American Jobs Creation Act of 2004 (P.L. 108-357) (Title VI--Fair and Equitable Tobacco Reform Act of 2004)

A. Provisions to Reduce Tax Avoidance Through Individual and Corporate Expatriation

The House bill and the Senate amendment each repeal the extraterritorial income exclusion provisions of present law, provide provisions to reduce the effective income tax imposed on income earned from certain domestic production activities, and make numerous other changes to the Internal Revenue Code. This document,² prepared by the staff of the Joint Committee on Taxation, compares certain provisions that raise revenue.

In this publication set,³ (JCX-61-04 to JCX-66-04), the staff of the Joint Committee on Taxation compares provisions of H.R. 4520 as passed by the House of Representatives and as amended by the Senate relating to the repeal of the extraterritorial income exclusions, domestic production, corporate income tax rates applicable to small corporations, tax incentives for manufacturers, small businesses and farming, international tax reform and simplification for United States businesses, alcohol fuels and fuel fraud, expiring provisions, and certain revenue raising provisions.

Any applicable corporate-level "toll charges" for establishing the inverted structure are not offset by tax attributes such as net operating losses or foreign tax credits. This rule does not apply to certain transfers of inventory and similar property. These measures generally apply for a 10-year period following the inversion transaction.

Effective date

The provision applies to taxable years ending after March 4, 2003.

The first type of inversion is a transaction in which:

The second type of inversion transaction meets the definition above, except that the 80-percent ownership threshold is not met.

In such a case, the inversion transaction is respected (i.e., the foreign corporation is treated as foreign), but:

Effective date

Regime applicable to transactions involving at least 80 percent identity of ownership applies to inversion transactions completed after March 20, 2002. Rules for inversion transactions involving greater-than-50-percent identity of Ownership apply to inversion transactions completed after 1996 that meet the 50-percent test and to inversion transactions completed after 1996 that would have met the 80-percent test but for the March 20, 2002, date.

Effective date

Generally effective March 4, 2003.

Effective date

Generally effective July 11, 2002.

Effective date

Any risk reinsured after date of enactment.

Effective date

Any risk reinsured after April 11, 2002.

Applies to individuals who relinquish citizenship or terminate long-term residency after June 3, 2004.

Effective date

Applies to individuals who relinquish citizenship or terminate long-term residency after January 1, 2004.

Alternatively, a stock transfer agent who records transfers of stock in such transaction may make the return described above in lieu of the second corporation.

Also, every person required to make a return described above is required to furnish to each shareholder (or the shareholder's nominee) whose name is required to be set forth in such return a written statement showing certain information.

The present-law penalties for failure to comply with information reporting requirements are extended to failures to comply with the requirements set forth under this bill.

Effective date

Acquisitions after the date of enactment.

In addition to the statutory rules governing the taxation of foreign income of U.S. persons and U.S. income of foreign persons, bilateral income tax treaties limit the amount of income tax that may be imposed by one treaty partner on residents of the other treaty partner.

For example, treaties often reduce or eliminate withholding taxes imposed by a treaty country on certain types of income (e.g., dividends, interest and royalties) paid to residents of the other treaty country.

Effective date

The tax treaty study required under the provision is due no later than June 30, 2005. The transfer pricing study required under the provision is due no later than June 30, 2005. The inversions study required under the provision is due no later than December 31, 2005.

(sec. 611 of House bill and sec. 402 of the Senate amendment)

The penalty with respect to a transaction (other than a listed transaction) can be waived by the Commissioner if the waiver would promote compliance and effective tax administration.

Effective date

Returns and statements the due date for which is after the date of enactment.

Penalty waiver is same as House bill, except imposes additional conditions, including limited delegation of waiver authority by the Commissioner.

Also requires a publicly traded entity that is required to pay a penalty for failing to disclose a listed transaction to disclose the imposition of the penalty in reports to the SEC. Also requires the Secretary to make public the name of any person required to pay such penalty and the amount of such penalty.

(b) Accuracy-related penalty for listed transactions and other reportable transactions having a significant tax avoidance purpose

(sec. 612 of the House bill and sec. 403 of the Senate amendment)

Except in the case of tax shelters (as defined), the penalty is not applicable if substantial authority for the tax treatment exists or if the tax treatment is disclosed and reasonable basis for such treatment exists. In the case of non-corporate tax shelters, the penalty is not applicable if substantial authority for the tax treatment exists and the taxpayer reasonably believed that such treatment was more likely than not proper.

Repeals the exception from the present-law penalty for noncorporate tax shelters.

Effective date

Taxable years ending after the date of enactment.

Also provides special rules that limit the assertion and compromise of the penalty.

Also requires a publicly traded entity that is required to pay a penalty for an understatement of tax with respect to certain undisclosed tax avoidance transactions to disclose the imposition of the penalty in reports to the SEC. Also requires the Secretary to make public the name of any person required to pay such penalty and the amount of such penalty.

(c) Tax shelter exception to confidentiality privileges relating to taxpayer communications

(sec. 613 of the House bill and sec. 406 of the Senate amendment)

Effective date

Communications made on or after the date of enactment.

(d) Statute of limitations for taxable years for which required listed transactions not reported

(sec. 614 of the House bill and sec. 416 of the Senate amendment)

Effective date

Taxable years with respect to which the period for assessing a deficiency did not expire before the date of enactment.

(e) Disclosure of reportable transactions

(secs. 615 and 616 of the House bill and secs. 407 and 408 of the Senate amendment)

The penalty for failing to timely register a tax shelter generally is the greater of one percent of the aggregate amount invested in the shelter or $500. However, if the tax shelter involves an arrangement offered to a corporation under conditions of confidentiality, the penalty generally is the greater of $10,000 or 50 percent of the fees payable to any promoter with respect to offerings prior to the date of late registration.

Effective date

The provision requiring disclosure of reportable transactions by material advisors applies to transactions with respect to which material aid, assistance or advice is provided after the date of enactment.

The provision imposing a penalty for failing to disclose reportable transactions applies to returns the due date for which is after the date of enactment.

(f) Investor lists and modification of penalty for failure to maintain lists of investors

(secs. 615 and 617 of the House bill and secs. 407 and 409 of the Senate amendment)

Effective date

Requests made after the date of enactment.

Also clarifies that the identity of any person on an investor list is not privileged, effective as if included in the Deficit Reduction Act of 1984.

(g) Penalty on promoters of tax shelters

(sec. 618 of the House bill and sec. 415 of the Senate amendment)

Effective date

Activities after the date of enactment.

(h) Penalty for aiding and abetting the understatement of tax liability

(sec. 419 of the Senate amendment)

Also imposes joint and several liability upon all persons subject to the penalty for such activity, and provides that the payment of such penalty or any amount to settle or avoid the imposition of such penalty is not deductible.

Effective date

Activities after the date of enactment.

Effective date

Taxable years beginning after date of enactment.

Effective date

Day after the date of enactment.

Effective date

Failures to report occurring after the date of enactment.

Effective date

Actions taken after the date of enactment.

Effective date

Purchases and dispositions occurring after the date of enactment.

Present law generally denies a U.S. shareholder (other than a securities dealer) the foreign tax credits normally available with respect to a dividend from a corporation or a RIC if the shareholder has not held the stock for more than 15 days (within a 30-day testing period) in the case of common stock or more than 45 days (within a 90-day testing period) in the case of preferred stock. If a taxpayer is denied foreign tax credits because the applicable holding period is not satisfied, the taxpayer is entitled to a deduction for the foreign taxes for which the credit is disallowed.

Effective date

Amounts paid or accrued more than 30 days after the date of enactment.

Partnership basis adjustments are required for a distribution of property when there is a substantial basis reduction in partnership property (a downward adjustment of more than $250,000).

A built-in loss on contributed property may be taken into account only by the contributing partner and not by any other partner, including a partner purchasing the partnership interest from the contributing partner.

Effective date

Transfers, distributions and contributions after the date of enactment.

Effective date

Generally transfers and distributions after the date of enactment.

Effective date

Distributions after the date of enactment.

Effective date

Distributions after February 13, 2003.

A FASIT is a non-taxable entity intended to facilitate the securitization of debt obligations such as credit card receivables, home equity loans, and auto loans.

Real estate mortgage investment conduits (REMICs)

A REMIC is a self-liquidating, non-taxable entity that holds a fixed pool of mortgages and issues multiple classes of investor interests. In order to qualify as a REMIC, substantially all of the assets of the entity must consist of qualified mortgages and permitted investments as of the close of the third month beginning after the startup day of the entity.

Repeals the special rules for FASITs, with a transition period for existing FASITs, pursuant to which the repeal of the FASIT rules would not apply to any FASIT in existence on the date of enactment to the extent that regular interests issued by the FASIT prior to such date continue to remain outstanding in accordance with their original terms.

REMICs

Modifies the definitions of REMIC regular interests, qualified mortgages, and permitted investments so that reverse mortgage loans and government-originated loan pools can be transferred to, or purchased by, a REMIC.

Effective date

After February 13, 2003, except as provided by the transition period for existing FASITs.

Effective date

After December 31, 2004, except as provided by the transition period for existing FASITs.

The basis of property received by a corporation, whether from domestic or foreign transferors, in a tax-free incorporation, reorganization, or liquidation of a subsidiary corporation is the same as the adjusted basis in the hands of the transferor, adjusted for any gain recognized by the transferor.

Effective date

Transactions after date of enactment.

Provides that if a net built-in loss is imported into the U.S. in a tax-free organization, reorganization or liquidation from persons not subject to U.S. tax, the basis of each property so transferred is its fair market value.

Limitation on transfer of built-in-losses in section 351 transactions

Provides that if the aggregate adjusted bases of property contributed by a transferor (or by a control group of which the transferor is a member) to a corporation exceed the aggregate fair market value of the property transferred in a tax-free incorporation, the transferee's aggregate bases of the property is limited to the aggregate fair market value of the transferred property.

In the case of a transfer after which the transferor owns at least 80 percent of the vote and value of the stock of the transferee corporation, any required basis reduction is made to the stock received by the transferor and not to the assets transferred.

Effective date

Transactions after December 31, 2003.

Effective date

Date of enactment.

Effective date

Taxable years beginning after December 31, 2003.

Effective date

Taxable years beginning after December 31, 2004, with transition rule for companies in receivership or liquidation.

Effective date

Underpayments attributable to transactions entered into in taxable years beginning after the date of enactment.

Section 338(h)(13) provides that for purposes of estimated tax penalties, tax attributable to a deemed asset sale under section 338(a)(1) shall not be taken into account.

Effective date

Transactions that occur after the date of enactment.

Effective date

Sales or exchanges of principal residences after the date of enactment.

As a general rule, there is allowed as a deduction all interest paid or accrued within the taxable year with respect to indebtedness, including the aggregate daily portions of original issue discount ("OID") of the issuer for the days during such taxable year. If a debt instrument is held by a related foreign person, however, any portion of such OID is not allowable as a deduction by the payor of such instrument until paid (the "related-foreign-person rule").

Treasury regulations apply the related-foreign-person rule to the deduction of stated interest and other expense amounts owed to related foreign persons. The related-foreign-person rule is modified by Treasury regulations that provide that in the case of OID, stated interest, or other amounts owed to a related foreign person that is a FPHC, CFC or PFIC, a deduction is allowed as of the day on which the amount is includible in the income of the FPHC, CFC or PFIC, respectively.

For purposes of determining how much of the amount accrued, if any, is currently includible in the income of a U.S. person under the relevant inclusion rules, properly allowable deductions of the related foreign corporation under the principles of section 954(b)(5) and qualified deficits under section 952(c)(1)(B) are taken into account.

The Secretary is granted regulatory authority to provide exceptions to these rules, including an exception for amounts accrued where payment of the amount accrued occurs within a short period after accrual, and the transaction giving rise to the payment is entered into by the payor in the ordinary course of a business in which the payor is predominantly engaged.

Effective date

Payments accrued on or after date of enactment.

Effective date

Interest received in calendar years beginning after the date of enactment.

Generally, deposited amounts that have not been used to pay a tax may be withdrawn at any time if the taxpayer so requests in writing. The withdrawn amounts will earn interest at the applicable Federal rate to the extent they are attributable to a disputable tax.

Effective date

Deposits made after date of enactment.

Prior to 1998, the IRS administratively entered into installment agreements that provided for partial payment (rather than full payment) of the total amount owed over the period of the agreement. In that year, the IRS Chief Counsel issued a memorandum concluding that partial payment installment agreements were not permitted.

Effective date

Installment agreements entered into on or after the date of enactment.

Effective date

Taxable years beginning before, on, or after the date of enactment.

Recovery period for tax-exempt use property subject to lease

Tax-exempt use property subject to a lease must be depreciated on a straight-line basis over a recovery period equal to the longer of the property's class life or 125 percent of the lease term. "Tax-exempt use property" is tangible property that is leased (other than under a short-term lease) to a tax-exempt entity (including governments, charities, and foreign entities). The recovery period for qualified technological equipment ("QTE") that is treated as tax-exempt use property, and is not eligible for the QTE short-term lease exception (i.e., generally leases of five years or less), is five years.

In determining the lease term for purposes of the 125-percent calculation, taxpayers must include options to renew, and two or more successive leases with respect to the same or similar property are treated as one lease.

Limitation on deductions allocable to property used by governments or other tax-exempt entities

Depreciation and other deductions or losses allocable to tax-exempt property are not limited to the income from the property.

Applies the minimum recovery period for tax-exempt use property (125 percent of the lease term) to: (1) QTE leased to a tax-exempt entity (unless the lease is eligible for the present-law QTE short-term lease exception); and (2) computer software leased to a tax-exempt entity (unless the lease is eligible for the present-law QTE short-term exception).

Also provides that the lease term includes all service contracts and other similar arrangements that follow a lease of property to a tax-exempt entity and that are part of the same transaction (or series of transactions) as the lease.

For purposes of determining whether a QTE lease satisfies the present-law QTE short-term lease exception, also provides that the lease term generally does not include certain renewal or extension options of the lessee, provided the aggregate period of such renewals or extensions does not exceed 24 months.

Limitation on deductions allocable to property used by governments or other tax-exempt entities

Provides that if a taxpayer leases property to a tax-exempt entity, the taxpayer may not claim deductions or losses from the lease transaction in excess of the taxpayer's gross income from the lease for that taxable year. Disallowed deductions are carried forward and treated as deductions related to the lease in the following taxable year subject to the same limitations, and are allowable upon complete disposition of the leased property. Also provides that this limitation does not apply to certain transactions involving low-income housing credit property or rehabilitation credit property.

A lease of property to a tax-exempt party is not subject to this limitation if the lease satisfies all of the following requirements: (1) the tax-exempt lessee does not monetize or defease its lease obligations in an amount that exceeds (a) 20 percent of the taxpayer's adjusted basis in the leased property at the time the lease is entered into, (b) 50 percent of such basis if the Secretary determines that the creditworthiness of the tax-exempt entity necessitates such increase, or (c) zero percent of such basis in the case of certain lease arrangements that involve circular cash flows or insulation of the taxpayer's equity investment from the risk of loss; (2) except for leases with lease terms of five years or less, the taxpayer makes and maintains at least a 20-percent equity investment in the leased property and the fair market value of the property at the end of the lease term is reasonably expected to decline by no more than 80 percent; (3) except for leases with lease terms of five years or less, the tax-exempt lessee does not bear more than a minimal risk of loss (i.e., requirement not satisfied if the lessee bears any of the first 25 percent of loss or more than 50 percent of the overall loss associated with a potential decline in the property's market value).

Also provides special rules to prevent the circumvention of this limitation through the use of likekind exchanges and involuntary conversions.

Same as House bill, except: (1) does not except lessee renewal or extension options of up to 24 months from the determination of whether a QTE lease satisfies the present-law QTE short-term lease exception; and (2) the effective date.

Limitation on deductions allocable to property used by governments or other tax-exempt entities

Similar to House bill, except: (1) does not provide an exception for rehabilitation credit property; (2) requires (a) that the leased property not be financed with tax-exempt bonds or Federal funds, (b) that any lease of property with a class life of more than seven years not include a fixed-price purchase option of the lessee, and (c) that the lease meet any other requirements prescribed in regulations; (3) permits the Secretary to identify arrangements (in addition to those specified by statute) to which the monetization and defeasance requirement applies; (4) provides only a partial exception from the equity investment requirement for short-term leases (rather than a complete exception for leases with lease terms of five years or less); (5) does not provide an exception from the minimal risk of loss requirement for leases with lease terms of five years or less; (6) does not provide special rules relating to like-kind exchanges and involuntary conversions; and (7) the effective date.

No penalties are specifically applicable to transactions that result in an understatement of tax solely by virtue of lacking economic substance.

Provides that potential profit may not be relied on to establish economic substance unless: (1) reasonably expected pre-tax profit is substantial in relation to present value of expected net tax benefits and; (2) it exceeds a risk-free rate of return. Fees and foreign taxes taken into account as expenses. Financing transactions with tax-indifferent parties not respected if present value of deductions to be claimed is substantially in excess of present value of anticipated economic returns of tax-indifferent party. Artificial income shifting to tax-indifferent party not respected. Imposes a separate 40-percent penalty on understatements of tax resulting from transactions that lack economic substance, and limits the ability to assert or compromise and an asserted penalty. The penalty is reduced to 20 percent for disclosed transactions.

Requires a publicly traded entity that is required to pay a penalty for an understatement of tax with respect to a transaction that lacks economic substance to disclose the imposition of the penalty in reports to the SEC. Also requires the Secretary to make public the name of any person required to pay such penalty and the amount of such penalty.

Effective date

Transactions entered into after the date of enactment.

Effective date

Documents prepared after the date of enactment.

Effective date

Submissions made and issues raised after the date on which the Secretary first prescribes the required list of frivolous positions.

Effective date

Date of enactment.

Also requires the Treasury Secretary to report to the appropriate committees of Congress the results of the study, including any legislative recommendations, within one year after the date of enactment.

Effective date

Federal tax returns for taxable years ending after the date of enactment.

Thus, a taxpayer may not avoid nondeductibility of a settlement payment by not admitting wrongdoing, or by characterizing the payment as a charitable deduction rather than as a business expense. An exception applies to payments that are for restitution or for remediation of property.

Effective date

Amounts paid or incurred on or after April 28, 2003, unless paid under a binding order or agreement entered before that date. If court approval is required, an order or agreement is not considered binding until such court approval is obtained.

In general, gross income does not include amounts received on account of personal physical injuries and physical sickness. However, this exclusion does not apply to punitive damages.

Effective date

Punitive damages paid or incurred on or after the date of enactment.

Effective date

Debt instruments issued after February 13, 2003.

A criminal penalty generally is imposed on persons who willfully attempt to evade or defeat any tax imposed by the Code. Upon conviction, the Code provides that the penalty is up to $100,000 or imprisonment of not more than five years (or both). In the case of a corporation, the Code increases the monetary penalty to a maximum of $500,000.

Willful failure to file return, supply information, or pay tax

A criminal penalty generally is imposed on persons required to make estimated tax payments, pay taxes, keep records, or supply information under the Code who willfully fails to do so. Upon conviction, the Code provides that the penalty is up to $25,000 or imprisonment of not more than one year (or both). In the case of a corporation, the Code increases the monetary penalty to a maximum of $100,000.

Fraud and false statements

A criminal penalty generally is imposed on persons who make fraudulent or false statements under the Code. Upon conviction, the Code provides that the penalty is up to $100,000 or imprisonment of not more than three years (or both). In the case of a corporation, the Code increases the monetary penalty to a maximum of $500,000.

Uniform sentencing guidelines

The uniform sentencing guidelines can provide for substantial increases in the levels of monetary penalties and are applicable to all criminal provisions in the United States Code, including those in the Code.

Increases the criminal penalty under section 7201 of the Code for individuals to $250,000 and for corporations to $1,000,000. The provision increases the maximum prison sentence to ten years.

Willful failure to file return, supply information, or pay tax

Increases the criminal penalty under section 7203 of the Code from a misdemeanor to a felony and increases the maximum prison sentence to ten years.

Fraud and false statements

Increases the criminal penalty under section 7206 of the Code for individuals to $250,000 and for corporations to $1,000,000. Increases the maximum prison sentence to five years. Provides that in no event shall the amount of the monetary penalty under this provision be less than the amount of the underpayment or overpayment attributable to fraud.

Effective date

Underpayments and overpayments attributable to actions occurring after the date of enactment.

Effective date

Stock and property acquired after February 13, 2003.

Effective date

Taxable years of controlled foreign corporations beginning after February 13, 2003, and taxable years of U.S. shareholders in which or with which such taxable years of controlled foreign corporations end.

Assets set aside in an offshore trust are treated as property transferred under section 83. A transfer of property also occurs if a plan provides that assets will be restricted upon a change in financial health.

If the requirements of the provision are not satisfied, in addition to current income inclusion, interest at the underpayment rate plus one percentage point is imposed on the underpayments that would have occurred had the compensation been includible in income when first deferred, or if later, when not subject to a substantial risk of forfeiture.

Effective date

Amounts deferred after June 3, 2004, except for amounts deferred before January 1, 2005, pursuant to an irrevocable election or binding arrangement made before June 4, 2004.

Payments made to individuals subject to section 16(a) of the Securities and Exchange Act of 1934 within one year of a change in control are treated as excess parachute payments. Unforeseeable emergency also includes hardship to the beneficiary. Participants must be limited to one subsequent election. Limits on investment direction apply. Provision does not apply to plans meeting the exception under section 457(e)(12) as of May 1, 2004.

If the requirements of the provision are not satisfied, in addition to current income inclusion, interest at the underpayment rate is imposed on the underpayments that would have occurred had the compensation been includible in income when first deferred, or if later, when not subject to a substantial risk of forfeiture. A ten percent additional tax also applies.

Effective date

Amounts deferred in taxable years beginning after December 31, 2004.

Effective date

Exchanges made after December 31, 2004.

Creates a revolving fund from the amounts collected by the private debt collection companies. The private debt collection companies would be paid out of this fund.

Effective date

Date of enactment.

Taxpayers that understate tax liability on a return due to a valuation misstatement are subject to a penalty of 20 percent of the underpayment in the case of a substantial valuation misstatement, and 40 percent of the underpayment in the case of a gross valuation misstatement. A substantial misstatement occurs if the taxpayer's claimed value is 200 percent or more of the correct amount. A gross misstatement occurs if the taxpayer's claimed value is 400 percent or more of the correct amount.

No charitable deduction is permitted with respect to any revenues or income received or accrued by the charitable donee after the expiration of the legal life of the patent or intellectual property, or after the tenth anniversary of the date the contribution was made by the donor.

Effective date

Contributions after June 3, 2004.

The Senate amendment imposes a processing fee (credited to the Exempt Organizations unit with the IRS) equal to 1 percent of the claimed deductible amount for contributions of applicable intellectual property.

With respect to applicable intellectual property contributions, the Senate amendment increases the present law thresholds that trigger application of penalties for substantial and gross valuation misstatements. The substantial misstatement penalty applies if the taxpayer's claimed value exceeds the correct amount by 50 percent or more; the gross misstatement penalty applies if the taxpayer's claimed value exceeds the correct amount by 100 percent or more.

The Senate amendment requires that the Secretary shall prescribe guidance on appraisal standards for charitable contributions of intellectual property.

Effective date

Contributions after the date of enactment.

Effective date

Contributions after June 3, 2004.

Effective date

Contributions after June 3, 2004.

Effective date

Contributions after June 30, 2004.

Effective date

Property acquired after the date of enactment.

Effective date

Date of enactment.

In limited cases, the straddle rules do not apply to positions in stock. Also, the straddle rules do not apply to offsetting positions that consist of stock and an option if the option is a "qualified covered call option" written by the taxpayer.

The Treasury Secretary is directed to provide regulations concerning straddles in which one position offsets only a portion of one or more other positions ("unbalanced straddles"). To date, no such regulations have been promulgated.

Effective date

Positions established on or after the date of enactment.

Effective date

Effective for vaccines sold beginning on the first day of the first month beginning more than four weeks after the date of enactment.

Effective date

Same as the House bill.

Effective date

Effective for vaccines sold or used beginning on the later of the first day of the first month beginning more than four weeks after the date of enactment or the date on which the Secretary of Health and Human Services lists any such vaccine for purpose of compensation for any vaccine-related injury or death through the Vaccine Injury Compensation Trust Fund.

Effective date

Requests made after the date of enactment.

Extends the passenger and conveyance processing fees and the merchandise processing fees authorized under the Consolidated Omnibus Budget Reconciliation Act of 1985 through September 30, 2014. For fiscal years after September 30, 2005, the Secretary is to charge fees in amount that are reasonably related to the costs of providing services.

Sense of Congress

Includes a Sense of the Congress that the fees have been reasonably related to the costs of providing customs services.

Study

Provides that the Secretary conduct a study of all the fees collected by the Department of Homeland Security, and shall submit to the Congress, not later than September 30, 2005, a report containing the recommendations of the Secretary on what fees should be eliminated and what the rate of fees retained should be.

Effective date

Date of enactment.

Extends fees through September 30, 2013.

Sense of Congress

No provision.

Study

No provision.

Effective date

Date of enactment.

In general, U.S. withholding tax is not imposed with respect to a distribution of a U.S. corporation's earnings to a foreign corporation in complete liquidation of the subsidiary, because the distribution is treated as made in exchange for stock and not as a dividend.

Regulations under section 367(e) provide that the Commissioner may require a domestic liquidating corporation to recognize gain on distributions in liquidation made to a foreign corporation if a principal purpose of the liquidation is the avoidance of U.S. tax.

Effective date

Distributions occurring on or after date of enactment.

Effective date

Taxable years beginning after the date of enactment.

Effective date

Dispositions after the date of enactment.

Effective date

Taxable years beginning on or after the date of enactment.

In the case of a partnership that transfers to a creditor an interest in the partnership in satisfaction of its debt, it is unclear whether the partnership is required to recognize cancellation of indebtedness income. It also is unclear whether any requirement to recognize cancellation of indebtedness income is affected if the cancelled debt is nonrecourse indebtedness.

Effective date

Cancellations of indebtedness occurring on or after the date of enactment.

Effective date

Sales occurring on or after date of enactment.

In addition, for divisive transactions under section 355, and for certain acquisitive reorganizations, the transferor corporation recognizes gain to the extent the liabilities assumed by the transferee exceed the basis of assets transferred.

Effective date

Transactions on or after the date of enactment.

Effective date

Transactions after May 14, 2003.

For this purpose, a brother-sister controlled group is defined as two or more corporations if five or fewer persons who are individuals, estates or trusts own (after application of attribution rules): (1) at least 80 percent of the combined voting power and value of all classes of stock; and (2) more than 50 percent of the total voting power or value of all stock, taking into account the stock ownership of each person only to the extent the stock ownership is identical with respect to each corporation.

80-percent test continues to apply to other Code provisions using the controlled group definition by reference.

Effective date

Taxable years beginning after date of enactment.

Assets used in the transmission and distribution of electricity for sale are provided a class life of 30 years and a recovery period of 20 years. The cost of initially clearing and grading land improvements are specifically excluded and no separate asset class is provided for such costs. A similar situation exists with regard to clearing and grading costs associated with gas utility trunk pipelines and related storage facilities.

Effective date

Property placed in service after the date of enactment.

In lieu of depreciation, a taxpayer with a sufficiently small amount of annual investment may elect to expense such investment, up to a limit of $100,000 per year. Passenger automobiles subject to section 280F are eligible for section 179 expensing only to the extent of the applicable limits contained in section 280F.

Effective date

Property acquired after the date of enactment.

Section 197 requires most acquired intangible assets (such as goodwill, trademarks, franchises, and patents) that are held in connection with the conduct of a trade or business or an activity for the production of income to be amortized over 15 years.

Effective date

Amounts incurred after date of enactment.

In January 2003, Treasury announced the Offshore Voluntary Compliance Initiative ("OVCI") running through April 15, 2003, to encourage the voluntary disclosure of previously unreported income placed by taxpayers in offshore accounts and accessed through credit card or other financial arrangements. The taxpayer will pay back taxes, interest and certain accuracy-related and delinquency penalties.

A taxpayer's timely, voluntary disclosure of a substantial unreported tax liability has long been an important factor in deciding whether the taxpayer's case should ultimately be referred for criminal prosecution. The voluntary disclosure must be truthful, timely, and complete. A voluntary disclosure does not guarantee immunity from prosecution.

Effective date

Taxpayers' open tax years on or after date of enactment.

Generally, establishes a reward floor of 15 percent of the collected proceeds (including penalties, interest, additions to tax and additional amounts) if the IRS proceeds with an administrative or judicial action based on information brought to the IRS's attention by an individual. Permits awards of lesser amounts (but no less than 10 percent) if the action was based principally on allegations (other than information provided by the individual) resulting from a judicial or administrative hearing, government report, hearing, audit, investigation, or from the news media. Caps the available reward at 30 percent of the collected proceeds. Any determination regarding a reward may be appealed to the U.S. Tax Court.

Creates a Whistleblower Office within the IRS to administer this reward program. The Whistleblower Office is funded with amounts equal to rewards made. The Whistleblower Office may seek the assistance from the individual providing information or from his legal representative, and may reimburse the costs incurred by any legal representative out of the funds of the Whistleblower Office. To the extent the disclosure of returns or return information is required to render such assistance, the disclosure must be pursuant to an IRS tax administration contract.

Effective date

Information provided on or after the date of enactment.

Effective date

Taxable years beginning after December 31, 2003.

Effective date

Taxable years beginning after the date of enactment.

Thus, if a U.S. corporation owns a foreign entity that is a partnership for foreign tax purposes, the U.S. corporation can claim foreign tax credits for the tax that is imposed on it as a partner in the foreign entity. This is true even if the U.S. corporation elects to treat the foreign entity as a corporation for U.S. tax purposes. If the foreign entity does not generate subpart F income, or if the foreign entity does not meet the definition of a CFC, the income generated by the foreign entity may never be reported on a U.S. return, despite the fact that the U.S. corporation can claim credits for taxes imposed on that income.

The regulations may provide for:

The provision is effective for transactions entered into after the date of enactment.

Effective date

Taxable years beginning after December 31, 2003, except addition of listed and reportable transactions applies to interest accruing after May 5, 2004.

Effective date

Payments made after December 31, 2003.

Effective date

Sales after the date of enactment.

Employer contributions to retirement plans and other payments for labor or personal services performed outside the United States by nonresident aliens generally are not treated as U.S. source income. Such contributions, therefore, generally would not be includible in the nonresident alien's gross income if they had been paid directly to the nonresident alien at the time they were contributed. Thus, the amounts of such contributions generally are includible in the employee's basis and are not taxed by the United States if a distribution is made when the employee is a U.S. citizen or resident

Distributions on or after date of enactment.

Under the substantial presence test, an alien individual is generally treated as a resident alien if he or she is present in the United States for 31 days during the taxable year and the sum of the number of days on which such individual was present in the United States (when multiplied by the applicable multiplier) during the current year and the preceding two calendar years equals or exceeds 183 days. The applicable multiplier for: the current year is one, for the first preceding year is 1/3, and for the second preceding year is 1/6.

Special income tax rules apply with respect to bona fide residents of certain U.S. possessions, including Virgin Islands, Puerto Rico, Guam, Northern Mariana Islands, and American Samoa. Generally, for U.S. citizens and residents, bona fide residence in a possession is determined using the principles of a subjective, facts and circumstances test set forth in regulations under section 871. However, for aliens, bona fide residence in a possession, which has a mirror code, is determined under the principles used to determine U.S. residence (discussed above).

Provision also requires bona fide residents of the Virgin Islands to file an informational income tax return with the United States, and imposes a penalty for the failure to file such a return.

Effective date

The provision is effective for taxable years ending after the date of enactment.

The exclusion for foreign earned income generally applies to income earned from sources outside the United States as compensation for personal services actually rendered by the taxpayer and the maximum exclusion for a taxable year is $80,000. For taxable years beginning after 2007, the maximum exclusion amount is indexed for inflation.

The exclusion for housing costs applies to reasonable expenses paid or incurred by or on behalf of the taxpayer for housing. The exclusion amount for housing costs is equal to the excess of such housing costs over a base housing amount for the taxable year.

The present-law provision providing indexation for inflation for tax years beginning after 2007 would remain unchanged.

The present-law provision imposing an additional foreign earned income cap on exclusions and deductions would also remain unchanged.

Effective date

Taxable years beginning after December 31, 2003.

Effective date

Expenses incurred after the date of enactment and before January 1, 2006.

With respect to certain debt instruments that are convertible into stock of the issuer and that also provide for contingent payments ("contingent convertible" debt instruments), the IRS has stated that the special rules for contingent payment debt instruments apply in computing the accrual of OID on the debt instrument, and that the comparable yield for a contingent convertible debt instrument is determined by reference to a comparable fixed-rate nonconvertible debt instrument.

Effective date

Debt instruments issued after the date of enactment.

² This document may be cited as follows: Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Revenue Provisions (JCX-64-04), September 29, 2004.

³ Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Provisions Relating to the Repeal of the Exclusion for Extraterritorial Income, Domestic Production, and the Corporate Income Tax Rates Applicable to Small Corporations (JCX-61-04), September 29, 2004; Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Job Creation Tax Incentives for Manufacturing, Small Business, and Farming (JCX-62-04), September 29, 2004; Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Provisions Relating to International Tax Reform and Simplification for United States Businesses (JCX-63-04), September 29, 2004; Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Revenue Provisions (JCX-64-04), September 29, 2004; Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Alcohol Fuels and Fuel Fraud Provisions (JCX-65-04), September 29, 2004; and Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Expiring Provisions (JCX-66-04), September 29, 2004.