foreign trade during any period of temporary use in U.S. domestic trade until the vessel resumes operation in U.S. foreign trade, or otherwise abandons its intention to do so, provided that the qualifying vessel is not operated in U.S. domestic trade for more than 30 days during the taxable year.

The Act for this purpose treats use of a vessel in “qualified zone domestic trade,” defined as the transportation in U.S. domestic trade of goods or passengers between places in the Great Lakes Waterway and the St. Lawrence Seaway, as use in U.S. foreign trade (and not use in U.S. domestic trade). An electing corporation is treated as continuing to use a qualifying vessel in U.S. foreign trade during any period of temporary use in U.S. domestic trade (other than qualifying zone domestic trade) until the vessel resumes operation in U.S. foreign trade or qualified zone domestic trade, or abandons its intention to do so, provided that the qualifying vessel is not operated in U.S. domestic trade for more than 30 days during the taxable year.

Effective for taxable years beginning after the date of enactment.

[Act §416; Code §143]

The Act removes the “first-time homebuyer” restriction from qualified veterans' mortgage bonds issued after the date of enactment and before January 1, 2008, unless the veteran had previously qualified for and received mortgage bond financing. Under current law, qualified veterans' mortgage bonds may not be used for veterans who had a present ownership interest in a principal residence in the three years preceding execution of the mortgage.

Effective for bonds issued after the date of enactment and before January 1, 2008.

[Act §417; Code §121]

The Act adds employees of the intelligence community on qualified extended duty at a duty station outside the United States to the list of individuals eligible to elect to suspend the five-year test period for ownership and use of a principal residence for purposes of the exclusion of gain from the sale of a principal residence.

Under the Act, the election applies to employees of the Office of the Director of National Intelligence; Central Intelligence Agency; National Security Agency; Defense Intelligence Agency; National Geospatial-Intelligence Agency; National Reconnaissance Office or any other office within the Defense Department for the collection of specialized national intelligence through reconnaissance programs; Bureau of Intelligence and Research of the State Department; any intelligence element of the Army, Navy, Air Force, Marine Corps, Federal Bureau of Investigation, Treasury Department, Energy Department, and Coast Guard; and any element of the Department of Homeland Security concerned with the analyses of foreign intelligence information.

Effective for sales or exchanges after the date of enactment and before January 1, 2011.

[Act §418; Code §1043]

The Act adds certain judicial officers to the list of government employees or officers who can defer gain on property required to be sold in order to comply with conflict-of-interest requirements. Under the Act, a judicial officer selling property in order to comply with a judicial canon who receives a certificate of divestiture from the Judicial Conference of the United States will not recognize gain on the sale of the property to the extent that the proceeds are reinvested in permitted property during the 60-day period after the sale.

The Act defines the term “judicial officer” as the justices of the Supreme Court; judges of United States courts of appeals and district courts (including district courts in Guam, the Northern Mariana Islands, and the Virgin Islands); judges of the Court of Appeals for the Federal Circuit, the Tax Court, the Court of International Trade, the Court of Federal Claims, the Court of Appeals for Veteran Claims, and the Court of Appeals for the Armed Forces; and judges of any court created by Congress who are entitled to hold office during good behavior.

Effective for sales after the date of enactment.

[Act §419; Code §§163, 6050H]

The Act provides that premiums paid or accrued for qualified mortgage insurance by a taxpayer during the taxable year in connection with acquisition indebtedness with respect to a qualified residence of the taxpayer is treated as interest which is qualified residence interest.

In addition, the Act defines qualified mortgage insurance as mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined by §2 of the Homeowners Protection Act of 1998, 12 U.S.C. §4901, as in effect on the date of the enactment).

No deduction is allowed for any amount paid or accrued after December 31, 2007, or properly allocable to any period after that date. In addition, under the Act, the amount allowable as a deduction is phased out ratably by 10% for each $1,000 (or fraction thereof) by which the taxpayer's adjusted gross income exceeds $100,000 ($500 and $50,000, respectively, in the case of a married individual filing a separate return). Thus, the deduction is not allowed if the taxpayer's adjusted gross income exceeds $109,000 ($54,500 in the case of married individual filing a separate return).

Moreover, for prepaid qualified mortgage insurance, the Act provides that any amount paid by the taxpayer for qualified mortgage insurance that is properly allocable to any mortgage the payment of which extends to periods that are after the close of the taxable year in which such amount is paid is chargeable to capital account and treated as paid in such periods to which so allocated. No deduction is allowed for the unamortized balance of such account if such mortgage is satisfied before the end of its term. This provision does not apply to amounts paid for qualified mortgage insurance provided by the Veterans Administration or the Rural Housing Administration.

The Act also provides that the Treasury Secretary could prescribe, by regulations, that any person who, in the course of a trade or business, receives from any individual premiums for mortgage insurance aggregating $600 or more for any calendar year, shall make a return with respect to each such individual. Such return is in such form, made at such time, and contains such information as the Secretary shall prescribe.

Effective for mortgage insurance contracts issued after December 31, 2006 and amounts paid or accrued before January 1, 2008 or properly allocable to any period prior to such date.

[Act §420; Code §6427]

The Act modifies the refund for nontaxable uses of kerosene used in aviation. Presently, §6427 provides for a refund of the tax applicable to diesel fuels, kerosene, or special motor fuels purchased in a taxable transaction and actually used for exempt uses.

The Act provides that for certain kerosene used in commercial aviation, the refund for a nontaxable use will not apply to that portion of the tax attributable to fund the Leaking Underground Storage Tank (LUST) Trust Fund and to that portion of the tax rate as does not exceed 4.3 cents per gallon.

The Act further provides that in the case of certain noncommercial aviation uses of kerosene, the refund amount does not apply to the tax imposed on certain liquids used as aviation fuel under §4041(c); and to the tax attributable to the LUST Trust Fund financing rate under §4081 and the 24.3 cents per gallon rate that does not exceed the 21.8 cent per gallon rate for fuel used in aviation.

The Act also allows payments to the ultimate vendor with respect to certain kerosene uses if specific registration requirements, among other requirements, are met. Special rules are provided for pending claims and for refunds for kerosene used in aviation on a farm for farming purposes and purchased after December 31, 2004, and before October 1, 2005. Finally, no refund amount can exceed the §§4041 and 4081 excise tax amounts.

Effective for kerosene sold after September 31, 2005.

[Act §421; Code §6103]

The Act amends §6103 to treat regional income tax agencies (i.e., municipalities that impose a tax on income or wages) as a state for purposes of the confidentiality and disclosure rules in the Code.

Effective for disclosures made after December 31, 2006.

[Act §422; Code §5388]

The Act revises the requirements for the labeling of semi-generic wines, implementing a trade agreement with the European Union regarding the labeling of wine.

Applicable to wine imported or bottled in the United States on or after the date of enactment.

[Act §423; Code §45G]

The Act modifies the definition of qualified railroad track expenditures, so that the term means 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 expenditures given by the Class II or Class III railroad which made the assignment of such track).

Effective for expenditures paid or incurred during taxable years beginning after December 31, 2004, and before January 1, 2008.

[Act §424; Code §664]

The Act imposes a 100% excise tax on the unrelated business taxable income of a charitable remainder trust. This replaces the present-law rule that takes away the income tax exemption of a charitable remainder trust for any year in which the trust has any unrelated business taxable income. The tax is treated as paid from corpus. The unrelated business taxable income is considered income of the trust for purposes of determining the character of the distribution made to the beneficiary.

Effective for taxable years beginning after December 31, 2006.

[Act §425; Code §7872(h)]

The Act makes permanent the Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA”) modifications to §7872 regarding below-market loans to qualified continuing care facilities.

Among other changes, TIPRA modified the exception under §7872 relating to loans to continuing care facilities by eliminating the dollar cap on aggregate outstanding loans.

Further, under the TIPRA provision, a continuing care contract is a written contract between an individual and a qualified continuing care facility under which: (1) the individual or the individual's spouse may use a qualified continuing care facility for the life or lives of one or both individuals; (2) the individual or the individual's spouse will be provided with housing, as appropriate for the health of such individual or individual's spouse, (i) in an independent living unit (which has additional available facilities outside such unit for the provision of meals and other personal care), and (ii) in an assisted living facility or a nursing facility, as is available in the continuing care facility; and (3) the individual or the individual's spouse will be provided assisted living or nursing care as the health of the individual or the individual's spouse requires, and as is available in the continuing care facility. The Secretary is required to issue guidance that limits the term “continuing care contract” to contracts that provide only facilities, care, and services described in the preceding sentence.

Effective as if included in §209 of TIPRA, i.e., for calendar years beginning after December 31, 2005, with respect to loans made before, on, or after such date.

[Act §426; Code §954]

Under the Act, for taxable years beginning after 2005 and before 2009, dividends, interest (including factoring income which is treated as equivalent to interest under §954(c)(1)(E)), rents, and royalties received by one controlled foreign corporation (“CFC”) from a related CFC are not treated as foreign personal holding company income to the extent attributable or properly allocable to non-subpart F income of the payor (the “TIPRA look-through rule”). The Act further provides that the Secretary shall prescribe such regulations as are appropriate to prevent the abuse of the purposes of the rule.

Section 952(b) provides that subpart F income of a CFC does not include any item of income from sources within the United States which 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 Act also conforms the TIPRA look-through rule to the rule's purpose of allowing U.S. companies to redeploy their active foreign earnings (i.e., CFC earnings subject to U.S. tax deferral) without an additional tax burden in appropriate circumstances. Under the Act, in order to be excluded from foreign personal holding company income under the TIPRA look-through rule, the dividend, interest, rent, or royalty also must not be attributable or properly allocable to income of the related party payor that is treated as ECI. The rule applies to dividends, notwithstanding that dividends are not deductible.

The Act also clarifies the authority of the Secretary to issue regulations under the TIPRA look-through rule, as amended by this provision.

With respect to §903 of the American Jobs Creation Act of 2004 (“AJCA”), as modified by §303 of the Gulf Opportunity Zone Act of 2005, the Act clarifies that the Secretary may delegate authority under §903 of AJCA (as modified) by adding the words “or the Secretary's delegate” following the reference to the Secretary. This provision allows the Secretary or his delegate to permit interest suspension where taxpayers have acted reasonably and in good faith.

DIVISION C--OTHER PROVISIONS

TITLE IV--OTHER PROVISIONS

[Act §403(c)]

The Act, in a non-Code provision, provides that sales of mineral or geothermal property to a qualifying exempt organization will qualify for a 25% exclusion of any long-term capital gain on the sale. In order to qualify for the exclusion: (1) the sale must be to a governmental unit or tax-exempt organization described in §170(b)(1)(A)(vi) or (h)(4)(A); (2) the transferee must sign a statement that the property will be used for a conservation purpose; and (3) the sale must be of an entire interest in a mineral or geothermal deposit located on federal land. The provision includes a recapture tax on any subsequent transfer of the interest.

Applicable to sales occurring on or after the date of enactment.

[Act §408; Code §6015]

The Act amends §6015(e) to provide the Tax Court with jurisdiction to review so-called “stand alone” petitions, i.e., requests for equitable relief from joint and several liability under §6015(f) when no deficiency has been asserted against the spouse seeking relief.

Effective with respect to a liability arising or remaining unpaid on or after the date of enactment of the Act.