DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.
September 5, 2018
Sara Kaiser Creighton
Elizabeth France
John E. Bies
American Oversight
1030 15th Street NW, Suite B255
Washington, DC 20005
foia@americanoversight.org
Re: American Oversight v. U.S. Department of the Treasury, 17-cv-2078-RBW (D.D.C.):
Treasury September 5 Production
Counsel:
This letter describes the September 5, 2018 production from the U.S. Department of the
Treasury (Treasury) in the above-referenced Freedom of Information Act litigation. Pursuant to
the Court’s February 2, 2018 Order, Treasury has reviewed and processed 60 documents
collected in response to American Oversight’s Congressional Communications FOIA Request,
2017-08-121. Via email, Treasury is producing 20 documents totaling 34 pages, comprising the
non-exempt, responsive portions of the records within this collection. The documents are
numbered UST 000875 - 908; portions of these materials are withheld pursuant to Exemptions 5
and 6 of the FOIA. An additional 36 documents, totaling 226 pages, are being withheld in their
entirety pursuant to Exemption 5, and four documents are non-responsive and/or duplicative of
other materials within this collection and are therefore not being produced.
Treasury is continuing to review records that are potentially responsive to this request
and will respond to you again on or before October 5, 2018.
If you have any questions concerning this production or a related matter, please contact
Rebecca Kopplin, U.S. Department of Justice, at (202) 514-3953.
Sincerely,

Ryan Law
Office of Privacy, Transparency, and Records
U.S. Department of the Treasury

A\11 f C,I N

pVERSIGHT

 Staff Summar
From:

"Knight, Shahira E. EOP/WHO"

To:

"Brendan M. Dunn (Brendan_Dunn@mcconnell.senate.gov)"
<brendan_dunn@mcconnell.senate .gov>, "Callas, George"
<george.callas@mai l.house .gov>

Cc:

"Muzinich, Justin" <justin.muzinich@treasury .gov>

Date:

Tue, 19 Sep 2017 18:43:10 -0400

Attachments:

Big 4 Staff Consensus Summary - Treasury NEC Edits.docx (38.23 kB)

We took the liberty of converting the document into Word format so we could edit it. The attached reflects
comments from Treasury and NEC.
It is not as heavily edited as it appears. There is a lot of redlining because we deleted the tables, moved
one section and had some wo rdsm ithing changes. We also have several questions as we didn't
understand the context of some of the language and numbers in here. Thanks .

AMERICAN

UST 000875
pVERSIGHT

TREAS-17-0313-G-000001

 Re: Tax Education
mail.house.gov>

From:

To:
Cc :

Date:

@treasury.gov>
"Bailey, Bradley" <bradley.bailey@treasury.gov>, "Maloney, Drew"
<drew.maloney@treasury.gov>, "Kellogg, Matthew" <matthew.kellogg@treasury.gov>, "Specht,
Brittan" <brittan.specht@mail.house.gov>
Tue , 19 Sep 2017 18:44 :23 -0400

Super thank you!
Sent from my iPhone

On Sep 19, 2017, at 6:43 PM ,

Great. Please meet at Drew's Office - Main Treasury 3134 at 8AM and then can walk down to the dining

room.
From: Dunham, Will [mailto:Will.Dunham@mail.house.gov )
Sen
6:40 PM
To :
treasu . ov >
Cc: Bailey, Bradley <Bradley.Bailey@treasury.gov >; Maloney , Drew <Drew.Maloney@treasury.gov >;
Kel logg, Matthew <Matthew.Kellogg@treasury.gov >; Specht, Brittan <Brittan.Specht@mail.house.gov >
Subject: Re: Tax Education

Thanks Casey. Brittan and I can do that. I'll send you my info directly .
Sent from my iPhone
On Sep 19, 2017, at 6:35 PM ,'

wrote:
HiW ill,
Hope you are doing well! Any chance you can do a 8AM breakfast?
need the information below asap.

We can host at Treasury, but will

First,Middle, and Last Name
DOB

Y/N USCitizen
SSN
Countryof Birth
Cityand State of Residence

From: Bailey, Bradley
Sent : Tuesday, September 19, 2017 5:55 PM
To: Dunham, Will <Will.Dunham@mai l.house.gov >
Cc: Malo ney, Drew <Drew.Malone
<Matthew. Kellogg@treasury.gov >;
Subject : Re: Tax Education

AMERICAN

UST 000876
pVERSIGHT

TREAS-17-0313-G-000002

 Adding-

From: Dunham, W ill <W ill.Dunham@mail.house .gov>
Date: September 19, 2017 at 5:38:12 PM EDT
To: Bailey, Bradley <Bradley .Bailey@treasury .gov>
Cc: Maloney, Drew <Drew.Maloney@treasury.gov >, Kellogg, Matthew
<Matthew. Kellogg@treas u ry.gov >
Subject: Re: Tax Education

It'll take me half an hour at least to get there and get in the building if I leave right now - let's
do it tomorrow AM. rm flexible in the morning. Adding Brittan.
Sent from my iPhone
On Sep 19, 2017, at 5:28 PM, "Bradley.Bailey@treasmy.gov "
<Bradley. Bailey@treasw:y .gov> wrote:
Prob 6:30 if you want or we could do tomorrow

From: Dunham, Will <Will.Dunham@mail.house.gov >
Date: September 19, 2017 at 5:20:34 PM EDT
To: Bailey, Bradley <Bradley.Bai ley@treasury .gov>
Cc: Maloney, Drew <Drew .Maloney@treasury.gov >, Kellogg, Matthew
<Matthew .Kellogg@treasury .gov>
Subject: Re: Tax Education

You're thinking meeting tonight in person? How late are you guys in?
Sent from my iPhone
On Sep 19, 2017, at 5:16 PM, "Bradley.Bailey@treasury.gov "
<Bradley.Bailey@treasury.gov > wrote:
Wil l--j ust t ri ed giving you a call. We can do someth ing this evening if that still
works for you. 202-615-2125

From: Dunham, Wil l <Will.Dunham@mail.house.gov >
Date: September 19, 2017 at 10:34:30 AM EDT
To: Kellogg, Matthew l<Matthew.Kellogg@treasury .gov>
Cc: Bailey, Bradley <Bradley.Bai ley@treasury .gov>, Maloney, Drew
<Drew.Maloney@treasury.gov >
Subject: RE:Tax Education

Happy to come down at your convenience. Free noon-3 today and after 5. I'd
bring Brittan along.

AMFF~IC,A

UST 000877
pVERSIGHT

TREAS-17-0313-G-000003

 From: Matthew.Kellogg@treasuzy.gov [mailto:Matthew.Kellogg@treasury.gov ]
Sent: Tuesday, September 19, 2017 10:29 AM
To: Dunham, Will <Will.Dunham@mail.house.gov >
Cc: Bradley.Bailey@treasury.gov
; Drew.Maloney@treasury.gov
Subject: Tax Education
Will - Following up on our discussion. Any chance you'll be down this way in the
near future so we could have a quiet conversation of how to be helpful on tax
reform education efforts?
Thanks.
-Matt
Matt Kellogg
Deputy Assistant Secretary for Banking and Finance
Office of Legislative Affairs
Department of the Treasury
Matthew.kellogg@treasury.gov
202.622.1900

AMFfllCAN

UST 000878
pVERSIGHT

TREAS-17-0313-G-000004

 Re: Bi 6 Comms Meetin
From:

"Sayegh, Tony E. EOP/WHO"

To:

"Buck, Brendan" <brendan.buck@mail.house.gov>

Cc:

"Dorr, Kaelan K. EOP/WHO"
>, "Ferrier, Antonia (McConnell)"
<antonia_ferrier@mcconnell.senae.go v>, c 1 1nger, m1ly"
<emily.schillinger@mail.house.gov> , "Lawless , Julia (Finance)"
<·u1ia lawless finance.senate.gov>, "Ditto, Jessica E. EOP/WHO"
>, "Strong, Ashlee" <ashlee.strong@mail.house.gov>, "Andres,
oug < oug.an res ma1. ouse.gov>, "Popp, David (McConnell)"
<david_popp@mcconnell.senate.gov>, "Stewart , Don (McConnell)"
<don stewart mcconnell.senate.gov>, "Knight, Shahira E. EOP/WHO"
>, "Muzinich , Justin" <justin.muzinich@treasury.gov>

Date:

Wed, 20 Sep 2017 05:58:44 -0400

Thanks Brendan. This is the exact right list of action items. I know it's ambitious to execute all this in 30
minutes so I would suggest we view the first 30 as Comms only discussion b(5)

b(5)

b(5)
Sent from my iPhone
On Sep 19, 2017, at 5:02 PM , Buck, Brendan <Brendan.Buck@mail.house .gov> wrote:

Hey folks, sorry for delay. I know we only have 30 minutes for the comms portion of the meeting, but
these are the things I think we need to work through for next week.

UST 000879

TREAS-17-0313-G-000005

 From: "Dorr, Kaelan K. EOP/WHO"
>
Date: Tuesday, September 19, 2017 at 3:28 PM
To: "Ferrier, Antonia (McConnell)" <Antonia Ferrier@mcconnell .senate .gov>, Emily
Schillinger <Emily.Schillinger@mail.house.gov >, "Buck, Brendan"
<Brendan.Buck@mail.house.gov >
Cc: "Lawless Julia Finance "< Julia_Lawless@finance.senate.gov >,Jessica Ditto
>, Ashlee Strong <AshLee.Strong@mail.house.gov >,
"Andres, Doug" <Doug.Andres@mail.house.gov >, "Popp, David (McConnell) "
<David Popp@mcconnell.senate.gov >, "Stewart, Don (McConnell)"
<Don Stewart mcconnell.senate . ov>, "Sayegh, Tony E. EOP/WHO"
>, "Knight, Shahira E. EOP/WHO"
>, "Justin.Muzinich@treasury.gov "
<Justin.Muzinich@treasury.gov >
Subject: Big 6 Comms Meeting
All,
Tentative agenda for tomorrow's Communicators
your vitals please let me know ASAP.

meet i ng is below. If you haven't already submitted

Best,
Kaelan

AMERICAN

UST 000880
pVERSIGHT

TREAS-17-0313-G-000006

 RE: RELEASE: Corker Toome Statement on Tax Reform
From:

"Dunn, Brendan (McConnell)" <brendan _dunn@mcconnell.senate.gov>

To:
Date:

"Muzinich, Justin" <justin.muzinich@treasury.gov>
Wed, 20 Sep 2017 09:09:38 -0400

You guys were a huge assist .

Brendan M. Dunn
Policy Advisor and Counsel

Office of the Senate Majority Leader
From: Justin.Muzinich@treasury.gov

[mailto:Justin. Muzinich@trea sury.gov]

Sent: Wednesday, Septembe r 20, 2017 4:52 AM
To: Danie l. Kowalski@treasury.gov ; Dunn, Brendan (McConnell)
<Bren dan_Du n n@mcco n nel I.senate .gov>
Subject: Re: RELEASE:Corker , Toomey Statement on Tax Reform

Thanks. Nice work on this.

From: Dunn, Brendan (McConnell) <Brendan Dunn@mcconnell.senate.gov >
Date: September 19, 2017 at 8:59:28 PM EDT
To: Kowalski, Daniel <Daniel.Kowalski@treasury.gov >, Muzinich , Justin
<Justin.Muz inich@treasury .gov>
Subject: FW: RELEASE:Corker, Toomey Statement on Tax Reform
From: Johnson, Micah (Corker)

Sent: Tuesday, September 19, 2017 7:34 PM
To: Johnson, Mic ah (Corker) <Micah Johnson@corker.senate.gov
Subject : RELEASE:Corker, Toomey Statement on Tax Refo r m

UNITED

STATES

>

SENATE

For immediate release: September 19, 2017
Contacts:
Micah Johnson (Corker) , 202-228-6523
Kasia Mulligan(Toomey), 202-224-8609

Corker, Toomey Statement on Tax Reform
WASHINGTON - U.S. Senators Bob Corker (R-Tenn.) and Pat Toomey (R-Pa.),
members of the Senate Budget Committee, today announced a path forward on tax

reform. The budget resolutionwould allow for a tax reduction,as scored on a static basis,
over a 10-yearperiod.

1c.n

UST 000881
pVERSIGHT

TREAS-17-0313-G-000007

 "I am strongly committed to pro-growth tax reform that will lead to more jobs and higher
wages and was glad to work with Chairman Enzi and Senator Toomey at the request of
Senate leadership to reach an agreement that will allow the committees of jurisdiction to
begin their work to craft this important legislation," said Corker. "While each member of
the caucus will have to make their own decision , I believe our agreement gives the tax
writing committees enough headroom to achieve real tax reform that eliminates loopholes
and lowers tax rates for hardworking Americans. I will be watching closely as the tax
reform legislation is drafted, and ultimately, my support will be contingent on a final
package that generates significant economic growth and does not worsen but hopefully
improves our fiscal situation ."
"I am confident the budget agreement I have reached with Chairman Enzi and Senator
Corker will give the Finance Committee the headroom needed to write a pro-growth tax
plan that reforms the code, causes the economy to surge, and ultimately results in
reduced federal budget deficits," said Toomey.

ft##

AMt::HICAr\

UST 000882
pVERSIGHT

TREAS-17-0313-G-000008

 Possible Bi 6 Document - DRAFT
From:

"Knight, Shahira E. EOP/WHO"

To:

"Muzinich, Justin" <justin.muzinich@treasury.gov>, "(RYAN) Callas, George"
<geo rge .callas@mail. house .gov>, "Brendan M. Dunn
(Brendan_Dunn@mcconnell .senate.gov)" <bren dan_dun n@mcconnell .senate.gov>

Date:
Attachments:

I 1 • 1

• 1•

Wed, 20 Sep 2017 19:59:25 -0400
Big 6 Framework Decision ltems.docx (17 .6 kB)

······ .... -.

b(5)

, ... ,

...

- , -- . -

... .. ....
-

-

·-

b(5)

AMERICAN

UST 000883
pVERSIGHT

TREAS-17-0313-G-000009

 For 3:40 Call
From:

"Knight, Shahira E. EOP/WHO"

To:

"Brendan M. Dunn (Brendan_Dunn@mcconnell.senate.gov)"
<brendan_dunn@mcconnell.senate .gov>, "Muzinich, Justin"
<justin.muzinich@treasury.gov>, "Callas , George" <george.callas@ma il.house.gov>

Date:

Thu, 21 Sep 2017 07:17:22 -0400

Attachments:

Big 6 Call 9.21.2017.docx (17.05 kB)

AMERICAN

UST 000884
pVERSIGHT

TREAS-17-0313-G-000010

 Revised Framework
From:

"Knight, Shahira E. EOP/WHO"

To:

"Muzinich, Justin" <justin.muzinich@treasury.gov>,george.callas@mail.house.gov,
"Brendan M. Dunn (Brendan_Dunn@mcconnell.senate.gov)"
<brendan_dunn@mcconnell .senate .gov>

Date:

Thu, 21 Sep 2017 16:08:02 -0400

Attachments:

Big 6 Call 9.21.2017 Readout.docx (18.68 kB)

Please let me know if you disagree (based on today's call)

AMERICAN

UST 000885
pVERSIGHT

TREAS-17-0313-G-000011

 RE: Median famil
From:

"Prater, Mark (Finance)" <mark_prater@finance.senate.gov>

To:

"Muzinich, Justin" <justin.muzinich@treasury.gov>, "Mackie, James Ill"
<jam es. mackie@treasury.gov>

Cc:

"Maloney, Drew" <drew.maloney treasu . ov> "Kowalski Daniel"
<daniel.kowalski@treasury.gov>,
"Coughlan , Tony
(Finance)" <tony_coughlan@finance.senate.gov>,
cuna, enni er (Finance)"
<jennifer_acuna@finance.senate.gov>

Date:

Thu, 21 Sep 2017 17:25:43 -0400

Attachments:

b(5)

(20.22 kB)

Thanks for the call, Justin.

b(5)
b(5)

From: Justin.Muzinich@treasury.gov [mailto :Justin. Muzinich@treasury .gov]
Sent: Thu rsday, September 21, 2017 5:12 PM
To: James.Mackie@treasury.gov
Cc: Prater, Mar k [Finance) <Mark Prater@fin ance.senate. ov>; Drew.Maloney@treasury.gov;
Daniel.Kowalski@treasury.gov;
Subject: Med ian fam ily

Jay - b(S)

b(5)

b(5)

AMERICAN

UST 000886
pVERSIGHT

TREAS-17-0313-G-000012

 RE: Median famil
From:

"Coughlan , Tony (Finance)" <tony_coughlan@finance.senate.gov>

To:

"Prater, Mark (Finance)" <mark_prater@finance.senate.gov> , "Muzinich, Justin"
<justin.muzinich@treasury.gov>, "Mackie, James Ill" <james.mackie@treasury.gov>

Cc:

"Maloney, Drew" <drew.maloney treasu . ov> "Kowalski Daniel"
<daniel. kowalski@treasury.gov>,
, "Acuna , Jennifer
(Finance)" <jennifer _acuna@finance.senate.gov>

Date:

Thu. 21 Sep 2017 17:33:59 -0400

Attachments:

b(5)

, ocx (20.24 kB)

Attached is a very slightly revised/improved version of the memo Mark just
circulated.
From: Prater, Mark (Finance)
Sent: Thu rsday, September 21, 2017 5:26 PM
To: Justin.Muzinich@treasury.gov; James.Mackie@treasury.gov
Cc: Drew.Maloney@treasury.gov ; Daniel.Kowalski@treasury.gov;
Coughlan, Tony (Finance) <Tony_Coughlan@finance.senate.gov>;
<Jennifer _Acu na@fi na nee.senate.gov>
Subject: RE: Med ian family

Acuna, Jennifer (Finance)

Thanks for the call, Justin.

b(5)
b(5)
Tony Coughlan handles the CTC and fam i ly provisions. Jennifer assists on those issues, too. Tony
•

b(5)

•

b(5)

From: Justin.Mu zi n ich@treasury.gov [mai Ito :Justin.Mu zi n ich@treasury.gov ]
Sent: Thu rsday, September 21, 2017 5 :12 PM
To: James.Mackie@treasury.gov
Cc: Prater, Mark [Finance) <~M=a~r
....
k~=~~~=~~=-=
Daniel.Kowalski@treasury .gov;
Subject: Med ian family

b(5)
I

AMERICAN

UST 000887
pVERSIGHT

TREAS-17-0313-G-000013

 RE: Median famil
From:

"Coughlan , Tony (Finance)" <tony_coughlan@finance.senate .gov>

To:

"Mackie, James Ill" <james. mack ie@ treasu ry .gov>

Date:

Th u, 21 Sep 2017 18:03:42 -0400

Attachm e nts:

•

docx (20.24 kB)

Hi, Jay Please use the attached examples. Example 4 is slightly different.

b(S)

b(5)
I

Tony
From: James.Mackie@treasury .gov [mailto:James.Mackie@treasury.gov]
Sent: Thu rsday, September 21, 2017 6 :02 PM
To : Prater, Ma r k (Finance) <M ark_Prater@finance .senate.gov>; Justin. M uzinich@treasur .
Cc: Drew .Ma loney@treasury.gov ; Daniel .Kaw alski@treasury .gov;
Coughlan, Tony (Finance) <Tony_Coughlan@finance .senate .gov>; Acuna, Jennifer (Finance)
<Jennif er _Acu na@fi na nee.sen ate .gov>
Subje ct : RE: M edian family

We certainly can look at the case that Justin described.

b(5)

We also will look at the examples that Tony has done.
From: Prater, Mark (Finance) (mailto:Mark

Prater@finance .senate .gov]

Sent : T hu rsday, September 21, 2017 5 :26 PM
To : M uzinich, Justin <Justin.Muzinich@treasury.gov >; Mackie, James Ill <James.Mackie@treasury.gov >
Cc: Malone , Drew <Drew .Maloney@treasury .gov >; Kowalsk i, Daniel <Danie l.Kowalsk i @treasury .gov>;
; Coughlan, Tony (Finance) <Tony Coughlan@finance.senate .gov>;
Acuna, Jenn ifer (Fina nce) <Jennifer Acuna@finance .senate .gov>
Subject: RE: M edian family

Thanks for the call, Justin.

b(5)
b(5)
T

C

hi

• •
b(5)

h

di

th
b(5)

CTC

From: Justin.Muzinich@treasury.gov

df

·1

•

J

·t

. t

[mailto:Justin.Muzinich@treasury.gov

th

t

T

]

AM HICAN

UST 000888
pVERSIGHT

TREAS-17-0313-G-000014

 Sent : T hu rsday, Septembe r 21, 2017 5:12 PM
To : James .Mackie@treasury .gov
Cc: Prater, M ark [Finance) <Mark Prater f inance.senate . ov >; Drew .Maloney@treasu
Daniel .Kow alski@treasury .gov ;
Subject : M edian family

ry .gov ;

b(S)

b(5)

Mark - b(5)
b(5)

AMERICAN

UST 000889
pVERSIGHT

TREAS-17-0313-G-000015

 Partnershi reform/raisers
From:

"Acuna, Jennife r (Finance)" <jennifer _acuna@finance.senate.gov>

To:
Cc:

'Trier , Dana" <dana.trier@treasury.gov>

Date:

Tue, 10 Oct 2017 11 :10:18 -0400
b(5)

Attachments:

"Hanna , Christopher (F inance)" <christopher_hanna@finance.senate.gov>

Hi Dana,

Who better than a tax god to give
them a look!? We know you are busy and appreciate any insight you can share on the attached .
Thank you!!!
Jen

Jen Acuna
Senior Tax Counsel & Policy Advisor
Senate Finance Committee
Tel: (202) 224-4515

AMERICAN

UST 000890
pVERSIGHT

TREAS-17-0313-G-000016

 Re: Partnershi reform/raisers
From:

''Trier, Dana" <"/o=ust rea sury/ou=exc hange administrative group
(fydibohf23spdlt)/cn=recipients/cn=3fb4cbf9d 1c84bb08776ff0c423483 29-t rier, dana">

To:

"Acuna, Jennifer (Finance)" <jennifer_acu na@finance.senate .gov>

Date:

Tue, 10 Oct201711:12:47-0400

Will get back as soon as possible! Dana

From:Acuna, Jennifer (Finance) <Jennifer_Acuna@finance.senate.gov>
Date: October 10, 2017 at 11:10:41 AM EDT
To: Trier, Dana <Dana.Trier@t reasury.gov>
Cc: Hanna, Christopher (Finance) <Christopher_Hanna@finance.senate .gov>
Subject: Partnership reform/raisers
Hi Dana,

them a look!?

We know you are busy and appreciate

Who better than a tax god to give
any insight you can share on the attached.

Thank you!!!
Jen

Jen Acuna
Senior Tax Counsel & Policy Advi sor
Senate Finance Committee
Tel: (202) 224-4515

AMERICAN

UST 000891
pVERSIGHT

TREAS-17-0313-G-000017

 RE: Meetin
From : b(6)

To:

Cc:

Date :

, treasury.gov>

"Gosnell, Ellen" <ellen.gosnell@mail.house.gov> , "Maloney, Drew"
<drew.maloney@treasury.gov>, "Horton, Brett" <brett.horton@mail.house.gov>, "Poling, Parker"
<parker.poling@mail.house.gov>
"Shackelford, Lindsey" <lindsey.shackelford@mail.house.gov>, b(6)
@treasury.gov>
Tue, 10 Oct 20 17 16:35 :55 -0400

Hi Ellen! The Secret ary is running about 10 minutes behind fo r this meeting.
prob lem . Thank you!

I hope this will not be a

From: Gosnell, Ellen [ma ilto:Ellen .Gosnell@mail.house.gov]

Sent : Thu rsday , October 05, 2017 3:12 PM
To ·. •
@treasury .gov>;Maloney , Drew <Drew .Maloney@treasu ry.gov> ;
Horton , Brett <Brett .Horton@mail.house .gov>; Poling, Parker <P~ail.
house .gov>
Cc: Shackelford, Lindsey <lindsey.shackelford@mail.house
.gov> ; -.--....
<fu@ I
r@treasu ry.gov>
Subject : RE: Meeting req uest
Great! The meeting will be in Rep. Scalise's Whip Office, H-328 US Capitol Build ing. I have it confirmed
on Rep . Scalise' s calendar . Please let me know if you have any questions .
Thank you,

Ellen Gosnell
Scheduler
House Majority Whip Steve Scalise
Mobile I(202) 641-5148

From: b(6)

treasur

. ov [mailto mmllll

Sent : Wednesday, October 04, 2017 5:00 PM
To: Gosnell, Ell en <Ellen .Gosne l l@mail.house .gov >; Drew.Maloney@treasury.gov
; Horto n, Brett
<Brett .Horton@ma il.house .gov >; Poling, Parker <Parker.Poling@mail.house.gov >
Cc: Shackelford, Lindsey <lindsey.shackelford@mail.house
.gov >; Mlli
@treasury.gov
Subject : RE: Meeting request
Hi Ellen! I would like to confirm that Tuesday, Oct. 10th at 5:00pm will work for Secretary Mnuchin.
Please let me know where this meeting will be held. I will circle back shortly to let you know who will
accompany the Secretary to this meeting. Thanks very much!
b(6)

From: Gosnell , Ellen [mailto :Ellen .Gosnell@mail.house.gov

]

Sent : Wednesday, October 04, 2017 4:11 PM
To : Maloney, Drew < Drew .Maloney@treasury .gov >; Horton, Brett <Brett .Horton@mail.house
Poli ng, Parker <Parker.Poling@mail.house .gov>
Cc: Shackelford, Lindsey <lindsey.shackelford@mail .house .gov >; • •
llilli
@treasury .gov >;
treasur . ov >
Subje ct: RE: Meeting request
I

.gov >;

f-\ '\J

UST 000892
pVERSIGHT

TREAS-17-0313-G-000018

 Hi Drew,
Please let us know if 5:00pm on Tuesday, October 10th works for the Secretary. If not, I will circle back
with some other times that work for Whip Scalise and Chief Deputy Whip McHenry.
Thank you!

Ellen Gosnell
Scheduler
House M~eve
Mobile ILl:lBllllllllll

Scaljse

From: Drew .Maloney@t reasury.gov (mailto:Drew.Ma loney@treasury .gov]
Sent : Wednesday, October 04, 2017 2:15 PM
To: Horton, Brett <Brett .Horton@mail.house .gov>; Poling, Parker <Parker.Poling@mail.house .gov>
Cc: Shackelford, Lindsey <lindse .shackelford mail.house . ov>; Gosnell, Ellen
<El len .Gosnell@mail.house .gov>;
treasu . ov;
treasur . ov
Subject : Meeting request

The Secretary would li ke to meet with the Whip and Deputy Whip next week if possible to discuss tax
reform.
I have copiedlltllll

who handles the Secretary's schedule .

Let me know if something works.
Thanks
Drew

Drew Maloney
Assistant Secretary of the Treasury
Legislative Affairs
United States Department of the Treasury
1500 Pennsylvania Avenue, NW Suite 3134
Washington, DC 20220
Office: 202-622-1900
Cell: • •
drew.maloney@treasury.gov

AMERICAN

UST 000893
pVERSIGHT

TREAS-17-0313-G-000019

 Materials from toda 's meetin with Treasur
To:

jennifer_acuna@finance.senate.gov, christopher_hanna@finance.senate.gov,
eric_oman@finance.senate .gov

Date:

Thu, 12 Oct 2017 15:24:48 -0400
b(5)

Attachments:

Hi all,
Attached are t he materials that we distributed at today's meeting. If you have any questions
regarding these, let us know. As we said at the meeting , if Treasury can provide f urthe r technical
assistance in any way, we are happy to do so.
Best regards,
Doug

AMERICAN

UST 000894
pVERSIGHT

TREAS-17-0313-G-000020

 RE: tax reform
From:

"Elliott , Joe l (Donnelly)" <joel_elliott@donnelly.senate.gov>

To:
Cc:

"Lattanner, Andrew (Donnelly)" <andrew_lattanner@donnelly .senate.gov>

Date:

Mon, 16 Oct 20 17 14 :26:16 -0400

@treasury.gov>,"Maloney, Drew" <drew.maloney@treasury.gov>

Thank you.
, treasury.gov [mailto: ~
From: b(6)
treasury.gov]
Sent: Monday, October 16, 2017 2 :26 PM
To: Elliott, Joel (Donnelly) <Joel_Elliott@donnelly.senate.gov>; Drew.Maloney@treasu ry.gov
Cc: Lattanner, Andrew (Donnelly) <Andrew_Lattanner@donnelly .senate.gov>
Subject: RE: tax reform

Great, thanks. Below is the dial-in info.
Dial-ln :Passcode:

mJII

From: Elliott, Joel (Donnelly) [mailto:Joel Elliott@donnelly.senate.gov
Sent: Monday, October 16, 2017 2:24 PM

]

To:[h(i
,>treasury .gov>; Maloney, Drew <Drew.Maloney@treasury .gov>
Cc: Lattanner, Andrew (Donnelly) <Andrew Lattanner@donne lly.senate .gov>
Subject: RE: tax reform
It will work. W i ll you supply dial -in info?
From:

l#iffl

@treasury .gov]

Sent: Monday, October 16, 2017 2:19 PM

To: Elliott, Joel (Donnelly) <Joel Elliott@donnelly.senate.gov >; Drew .Maloney@treasu ry.gov
Cc: Lattanner, Andrew (Donnelly) <Andrew Lattanner@donne lly .senate .gov>
Subject: RE: tax reform
Hi Joel,
Would 10:45AM on Wednesday work fo r a call?
From: Elliott, Joel (Donnelly) [mailto:Joel Elliott@donnelly .senate.gov ]
Sent: Monday , October 16, 2017 2:17 PM
To: Malone Drew <Drew.Malone
treasur . ov>
Cc: • •
treasur . ov>; Lattanner, Andrew (Donnelly)
<Andrew Lattanner@donnelly .senate .gov>
Subject: RE: tax reform

Drew, do you have any time on Wednesday morning?

AMERICAN

UST 000895
pVERSIGHT

TREAS-17-0313-G-000021

 Joel,
Let me know when it is convenient to catch up on tax reform.
Thanks
Drew

Drew Maloney
Assistant Secretary of the Treasury
Legislative Affairs
United States Department of the Treasury
1500 Pennsylvania Avenue, NW Suite 3134
Washington, DC 20220
Office: 202-622-1900
Cell:
ov

AMt::HICAr\

UST 000896
pVERSIGHT

TREAS-17-0313-G-000022

 RE: Technical assistance - Treasur

contacts

From:

'West, Thomas" <thomas.west@treasury.gov>

To:

"Acuna, Jennifer (Finance)" <jennifer_acuna@finance.senate.gov>

Cc:

"Hanna, Christopher (F inance)" <christopher_hanna@finance.senate.gov>, "Trier, Dana"
.
ov>,,
b(6)
'i>treasury.gov>
,I I
treasury.gov>,
treasury
.gov>
b6
•
Mon. 16 Oct 2017 20:38:03 -0400

Date:
Attachments:

.. .

.

mm

Hi Jen,

Our schedules are packed this week and Friday is probably the best day for all ofus, but if we need to do
something sooner we can muster a contingent
Best,
Tom
Tom West
(202) 622-6707
thomas.west@treasury

.gov

From: Acuna, Jennifer (Finance) [mailto:Jennifer_Acuna@finance.senate.gov]

Sent: Friday, October 13, 2017 6:28 PM
To: We:,t, Thomas
Cc: Hanna,Christopher (Rnance)

Subject: RE: Technicalassistance - Treasury contacts
Hi Tom,
Hope all is well! We would like to schedule a time next week for your team to brief us on Let me know what works for you guys.
b(5)
Have a great weekend! :)
Jen
From: Austin .Bramwell@treasury .gov [mailto :Aust in .Bramwell@treasury.gov
]
Sent: Wednesday, October 4, 2017 3:32 PM
To: Acuna, Jennifer (Finance) <Jennifer Acuna@finance .senate .gov >
Cc: Prater, Mark (Fina nce) <Mark Prater@finance.senate
.gov >; David .Kautter@treasury .gov ;
James .Mackie@treasury .gov ; Dana .Trier@treasury .gov ; Thomas.West@treasury
.gov ;
Douglas .Poms@treasury .gov ; LafayetteChip.Harter@treasury
.gov ; Robert .Neis@treasury .gov

A I HLiAN

UST 000897
pVERSIGHT

TREAS-17-0313-G-000023

 Subject: Technical assistance - Treasury contacts

Jen,
As discussed, here are Office of Tax Policy staff to whom you should feel free to reach out to discuss
technical drafting issues:
Passthroughs
Dana Trier (Deputy Assistant Secretary for Tax Policy), 622-0140, dana.trier@treasury.gov
International
Doug Porns, 622-1754 , douglas .poms@treasury.gov
Individual
Tom West, 622-6707, thomas.west@treasury

.gov

Estate. gift and basis at death
Austin Bramwell, 622-7827, austin.bramwell@treasury
Corporate
Tom West, 622-6707, thomas.west@treasury

.gov

.gov

We have working groups on each topic and are available to review drafts and meet at your
convenience. Thanks.
Regards,
Austin
Austin Bramwell
Office of Tax Policy I U.S. Department of the Treasury
1500 Pennsylvania Avenue , NW IWashington, D.C. 20220
202-622- 7827 I a usti n .bramwell@treasury.gov

AMt::HICAr\

UST 000898
pVERSIGHT

TREAS-17-0313-G-000024

 RE: Estate tax - le
From:

"Bramwell, Austin" <austin.bramwell@treasury.gov>

To:

"Acuna, Jennifer (Finance)" <jennifer_acuna@finance.senate.gov>, "Hanna, Christopher
(Finance)" <christopher _hanna@finance.senate .gov>
b(6)
treasury.gov> ,
treasury.gov>, "Oman, Eric (F inance)"
<eric_oman@finance.senate.gov>, "Kautter, David" <david.kautter@treasury.gov>

Cc:
Date:
Attachments:

Mon. 16 Oct 2017 21:46:31 -0400

Jen,
As promised, I am attaching the following:
•
•

•

Memorandum on selected high-level issues with the proposed legislation;
Line-by-l i ne comments;
A descri tion of
and

•
e-mail, we will also send a memorandum that discusses b(5)

-

We would be happy to discuss these materials or any questions or comments at your convenience.
Regards,
Austin
From: Acuna, Jenni fer (Finance) [ma i lto:Jennifer_Acuna@finance.senate.gov]
Sent: Friday , October 13, 2017 5:58 PM
To: Bramwe l l, Austin <Austin.Bramwell@treasury.gov>; Hanna, Christopher (Finance)
finan . en
<Christ h r H
Cc:
treasury.gov>• •
•
treasury.gov>; man, ric (Finance) <Eric_Oman@finance.senate.gov>
Subject: RE: Estate tax - leg specs

Hi Aust i n,
Likewise! Thank you so much for trekking over here to meet with us. We are very excited to review
the materials and reconnect in the upcoming week. Have a wonderful weekend !
Jen
From: Austin .Bramwell@treasury.gov [mailto :Austin .Bramwell@treasury.gov ]
Sent: Thu rsday, October 12, 2017 10:42 PM
To: Acuna, Jennifer (Fi nance) <Jennifer Acuna@finance.senate.gov >; Hanna, Christopher (Finance)
<Christopher Hanna@finance .senate.gov >
Ccffi(j
@treasury.gov :
v
Subject: RE: Estate tax - leg specs

Jen,
I

CAN

UST 000899
pVERSIGHT

TREAS-17-0313-G-000025

 It was a pleasure to meet you in person yesterday. We should have our comments on the
draft you sent us, a description o
Austin

b(6)

We have arrived and managed to find our way 211 already! See you soon.

From: Acuna, Jennifer (Finance) <Jennifer Acuna@finance.senate.gov >
Date: October 11, 2017 at 6:01:51 PM EDT
To: Bramwell, Austin <Austin.Bramwell@treasury.gov >, Hanna, Christopher (Finance)
<Christo her Hanna finance.senate. ov>

b(6)

Cc:

Hi Aust in, Please let me know when you guys arrive.
From: Austin .Bramwell@treasury .gov [mailto:Aust i n.Bramwell@treasury.gov ]
Sent: Wednesday, October 11, 2017 1:00 PM
To: Hanna, Christopher {Finance) <Christopher Hanna@finance.senate.gov >; Acuna , Jennifer
·n
. v>
{Finance <Jennifer A

Cc:• •

r

v

Subject: RE: Estate tax - leg specs
Great -see you then.

Hanna@finanee.senate.govl

b(6)

We can host -- 6pm today. We have reserved Senate Dirksen room 211. Thanks.

Sent from my Verizon, Samsung Galaxy smartphone

AMERICAN

UST 000900
pVERSIGHT

TREAS-17-0313-G-000026

 Just fo llow ing up on venue -- I t hin k it wo uld be most productive to meet in pe rson, if yo u ar e
willi ng to host us, but we defe r to you .

6 tomorrow

it is! Would you like to meet in person or speak by phone?

From: Acuna, Jennifer (Finance) (ma i lto :Jennifer Acuna@finance.senate .gov]

Sent : Tuesday, October 10, 2017 12:27 PM
To: Bramwe l l, Austin <Austin.Bramwell@treasury.gov >
Cc: Hanna, Christo her (Finance) <Christopher Hanna@finance .senate.gov >; b(6)
treasur . ov>ffii.;j
,@treasury .gov>
Subject : RE: Estate tax - leg specs
Great! How about tomorrow

at 6?

Looking forward to it!©
From:Austin.Bra mwell@treasury .gov [mai lto:Austin.Bramwell@treasury.gov

]

Se nt : Tuesday, October 10, 2017 12:26 PM
To : Acuna, Jennifer (Fi nance) <Jennifer Acuna@finance.senate.gov >
Cc: Hanna, Christopher (Finance)
<Christopher Hanna@finance.senate .gov> b(6)
• treasur

. ov b(6)

• treasu

gov

Subje ct: RE: Estate tax - leg specs
Thank you, Jen. We look forward to working with you on this. I am copying my colleagues lJ.mJa
and b(6)

E

It looks as if we are free tomorrow afternoon (October 11) after 3:30, Thursday (October 12) from 10
t o 11:30, and from 12 to 5. Please let us know if any of those times work for you. Thanks.
Best,
Austin
Aust in Bramwell

Office of Tax Policy I U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW IWashington, D.C. 20220

AM HCAN

UST 000901
pVERSIGHT

TREAS-17-0313-G-000027

.

 202-622-7827 Iaustin.bramwell@treasury.gov

From:Acuna, Jenni fer (Finance) [mailto:Jennifer Acuna@finance .senate.gov ]
Sent : Tuesday, October 10, 2017 11:52 AM
To : Bramwe l l, Austin <Austin.Bramwell@treasury.gov >
Cc: Hanna, Christopher (Finance) <Christopher Hanna@finance.senate.gov >
Subject : Estate tax - leg specs
Hi Aust i n,

Can we find a time to chat in the upcoming days to discuss?
Thanks !!
Jen

Jen Acuna
Senior Tax Counsel & Policy Advisor
Senate Finance Committee
Tel: (202) 224-4515

AMERICAN

UST 000902
pVERSIGHT

TREAS-17-0313-G-000028

 RE: Estate tax - le
From:

"Bramwell, Austin" <austin.bramwell@treasury.gov>

To:

"Acuna, Jennifer (Finance)" <jennifer_acuna@finance.senate.gov>, "Hanna, Christopher
Finance "<christo

her_hanna@finance .senate .gov>

Cc:

treasury.gov>, liff;i
treasury.gov>, "Oman, Eric (Finance)"
<eric_oman@finance.senate.gov>, "Kautter, David" <david.kautter@treasury.gov>

Date:

Tue. 17 Oct 2017 12:53:16 -0400

Attachments:

b(5)

docx (36.97 kB)

Jen - as promised, see attached our memorandum on b(5)
you'd like all 5 pieces of commentary in one e- mai l just let me know.

If

From: Ac una, Jenni fer (Finan ce) [ma ilto:Jennifer_Acuna@finance.senate.gov]

Sent: Monday, October 16, 2017 10:13 PM
To : Bramwe l l, Austin <Austin.Bramwell@treasury.gov>;
Hanna, Chr istopher (Finance)
<Christopher _Han na@finance.senate .gov>
Cc: Hughes, Catherine <Catherine .Hughes@treasury.gov>; Anantham, Siva
<Siva.Anantham@treasury.gov>;
Oman, Eric (Finance) <Eric_Oman@finance.senate.gov>;
David <David .Kautter@treasury.gov>
Subject: Re: Estate tax - leg specs

Kautter,

Thanks Austin! We will be in touch very soon to sche dule a follow-up.

Sent from my Verizon, Samsung Galaxy smartphone

--------Original message -------From: Austin.Bramwell@treasmy.gov
Date: 10/16/179:48 PM (GMT-05:00)
To: "Acuna , Jennifer (Finance)" < lennlfer_Acuna@finance.senate.gov >, "Hanna, Christopher
(FinHann~nance.senate.gov
>
Cc :_• •
=treasu :ov ,
~
:areasui>';ov , "Oman, Eric (Finance)"
<Enc Oman@finance.senate.gov
>, D 1d.
r
sury.
Subject: RE: Esta te tax - leg specs

!

Jen,
As promised,
•
•
•

I am attachi ng the following:

Memorandum on selected high -level issues with the proposed legislation;
Line- by-l i ne comments;
A description of

•
--

e-mail, we will also send a memorandum

that discusses b(5)

We would be happy to discuss these materials or any questions or comments at your convenie nce.

AMERICAN

UST 000903
pVERSIGHT

TREAS-17-0313-G-000029

 Rega rds,
Austin

From:Acuna, Jennifer (Finance) (mailto :Jennifer Acuna@finance .senate.gov ]
Sent: Friday, October 13, 2017 5:58 PM
To: Bramwe l l, Austin <Austin .Bramwell@treasury.gov >; Hanna, Christopher (Finance)
<Christopher Hanna@finance .senate.gov >
Cc:
treasur . ov >; b(6)
treasu . ov>; Oman, Eric (Finance) <Eric Oman@finance.senate.gov >
Subject: RE: Estate tax - leg specs
Hi Aust i n,
Likewise! Thank you so much for trekking over here to meet with us. We are very excited to review
the materials and reconnect in the upcoming week. Have a wonderful weekend!
Jen
From: Austin.Bramwell@treasury .gov [mailto:Aust i n.Bramwell@treasury .gov]
Sent: Thursday, October 12, 2017 10:42 PM
To: Acuna, Jennifer (Finance) <Jennifer Acuna@finance.senate.gov >; Hanna, Christopher (Finance)
<Christopher Hanna@finance.senate .gov>
Cc:MM
@treasury .gov; ••
Subject: RE: Estate tax - leg specs

Austin

We have arrived and managed to find our way 211 already! See you soon.

From: Acuna, Jennifer (Finance) <JenniferwAcuna@finance .senate.gov >
Date: October 11, 2017 at 6:01:51 PM EDT
To: Bramwell, Austin <Austin.Bramwell@treasury.gov >, Hanna, Christopher (Finance)
<Christopher Hanna@finance.senate.gov >
Cc:
treasur . ov>, b(6)
• •
r
r
v>
Su Ject: RE: Estate tax - leg specs

AM HICAN

UST 000904
pVERSIGHT

TREAS-17-0313-G-000030

 Hi Austin, Pleaselet me know when you guys arrive.

@treasury.gov
Great -see you then.
From: Hanna, Chri stopher (Finance) [mai lto:Christopher
Hanna@finance.senate
.gov ]
Sent: Wednesday, October 11, 2017 12:36 PM
To : Bramwe l l, Austin <Austin .Bramwell@treasury
.gov >; Acuna, Jennifer (Finance)
<Jennifer Acuna@finance .senate.gov >
Cc: It]
51treasury.gov >; b(6)

We can host -- 6pm today. We have reserved Senate Dirksen room 211. Thanks.

Sent from my Verizon, Samsung Galaxy smartphone

-------- Origin aI message -------From: Aust in.Bramwell@treasury.gov
Date: 10/11/17 7:16 AM (GMT-06:00)
To: "Acuna , Jennifer (Finance)" <Jennifer Acuna@finance.senate.gov >
Cc:
treasu . ov jfffu
@treasury.gov , "Ha nn a, Christopher
(Finance <Christop er Hanna@finance.senate .gov >
Subject: RE: Estate tax - leg specs
Just following up on venue -- I t hink it would be most pro duct ive to meet in person , if you are
willing to host us, but we defer to you.

From: Bramwell, Austin <Austin.Bramwell@treasury.gov >
Date: October 10, 2017 at 12:31:36 PM EDT
To: 'Acuna, Jennifer (Finance)' <Jennifer Acuna@finance.senate.gov >
Cc: Hanna Christo her Finance) <Christopher Hanna@finance.senate.gov
treasur . ov> b(6)
E
,@treasury.gov >
Subject: RE: Estate tax - leg specs

>,5IIIIIIII

6 tomorrow it is! Would you like to meet in person or speak by phone?
From: Acuna, Jennifer (Finance} [ma ilto:Jenn ifer Acuna@finance.senate
.gov ]
Sent: Tue sday, October 10, 2017 12:27 PM
To : Bramwe ll, Austin <Austin .Bramwell@treasury.gov
>
b(6)
Cc: Hanna, Christopher (Finance) <Christopher
Hanna@finance.senate.gov
>;

AMERICAN

UST 000905
pVERSIGHT

TREAS-17-0313-G-000031

 lfilli

@treasury.gov >; b(6)
Subject: RE: Estate tax - leg specs
Great! How about tomorrow at 6?
Looking forward to it! ©
From:Austin.Bra mwell@treasury.gov [mai Ito :Austin .Bramwel l@treasury.gov ]
Sent: Tuesday, October 10, 2017 12:26 PM
To : Acuna, Jennifer (Finance) <Jennifer Acuna@fi nance.senate .gov>
Cc: Hanna, Christopher (Finance)
,
<Christopher Hanna@finance.senate.gov > b(6)

gov
Subject: RE: Estate tax - leg specs

~

ou, Jen. We look forward to working with you on this. I am copying my colleaguesmJIII

ll\tllllll and b(6)
It looks as if we are free tomorrow afternoon (October 11) after 3:30, Thursday (October 12) from 10
to 11:30, and from 12 to 5. Please let us know if any of those times work for you. Thanks.
Best,
Austin
Austin Bramwell

Office of Tax Policy I U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW IWashington, D.C. 20220
202-622-7827 Iaustin.bramwell@treasury.gov
From: Acuna, Jennifer (Finance} [mailto:Jennifer Acuna@finance .senate.gov ]
Sent: Tuesday, October 10, 2017 11:52 AM
To : Bramwe l l, Austin <Austin .Bramwell@treasury.gov >
Cc: Hanna, Christopher (Finance) <Christopher Hanna@finance.sen ate .gov>
Subject : Estate tax - leg specs

Hi Aust i n,

b(5)
but wanted to get you and your
at in the upcoming days to discuss?
Thanks!!
Jen

Jen Acuna

Senior Tax Counsel & Policy Advisor
Senate Finance Committee
Tel: (202) 224-4515

AMERICAN

UST 000906
pVERSIGHT

TREAS-17-0313-G-000032

 RE: followin LYIJ
________________

_

From:

''Trier, Dana" <"/o=ustreasury/ou=exc hange administrative group
(fydibohf23spdlt)/cn=recipients/cn=3fb4cbf9d 1c84bb0 8776ff0c423 48329-trier , dana">

To:

"Angus, Barbara" <barbara .angus@ mail .house.gov >

Date:

Wed, 18 Oct 2017 15:26:19 -0400

Barbara, Sorry for not gett ing back to you this morning. We had an hour long fire drill, and everything
was downhi ll from there.

later.
Dana
From: Angus, Barbara [mailto:Barbara.Angus@mail.house

.gov]

Sent: Tu esday, October 17, 2017 12:56 PM
To: Trier, Dana <Dana.T rier@treasury.gov>
Subject: following up

Thanks very much for a good session today . I would like to follow up and talk further about interest. Can we
find a time to do that in the next couple of days?

Barbara M. Angus
Chief Tax Cow1sel
Committee on Ways and Means
1136 Lon gworth House Office Building
202.225.5522
barbara.angus @mail house.gov

AMERICAN

UST 000907
pVERSIGHT

TREAS-17-0313-G-000033

 RE:
From:

"Prater, Mark (Finance)" <mark_prater@finance.senate.gov>

To:

"Maloney, Drew" <drew.maloney@treasury.gov>

Date:

Thu, 19 Oct 2017 10:25:43 -0400
b(5)

Attachments:

docx (14.56 kB)

Does this do it, Drew?
From: Drew.Maloney@t r easury.gov [mailto:Drew.Maloney@treasury.gov]

Sent: Thu rsday, October 19, 2017 10:23 AM
To: Prater, Mark (Finance) <Mark_Prater@finance.senate.gov>

Subject:

•

b(5)
I

Thanks
Drew

Drew Maloney
Assistant Secretary of the Treasury
Legislative Affairs
United States Department of the Treasury
1500 Pennsylvania Avenue, NW Suite 3134
Washington, DC 20220
Office: 202-622-1900
Cell: b(6)
drew.maloney@treasury.gov

AMERICAN

UST 000908
pVERSIGHT

TREAS-17-0313-G-000034

 DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.
October 5, 2018
Sara Kaiser Creighton
Elizabeth France
John E. Bies
American Oversight
1030 15th Street NW, Suite B255
Washington, DC 20005
foia@americanoversight.org
Re: American Oversight v. U.S. Department of the Treasury, 17-cv-2078-RBW (D.D.C.):
Treasury September 5 Production
Counsel:
This letter describes the October 5, 2018 production from the U.S. Department of the
Treasury (Treasury) in the above-referenced Freedom of Information Act litigation. Pursuant to
the Court’s February 2, 2018 Order, Treasury has reviewed and processed 60 documents
collected in response to American Oversight’s Congressional Communications FOIA Request,
2017-08-121. Via email, Treasury is producing 35 documents totaling 71 pages, comprising the
non-exempt, responsive portions of the records within this collection. The documents are
numbered UST 000909 - 979; portions of these materials are withheld pursuant to Exemptions 5
and 6 of the FOIA. An additional 20 documents, totaling 75 pages, are being withheld in their
entirety pursuant to Exemption 5, and four documents are non-responsive and/or duplicative of
other materials within this collection and are therefore not being produced.
Treasury is continuing to review records that are potentially responsive to this request
and will respond to you again on or before November 5, 2018.
If you have any questions concerning this production or a related matter, please contact
Rebecca Kopplin, U.S. Department of Justice, at (202) 514-3953.
Sincerely,

Ryan Law
Office of Privacy, Transparency, and Records
U.S. Department of the Treasury

 RE: Technical assistance - Treasur

contacts

From:

'W est , Thomas" <"/o =ustre asury/ou= exchan ge adm inistrati ve group
(fyd iboh f23sp dlt)/cn=recip ients/c n=westt">

To:

"Ac una, Jennife r (Finan ce)" <j ennifer_ac una@ financ e.s enate.gov>

Date:

Thu , 19 Oct 20 17 18:57:59 -0400

No problem

From : Acuna, Jennifer (Finance)<Jennifer_Acuna@finance.senate.gov>
Date: October 19, 2017 at 6:26:55 PM EDT
To : West, Thomas <Thomas.West@t reasury.gov>
Subject : RE:Technical assistance- Treasury contacts

Hey Tom,
Tomorrow

has turned into a fire drill for us, so we need to reschedule for the following

week.

Thanks ! !
Jen

From:Thomas. West@treasury.gov [mai lto :Thomas.West@treasury.gov]
Sent : Wednesday, October 18, 20 17 9 :46 AM
To: Acuna, Jennifer (Finance) <Jennifer_Acuna@finance.senate.gov>
Subject: RE:Technical assistance - Treasury contacts

Hi Jen, Friday is starting to get booked with other things for some of us - how does noon -230 window look
for you?
Tom West

(202) 622-6707
thomas.west@treasury .gov

From: Acuna, Jennifer (Rnance)[mailto:Jennifer_Acuna@finance.senate.gov]
Sent: Tuesday, October17, 2017 7:32 PM
To: West,Thomas
Cc: Hanna, Christopher (Finance); Trier, Dana;b(6)
Subject: RE: Technical assistance - Treasury contacts
Hey Tom,
We just got a request from our leg counsel to move our drafting session to the 10am time slot. Any
chance your team is available later in the afternoon?
Thanks!
Jen

UST 000909

TREAS-17-0313-H-000001

 Hi Jen,

Our schedules are packed this week and Friday is probably the best day for all ofus, but if we need to do
something sooner we can muster a contingent.
Best~
Tom
Tom West
(202) 622-6707
t homas .west@treasury.gov

From: Acuna, Jennifer (Finance)[mailto:JenniferAcuna@finance.senate.gov
]
Sent: Friday, October 13, 20 17 6:28 PM
To: West, Thomas
Cc: Hanna, Christopher (Finance)
Subject: RE: Technical assistance - Tr easury contacts
Hi Tom,
Hope all is well! We would like to schedule a time next week for your team to brief us on previous
Green book corporate raisers. Let me know what works for you guys.
Have a great weekend ! :)
Jen
From: Austin .Bramwell@treasury .gov [ma ilto :Aust i n .Bra mwel l@treasury .gov]
Sent : Wednesday, October 4, 2017 3:32 PM
To : Acuna, Jennifer (Fi nance) <Jennifer Acuna@finance.senate .gov>
Cc: Prater, Mark [Finance) <Mark Prater@finance .senate .gov>; David.Kautter@treasury .gov;
treasur . ov; Dana.Trier@treasury .gov ; Thomas.West@treasury.gov ;
Douglas.Poms@treasury .gov ; LafayetteChip .Harter@treasury .gov ; Robert .Neis@treasury .gov
Subject : Technical assistance - Treasury contacts

Jen,
As discussed, here are Office of Tax Policy staff to whom yo u shou Id feel free to reach out to discuss
technical drafting issues:
Passthroughs
Dana Trier (Deputy Assistant Secretary for Tax Policy), 622-0140, dana .trier@treasury .gov
lnternatio na I
Doug Porns, 622-1754, douglas.poms@treasury .gov
Indi vidual
Tom West, 622-6707, thomas .west@treasury .gov

UST 000910

TREAS-17-0313-H-000002

 Estate. gift and basis at death
Austin Bramwell, 622-7827, austin.bramwell@treasury.gov
Corporate
Tom West, 622-6707, thomas .wes t @treasury .gov
We have working groups on each topic and are available to review drafts and meet at your
convenience . Thanks.
Regards,
Austin
Austin Bram well
Office of Tax Policy I U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW IWashington, D.C. 20220
202-622-7827 I austin .bramwell@treasury.gov

UST 000911

TREAS-17-0313-H-000003

 From:

"Bailey, Bradley" <"/o=ustreasury /ou=exchange administrative group
(fydibohf23spdlt)/cn=recipients/cn= 7eb678b02d9b41 c0af365038a082c58e-bailey, brad I">

To:

"Portman, Stuart (Finance)" <stuart_portman@finance.senate.gov>

Cc:

"Bonelli, Anna (Finance)" <anna_bonelli@finance.senate.gov>, "Kuskowski, Jennifer
(Finance)" <jennifer _kuskowsk i@finance .senate .gov>

Date:

Thu, 19 Oct 2017 23:32:22 -0400

Attachments:

101717 TAM17J23_XML confidential draft (Treasury) .doc (39.42 kB)

Stuart,
Please see attached comments . One note : we wou ld normally coordinate comments with HHSbut
have not done so here. Please consider these as Treasury TA only.
Brad
From: Portman, Stuart (Finance) [mailto:St u art_Po rtman@finance.senate.gov]

Sent: Tuesday, October 17, 2017 2:37 PM
To: Bailey, Bradley <Bradley.Bailey@treasury.gov>
Cc: Bonelli, Anna (Finance) <Anna_Bo n e ll i@finance.senate.gov>;
<Jennifer _Kuskowski@finance.se nate.gov>
Subject: TA Request on Confidential Draft Language

Kuskowski, Jennifer (Finance)

Hi Brad,
I hope all is well. After our brie fi ng with Senate Fina nce Committee LAs, the ideas we heard in the
room were synthes ized into the attached discussion draft. As such, we request that Treasury p rovide
TA as quickly as possible on this language. Please keep this draft language confidential, and reach out
if you have any questions; I am happy to answer to the best of my ab ility. My direct is 202.224.6918.
Thank you!

Stuart Portman
Health Policy Advisor
U.S. Senate Committee

UST 000912

on Finance

TREAS-17-0313-H-000004

 Re: Saw this in Politico Huddle
From:

"Dunn , Brendan (McConnell)" <brendan _dunn@mcconnell.senate.gov>

To:

"Muzinich, Justin" <justin.muzinich@treasury.gov>

Cc:
Date:
Thanks Justin.
And it wasn't even that late a night!
Sent from my iPhone
On Oct 20, 2017, at 7 :07 AM , "Justin .Muz inich@t reas ury .gov " <Ju stin .Muz inich@t reas ury .gov > wrote :

b(5)

From: Callas, George <George.Callas@ma il.house.gov >
Date : October 17, 2017 at 11:31:06 AM EDT
To:
>, Muzinich, Justin
<Justin .Muzinic @treasury.gov >, Mar Prater@ inance.senate .gov
<Mark Prater@finance .senate .gov>
Cc:Angus, Barbara <Barbara.Angus@ma il.house .gov>, Brendan Dunn@mcconnell.senate .gov
<Brendan Dunn@mcconnell.senate.gov >
Subject: RE: Saw this in Politico Huddle
b(5)

From: Justi n.Muzin ich@treasurv .gov [mail to :Justi n.Muzin ich@treasurv .gov]
Sent: Tuesday, October 17, 2017 10:17 AM
To : Mark Prater@finance .senate .gov :
Cc: Callas, George; Angus, Barbara; Bren dan Dunn@mcconne ll.senate.gov
Subject: Re: Saw this in Politico Huddle

Thanks Ma rk

From: Prater, Mark (Finance) <Ma rkwPrat er@f inance.senate .gov>
Date: October 17, 2017 at 10:10:22 AM EDT
To: Muzinich, Justin <Justin .M uzinich @tr easury.gov>, Knight, Shahira E. EOP/WHO

>
Cc: Dunn , Bren an McConne
<Brenda n Du nn@mcconnell.senat e.gov>,
Bar ba ra .Angus@ Mail.H ouse.Gov Barb ara.Angus@ M ail. House .Gov
<Barb ara.Angus@Ma il.Ho use.Gov>, Callas, George <George.Callas@mail.house.go v>
Subject: Saw this in Politico Huddle

FYI

UST 000913

TREAS-17-0313-H-000005

 Sent from my Verizon, Samsung Galaxy srnartphone

Sent from my Verizon, Samsung Galaxy srnartphone

Contact: Rache l McCleery (202) 224-4515

FOR PLANNING PURPOSES
Octob er 16, 2017

***MEDIA ADVISORY***

ON BACKGROUND:Pass-throughLoophole101: SenateFinance
Committee Democratic Policy Staff Break Down New Tax Dodge for
Wealthy Americans
WASIDNGTON - Senate Finance Committee Senior Democratic Policy Staff will lead a
press call on TUES DAY, October 17, to explain the new pass-through rate in Trump's tax scam.
Staff will detail what pass -through status is, why wealthy individuals, not the middle class, will
benefit from the propo sed rate, and how this new loophole will choke off funding for Social
Security and Medicare. The entire call will be on backgrou nd attributable to Senate Democratic

aides.
Who:

Senate Finance Committee Senior Democratic Staff

What:

Press conference call

When:

October 17, 2017
3:00 PM EST

*·HFor call in information, please RSVP to Emily ZahnJe-Hostetler at Emily zahnlehostetler@wyden.senate.gov , with your name, outlet, and phone number***

UST 000914

TREAS-17-0313-H-000006

 From:

"Porns, Douglas" <douglas.poms@treasury .gov>

To:
Cc:

jennifer_acuna@finance.senate.gov
christopher_hanna@finance.senate.gov, ''Trier
• II<
r@treasury.gov>
treasury.gov> , •
@treasury.gov>
<>T<>\/01TOr

Date:
Attachments:

•

Fri, 20 Oct 2017 19:56:10-0400
Treasury comments on proposal to modify section 864 in relation to Rev Rul 91-32.docx
(29.11 kB); Subpart F Tax Reform Memo (10-20-2017).docx (43.74 kB)

Hi Jen,
I hope you survived the week . Attached are (i) our comments on the draft language for RR91-32 fix
and (ii) the complete li st of our proposed legislative fi xes to subpart F (we had sent the first of these
subpart F proposals last Friday). If yo u would like to discuss any of these, just let us know .
Have a great weekend and hopefully get some rest,
Doug

UST 000915

TREAS-17-0313-H-000007

 From:

"Porns, Douglas" <"/o=ustreas ury/ou=exch ange administrative group
(fydibohf23sp dlt)/cn=recip ients/cn=pomsd">

To:

••

Cc:
Date:

b(6)
b(6)

@jct.gov>

, treas ury.gov>, "Harter , Chip" <lafayettechip.harter@treas ury.gov>,
sury.gov>

Sun , 22 Oct 20 17 12:24 :31 -040 0

Doug

, JCT.gov>
From:b(6)
Date: October 22, 2017 at 11:51:10 AM EDT
To:~_
s.Poms@treasu
~
Cc:1:I~t
reasury.gov>,~
<LafayetteChip.Harter@treasury.gov>
Subject : RE: Proposed legislative fixes to subpart F prov isions

@treasury.gov>, Harter, Chip

Thanks for emailing these proposals, Doug.
We have circulated them within our staff and to the Republ ican staff of the Ways and Means
committee.
David

HiAttached are some proposed legislative fixes to the subpart F provisions that cou ld be considered as
part of tax reform. If you can circulate to your staff, as appropriate, and W&M sta f f, we would
appreciate it.
Thanks and have a great weekend,
Doug

UST 000916

TREAS-17-0313-H-000008

 RE: Passthrou h Rate
From:

''Trier, Dana" <"/o=ustreasury/ou=exc hange administrative group
(fydibohf23spdlt)/cn=recip ients/cn=3fb4cbf9d 1c84bb08776ff0c42348329-trier, dana">

To:

"Acuna, Jennifer (Finance)" <jennifer_ac una@finance.senate.gov>

Date:

Mon, 23 Oct 2017 10:36:48 -0400

From: Acuna, Jennifer (Finance) [ma i lto :Jennifer_Acuna@ fi nance.senate.gov]
Sent : Monday, October 23, 2017 10:34 AM
To : Trier, Dana <Dana.Trier@treasury.gov>
Subject: RE: Passthrough Rate

Hi Dana,

Jen
From: Dana .Trier@treasury.gov [ma ilto :Dana .Trier@treasury .gov]
Sent : Monday, October 23, 2017 10:01 AM
To : Acuna, Jennifer (Finance) <Jennifer Acuna@finance.senate.gov >
Subject : RE: Passthrough Rate
b(5)

Hi, I am chatting with Dave about
again at 11:30. We did discuss your ideas last
week, and even had brief conversations with Justin M. If you wanted to apprise me of something
before 11:30 that you want a specific reaction to, happy to talk. Dana
From: Acuna, Jennifer (Finance ) [mai lto:Jennifer Acuna@finance.senate.gov ]
Sent : Friday, October 20, 2017 3:08 PM
To : Trier, Dana <Dana.Trier@treasury .gov>
Subject : RE: Passthrough Rate
b(5)

From: Dana.Trier@treasury.gov [mailto:Dana.Trier@treasury .gov]
Se nt : Friday, October 20, 2017 3:07 PM
To : Acun a, Jennifer (Fi nance) <Jennifer Acuna@finance.senate.gov >
Subject : RE: Passthrough Rate

Jennifer
b(5)

think misunderstood.

From: Acuna, Jennifer (Finance} [ mailto :Jennifer Acuna@finance.senate.gov ]
Sent: Friday, October 20, 2017 1:49 PM
To : Trier, Dana <Dana.T rier@treasury.gov >
Cc:Acuna, Jennifer (Finance} <Jennifer Acuna@fin ance.senate .gov >; Coughlan, Tony (Finance)
<Tony Coughlan@finance .senate .gov>; Hanna, Christopher (Finance)
<Christopher Hanna@finance .senate .gov>; Monie, Alex (Finance} <Alex Monie@finance .senate .gov >;
Oman, Eric (Finance} <Eric Oman@finance .senate .gov>; Pi ppins, Martin (Finance}
<Martin Pippins@finance .senate .gov>; Prater, Mark (Finance) <Mark Prater@finance .senate .gov>;
Rutledge, Preston (Fina nce) <Preston Rutledge@finance .senate .gov>; Wrase, Jeff (Finance)

UST 000917

TREAS-17-0313-H-000009

 <Jeff Wrase@finance .senate .gov >; Wyatt, Nick (Finance) <Nick Wyatt@finance .senate .gov >
Subject : Passthrough Rate
Hi Dana,
Sorry we had to reschedule our discussion o ~
i~
can we touch base on •
either meet or hop on a call?

to next week. Given the time crunch,
ys? Does your team have time to

Thanks! !
Jen
Jen Acuna
Senior Tax Counsel & Policy Advisor
Senate Finance Committee
Tel: (202) 224-4515

UST 000918

TREAS-17-0313-H-000010

 FW: Materials from toda 's meetin with Treasur
From:

"Porns, Doug las" <"/o=ustreasury/ou=exchange
(fydibohf23spdlt)/cn=recipients/cn=pomsd">

To:

jennifer _acuna@finance.senate.gov

Date:

Mon, 23 Oct 2017 13:21:36 -0400

Attachments:

Considerations on SFC staff inbound proposa l for expanding 163j principl. ... docx (32. 72
kB); Recommendations on Tax Reform doc- SENATE DRAFT 10.11.17 blz.docx (60.64
kB); Transfer Pricing - Leg Proposal Limited Record DRAFT (BTO) SdAL.(BTO 1012).docx (25.99 kB); Baseball arbitration Statutory Language DRAFT (clean 10-11) (SdAL)
(3).docx (32.26 kB) ; LH for 936 and 482 proposals.doc (64 kB); Subpart F Tax Refo rm
Memo (10-20-2017).docx (43 .74 kB); Treasury comments on proposal to modify section
864 in relation to Rev Rul 91-32.docx (29.11 kB)

administrative group

Hi Jen, here is everything we sent. Let us know if you have any questions as well as when you would
l ike to discuss the administrative record proposal (and anything else you might want to discuss).
Doug

UST 000919

TREAS-17-0313-H-000011

 Rou h Outline of Thou hts for Estimate
b(6)

From:

To:

@tr easury.gov>
• jct.gov>

"Dowd, Tim" <tim .dowd@ma il.house .gov>, b(6)

Cc:
@treasury .gov>
Date:

Mon, 23 Oct 20 17 17:28:0 1 -0400

Attachments:

Portman Toomey lnbound_np v2 .docx (22.25 kB)

HiT1m1:I0il

For what it is worth, here is an initial (rough)outline of our understanding of the generals ecifications of,
•

·

•

l Ac,t ,o.- h,

•

""

"

-

UST 000920

TREAS-17-0313-H-000012

 FW: Passthrou h Rate Activit Exam les
From:

'Trier , Dana" < "/o= ustreasury /ou=exchange administrative group
(fydibohf23spdlt)/cn=recipients/cn=3fb4cbf9d 1c84bb08776ff0c42348329-trier,

To:

"Angus, Barbara" <ba rbara .angus@mail.house .gov>

Date:
Attachments:

Tue , 24 Oct 2017 12:02:30 -0400

dana">

Passthrough Rate Activity Examples 10-24-17.docx (16.31 kB)

Barbara,
b(5)

Dana

UST 000921

TREAS-17-0313-H-000013

 b(5)
From:

"Kautter , David" <david .kautter@treasury.gov>

To:
Cc:

"Prater, Mark (Finance)" <mark_prater@finance.senate.gov>
treasury.gov>

Date:

Tue, 24 Oct 2017 17 :29 :39 -0400

Attachments:

b(5)

Mark
We promised you a few tables over a week ago and I am just getting them to you. Sorry

b(5)
b(5)
b(5)
If you have any questions, please let ~

know b(6)

Thanks
Dave

UST 000922

TREAS-17-0313-H-000014

 Re: Tax Reform
From:

"Specht, Brittan" <brittan .specht@mai l.house.gov>

To:

"Knight, Shah ira E. EOP/WHO"

Cc:

"Callas, George" <george.callas@mail.house .gov>, "Reiser, Martin"
<martin.reiser@mail.house.gov>, "Muzinich , Justin" <justin.muzinich@treasury.gov>

Date:

Thu , 26 Oct 2017 22:40 :55 -0400

>

Thanks fo r organizing.
Brittan G . Specht, CFA
Majority Leader Kevin McCarthy

On Oct 26, 2017 , at 10:34 PM, Knight. Shahira E. EOP/WHO

> wrote:

Holding it. We will get a cont call number. Thanks .
On Oct 26, 2017, at 9:37 PM, Callas, George <George.Callas@ma il.house.gov > wrote:

1045 is the current bid.
On Oct 26, 2017, at 9:33 PM, Knight, Shahira E. EOP/WHO

> wrote:

Justin and I can make either work.
On Oct 26, 2017, at 9:27 PM, Callas, George <George .Callas@ma il.house.gov > wrote:

How about 930 or 1045?

Kni ht, Shahira E. EOP/WHO
> wrote:

Hi all,

b(5)

Can we please set up a call for the five of us tomorrow to discuss?
M but please let me know if that doesn 't work.

UST 000923

TREAS-17-0313-H-000015

 Thanks,

Shahka

UST 000924 

tax reform catch-up call (Leadership/NEC/Treasury)
Where :

b(6)

When:

Fri Oct 27 10:45:00 20 17 (America/New _York)

Until:

Fri Oct 2711 :15:00 2017 (America/New _York)

Organ iser:

"Knight, Shahira E. EOP/WHO"

Required Attendees:

"Muzinich, Justin" <just in.muzinich@treasury .gov>
"Specht , Brittan (Brittan.Specht@mail.house.gov)" <brittan.specht@mail.house.gov>
martin .reiser@mail .house .gov
"Callas, George" <george .callas@mail.house.gov>

UST 000925

>

TREAS-17-0313-H-000017

 RE: Phone call
From:

"Maloney, Drew" <"/o=ustreasury/o u=exc hange admini strative group
(fydiboh f23sp dlt)/cn=recip ients/c n=0aa00 d7c98 de43f9aec8 f6 8a9 19f6fe3-m aloney, drew">

To:

"Ri elly, Bill y (Toom ey) " <billy_rielly@too mey.se nate.gov>

Date:

Fri, 27 Oct 20 17 11: 18:32 -0400

Tax refo rm and thanks for leadership on budget
Drew Maloney
Assistant Secretary of the Treasury
Legislative Affairs
United States Department of t he Treasury
1500 PennsylvaniaAvenue, NW Suit e 3134
Washington, DC20220
Office: 202-622 -1900
Cell:j;ffo

drew.malo ney@t reasury.gov

From: Rielly, Billy {Toomey) <Billy_Rielly@toomey.senate.gov>
Dat e : October 27, 2017 at 11:04:05 AM EDT
To: Maloney, Drew <Drew.Maloney@treasury.gov>
Subj ect : RE: Phonecall

Drew,
What does the Secretary want to discuss with the Senator?
Thanks,
Billy
From: Drew.Maloney@t

reasury.gov [mailto:Drew.Maloney@treasury.gov]

Sent : Friday, October 27, 2017 10 :33 AM
To : Rielly, Billy (Toomey) <Billy_Rielly@toomey.senate.gov>
Cc: Brand t , Daniel (Toomey) <Daniel_Brandt@toomey .senate .gov>; Herndon, Randy (Toomey)
<Randy_Herndo n@toomey.senate .gov> ; Patricia .Griffin@ t reasury.gov
Subject: RE: Phone call

11:30a works, what is best number for the Secretary to call
From: Riel ly, Bi lly (Toomey) [mail to :Bil ly Riell y@toomey .sena t e.gov ]

Sent : Friday, October 27, 2017 9:06 AM
To : Maloney, Drew < Drew.Malon ey@t re asury .gov >
Subject : RE: Phone call

Drew,
The Senator has availab i lity today from 11-noon and then 3-4:30 .
Best,
Billy
From: Drew .Ma loney@t reasu ry.gov [ma ilto:Drew. Ma lo ney@treasury .gov]

UST 000926

TREAS-17-0313-H-000018

 Sent: Friday, October 27, 2017 8:15 AM
To: Brandt, Daniel (Toomey) <Daniel Brandt@toomey.senate .gov>
Cc: Herndon, Randy (Toomey) <Randy Herndon@toomey.senate.gov >; Malloy, Maxwell (Toomey)
<Maxwe l I Malloy@toomey.senate.gov >; Patricia.Griffin@treasury.gov ; Rielly, Billy (Toomey)
<Bil ly Riel ly@too mey.senate .gov >
Subject: Re: Phone call
15 mins
Drew Maloney
Assistant Secretary of the Treasury
Legislative Affairs
United States Department of the Treasury
1500 Pennsylvania Avenue, NW Suite 3134
Washington, DC 20220
Office: 202-622-1900
Cell: b(6)
drew . ma Io ney@treasury .gov

From: Brandt, Daniel (Toomey) <Daniel Brandt@toomey .senate .gov >
Date: October 27, 2017 at 8:12 :10 AM EDT
To: Maloney, Drew <Drew .Maloney@treasury .gov >
Cc: Malloy, Maxwell (Toomey) <Maxwe l l Malloy@toomey .senate .gov>, Herndon, Randy (Toomey)
<Randy Hernd on@too mey .sen ate .gov >, Griffin, Pat <Patricia .G riffi n@treasury .gov>, Rielly, Bi Ily
(Toomey) <Bil ly Rielly@toomey .senate .gov >
Subject: Re: Phone call

Danielle is out on maternity
For situational

leave . I have CC'd our scheduling Team .

awareness, PT is traveling in the state promoting tax reform and has a packed day .

There may be some times in the car we could schedule some time but I defer to Billy.
How much time you thinking?
Sent from my iPhone
On Oct 27, 2017, at 8:07 AM, " Drew.Maloney@treasury

.gov " <Drew .Ma loney@treasury .gov > wrote:

Danielle,
The Secretary is traveling in the middle east today, but would like to touch base with the Senator
this morning. Is there time available to arrange a call?
Thanks
Drew

Drew Maloney
Assistant Secretary of the Treasury
legislative Affairs
United States Department of the Treasury
1500 Pennsylvania Avenue, NW Suite 3134
Washington, DC 20220

UST 000927

TREAS-17-0313-H-000019

 Of?ce: 202-622-1900


drewma CIFIEV 

UST 000928 

Child Tax Credit & Free Speech Fairness Act
From:

"Neill, Jim (Budget)" <jim_neill@budget.senate.gov>

To:

"Kowalski, Daniel" <da niel.kowalski@t reasury.gov>

Date:

Fri, 27 Oct 2017 11 :39:25 -0400

Attachments:

FRC 1 Pager CTC and Unborn Child 10.23. 17 .doc (290.82 kB); FSFA issue brief.doc
(118.27 kB)

Hi Dan - hope you're well.
I wanted to provide two documents that were given to me by David Christensen with the Family
Research Council (FRC). One covers the Child Tax Credit (CTC) & the other is the 'Johnson
Amendment' (FSFA).
Regarding FSFAand how Congress may take up, David told me that a paring back of FSFA- which is
sponso red by Steve Scalise in the House -- to cover only churches and omits the inclusion of charities
and their leaders would be something FRC President Tony Perkins "could not suppo rt ."
Happy to chat if you'd like - othe rwise, hope we see each other soon!

Jim Neill

U.S. Senate Budget Committee
SD-624
202/224-2370

UST 000929

TREAS-17-0313-H-000021

 ADVANCING

FAITH , FAMILY AND FREEDOM

Improving the Child Tax Credit in FY18 Tax Reform Reconciliation
•

The child tax credit (CTC ) is available to mostly low-inco me ind ividual s. It is currently as
much as $1,000 per child, reduces income tax liabi lity, is partially refundable, and includes
marriage penalties for some families.

•

The FY18 tax reform reconciliation bill should strengthen and expand the CTC by:
o recognizing an unborn child within the CTC 's statutory defini tion of a qualijj 1ing child ,·
o increa sing the CTC to at least $2,500 to $5, 000 ; and
o remov ing the CT C's marriage penalties.

•

Allowing unborn children to qual ify for the CTC in statute would be a significant pro-life
achievement by reco gnizin g the personhood of the unborn child in federal law. It would also
help families cover the start-up costs associated with caring for a newborn .

•

Federa l law already recogn izes the "unb orn child,, in a few arnas oflaw
o The Unborn Victimsof Violence Act of 2004 (18 USC [841):

•

the term "unbornchild" means a child in utero, and the term "child in utero" or
"child, who is in utero" means a member of the species homo sapiens, at any stage

of development , who is carried in the womb.
o The Child Health Insurance Progra m 's 2002 Unborn Child Rule (42 CFR 457.10):
• Child means an individual under the age of 19 including the period from
conceplion to birth.
•

The Trump Campaign proposed a package of tax benefits for families like the "Chi ld Care
Credit" in 2016 to expand the ability of working parents , or parents who also stay at home, to
obtain a credit. The proposal also included a proposal for Dependent Care Savings Accounts
(https ://www .frcaction .org/ get.cfm?i = WA16I07& f-=WU16l03 ). This proposal would have
allowed dependents to include children and unborn children so that parents could begin cover
the costs of preparin g for their child. The child care credit and dependent care proposals have
been wrapped into the Child Tax Credit in the Unified Framework for Fixing our Broke n Tax
Code. Therefore, the Child Tax Credit should include unborn children.

•

Parents should be allowed to carry forward the CT C for th eir unb orn child to the following
taxable year , but only after the child is born and receives a tax.able identi fication number.
This approach would address verification concerns , since a parent could only retroactively
claim the CTC for an unborn child after the child is born.

FAMILY RESEARCH COUNCIL
801 G STR EET NW , WASHING T ON, D .C . 20001

UST 000930

•

202 - 393 -2100

•

202 - 393 - 2134 FAX

•

(800)

225 -4008

ORDER LI NE

•

FRC .ORG

TREAS-17-0313-H-000022

 •

In current law, the ere contains a marriage penalty that should be removed by increasing the
ere phase-out threshold for married couples filing jointly to be at least doub le that of single
filers. The ere begins to phase out when adjusted gross income exceeds $75,000 for single
filers, but for married couples filing jointly , the threshold is $110,000, which is less than
double

FAMILY RESEARCH COUNC IL
801 G STREET NW . WASHINGTON, D.C. 20001

UST 000931

• 202 - 393 -2100

• 202 -393 -2134 FAX

• (800 ) 225 -4008 ORDER LINE

• FRC.ORG

TREAS-17-0313-H-000023

 ,>~

~~;'.~-~Rc">-

[(8

~ ISSUE BRIEF

~f ~_C_£_\~_~:--/4 -

The Free Speech Fairness Act:
Restoring First Amendment Speech Rights to Churches, Charities,
and their Leaders
What is the Johnson Amendment ?

The Johnson Amendment is a tax provision that prevents 5O1(c)(3)organizations from participating in
political campaigns on behalf of, or in opposition to, a candidate for public office. The Johnson
Amendment is an unconstitutional restraint on free speech, and is a tool the IRS uses to threaten and
censor the First Amendment free speech rights of churches, charities, and their leaders. The Johnson
Amendment was passed in 1954 and since then, has caused great confusion and concern regarding what
tax-exempt organizations and their leaders may say about moral issues and political candidates .
Despite the IRS not revoking a church's tax-exempt status, organizat ions like Amer icans United for
Separation of Church and State use the Johnson Amendment as a tool for threatening churches into selfcensoring regarding political issues. During election seasons, these organizations send churches letters
threatening to report the churches to the IRS H they make certain types of statements about political
candidates, in the hopes that these churches would be silenced on political issues from fear of an IRS
investigation or audit.
How does the Free Speech Fairness A ct ("Fairne ss A ct") roll back the John son Amendment ?

For the past decade, thousands of pastors have spoken on political matters on Pulpit Freedom Sunday,
with the goal being to elicit a court challenge and thus overturn the Johnson Amendment. The IRS has
not directly responded to these sermons, so the strategy must be legislative.
The Fairness Act would restore free speech to churches, charities, and their leaders who, since the
Johnson Amendment's passage, have effectively been silenced because of their charitable nature . The
Fairness Act amends the Johnson Amendment to aJJow for political activity that is 1) made in the
ordinary course of the 501(c)(3)organization's regular and customary activities, so long as the activities
carry out the organization's tax-exempt purpose, and 2) so long as the organization does not incur more
than de minimis incremental costs.

Should the Fairness Act apply to all non-profit organizations, or just church es?

The Fairn ess Act should apply to all non -profits, not just churches or pastors. While churches need
protections, other 5O1(c)(3)organizations also need speech protections, as it is impractical to parse
protections for churches and their integrated auxiliar ies and conventions, from other non-profits. In
addition, it is inequitable, and perhaps even unconstitutional , to allow churches and their integrated

FAMILYRESEARCHCOUNCIL
801 G STREETNW, WASHINGTON, D.C. 20001
202-393-2100 • fax 202-393-2134• (800) 225-4008orderline
www.fr c.org
UST 000932

October 2016
lssue Brief IF16}01

TREAS-17-0313-H-000024

 auxiliaries to engage in some political campaign activities without also allowing other religious
ministries and secular charities that are 501(c)(3) organizations to engage in such activities.
Wouldn't the Fairness Act eliminate the need for 501(c)(4) organizations and PACs?

The Fairness Act does not allow 501(c)(3) organizations to purchase political campaign advertisements or
to become politicaJ action committees. In adilition, the Fairness Act does not allow donations to be
earmarked for political purposes. Taxpayers will still only be able to deduct from their taxes
contributions to charitable, tax exempt organizations. The idea behind the Fairness Act is not to allow
501(c)(3) organizations to take the place of 501(c)(4) organizations or political action committees, nor
would that be its effect.
Would the Fairness Act be constitutional?

Based on the limited jurisprudence governing this issue, the Fairness Act would more closely align the
law governing 501(c)(3) organizations with the Constitution. Only a few cases have been litigated
regarding an organization's tax-exempt status being lost because of engagement in political campaign
activity. In one case, the IRS withdrew the tax-exempt letter of a church, Church at Pierce Creek, because
it purchased full page newspaper ads urging Christians not to vote for Bill Clinton. 1 The withdrawal of
the letter was upheld by the D.C. Court of Appeals. 2 However, because churches are not required to
apply to the IRS for tax-exempt status, there is significant question about the implications of the court's
decision on the tax-exempt status of churches. In addition, the Church at Pierce Creek's activity would
not be protected by the Fairness Act. The Fairness Act provides for speech in the ordinary course of the
501(c)(3)'s ordinary and customary activities, which further the tax-exempt purpose of the organization,
and do not exceed more than a de minimis incremental cost (the cost of the politically-related
communication must be trivial) .
That said, in the context of lobbying requirements on 501(c)(3) organizations, courts have held that
Congress may impose some limits on the organization's First Amendment activity in exchange for a
government subsidy. For example, in Reganv. Taxationwith Representation,the Supreme Court defined
tax exemptions and deductions as forms of subsidies and held that Congress "has the authority to
determine whether the advantage the public would receive from additional lobbying by charities is
worth the money the public would pay to subsidize that lobbying." 3 Thus, Reganunderscores the fact
that Congress retains the authority to restore the free speech rights of 501(c)(3) organizations, to free
them up to speak about political candidates.

Why should the Free Speech Fairness Act be in the FY2018 Reconciliation Bill?
The Fairness Act addresses provisions in the IRS code; therefore, it makes sense to add this bill to the
FY2018 reconciliation bill which will address tax reform. While the Fairness Act does not allow 501(c)(3)
organizations to function like 501(c)(4) organizations or PACs, some estimate that donors will shift their
taxable contributions from 501(c)(4) organizations or PACs to 501(c)(3) organizations. To the extent that
taxable contributions shift to tax-exempt contributions the government will lose revenues, which in turn
means the Fairness Act will trigger a budget score on the tax reform bill. This brings the provision in line
with the Byrd rule budgetary requirements governing reconciliation. Therefore, the Fairness Act should
be able to pass Congress on reconciliation with only 51 votes.
1

Branch Ministries v. Rossotti, 211 F.3d 137, 140 (D.C. Cir. 2000).

2

Ibid, 145.

3

Regan v. Taxationwith Representation,461 U.S. 540,544,550 (1983).
2

UST 000933

TREAS-17-0313-H-000025

 comments on 10-25-17 W&M draft

Treasur
To:

jct.gov>, lla

Cc:

ov>, _
treas ury.gov>,
@treas ury.gov>
Date:

Fri, 27 Oct 2017 16:12:20 -0400

Atta chments:

Recommendations on 10.25.17 version of House draft legislation - 10.27.20 17.docx
(52.72 kB)

HI

lffi:i&an d

iiWIIIII

Hope you all ar e hold ing up alright©
Attached are some Treasury comments on the 10-25-17
discussion draft of the House b i ll. Can you circulate to your staff, as appropriate, and share with
W&M. We really appreciate it.
Also, if you all and/or W&M have any questions about our comments (or any other issues) and would
like to discuss over the weekend, just let us know. We could set up a call or meet with you, whatever
is most helpful.
Thanks and have a nice weekend,
Doug

UST 000934

TREAS-17-0313-H-000026

 Senator Scott's Investin

ortunit Act

From:

'Wyatt, Nick (Finance)" <nick_wyatt@finance.senate.gov>

To:

'West, Thomas" <thomas.west@treasury.gov>, "Bailey, Bradley"
<bradley.bailey@treasury .gov>

Cc:

"Hawkins, Shay (Scott)" <shay_hawkins@scott.senate.gov>,
<em ily_lavery@scott .senate .gov>

Date:

Fri, 27 Oct 2017 16:35:28 -0400

Attachments:

S.293, Investing In Opportunity BILLS-115s293is.pdf (289.26 kB); The Investing in

"Lavery, Emily (Scott)"

Opportunity Act Factsheet.pdf (317.9 4 kB)

Brad and Thomas,
We're wo rking w ith Senator Scotts office to prep a proposal he's been working on for tax reform, and
we've been working with JCT, and have some items that Treasury's input would be helpful in
re solving.
The legislation, which is attached with a summary, allows individuals to defer capital gains if they
i nvest in "Opportunity Zones" which are keyed off of New Mar kets Tax Credits depressed census
tracts as designated by a governo r.
b(5)

b(5)

Thank you for your help, Shay and Emily from Senator Scott's office are on this e-mail to answer any
questions,
Nick

UST 000935

TREAS-17-0313-H-000027

 A\JTHENTICATE 9
U,S .COVERNMENT
INFORMATION

GPO

II

115'rn CONGRESS
l S'l' SESSIO~

S.293

To a111e11d the l11te rmll R<vern 1e Cotle of 1986 to provide fo r the def erral
of in<.:
ln::;ion ill gTOssincome fo1·capital g·ains reinvested in oppol'tuu ity zone::..
0

I K 'f HE SENA T'E OF TI-IE UN'"IT'ED S'l'A'fES
Fl'}l:HWAlW

2, 2017

Mr. SCO'l"l' (for himself, 1\11'.Boo,mn, l\fr. BI;liN'l', Mr. BE:'\KET, Xlr.

Gru-

Mr. Coo:--:s,MrR. CAPITO, 1\frs. G1 1,t ..1BJu\_;'\D, Mr. Pwr,ms, l\fr.
GAHD:-.:1m, l\Ir. YOL;--;c:
, and Mr. WAHXIrn) i11trodured the following hill;
wh ich was n'acl twice and referr ed to the Committetl on J;'inance
llA:\I ,

A BILL
''Po amend the Int erna l Revenue Code of 1986 to provide
for the deferral of inclu::,ion iu gross in come for ea pital
gains reinvested in opport nnit y zones .
1

Be it enactedby the Senate and House of Representa-

2 t-ivesof the United States of 1lmerica in Congressassembled,
1

3

4

SECTION 1. SHORT TITLE.

This Act may be cited as the "Invest ing in Oppor-

5 tunit y Act".
6 SEC. 2. OPPORTUNITY ZONES.
7

(a) I N GENEHAL.-Chapt er 1 of the Int erna l

RBY -

8 enue Code of 1986 is amended b~r adding at th e end the
9 following:
UST 000936

TREAS-17-0313-H-000028

 2
1

"Subchapter Z-Opportunity

Zones

"Sec. 1400Z-1. Desig11a tio11.
"Sec. 1-t00Z-2. Defen·al for eapital gai 11
s i11\·
estcd iII oppo1tu11
it:y zo11cs.

2 "SEC. 1400Z-1. DESIGNATION.

3

"(a) Q UALIFIED

OPPORT UN ITY Z0 J\TE D EF IJ\TE
D .-

4 For the purpo ses of this sub chapt er , the term 'qualifi ed
5 opportunit y zone' means a population cen su s tract that
6 is a low-income community that is designat ed as a quali-

7 fied opp ortuni ty zone.
8

"(b)

9

DE SIGNA'l'IO N .-

"(1)

GOVERNOR. -

10

"(A) I N GKl\TERA
L .- For purpo ses of snb-

11

section (a), a population census tra ct that is a

12

low-income communit y is designa te<l as a quaJi-

13

fied opportunit y zone if -

14

"( i) not late r than th e end of the dc-

15

te rminat ion period, th e governor of the

16

State in which the tr act is loca.tecl-

17

"( I) nominat es the tra ct for des-

18

ignation as a qualifi ed opportunit y

19

zone, and
"( II ) not ifies the Secr eta ry m

20

21

writing of such nominatio n, and

22

"( ii) the Secretar y certifi es such nomi-

23

UST 000937

nation

•S 293 IS

and designates such tra ct as a

TREAS-17-0313-H-000029

 3
1

qualified opporttmity zone before the end

2

of th e consjderation period.

3

"( B) EX'l 'ENS ION OF PERIODS .- A gov-

4

ernor may request t hat th e Secretary extend ci-

5

ther the determination or consideration period,

6

or both (determin ed without regard to thi s sub-

7

paragraph) , for an additional 30 days.

8

"(C)

DEB 1V
fBD

DBSIGNN l'IO N

IF'

SBC-

9

RE'l'ARYFAILS TO ACT.- Unlcss the tracts arc

10

ineligible for designation , if th e Secretary de-

ll

clines in writing to mak e such certifi cation and

12

designabon or fails to act before the end of the

13

consideration period, such nomination shall be

14

deemed to be certified and designated, effective

15

on the day after the last day of the consider-

16

ation period .

17

"(2) SECRE'l'AR.Y.
-I f a governor fails to make

18

th e nomination s and notifications by th e end of the

19

periods referr ed to in paragraphs (l )(A) and (l )(B),

20

th e Secretary shall desig11atc and certify population

21

censu s tract s that ar c low-income commmuti cs as

22

qualified opportunity zones, as permitted by sub-

23

section (c) .

24

"(c)

0 '1'1IER

Drnl<INJTIONS.-For
'
pm1Joses of thi s

25 sub secti on-

UST 000938

•S 293 IS

TREAS-17-0313-H-000030

 4

" (l)

1

LOW-fN COl\IE

COMi\CUNl'l'IE S.-

rrh e

t erm

2

'low-income community ' ha s th e same meamn g as

3

when used in section 45D (c) .

4

"(2) DE FIN ITION OF PERIOD S .-

5

"(A ) CONSIDERA'rION PERIOD.- Th c term

6

'cons ider atio n per iod' mean s th e 30-day period

7

beginrun g on th e dat e on which th e Secretary

8

r eceives

9

(b)( l )(A)(i)( II ), as extended und er sub section

noti ce

under

subsection

(b)( l)(B ) .

10
11

"(B) D ETER1\1INA'l'ION PERIOD. - rrh c term

12

'determination period' mean s th e 90-da y period

13

bcgimun g on th e dat e of th e enactm ent of th e

14

In vesting

15

und er subsect ion (b)(l)(B).

16

in

Opportunit y Act,

nded
as CA-te

"( d) GUIDAl"JC
E FOR OPPORTUNITY ZONE NOl\IlNA-

17 'rIONS.- "\¥hcn con sidering th e nomination of qualifi ed op-

18 portunit y zones, governor s should stri ve for th e creat ion
19 of qualifi ed opportu nity zones that are geog1·a phi cally con20 centrat ed and contiguou s cluster s of population cen su s

21 tra cts and should give particu lar considerat ion to areas
22 tha t23

"( l ) ar c curr ently th e focus of mutually rcm-

24

for cing Sta te, local, or pr ivate economic development

UST 000939

•S 293 IS

TREAS-17-0313-H-000031

 5

1

initi at ives to attrac t investment and foster startup

2

act i,rit y,

3

"(2) have demonstrated

success in geog1·aphi-

4

cally targ eted development program s, such as prom-

5

ise zones, new mad wt tax cr edit , empowerm ent

6

zones, and r enewal communities, and
" (3) have recently e},.
rperienced significant lay-

7

8

offs due to bu siness clostffes or relocations.

9

"(e)

10

NUJ\IBER

OF DESIGNATIONS.-

"( I ) I N GENERAL.
- Except as provided by

11

paragrap h (2), th e numb er of population

12

tra ct s in a State that may be desig11ated as qua lified

13

opportunit y zones und er thi s section may not exceed

14

25 per cent of th e nu mber of low-income comn1tmiti es

15

in th e State .

census

16

"(2) E XCEPTION.- If the nlunb er of low-income

17

communit ies in a State is less than 100, th en a total

18

of 25 of such tra ct s may be designat ed as qua lified

19

opp ortuni ty zones .

20

"( f) D ESIGNN rI ON 01 'rl{ AC'l' S CON'l'IGUOUS
1

VVI'l' II

21 Low -INCO:MECOMMUNI'
l'IES."( l ) I N GENERAL.-A

22

popul at ion censns tra ct

23

that is not a low-income con1111unit
y may be des-

24

ignated as a qua lified opportuni ty zone und er thi s

25

secti on if-

UST 000940

•S 293 IS

TREAS-17-0313-H-000032

 6
1

"(A) the tra ct is conti guous vvith th e low-

2

income conununity

th at is designated

3

qualified opportunity zone, and

as a

4

"( B) th e median family income of the tract

5

does not exceed 125 percent of the median fam-

6

ily income of th e low-income cmrnn1mity '"rit h

7

which th e tra ct is contiguou s.

8

"(2) Li i\lI'l'A'I'lON.- Not more than 5 perce nt of

9

the popul ation census tra cts designat ed in a Stat e as

10

a qualified opportunity

11

und er pa r agraph (1).

12

"(g) P EmOD FOR \ i\Tr-IICII D ESI GNATIO N Is I N El•'-

13

I-'EC'l' .-

zone may be designat ed

A design ation as a qualifi ed opportunity

zone

14 shaJl remain in effect for th e period b eginnin g on th e dat e
15 of the designation and ending at th e close of the 10th cal16 endar year begim1ing on or after such dat e of designatio n.
17

"SEC. 1400Z-2. DEFERRAL FOR CAPITAL GAINS INVESTED

18

19
20

IN OPPORTUNITY ZONES.

"( a) S PECIAL RULE S \V H rnN GAI N FROM SALE
PR0PEH'l'Y

l ~f\'ES' l'ED

IN

OPP0R'l' UNYrY

ZONE

cw

PROP-

21 ER TY.22

"(l ) E XCLUS ION OF G.JUN INVESTED IN OPPOR-

23

T UN IT Y ZONE PROPERTY. -

24

th e sale to, or exchan ge with, an unr elat ed person of

UST 000941

•S 293 IS

In

the case of gain from

TREAS-17-0313-H-000033

 7
1

any pr operty held by the ta:>..
rpayer , at the elecfaon of

2

th e tmq)ayer-

3

"(A)

gross mcome for the ta,-xable year

4

shall not include so much of such gain as docs

5

not exceed the aggregate cost of all qualified

6

opportunity zone propert y acqui red by th e tax-

7

payer during the 180-day period beginning on

8

th e date of such sale or exchang e, and

9

"( B) the amount of gain excluded by sub-

10

paragraph (A ) shall be included in gross income

11

as provided by paragraph (2) .

12

"(2) DE P ERHJ\L 01<' GAIN INVESTI~D IN OPPOR-

13

TUN l'l'Y ZONE PROPERTY .-

14

"(A)

YEAH . OF

INCLUSJON.-E xcept as

15

provided by subparagraph

16

paragraph

17

income in th e taxabl e year in which the quali-

18

fied opportunjty zone property relat ed to such

19

gain is sold or exchan ged in th e amount deter-

20

mined und er subpara gTaph (B).

21

(C), gain to which

(1) (B) applies shall be included in

"( B) AMOUNT I NCLUDIJ3LE .- Th c amount

22

of gain determin ed und er thi s clause shall bc-

23

"( i) 100 percent of such gain in the

24

case of the sale or exchange of th e quali-

25

fied opportunity zone prop ert y with respect

UST 000942

•S 293 IS

TREAS-17-0313-H-000034

 8
1

to ·which gain is deferr ed und er paragrap h

2

(1) that is held for less than 5 year s,

3

"( ii) 90 percent of such gain in the

4

case of th e sale or exchang e of the qua li-

5

fied opportunity zone property vvith respect

6

to which gain is deferred und er para grap h

7

(1) that is held for at least 5 years but less

8

t han 7 year s, an d

9

"( iii) 85 percent of such gam m th e

10

case of th e sale or exchange of the qua li-

11

fied opportunity zone prop ert y with respect

12

to which gain is deferred und er paragraph

13

(1) that is held for at least 7 year s .

14

"(C) PROP ERTY HE I,D

1\I •,,l'EH 2026 THEA'I'-

15

ED

16

(A), any qua lified opportunity

17

that ha s not been sold or exchang ed on or bc-

18

fore December 31, 2026, shall be tr eated as

19

sold on D ecember 31, 2026.

20

"(3)

AS

SOLD.- For purp oses of snb paragrap h
zone prop erty

Ex cl,US ION 01<' GJ\l N ON QUAI,JF'IEI)

OP-

21

PORTUNI'l'Y ZONE PROPER'l'Y II ELD POR A'l' LEAS T JO

22

YEARS.- Ex cept as pro vided in paragraph (2), in th e

23

case of the sale or exchang e of qualified opportunit y

24

zone prop ert y, or an investm ent in a qualified oppor -

25

tunit y fund, held for at least 10 years, gross income

UST 000943

•S 293 IS

TREAS-17-0313-H-000035

 9
1

for th e taxabl e yea r sha ll not in clud e any gain from

2

th e sale or exchange of such prope rt y or investment.

3

" (4) ONE ELECTION PER PROPERTY.
- No clec-

4

tion may be made under paragraph (1) ,,~~th r espect

5

to a sale or exchang e if an election p1·eviously made

6

with respect to such sale or exchang e is in effect.

7

"(b) BASIS Ru1 _JES RE l JA'l'I NG TO Q UAIJlFIED OPPOJ {.-

8

'l' UN I'l' Y

ZONE PROPER'l'Y

9

.-

"( l ) REDUCED BY GAIN DEFERRED UNDER

10

SUBSECTION (a)( l ).- The ba sis of a qualified oppor-

11

tun ity zone prop ert y immed iate ly after its acquisi-

12

tion und er subsect ion (a) shall be reduced by the

13

amount of gain deferre d by reason of subsec tion

14

(a)( l )(A) with r espect to su ch prop er ty.

15

"(2) I NCREASE FOR G.tUN RECOGNIZEDUNDER

16

SUBSECTION (a)(2) .- Th e basis of qua lified oppor-

17

tunity

18

amount of gain recognized b,v reaso n of subsection

19

(a)(2) with r espect to such property .

20

zone property

"(3)

SOBSEQUJ_!,N'l'

shall be increase d by the

INCK E ASE

IN

BAS IS

F01-{.

21

PR0PER'fY HELD FOR AT LEAS'!' G YEARSBUT LESS

22

TII.A.N

23

tunity zone pr operty held for at leas t 5 yea r s but

24

less th an 10 year s-

UST 000944

•S 293 IS

10 YEARS.- ln the case of qualifi ed oppor-

TREAS-17-0313-H-000036

 10
" (A)

1

PROPl3:RTY lIEJJD 1rOH, 5

YEJ\l{S.-For

2

qualified opportuni ty zone prop ert y held for at

3

least 5 year s, th e basis of such propert y shall

4

be increased by an amount equal t o 10 percent

5

of the amount of gain deferr ed by 1·eason of

6

subsection (a)(l)(A)

7

erty.

with respect to such prop -

" (B) PROP E R'l'Y I lE Jjl) l<'OR

8

7 Y~AHS.-For

9

qualified opportunit y zone prop ert y held for at

10

least 7 year s, th e basis of such prop ert y shall

11

be increased by an amount equal to 5 percent

12

of th e amount of gain deferr ed by reason of

13

subsection (a )(l)(A)

14

erty.

15

·with respect to such prop-

"(c) QU ALIFIED OPP0R'l' UN I'l'Y ZO N E PR0PER'l'Y .-

16 For purpo ses of this section:
" (1) I N GE N ER A L. - rrh c term 'qualified oppor-

17

18

tunit y zone prop erty' means prop erty which is-

19

" (A) qualified opportu nity zone stock,

20

" (B) qualified opportunit y zone partn er-

21

ship int erest ,
" (C) qualified opportunit y zone business

22
23

prop erty, or

24

" (D) an intere st in a quaJified investm ent

25

UST 000945

fund.

•S 293 IS

TREAS-17-0313-H-000037

 11
1

"(2) Q UA LJFIE O OPPOR'I' UNITY ~O NE STO CK.-

2

"(A) I N GENrn
RAL.-E xcept as pr ovided in

3

subpara graph (B), the term 'qualified oppor-

4

t unity zone stock' mean s any stock in a domcs-

5

tic corp oration if -

6

"( i) such stock is acquir ed by th e tax-

7

payer after December 31, 2017 , at its

8

original issue (directly or thr ou gh an tm -

9

derwrite r) fro1n the corporation solely in
exchange for cash ,

10
11

"( ii) as of the time such stock was

12

issued, su ch corporation was a qualified

13

opporh mjty zone business (or, in th e case

14

of a new corpor ation , such corporati on vvas

15

being orga nizcd for purposes of being a

16

qualified opportu nity zone business), and

17

"( iii) during subst antiall y all of th e

18

taArpayer's holding period for such stock,

19

such corp oration qualified as a qua lified

20

opportunit y zone business .

21

"( B) RED EMPT IONS.- A rule similar to

22

the rule of section 1202(c)(3) shall apply for

23

purp oses of this par agTaph .

24

"(3)

25

UST 000946

SHIP

•S 293 IS

Q UAL TI?IED OPPOR 'l'UN I'l'Y ZON E P;U{ T NER,-

INTElm ST .-' rh e

t er m ' qualified opportu nity

TREAS-17-0313-H-000038

 12
1

zone partn er ship int erest ' means any capita] or prof-

2

it s int er est iu a domestic partn ership if"(A) such int er est is acquir ed by the tax -

3
4

pay er aft er December 31, 2017, from the part-

5

nership solely in exchan ge for cas h,

6

as of th e time such int erest was ac-

"(B)

7

quired, such partnership was a qualified oppor-

8

tunit y zone business (or , in the case of a new

9

partn er ship, such partner ship '"'as being orga-

10

nized fo1·purposes of being a qualifi ed oppor-

11

tmlity zone bu siness), and

12

"(C) duri ng substa ntiall y all of th e tax-

13

pay er 's holding period for su ch int erest, su ch

14

partn er ship qualifi ed as a qualifi ed opportuni ty

15

zone bu siness .

16

"( 4) Q UALIFIED OPPORT UNITY ZONE BUSINESS

17

PROPER:rY .-

18

L'\/ GENERA!
.J.-Th e term 'qualifi ed

"(A)

19

opportunity zone bu siness property' means tan-

20

gible prop ert y u sed in a trad e or business of the

21

ta,'-rpaycr if-

22

"( i) such prop ert y w<1s acquir ed by

23

the ta,A'])a
yer by pur cha se (as defined in

24

section

25

2017,

UST 000947

•S 293 IS

179(d)(2))

after

December

31,

TREAS-17-0313-H-000039

 13
"( ii) th e origina l u se of such property

1
2

m the qualified opport unit y zone com-

3

mences ,~~th the ta2q)ayer or the t&"\.'l)ayer

4

substant ially improves the property , and

5

"( iii ) during substantia lly all of the

6

ta:>..l)ay
er 's holding peri od for such prop -

7

erty, substant ialJy all of the us e of such

8

property ,vas in a qualified opportunity

9

zone.

10

"(B)

SUBSTANTIAL

lt\lIPRO-VE.i\lENT.-

For

11

purposes of subparagraph (A)(ii), prope rty shall

12

be treated as substantially improved by the tax-

13

payer onJy if, durin g any 30-month period be-

14

ginnin g aft er th e dat e of acquisition of such

15

property, additions to basis ,~~th respect to such

16

property in the hand s of the ta,'\.'l)ayerexceed an

17

amount equa l to th e adjust ed basis of such

18

property at the beginning of such 30-month pe-

19

riod in the han<ls of the ta::-rpayer.

20

"(C) RE I~ATED PJ\J{'l'Y.-For purposes of

21

subparagraph

22

sectio n 179 (d)(2) shall be applied pursuant to

23

paragraph (8) of this subsection in lieu of the

24

application of su ch rule in section 179(d)(2)(A).

UST 000948

•S 293 IS

(A)(i), the relat ed person rule of

TREAS-17-0313-H-000040

 14
1

"(5)

QU J\!JIJi'IED

OPPORT U NI T Y

FUN D.-Th

e

2

term 'qualified opportunit y fund ' means any invest-

3

ment vehicle organi zed as a corporation or a par t -

4

nership for the pm·pose of investing in qualified op-

5

portunit y zone prop ert y (other than anoth er quali-

6

fied opportunit y fund) that holds at least 90 percent

7

of it s asset s in qualified opportunit y zone prop erty,

8

detennin ctl-

9

" (A) on th e last day of the first 6-month

period of th e taxabl e year of the fund , and

10

"(B) on th e last day of the taxab le year of

11

12

th e fund.

13

" (6)

14

QU J\ [JJ F'I E D

OPPOR rl'UN ITY

ZONE

B USI-

NESS.-

15

" (A) L"1' GENERAL.- 1~he term 'qualified

16

oppo1·tunity zone business' mean s a trad e or

17

busincss-

18

" (i) m which substant ially all of the

19

ta ngib le prop ert y owned or leased by the

20

ta ).l)a yer is qualified opportunit y zone busi-

21

ness prop erty,

22

"( ii) ,,,lu ch sati sfies t he requirement s

23

of paragrap hs (2) , (4), and (8) of section

24

1397C(b) , and

UST 000949

•S 293 IS

TREAS-17-0313-H-000041

 15
1

"( iii) which is not described in section

2

144(c)(6)(B).

3

"( B)

SPECIAL RULE.- Fo r purpo ses of

4

subparagraph (A), tangib le property tha t ceases

5

to be a qualifi ed opportunit y zone business

6

prop ert y shall continue to be tr eated as a quali-

7

fied opportu nit y zone bu siness property for the

8

lesser of-

9

"( i) 5 yea rs after the date on ,,vhich

10

such t an gible property

11

qualifi ed, or

ceases to be so

12

"( ii) th e date on which such tangibl e

13

prop ert y is no longer held by the qualifi ed

14

opportunity zone bu siness .

15

" (d) APPLICABLERULES.-

16

"( l ) IN GENERAL.- For purposes of this sec-

17

tion and except as otherwise provided in this section ,

18

rul es similar to the rul es app licable to deferred lilrn

19

kind exchan ges tmder section J 03 1 shall apply ex-

20

cept that r einvestment in opportuni ty zone prop erty

21

need not r equir e an inte rm ediar y part y.

22

"(2) RELATED PERS0N8.- For pm·poses of this

23

sub sectio n, per sons arc related to each other if such

24

pers ons arc described in section 267(b) or 707 (b)( l ),

UST 000950

•S 293 IS

TREAS-17-0313-H-000042

 16
1

determin ed by subst itufa1g '2 0 percent' for '50 per -

2

cent' each place it occurs in such sections.

3

"(3) DE CEDENTS .- In the case of a decedent,

4

amounts recognized tmder t his section shall, if not

5

prop erly includible in the gross income of th e dece-

6

dent , be incluclible m gToss income as provided by

7

section 69].

8

lONS.-Th c Secretary shall prc"(4) REGULA'l'

9

scribe such l'egulation s as may be necessary or ap-

10

propriate to carry out th e purposes of this section ,

11

including-

12

"(A) rules providing for proportionat e in-

13

clu sion in income and incr eases in basis for

14

purposes of subsections (a) and (b) in cases in

15

which a sale

16

tunity zone property ,vith re spect to which gain

17

is deferr ed tmder subsection (a)(l)(A)

18

than all of such prop erty,

01·

exchang e of any qualified oppor-

is less

19

"(B) rules requiring taA'})a
yers to provide

20

such information as the Secretary determin es to

21

be necessary or appropriat e for the idcntifi ca-

22

tion of both the assets sold (including ba sis and

23

sale price) and the assets acquired and invest-

24

ment s made, and

25

UST 000951

"(C) rules to pr event abuse.

•S 293 IS

TREAS-17-0313-H-000043

 17
1

" (e) FAI L URE o r,~ Q UAl ,IP'l gl) O PP0H.T UN I'I'Y FU ND

2 TO lVlAINTAIN l NVE S'l'MEN'l'

ST A1'J DARD.-

3

" (l ) IN GE l\TERAL.- If a qualified opportm 1ity

4

fund fails to meet th e 90-pcr ccnt requir ement of

5

sub section (c)(5), the qualified opportunit y fn nd

6

sh all pay a penalty for each mont h it fails to meet

7

th e requirem ent in an amount equal to th e pro duct

8

of-

9

" (A) th e excess of-

10

"( i) the amount equ al to 90 pci·cent of

11

its aggregat e asset s, over

12

" (ii) the aggTegate amount of qu ali-

13

fied opportun ity zone propert y he]d by the

14

fund, muJt iplied by

15

" (B) the nn de1·pa yrnent rat e esta blished

16

und er section 6621 (a) (2) for such month.

17

" (2)

SPE CIAL

RU LE

FOR

PART N ER SII IP S .- In

18

the case th at th e qualified opport unity fund is a

19

pa r t ner s]1ip, t he pena lty imposed by para gTaph (1)

20

sha ll be taken into account pro port ionately as part

21

of the dist ributive sh ar e of each partn er of the part-

22

ner ship .

23
24

UST 000952

" (3)

R EA soNABLE

C,AU .._
sE

EXCEPTIO N .-

No

penalty shall be imposed und er this subsection with

•S 293 IS

TREAS-17-0313-H-000044

 18
1

respect to any failur e if it is shown th at such failur e

2

is du e to reasonable cau se." .

3

(b) BASIS ADJUSTl\IENTS.- Scction 1016 (a) of such

4 Code is amended by strikin g "and " at th e end of para -

5 graph (36), by strikin g th e period at th e end of para gn1ph
6 (37) and insertin g '', and ", and by insertin g aft er para7 graph (37) the following:

" (38) to th e C}..
't ent provided in section 1400Z-

8

9
10

2(b) ." .

(c) REPORT TO CONGRESS.- The Secretar y of the

11 rrreasury , or th e Secretar y 's delegat e, shall submit a re-

12 port to Congress on th e opportunit y zone in cent ives en13 act ed by this section begin nin g 5 year s aft er the dat e of
14 enactm ent of thi s Act and annuall y th ereaft er. T'he report
15 shall include an assessment of investment s held by quali16 fied opportuni ty fund s nationall y and at the Sta te level.
17 rro the exte11t such informa tion is available, th e report
18 shall in clud e the numb er of qualified opportunit y fund s,
19 th e am0tmt of assets held in qualified opportmlity fund s,
20 th e composition of qualified opportunit y fund investm ent s
21 by asset class, th e percentag e of qualified opportunit y zone
22 census tr acts designat ed und er sub chapt er Z of th e Int er23 na1 Revenu e Code of 1986 (as added by thi s section) that
24 have received qualified opportunit y fund investm ent s. The
25 report shall also include an assess ment of th e impa cts and

UST 000953

•S 293 IS

TREAS-17-0313-H-000045

 19
1 out comes of th e investm ent s in tho se areas on econmmc
2 indicator s includin g job creat ion, povert y reduction , and
3 new bu siness start s, and oth er metri cs as deter mined by
4 th e Secretar y.

5

(cl) CLER ICAL .A..1
vl ENDl\IE N'l'.- Th e t abl e of sub-

6 chapt ers for chapt er 1 of such Code is amended by a<lding
7 at the end th e follmliri.ng new it em:
" SU IK 'I I.\ P'f' EH %. OPPOH 'I'L' l\ l T Y 7.01\BS " .

8

(e)

E PPEC 'l'I V E

DNl'E.-rrh e amendm ent s mad e by

9 thi s section shaU tak e effect on th e dat e of th e enactm ent
10 of thi s Act .
0

UST 000954

•S 293 IS

TREAS-17-0313-H-000046

 The Investing in Opportunity Act Factsheet
Senators Tim Scott (R-SC) and Cory Booker (D-NJ) and
Congressmen Pat Tiberi (R-OH) and Ron Kind (D-WI) introduced
the Investing in Opportunity Act to help revitalize economically distressed
communities which suffer from a lack of investment and business growth, by
facilitating new incentives for investment in those areas around the country.

Today, more than 50 million Americans live in a distressed community .
and American investors have trillions of dollars of inactive capital that, if
reinvested, could be an important new source for catalyzing growth and
opportunity. These new dollars could help stem the tide of business
closures, a lack of access to capital, and absent entrepreneurship in areas
that need it most.
The Investing in Opportunity Act encourages new investment by:
. Allowing investors

to temporarily

defer capital gains

recognition if they reinvest into an "Opportunity Zone." U.S.
investors currently hold an estimated $2.3 trillion in unrealized capital
gains-a significant untapped resource for economic development. This
legislation allows investors to temporarily defer capital gains recognition

UST 000955

TREAS-17-0313-H-000047

 from the sale of an appreciated asset , but only if they reinvest the gains
into qualified assets in an Opportunity Zone. This will remove the tax
disincentive for investors to roll assets into distressed communities, and
preserve a larger amount of capital for investment in distressed
communities.
. Encouraging investors to pool resources and risk in
"Opportunity Funds" (O Funds). Many investors are willing to
provide the capital, but lack the wherewithal to locate and execute
investment opportunities in communities that need it. These new 0
Funds will democratize economic development by allowing a broad
array of investors throughout the country to pool resources and mitigate
risk, increasing the scale of investments going to underserved areas and
thereby increasing the probability of neighborhood turnaround. 0
Funds would be required to invest 90 percent of their resources in
qualifying Opportunity Zones.
• Giving governors the responsibility for designating
Opportunity Zones. This legislation uses the New Markets Tax Credit
(NMTC) program definition of a "low income community" as the basis
for defining areas eligible to be designated an Opportunity Zone.
Governors will be able to designate no more than 25 percent of the total
number of qualifying NMTC census tracts and all areas will have to meet
the required threshold of economic distress. This approach will help
ensure local needs and opportunities are being met as well as encourage
concentration of capital in targeted, geographically contiguous zones in
each state.

The legislation is designed to be low cost and low risk to the taxpayer.
Investors bear the risk and are on the hook for all of their originally deferred
capital gains, minus a modest reduction for long-term holdings , regardless
whether subsequent investments have increased or decreased in value.
There are no tax credits and no public sector financing is involved.
Finally, this legislation incentivizes long-term investment via a modest
reduction in capital gains taxes owed on the original investment after
holding qualified investments for five to seven years. Patient capital is
further rewarded by exempting qualified investments held for more than 10
years from additional capital gains recognition beyond that which was
originally deferred.

UST 000956

TREAS-17-0313-H-000048

 Fwd: ca
From:

ed itemized deductions
"Muzinich, Justin" <"/o=ustreasury/ou=exchange
administrative group
(fydibohf23spdlt)/cn=recipients /cn=3d2afce60d7 e464fbd30ff8dbedefecb-m

To:

George Callas <geo rge .callas@mai l.house.gov>

Cc:

Shahira E. Knight

Date:

Fri, 27 Oct 2017 18 :24:28 -0400

Attachments:

Current Law Roug h Score 20 17_ 10_27.x lsx (13 .87 kB)

George - As discussed. b(5)
theme if helpful.

uzinich , jus">

>

and we are happy to work on variations of the

From: Muz inich, Justin <Justin.Muzin ich@treasury.gov>
Date: October 27, 2017 at 9:56:4 6 AM EDT
To : 'Angus, Barbara' <Barbara.An us mail.house . ov>
Cc : 'Knight, Shah ira E. EOP/WHO '
Subject : capped itemized deduct ions

>

Barbara - Tha nks for chatting jus t now . As d iscussed, all o f our resources are available to help .
b(5 )

----------

b(5)
afternoon

if help ful.

Justin

UST 000957

TREAS-17-0313-H-000049

 RE: ca
From:

ed itemized deductions

"Muzinich, Justin" <"/o=ustreasury/ou=exchange administrative group
(fydibohf23spdlt)/cn=recipients/cn=3d2afce60d7e464fbd30ff8dbedefecb-muzinich

To:

"Callas, George" <george.callas@mail.house.gov>

Date:

Fri, 27 Oct 2017 18:38:20 -0400

, j us">

b(5)

From: Callas, George <George.Callas@mail.house.gov>
Date: October 27, 2017 at 6:30:58 PM EDT
To: Muzinich, Justin <Justin.Muzinich@treasury.gov>
Subject: RE: capped itemized deduc t ions

Thanks, b(5)
From: Justin. Muzin ich@treasury.gov

[mailto :Justin. Muzin ich@treasury.gov]

Sent: Friday , October 27, 2017 6:24 PM
To : Callas, Gear e

Cc:
Subject: Fwd: capped item ized deductions

and we are happy to

From: Muzinich, Justin <Just in.M uzin ich@treasury .gov >
Date: October 27, 2017 at 9:56:46 AM EDT
To: 'Ang us, Barbara' <Barbara.An us mail.house . ov >
Cc: 'Kn ight, Shahira E. EOP/WHO'
Subject: capp ed itemized deductions
Barbara -Thanks

afternoon

for chattin

>

·ust now. As discussed, all of our resources are available to help.

if helpful.

Justin

UST 000958

TREAS-17-0313-H-000050

 Re: Available to meet tomorrow afterno on?
From:

"Huang, Gerald (Perdue)" <gerald_huang@perdue.senate.gov>

To:

"Kowalski, Daniel" <daniel.kowalski@treasury.gov>

Date:

Fri, 27 Oct 2017 20:36:07 -0400

Russell455

Sent frommy Verizon,SamsungGalaxysmartphone
------- Original message ------From: Danie l.Kowalski@treasury.gov
Date: 10/27/17 6:03 PM (GMT-06:00)
To: "Huang, Gerald (Perdue)" <Gerald_Huang@perdue.senate.gov>
Subject RE: Avai lable to meet tomorrow afterno on?
Great . I' ll meet you at your office and we can go from there . What room#?
From: Huang, Gerald (Perdue) [mailto:Gerald_Huang@perdue.senate.gov]
Sent: Friday, October 27, 2017 6:55 PM
To : Kowalski, Daniel <Daniel.Kowalski@treasury.gov>
Subject: Re: Available to meet tomorrow afternoon?

Works for me

Sent from my Verizon, Samsung Galaxy smartphone

-------- Original message --------

From:Daniel.Kowalski@treasury.gov
Date: 10/27/17 5:26 PM (GMT -06 :00)
To: "Huang, Gerald (Perdue)" <Gerald Huang@perdue.senat
e.gov>
Subject: RE: Available to meet tomorrow afterno on?
How about Tuesday? I will be over there for an 11 :30 meeting , so could meet with you at 12 :30 or
later . We can meet for lunch if that works for you .
From: Huang, Gerald (Perdue) [mailto :Gerald Huang@perdue.senate.gov ]
Sent: Thursday, October 26, 2017 8:04 AM
To : Kowalski, Daniel <Daniel.Kowalski@treasury.gov >
Subject: RE: Available to meet tomorrow afternoon?

Dan,
Let me know when you are free to meet next week, I am happy to meet at my office or come
over to the Treasury, whatever works best for you.
Gerald
From: Daniel .Kowalski@treasury .gov [mai lto:DanieLKowalsk i @treasury .gov]
Sent: Wednesday, October 25, 2017 9:33 PM

UST 000959

TREAS-17-0313-H-000051

 To: Hua ng, Gerald (Perdue) <Gerald Huang@pe rdue.senate.gov >
Cc: Wa ldrop , PJ (Per due ) <PJ Waldrop@perdue.senate .gov >

Subject : RE: Available to meet tomorrow afternoon?

Thank s Gerald . You are very kind. I know budget well, and I definitely missed bein g the re for
floor action last week, but this is a good change for me.
b(5)

Let me see what I can find out and we can meet next w eek (I would not be able to emai l
distribution info).
PJ,if you are around tomorrow, I'd st ill be intere sted in catching up with you.

From: Huang, Gerald (Perdue) <Gerald Huang@pe rdue .senate.gov >
Date : Octobe r 25, 2017 at 9:13:50 PM EDT
To: Kowalski, Daniel <Daniel.Kowalski@tr easury .gov>
Cc: Waldrop, PJ (Perdue ) <PJwWaldrop@perdue .senate .gov>
Subject: RE: Availab le to meet tomorrow afternoon?

Dan,
Hope you are doing well at Treasury, Budget doesn't feel the same without you.
Unfortunately, I am leaving town midday tomorrow. If PJcan't meet with you, I am happy to talk to
you over the phone or meet next week. Here's a few things that we are working on:

1.

2.

3.

There's a longer list but these were the first ones that popped up. Happy to keep talking.

UST 000960

TREAS-17-0313-H-000052

 Thanks,
Gerald

From: Daniel .Kawa lski@treasury.gov [ma i lto :Dani el. Kawa lski@treasury .gov]
Sent : Wednes day, October 25, 2017 8:04 PM
To : Huang, Gerald (Perdue) <Gerald Huang@perdue.senate.gov >; Waldrop, PJ(Perdue)

<PJ Waldrop@perdue.senate.gov >
Subject : Available to meet tomorrow

afternoon?

I know from the campaign Senator Perdue's interest in tax reform . Now that it looks like t he process
of legislating in earnest is going to begin, I'd be interested in talking with you to get your take on how
the Senator feels that effort is proceeding, and what we here at Treasury should be do ing.
I'll be meeting a former Budget colleague for lunch tomorrow, and am wondering if one or both of
you might be avai lable for a meeting tomorrow afternoon, after 1 pm .
Would you be available?
Thanks,
Dan Kowalski
Counselor to the Secretary
Department of the Treasury
202-622-0992 (desk, direct)

UST 000961

TREAS-17-0313-H-000053

 Distribution table
From:

"Muzinich, Justin" <"/o=ustreasury/ou=exchange
administrative group
(fydibohf23spdlt)/cn=recipients /cn=3 d2afce60d7 e464fbd30ff8dbedefecb-m

To:

George Callas <george.callas@mail.house.gov>,
<barbara.angus@mail.house.gov>

Cc:

Shahira E. Knight

Date:

Fri, 27 Oct 2017 20:48:52 -0400

Attachments:

b(5)

uzinich , jus">

Barbara M. Angus
>

revised 10272017) (003).pdf (53.25 kB)

b(5)
b(5)
###

UST 000962

TREAS-17-0313-H-000054

 Score
From:

"Muzinich, Justin" <"/o=ustreasury/ou=exchange
administrative group
(fydibohf23spdlt)/cn=recipients /cn=3 d2afce60d7 e464fbd30ff8dbedefecb-m

To:

George Callas <george.callas@mail.house.gov>,
<barbara.angus@mail.house.gov>

Cc:

Shahira E. Knight

Date:

Fri, 27 Oct 2017 21 :07 :57 -0400

Attachments:

Tax reform v10.3 Plan B summary individual only.pdf (109.4 kB)

uzinich , jus">

Barbara M. Angus
>

b(5)
b 5)
discuss if helpful.

UST 000963

TREAS-17-0313-H-000055

 RE: Treasur comments on 10-25-17 W&M draft
T o:

b(6)

Cc:

b(6)

, jct.gov>, ''Trier, Dana" <da na.trie r@treasury.gov>
, jct.gov> "
.harte r@treas ury.gov>
ry.gov>, '•
@treas u ry.gov>,' • •
tr easury .gov>

treasury~
@treas ury.gov>,l:m>WIIIIIII

Date :

Sat, 28 Oct 20 17 15:59:08 -0400

Atta chments:

Recom mendatio ns on 10.27 .17 ve rsion of House draft leg islatio n - 10.28 .20 17.docx
(52.99 kB)

We completely understand . As t here has been a new draft dated 10-27 for which there was no time
for our comments from yesterday to be considered, we are re-sending those same comments with the
a e and line numbers u dated to reflect the changes to the document resulting from b(5)
We wou ld appreciate if you could also share this updated
version w ith W&M.
As always, please let us know if you have any questions or if we can help in any way .
Thanks ,
Doug

To:From: b(6)

, JCT .gov]

Sent: Friday, October 27, 2017 4:32 PM
Cc: • •
SubJect:

e:

Harter, Chip; b(6)
re.asury comments on 10-25-17 W&M draft

Thanks Doug and colleagues .
We'll do our best to spend time on your comments.

On Oct 27, 2017, at 4:18 PM, " Douglas .Poms@treasury .gov" <Douglas .Poms@treasury .gov> wrote:
Hi -

nd -

Hope you all are holding up alright©
Attached are some Treasury comments on the 10-25-17
discussion draft of the House bill . Can you circulate to your staff, as appropriate, and share with
W&M. We really appreciate it.
Also, if you all and/or W&M have any questions about our comments (or any other issues) and
would like to discuss over the weekend, just let us know . We could set up a call or meet with you,
whatever is most helpful.
Thanks and have a nice weekend,
Doug

UST 000964

TREAS-17-0313-H-000056

 <Recommendations on 10.25.17 version of House draft legislation -- 10.27.2017.docx >

UST 000965

TREAS-17-0313-H-000057

 Re: Score
From:

"Callas, George" <george.callas@mail.house.gov>

To:

"Muzinich, Justin" <justin.muzinich@treasury.gov>

Date:

Sun , 29 Oct 2017 19:39:13-0400

Thanks . You've got the wheels in my head turning.
On Oct 29, 2017 , at 7:38 PM, "Jus tin .Muzi nich@tr easury .gov " <Justin.Muzinich@treasury .gov > wrote:

b(5)

From: Callas, George <George .Callas@mai l.house.gov >
Date: October 29, 2017 at 7:36 :32 PM EDT
To: Muzinich, Justin <Justin .Muzin ich@treasury .gov >
Subject: Re: Score

b(5)
On Oct 29, 2017, at 7:24 PM, "Justin.Muzinich@treasury .gov" <Justin.Muzinich@treasury .gov>
wrote:

b(5)

From: Call as, George <George .Callas@mai l.house.gov >
Date: October 29, 2017 at 7:12:39 PM EDT
To: Muzinich, Justin <Justin .Muzinich@treasury.gov
Subject: Re: Score

>

b(5)
From: Justin Muzinich <Justin .Mu zinich@treasury .gov>
Date: Sunday, October 29, 2017 at 7:09 PM
To: "Callas, George" <George .Callas@mail.house.gov >
Subject: Re: Score

b(5)

From: Callas, George <George .Callas@mai l.house.gov >
Date: October 29, 2017 at 7:00 :05 PM EDT
To: Muzinich, Justin <Justi n. Muz i nich@treasury.gov >
Subject: Re: Score
UST 000966

TREAS-17-0313-H-000058

 b(5 )

From: Justin Muzinich <Justin.Muzinich@treasury.gov >

Date: Sunday, October 29, 2017 at 6:19 PM
To: "Callas, George" <George.Callas@mail.house .gov>

Subject: Re: Score

From: Callas, George <Georg e.Callas@mail.house.gov >
Date: October 29, 2017 at 6 :07 :33 PM EDT
To: Muzi nich, Justin <Justin .Muz i nich@treasury.gov >
Subject: Re: Score

-

From: Justin Muzinich <Justin.Muzinich@treasury.gov >

Date: Friday, October 27, 2017 at 9:08 PM
To: "Callas, George" <George.Callas@mail.house.gov >, "Angus, Barbara "
<Ba~
Cc:-'
'
>
Subject: Score

UST 000967

TREAS-17-0313-H-000059

 Re: Thank

OU

From:

"Lee, Jane (McConnell)" <jane_lee@mcconnell.senate.gov>

To:

"Kowalski, Daniel" <daniel.kowalski@treasury.gov>

Date:

Mon, 30 Oct 2017 05:37:30 -0400

Yes let me know! That's a good idea .
Sent from my iPhone

On Oct 29, 2017, at 9:32 PM, "Daniel.Kowalski@t reasury .gov" <Daniel.Kowa lski@treasury. gov> wrote:

I'll be spending some time there, so should be easier
to meet up.
Dan
From: Lee, Jane (McConnell)

[mailto :Jane Lee@mcconnell.senate

Sent: Saturday, October 28, 2017 7:11 PM
To: Kowalski, Daniel <Daniel.Kowalski@treasury.gov
Subject: Re: Thank you

.gov ]

>

Hey! Yeah we're all trucking along. I could do 5:30? Otherwisein meetings. Wou1dbe good to
see you! Let me know.
Hope you have time to eajoy the weeken d.
Sent from my iPhone
On Oct 28 , 2017, at 9:44 AM, "Daniel.Kowa lski @trea sury .gov"

<Danie1.Kowalski@treasury.gov> wrote:
You're very kind Jane, since I should be the one thanking you. We saved a lot of time not
needing to conference on budget.
b(5)

b(5)

I'm coming up for a couple of meetings on Tuesday. Available for coffee after 2:007

I

From: Lee, Jane (McConnell) <Jane Lee@mcconnell.senate.gov>
Date: October 28, 2017 at 9:35:51 AM EDT
To: Kowalski, Daniel <Daniel.Kowalski@treasury .gov>
Subject:Thank you

UST 000968

TREAS-17-0313-H-000060

 Hey Dan, The adoption of the budget already seems like ages ago but wanted to thank you
for all your guidance and help through the process. We miss you!
Already working on the next stage . The next few months will be fun
Talk soon! - Jane
Sent from my iPhone

UST 000969

TREAS-17-0313-H-000061

 RE: Treasur

artment Res onses

From:

treasury .gov>

To:

jay_khosla@finance.senate.gov, "Stegmaier, Jason (Finance)"
<jason_steg maier@finance.senate .gov>

Cc:

•~ey"
~

Date:

Tue, 31 Oct 2017 09:27:19-0400

Attachments:

Treasury on Tax Reform_McCaskill.pdf (209.55 kB)

<bradley.bailey@treasury.gov>, ~
@treasury.gov>, LegAffairs <legaffa~ov>

Jay and Jason,
An additional letter from the Treasury Department on tax reform that Chairman Hatch was copied on is
attached.
Thank you!

-

From: b(6)
Sent : T uesd ay, October 31, 2017 9:08 AM
To : 'jay_khosla@finance .senate .gov' <jay_khosla@finance
<Jason_Stegmaier@finance .senate.gov>
Cc: Bailey , Bradley <Bra dley.Ba iley@treasury.go v>;
LegAffa i rs <LegAffairs@treasury .gov>
Subject : Treasury Department Responses
Enclosed is a response from the Tr easury Department
on.

.senate.gov>;

'Stegmaier, Jason (Finance)'
@treasury.gov>;

to Senator Baldwin that Senator Hatch was copied

If you have any questions, please contact Brad Bailey at 202.622.1900.

mllllllllllllll
~

ative Affairs

rt

t fthe Treasury
Office)
Cell)

-

UST 000970

TREAS-17-0313-H-000062

 D EP AR TM E NT O F TH E TREA S URY
WA S H INGTON,

D, C , 2 0 22 0

October 31, 2017

The Honorable Claire McCaskill
United States Senate
Washington, DC 20510
Dear Senator McCaskill:
Thank you for your letter regarding the tax reform process. We share your goal of
comprehensive tax reform with real results, and welcome your desire to be partners in the tax
reform prncess. The Unified Framework for Tax Reform released on September 17, 2017, sets
fotih the proposals embraced by the Administration and members of the tax-writing conunittees.
It is now up to those committees to work out details and develop legislation in a process that, as
the Framework states, will be transparent and inclusive. We look forward to work with you in
order to achieve historic tax reform.
Thank you again for your letter. If you have additional questions, please contact Bradley Bailey,
Office of Legislative Affairs, at (202) 622-1900.
Sincerely,

·Ealoney

Assistant Secretary for Legislative Affairs

Identical letter sent to:
The Honorable Ron Wyden
The Honorable Debbie Stabenow
The Honorable Maria Cantwell
The Honorable Bill Nelson
The Honorable Robert Menendez
The Honorable Thomas R. Carper
The Honorable Benjamin L. Cardin
The Honorable Sherrod Brown
The Honorable Michael F. Bennet
The Honorable Robert P. Casey, Jr.
The Honorable Mark R. Warner
cc:

Mr. Gary D. Cohn
The Honorable Orrin G. Hatch
The Honorable Mitch McConnell

UST 000971

TREAS-17-0313-H-000063

 RE: catch u call toda
From:

To:

''Youngen, Angie (Portman)" <an gie_youngen@portman.se nate.go v>
b(6)
, treasury .gov>

Cc:

"Maloney, Drew" <drew.maloney@treasury.gov>

Date:

Tue, 3 1 Oct 2017 12 :18:24 -0400

Certainly understand. Would 6:00 tonight work or is the evening out?
From: b(6)

@treasury .gov[mailto • •
Sent: Tuesday, October 31, 2017 12:16 PM
To : Youngen, Angie (Portman) <Angie_Youngen@portman
Cc: Drew.Maloney@treasury.gov
Subject: RE: catch up call today

@treasury.gov]
.senate .gov>

Hi Angie! As it turns out the Secretary cannot make 5:30 today work. While it is not urgent to do this
call today, does the Senator have any availability tomo rrow for a call? The Secretary will be on the
west coast, but is happy to accommodate the Senator's schedule. Let me know options and I will try
and lock this in. Thanks much!

From: Youngen, Angie (Portman) [mailto:Angie Youngen@portman .senate.gov ]
Sent: Tuesday, October 31, 2017 8:31 AM
To : Maloney, Drew <Drew.Maloney@treasury .gov>
Cc:
treasu . ov>
Subject: RE: catch up call today

Drew-

Good morning. Would today at 12:45 or 5:30 work for you today ?

Or if needing sooner, please let me know.
Angie
From: lsakowitz, Mark (Portman)
Sent : Tuesday, October 31, 2017 8:02 AM
To : Drew .Maloney@treasury .gov; Youngen, Angie (Portman) <Angie
Cc: Scheduler (Portman)< Scheduler@portman.senate.gov >; • •
Subject : Re: catch up call today

Yes of course .
Ful l day but we will work it out.
Adding Angie's di rect email address.

Sent from my iPhon e
On Oct 31, 2017, at 7:56 AM, " Drew .Maloney@treasury .gov " <Drew .Maloney@treasury .gov> wrote:
Does the Senator have t ime for a call with the Secretary today o n tax reform ?
Thanks
Drew

UST 000972

TREAS-17-0313-H-000064

 Drew Maloney
Assistant Secretary of the Treasury
Legislative Affairs
United States Department of the Treasury
1500 Pennsylvania Avenue, NW Suite 3134
Washington, DC 20220
Office: 202-622-1900
Cell: b(6)
drew.maloney@treasury.gov

UST 000973

TREAS-17-0313-H-000065

 401k
From:

j ustin.muzinich@t reasury .gov

To:
Cc:

Barbara M. Angus <barbara.a ngus@ma il.house.gov>
Shahira E. Knight

Date:

Tue , 31 Oct 2017 14:33:31 -0400

>

b(5)

UST 000974

TREAS-17-0313-H-000066

 RE: territorial discussion
From:

"Kowa lski, Daniel" <"/o= ustreasury/ou=exc hange administrative gr oup
(fydibohf23sp dlt)/cn=recip ients/c n=c f6b4ee3 71 Of 422fbceec b0020766838 -kowalsk i, dan">

To:

"Hu ang, Ge ra ld (Perdu e)" <gerald_huang@perdue.se nate. gov>

Date:

Tue , 31 Oct 20 17 17:47:23 -040 0

Thanks, I'll review this information.
I'd be happy to discuss distribution when we have it for specific
legislation. We'll keep in touch as tax reform moves through the process.
Dan
From: Huang, Gerald (Perdue) [mailto:Gerald_Huang@perdue

.senate.gov]

Sent: Tuesday, October 31, 2017 5:29 PM
To: Kowalski, Daniel <Daniel.Ko w alski@treasury .gov>
Subject : territorial discussion
Dan,
b(5)
b(5)

-

.

warning, my boss may want to meet with you and ta l k about the distribution
once we have actual text and you can update the models .

charts you showe d me

Thanks,
Gera ld Huang
Legislative Assistan t
Office of Senator David Perdue
455 Russell Senate Office Bu ii ding
Washington, DC 20510 (202) 224-6607

UST 000975

TREAS-17-0313-H-000067

 RE: Call Toni ht
From:

"Mu zinic h, Ju sti n" <"/o =ustre as ury/o u=exc hange adm inistrati ve group
(fy dibohf23sp dlt )/c n=recip ie nts/c n=3 d2afce60d 7 e4 64fb d30 ff8d bedefecb -muz inich , j us ">

To:

"Stewart Dav id" <dav id .stewart

Date:

Tue , 3 1 Oct 20 17 21:18 :01 -040 0

mail.ho use.gov>, "K night , Shah ira E. EOP/W HO"

Yes, t hanks, helpful to see.

From : Knight, Shahira E. EOP/WHO
Date: Octo ber 31, 2017 at 9:17:17 PM EDT
To: Stewart, David <David.Stewart@mail.house.gov>
Cc: Muzinich, Justin <Justin.Muzinich@treasury .gov>

>

Su bjec t : RE: Call Tonight

Thanks so much.
From: Stewart, David [mailto:David .Stewart@mail. h ouse .gov]

Sent : Tuesday, October 31, 2017 9:13 PM

>

To : Knight, Shahira E. EOP/WHO
Cc: Justin. M uzinich@ Treasury.gov
Subject : Re: Call Tonight

On Oct 31, 2017, at 9:09 PM, Knight, Shahira E. EOP/WHO
Thanks for letting us know . Getting tons of press inquiries.

b(5)

b(5)
From : Stewart, David [mailto :David.Stewart@mail.house.gov

]

Sent: Tuesday , October 31, 2017 9:0 3 PM
To : Knight, Shahi ra E. EOP/WHO
Cc: Just jn .Muzinich@Treasu ry.gov
Su bject : Re: Call Tonight

Announcing

>

shortly formal release on Thursday . Not that that's news.

On Oct 31, 2017, at 7 :40 PM, Knight, Shahira E. EOP/WHO
wrote :
b(5)

On Oct 31, 2017, at 7 :36 PM, Stewart, David <David.Stewart@mai l.house .gov> wrote :

b(5)

UST 000976

TREAS-17-0313-H-000068

 Kni ht, Shahira E. EOP/WHO
> wrote :
b(5)

On Oct 31, 2017, at 7:26 PM, Stewart, David <David.Stewart@mail.house.gov > wrote:
Reports out that we are delaying until Thursday. b(5)
b(5)

On Oct 31, 2017, at 7:17 PM, Jett, Jen <Jen.Jett@mai l.house.gov > wrote :

Hi Shahira & Justin,
Mr. Brady is in with the W&M Members now. I'll do my best to try and get
a time frame to call with the Sec. Mnuchin /Dir . Cohn. Thanks for being a
little flexible.
Thanks,
Jen

Jen Jett
Director of Scheduling
Office of Congressman Kevin Brady, TX-08
Chairman, Committee on Ways & Means
Phone: 202-225-4901

UST 000977

TREAS-17-0313-H-000069

 RE: Senator Scott's Investin

ortunit Act

From:

"Newton, Andrew" <andrew.newton@treasury.gov>

To:

nick_wyatt@finance.senate.gov
"Bailey, Bradley" <bradley.bailey@treasury.gov>, 'West, Thomas" <thomas.west@treasury.gov>,
shay_hawkins@scott.senate.gov, emily_lavery@scott.senate.gov
Thu, 02 Nov 2017 12:56:0 1 -0400

Cc:
Date:

Hi Nick,
Brad asked me to look into this . b(5)

b(5)
b(5)

We're happy to take a look at any specific language proposals you have or that JCT has given their
original recommendation .
Thank you,
Andy

Andrew Newton
Deputy Assistant Secretary for Appropriations and Management
Office of Legislative Affa irs
U.S. Treasury Department
202-622-7593

From:Wyatt, Nick (Finance) <Nick Wyatt@finance .senate .gov>
Date: October 27, 2017 at 4:35:48 PM EDT
To: West, Thomas <Thomas .Wes t @treas ury.gov >, Bailey, Bradley
< Bradley. Ba ii ey@trea su ry.gov >
Cc: Hawkins, Shay (Scott) <Shay Hawkins@scott.senate.gov
>, Lavery , Emily (Scott)
<Emi ly Lavery@scott.senate .gov >
Subject: Senator Scott's Investing In Opportunity Act
Brad and Thomas,
We're working with Senator Scotts office to prep a proposal he's been working on for tax reform, and
we've been working with JCT,and have some items that Treasury's input would be helpful i n
resolving.
The legislation, which is attached with a summary, allows individuals to defer capital gains if they
invest in "Opportunity Zones" which are keyed off of New Markets Tax Credits depressed census
tracts as designated by a governor.

b(5)

UST 000978

TREAS-17-0313-H-000070

 b(5)

Thank you for your help, Shay and Emily from Senator Scott's office are on this e-mail to answer any
questions,
Nick

UST 000979

TREAS-17-0313-H-000071

 DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.
November 5, 2018
Sara Kaiser Creighton
Elizabeth France
John E. Bies
American Oversight
1030 15th Street NW, Suite B255
Washington, DC 20005
foia@americanoversight.org
VIA UPS
Re: American Oversight v. U.S. Department of the Treasury, 17-cv-2078-RBW (D.D.C.):
Treasury November 6 Production
Counsel:
This letter describes the November 6, 2018 production from the U.S. Department of the
Treasury (Treasury) in the above-referenced Freedom of Information Act litigation. Pursuant to
the Court’s February 2, 2018 Order, Treasury has reviewed and processed 61 documents
collected in response to American Oversight’s Congressional Communications FOIA Request,
2017-08-121. Via UPS overnight on November 6, Treasury will transmit 48 documents totaling
722 pages, comprising the non-exempt, responsive portions of the records within this collection.
The documents are numbered UST 000980 - 1701; portions of these materials are withheld
pursuant to Exemptions 5 and 6 of the FOIA. Additional documents are being withheld in their
entirety pursuant to Exemption 5, and other documents are not being produced because they are
non-responsive and/or duplicative of other materials within this collection; Treasury will provide
additional details about these materials later this week.
Treasury is continuing to review records that are potentially responsive to this request
and will respond to you again on or before December 5, 2018.
If you have any questions concerning this production or a related matter, please contact
Rebecca Kopplin, U.S. Department of Justice, at (202) 514-3953.
Sincerely,

Ryan Law
Office of Privacy, Transparency, and Records
U.S. Department of the Treasury

A v1 )I< ,.

PVERSIGHT

 From :

"Gorman , Tori (Corker)" <tori_gorman@cork er.senate.gov>

To:

"Kowalski, Daniel" <da niel.kowa lski@treasury.gov>

Date :

Thu , 02 Nov 20 17 17:36:41 -0400

-

From: Daniel.Kowalski@treasury.gov [mailto:Daniel.Kowalski@treasury.gov]

Sent : Thu rsday, November 02, 2017 5:28 PM

To: Gorman, Tori (Corker)
.
Subject: RE: What do you think of the House tax bill?

From: Gorman, Tori (Corker) [maUto :Tori Gorman@co rker .senate .gov]
Sent : Thursday, November 02, 2017 5:06 PM

To: Kowalski, Daniel <Daniel.Kowalski@treasury .gov>
Subject : RE: What do you think of the House tax bill?
b(5)

Tori

From: Daniel.Kowalski@treasury.gov [mailto:Daniel .Kowalski@treasury.gov]

Sent: Thursday, November 02, 2017 4:48 PM
To: Gorman, Tori (Corker)
Subject: What do you think of the House tax bill?
I'm waiting for a conference call, but would you be available for a call when it is over? 5:15 - 5:30?

/\Mlf

ll Al\

UST 000980
pVERSIGHT

TREAS-17-0313-I-000001

 From:

'West , Thomas" <"/o=ustreasury /ou=e xchange administrative group
(fydibohf23spdlt)/cn=recipients /cn=westt">

To:

"Angus , Barbara" <barbara.angus@mail.house .gov>

Date:

Fri, 03 Nov 2017 09:45 :31 -0400

Barbara, putting all substantive discussio n aside for one moment, I j ust wan ted to say thanks and co ngrats . 1
saw some of it in action but I still can' t imagine what went into getting that thing out. Regardless of where
things go fi-om here, you and your team have made an enormous contributio n to advancing tax reform
Best,
Tom
Tom West
(202) 622-6707
thomas. west@treasury.gov

/\Mlf

ll Al\

UST 000981
pVERSIGHT

TREAS-17-0313-I-000002

 JCT Docs
From :

"Angus , B·arbara" <barbara .anglts@mail.house.gov >

To:

"Knight, Shahira E. EOP/WHO" <
<justin .muzinich@treasury .gov>

Date :
Attachments:

Fri, 03 Nov 2017 21 :51 :3·5 -0400

, "Muzinich, Justin"

JCX-50-17 W&M Tax Reform Markup.pdf (3.57 MB); x-49-17.pdf (27.52 kB}

Wanted to make sure you see these new documents from JCT - distribution analysis and technical
explanation

Barbara M. Angus
Chief Tax Counsel
Committee on Ways and Means
I J36 Longworth House O ffice Building

202.225.5522
batbara.angus @mail.housc.gov

UST 000982

TREAS-17-0313-I-000003

 DESCRIPTION OF H.R. 1, THE
"TAX CUTS AND JOBS ACT"

Scheduled for Markup
by the
HOUSE COMMITTEE ON WAYS AND MEANS
on November 6, 2017

Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION

November 3, 2017
JCX-50-17

/\MERll Al\

UST 000983
pVERSIGHT

TREAS-17-0313-I-000004

 CONTENTS

INTRO DUCTION ..........................................................................................................................

1

TITL E I - TAX REFORM FOR INDIVIDUALS .........................................................................

1

A. Simplification and Reform of Rates , Standard Deduct ions, and Exemptions .............. 1
1. Reduction and simplification of individual income tax rates ................................. 1
2. Enhancement of standa rd deduction ....................................................................... 9
3. Repeal of deduction for personal exemption s ....................................................... 10
4. Maximum rate on bu siness income of individuals ............................................... 11
B. Simplification and Reform of Family and Individual Tax Credits .......... ...................
1. Enhancement of child tax credit and family tax credit .........................................
2. Repeal of credit for the elderly and permane ntly disabled ............ ............ ...........
3. Repeal of credit for adoption expenses .................................................................
4. Termination of credit for interest on certain home mort gages .............................
5. Repea l of credit for plu g- in electric drive motor vehicle s ....................................
6. Social security requirement for refundable portion of child credit , American
Refundable Credi t Program Integrity ....................................................................

23
23
24
26
27
27
28

C. Simplification and Reform of Education Incenti ves ................................................... 32
1. Reform of American opportunity tax credit and repeal of lifetime learnin g
credit .....................................................................................................................
32
2. Consolidation and modification of education savings rules ......... ............ ............ 33
3. Reform s to discharge of certain student loan indebt ednes s .................................. 37
4. Repeal of dedu ction for student loan intere st ....................................................... 39
5. Repeal of dedu ction for qualified tuition and related expenses ............................ 40
6. Repeal of exclusion for educational assistance pro grams ..................................... 40
7. Repeal of exclusion for intere st on United States savings bond s used to pay
higher education tuition and fees .......................................................................... 41
8. Repeal of excl usion for qualified tuiti on reduction s ................. ........................ .... 42
D. Simplification and Reform of Deductions .................................................................. 43
1. Repeal of overall limitat ion on itemi zed deductions ........... ............ ..................... 43
2. Mod ification of deduction for home mortgage intere st ........................................ 43
3. Modification of deduction for taxes not paid or accrued in a trad e or bu siness ... 45
4. Repeal of dedu ction for personal casualt y and theft losses .................................. 47
5. Limitation on wagering losses .............................................................................. 47
6. Mod ification s to the deduction for charitable contr ibution s ................................. 48
7. Repeal of deduction for tax pr eparation expenses ........ ............ ........................ .... 59
8. Repeal of deduction for medi cal expe nses ........ ............ ................. ......... .......... .... 60
9. Repeal of deduction for alimony payments and corresponding inclu sion in
gross incom e .........................................................................................................
61
10. Repeal of deduction for moving ex penses ...................... .............. .................... .... 61

/\MERICAi\

UST 000984
pVERSIGHT

TREAS-17-0313-I-000005

 11. Termination of deduction and exclusions for contributions to medical
savings accounts .................................................................................................... 62
12. Denial of deduction for expenses attributable to the trade or business of being
an employee, expenses of teachers, performing artists and certain officials ........ 64
E. Simplification and Reform of Exclusions and Taxable Compensation ...................... 67
1. Limitation on exclusion for employer-provided housing ..................................... 67
2. Modification of exclusion of gain on sale of a principal residence ...................... 68
3. Repeal of exclusion , etc., for employee achievement awards .............................. 69
4. Repeal of exclusion for dependent care assistance programs ............................... 69
5. Repeal of exclusion for qualified moving expense reimbursement.. .................... 70
6. Repeal of exclusion for adoption assistance programs ......................................... 70
F. Simplification and Reform of Savings, Pensions, Retirement .................................... 72
1. Repeal of special rule permitting recharacterization ofIRA contribution s .......... 72
2. Reduction in minimum age for allowable in-service distributions ....................... 75
3. Modification of rules governing hardship distributions ........................................ 76
4. Modification of rules relating to hardship withdrawals from cash or deferred
arrangements ......................................................................................................... 77
5. Extended rollover period for the rollover of plan loan offset amounts in
certain cases .......................................................................................................... 78
6. Modification of nondiscrimination rules for certain plans providing benefits
or contributions to older, longer service participants ............................................ 80
G. Estate, Gift, and Generation-Skipping Transfer Taxes ............................................... 90
1. Increase in estate and gift tax exemption, followed by repeal of estate and
generation- skipping transfer taxes and reduction in gift tax rate .......................... 90
TITLE II - ALTERNATIVE MINIMUM TAX REPEAL. ....................................................... 101
1. Repeal of alternative minimum tax ..................................................................... 101

TITLE Ill-BUSINESS

TAX REFORM ................................................................................... 108

A. Tax Rates .................................................................................................................. 108
1. Reduction in corporate tax rate ........................................................................... 108
B. Cost Recovery ........................................................................................................... 110
1. Increased expensing ............................................................................................ 110
C. Small Business Reform s ................................................................. .......................... 119
1. Expansion of section 179 expensing ................................................................... 119
2. Small business accounting method reform and simplification ........................... 121
3. Small business exception from limitation on deduction of business interest ..... 128
D. Reform of Business-related Exclusions , Deductions , etc... ...................................... 129
1. Interest. ................................................................................................................ 129
2. Modification of net operating loss deduction .............................. ....................... 134

/\MERICAi\

UST 000985

pVERSIGHT

11

TREAS-17-0313-I-000006

 3.
4.
5.
6.
7.
8.

Like-kind exchanges ofreal property ................................................................. 135
Revision of treatment of contributions to capital.. .............................................. 138
Repeal of deduction for local lobbying expenses ............................................... 139
Repeal of dedu ction for income attributable to dome stic production activities . 141
Entertainment, etc. expenses ............................................................................... 143
Unrelated business taxable income increased by amount of certain fringe
benefit expenses for which deduction is disallowed ........................................... 147
9. Limitation on deduction for FDIC premiums ..................................................... 149
10. Repeal of rollover of publicly traded securities gain into specialized small
business investment companies .......................................................................... 152
11. Certain self-created property not treated as a capita l asset ................................. 152
12. Repeal of special rule for sale or exchange of patent s ........................................ 154
13. Repeal of techn ical termination of partnerships ................................................. 155
E. Reform of Business Credits ...................................................................................... 156
1. Repeal of credit for clinical testing expenses for certain drugs for rare
diseases or conditions ......................................................................................... 156
2. Repeal of employer-provided child care credit ............................. ...................... 156
3. Repeal of rehabilitation credit.. ........................................................................... 157
4. Repeal of work opportunity tax credit ................................................................ 158
5. Repeal of deduction for certain unused business credits .................................... 160
6. Termination of new markets tax credit.. ............................................................. 160
7. Repeal of credit for expenditures to provide access to disabled individuals ...... 163
8. Modification of credit for portion of employer social security taxes paid
with respect to employee tips .............................................................................. 164
F. Energy Credits .......................................................................................................... 166
1. Modifications to credit for electricity produced from certain renewable
resources . .. .... .... .. .. .... .... .. .. .... .... .... .... .... .. .. .... .... .. .. .... .... .. .. .... .... .... .... .... .. .. .... .... .. 166
2. Modification of the energy investment tax credit.. ............................................. 167
3. Extension and phaseout ofresidential energy efficient propert y ........................ 171
4. Repeal of enhanced oil recovery credit.. ............................................................. 172
5. Repeal of credit for producing oil and gas from marginal wells ........................ 173
6. Modifications of credit for production from advanced nuclear power
facilities ............................................................................................................... 173
G. Bond Reforms ........................................................................................................... 176
1. Termination of private activity bonds .................................. ............................... 176
2. Repeal of advance refunding bonds .................................................................... 178
3. Repeal of tax credit bonds................................................................................... 180
4. No tax-exempt bonds for professional stadiums ............................ ..................... 183
H. Insurance ...................................................................................................................
1. Net operating losses of life insurance companies ...............................................
2. Repeal of small life insurance company deduction ............................................
3. Computation of life insurance tax reserves .......................... ...............................
4. Adjustment for change in computing reserves ....................................................

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186
186
187
187
189

lll

TREAS-17-0313-I-000007

 5. Modification of rules for life insurance prorat ion for purposes of determining
the dividends received deduction .............................. .......................................... 190
6. Repeal of special rule for distributions to shareholder s from pre-1984
policyholders surplus account ............................................................................. 193
7. Modification of proration rules for property and casualty insurance
companies ...................................... ................................................ ..................... 195
8. Modification of discounting rules for property and casualty insurance
companies ........................................................................................................... 195
9. Repeal of special estimated tax payments .......................................................... 198
10. Capitalization of certain policy acquisition expenses ......................................... 201
I.

Compensation ........................................................................................................... 202
1. Nonqualified deferred compensation .................................................................. 202
2. Modification of limitation on excessive employee remuneration ....................... 2 11
3. Excise tax on excess tax-exempt organization executive compensation ............ 214

TITLE IV-TAXATION
I.

OF FOREIGN INCOME AND FOREIGN PERSONS ................... 218

PRESENTLAW ............................................................................................................. 2 18
A. Principles Common to Inbound and Outbound Taxation .........................................
1. Residence ............................................................................................................
2. Entity classification .............................................................................................
3. Source of income rules........................................................................................
4. Intercompany transfers ........................................................................................

2 18
2 18
220
220
225

B. U.S. Tax Rules Applicable to Nonresident Aliens and Foreign Corporations
(Inbound) ................................................................................................................... 227
1. Gross-basis taxation ofU.S .-source income ....................................................... 227
2. Net-basis taxation of U.S.-source income ........................................................... 23 1
3. Special rules ........................................................................................................ 235

C. U.S. Tax Rules Applicable to Foreign Activities of U.S. Persons (Outbound) ........ 238
1. In general ....................................................... ................................................... .. 238
2. Anti-deferral regimes .......................................................................................... 238
3. Foreign tax credit ............................... ................................................ ................. 244
4. Special rules ........................................................................................................ 246
IL TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS ............................ 249
A. Establishment of Participation Exemption System for Taxation of Foreign
Income ................................................ ....................................................................... 249
1. Deduction for foreign-source portion of dividends received by domestic
corporations from specified 10-percent owned foreign corporations ................. 249
2. Application of participation exemption to investments in United States
property ............................................................................................................... 251
3. Limitation on losses with respect to specified 10-percent owned foreign
corporat ions ......................................................................................................... 252

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IV

TREAS-17-0313-I-000008

 4. Treatment of deferred foreign income upon transition to participation
exemption system of taxation .............................................................................

253

B. Modifications Related to Foreign Tax Credit System .............................................. 260
1. Repeal of section 902 indirect foreign tax credits; determination of
section 960 credit on current year basis .............................................................. 260
2. Source of income from sales of inventory determined solely on basis of
production activities ............................................................... ............ ................. 261
C. Modification of Subpart F Provi sions ...................................................... ................. 262
1. Repeal of inclusion based on withdrawal of previously excluded subpart F
income from qualified investment ...................................................................... 262
2. Repeal of treatment of foreign base company oil related income as subpart F
incom e .................................................................................................................
262
3. Inflation adjustment of de minimis exce ption for foreign base company
income .................................................................................................................
262
4. Look-thru rule for related controlled foreign corporations made permanent ..... 263
5. Modification of stock attribution rules for determining status as a controlled
foreign corporation ............................................. ................................................. 263
6. Elimination of requirement that corporation must be controlled for 30 days
before subpart F inclusions apply ....................................................................... 263
D. Preven tion of Base Erosion ....................................................................................... 265
1. Current year inclusion by United States shareholders with foreign high
returns .................................................................................................................
265
2. Limitation on deduction of interest by dome stic corporations which are
members of an international financial reporting group ............ ............ ............ ... 267
3. Excise tax on certain payments from dome stic corporations to related foreign
corporations ; election to treat such payments as effectively connected
income .................................................................................................................
269
E. Provision s Related to Possessions of the United States ............................................ 272
1. Extension of deduction allowable with respect to income attributable to
domestic production activities in Puerto Rico .................................................... 272
2. Extension of temporary increase in limit on cover over of rum excise taxes
to Puerto Rico and the Virgin Islands ................................................................. 273
3. Extension of American Samoa economic de velopment credit ............ .......... ..... 274
F. Other International Reforms .............. ....................................................................... 277
1. Restriction on insurance business exception to the passive foreign
investment company rules .............. .................................... ............ ..................... 277
2. Limitation on treaty benefits for certain deductible payments ........................... 278

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TREAS-17-0313-I-000009

 TITLE V-EXEMPT

ORGANIZATIONS .............................................. .................................. 280

A. Unrelated Business Income Tax ............................................................................... 280
1. Clarification of unrelated business income tax treatment of entities exempt

from tax under section 50l(a) ............................................................................. 280
2. Exclusion of research income from unrelated business taxable income
limited to publicly available research ................................................................. 281
B. Excise Taxes ............................................................................................................. 284
1. Simplification of excise tax on private foundation investment income .............. 284
2. Private operating foundation requirements relating to operation of an art
museum ............................................................................................................... 285
3. Excise tax based on investment income of private colleges and universities ..... 288
4. Provide an exception to the private foundation excess business holdings rules
for philanthropic business holdings .................................................................... 291
C. Requirements for Organizations Exempt From Tax ................................................. 295
1. Churches and certain other organizations permitted to make statements
relating to political campaign in ordinary course of activities in carrying out
exempt purpose ..................................... ............................................. ................. 295
2. Additional reporting requirements for donor advised fund sponsoring
organizations ....................................................................................................... 297

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TREAS-17-0313-I-000010

 INTRODUCTION

The House Committee on Ways and Means has scheduled a markup on November 6,
2017 , on H.R. I, the "Tax Cuts and Jobs Act." This document , 1prepared by the staff of tl1eJoint
Committee on Taxation, pro vides a description of the ''Tax Cuts and Job s Act .."

This document may be cited as follows: Joint Committee on Taxation, Desci-iption of H.R. 1, 1/,e ·'ra.
..
Cuts a11d Jobs Act " (JCX-50-17), November 3, 20 17. This document can be foHndalso on the Joint Committee on
Taxation website at www .jcLgov .
1

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TREAS-17-0313-I-000011

 TITLE I -TAX REFORM FOR INDWIDUALS
A. Simplification and Reform of Rates, Standard Deductions, and Exemptions
1. Reduction and simplification of individual income tax rates

Present Law
In general
To determine regular tax liab ility , an individu al taxpayer genera lly must apply the tax
rate sc hedule s (o r the tax tables) to his or her reg ular taxable income . The rate sc hedule s are
broken into several ranges of income , known as inco me bra ckets , and the marginal tax rate
increases as a taxpayer 's income increases .

Tax rate schedules
Separate rate schedu les apply based on an individual's
individual income tax rate sc hed ules are as follows:

filing status . For 20 17, the regular

Table 1.-Federal lndividuaJ Income Tax Rates for 2017 1

,l f ta:u,ble'income ,i_s:

'Then inq ui1e ta~ et1,uals:·
Single Jndivid11al
s

Not over $9,325

10% of the taxable income

Over $9,325 but not over $37,950

$932.50 plus 15% of the excess over $9,325

Over $37,950 but not over $91,900

$5,226.25 plus 25% of the excess over $37,950

Over $91,900 but not over $191,650

$ 18,713.75 plus 28% of the excess over $91,900

Over $ 191,650 but not over $416.700

$46,643.75 plus 33% of the excess over ~191,650

Over $416 ,700 but not over $418,400

$ 120,910.25 plus 35% of the excess over $416,700

Over $418,400

$ 121,505.25 plus 39.6% of the excess over $418,400
Heads of Households

Not over $ 13,350

10% of the taxable income

Over $ 13,350 but not over $50,800

$ 1,335 plus 15% oftbe excess over $13,350

Over $50,800 but not over $131,200

$6,952.50 plus 25% oftbe excess over $50,800

Over $ 13 L.200 but not over $212,500

$27,052.50 plus 28% of the excess over $ 131,200

Over $2 12,500 but not over $416,700

$49,816.50 p.lus 33% of the excess over $2 12,500

Over $416 ,700 but not over $444,550

$117,202.50 plus 35% of the excess over $416,700

Over $444,550

$126,950 plus 39.6% of the excess over $444,550

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TREAS-17-0313-I-000012

 If t.1xable income is:

Then income tax ~c.111
a ls:

Married /l1llivit/110/sFilillg .loi11tReturn s am/ Surviving Spouses
Not over $18 ,650

10% of the taxable income

Over $ 18,650 but not over $75,900

$1,865 plus 15% of the excess over $18,65 0

Over $75,900 but not over $ 153, 100

$ 10,452.50 plus 2.5% of the excess over $75,9 00

Over $ 153, 100 but not over $233 ,350

$29 ,752.50 plus 28% oftl1e excess over $ 153, 100

Over $233,35 0 but not over $416 ,700

$52 ,222 .50 plus 33% of the excess over $233,35 0

Over $416,700 but not over $470 ,700

$1 12,728 plus 35% oftbe excess over $4 16,700

Over $470,700

$ 131,628 plus 39 ,6% of the excess over $470 ,700
Mttrrie,I l11divid11alsFiling Separate Returns

Not ove r $9,32 5

10% of the taxable income

Over $9,325 but not over $37,950

$932.50 plus 15% of the excess over $9,325

Over $3 7,950 but not over $76,55 0

$5,226.25 plus 25% oftbe excess over $37,95 0

Over $76 ,550 but not over $116,675

$ 14,876.25 plus 28% of the excess over $76,550

Over $ 116,675 but not over $208,350

$26 ,111.25 plus 33% of the excess over $ 116,675

Over $208,35 0 but n ot over $235,350

$56 ,364 plus 35% of the excess over $208,350

Over $235, 350

$65 ,814 plus 39.6% of the excess over $235,350

1

Rev. Proc. 20 16-55 , 20 16-45 I.R.B. 707, sec. 3.0 I.

Unearned. income of children
Special rules (genera lly referred to as the "ki ddi e tax") apply to the net lmearued income
of certain chi ldren. 2 Generally , the kiddie tax appli es to a child if: ( 1) the child has notreached
the age of 19 by the clo se of the taxable year, or the child is a full-time student und er the age of
24, and either of the child 's parent s is alive at such time; (2) the child 's unearned income exceeds
$2, 100 (for 2017); and {3) the child does not file a j oint return .3 The kiddie tax applies
regard less of wheth er th e child may b e claimed as a depe ndent by either or both parents. For
childre n above age 17, the kiddie tax applies on ly to childr en whose earne d income does not
exceed one-half of the amount of their supp ort.
Under these rn les, the net un earned income of a child (for 201 7, unearned income over
$2, l 00) is taxed at the parents ' tax rates if the parents ' tax rates are higher than the tax rates of
2

Sec. l (g). Unless otl1erwiscslated, all section referencesare to tbe loternaJ Revenue Code of 1986, as
amended(the "Code").
3

Sec. I(g)(2).

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TREAS-17-0313-I-000013

 the child. 4 The remainder of a child's taxable income (i.e. , earned income , plus unearned income
up to $2, 100 (for 2017) , less the child's standard deduction) is taxed at the child's rates ,
regardless of whether the kiddie tax applies to the child. For these purposes , unearned income is
income other than wages, salaries , professional fees, other amounts received as compensation for
personal services actually rendered , and distributions from qualified disability trusts. 5 In
general, a child is eligible to use the preferential tax rates for qualified dividends and capital
gains. 6
The kiddie tax is calculated by computing the "allocable parental tax." This involves
adding the net unearned income of the child to the parent's income and then applying the
parent's tax rate. A child's " net unearned income " is the child's unearned income less the sum
of (I) the minimum standard deduction allowed to dependents ($1 ,050 for 20 I 7 7) , and (2) the
greater of ( a) such minimum standard deduction amount or (b) the amount of allowable itemized
deductions that are directly connected with the production of the unearned income. 8
The allocable parental tax equals the hypothetical increase in tax to the parent that results
from adding the child's net unearned income to the parent's taxable income. 9 If the child has net
capital gains or qualified dividends , these items are allocated to the parent ' s hypothetical taxable
income according to the ratio of net unearned income to the child ' s total unearned income. If a
parent has more than one child subject to the kiddie tax, the net unearned income of all children
is combined , and a single kiddie tax is calculated. Each child is then allocated a proportionate
share of the hypothetical increase , based upon the child ' s net unearned income relative to the
aggregate net unearned income of all of the parent's children subject to the tax.
Generally , a child must file a separate return to report his or her income. 10 In such case ,
items on the parents' return are not affected by the child ' s income , and the total tax due from the
child is the greater of:
1. The sum of (a) the tax payable by the child on the child's earned income and unearned

income up to $2,100 (for 2017) , plus (b) the allocable parental tax on the child's
unearned income , or

4

Special rules apply for determining which parent 's rate applies where a jo int return is not filed.

5

Sec. l (g)(4) and sec. 9 1 l(d )(2).

6

Sec. l (h).

7

Sec. 3.02 o f Rev. Proc. 20 16-55, supra.

8

Sec. l(g)(4).

9

Sec. 1(g)(3) .

10

Sec. I (g)(6). See Form 86 15, Tax for Certain Children Who Have Unearn ed Income.

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TREAS-17-0313-I-000014

 2. The tax on the child's income without regard to the kiddie tax provisions . 11
Under certain circumstances , a parent may elect to report a child 's unearned income on
the parent ' s return. 12
Indexing tax provisions for inflation

Under present law, many parameters of the tax system are adjusted for inflation to protect
taxpayers from the effects of rising prices. Most of the adjustments are based on annual changes
in the level of the Consumer Price Index for all Urban Consumers ("CPI-U "). 13 The CPI-U is an
index that measures prices paid by typical urban consumers on a broad range of products , and is
developed and published by the Department of Labor.
Among the inflation-indexed tax parameters are the following individual income tax
amounts : (1) the regular income tax brackets ; (2) the basic standard deduction ; (3) the additional
standard deduction for aged and blind; (4) the personal exemption amount ; (5) the thresholds for
the overall limitation on itemized deductions and the personal exemption phase-out ; (6) the
phase-in and phase-out thre sholds of the earned income credit ; (7) IRA contribution limits and
deductible amounts ; and (8) the saver ' s credit
Capita l Gains Rates
In general

In the case of an individual, estate, or trust, any adjusted net capital gain which otherwise
would be taxed at the 10- or 15-percent rate is not taxed. Any adjusted net capital gain which
otherwise would be taxed at rates over 15-percent and below 39.6 percent is taxed at a 15percent rate. Any adjusted net capital gain which otherwise would be taxed at a 39.6-percent rate
is taxed at a 20-percent rate.
The unrecaptured section 1250 gain is taxed at a maximum rate of 25 percent , and 28percent rate gain is taxed at a maximum rate of 28 percent. Any amount of unrecaptured section
1250 gain or 28-percent rate gain otherwise taxed at a 10- or 15-percent rate is taxed at the
otherwise applicable rate.
In addition , a tax is imposed on net investment income in the case of an individual , estate,
or trust. In the case of an individual , the tax is 3.8 percent of the lesser of net investment income ,
which includes gains and dividends , or the excess of modified adjusted gross income over the
threshold amount. The threshold amount is $250,000 in the case of a joint return or surviving
spouse, $ I 25,000 in the case of a married individual filing a separate return, and $200,000 in the
case of any other individual.

11

Sec. I (g)( l ) .

12

Sec. l( g)(7).

13

Sec. I (f)(S) .

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TREAS-17-0313-I-000015

 Definitions
Net capital gain

In general , gain or loss reflected in the value of an asset is not recognized for income tax
purposes until a taxpayer disposes of the asset. On the sale or exchange of a capital asset, any
gain generally is included in income. Net capital gain is the excess of the net long-term capital
gain for the taxable year over the net short-term capital loss for the year. Gain or loss is treated
as long-term if the asset is held for more than one year.
A capital asset generally means any property except (1) inventory , stock in trade, or
property held primarily for sale to customers in the ordinary course of the taxpayer's trade or
business , (2) depreciable or real property used in the taxpayer ' s trade or business , (3) specified
literary or artistic property , (4) business accounts or notes receivable , (5) certain U.S.
publications , (6) certain commodity derivative financial instruments , (7) hedging transactions ,
and (8) business supplies. In addition , the net gain from the disposition of certain property used
in the taxpayer ' s trade or business is treated as long-term capital gain. Gain from the disposition
of depreciable personal property is not treated as capital gain to the extent of all previous
depreciation allowances. Gain from the disposition of depreciable real property is generally not
treated as capital gain to the extent of the depreciation allowances in excess of the allowances
available under the straight-line method of depreciation.
Adjusted net capital gain
The "adjusted net capital gain" of an individual is the net capital gain reduced (but not
below zero) by the sum of the 28-percent rate gain and the umecaptured section 1250 gain. The
net capital gain is reduced by the amount of gain that the individual treats as investment income
for purposes of determining the investment interest limitation under section 163(d).
Qualified dividend income
Adjusted net capital gain is increased by the amount of qualified dividend income.
A dividend is the distribution of property made by a corporation to its shareholders out of
its after-tax earnings and profits. Qualified dividends generally includes dividends received from
domestic corporations and qualified foreign corporations. The term "qualified foreign
corporation " includes a foreign corporation that is eligible for the benefits of a comprehensive
income tax treaty with the United States which the Treasury Department determines to be
satisfactory and which includes an exchange of information program. In addition , a foreign
corporation is treated as a qualified foreign corporation for any dividend paid by the corporation
with respect to stock that is readily tradable on an established securities market in the United
States.
If a shareholder does not hold a share of stock for more than 60 days during the 121-day
period beginning 60 days before the ex-dividend date (as measured under section 246(c)) ,
dividends received on the stock are not eligible for the reduced rates. Also, the reduced rates are
not available for dividends to the extent that the taxpayer is obligated to make related payments
with respect to positions in substantially similar or related property.

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TREAS-17-0313-I-000016

 Dividends received from a corporation that is a passive foreign investment company (as
defined in section I 297) in either the taxable year of the distribution , or the preceding taxable
year, are not qualified dividends.
A dividend is treated as investment income for purposes of determining the amount of
deductible investment interest only if the taxpayer elects to treat the dividend as not eligible for
the reduced rates.
The amount of dividends qualifying for reduced rates that may be paid by a regulated
investment company ("RIC ") for any taxable year in which the qualified dividend income
received by the RIC is less than 95 percent of its gross income (as specially computed) may not
exceed the sum of (1) the qualified dividend income of the RIC for the taxable year and (2) the
amount of earnings and profits accumulated in a non-RIC taxable year that were distributed by
the RIC during the taxable year.
The amount of qualified dividend income that may be paid by a real estate investment
trust ("REIT ") for any taxable year may not exceed the sum of (I) the qualified dividend income
of the REIT for the taxab le year, (2) an amount equal to the excess of the income subject to the
taxes imposed by section 857(b)(l) and the regulations prescribed under section 337(d) for the
preceding taxable year over the amount of these taxes for the preceding taxable year, and (3) the
amount of earnings and profits accumulated in a non-REIT taxable year that were distributed by
the REIT during the taxable year.
Dividends received from an organization that was exempt from tax under section 501 or
was a tax-exempt farmers ' cooperative in either the taxable year of the distribution or the
preceding taxable year; dividends received from a mutual savings bank that received a deduction
under section 591; or deductible dividends paid on employer securities are not qualified dividend
mcome.
28-percent rate gain
The term "28-percent rate gain" means the excess of the sum of the amount of net gain
attributable to long-term capital gains and losses from the sale or exchange of collectibles (as
defined in section 408(m) without regard to paragraph (3) thereof) and the amount of gain equal
to the additional amount of gain that would be excluded from gross income under section 1202
(relating to certain small business stock) if the percentage limitations of section I 202(a) did not
apply, over the sum of the net short-term capital loss for the taxable year and any long-term
capital loss carryover to the taxable year.
Unrecaptured section 1250 gain
"Unrecaptured section 1250 gain" means any long-term capital gain from the sale or
exchange of section 1250 property (i.e., depreciable real estate) held more than one year to the
extent of the gain that would have been treated as ordinary income if section 1250 applied to all
depreciation , reduced by the net loss (if any) attributable to the items taken into account in
computing 28-percent rate gain. The amount of unrecaptured section 1250 gain (before the
reduction for the net loss) attributable to the disposition of property to which section 1231

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TREAS-17-0313-I-000017

 (relating to certain property used in a trade or business) applies may not exceed the net section
1231 gain for the year.
Description of Proposal
Modification of rates
The proposal replaces the individual income tax rate structure with a new rate structure.
The new rate structure generally has four rates: 12 percent , 25 percent , 35 percent , and 39.6
percent. 14 The 25-percent rate bracket begins at taxable income of $90,000 for joint returns ,
$67,500 for heads of household , $2,550 for estates and trusts , and $45,000 for other individuals.
The 35-percent rate bracket begins at taxable income of $260,000 for joint returns , $9,150 for
estates and trusts , and $200,000 for other individuals. The 39.6-percent rate bracket begins at
taxable income of $1,000 ,000 for joint returns , $12,500 for estates and trusts , and $500,000 for
other individuals.
The bracket thresholds are all adjusted for inflation and then rounded to the next lowest
multiple of $ 100 in future years. Unlike present law (which uses a measure of the consumer
price index for all-urban consumers) , the new inflation adjustment uses the chained consumer
price index for all-urban consumers.
Phaseout of benefit of the 12-percent bracket
For taxpayers with adjusted gross income in excess of $1,000,000 ($1,200,000 in the case
of married taxpayers filing jointly) , the benefit of the 12-percent bracket , as measured against the
39.6-percent bracket , is phased out at a rate of 6-percent for taxpayers whose AGI is in excess of
these amounts. Thus , in the case of a married taxpayer filing a joint return , if AGI is in excess of
$ 1,200,000, regardless of the character of that income , the taxpayer ' s marginal rate increases by
6-percent while the benefit of $24,840 (27.6-percent of $90,000) phases out over a range of
$414,000.
Simplification of tax on unearned income of children
The proposal simplifies the "kiddie tax " by effectively applying the rates applicable to
trusts , without the 12-percent rate applicable to trusts , to the net unearned income of a child to
whom the proposal applies. Specifically , the amount of taxable income taxed at a 12-percent
rate may not exceed the amount of taxable income in excess of the net unearned income of the
child. The amount of taxable income taxed at rates below 35 percent may not exceed sum of ( 1)
the taxable income in excess of the net unearned income of the child plus (2) the amount of
taxable income not in excess of the 35-percent bracket threshold applicable to a trust. The
amount of taxable income taxed at rates below 39.6 percent may not exceed sum of (1) the
taxable income in excess of the net unearned income of the child plus (2) the amount of taxable
income not in excess of the 39.6-percent bracket threshold applicable to a trust.

14
In all cases tbe bracket breakpoints for married taxpayers filing a separate return are one-balf o f tbe
breakpoints for married taxpa yers filing jointl y.

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TREAS-17-0313-I-000018

 The following examples illustrate the application of the proposal:
Example I .- Assume a child to whom the "kiddie tax" applies has $60,000 taxable
income of which $50,000 is net unearned income, which would otherwise be treated as ordinary
income, such as interest. Assume the 25-percent bracket threshold amount for the taxable year is
$45,000 for an unmarried taxpayer , and the 35-percent and 39.6-percent bracket thresholds for a
trust are $9,150 and $12,500 respectivel y.
The child ' s 25-percent bracket threshold is $10,000 ($60,000 less $50,000), 35-percent
bracket threshold is $ 19,150 ($ 10,000 plus $9,150), and 39.6-percent bracket threshold is
$22,500 ($ 10,000 plus $12,500). Thus , $ 10,000 is taxed at a 12-percent rate , $9,150 at a 25percent rate, $3,350 at a 35-percent rate, and $37,500 at a 39.6-percent rate .
Example 2.-Assume the same facts as Example 1 except that the amount of the child ' s
net unearned income is $20,000 (rather than $50,000).
The child ' s 25-percent bracket threshold is $40,000 ($60,000 less $50,000), 35-percent
bracket threshold is $49,150 ($40,000 plus $9,150), and the 39.6-percent bracket threshold is
$52,500 ($40,000 plus $12,500). Thus , $40,000 is taxed at a IO-percent rate, $9,150 at a 25percent rate, $3,350 at a 35-percent rate, and $7,500 at a 39.6-percent rate.
Replacing CPI-U with chained CPI-U

The proposal requires the use of the chained CPI-U ("C-CPI-U ") to index tax parameters
currently indexed by the CPI-U. The C-CPI-U is also developed and published by the
Department of Labor, and differs from the CPI-U in that it accounts for the ability of individuals
to alter their consumption patterns in response to relative price change s. Values that are reset for
2018, such as the bracket thresholds and standard deduction , are indexed by the C-CPI-U in
taxable years beginning after December 31, 20 I 8. Other indexed values in the code switch from
CPI indexing to C-CPI-U indexing going forward in taxable years beginning after December 31,
2017.
However , the proposal contains an overriding provision to require that all indexing
throughout the bill uses the CPI, instead of the C-CPI-U , with respect to periods before January
1, 2023. In effect, all cost-of-living adjustments use the CPI through 2022. In 2023 , cost-ofliving adjustments use the C-CPI-U going forward.
Maximum rates on capital gains and qualified dividends

The proposal generally retains the present-law maximum rates on net capital gain and
qualified dividends. The breakpoints between the zero- and 15-percent rates (" 15-percent
breakpoint ") and the 15- and 20-percent rates ("20-percent breakpoint") are the same amounts as
the breakpoints under present law, except the breakpoints are indexed using the C-CPI-U in
taxable years beginnin g after 2017. Thus , for 2018 , the 15-percent breakpoint is $77,200 for
joint returns and surviving spouses ( one-half of this amount for married taxpaye rs filing
separately) , $51,700 for heads of household , $2,600 for estates and trusts, and $38,600 for other
unmarried individuals. The 20-percent breakpoint is $479,000 for joint returns and surviving

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 spouses (one-half of this amount for married taxpayers filing separately), $452,400 for heads of
household , $12,700 for estates and trusts , and $425,800 for other unmarried individuals.
Therefore , in the case of an individual (including an estate or trust) with adjusted net
capital gain, to the extent the gain would not result in taxable income exceeding the 15-percent
breakpoint is not taxed . Any adjusted net capital gain which would result in taxable income
exceeding the 15-percent breakpoint but not exceeding the 20-percent breakpoint is taxed at 15
percent. The remaining adjusted net capital gain is taxed at 20 percent.
As under present law, unrecaptured section 1250 gain generally is taxed at a maximum
rate of 25 percent , and 28-percent rate gain is taxed at a maximum rate of 28 percent.
Effective Date

The proposal is effective for taxable years beginning after December 31, 2017.
2. Enhancement of standard deduction
Present Law

Under present law, an individual who does not elect to itemize deductions may reduce his
adjusted gross income ("AGI") by the amount of the applicable standard deduction in arriving at
his taxable income. The standard deduct ion is the sum of the basic standard deduction and, if
applicable , the additional standard deduction. The basic standard deduction varies depending
upon a taxpayer's filing status. For 2017, the amount of the basic standard deduction is $6,350
for single individuals and married individuals filing separate returns, $9,350 for heads of
households , and $12,700 for married individuals filing a joint return and surviving spouses. An
additional standard deduction is allowed with respect to any individual who is elderly or blind. 15
The amount of the standard deduction is indexed annually for inflation.

In the case of a dependent for whom a deduction for a personal exemption is allowed to
another taxpayer , the standard deduction may not exceed the greater of (i) $1,050 (in 2017) or
(ii) the sum of$350 (in 2017) plus the individual ' s earned income.
Description of Proposal

The proposal increases the standard deduction for individuals across all filing statuses .
Under the proposal , the amount of the standard deduction is $24,400 for married individuals
filing a joint return, $18,300 for head-of-household filers, and $12,200 for all other taxpay ers.

15

For 2017 , the additiona l amount is $ 1,250 for married taxpayers (for each spouse meeting the applicabl e
criterion) and surviving spouses. The additional amount for single individuals and heads of hous eholds is $1, 550 .
An individual who qualifies as both blind and elderly is entitled to two additional standard deductions , for a total
additional amount (for 20 I 7) of $2,500 or $3,100, as applicable.

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 The amount of the standard deducti on is indexed for inflation using the cha ined consumer price
index for all-urban consumer s for taxable years beginnin g after Dece mber 31, 2019 . 16
The proposal eliminate s the additional standard deduction for the aged and the blind .

Effective Date
The propo sal is effec tive for taxable years be ginnin g after December 31 , 2017.

3. Repeal of deduction for personal exemptions
Present Law
Under present law , in determining taxable income , an individual red uces A GI by any
personal exemp tion deductions and either the appli cable standard deduction or his or her
itemiz ed deductions. Personal exemptions generall y are allowed for the taxpayer , his or her
spouse, and any dependents. For 2017 , the amount deductible for each perso nal exemption is
$4,050. This amount is indexed annually for inflation. The persona l exemption amount is
phased out in the case of an individual with AGI in excess of $313,800 for taxpay ers filing
jointl y, $287 ,650 for heads of household and $261 ,500 for all other filers. In addition , no
personal exemption is allowed in the case of a dependent if a deduction is allowed to anot her
taxpayer.
Withho lding rules
Under pre sent law, the amount of tax required to be withheld by emplo yers from a
taxpayer ' s wages is based in pa rt on the number of with hold ing exemptions a taxpayer claim s on
his Form W-4. An emp loyee is entitled to the following exemption s: (1) an exem pt ion for
himself , unl ess he allowed to be claimed as a dependent of another person; (2) an exem ption to
which the employee's spouse would be entitled , if that spouse does not file a Form W-4 for that
taxable year claiming an exemption described in (l) ; (3) an exemption for each individual who is
a dependen t (but only if the emp loyee's spouse has not also claimed such a withhold ing
exem ption on a Form W-4) ; (4) additional withhold ing allowances (takin g into account estimat ed
itemized deductions , estimated tax credits , and additional deduction s as provided by the
Secretary of the Treasur y); and (5) a standard deduction allowance.
Filin g requirements
Under pr esent law , an unmarried individual is required to file a tax return for the taxable
year if in that year the individual had income which equal s or exceeds the exemption amount
plus the standard deduction applicable to such individua l (i.e., single , head of hou sehold , or
surviving spouse) . An indi vidual entitled to file a joint return is required to do so un less that
individual ' s gross income , when com bined with the individual's spouse ' s gross income fo r the
taxable year , is less than the sum of twice the exemption amount plus the basic standard

16

Thus , the standard deduc tion is the same for 2018 and 2019.

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 deduction applicable to a joint return , provided that such individual and his spouse , at the close
of the taxable year, had the same household as their home.
Trusts and estates
In lieu of the deduction for personal exemptions , an estate is allowed a deduction of
$600. A trust is allowed a deduction of $ 100; $300 if required to distribute all its income
currently ; and an amount equal to the personal exemption of an individual in the case of a
qualified disability trust.

Description of Proposal
The proposal repeals the deduction for personal exemptions.
The proposal modifies the requirements for those who are required to file a tax return. In
the case of an individual who is not married , such individual is required to file a tax return if the
taxpayer's gross income for the taxable year exceeds the applicable standard deduction.
Married individuals are required to file a return if that individual ' s gross income , when combined
with the individual's spouse ' s gross income for the taxable year, is more than the standard
deduction applicable to a joint return , provided that: (i) such individual and his spouse , at the
close of the taxable year , had the same household as their home ; (ii) the individual ' s spouse does
not make a separate return ; and (iii) neither the individual nor his spouse is a dependent of
another taxpayer who has income (other than earned income) in excess of $500 (indexed for
inflation).
The proposal repeals the enhanced deduction for qualified disability trusts.
The proposal provides that the Secretary of the Treasury shall develop rules to determine
the amount of tax required to be withheld by employers from a taxpayer ' s wages.

Effective Date
The proposal is effective for taxable years beginning after December 31, 2017.

4. Maximum rate on business income of individuals
Present Law
Individual income tax rates
To determine regular tax liability , an individual taxpaye r generally must apply the tax
rate schedules (or the tax tables) to his or her regular taxable income. The rate schedules are
broken into several ranges of income , known as income brackets , and the marginal tax rate
increases as a taxpayer ' s income increases. Separate rate schedules apply based on an
individual ' s filing status (i.e, single, head of household , married filing jointly , or married filing
separately). For 2017 , the regular individual income tax rate schedule provides rates of 10, 15,
25, 28, 33, 35, and 39.6 percent.

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 Under present law, no separate or different tax rate schedule applies to business income
of individuals from partnerships , S corporations, or sole proprietorships .
Partnerships
In general

Partnerships generally are treated for Federal income tax purposes as pass-through
entities not subject to tax at the entity level. 17 Items of income (including tax-exempt income) ,
gain, loss, deduction, and credit of the partnership are taken into account by the partners in
computing their income tax liability (based on the partnership 's method of accounting and
regardless of whether the income is distributed to the partners). 18 A partner's deduction for
partnership losses is limited to the partner's adjusted basis in its partnership interest. 19 Losses
not allowed as a result of that limitation generally are carried forward to the next year. A
partner 's adjusted basis in the partnership interest generally equals the sum of (1) the partner 's
capital contributions to the partnership , (2) the partner's distributive share of partnership income ,
and (3) the partner 's share of partnership liabilities , less (I) the partner's distributive share of
losses allowed as a deduction and certain nondeductible expenditures, and (2) any partnership
distributions to the partner. 20 Partners generally may receive distributions of partnership
property without recognition of gain or loss, subject to some exceptions. 21
Partnerships may allocate items of income , gain, loss , deduction , and credit among the
partners, provided the allocations have substantial economic effect. 22 In general, an allocation
has substantial economic effect to the extent the partner to which the allocation is made receives
the economic benefit or bears the economic burden of such allocation and the allocation
substantially affects the dollar amounts to be received by the partners from the partnership
independent of tax consequences. 23

17

Sec. 701.

18

Sec. 702(a).

19
Sec. 704(d). In addition , passive loss and at-risk limitations limit the extent to which certain types of
income can be offset by partnership deductions (sections 469 and 465). These limitations do not apply to corporate
partners (except certain closely-held corporations) and may not be important to individual partners who have
partner-level passive income from other investments.
20

Sec. 705.

21

Sec. 731. Gain or loss may nevertheless be recognized, for example , on the distribution of money or
marketable securities , distributions with respect to contributed property , or in the case of disproportionate
distributions (which can result in ordinary income).
22

Sec. 704(b)(2).

23

Treas. Reg. sec . I. 704-1 (b)(2).

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 Limited liability companies
State laws of every State provide for limited liabilit y companies 24 ("LLCs"), which are
neither partnerships nor corporat ions under applicable State law, but which are genera lly treated
as partnerships for Federa l tax purposes. 25
Publicly traded partners hips
Under present law, a publicly traded partnership genera lly is treated as a corporation for
Federal tax purposes. 26 For this purpose, a publicl y traded partnership means any partnership if
interests in the partnership are traded on an established securities market or interests in the
partnership are readily tradable on a secondary market (or the substantia l equivalent thereof). 27
An exception from corporate treatment is provided for certai n publicly traded
partnerships , 90 percent or more of whose gross income is qualifying income. 28

24

The first LLC statute was enacted in Wyoming in 1977. All States (and the District of Columbia) now
have an LLC statute, though the tax treatment ofLLCs for State tax purposes may differ.
25

Under Treasury regu lations promul gated in l 996, any domestic nonpublicly traded unincorporated entity
with two or more members generally is treated as a partnership for federal income tax purposes , while any singlemember domestic unincorporat ed entity generally is treated as disregarded for Federal income tax purposes (i.e. ,
treated as not separate from its owner). lnstead of the applica ble default treatment , however , an LLC may elect to be
treated as a corporation for Federal income tax purposes. Treas. Reg. sec. 301.770 1-3. These are known as the
"check -the-box" regu lations.
26

Sec. 7704 (a). The reasons for change stated by the Ways and Means Committee when the provision was
enacted provide in part: "[t]he recent pro liferation of pub licly traded partnerships has come to the committee's
attent ion. The growth in such partnerships has caused concern about long-tenn erosion of the corporate tax base."
H.R. Rep. 100-391, Omnibu s Reconciliation Act of 1987, Octobe r 26, 1987, p. 1065.
27

Sec. 7704(b ).

28

Sec. 7704 (c)(2). Qualifying income is defined to include interest, dividends , and gains from the
disposition of a capital asset (or of proper ty described in section 123 l (b)) that is held for the production of income
that is qua lifying income. Sec . 7704(d). Qualifying income also includes rents from real property, gains from the
sale or other disposition of real property, and income and gains from the exploration , development , mining or
production, processin g, refining, transportation (including pipelines transporting gas, oil, or products thereof) , or the
marketing of any mineral or natural resource (including fertilizer , geothermal energy , and timber), industrial source
carbon dioxide , or the transportation or storage of certain fuel mixtures , alternative fuel, alcohol fuel, or biodiesel
fuel. It also includes income and ga ins from commodities (not described in section 1221(a)( I)) or futures , options ,
or forward contracts with respect to such commodities (including foreign currency transactions of a commodity
pool) where a principal activity of the partnership is the buying and selling of such commod ities, futures, options, or
forward contracts. However , the exception for partnerships with qualifying income does not apply to any
partnership resembling a mutual fund (i.e., that would be described in section 851 (a) if it were a domestic
corporation) , which includes a corporation registered under the Investment Company Act of 1940 (Pub. L. No . 76768 (1940)) as a management company or unit investment trust (sec. 7704(c)(3)).

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 S corporations
Genera lly
For Federa l income tax purposes, an S corporat ion 29 generally is not subject to tax at the
corporate level. 30 Items of income (including tax-exempt income) , gain, loss , deduction , and
credit of the S corporation are taken into account by the S corporation shareho lders in computing
their income tax liabiliti es (based on the S corporat ion's method of accountin g and regardles s of
whet her the income is distributed to the shareho lde rs). A shareho lder's deduction for corporate
losses is limited to the sum of the shareho lder's adju sted basis in its S corporation stock and the
indebtedness of the S corporation to such shareho lder. Losses not allowed as a result of that
limitat ion genera lly are carried forward to the next year. A sha reho lder's adjusted basis in the
S corporat ion stock genera lly equal s the sum of (1) the shareho lder's capital contr ibutions to the
S corporation and (2) the shareho lder's pro rata share of S corporation income , less (1) the
shareholder's pro rata share of losses allowed as a deduction and certain nondeductible
expe nditur es, and (2) any S corporat ion distributions to the shareho lder. 31
In genera l, an S corporatio n share holder is not subj ect to tax on corporate distributions
unless the distributions exceed the shareholde r 's basis in the stock of the corporation.
S corporations that were previously C corporations
There are two princ ipal excep tions to the genera l pass-thro ugh treatmen t of
S corporations. Both are applicable only if the S corporatio n was previous ly a C corporation.
The first applies when the C corporation had appreciated asse ts, 32 and the second app lies when
the C corporation had accum ulat ed earnings and profits. 33

29

An S corporation is so named because its Federal tax treatment is governed by subchapter S of the Code.

30

Secs. 1363 and 1366.

31 Sec. 1367. If any amount that woul d reduce the adjusted basis ofa shareholder ' s S corporation stock
exceeds the amount that wou ld reduce that basis to zero, the excess is app lied to reduce (but not below zero) the
shareholder 's basis in any indebtedness of the S corporation to the shareholder. If, after a reduct ion in the basis of
such indebtednes s, there is an event that would increase the adju sted basis of the shareholder's S corporation stock ,
such increase is instead first applied to restore the reduction in the basis of the shareholder 's indebtedness.
Sec. 1367(b)(2).
32
Sec. 1374. The per iod was seven years for taxable years beginning in 2009 and 2010 , and five years for
taxable years beginning in 201 1, 2012, 2013, and 2014. Ifa C corporation elects to be an S corporation (or transfers
assets to an S corporation in a carryover basis transaction) , certain net built-in gains that are attributable to the
period in which it was a C corporation , and that are recognized during the first five years in which the former
C corporation is an S corporation , are subject to corporate-level tax.
33

Sec. 1375. An S corpora tion with accumulated earnings and profits is subject to corporate tax on excess
net passive investment income (but not in excess of its taxable income , subject to certain adjustments) , if more than
25 percen t of its gross receipts for the year are passive investment income. Subchapter C earnings and profits
genera lly refers to the earnings of the corporation prior to its subchapter S election which would have been taxable
as dividends if distributed to shareho lders by the corporation prior to its subchapter S election. If the S corporat ion

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 Electing S corporation status
To be eligible to elect S corporation status, a corporation may not have more than
100 shareholders and may not have more than one class of stock. 34 Only individuals (other than
nonresident aliens), certain tax-exempt organizations, and certain trusts and estates are permitted
shareholders of an S corporation.

Sole proprietorships
Unlike a C corporation, partnership , or S corporation, a business conducted as a sole
proprietorship is not treated as an entity distinct from its owner for Federal income tax
purposes. 35 Rather, the business owner is taxed directly on business income, and files
Schedule C (sole proprietorships generally), Schedule E (rental real estate and royalties), or
Schedule F (farms) with his or her individual tax return. Furthermore, transfer of a sole
proprietorship is treated as a transfer of each individual asset of the business . Nonetheless, a sole
proprietorship is treated as an entity separate from its owner for employment tax purposes, 36 for
certain excise taxes, 37 and certain information reporting requirements. 38

Self-employment tax
As part of the financing for Social Security and Medicare benefits, a tax is imposed on
the wages of an individual received with respect to his or her employment under the Federal

continues to have C corporation earnings and profits and has gross receipts more than 25 percent of which are
passive investment income in each year for three consecutive years, the S corporation election is automatically
terminated. Sec. 1362(d)(3). Further, while an S corporation shareholder generally is not subject to tax on corporate
distributions unless the distributions exceed the shareholder's basis in the stock of the corporation , distributions
from an S corporation that was formerly a C corporation genera lly are taxed to shareholders as dividends to the
extent of the S corporation 's accumulated earnings and profits. Sec. 1368.
The seco nd principal exception also applies to appreciated assets that are transferred by a C corporation to
an S corporation in a carryover basis transaction.
34

Sec. 1361. For this purpose , a husband and wife and all members ofa family are treated as one
shareholder. Sec. 136l(c)(l).
35

A single-member unincorporated entity is disregarded for Federal income tax purposes , unless its owner
elects to be treated as a C corporation. Treas. Reg. sec. 30l.7701-3(b)(l)(ii). Sole proprietorships often are
conducted through legal entit ies for nontax reasons . While sole proprietorships generally may have no more than
one owner , a married couple that files a joint return and jointly owns and operates a business may elect to have that
business treated as a sole proprietorship U11dersection 76 I (f).
36

Treas. Reg. sec. 301.7701 -2(c)(2)(iv).

37

Treas. Reg. sec. 301.7701 -2(c)(2)(v).

38

Treas. Reg. sec. 301.7701 -2(c)(2)(vi).

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 Insurance Contributions Act ("FICA"). 39 A similar tax is imposed on the net earnings from selfemployment of an individual under the Self-Employment Contributions Act ("SECA"). 40
The SECA tax rate is the combined employer and employee rate for FICA taxes. 41 Under
the OASDI component, the rate of tax is 12.4 percent and the amount of earnings subject to this
component is capped at $127,200 for 2017. Under the HI component, the rate is 2.9 percent, and
the amount of self-employment income subject to the HI component is not capped. An
additiona l 0.9 percent HI tax applies to self-employment income in excess of the same threshold
amount that is applicable under FICA (reduced by FICA wages) .
For SECA tax purposes , net earnings from self-employment generally includes the gross
income derived by an individual from any trade or business carried on by the individual, less the
deductions attributable to the trade or business that are allowed under the self-employmen t tax
rules. 42 Net earnings from self-emp loyment generally includes the distributive share of income
or loss from any trade or business of a partnership in which the individua l is a partner.
Specified types of income or loss are excluded, such as rentals from real estate in certa in
circumstances, dividends and interest, and gains or loss from the sale or exchange of a capita l
asset or from timber, certain minerals , or other property that is neither inventory nor held
primarily for sale to customers.

39

See Chapter 21 of the Code.

40

Sec. I 40 I.

41

The FICA tax has two components. Under the old-age , survivors , and disability insurance component
("OASDI "), the rate of tax is 12.4 percent, halfofwhich is imposed on the employer , and the other halfofwhich is
imposed on the employee. Th e amount of wages subject to this component is capped at $127 ,200 for 2017. Under
the hospita l insurance ("HI") component , the rate is 2.9 percent , also split equally between the emp loyer and the
employee. The amount of wages subject to the HI component of the tax is not capped. The emp loyee portion oftbe
HI tax under FICA (not the employer portion) is increased by an additional tax of 0.9 percent on wages received in
excess of a threshold amount. The threshold amow1t for the add itional 0.9 percent is $250 ,000 in the case of a joint
return , $ 125,000 in the case of a married individual filing a separate return, and $200,000 in any other case. The
threshold amount is not indexed for inflation. The wages of individuals employed by a bus iness in any form (for
example, a C corporation) generall y are subject to the FICA tax. The employee portion of the FICA tax is collected
through withhold ing from wages. Secs. 310 I, 3102, and 3111.
42

For purposes of determining net earn ings from self-emp loyment , taxpayers are permitted a deduction
from net earnings from self-employment equa l to the product of the taxpayer's net earnings (determined without
regard to this deduc tion) and one-half of the smn oftbe rates for OASDI (12.4 percent) and HI (2.9 percent) , i.e.,
7.65 percent of net earnings. This deduction reflects the fact that the FICA rates apply to an employee's wages,
which do not include FICA taxes paid by the employer , whereas a self-em ployed individual's net earnings are
economically the equivalent ofan employee's wages plus the employer share of FICA taxes. The deduc tion is
intended to provide parity between FICA and SECA taxes. In addition , self-employed individua ls may deduct onehal fof self-employment taxes for income tax purposes under section l 64(t).

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 An S corporation shareholder ' s pro rata share of S corporation income is not subject to
SECA tax. 43 Nevertheless , courts have held that an S corporation shareholder is subject to FICA
tax on the amount of his or her reasonable compensation , even though the amount may have
been characterized by the taxpayer as other than wages . This treatment differs from a partner ' s
distributive share of income or loss from the partnership ' s trade or business , which is generally
subject to SECA tax. Howe ver, in determinin g a limited partner ' s net earnings from selfemployment , an exclusion is generally provided for his or her distributive share of partnership
income or loss. The exclusion does not apply with respect to guaranteed payments to the limit ed
partner for services actually rendered to or on behalf of the partnership to the extent that those
payments are established to be in the nature of remuneration for those services .44

Under the Social Security Act , OASDI taxes are directed to Treasury trust funds that
provide Social Security benefits , and HI taxes are directed to the Federal Hospital Insurance
Trust Fund .

Description of Proposal
Qualified bu siness income of an individual from a partnership , S corporation , or sole
proprietorship is subject to Federal income tax at a rate no higher than 25 percent. Qualified
business income means , generally , all net business income from a passive business activity plus
the capital percentage of net business income from an active business activity, reduced by
carryo ver business losses and by certain net bu siness losses from the current year , as determined
under the provision.

Determination of rate
The provision provides that an individual' s tax is reduced to reflect a maximum rate of
25 percent on qualified business income. 45
Taxable income (reduced by net capital gain) that is less than the maximum dollar
amount for the 25-percent rate bracket applicable to the taxpayer , is subject to tax at the lower
rate brackets applicable to the taxpa yer.
Taxable income (reduced by net capital gain) that exceeds the maximum dollar amount
for the 25-percent rate bracket applicable to the taxpayer , and that is less than or equal to
qualified business income , is subject to tax at a rate of 25 percent. However , taxable income
(reduced by net capital gain) that exceeds the maximum dollar amount for the 25-percent rate

43

See Rev. Rul. 59-22 1, 1959-1 C.B. 225, and Rev. Rul. 74-44 , 1974-1 C.B. 287. This treatment di ffers
from a partner's distribu tive share of income or loss from the partnership ' s trade or business, which is genera lly
subjec t to SECA tax, as described below. Sec. l 402(a) .
44

Sec. l402 (a).

45

For taxable years beginning after Dece mber 3 1, 20 17, under otber provisions of the bill, the regular
individual income tax rate schedule pro vides rates of 12, 25, 35, and 39.6 percent. See section 100 I of the bill
(Reduction and simplification of individual income tax rates).

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 bracket applicable to the taxpayer, and that excee ds qualifi ed business income, is subject to tax
in the next higher rate brackets .
The provision provides that a 25-percent tax rate applies generall y to dividends received
from a real estate investment trust (other than any portion that is a capital gain dividend or a
qualified dividend) , and applies genera lly to dividend s that are includable in gross income from
certain coopera tives.

Qualified business income
Qualified business income is define d as the sum of 100 percent of any net bu siness
income derived from any passive business activity plus the capital percentage of net business
incom e derived from any active business activity , reduced by the sum of 100 pe rcen t of any net
business loss derived from any passive bu siness activity , 30 percent (except as otherwise
pro vided in the case of specified service activities or in the case of a taxpayer election to prove
out a differen t percentage , below) of any net business loss derived from any active business
activity , and any carryove r bu siness loss determined for the preceding taxable year. Qualified
business income does not include income from a business activity that excee ds these
percentages.
Passive business activity and active business activity
A bu siness activity mean s an activity that involves the conduct of any trade or bu siness.
A taxpayer ' s activities include those conducted through partnerships , S corporations , and sole
propri etorship s. An activity has the same meaning as und er the present-law passive loss rules
(section 469). As provided in regulat ions under those rules , a taxpayer may use any reasona ble
method of applying the relevant facts and circumstances in groupin g act ivities together or as
sepa rate activities (through rental activities generall y may not be grouped with other activities
unless together they cons titute an appropriate econo mic unit , and groupin g real propert y rental s
with persona l property rental s is not permitted) . It is intende d that the activity grouping the
taxpayer has selec ted und er the passive loss rules is required to be used for purposes of the
passthrough rate rules. For example , an individual taxpayer has an interest in a bakery and a
movie theater in Baltimore , and a bakery and a movie theatre in Philadelphia. For purposes of
the passive loss rules , the taxpayer has grouped them as two activities , a bakery activity and a
movie theatre activity. The taxpayer must group them the same way , that is as two activities , a
bakery activity and a movie theatre activity , for purposes of rules of this provision.
Regulatory authority is provided to require or permi t group ing as one or as multiple
activities in particular circumstances , in the case of specifie d services activities that wou ld be
treated as a single employer under broad related party rules of pr esen t law.
A passive business activity gene rally has the same meaning as a passive activity under
the present-law passive loss rules . However , for this purpose , a passive business activi ty is not
defined to exclude a worki ng interest in any oi l or gas property that the taxpayer holds directly or
through an entity that does not limit the taxpaye r' s liabilit y. Rathe r, whether the taxpayer
materially participates in the activity is relevant. Further , for this purpose , a passive bu siness

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 activity does not include an activity in connection with a trade or business or in connection with
the production of income.
An active business activity is an activity that involves the conduct of any trade or
business and that is not a passive activity. For examp le, if an individual has a partnership
interest in a manufacturin g business and materiall y participates in the manufacturing business , it
is considered an active business activity of the individual.
Net business income or loss
To determine qualified business income requires a calculat ion of net business income or
loss from each of an individual ' s passive business activities and active business activities. Net
business income or loss is determined separately for each business activity.
Net business income is determined by appropriately netting items of income, gain,
deduction and loss with respect to the business activity. The determination takes into account
these amounts only to the extent the amount affects the determination of taxable income for the
year. For example, if in a taxable year, a business activity bas 100 of ordinary income from
inventory sales, and makes an expenditure of 25 that is required to be capitalized and amortized
over 5 years under applicable tax rules, the net business income is 100 minus 5 (current-year
ordinary amorti zation deduction) , or 95. The net business income is not reduced by the entire
amount of the capital expenditure, only by the amount deductibl e in determ ining taxable income
for the year.
Net business income or loss also includes any amounts received by the individual
taxpayer as wages , director's fees, guarant eed payments and amounts received from a
partnership other than in the individual ' s capacity as a partner , that are prope rly attributable to a
business activity. For example , if an individual shareholder of an S corporation engaged in a
business activity is paid wages or director 's fees by the S corporation, the amount of wages or
director ' s fees is included in net business income or loss with respect to the business activity.
This rule is intended to ensure that the amount eligible for the 25-perce nt tax rate is not
erroneously reduced because of compensation for services or other specified amounts that are
paid separately (or treated as separate) from the individual's distributive share of passthrough
mcome.
Net business income or loss does not include specified investme nt-related income,
deductions , or loss. Specifically, net business income does not include (1) any item taken into
account in determining net long-term capital gain or net long-term capital loss, (2) dividends ,
income equivalent to a dividend, or payments in lieu of dividends, (3) interest income other than
that which is properly allocable to a trade or business, (4) the excess of gain over loss from
commoditie s transactions , other than those entered into in the normal course of the trade or
business or with respect to stock in trade or propert y held primaril y for sale to customers in the
ordinary course of the trade or business, property used in the trade or business, or supplies
regularly used or consumed in the trade or business, (5) the excess of foreign currency gains over
foreign currency losses from sect ion 988 transactions , other than transactions directly related to
the business needs of the business activity, (6) net income from notional principa l contracts,
other than clearly identified hedging transactions that are treated as ordinary (i.e., not treated as

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 capital assets) , and (7) any amount received from an annuity that is not used in the trade or
business of the business activity. Net business income does not include any item of deduction or
loss properly allocable to such income.
Carryover business loss
Solely for purposes of determining qualified business income eligible for a maximum rate
of 25 percent , the carryover business loss from the preceding taxable year reduces qualified
business income in the current taxable year. 46 The carryover business loss is the excess of (I)
the sum of 100 percent of any net business loss derived from any passive business activity , 30
percent (except as otherwise provided under rules for determining the capital percentage , below)
of any net business loss derived from any active business activity , and any carryover business
loss determined for the preceding taxable year , over (2) the sum of 100 percent of any net
business income derived from any passive business activity plus the capital percentage of net
business income derived from any active business activity. There is no time limit on carryover
business losses. For example , an individual has two business activities that give rise to a net
business loss of 30 and 40 , respectively , in year one , giving rise to a carryover business loss of
70 to year two. If the two business activities each give rise to net business income of20 in year
two , a carryover business loss of 30 is carried to year three (that is, <70> - (20 + 20) = <30> ).
Capital percentage
The capital percentage is the percentage of net business income from an active business
activity that is included in qualified business income.
In general , the capital percentage is 30 percent , except as provided in the case of
application of an increased percentage for capital-intensive business activities , in the case of
specified service activities , and in the case of application of the rule for capital-intensive
specified service activities.
The capital percentage is reduced if the portion of net business income represented by the
sum of wages , director ' s fees, guaranteed payments and amounts received from a partnership
other than in the individual's capacity as a partner , that are properly attributable to a business
activity exceeds the difference between 100 percent and the capital percentage. For example , if
net business income from an individual's active business activity conducted through an S
corporation is 100, including 75 of wages that the S corporation pays the individual , the
otherwise applicable capital percentage is reduced from 30 percent to 25 percent.
Increased percentage for capital-intensive business activities.-A taxpayer may elect the
application of an increased percentage with respect to any active business activity other than a
specified service activity (described below). The election applies for the taxable year it is made
46

The determination of carryov er business loss, for purpos es of detem1ining the amount o f qualified
business income eligible for a maximum rate of 25 percent, does not affec t the extent to which items of incom e,
gain, deduc tion, and loss are included in taxable income. For example, the carryforward of net operating losses and
the treatment o f passiv e activity losses continue to affect the determination of taxable income as pro vided in sections
172 and 469, respectively.

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 and each of the next four taxable years. The election is to be made no later than the due date
(including extensions) of the return for the taxable year made, and is irrevocable. The
percentage under the election is the applicable percentage (described below) for the five taxable
years of the election.
Calculation of applicable percentage.-The applicable percentage is the percentage
applied in lieu of the capital percentage in the case of an election with respect to capital-intensive
business activities , or with respect to capital-intensive specified service activities (below). Once
an election is made, the applicable percentage (not the capital percentage) determines the portion
of the net business income or loss from the activity for the taxable year that is taken into account
in determining qualified business income subject to Federal income tax at a rate no higher than
25 percent.
The applicable percentage is determined by dividing (1) the specified return on capital for
the activity for the taxable year, by (2) the taxpayer ' s net business income derived from that
activity for that taxable year. The specified return on capital for any active business activity is
determined by multiplying a deemed rate of return times the asset balance for the activity for the
taxable year, and reducing the product by interest expense deducted by the activity for the
taxable year. The deemed rate of return for this purpose is the short-term AFR plus 7 percentage
points. The asset balance for this purpose is the adjusted basis of property used in connection
with the activity as of the end of the taxable year, determined without taking into account of
basis adjustments for bonus depreciation under section 168(k) or expensing under section 179.
In the case of an active business activity conducted through a partnership or S corporation , the
taxpayer takes into account his distributive share of the asset balance of the partnership ' s or S
corporation's adjusted basis of property used in connection with the activity. Property used in
connection with an activity is property described in section 122l(a)(2) , which includes property
of a character which is subject to the allowance for depreciation provided in section 167 and real
property used in the trade or business. For example , if an individual's active business activity
has on hand at the end of the taxable year machinery with an adjusted basis of 100 (determined
without taking into account basis adjustments for bonus depreciation under section 168(k) or
expensing under section 179) and cash of 50, then the asset balance for the activity is 100.
Regulatory authority is provided to ensure that in determining asset balance , no amount is taken
into account for more than one activity.
Specified service activities. -In the case of an active business activity that is a specified
service activity , generally the capital percentage is O and the percentage of any net business loss
from the specified service activity that is taken into account as qualified business income is 0
percent. Regulatory authority is provided to treat all specified services activities of an individual
as a single business activity to the extent the activities would be treated as a single employer for
purposes of aggregation rules.
A specified service activity means any trade or business activity involving the
performance of services in the fields of health, law, engineering , architecture , accounting ,
actuarial science , performing arts, consulting , athletics , financial services, brokerage services ,
any trade or business where the principal asset of such trade or business is the reputation or skill
of one or more of its employees , or investing , trading , or dealing in securities , partnership
interests , or commodities. For this purpose a security and a commodity have the meanings

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 provided in the rules for the mark-to-market accounting method for dealers in securities (sections
475(c)(2) and 475(e)(2) , respectively).
Capital-intensive specified service activities. - A taxpayer may annually elect the
application of an increased percentage with respect to any active business activity that is
specified service activity , provided the applicable percentage for the taxable year is at least 10
percent.

Self-employment tax
The proposal provides that only the labor percentage of gross income less deductions
from a trade or business carried on by an individual , including an individual who is a partner or S
corporation shareholder in a trade or business carried on by a partnership or S corporation , are
taken into account in determining net earnings from self-employment. The labor percentage is
the excess (expressed as a percentage) of one minus the capital percentage (or applicable
percentage , as the case may be).
Thus , the proposal provides that net earnings from self-employment generally include the
individual ' s pro rata share of nonseparately computed income or loss from any trade or business
of an S corporation in which the individual is a stockholder. Proper adjustment is made for
wages paid in a trade or business carried on by an S corporation to a taxpayer who is a
shareholder. For example , an S corporation shareholder is paid wages of 20 with respect to a
trade or business conducted by the S corporation , and after the deduction for wages , and has a
pro rata share of income from the S corporation of 100. Assume the labor percentage is 70
percent. In determining net earnings from self-employment , the 20 of wages is added to the 100
pro rata share before applying the labor percentage of70 percent (120 x .7 = 84). The 84 amount
is then reduced by the wages of 20 , yielding net earnings from self-employment of 64. Presentlaw rules imposing FICA tax on the wages of 20 are not changed by the provision.
The proposal repeals the present-law exclusion for a limited partner ' s distributive share
of partnership income or loss in determining net earnings from self-employment (including
repeal of the exception for partnership guaranteed payments in the nature ofremuneration for
services). Thus , under the proposal , limited partners are treated the same as other partners for
purposes of determining net earnings from self-employment.
The proposal modifies the exceptions that apply in determining net earnings from selfemployment by providing that rentals from real estate and personal property leased with the real
estate are not among the exceptions. The proposal retains the present-law exceptions for
dividends and interest , and gains or loss from the sale or exchange of a capital asset , or gains or
losses from other property that is neither inventory nor held primarily for sale to customers.

Effective Date
The provision is effective for taxable years beginning after December 31 , 2017. A
transition rule provides that for fiscal year taxpayers whose taxable year includes December 31,
2017 , a proportional benefit of the reduced rate under the pro v ision is allowed for the period
beginning January 1, 20 I 8, and ending on the day before the beginning of the taxable year
beginning after December 31, 2017.

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 B. Simplification and Reform of Family and Individual Tax Credits
1. Enhancement of child tax credit and family tax credit

Present Law
An individual may claim a tax credi t for each qual ifying child und er the age of 17. The
amount of the credit per child is $ 1,000. A child who is not a cit izen, nation al, or resident of the
United States cannot be a qu alifying child.
The aggregate amount of child credits that may be claimed is phased out for individua ls
with income over certain thresho ld amounts. Specifically , the otherwise allowable child tax
credit is reduced by $50 for each $ 1,000 (or fraction thereof) of modified adjusted gross income
(" AGI' ') over $75 ,000 for single individual s or heads of households, $110 ,000 for marri ed
individual s filing joint returns , and $55 ,000 for marr ied individuals filing separat e returns. For
purposes of this limitat ion , mod ified AGI includes certain otherwise excl udabl e income earned
by U.S. citizens or residents living abroad or in certai n U.S. territories.
The cred it is allowable against both the regular tax and the alternative m inimum tax
(" AMT "). To the extent the child credit exceeds the taxpayer ' s tax liabilit y, the taxpayer is
eligible for a refundable credit 47 (the "additional child tax credit ") equal to 15 percen t of earned
income in excess of $3,000 (the "earned income " formula).
Fam ilies with three or more childr en may determine the additional chi ld tax credit using
the "a lternati ve formula ," if this results in a larger cred it than determined under the earned
incom e formula. Under the alternative formula , the additional child tax credit equa ls the amount
by which the taxpayer ' s Soc ial Security taxes excee d the taxpayer ' s earne d income credit
("EIC ").
Earned income is defined as the sum of wages , salaries, tips , and other taxable employee
compensation plu s net self-e mploym ent earnings. At the taxpayer's election , combat pay may be
treated as earned income for these purpo ses . Unlike the EIC , which also includes the preceding
items in its definition of earned income, the additional child tax cred it is based only on earned
incom e to the exten t it is included in computin g taxable income . For exa mple, some ministers'
parsonage allowances are considere d self-employment income , and thu s are considered earned
income for purposes of com putin g the EIC , but the allowances are exclud ed from gross income
for individual income tax purposes , and thus are not considered earned income for purposes of
the additional child tax credit since the income is not included in taxable income.
Any credit or refund allowed or made to an individ ual under this provision (including to
any reside nt of a U.S. possession) is not taken into accoun t as income and is not be taken into
account as resources for the month of receipt and the follow ing two months for purposes of
determining eligibility of such individual or any other ind ividual for benefits or assistance , or the

47

The refundable credit may not exceed the maximum credit per child of $ 1,000.

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TREAS-17-0313-I-000034

 amount or extent of benefits or assistance, under any Federal pro gram or under any State or local
program financed in whole or in part with Federal funds.
Description of Proposal
The proposal consolidates the child tax credit into a new family tax credit. The family
credit consists of a $ 1,600 credit per qualifying child under the age of 17, and $300 for each of
the taxpayer (both spouses in the case of married taxpayers filing a joint return) and each
dependent of the taxpayer who is not a qualifyin g child under age 17.
The proposal generally retains the present-law definition of dependent. However , under
the proposal , a qualifying child is eligible for the $ 1,600 credit only if such child is a citizen or
national of the United States.
The family credit phases out AGI of $230,000 for married taxpayers filing joint returns
and $115,000 for other individuals. The credit is refundable under rules similar to the present
law additional child tax credit. That is, to the extent the credit exceeds the taxpayer ' s tax
liability, the taxpayer is eligible for a refundable credit equal to 15 percent of earned income in
excess of $3,000.48 The refundable credit is limited to $1,000 times the number of qualifyin g
children under the age of 17 claimed on the return. This $1,000 dollar limitation is indexed for
inflation.
The propo sal requires that the taxpayer include the name and taxpayer identific ation
number of each qualifying child and dependent on the tax return for each taxable year. fa tb.e
case of a refundable child tax credit, the taxpayer must include the taxpayer ' s Social Security
number on the tax return for the taxable year (in the case of a joint return either spouse's Social
Security number will suffice). 49
The $300 credit for the taxpayer , spouse, and non-child dependents of the taxpa yer
expires for taxable years beginning after December 31, 2022.
Effective Date
The proposal is effective for taxable years beginning after December 31, 2017 .
2. Repeal of credit for the elderly and permanently disabled
Present Law
Certain taxpayer s who are over the age of 65 or retired on account of permanent and total
disability may claim a nonrefundable credit. The maximum credit is 15 percent of $5,000 for a

48

Th e a lternate formula described in the present law section applies to the re fundable portion o f the family
credit as well.
49

See descript ion o f sec. 1103 o f the bill.

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TREAS-17-0313-I-000035

 return where one individual quali fies and $7,500 on a joint return where both spouses qualify. 50
Thu s, the maximum credit amounts are $750 and $ 1,125, respectively.
The credit base is reduced by one half of the amount by which the taxpayer's adjusted
gross income exceeds $7,500 if the taxpayer is unmarr ied, $ 10,000 if the taxpayer is married and
files a joi nt return , or $5,000 if the taxpayer is married and files a separate return. 51 Thus, the
credit base is phased down to zero when adjusted gross income exceeds $17,500 for an
unmarried person, $20,0 00 for a married couple filing a jo int return where only one spouse
qualifies for the credit, $25,00 0 for a joint return where both spouses qualify , and $ 12,500 for a
married person filing a separate return.
Additionally, the cred it base is reduced by certa in items of income otherw ise exempt
from tax: ( 1) benefits under Title II of the Social Securit y Act; (2) retirement benefits under the
Railroad Retirement Act of 1974; (3) disability benefits paid by the Veterans Adm inistration,
except for benefits payable on account of personal injuries or sickness resulting from active
service in the armed forces ; and (4) pensions , annuities , and disability benefit s exempted from
tax by any provision not in the Code. 52
To qualify for the credit, a taxpayer must, at the end of the taxable year, be at least 65
years old or retired on account of permanent and total disab ility. 53 Permanen t and total disability
exists if, at the time of retirement , the taxpayer was "unable to engage in any substa ntial gainful
activity by reason of any medic ally determinable physical or mental impairm ent which can be
expected to result in death or which has lasted or can be expected to last for a continuous period
of not less than 12 months. 54
Description of Proposal
The proposal repeals the credit for the elderly and permanently disabled.
Effective Date
The proposal applies to taxable years beginning after December 31, 2017.

so Sec. 22(a).
51

Sec. 22(d).

52

Sec. 22(c)(3).

53

Sec. 22(b).

54

Sec. 22(e)(3).

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 3. Repeal of credit for adoption expenses
Present Law
In general
A tax credit is allowed for qualified adoption expenses paid or incurred by a taxpayer
subject to a maximum credit amount per eligible child. 55 An eligib le child is an individual who:
(1) has not atta ined age 18; or (2) is physically or mentally incapable of caring for himself or
herself. The maximum credit is applied per child rather than per year. Therefore , while
qualified adoption expenses may be incurred in one or more taxable years , the tax credit per
adoption of an eligible child may not exceed the maximum credit.
For taxable years beginning in 2017 , the maximum credit amount is $ 13,570 , and the
cred it is phased out ratably for taxpayers with modified adjusted gross income ("AGI' ') above a
certain amount. In 2017 , the phase out range begins at modified AGI of $203 ,540 , with no credit
allowed for taxpayers with a modified AGI of $243 ,540. Modified AGI is the sum of the
taxpayer's AGI plus amounts excluded from income under sections 911 , 931 , and 933 (re lating
to the exclusion of income of U.S. citizens or residents living abroad ; residents of Guam ,
American Samoa , and the Northern Mariana Islands and residents of Puerto Rico , respectively).

Special needs adoptions
In the case of a special needs adoption finalized during a taxable year , the taxpayer may
claim as an adoption credit the amount of the maximum credit minus the aggregate qualified
adoption expenses with respect to that adoption for all prior taxable years. A specia l needs child
is an eligible child who is a citizen or resident of the United States whom a State has determined:
(1) cannot or should not be returned to the home of the birth parents; and (2) has a specific factor
or condition (such as the child's ethnic background , age, or membership in a minority or sibling
group , or the presence of factors such as medical conditions , or physical , mental , or emotional
handicaps) because of which the chi ld cannot be placed with adoptive parents without adoption
assistance.

Qualified adoption expenses
Qualified adoption expenses are reasonable and necessary adoption fees , court costs ,
attorney fees , and other expenses that are: (1) directly related to, and the principal purpose of
which is for, the legal adoption of an eligible ch ild by the taxpayer; (2) not incurred in vio lation
of State or Federa l law , or in carrying out any surrogate parenting arrangement; (3) not for the
adoption of the child of the taxpayer's spouse ; and (4) not reimb ursed (e.g., by an employer) .

Description of Proposal
The proposal repeals the credit for adoption expenses.

55

Sec. 23.

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TREAS-17-0313-I-000037

 Effective Date

The proposal applies to taxable years beginn ing after December 31, 2017.
4. Termination of credit for interest on certain home mortgages
Present Law

Qualified governmental units can elect to exchange all or a portion of their qualified
mortgage bond authority for authority to issue mortgage credit certificates ("MCCs"). 56 MCCs
entitle homebuyers to a nonrefundab le income tax cred it for a specified percentage of interest
paid on mortgage loans on their principal residences. The tax credit provided by the MCC may
be carried forward three years. Once issued , an MCC generally remains in effect as long as the
residence being financed is the certificate-rec ipient ' s principal residence. MCCs generally are
subject to the same eligibility and targeted area requirements as qualified mortgage bonds. 57
Description of Proposal

No credit is allowed with respect to any MCC issued after December 3 1, 20 17.
Effective Date

The prov ision applies to taxable years ending after December 31, 2017. Credits continue
for interest paid on mortgage loans on principal residences for which MCCs have been issued on
or before December 31, 201 7.
5. Repeal of credit for plug-in electric drive motor vehicles
Present Law

A credit is available for new four-whee led vehicles (excluding low speed vehicles and
vehicles weighing 14,000 pounds or more) propelled by a battery with at least 4 kilowatt-hours
of electric ity that can be charged from an external source. 58 The base credit is $2,500 plus $417
for each kilowatt-hour of additional battery capac ity in excess of 4 kilowatt-hours (for a
maximum cred it of $7,500) . Qualified vehicles are subject to a 200 ,000 vehicle-permanufacturer limitatio n. Once the limitation has been reached the credit is phased down over
four calendar quarters.
Description of Proposal

The proposal repea ls the credit for plug-in electric drive motor vehicles.

56

Sec. 25.

57

Sec. 143.

58

Sec. 30D.

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 Effective Date
The proposal is effective for vehicles placed in service in taxable years beginning after
December 31, 2017.

6. Social security requirement for refundable portion of child credit, American Refundable
Credit Program Integrity
Present Law
Earned income credit
Low and moderate-income taxpayers may be eligible for the refundable earned income
credit ("EIC "). Eligibility for the EIC is based on the taxpayer ' s earned income , adjusted gross
income , investment income , filin g status , and work status in the United States. The amount of
the EIC is based on the presence and number of qualifying children in the worker's family , as
well as on adjusted gross income and earned income.
The earned income credit generally equals a specified percentage of earned income 59 up
to a maximum dollar amount. The maximum amount applies over a certain income range and
then diminishes to zero over a specified phase-out range. For taxpayers with earned income (or
adjusted gross income (" AGI")), if greater) in excess of the beginning of the phase-out range , the
maximum EIC amount is reduced by the phase-out rate multiplied by the amount of earned
income (or AGI , if greater) in excess of the beginning of the phase-out range. For taxpayers with
earned income (or AGI, if greater) in excess of the end of the phase-out range , no credit is
allowed .
An individual is not eligible for the EIC if the aggregate amount of disqualified income
of the taxpayer for the taxable year exceeds $3,450 (for 2017). This threshold is indexed for
inflation. Disqualified income is the sum of: (I) interest (taxable and tax-e xempt) ; (2) dividends ;
(3) net rent and royalty income (if greater than zero) ; (4) capital gains net income ; and (5) net
passive income (if greater than zero) that is not self-employment income.

The EiC is a refundable credit , meanin g that if the amount of the credit exceeds the
taxpayer ' s Federal income tax liability , the excess is payable to the taxpayer as a direct transfer
payment.

Child tax credit 60
An individual may claim a tax credit of $ 1,000 for each qualifying child under the age of
17. A child who is not a citizen , national , or resident of the United States cannot be a qualifying
child.

59

Earned incom e is defined as ( I) wages, salaries, tips, and other emplo yee compen sation, but only if such
amounts are includible in gross income, pl us (2) the amoun t of the individual 's net se lf-employment earnings.
60

See descript ion of sec. 110 1 of the bill for the proposal's modifications to the child tax credi t.

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 The aggregate amount of allowable child credits is phased out for individuals with
income over certain threshold amounts. Specifically , the otherwise allowable aggregate child tax
credit ("CTC ") amount is reduced by $50 for each $1,000 (or fraction thereof) of modified
adjusted gross income ("modified AGI") over $75,000 for single individuals or heads of
households , $ 110,000 for married individuals filing joint returns , and $55,000 for married
individuals filing separate returns. For purposes of this limitation , modified AGI includes certain
otherwise excludable income 61 earned by U.S. citizens or residents living abroad or in certain
U.S. territories.
The child tax credit is allowable against both the regular tax and the alternative minimum
tax ("AMT"). To the extent the credit exceeds the taxpayer ' s tax liability , the taxpayer is eligible
for a refundable credit (the "additional child tax credit") equal to 15 percent of earned income in
excess of a threshold dollar amount of $3,000 (the "earned income " formula).
Families with three or more qualifying children may determine the additional child tax
credit using the "alternati ve formula " if this results in a larger credit than determined under the
earned income formula. Under the alternative formula , the additional child tax credit equals the
amount by which the taxpayer ' s Social Security taxes exceed the taxpayer ' s EIC.
As with the EIC, earned income is defined as the sum of wages , salaries , tips, and other
taxable employee compensation plus net self-emplo yment earnings. Unlike the EIC, the
additional child tax credit is based on earned income only to the extent it is included in
computing taxable income. For example , some ministers ' parsonage allowances are considered
self-employment income and thus are considered earned income for purposes of computing the
EiC, but the allowances are excluded from gross income for individual income tax purposes and
thus are not considered earned income for purposes of the additional child tax credit.
American Opportunity credit 62
The American Opportunity credit provides individuals with a tax credit of up to $2,500
per eligible student per year for qualified tuition and related expenses (including course
materials) paid for each of the first four years of the student' s post-secondary education in a
degree or certificate program. The credit rate is 100 percent on the first $2,000 of qualified
tuition and related expenses , and 25 percent on the next $2,000 of qualified tuition and related
expense s.
The American Opportunity credit is phased out ratably for taxpayers with modified AGI
between $80,000 and $90,000 ($160 ,000 and $180,000 for married taxpayers filing a joint
return). The credit may be claimed against a taxpayer 's AMT liability.

61

Sec. 9 11.

62

See descript ion of sec. 120 I of the bill for the propos al's modifications to the American Opportuni ty

credit.

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 Forty percent of a taxpayer ' s otherwise allowable modified credit is refund able. A
refundable credit is a credit which , if the amount of the credit exceeds the taxpayer's Federal
income tax liability , the excess is payable to the taxpayer as a direct transfer payment.
No credit is allowed to a taxpayer who fails to include the taxpayer identification number
of the student to whom the qualified tuition and related expenses relate.

Taxpayer identification number requirements
Any individual filing a U.S. tax return is required to state his or her taxpayer
ident ification number on such return. Generally , a tax payer identification number is the
individual 's Social Security number ("SSN "). 63 However , in the case of an individual who is not
eligible to be issued an SSN , but who has a tax filing obligation , the Internal Revenue Service
("IRS") issues an individual taxpa yer ident ification number ("!TIN ") for use in connection w ith
the individ ual 's tax filing requirements. 64 An individual who is eligible to receive an SSN may
not obtain an !TIN for purposes of his or her tax filing obligations. 65 An !TIN doe s not provide
eligibility to work in the United States or claim Social Security benefit s.
Examples of individuals who are not eligible for SSNs, but potentiall y need ITINs in
order to file U.S. returns include a nonresident alien filing a claim for a reduced withho lding rate
under a U.S. income tax treaty , a nonresident alien required to file a U.S. tax return , 66 an
individual who is a U.S. resident alien under the substa ntial pre sence test and who therefore must
file a U.S. tax return , 67 a dependent or spouse of the prior two categories of indiv idual s, or a
dependent or spou se of a nonresident alien visa holder.
An individual is ineligible for the EIC (but not the chi ld tax credit) if he or she doe s not
include a valid SSN and the qualifying child 's valid SSN (and, if married , the spouse's SSN) on
his or her tax return. For these purposes , the Code defines an SSN as a Social Security number
issued to an individual , other than an SSN iss ued to an individual solely for the purpose of
applying for or receiving federally funded benefits. 68 If an individual fails to provide a correct
taxpayer identifi cation number , such omission w ill be treated as a mathematical or clerical error
by the IRS.

63

Sec. 6109(a).

64

Treas. Reg . Sec. 30 l.6l09 -l(d)( 3)(i).

65

Treas. Reg. Sec. 30l.6109 -l(d)( 3)(ii).

66
For instance, in the case of an individual that has income which is effect ively conn ected with a United
States trade or bus iness, such as the performance of personal services in the United States.

67

Such an individua l would have a filing requirement without regard to whet her the individua l is lawfully
presen t or has work authori zation.
68

Sec. 20 5(c)(2)( B)(i)(II) (and that portion of sec. 205(c)(2)(B)(i)(Ill) relating to it) of the Social Security

Act.

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 A taxpayer who resides with a qualifying child may not claim the EiC with respect to the
qualifying child if such child does not have a valid SSN. The taxpayer also is ineligible for the
EiC for workers without children because he or she resides with a qualifying child. However , if
a taxpayer has two or more qualifying children, some of whom do not have a valid SSN, the
taxpayer may claim the EiC based on the number of qualifying children for whom there are valid
SSNs.
Description of Proposal

The proposal provides that a taxpayer must have a Social Security number that is valid
for employment in the United States (that is, the taxpayer must be a United States citizen ,
permanent resident , or have a visa that allows him or her to work temporarily in the United
States) in order to claim the refundable portion of the CIC. Additionally, under the proposal
taxpayers who use as their taxpayer identification number a Social Security number issued for
non-work reasons , such as for purposes of receiving Federal benefits or for any other reason, are
not eligible for the refundable portion of the CIC or EiC.
Additionally, the proposal prov ides that in order to claim the American Opportunity
credit, the identification number provided with respect to the student to whom the tuition and
related expenses relates is a Social Security number.
Effective Date

The proposa l applies to taxable years beginning after December 31, 2017.

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TREAS-17-0313-I-000042

 C. Simplification and Reform of Education Incentives
1. Reform of American opportunity tax credit and repeal of lifetime learning credit

Present Law
American Opportunity credit

The American Opportunity credit provides individuals with a tax credit of up to $2,500
per eligible student per year for qualified tuition and related expenses (including course
materials) paid for each of the first four years of the student ' s post-secondary education in a
degree or certificate program. The credit rate is 100 percent on the first $2,000 of qualified
tuition and related expenses , and 25 percent on the next $2,000 of qualified tuition and related
expenses. The credit may not be claimed for more than four taxable years with respect to any
student.
The American Opportunity credit is phased out ratably for taxpayers with modified AGI
between $80,000 and $90 ,000 ($160 ,000 and $180,000 for married taxpayers filing a joint
return). The credit may be claimed against a taxpayer 's AMT liability.
Forty percent of a taxpayer ' s otherwise allowable modified credit is refundable. A
refundable credit is a credit which , if the amount of the credit exceeds the taxpayer 's Federal
income tax liability , the excess is payable to the taxpayer as a direct transfer payment.
A taxpayer may not claim the American Opportunity credit if the qualified tuition and
related expenses for the enrollment or attendance of a student , if such student has been convicted
of a Federal or State felony offense consisting of the possession or distribution of a controlled
substance before the end of the taxable year. 69
Lifetime learning credit

Individual taxpayers may be eligible to claim a nonrefundable credit , the Lifetime
Leaming credit , against Federal income taxes equal to 20 percent of qualified tuition and related
expenses incurred during the taxable year on behalf of the taxpayer , the taxpayer's spouse , or
any dependents. Up to $ 10,000 of qualified tuition and related expenses per taxpayer return are
eligible for the Lifetime Leaming credit (i.e., the maximum credit per taxpayer return is $2,000).

In contrast to the American Opportunity credit , a taxpayer may claim the Lifetime
Learning credit for an unlimited number of taxable years. 70 Also in contrast to the American
Opportunity credit , the maximum amount of the Lifetime Leaming credit that may be claimed on
a taxpayer ' s return does not vary based on the number of students in the taxpayer ' s family-that
is, the American Opportunity credit is computed on a per-student basis while the Lifetime
Leaming credit is computed on a family-wide basis. The Lifetime Learning credit amount that a
6
' ft

$ ec. 25A(b)(2)(D) .

;;o Sec. 25A(a)(2).

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TREAS-17-0313-I-000043

 taxpayer may otherwise claim is phased out ratably for taxpayers with modified AGI between
$56,000 and $66,000 ($112,000 and $ 132,000 for married taxpayers filing a joint return) in
2017.
Description of Proposal
The proposal modifies the American Opportunity credit 71 by providing that a credit may
be claimed with respect to a student for five taxable years (rather than four taxable years under
present law). For a credit claimed with respect to the student's fifth taxable year, the credit is
half the value of the AOTC that is applicable to the first four taxable years (the refundable
portion of the credit is 40-percent of the half-value credit).
The proposal repeals the provision that denies the credit with respect to qualified tuition
and related expenses for the enrollment or attendance of any student who has been convicted of a
felony offense consisting of the possession or distribution of a controlled substance.
The proposal repeals the lifetime learning credit.
Effective Date
The proposal applies to taxable years beginning after December 31, 2017.
2. Consolidation and modification of education savings rules
Present Law
Coverdell education savings accounts
A Coverdell education savings account is a trust or custodial account created exclusively
for the purpose of paying qualified education expenses of a named benefi ciary. 72 Annual
contributions to Coverdell education savings accounts may not exceed $2,000 per designated
beneficiary and may not be made after the designated beneficiary reache s age 18 (except in the
case of a special needs beneficiar y). The contribution limit is phased out for taxpayers with
modified AGI between $95,000 and $110,000 ($190 ,000 and $220,000 for married taxpayer s
filing a joint return) ; the AGI of the contributor , and not that of the beneficiary , controls whether
a contribution is permitted by the taxpayer.
Earnings on contributions to a Coverdell education savings account generally are subject
to tax when withdrawn. 73 However , distributions from a Coverdell education savings account
71

The proposal also repeals the Hope credit , a precursor to the American Opportunity credit which since
2009 has been largely superseded in the Code by the American Oppo rtunity credit.
72

Sec. 530.

73
In additio n, Coverdell ed ucation savings accounts are subject to the unrela ted business income tax
imposed by section 511.

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TREAS-17-0313-I-000044

 are excludable from the gross income of the distributee (i.e., the student) to the extent that the
distribution does not exceed the qualified education expenses incurred by the beneficiary during
the year the distribution is made. The earnings portion of a Coverdell education savings account
distribution not used to pay qualified education expenses is includible in the gross income of the
distributee and generally is subject to an additional 10-percent tax. 74
Tax-free (and free of additional IO-percent tax) transfers or rollovers of account balances
from one Coverdell education savings account benefiting one beneficiary to another Coverdell
education savings account benefiting another beneficiary (as well as redesignations of the named
beneficiary) are permitted , provided that the new beneficiary is a member of the family of the
prior beneficiary and is under age 30 (except in the case of a special needs beneficiary). In
general , any balance remaining in a Coverdell education savings account is deemed to be
distributed within 30 days after the date that the beneficiary reaches age 30 (or , if the beneficiary
dies before attaining age 30, within 30 days of the date that the beneficiary dies).
Qualified education expenses include qualified elementary and secondary expenses and
qualified higher education expenses. Such qualified education expenses generally include only
out-of-pocket expenses. They do not include expenses covered by employer-provided
educational assistance or scholarships for the benefit of the beneficiary that are excludable from
gross mcome .
The term qualified elementary and secondary school expenses , means expenses for: (1)
tuition , fees, academic tutoring , special needs services , books , supplies , and other equipment
incurred in connection with the enrollment or attendance of the beneficiary at a public , private ,
or religious school providing elementary or secondary education (kindergarten through grade 12)
as determined under State law; (2) room and board , uniforms , transportation , and supplementary
items or services (including extended day programs) required or provided by such a school in
connection with such enrollment or attendance of the beneficiary ; and (3) the purchase of any
computer technology or equipment (as defined in section I 70(e)(6)(F)(i)) or internet access and
related services , if such technology , equipment , or services are to be used by the beneficiary and
the beneficiary's family during any of the years the beneficiary is in elementary or secondary
school. Computer software primarily involving sports , games , or hobbies is not considered a
qualified elementary and secondary school expense unless the software is predominantly
educational in nature.
The term qualified higher education expenses includes tuition , fees, books , supplies , and
equipment required for the enrollment or attendance of the designated beneficiary at an eligible
education institution , regardless of whether the beneficiary is enrolled at an eligible educational
institution on a full-time , half-time , or less than half-time basis. 75 Moreover , qualified higher
education expenses include certain room and board expenses for any period during which the
74

This I0-perc ent additional tax does not appl y if a distribution from an educa tion savin gs account is made
on account of the death or disabilit y of the designated beneficiary , or if made on account of a scholarship received
by the designat ed beneficiary.
75

Qualified higher education expense s are defined in the same manner as for qualified tuition programs.

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TREAS-17-0313-I-000045

 beneficiary is at least a half-time student. Qualified higher education expenses include expenses
with respect to undergraduate or graduate-level courses. In addition , qualified higher education
expenses include amounts paid or incurred to purchase tuition credits (or to make contributions
to an account) under a qualified tuition program for the benefit of the beneficiary of the
Coverdell education savings account. 76
Section 529 qualified tuition programs

In general
A qualified tuition program is a program established and maintained by a State or agency
or instrumentality thereof , or by one or more eligible educational institutions , which satisfies
certain requirements and under which a person may purchase tuition credits or certificates on
behalf of a designated beneficiary that entitle the beneficiary to the waiver or payment of
qualified higher education expenses of the beneficiary (a "prepaid tuition program "). Section
529 provides specified income tax and transfer tax rules for the treatment of accounts and
contracts established under qualified tuition programs. 77 In the case of a program established
and maintained by a State or agency or instrumentality thereof , a qualified tuition program also
includes a program under which a person may make contributions to an account that is
established for the purpose of satisfying the qualified higher education expenses of the
designated beneficiary of the account, provided it satisfies certain specified requirements (a
"savings account program") . Under both types of qualified tuition programs , a contributor
establishes an account for the benefit of a particular designated beneficiary to provide for that
beneficiary's higher education expenses.

In general, prepaid tuition contracts and tuition savings accounts established under a
qualified tuition program involve prepayments or contributions made by one or more individuals
for the benefit of a designated beneficiary. Decisions with respect to the contract or account are
typically made by an individual who is not the designated beneficiary. Qualified tuition accounts
or contracts generally require the designation of a person (generally referred to as an "account
owner ") 78 whom the program administrator (oftentimes a third party administrator retained by
the State or by the educational institution that established the program) may look to for decisions ,
recordkeeping , and reporting with respect to the account established for a designated beneficiary.
The person or persons who make the contributions to the account need not be the same person
who is regarded as the account owner for purposes of administering the account. Under many
qualified tuition programs , the account owner generally has control over the account or contract ,
including the ability to change designated beneficiaries and to withdraw funds at any time and
for any purpose. Thus , in practice , qualified tuition accounts or contracts generally involve a

76

Sec. 530(b)(2)(B).

77

For purposes of this description , the term "account" is used interchangeab ly to refer to a prepaid tuition
benefit contract or a tuition sav ings account estab lished pursuant to a qualified tuition program.
78

Section 529 refers to contributors and designated beneficiaries , but does not define or otherwise refer to
the term "account owner ," which is a commonly used term among qualified tuition programs.

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TREAS-17-0313-I-000046

 contributor , a designated beneficiary , an account owner (who oftentimes is not the contributor or
the designated beneficiary) , and an admin istrator of the account or contract.
Qua lified higher education expenses
For purposes ofreceiving a distribution from a qualified tuition program that qualifies for
favorable tax treatment under the Code , qualified higher education expenses means tuition , fees,
books, supplies , and equipment required for the enrollment or attendance of a designated
beneficiary at an eligible educational institution , and expenses for special needs services in the
case of a special needs beneficiary that are incurred in connection with such enrollment or
attendance. Qualified higher education expenses generally also include room and board for
students who are enrolled at least half-time. Qualified higher education expenses include the
purchase of any computer technology or equipment , or Internet access or related services , if such
technology or services were to be used primarily by the beneficiary during any of the years a
beneficiary is enrolled at an eligible institution.
Contributions to qualified tuition programs
Contributions to a qualified tuition program must be made in cash. Section 529 does not
impose a specific dollar limit on the amount of contributions , account balances , or prepaid tuition
benefits relating to a qualified tuition account ; however , the program is required to have
adequate safeguards to prevent contributions in excess of amounts necessary to provide for the
beneficiary's qualified higher education expenses. Contributions generally are treated as a
completed gift eligible for the gift tax annual exclusion. Contributions are not tax deductible for
Federal income tax purposes , although they may be deductible for State income tax purposes.
Amounts in the account accumulate on a tax-free basis (i.e., income on accounts in the plan is
not subject to current income tax).
A qualified tuition program may not permit any contributor to, or designated beneficiary
under, the program to direct (directly or indirectly) the investment of any contributions (or
earnings thereon) more than two times in any calendar year, and must provide separate
accounting for each designated benefic iary. A qualified tuition program may not allow any
interest in an account or contract (or any portion thereof) to be used as security for a loan.
Description of Proposa l

Under the proposal , no new contributions are permitted into Coverdell savings accounts
after December 31, 2017. However , rollovers of account balances from one Coverdell education
savings account to another pre-existing Coverdell education savings account benefiting another
beneficiary remain permitted after this date. Additionally , the proposal allows section 529 plans
to receive rollover contributions from Coverdell education savings accounts.
The proposa l modifies section 529 plans to allow such plans to distribute not more than
$ 10,000 in expenses for tuition incurred during the taxable year in connection with the
enrollment or attendance of the designated beneficiary at a public , private or religious elementary
or secondary school. This limitation applies on a per-student basis , rather than a per-account
basis. Thus , under the proposal , although an individual may be the designated beneficiary of
multiple accounts , that individual may receive a maximum of $10,000 in distributions free of tax,

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TREAS-17-0313-I-000047

 regardless of whether the funds are distributed from multiple accounts. Any excess distributions
received by the individual would be treated as a distribution subject to tax under the general rules
of section 529.
The propo sal also modifies section 529 plans to allow such plan distributio ns to be used
for certain expenses , including books, supplies, and equipment, required for attendance in a
registered apprenticeship program. Registered apprenticeship pro grams are apprenticeship
programs registered and certified with the Secretary of Labor.
Finally, the proposal specifies that nothing in this section shall prevent an unborn child
from qualifying as a designated beneficiary. For these purposes , an unborn child means a child
in utero, and the term child in utero means a member of the species homo sapiens, at any stage of
development , who is carried in the womb.

Effective Date
The proposal applies to contributions made in taxable years beginning after December
31, 2017.

3. Reforms to discharge of certain student loan indebtedness
Present Law
Gross income generally includes the discharge of indebtedness of the taxpayer. Under an
exception to this general rule, gross income does not include any amount from the forgiveness
(in whole or in part) of certain student loans, provided that the forgiveness is contingent on the
student' s working for a certain period of time in certain professions for any of a broad class of
employers. 79
Student loans eligible for this special rule must be made to an individual to assist the
individual in attending an educat ional institution that normally maintains a regular faculty and
curriculum and normally has a regularly enrolled body of students in attendance at the place
where its education activities are regularly carried on. Loan proceeds may be used not only for
tuition and required fees, but also to cover room and board expenses. The loan must be made by
(I) the Un ited States (or an instrumentality or agency thereof) , (2) a State (or any politi cal
subdi vision thereof) , (3) certain tax-exempt publ ic benefit corporations that contro l a State,
county, or municipal hospital and whose employees have been deemed to be public employees
under State law, or (4) an educational organ ization that originally received the funds from which
the loan was made from the United States, a State, or a tax-exempt public benefit corporation.

In addition, an individual 's gross income does not include amounts from the forgiveness
of loans made by educationa l organizations (and certain tax-exempt organizations in the case of
refinancing loans) out of private , nongovernmental funds if the proceeds of such loans are used
to pay costs of attendance at an educational institution or to refinance any outstanding student
loans (not ju st loans made by educationa l organizations) and the student is not employed by the
79

Sec. I 08(t).

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TREAS-17-0313-I-000048

 lender organization. In the case of such loans made or refinanced by educational organizations
(or refinancin g loans made by certain tax-exempt organizations) , cancellation of the student loan
must be contingent on the student working in an occupation or area with unmet needs and such
work must be performed for, or under the direction of, a tax-exempt charitable organization or a
governmental entity.
Finally, an individual' s gross income does not include any loan repayment amount
received under the National Health Service Corps loan repayment program, certa in State loan
repayment programs, or any amount received by an individual under any State loan repayment or
loan forgiveness program that is intended to provide for the increased availability of health care
services in under served or health professional shortage areas (as determined by the State).
Description of Proposal
The propo sal modifie s the exclusion of student loan discharges from gross income, by
includin g within the exclusion certain discharges on account of death or disability. Loan s
eligib le for the exclusion under the propo sal are loans made by (1) the United States (or an
instrumentality or agency thereof) , (2) a State (or any political subdivision thereof) , (3) certain
tax-exe mpt public benefit corporations that control a State, county , or municipal hospital and
whose employees have been deemed to be publi c employees under State law, (4) an educational
organization that originally received the funds from which the loan was made from the United
States, a State, or a tax-exempt publ ic benefit corporation , or (5) private education loans (for this
purpo se, private education loan is defined in section 140(7) of the Consumer Protection Act). 80
Under the proposal , the discharge of a loan as described above is excl uded from gross
income if the discharge was pursuant to the death or total and permanent disability of the
student. 8 1
Additionall y, the propo sal modifi es the gross income exclusion for amounts received
under the National Health Service Corps loan repayment program or certain State loan
repayment pro grams to include any amount received by an individual under the Indian Health
Service loan repaym ent program. 82

80

l 5 U .S.C. l 650(7).

81

Although the proposal makes specific reference to those provisions of the Higher Education Act of 1965
that dischar ge Will iam D. Ford Federal Direct Loan Program loans, Federa l Family Education Loan Program loans ,
and Federal Perkins Lo an Program loans in the case of death and total and permanent disability , the proposal also
contains a provis ion providin g generally for an exclusion in the case of a student loan discharged on account of the
death or total and penn anen t disability of the student , in addition to those specific statutory references.
82

Sect ion 108 of the Indian Health Care Improvement Act estab lished the Indi an Heal th Service loan
repayment program to assure a sufficient suppl y of traine d health professionals needed to provide health care
serv ices to Indians. Pub. L. No . 94-437, as amended by Pub. L. No . 100-713 , sec . 108 , and Pub. L. No . 102-573 ,
sec. l 06 , and as amended , and permanent ly reauthorized by Pub . L. No. l l l-l 48 , sec. l 022 l .

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 Effective Date
The proposal applies to discharges of loans after, and amounts received after, December
31, 2017.
4. Repea l of deduction for student loan interest
Present Law
Certain individuals who have paid interest on qualified education loans may claim an
above-the-line deduction for such interest expenses , subject to a maximum annual deduction
limit. 83 Required payments of interest generally do not include voluntary payments , such as
interest payments made during a period of loan forbearance. No deduction is allowed to an
individual if that individual is claimed as a dependent on another taxpayer 's return for the
taxable year. 84
A qualified education loan generally is defined as any indebtedness incurred solely to pay
for the costs of attendance (including room and board) of the taxpayer , the taxpayer 's spouse, or
any dependent of the taxpayer as of the time the indebtedness was incurred in attending on at
least a half-time basis (I) eligible educational institutions , or (2) institutions conducting
internship or residency programs leading to a degree or certificate from an institution of higher
education , a hospital , or a health care facility conducting postgraduate training. The cost of
attendance is reduced by any amount excluded from gross income under the exclusions for
qualified scholarships and tuition reductions , employer-provided educational assistance , interest
earned on education savings bonds, qualified tuition programs , and Coverdell education savings
accounts , as well as the amount of certain other scholarships and similar payments.
The maximum allowable deduction per year is $2,500. 85 For 2017, the deduction is
phased out ratably for taxpayers with AG! between $65,000 and $80,000 ($ 135,000 and
$ 165,000 for married taxpayers filing a joint return). The income phase-out ranges are indexed
for inflation and rounded to the next lowest multiple of $5,000.
Description of Proposal
The proposa l repeals the deduct ion for student loan interest.
Effective Date
The proposal applies to taxable years beginning after December 31, 2017.

83

Sec. 221.

84

Sec. 221(c).

85

Sec. 221 (b )( I) .

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TREAS-17-0313-I-000050

 5. Repeal of deduction for qualified tuition and related expenses
Present Law
An individual is allowed an above-the-line deduction for qualified tuition and related
expenses for higher education paid by the individual during the taxable year. 86 Qualified tuition
includes tuition and fees required for the enrollment or attendance by the taxpayer , the taxpayer's
spouse, or any dependent of the taxpayer w ith respect to whom the taxpayer may claim a
personal exemption , at an eligible institution of higher education for courses of instruction of
such individual at such institution. The expenses must be in connection with enrollment at an
institution of higher education during the taxable year, or with an academic term beginning
during the taxable year or during the first three months of the next taxab le year. The deduction is
not available for tuition and related expenses paid for elementary or secondary education.
The maximum deduction is $4,000 for an individual whose AGI for the taxable year does
not exceed $65,000 ($130,000 in the case of a joint return) , or $2,000 for other individuals whose
AGI does not exceed $80,000 ($160 ,000 in the case of a joint return). 87 No deduction is allowed
for an individual whose AGI exceeds the relevant AGI limitations , for a married individual who
does not file a joint return , or for an individual with respect to whom a personal exemption
deduction may be claimed by another taxpay er for the taxable year. The deduction is not
available for taxable years beginning after December 31, 2016.

Description of Proposal
The propo sal repeals the deduction for qualified tuition and related expenses.

Effective Date
The proposal applies to taxable years beginnin g after December 31, 2017.

6. Repeal of exclusion for educational assistance programs
Present Law
Up to $5,250 annually of educational assistance provided by an employer to an employee
is excludible from the employee 's gross income , provided that certain requirements are
satisfied. 88 Nondiscrimination rule s89 apply and the educational assistance must be provided
86

Sec. 222(a).

87

Sec. 222(b)(2)(B).

88

Sec. 127(a).

89

The employer's educational assistance program must not discriminate in favor of higbly comp ensated
employees, within the meaning of Sec. 414(q). lo addition , no more than five percent oftbe amounts paid or
incurred by the employer during the year for educat ional assistance under a qualified educational assistance program

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TREAS-17-0313-I-000051

 pursuant to a separate writte n plan of the employer. The exclusio n applies to both graduate and
undergraduate courses, and applies only with respect to education provided to the employee (i.e.,
it does not apply to education provided to the spouse or a child of the employee) . Amount s that
are excl udibl e from gross income for income tax purposes are also excluded from wages for
employment tax purp oses.
For purposes of the exclus ion, educa tiona l assistance means the payment by an employer
of expe nses incurred by or on behalf of the employee for education of the emp loyee includin g,
but not limited to, tuiti on, fees and similar payments , books , suppl ies, and equipment.
Educationa l assistance also includes the provision by the employer of courses of instruction for
the employee (including books, suppli es, and equ ipment). Educat iona l assistance does not
includ e (I) tools or supplies that may be reta ined by the emplo yee afte r co mpletion of a course ,
(2) meals , lodging , or transportation , and (3) any educ ation involving sports , games , or hobbies.

Description of Proposal
The proposal repeals the exclus ions from gross income and wages for educat ional
assistance programs.

Effectiv e Date
The proposal app lies to taxable years beginning after December 31, 2017.
7. Repeal of exclusion for interest on United States savings bonds used to pay higher
education tuition and fees

Present Law
Interest earned on a qualified U.S. Series EE savings bond issued after 1989 is excludab le
from gross income if the proceeds of the bond upon redemption do not exceed qualified higher
education expe nses paid by the taxpayer during the taxable year. 90 Qualified higher education
expenses include tuiti on and fees (but not room and board expenses) required for the enrollment
or attendance of the taxpayer , the taxpa yer 's spouse , or a dependent of the taxpayer at certain
eligible higher educat ional institution s. The amount of qualified higher education expenses taken
into account for purposes of the excl usion is reduced by the amount of such expenses take n into
acco unt in determining th e Hope , American Opportunity , or Lifetime Learning credits claimed
by any taxpayer , or taken into accoun t in determining an excl usion from gross income for a
distribution from a qual ified tuition program or a Coverde ll educatio n savings account , wit h
respect to a particular student for the taxable year.
The exclusion is phased out for certain higher-income taxpayers , determined by the
taxpayer ' s modified AG I during the year th e bond is redeemed. For 20 17, the exclusion is

can be provid ed for tbe class of individuals consisting of more-than-five-percent owners of tbe employ er and the
spou ses or dependents of such more-than- five-percent owners.
90

Sec. 135.

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TREAS-17-0313-I-000052

 phased out for taxpayers with modified AGI between $78,150 and $93,150 ($117,250 and
$ 147,250 for married taxpayers filing a jo int return). To prevent taxpayers from effectively
avoidin g the income phaseout limitation through the purchase of bonds directly in the child 's
name, the interest exclusion is available only with respect to U.S. Series EE savings bonds issued
to taxpayers who are at least 24 years old.
Description of Proposal

The proposal repeals the exclus ion of interest earned on U.S. Series EE savings bonds.
Effective Date

The proposal applies to taxable years beginning after December 31, 2017.
8. Repeal of exclusion for qualified tuition reductions
Present Law

Qualified tuition reductions for certain educa tion prov ided to employees (and their
spouses and dependents 91) of certain educational organizations are exc ludible from gross
income. 92 The tuition reduct ion is subject to nondiscrimination rules. 93 The exclus ion genera lly
applies below the graduate level, and to teaching and research assistants who are students at the
graduate leve l, but does not apply to any amount received by a student that represents payment
for teaching , research or other services by the student required as a condition for receiving the
tuition reduction. Amou nts that are exclud ible from gross income for income tax purposes are
also excluded from wages for employment tax purposes.
Description of Proposal

The proposal repeals the exclusions from gross income and wages for qualified tuition
reductions.
Effective Date

The proposal applies to amounts paid or incurred after December 31, 2017.

91

Individua ls described under the rules of section 132(11).

92

Educationa l organization described in section l 70(b )(] )(A)( ii). Sec. 1 l 7(d)(2).

93

The exclusion app lies with respect to highly compensated employees, within the meaning of Sec.
414(q), only ifsucb tuition reductions are available on substant ially the same terms to each member ofa group of
employees which is defined under a reasonable classification established by the employer, such that the benefit does
not discriminate in favor of highly compensated employees.

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TREAS-17-0313-I-000053

 D. Simplification and Reform of Deductions
1. Repeal of overall limitation on itemized deductions

Present Law
The total amount of most otherwise allowable itemized deductions (other than the
deductions for medical expenses , investment interest and casualty , theft or gambling losses) is
limited for certain upper-income taxpayers. 94 All other limitations applicable to such deductions
(such as the separate floors) are first applied and , then , the otherwise allowable total amount of
itemized deductions is reduced by three percent of the amount by which the taxpayer's adjusted
gross income exceeds a threshold amount.
For 2017 , the threshold amounts are $261 ,500 for single taxpayers , $287 ,650 for heads of
household , $313 ,800 for married couples filing jointly , and $156 ,900 for married taxpayers filing
separately. These threshold amounts are indexed for inflation. The otherwise allowable
itemized deductions may not be reduced by more than 80 percent by reason of the overall limit
on itemized deductions.

Description of Proposal
The proposal repeals the overall limitation on itemized deductions.

Effective Date
The proposal is effective for taxable years beginning after December 31 , 2017.

2. Modification of deduction for home mortgage interest
Present Law
Deductibility of home mortgage interest
As a general matter , personal interest is not deductible. 95 Qualified residence interest is
not treated as personal interest and is allowed as an itemized deduction , subject to limitations. 96
Qualified residence interest means interest paid or accrued during the taxable year on either
acquisition indebtedness or home equity indebtedness. A qualified residence means the
taxpayer ' s principal residence and one other residence of the taxpayer selected to be a qualified
residence. A qualified residence can be a house , condominium , cooperative , mobile home , house
trailer , or boat.

94

Sec. 68.

95

Sec. 163(h)(l).

96

Sec. 163(h)(2)(D) and (h)(3).

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TREAS-17-0313-I-000054

 Acquisition indebtedness
Acquisition indebtedness is indebtedness that is incurred in acquiring , constructing or
substantially improving a qualified residence of the taxpayer and which secures the residence.
The maximum amount treated as acquisition indebtedness is $1 million ($500,000 in the case of
a married person filing a separate return).
Acquisition indebtedness also includes indebtedness from the refinancing of other
acquisition indebtedness but only to the extent of the amount (and term) of the refinanced
indebtedness. Thus , for example , if the taxpayer incurs $200 ,000 of acquisition indebtedness to
acquire a principal residence and pays down the debt to $150,000, the taxpayer 's acquisition
indebtedness with respect to the residence cannot thereafter be increased above $150,000 (except
by indebtedness incurred to substantially improve the residence).
Interest on acquisition indebtedness is allowable in computing alternative minimum
taxable income. However , in the case of a second residence , the acquisition indebtedness may
only be incurred with respect to a house, apartment , condominium , or a mobile home that is not
used on a transient basis.
Home equity indebtedness
Home equity indebtedness is indebtedness (other than acquisition indebtedness) secured
by a qualified residence.
The amount of home equity indebtedness may not exceed $100,000 ($50,000 in the case
of a married individual filing a separate return) and may not exceed the fair market value of the
residence reduced by the acquisition indebtedness.
Interest on home equity indebtedness is not deductible in computing alternative minimum
taxable income.
Interest on qualifying home equity indebtedness is deductible , regardless of how the
proceeds of the indebtedness are used. For example, personal expenditures may include health
costs and education expenses for the taxpayer's family members or any other personal expenses
such as vacations , furniture , or automobiles. A taxpayer and a mortgage company can contract
for the home equity indebtedness loan proceeds to be transferred to the taxpayer in a lump sum
payment (e.g., a traditional mortgage) , a series of payments (e.g., a reverse mortgage) , or the
lender may extend the borrower a line of credit up to a fixed limit over the term of the loan (e.g.,
a home equity line of credit).
Thus, the aggregate limitation on the total amount of a taxpayer ' s acquisition
indebtedness and home equity indebtedness with respect to a taxpayer ' s principal residence and a
second residence that may give rise to deductible interest is $ 1,100,000 ($550 ,000, for married
persons filing a separate return).

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TREAS-17-0313-I-000055

 Description of Proposal
The proposal modifies the home mortgage interest deduction in the following ways.
First, under the proposal , only intere st paid on indebtednes s used to acquire , construct or
substantially improve the taxpayer 's principal residence may be included in the calculation of the
credit. Thus , under the proposal a taxpayer receives no credit for interest paid on indebtedness
used to acquire a second home.
Second, under the proposal, a taxpayer may treat no more than $500,000 as principal
residence acquisition indebtedness ($250,000 in the case of married taxpayers filing separately).
In the case of principal residence acquisition indebtedness incurred before the date of
introduction (November 2, 2017) , this limitation is $1,000,000 ($500 ,000 in the case of married
taxpayers filing separately). 97
Last, under the proposal , interest paid on home equity indebtedness incurred after 2017 is
not treated as qualified residence interest , and thus is not deductible.
Effective Date
The proposal is effective for interest paid or accrued in taxable years beginnin g after
December 31, 2017.
3. Modification of deduction for taxes not paid or accrued in a trade or business
Present Law
Individuals are permitted a deduction for certain taxes paid or accrued, whether or not
incurred in a taxpayer 's trade or business. These taxes are: (i) State, local real and foreign
property taxes; 98 (ii) State and local personal property taxes ;99 (iii) State, local and foreign
income , war profits , and excess profits taxes. 100 At the election of the taxpayer, an itemized

97
Special rules apply in the case of indebtedness from refinancing existing principal residence acquisition
indebtedness . Spec ifically, the $ I ,000,000 ($500,000 in the case of married taxpayers filing separately) limitation
continues to apply to any indebtedness incurred on or after November 2, 20 17, to refinance qualified residence
indebtednes s incurre d before that date to the extent the amount of the indebtedness resulting from the refinancing
does not exceed the amount of the refinanced indebtedness. Thus, the maximum dollar amount that may be treated
as principal residenc e acquisition indebtedness will not decrease by reason of a refinancing.
98

Sec. l 64(a)(l) .

99

Sec. 164(a)(2).

100

Sec. 164(a)(3). A foreign tax credit, in lieu of a deduction , is allowable for foreign taxes if the taxpayer

so elects.

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TREAS-17-0313-I-000056

 deduction may be taken for State and loca l general sales taxes in lieu of the itemized deduction
for State and local income taxes. 101
Property taxes may be allowed as a deduction in computin g adjusted gross income if
incurred in connection with property used in a trade or business ; otherwise they are an itemized
deduction. In the case of State and local income taxes , the deduction is an itemized deduction
notwithstanding that the tax may be imposed on profits from a trade or business . 102
Individuals also are permitted a deduction for Federal and State generat ion skipping
transfer tax ("GST tax") imposed on certain income distributions that are included in the gross
income of the distributee. 103
In determining a taxpayer ' s alternative minimum taxab le income , no itemized deduction
for property , income , or sales tax is allowed.

Descripti on of Proposa l
The proposal provides the following in the case of an individual:
State, loca l and foreign taxes paid or accrued in carrying on a trade or business or an
activity described in section 212 (relating to expenses for the production of income) remain
deductible as under present law. In the case of other State and local real property taxes , the
proposa l limits the deduction to $ 10,000 ($5,000 in the case of a married person filing a separate
return). Other fore ign real property taxes and state and local persona l property taxes are no
longer allowed as a deduction.
State and local income , war profits , and excess profits taxes paid or accrued , other than
those paid or accrued in carrying on a trade or business or an activity described in section 212 ,
are no longer allowed as an itemized deduction. The election to deduct State and local sales tax
in lieu of State and local income taxes is repealed.

Effective Date
The proposal is effective for taxable years beginning after December 31, 2017.

101

Sec . I 64(b )( 5).

102

See H. Rep. No. 1365 to accomp any Ind ividual Incom e T ax Bill of 1944 (78 11, Con g., 2d. Sess.),
reprinted at 19 C.B . 839 (1944 ).
103

Sec . l 64(a) (4) .

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TREAS-17-0313-I-000057

 4. Repeal of deduction for personal casualty and theft losses
Present Law
A taxpayer may generally claim a deduction for any loss sustained during the taxable
year , not compensated by insurance or otherwise. For individual taxpayers , deductible losses
must be incurred in a trade or business or other profit-seeking activity or consist of property
losses arising from fire, storm , shipwreck , or other casua lty, or from theft. 104 Personal casua lty
or theft losses are deductible only if they exceed $100 per casualty or theft. In addition ,
aggregate net casualty and theft losses are deductible only to the extent they exceed 10 percent of
an individual taxpayer ' s adjusted gross income .

Description of Proposal
The propo sal repeals the deduction for personal casualty and theft losses. However ,
notwithstanding the repeal of the deduction , the proposal retains the benefit of the deduction , as
modified by the Disaster Tax Relief and Airport and Airway Extension Act of 2017 105 for those
ind ividuals who sustained a personal casualt y loss arising from hurricanes Harvey , Irma or
Maria.

Effective Date
The proposal is effective for taxable years beginning after December 31 , 2017.

5. Limitation on wagering losses
Present Law
Losses sustained during the taxable year on wagering transactions are allowed as a
deduction only to the extent of the gains during the taxable year from such transactions . 106

Description of Proposal
The proposa l clarifies the scope of " losses from wagering transactions " as that term is
used in section 165(d). The propo sal provides that this term includes any deduction otherwise
allowable under chapter 1 of the Code incurred in carrying on any wagering transaction .
The propo sal is intended to clarify that the limitation on losses from wagering
transactions applies not only to the actua l costs of wagers incurred by an individual , but to other
expense s incurred by the individual in connection with the cond uct of that individual ' s gamb ling

104

Sec. 165(c) .

105

Pub. L. No. 115-63.

106

Sec. 165(d).

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TREAS-17-0313-I-000058

 activity. 107 The proposal clarifies , for instance , an individual ' s otherwise deductible expenses in
travelin g to or from a casino are subject to the limitation under section 165( d).

Effective Date
The proposal is effective for taxable years beginning after December 31 , 2017.

6. Modifications to the deduction for charitable contributions
Present Law
In general
The Internal Revenue Code allows taxpayers to reduce their income tax liability by
taking deductions for contributions to certain organizations , including charities, Federal , State ,
local and Indian tribal government s, and certain other organizations .
To be deductible , a charitable contribution generall y must meet several threshold
requirements . First , the recipient of the transfer must be eligible to receive charitable
contributions (i.e., an organization or entity described in section l 70(c)). Second , the transfer
must be made with gratuitou s intent and without the expectation of a benefit of substantial
economic value in return. Third , the transfer must be complete and generall y must be a transfer
of a donor ' s entire interest in the contributed property (i.e., not a contingent or partial interest
contribution). To qualify for a current year charitabl e deduction , paym ent of the contribution
must be made within the taxable year . 108 Fourth , the tran sfer must be of money or propertycontribution s of services are not deductible. 109 Finall y, the transfer must be sub stantiated and in
the proper form.
As also discussed below , special rules limit a taxpayer ' s charitable contributions in a
given year to a percenta ge of income , and those rules , in part , turn on whether the organization
receiving the contribution s is a public charity or a private foundation. Other special rules
determine the deductible value of contributed property for each type of property.

107

The prop osal thus reverses the result reached by the T ax Court in Ronald A. May o v. Commissioner,
l 36 T.C. 8 l (20 l l ). In that case , the Court held that a taxpayer 's expense s incurr ed in the conduct of the trade or
business of gamblin g, othe r than the cost of wagers , were not limited by sec . l 65(d), and were thus deduc tible unde r
sec. l 62(a).
108

Sec. 170(a)( I) .

109

For example, as discussed in greate r detail below, the value of time spent voluntee ring for a charitable
organi zation is not deduct ible. Incid ental expenses such as mileage, suppli es, or oth er expenses incurred while
voluntee ring for a chari table organization, howeve r, may be deductible.

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TREAS-17-0313-I-000059

 Contributions of partia l interests in property

In general
In general, a charitable deduction is not allowed for income, estate, or gift tax purposes if
the donor transfers an interest in property to a charity while retaining an interest in that property
or transferring an interest in that property to a noncharity for less than full and adequate
cons ideration. 110 This rule of nondeductibility , often referred to as the partial interest rule,
generally prohibits a charitable deduction for contributions of income interests , remainder
interests , or rights to use property.
A charitable contribution deduction generally is not allowable for a contribution of a
future interest in tangible personal property. 111 For this purpose , a future interest is one "in
which a donor purports to give tangib le persona l property to a charitable organization , but has an
understanding , arrangement, agreement , etc., whether written or oral, with the charitable
organization that has the effect of reserving to, or retaining in, such donor a right to the use,
possession , or enjoyment of the property. " 112
A gift of an undiv ided portion of a donor 's entire interest in property generally is not
treated as a nondeductible gift of a partial interest in property. 113 For this purpose , an undivided
portion of a donor 's entire interest in property must consist of a fraction or percentage of each
and every substantial interest or right owned by the donor in such property and must extend over
the entire term of the donor 's interest in such property. 114 A gift generally is treated as a gift of
an undivided portion of a donor 's entire interest in property if the donee is given the right, as a
tenant in common with the donor , to possession , dominion , and control of the property for a
portion of each year appropriate to its interest in such property. 115
Other exceptions to the partial interest rule are provided for, among other interests:
( 1) remainder interests in charitable remainder annuity trusts , charitable remainder uni trusts , and
pooled income funds ; (2) present interests in the form of a guaranteed annuity or a fixed
110

Secs. l 70(f)(3)(A) (income tax), 2055(e)(2) (estate tax), and 2522(c)(2) (gift tax).

111

Sec. l 70(a)(3).

112
Treas. Reg. sec. l. l 70A-5(a)(4). Treasury regulations provide that section l 70(a)(3) , which genera lly
denies a deduction for a contribution of a future interest in tangible personal property , has "no appl ication in respect
of a transfer of an undivided present interest in property. for example , a contribution of an undivided one-quarter
interest in a painting with respect to which the donee is entitled to possession during three months of each year shall
be treated as made upon the receipt by the donee of a formall y executed and acknowledged deed of gift. However,
the period of initial possession by the donee may not be deferred in time for more than one year." Treas. Reg. sec.
l. l 70A-5(a)(2) .
113

Sec. I 70(f)(3)(B)( ii).

114

Treas. Reg. sec. l.170A-7(b)(l).

115

Treas. Reg. sec. l.170A-7(b)(I).

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TREAS-17-0313-I-000060

 percentage of the annual value of the property ; (3) a remainder interest in a personal residence or
farm; and (4) qualified conservation contributions.
Qualified conservation contributions
Qualified conservation contributions are not subject to the partial interest rule , which
generally bars deductions for charitable contributions of partial interests in property. 116 A
qualified conservation contribution is a contribution of a qualified real property interest to a
qualified organization exclusively for conservation purposes. A qualified real property interest is
defined as: (1) the entire interest of the donor other than a qualified mineral interest ; (2) a
remainder interest; or (3) a restriction (granted in perpetuity) on the use that may be made of the
real property (generally , a conservation easement). Qualified organizations include certain
governmental units , public charities that meet certain public support tests , and certain supporting
organizations. Conservation purposes include: ( 1) the preservation of land areas for outdoor
recreation by, or for the education of, the general public ; (2) the protection of a relatively natural
habitat of fish, wildlife , or plants , or similar ecosystem; (3) the preservation of open space
(including farmland and forest land) where such preservation will yield a significant public
benefit and is either for the scenic enjoyment of the general public or pursuant to a clearly
delineated Federal , State , or local governmental conservation policy ; and (4) the preservation of
an historically important land area or a certified historic structure.

Percentage limits on charitable contributions
Individual taxpayers
Charitable contributions by individual taxpayers are limited to a specified percentage of
the individual ' s contribution base. The contribution base is the taxpayer's adjusted gross income
("AGI ") for a taxable year , disregarding any net operating loss carryback to the year under
section 172. 117 In general , more favorable (higher) percentage limits apply to contributions of
cash and ordinary income property than to contributions of capital gain property. More
favorable limits also generally apply to contributions to public charities (and certain operating
foundations) than to contributions to nonoperating private foundations.
More specifically , the deduction for charitable contributions by an individual taxpayer of
cash and property that is not appreciated to a charitable organization described in section
I 70(b )(1)(A) (public charities , private foundations other than non operating private foundations ,
and certain governmental units) may not exceed 50 percent of the taxpayer's contribution base.
Contributions of this type of property to nonoperating private foundations generally may be
deducted up to the lesser of30 percent of the taxpayer ' s contribution base or the excess of (i) 50
percent of the contribution base over (ii) the amount of contributions subject to the 50 percent
limitation.

116

Secs. I 70(f)(3)(B)(iii) and l 70(h).

117

Sec. 170(b)(l)(G ).

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TREAS-17-0313-I-000061

 Contributions of appreciated capital gain propert y to public charities and other
organizations descnoed in section 170(b)( I )(A) generally are deductible up to 30 percent of the
taxpayer 's contribution base (after taking into account contributions other than contributions of
capital gain property ). An individual may elect , however, to bring all these contributions of
appreciated capital gain property for a taxable year within the SO-percent limitation category by
reducing the amount of the contribution deduction by the amount of the appreciation in the
capital gain property. Contributions of appreciated capital gain property to nonoperatin g ptivate
foundations are dedu ctible up to the lesser of 20 percent of the taxpayer ' s contribution base or
the excess of (i) 30 percent of the contribution base over (ii) the amount of contributions subject
to the 30 percent limjtation .
Finally , more favorable percentage limit s sometime s apply to contributions to the donee
charity than to contributions that are for the use of the donee charity. Contributions of capital
gain property for the use of public charities and other organizations described in section
I 70(b ){l){A) also are limited to 20 percent of the taxpayer's contribution base. ln contrast to
property contributed directly to a charitable orga nization , property contr ibuted for the use of an
organization generall y has been interpreted to mean property contributed in trust for the
organization. 118 Charitable contributions of income interests (where deductible) also generally
are treated as contributions for the use of the donee organization.

Table 2.-Cbaritab le Contribution Percentage Limits For Individua l Taxpayers 119
.
Qi..l_iniuy

(n.co1:nc·

PropC:
rry.:mcJ( ash

C5pital Gain
:Propertyfo:1!1e
R~~ipJcnt 1~11

C::ip ital Gain'
Property for USC
_of,1h~. Recjpicnt

i~c

Public Charities, Pri vate
Operating Foundations , and
Private Distributing Foundations

50%

30% 121

20 %

Nonoperating Private
Foundations

30%

20%

20%

118

Rockefeller v. Commissioner, 676 F.2 d 35, 39 (2d Cir. J 9 82).

119

Percentages shown are the percentage of an individual's contribution base.

°

12

Capital gain property contTibu!edto public charities, private operating foundations, or private
distributing foundations will be subject to the SO-percentlimitation if the donor elects to reduce the fair market value
of the propertyby the amount that would have been long-termcapital gain if the property had been sold.
12 1

Certain qualified conservation contributions to public charities (generally. conservation easemems),
qualify for more generous contribution limits. .in general, the 30-perceut LimitappJicable to contributions of eapilal
gain property is increased to 100percent if the individual making the qua Iified conservation contribut.ionis a
qualified farmeror rancher or to 50 percetll if the individual is not a qualified farmer or rancher.

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TREAS-17-0313-I-000062

 Corporate taxpayers
A corporation generally may deduct charitable contributions up to 10 percent of the
corporation's taxable income for the year. 122 For this purpose , taxable income is determined
without regard to: ( 1) the charitable contributions deduction ; (2) any net operating loss
carryback to the taxable year; (3) deductions for dividends received; (4) deductions for dividends
paid on certain preferred stock of public utilities ; and (5) any capital loss carryback to the taxable
year. 123
Carryforwards of excess contributions
Charitable contributions that exceed the applicable percentage limit generally may be
carried forward for up to five years. 124 In general , contributions carried over from a prior year
are taken into account after contributions for the current year that are subject to the same
percentage limit. Excess contributions made for the use of (rather than to) an organization
generally may not be carried forward.
Qualified conservation contributions
Preferential percentage limits and carryforward rules app ly for qualified conservation
contributions. 125 In general , the 30-percent contribution base limitation on contributions of
capital gain property by individuals does not apply to qualified conservation contributions.
Instead , individuals may deduct the fair market va lue of any qualified conservation contribution
to an organization described in section l 70(b )(1)(A) (generally , public charities) to the extent of
the excess of 50 percent of the contribution base over the amount of all other allowable
charitable contributions. These contributions are not taken into account in determining the
amount of other allowable charitable contributions. Individual s are allowed to carry forward any
qualified conservation contributions that exceed the SO-percent limitation for up to 15 years. In
the case of an individual who is a qualified farmer or rancher for the taxable year in which the
contribution is made, a qualified conservation contribution is allowable up to 100 percent of the
excess of the taxpayer's contribution base over the amount of all other allowable charitable
contributions.
In the case of a corporation (other than a publicly traded corporation) that is a qualified
farmer or rancher for the taxable year in which the contribution is made , any qualified
conservation contribution is allowable up to 100 percent of the excess of the corporation's
taxable income (as computed under section 170(b)(2)) over the amount of all other allowable

122

Sec. I 70(b)( 2)(A).

123

Sec. I 70(b)(2)(C).

124

Sec. 170(d).

125

Sec . 170(b )( I)(E).

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TREAS-17-0313-I-000063

 charitable contributions. Any excess may be carried forward for up to 15 years as a contribution
subject to the 100-percent limitation. 126
A qualified farmer or rancher means a taxpayer whose gross income from the trade or
business of farming (within the meaning of section 2032A(e)(5)) is greater than 50 percent of the
taxpayer 's gross income for the taxable year.
Valuation of charitable contributions

In general
For purposes of the income tax charitable deduction , the value of property contributed to
charity may be limited to the fair market value of the property , the donor's tax basis in the
property, or in some cases a different amount.
Charitable contributions of cash are deductible in the amount contributed, subject to the
percentage limits discussed above. In addition , a taxpayer generally may deduct the full fair
market value of long-term capital gain property contributed to charity. 127 Contributions of
tangible personal property also generally are deductible at fair market value if the use by the
recipient charitable organization is related to its tax-exempt purpose .
In certain other cases, however, section l 70(e) limits the deductible value of the
contribution of appreciated property to the donor 's tax basis in the property. This limitation of
the property's deductible value to basis generally applies , for example, for: (1) contributions of
inventory or other ordinary income or short-term capital gain property; 128 (2) contributions of
tangible personal property if the use by the recipient charitable organization is unrelated to the
organization's tax-exempt purpose; 129 and (3) contributions to or for the use of a private
foundation (other than certain private operating foundations). 130

For contributions of qualified appreciated stock, the above-described rule that limits the
value of property contributed to or for the use of a private nonoperating foundation to the
ta::q;a yer's basis in the property does not apply; therefore , subject to certain limits, contributions
o::quaJ.ified appreciated stock to a nonoperating private foundation may be deducted at fair
126

Sec. l 70(b)(2)(B).

m Capital gain property means any capital asset or property used in the taxpayer 's trade or business , the
saJe of which at its fair market value, at the time of contribution, would have resulted in gain that would have been
long-term capital gain. Sec. l 70(e)(l)(A).
128

Sec. 170(e). Special rules, discussed below, apply for certain contributions of inventory and other

129

Sec. 170(e)(l)(B)(i)(I).

property.

130

Sec. 170(e)(l)(B)(ii). Certain contributions of patents or other intellectual property also generally are
limited to the donor's basis in the property. Sec. I70(e)(I )(B)(iii). However, a specia l rule permits additiona l
charitable deductions beyond the donor's tax basis in certain situations.

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TREAS-17-0313-I-000064

 market value. 13 1 Qualified appreciated stock is stock that is capital gain property and for which
(as of the date of the contribution) market quotations are readily available on an established
securities market. 132 A contribution of qualified appreciated stock (when increased by the
aggregate amount of all prior such contributions by the donor of stock in the corporation)
generally does not include a contribution of stock to the extent the amount of the stock
contributed exceeds 10 percent (in value) of all of the outstanding stock of the corporation. 133
Contributions of property with a fair market value that is less than the donor 's tax basis
generally are deductible at the fair market value of the property.
Enhanced deduction rules for certain contributions of inventory and other property
Although most charitable contributions of property are valued at fair market value or the
donor 's tax basis in the propert y, certain statutorily described contributions of appreciated
inventory and other property qualify for an enhanced deduction valuation that exceeds the
donor 's tax basis in the property , but which is less than the fair market value of the property.
As discussed above , a taxpayer ' s deduction for charitable contributions of inventory
property generally is limited to the taxpayer's basis (typically, cost) in the inventory , or if less,
the fair market value of the property . For certain contributions of inventory , however , C
corporations (but not other taxpayers) may claim an enhanced deduction equal to the lesser of
(1) basis plus one-half of the item's appreciation (i.e., basis plus one-half of fair market value in
excess of basis) or (2) two times basis. 134 To be eligible for the enhanced deduction value, the
contributed property generally must be inventory of the taxpayer , contributed to a charitable
organization described in section 501 ( c)(3) (except for private nonoperating foundations) , and
the donee must (1) use the propert y consistent with the donee 's exempt purpose solely for the
care of the ill, the needy, or infants, (2) not transfer the property in exchange for mone y, other
property , or services , and (3) provide the taxpayer a written statement that the donee 's use of the
property will be consistent with such requirements . 135 Contributions to organizations that are not
described in section 50l(c)(3) , such as governmental entities , do not qualify for this enhanced
deduction .
To use the enhanced deduction provision , the taxpayer must establish that the fair market
value of the donated item exceeds basis.

131

Sec . 170(e)(5).

132

Sec. I 70(e)(S)(B).

133

Sec. I 70(e)(S)(C).

134

Sec. 170(e)(3).

135

Sec . 170(e)(3)(A)(i)-(iii).

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TREAS-17-0313-I-000065

 A taxpayer engaged in a trade or business, whether or not a C corporation, is eligible to
claim the enhanced deduction for certain donation s of food inventory. 136
Selected statutory rules for specific types of contributions
Special statutory rules limit the deductible value (and impose enhanced reportin g
obligations on donor s) of charitable contributions of certa in types of property , including vehicles,
intellectual propert y, and clothing and household items. Each of these rules was enacted in
respon se to concerns that some taxpa yers did not accurately report - and in many instances
overstated - the value of the propert y for purpo ses of claiming a charitable deduction.
Vehicle donations s.-Un der present law, the amount of deduction for charitable
contributions of vehicles (generally including automobile s, boats, and airplanes for which the
claimed value exceeds $500 and excluding invento ry propert y) depends upon the use of the
vehicle by the donee organization. If the donee organization sells the vehicle without any
significant interven ing use or material improvement of such vehicle by the organization, the
amount of the deduction may not exceed the gross proceeds received from the sale. In other
situations , a fair market value deduction may be allowed.
Patents and other intellectual property .- If a taxpayer contributes a patent or other
intellectua l property (other than certain copyrights or inventory) 137 to a charitable organization ,
the taxpayer 's initial charitabl e deduction is limited to the lesser of the taxpayer's basis in the
contributed property or the fair market value of the propert y. 138 In addition , the taxpayer
generally is permitt ed to deduct, as a charitab le contr ibution , certain additional amounts in the
year of contribution or in subsequent taxable years based on a specified percentage of the
qualified donee income received or accrued by the charitable donee with respect to the
contributed intellectual property. For this purpo se, qualified donee income includes net income
received or accrued by the donee that properly is allocable to the intellectual property itself (as
opposed to the activity in which the intellectual property is used). 139
Clothing and household items.-Charitable contributions of clothin g and household items
generally are subject to the charitable deduction rules applicable to tangible personal property. If
such contributed property is appreciated property in the hands of the taxpayer, and is not used to
further the donee ' s exempt purpo se, the deduction is limited to basis. In most situations,
136

Sec. l 70(e)(3)(C) .

137

Under present and prior law, certain copyri ghts are not considered cap ital assets , such that the
charitable deduction for such copyrights generall y is limited to the taxpayer 's basis. See sec. 122l(a) (3),
123l(b)(l)(C).
138

Sec . 170(e)(l)(B)(iii).

139

The present-law rules allowin g additional charitabl e deductions for qua lified donee income were
enacted as part of the Amer ican Job s Creation Act of 2004 , and are effective for contributions made after June 3,
2004. For a more deta iled description of these rules, see Jo int Committee on Taxation , General Explanation o/ Tax
Legislation Enacted in the 108th Congress (JCS -5-05), May 2005 , pp. 457-461.

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TREAS-17-0313-I-000066

 however , clothing and household items have a fair market value that is less than the taxpayer 's
basis in the property. Because property with a fair market value less than basis generally is
deductible at the property 's fair market value , taxpayers generally may deduct only the fair
market value of most contributions of clothing or household items , regardless of whether the
property is used for exempt or unrelated purposes by the donee organization. Furthermore , a
special rule generally pro vides that no deduction is allowed for a charitable contribution of
clothin g or a household item unle ss the item is in good used or better condition . The Secretary is
authorized to deny by regulation a deduction for any contribution of clothing or a household item
that has minimal monetary value , such as used socks and used undergarments. Notwithstanding
the general rule , a charitable contribution of clothin g or household items not in good used or
better condition with a claimed value of more than $500 may be deducted if the taxpayer
includes with the taxpayer ' s return a qualified appraisal with respect to the property. 140
Household items include furniture , furnishings , electronics , appliances , linens , and other similar
items. Food , painting s, antique s, and other object s of art, jewelry and gems , and certain
collections are excluded from the special rules described in the precedin g para graph. 141
College athletic seating rights. - In general , where a taxpayer receives or expects to
receive a substantial return benefit for a payment to charity , the payment is not deductible as a
charitable contribution. Howe ver, special rules apply to certain payments to institution s of
higher education in exchan ge for which the payor receives the right to purchase tickets or seatin g
at an athletic event. Specifically , the payor may treat 80 percent of a payment as a charitable
contribution where: ( 1) the amount is paid to or for the benefit of an institution of higher
education (as defined in section 3304(f)) described in section (b)(l)(A)(ii) (generally , a school
with a regular faculty and curriculum and meeting certain other requirement s), and (2) such
amount would be allowable as a charitable deduction but for the fact that the taxpa yer receives
(direct! y or indirect! y) as a result of the payment the right to purchase tickets for seating at an
athletic event in an athletic stadium of such institution. 142

Use of a vehicle when volunteering for a charity
Unreimbur sed out-of-pocket expenditure s made incident to pro viding donated services to
a qualified charitable organization - such as out-of-pocket transportation expenses necessarily
incurred in performing donated services - may qualify as a charitable contribution . 143 No
charitable contribution deduction is allowed for travelin g expense s (includin g expenses for meal s

140

As is discussed above, the charitable contribu tion substantiation rules generally require a qualified
appra isal where the claimed value ofa contr ibution is more than $5,000 .
141

The special rules concerning the deductibility o f clothing and househo ld items were enacted as part of
the Pension Protection Act of 2006 , P.L. 109-280 (August l 7, 2006) , and are effective for contributions made after
August 17, 2006. For a more detailed descr iption of these mies , see Joint Committee on Taxati on, General
Explanation of Tax Legislation Enacted in the JO~h Congress (JCS-1-07 ), January 17, 2007, pp . 597-600.
142

Sec . 170(1).

143

Treas. Reg. sec. 1. I 70A- I(g).

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TREAS-17-0313-I-000067

 and lodging) while away from home , whether pa id directly or by reimbu rsement , unle ss there is
no significant element of per sona l pleasure , recreation , or vacation in such travel. 144

In determinin g the amount treated as a charitable contribution where a taxpayer operates
a vehicle in providing donated serv ices to a charity, the tax payer either may trac k and deduct
actual out-of-pocket expenditures or, in the case of a passenge r automobile, may use the
charitable standard milea ge rate. The charitable standard milea ge rate is set by statut e at 14 cents
per mile. 145 The taxpayer may also deduct (under either com putation method) , any parking fees
and toll s incurred in rendering the services , but may not deduct any amount (regardle ss of the
computation method used) for gene ral repair or maintenan ce expenses , depreciation , insurance ,
reg istration fees , etc. Regardless of the computation method used , the taxp ayer must keep
reliable written records of expenses incurre d. For example , where a taxpaye r uses the charitable
standard milea ge rate to det ermi ne a deduction , the IRS has stated that the taxpayer genera lly
must maintain records of miles driven , time , place (or use), and purpo se of the mi leage. If the
charitable standard milea ge rate is not u sed to determine the deduction , the taxpa yer ge nerall y
must maintain reliabl e written record s of actual expenses incurred. 146
Substantiation and other formal requirements
In general
A donor who claims a deduction for a charitable contribution must maintain reliable
written reco rds regardin g the contribution , regardle ss of the value or amount of such
contribution. 147 In the case of a charitable contribut ion of mon ey, regardless of the amount ,
applicable recordkeeping requirements are satisfied only if the donor maintain s as a recor d of the
contribution a bank reco rd or a written communication from the donee showing the name of the
donee organization , the date of the contribution , and the amount of the contribution . In such
cases, the recordk eeping requirements may not be satisfied by maintaining other wr itten records.
No charitable contribution deduction is allowed for a separat e contribution of $250 or
mor e unl ess the donor obtains a contemporaneous written acknowledgement of the contribution

144

Sec. l 70(j) .

145

Sec. l 70(i).

146
In lieu of actual operatin g expenses, an optiona l standard mileage rate may be used in computing
deductible transportation expenses for medical purposes (section 2 13) or for work-re lated moving (section 217).
The standard mileage rates for medical and moving purposes genera lly cover only out-of-pocket operati ng expenses
(includi ng gasoline and oil) directly related to the use oftl1e automobile . Such rates do not include costs that are not
deductible for medical or moving purposes , such as general maintenance expenses , deprecia tion, insurance , and
registration fees . The medical and moving standard mileage rates are determined by the IRS and updated
periodically. For expenses paid or incurred on or after January I, 20 I 7, tl1erate for both such purposes is 17 cents
permi le. JRSNotic e20 16-79.
147

Sec. 170(t)(l 7).

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TREAS-17-0313-I-000068

 from the charity indicating whether the charity provided any good or service (and an estimate of
the value of any such good or service) to the taxpayer in consideration for the contribution. 148
In addition, any charity receiving a contribution exceeding $75 made partl y as a gift and
partly as consideration for goods or services furnished by the charity (a "quid pro quo"
contribution) is required to inform the contributor in writing of an estimate of the value of the
goods or services furnished by the charity and that only the portion exceeding the value of the
goods or services is deductible as a charitable contribution. 149
If the total charitable deduction claimed for noncash property is more than $500, the
taxpayer must attach a completed Form 8283 (Noncash Charitable Contributions) to the
taxpayer's return or the deduction is not allowed. 150 In general , taxpayers are required to obtain
a qualified appraisal for donated propert y with a value of more than $5,000, and to attach an
appraisal summary to the tax return.

Exception for certain contributions reported by the donee organization
Subsection 170(f)(8)(D) provides an exception to the contemporaneous written
acknowledgment requirement described above. Under the exception, a contemporaneous written
acknowledgment is not required if the donee organization files a return, on such form and in
accordance with such regulations as the Secretary may prescribe, that includes the same content.
"[T]he section 170(f)(8)(D) exception is not available unless and until the Treasury Department
and the IRS issue final regulations prescribing the method by which donee reportin g may be
accomplished." 151 No such final regulations have been issued. 152

148

Such acknowledgement must include the amount of cash and a description (but not value) of any
property other than cash contributed , whether the donee provided any goods or services in consideration for the
contribution, and a good faith estimate of the value of any such goods or services. Sec. 170(t)(8).
149

Sec. 6115.

150

Sec. l 70(f)( 11).

151

See IRS, Notice of Proposed Rulemaking , Substantiation Requirement for Certain Contributions , REG138344-13 (October 13, 2015) , I.R.B. 2015-41 (pream ble).
152
In October 2015, the IRS issued proposed regulations that, if finalized, would have implemented the
section l 70(f)(8)(D) exception to the contemporaneous written acknowledgment requirement. The proposed
regulations provided that a return filed by a donee organization under section l 70(f)(8)(D) must include, in addition
to the infonnation generally required on a contemporaneous written acknowledgment: (1) the name and address of
the donee organization; (2) the name and address of the donor; and (3) the taxpayer identification number of the
donor. In addition, the return must be filed with the IRS (with a copy provided to the donor) on or before February
28 of the year following the calendar year in which the contribution was made. Under the proposed regulations,
donee reporting would have been optional and wou ld have been available solely at the discretion of the donee
organization. The proposed regulations were withdrawn in January 2016. See Prop. Treas. Reg. sec l. l 70A13(t)( 18).

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TREAS-17-0313-I-000069

 Description of Proposal
The proposal make s the following modifications to the pre sent law charitable deduction
rules.

Increased percentage limits for contributions of cash to public charities
The proposal increases the income-based percentage limit described in section
170(b )(1 )(A) for certain charitable contr ibution s by an individual taxpayer of cash to public
charities and certa in other organizations from 50 percent to 60 percent.

Charitable mileage rate adiusted for inflation
The proposal repeals the statutory charitable mileage rate and provides instead that the
standar d mileage rate used for determining the charitable contribution deduction shall be a rate
wh ich takes into account the variable costs of operating an automobile. The intent of the
provision is to allow the IRS to determine , and make periodic adjustments to, the chari tabl e
standar d mileage rate , taking into account the types of costs that are deductible under sect ion 170
of the Code when operating a vehicle in connection with provid ing vo lunteer services (i.e.,
generall y, the out-of-pocket operating expenses (includin g gaso line and oil) directly related to
the u se of the automobile for such purposes).

Denial of deduction for college athletic event seating rights
The proposal amend s sectio n 170(1) to provide that no charitable deduction shall be
allowed for any amount described in paragraph 170(1)(2), genera lly, a payment to an institut ion
of higher education in exchange for which the payor receives the right to purchase tickets or
seat ing at an athletic event , as described in greater detail above.

Repeal of substantiation exception for certain contributions reported by the donee
organization
The provision repeals the section l 70(f)(8)(D) exception to the contemporaneous written
acknowledgment requirement.

Effective Date
The proposal is effective for contributions made in taxable years beginning after
December 31 , 2017.

7. Repeal of deduction for tax preparation expenses

Present Law
For regular income tax purposes , individua ls are allowed an itemized deduction for
expenses for the production of income. These expenses are defined as ordinary and necessary
expenses paid or incurred in a taxable year: (1) for the production or collectio n of income ; (2) for

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TREAS-17-0313-I-000070

 the management, conservation, or maintenance of property held for the production of income; or
(3) in connection with the determination , collection, or refund of any tax. 153
Description of Proposal
The proposal repeals the deduction for expenses in connection with the determinat ion,
collection , or refund of any tax.
Effective Date
The proposa l is effective for taxab le years beginning after December 31, 2017.
8. Repeal of deduction for medical expenses
Present Law
Individuals may claim an itemized deduction for unreimbur sed medical expenses, but
only to the extent that such expenses exceed 10 percent of adjusted gross income. 154 For taxable
years beginning before January 1, 2017 , the IO-percent threshold is reduced to 7.5 percent in the
case of taxpayers who have attained the age of 65 before the close of the taxable year. In the
case of married taxpayers , the 7.5 percent thresho ld app lies if either spouse has obtained the age
of 65 before the close of the taxable year. For these taxpayers, durin g these years, the thresho ld
is 10 percent for AMT purposes.
Description of Proposal
The proposa l repeals the deduction for unreimbursed medical expenses.
Effective Date
The proposal is effective for taxable years beginning after December 31, 2017.

153

Sec. 212.

154

Sec. 213. The thresho ld was amended by the Patient Protection and Affordable Care Act (Pub. L. No.
111-118). For taxable years beginning before January 1, 2013, the threshold was 7.5 percent and 10 percent for
alternative minimum tax ("AMT ") purposes.

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TREAS-17-0313-I-000071

 9. Repeal of deduction for alimony payments and corresponding inclusion in gross income
Present Law

Alimony and separate maintenance payments are deductible by the payor spouse and
includible in income by the recipient spouse. 155 Child support payments are not treated as
alimony. 156
Description of Proposal

Under the proposal , alimony and separat e maintenance payments are not deductible by
the payor spouse. The proposal repea ls sections 6l(a)(8) and 71 of the Code. These sections
specify that alimony and separate maintenance payments are includ ed in income. Thus , the
intent of the proposal is to follow the rule of the Supreme Cour t' s holding in Gould v. Gould, 157
in which the Court held that such payments are not income to the recipient. The treatment of
child support is not changed.
Effective Date

The proposal is effective for any divorce or separat ion instrument executed after
December 31, 2017, or for any divorce or separation instrument executed on or before December
31, 2017, and modified after that date, if the modification express ly provides that the
amendments made by this section apply to such modifi cation.
10. Repeal of deduction for moving expenses
Present Law

Individuals are permitted an itemized deduction for moving expenses paid or incurred
during the taxable year in connection with the commencement of work by the taxpayer as an
employee or as a self-employed individual at a new principal place of work. 158 Such expenses
are deductible only if the move meets certa in conditions related to distance from the taxpayer's
previous residence and the taxpayer 's status as a full-time employee in the new location.
Description of Proposal

The proposal repeals the deduction for moving expenses.

155

Secs. 2 l 5(a) and 71 (a).

156

Sec. 7l(c).

157

245 U.S. 151 (1917).

158

Sec. 2 l 7(a).

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TREAS-17-0313-I-000072

 Effective Date

The proposal is effective for taxable years beginning after December 31, 2017.
11. Termination of deduction and exclusions for contributions to medical savings accounts
Present Law
Archer MSAs

As of 1997, certain individuals are permitted to contribute to an Archer MSA , which is a
tax-exempt trust or custodial account. 159 Within limits, contributions to an Archer MSA are
deductible in determining adjusted gross income if made by an individual and are excludible
from gross income for income tax purposes and wages for employment tax 160 purposes if made
by the employer of an individual. 161
An individual is generally eligible for an Archer MSA if the individual is covered by a
high deductible health plan and no other health plan other than a plan that provides certain
permitted insurance or permitted coverage. In addition , the individual either must be an
employee of a small employer (generally an employer with 50 or fewer employees on average)
that provides the high deductible health plan or must be self-employed or the spouse of a selfemployed individual and the high deductible health plan is not provided by the employer of the
individual or spouse.
For 2017, a high deductible health plan for purposes of Archer MSA eligibility is a health
plan with an annual deductible of at least $2,250 and not more than $3,350 in the case of selfonly coverage and at least $4,500 and not more than $6,750 in the case of family coverage. In
addition , for 2017 , the maximum out-of-pocket expenses with respect to allowed costs must be
no more than $4,500 in the case of self-only coverage and no more than $8,25 0 in the case of
family coverage . Out-of-pocket expenses include deductibles , co-payments , and other amounts
(other than premiums) that the individual must pay for covered benefits under the plan. A plan
does not fail to qualify as a high deductible health plan if substantially all of the coverage under
the plan is certain permitted insurance or is coverage (whether provided through insurance or
otherwise) for accidents , disability , dental care, vision care, or long-term care.
The maximum annual contribution that can be made to an Archer MSA for a year is 65
percent of the annual deductible under the individual ' s high deductible health plan in the case of
self-only coverage (65 percent of $3,350 for 2017) and 75 percent of the annual deductible in the
case of family coverage (75 percent of $6,750 for 2017) , but in no case more than the
individual ' s compensation income . In addition , the maximum contribution can be made only if
the individual is covered by the high deductible health plan for the full year.
159

Archer MSAs were originally called medical sav ings accounts or MSAs.

160

The FICA exclusion is provided under IRS Notice 96-53.

161

Secs. 106(b) and 220.

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 Distributions from an Archer MSA for qualified medical expenses are not includible in
gross income. Distributions not used for qualified medical expenses are includible in gross
income and subject to an additional 20-percent tax unless an exception applies. A distribution
from an Archer MSA may be rolled over on a nontaxable basis to another Archer MSA or to a
health savings account and does not count against the contribution limits.
After 2007, no new contributions can be made to Archer MSAs except by or on behalf of
individuals who previously had made Archer MSA contributions and employees of small
employers that previously contributed to Archer MSAs (or at least 20 percent of whose
employees who were previously eligible to contribute to Archer MSAs did so).
Health savings accounts
As of 2004, an individual with a high deductible health plan (and no other health plan
other than a plan that provides certain permitted insurance or permitted coverage) generally may
contribute to a health savings account ("HSA "), which is a tax-exempt trust or custodial account.
HSAs provide similar tax-favored savings treatment as Archer MSAs. That is, within limits,
contributions to an HSA are deductible in determining adjusted gross income if made by an
individual and are excludable from gross income for income tax purposes and wages for
employment tax 162 purposes if made by the employer of an individual , and distributions for
qualified medical expenses are not includible in gross income. 163 However , the rules for HSAs
are in various aspects more favorable than the rules for Archer MSAs. For example , the
availability of HS As is not limited to employees of small employers or self-employed individuals
and their spouses.
For 2017, a high deductible health plan for purposes of HSA eligibility is a health plan
with an annual deductible of at least $1,300 in the case of self-only coverage and at least $2,600
in the case of family coverage. In addition, for 2017 , the sum of the deductible and the
maximum out-of-pocket expenses with respect to allowed costs must be no more than $6,550 in
the case of self-only coverage and no more than $13, 100 in the case of family coverage. A plan
does not fail to qualify as a high deductible health plan for HSA purposes merely because it does
not have a deductible for preventive care.
For 2017 , the maximum aggregate annual contribution that can be made to an HSA is
$3,400 in the case of self-only coverage and $6,750 in the case of family coverage. The annual
contribution limits are increased by $ I ,000 for individuals who have attained age 55 by the end
of the taxable year (referred to as "catch-up contributions") . The maximum amount that an
individual make contribute is reduced by the amount of any contributions to the individual 's
Archer MSA and any excludable HSA contributions made by the individual 's employer. In
some cases, an individual may make the maximum HSA contribution , even if the individual is
covered by the high deductible health plan for only part of the year. A distribution from an HSA

162

The FICA exclus ion is provided under IRS Notice 2004-2.

163

Secs. I 06( d) and 223.

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 may be rolled over on a nontaxable basis to another HSA and does not count against the
contribution limits.
Description of Proposal
Under the proposal , contributi ons to Archer MSAs for taxable years beginning after
December 31, 2017 , are not deductible or excludible from gross income and wages.
Effective Date
The proposa l is effective for taxab le years beginning after December 31, 2017.
12. Denial of deduction for expenses attributable to the trade or busines s of being an
employee, expenses of teachers, performing artists and certain officials
Present Law

In genera l, busine ss expenses incurred by an employee are deduct ible, but only as an
itemized deduction and only to the extent the expenses exceed two percent of adjusted gross
income . 164 However , in the case of certain employees and certain expenses , a deduction may be
taken in determ ining adjusted gross income (referred to as an "above-the- line" deduction) ,
including expenses of qualified performing artists, expenses of State or loca l government
officials performing services on a fee basis, expenses of eligible educators ( applicab le under
present law for taxable years beginning after 2001 and before 20 17), and expenses of members
of a reserve component of the Armed Forces. 165
Present law and IRS guidance provide for numerous items that may be deducted under
this provision (subject to the two-percent adjusted gross income floor). This non-exha ustive list
includes): 166
•

Business bad debt of an employee;

•

Business liability insurance premiums ;

•

Damages paid to a former employer for breach of an employment contract ;

•

Depreciation on a computer a taxpayer 's employer requires him to use in his work ;

•

Dues to a chamber of commerce if membership helps the taxpayer do his job ;

•

Dues to professional societies ;

164

Secs. 62(a)( l) and 67.

165

Sec . 62(a)(2)(B), (C), (D) and (E) . Under section 62(a)(2)(A) and (c), certain reimbursements of
employee business expenses are excluded from income.
166

See IRS Publica tion 529, "Miscellaneous Ded uctions" (2016), p. 3.

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 •

Educator expenses 167;

•

Home office or part of a taxpayer's home used regularly and exclusively in the
taxpayer 's work;

•

Job search expenses in the taxpayer's present occupation;

•

Laboratory breakage fees;

•

Legal fees related to the taxpayer 's job;

•

Licenses and regulatory fees;

•

Malpractice insurance premiums ;

•

Medical examinations required by an employer;

•

Occupational taxes;

•

Passport for a business trip ;

•

Repayment of an income aid payment received under an employer's plan ;

•

Research expenses of a college professo r;

•

Rural mail carriers' vehicle expenses;

•

Subscriptions to professional journals and trade magazines related to the taxpa yer's
work;

•

Tools and supplies used in the taxpayer 's work;

•

Travel , transportation , meals , entertainment , gifts, and local lodging related to the
taxpayer ' s work;

•

Union dues and expenses ;

•

Work clothes and uniforms ifrequired and not suitable for everyday use; and

•

Work-related education.

A working condition fringe provided to an employee is excluded from the employee's
income and wages. 168 For this purpose , a working condition fringe means property or services
provided to an employee to the extent that, if the employee paid for the property or service , the
payment would be deductible as a business expense or depreciation.
Description of Proposal

Under the proposal , business expenses incurred by an employee are not deductible , other
than expenses that are deductible in determining adjusted gross income (that is, above-the-line
deductions).
167

Under a special provision , these expenses are deductible "above the line" up to $250.

168

Sec. 132(a)(3) and (d).

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TREAS-17-0313-I-000076

 In addition , the proposal repeals the provisions allowing above-the-line deductions for
expenses of qualified performing artists and expenses of State or local government officia ls
performing services on a fee basis. The proposal also repeals the provision allowing an abovethe-line deduction for expenses of eligible educators for taxable years beginning after 2001 and
before 2017. The proposal retains the provision allowing an above-the-line deduction for
expenses of members of a reserve component of the Armed Forces. 169

In addition , whether property or services provided by an employer are excluded as a
working condition fringe is determined without regard to the proposal. That is, the same standard
as under present law applies for this purpose.
Effective Date

The proposal applies to taxable years beginning after December 31, 2017.

169

The proposal also retains the provision under which certain reimbursemen ts of emplo yee business
expenses are excluded from incom e .

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TREAS-17-0313-I-000077

 E. Simplification and Reform of Exclusions and Taxable Compensation
1. Limitation on exclusion for employer-provided housing

Present Law
The value of lodging furnished to an employee , spouse, or dependents by or on behalf of
an employer for the convenie nce of the employer (referred to as "employer-provided lodging") is
excludible from the employee's gross income, but only if the employee is required to accept the
lodging on the business premises of the employer as a condition of employment. 170 Special rules
apply with respect to employees living in foreign camps 17 1 and lodging furnished by certain
educational institutions to employees. 172 Amounts attributable to employer-provided lodging that
are excludible from gross income for income tax purposes are also excluded from wages for
employment tax purposes.

Description of Proposal
The proposal limits the amount that may be excluded from gross income for employerprovided lodging to $50,000 ($25,000 in the case of a married individual filing a separate return),
subject to a phase-out based on the employee's level of compensation. The exclusion is phased
out by $1 for every $2 earned above the indexed compensation threshold. For 2017, this
compensation threshold is $120,000. 173 The proposal also denies any exclusion for employerprovided housing provided to 5% owners, 174 regardless of their compensation level.
In addition , the exclusion does not apply to more than one residence at any given time.
In the case of spouses filing a joint return, the one residence limit may be applied separately to
each spouse for a period during which the spouses reside in separate residences provided in
connection with their respective employments.

Those amounts that are not excludible from gross income for income tax purposes will
also not be excluded from wages for employment tax purposes.

Effective Date
The proposal is effective for taxable years beginning after December 3 1, 2017.

170

Sec. 119(a).

171

Sec. l l 9(c).

172

Sec. I 19(d).

173

The compensation thres hold is that amount in effect und er section 414(q)(l)(B )(i).

174

As defined in section 416(i)(l) (B)(i).

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TREAS-17-0313-I-000078

 2. Modification of exclusion of gain on sale of a principal residence
Present Law

A taxpayer who is an individual may exclude up to $250,000 ($500 ,000 if married filing
a joint return) of gain realized on the sale or exchange of a principal residence. To be eligible for
the exclusion , the taxpayer must have owned and used the residence as a principal residence for
at least two of the five years ending on the date of the sale or exchange. A taxpayer who fails to
meet these requirements by reason of a change of place of employment , health , or, to the extent
provided under regulations , unforeseen circumstances , is able to exclude an amount equal to the
fraction of the $250,000 ($500,000 if married filing a joint return) that is equal to the fraction of
the two years that the ownership and use requirements are met.
The exclusion under this provision may not be claimed for more than one sale or
exchange during any two-year period.
Description of Proposal

The proposa l extends the length of time a taxpayer must own and use a residence to
qualify for this exclusion. Specifically , the exclusion is available only if the taxpayer has owned
and used the residence as a principal residence for at least five of the eight years ending on the
date of the sale or exchange. A taxpayer who fails to meet these requirements by reason of a
change of place of employment , health , or, to the extent provided under regulations , unforeseen
circumstances is able to exclude an amount equal to the fraction of the $250 ,000 ($500,000 if
married filing a joint return) that is equal to the fraction of the five years that the ownership and
use requirements are met.
The proposa l limits the exclusion so that the exclusion may not apply to more than one
sale or exchange during any five-year per iod.
The proposal phases-out the exclusion by one dollar for every dollar a taxpayer ' s AGI
exceeds $250,000 ($500,000 if married filing a joint return). For purposes of this provision , AGI
is measured using the average of the taxpayers' AGI in the year of sale (excluding any income
from the sale of the home) and the prior two taxable years before such sale.
Effective Date

The proposal is effective for sales and exchanges after December 31, 2017.

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TREAS-17-0313-I-000079

 3. Repeal of exclusion, etc., for employee achievement awards
Present Law
An employer's deduction for the cost of an employee achievement award is limited to a
certain amount. 175 Employee achievement awards that are deductible by an employer (or would
be deductible but for the fact that the employer is a tax-exempt organization) are excludible from
an employee's gross income. 176 Amounts that are excludible from gross income under section
74(c) for income tax purposes are also excluded from wages for employment tax purposes.
An employee achievement award is an item of tangible personal property given to an
employee in recognition of either length of service or safety achievement and presented as part
of a meaningful presentation.

Description of Proposal
The proposal repeals the deduction limitation for employee achievement awards. It also
repeals the exclusions from gross income and wages.
Effective Date
The proposal is effective for taxable years beginning after December 31, 2017.
4. Repeal of exclusion for dependent care assistance programs
Present Law
An exclusion from the gross income of an employee of up to $5,000 annually for
employer-provided dependent care assistance 177 is allowed if the assistance is provided pursuant
to a separate written plan of an employer that does not discriminate in favor of highly
compensated employees 178 and meets certain other requirements. The amount excludible cannot
exceed the earned income of the employee or, if the employee is married, the lesser of the earned
income of the employee or the earned income of the employee's spouse. Amounts attributable to
dependent care assistance that are excludible from gross income for income tax purposes are also
excludible from wages for employment tax purposes.

175

Sec. 274(j).

176

Sec. 74(c).

177

Sec. 129(a).

178

Sec. 129(d). The exclusion applies if the contribu tions or benefits under the program do not
discriminate in favor of highly compensated employees , within the meaning of sec. 414(q), or their dependents , and
the program benefits employees under a classification established by the emp loyer found not to be discriminatory in
favor or such highly compensated employees or their dependents.

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TREAS-17-0313-I-000080

 Description of Proposal

'J;'Jieproposa l repeals the exclus ions from gross income and wages for dependent care
ass istance progra ms.
Effective Date
The proposal is effective for taxable years beginning after December 31, 2017.
5. Repeal of exclusion for qualified moving expense reimbursement
Present Law
Qualified moving expense reimbursements are excludible from an employee's gross
income 179, and are defined as any amount received (directly or indirectly) from an employer as
payment for (or reimbursement of) expenses which would be deductible as moving expenses
under sectio n 217 180 if directly paid or incurred by the employee. However, any such amount
actually deducted by the individual is not eligible for this exclusion. Amo unts excludible from
gross income for income tax purposes as qualified moving expense reimbursements are also
excluded from wages for employment tax purposes .
Description of Proposal
The proposal repeals the exclusion from gross income and wages for qualified moving
expense reimbursements.
Effective Date
The proposa l is effective for taxab le years beginning after December 31, 2017.
6. Repeal of exclusion for adoption assistance programs
Present Law
An exclusion from an employee's gross income is allowed for qualified adopt ion
expenses paid or reimbursed by an employer, if such amounts are furnished pursuant to an
adoption assistance program. 181 For 2017 , the maximum exclusion amount is $ 13,570, and is
phased out ratably for taxpayers with modified adjusted gross income ("AG I") above a certain
amount. In 2017, the phase out range begins at modifi ed AGI of $203,540, with no exclusion
179

Secs. 132(a)(6) and 132(g).

180
Individuals are allowed an itemized deduction for moving expenses paid or incurred during the taxable
year in connection with the commencement of work by the taxpayer as an emp loyee or as a self-emp loyed
individual at a new principa l place of work. 180 Such expenses are deduc tible only if the move meets certain
cond itions related to distance from the taxpayer's previous residence and the taxpayer's status as a full-time
emp loyee in the new location.
181

Sec. 137(a).

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 when modified AGI equals or exceeds $243,540. Modified AGI is the sum of the taxpayer 's
AGI plus amounts excluded from income under sections 911 , 931, and 933 (relating to the
exclusion of income of U.S. citizens or residents living abroad; residents of Guam, American
Samoa, and the Northern Mariana Islands and residents of Puerto Rico, respectively) .

In the case of adoption of a child with special needs that is finalized during a taxable
year, the taxpayer may claim as an exclusion the amount of the maximum exclusion minus the
aggregate qualified adoption expenses with respect to that adoption for all prior taxable years.
Qualified adoption expenses are reasonable and necessary adoption fees, court costs,
attorney fees, and other expenses that are: (1) directly related to, and the principal purpose of
which is for, the legal adoption of an eligible child by the taxpayer; (2) not incurred in violation
of State or Federal law, or in carrying out any surrogate parenting arrangement; (3) not for the
adoption of the child of the taxpayer 's spouse; and (4) not reimbursed (e.g., by an employer). 182
For the exclusion to apply, certain requirements must be satisfied , including satisfaction
of nondiscrimination rules and providing employees with reasonable notification of the
availability and terms of the program. 183
Adoption expenses paid or reimbursed by the employer under an adoption assistance
program are not eligible for the adoption credit under section 23. A taxpayer may be eligible for
the adoption credit (with respect to qualified adoption expenses he or she incurs) and also for the
exclusion (with respect to different qualified adoption expenses paid or reimbursed by his or her
employer).

Description of Proposal
The proposal repeals the exclusion from gross income for adoption assistance programs.

Effective Date
The proposal is effective for taxable years beginn ing after Dec ember 31, 2017.

182

Sec. 23(d)(l).

183

The employer's adoption assistance program must not discriminate in favor of highly compensated
employees, within the meaning of sec. 414(q). In addition, no more than five percent of the amounts paid or
incurred by the employer during the year for qualified adoption expenses under an adoption assistance program can
be provided for the class of individuals consisting of more-than-five-percent owners of the emp loyer and the spouses
or dependents of such more-than-five-percent owners.

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 F. Simplification and Reform of Savings, Pensions, Retirement
1. Repeal of special rule permitting recharacterization of IRA contributions

Present Law
Individua l retirement arrangements
There are two basic types of individual retirement arrangements ("IR.As") under present
law: traditional IR.As, 184 to which both deductible and nondeduct ible contributions may be
made, 185 and Roth IR.As, to wh ich only nondeductible contributions may be made. 186 The
principal difference between these two types of IRAs is the timing of income tax inclusion.
An annual limit applies to contributions to IRAs. The contribution limit is coordinated so
that the aggregate maximum amount that can be contributed to all of an individual's IRAs (both
traditional and Roth) for a taxable year is the lesser of a certain dollar amount ($5,500 for 2017)
or the individual ' s compensation. In the case of a married couple , contributions can be made up
to the dollar limit for each spouse if the combined compensation of the spouses is at least equal
to the contributed amount. The dollar limit is increased annually ("indexed ") as needed to reflect
increases in the cost-of living. An individual who has attained age 50 before the end of the
taxable year may also make catch-up contributions up to $1,000 to an IRA. The IRA catch-up
contribution limit is not indexed.

Traditional IRAs
An individual may make deductible contributions to a traditional IRA up to the IRA
contribution limit (reduced by any contributions to Roth IRAs) if neither the individual nor the
individual ' s spouse is an active participant in an employer-sponsored retirement plan. If an
individual (or the individual 's spouse) is an active participant in an employer-sponsored
retirement plan, the deduction is phased out for taxpayers with adjusted gross income ("AGI")
for the taxable year over certain indexed levels. 187 To the extent an individual cannot or does not
make deductible contributions to a traditional IRA or contributions to a Roth IRA for the taxable
year, the individual may make nondeductible after-tax contributions to a traditional IRA (that is,
no AGI limits apply) , subject to the same contribution limits as the limits on deductible
contributions , including catch-up contributions. An individual who has attained age 70 ½ before
to the close of a year is not permitted to make contributions to a traditional IRA for that year.

184

Sec. 40 8.

185

Sec. 2 19.

186

Sec . 40 8A.

187

Sec . 2 I9(g) .

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 Amounts held in a traditional IRA are includible in income when withdrawn, except to
the extent the withdrawal is a return of the individual 's basis. 188 All traditional IRAs of an
individual are treated as a single contract for purposes of recovering basis in the IRAs.

Roth IRAs
Individuals with AGI below certain levels may make nondeductible contributions to a
Roth IRA. The maximum annual contribution that can be made to a Roth IRA is phased out for
taxpayers with AGI for the taxable year over certain indexed levels.
Amounts held in a Roth IRA that are withdrawn as a qualified distribution are not
includible in income. A qualified distribution is a distribution that ( 1) is made after the fivetaxable-year period beginning with the first taxable year for which the individual first made a
contribution to a Roth IRA , and (2) is made after attainment of age 59½, on account of death or
disability , or is made for first-time homebuyer expenses of up to $10,000.
Distributions from a Roth IRA that are not qualified distributions are includible in
income to the extent attributable to earnings; amounts that are attributable to a return of
contributions to the Roth IRA are not includible in income. All Roth IRAs are treated as a single
contract for purposes of determining the amount that is a return of contributions.

Separation of traditional and Roth IRA accounts
Contributions to traditional IRAs and to Roth IRAs must be segregated into separate
IRAs, meaning arran gem ents with separate trusts, accounts , or contracts, and separate IRA
documents. Except in the case of a conversion or recharacterization , amounts cannot be
transferred or rolled over between the two types of IRAs.
Taxpayers generally may convert an amount in a traditional IRA to a Roth IRA. 189 The
amount converted is includible in the taxpayer 's income as if a withdrawal had been made. 190
The conversion is accomplished by a trustee-to-trustee transfer of the amount from the traditional
IRA to the Roth IRA , or by a distribution from the traditional IRA and contribution to the Roth
IRA within 60 days.
Rollovers to IRAs of distributions from tax-fa vo red employer-sponsored retirement plans
(that is, qualified retirement plans , tax-deferred annuity plans , and governmental eligible
188

Basis results from after-tax contributions to traditional IRAs or a rollovers to traditional IRAs of after tax amounts from another eligible retirement plan.
189

Although an individual with AGI exceeding certain limits is not permitted to make a contribution
directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to
a Roth IRA.
190

Subject to various exceptions , distributions from an IRA before age 59 ½ that are includible in income
are subject to a 10-percent early distribution tax under section 72(1). An exception applies to an amount includible
in income as a result of the conversion from a traditional IRA into a Roth IRA. However, the early distribution tax
app lies if the taxpayer withdraws the amount within five years of the conversion.

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TREAS-17-0313-I-000084

 deferred compensation plans 191) are also permitted . For tax-free rollovers , distributions from
pretax accounts under an employer-sponsored plan generall y must are contributed to a traditional
IRA, and distributions from a designated Roth account under an employer-sponsored plan must
be contributed only to a Roth IRA. However, a distribution from an employer-sponsored plan
that is not from a designated Roth account is also permitted to be rolled over into a Roth IRA,
subject to the rules that apply to conversions from a traditional IRA into a Roth IRA. Thus , a
rollover from a tax-favored employer-sponsored plan to a Roth IRA is includible in gross income
(excep t to the extent it represents a return of after-tax contributions). 192

Recharacterization of IRA contributions
If an individual make s a contribution to an lRA (tradit ional or Roth) for a taxable year,
the individual is permitted to recharacterize the contribution as a contribution to the other type of
IRA (traditional or Roth) by making a trustee-to-trustee transfer to the other type of IRA before
the due date for the individual 's income tax return for that year. 193 In the case of a
recharacterization , the contribution wi ll be treated as having been made to the transferee IRA
(and not the original , transferor IRA) as of the date of the original contribution. Both regular
contributions and conversion contributions to a Roth IRA can be recharacterized as having been
made to a traditional IRA.

The amount transferred in a recharacterization must be accompanied by any net income
allocable to the contribution. In genera l, even if a recharacteri zation is accomplished by
transferring a specific asset , net income is calculated as a pro rata portion of income on the entire
account rather than income allocable to the spec ific asset transferred. However , when doing a
Roth conversion of an amount for a year, an individual may establish multiple Roth IRAs, for
example , Roth IRAs with different investment strategies , and divide the amount being converted
among the IRAs. The individual can then choose whether to recharacterize any of the Roth IRAs
as a traditional IRA by transferring the entire amount in the particular Roth IRA to a traditional
IRA. 194 For examp le, if the value of the assets in a particular Roth IRA declines after the
conversion , the conversion can be reversed by recharacterizing that IRA as a traditional IRA
The individual may then later convert that traditional IRA to a Roth IRA (referred to as a
reconversion) , including only the lower value in income. Treasury regulations prevent the
reconversion from taking place immediatel y after the recharcterization , by requirin g a minimum
period to elapse before the reconvers ion. Generally the reconversion cannot occur sooner than

191

Secs. 40l(a) , 403(a) , 403(b) and 457(b).

192

As in the case of a conversion of an amount from a traditional IRA to a Roth IRA, the special recapture
mle relatin g to the l 0-percent additional tax on early distributions applies for distributions made from the Roth IRA
within a specified five-year period after the rollover.
193

Sec. 408A(d)(6) .

194

Treas. Reg. sec. I .408A-5, Q&A-2(b) .

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TREAS-17-0313-I-000085

 the later of 30 days after the recharacterization or a date during the taxable year following the
taxable year of the original conversion. 195
Description of Proposal
The proposal repeals the special rule that allows IRA contrib utions to one type of IRA
(either traditional or Roth) to be recharacterized as a contribution to the other type of IRA. Thus,
for example, under the proposal , a conversion contributi on establishing a Roth IRA during a
taxable year can no longer be recharacterized as a contribution to a traditional IRA (thereby
unwinding the conversion).
Effective Date
The proposal is effective for taxable years beginning after December 31, 2017.
2. Reduction in minimum age for allowable in-service distributions
Present Law
Tax-favored employer-spo nsored retirement plans consist of qualified retireme nt plans ,
including certa in defined contribution plans that allow employees to make elective deferrals (a
"section 401(k) plan") , tax-deferred annuity plans (a "section 403(b) plan"), wh ich may also
allow employees to make elective deferrals , and eligible deferred compensat ion plans of State
and local governmen t employers (a "gove rnmental section 457(b) plan") . 196 The terms of an
employer-sponsored retirement plan generally determine when distributions are permitted .
However , in some cases, restrictions may apply to distribution before an employee's severance
from employment , referred to as "in-service" distributions.
In-service distributions of elective deferrals (and related earnings) under a section 401 (k)
plan generally are permitted only after attainment of age 59½ or termination of the plan. 197
In-service distributions of elective deferrals (but not related earnings) are also permitted in the
case of hardship. Elective deferrals under a section 403(b) plan are subject to in-service
distribution restrictions similar to those applicable to elective deferrals under a section 40 1(k)
plan, and, in some cases, other contribution s to a section 403(b) plan are subject to similar
restrictions. 198
Pension plans, that is, qualified defined benefit plans and money purchase pensio n plans,
a type of qualified defined contribution plan, genera lly may not permit in-service distributions
195

Treas. Reg. sec. l.408A-5 , Q&A-9.

196

Secs. 401 (a), 40l(k) , 403(a), 403(b) , and 457(b).

197

Sec. 40l(k)( 2)(B). Similar restrictions apply to certain other contribut ions, such as employer matching
or nonelective contributions required under the nondiscrimination safe harbors under section 40l(k).
198

Secs. 403(b)(7 )(A)(ii) and 403(b)(l 1).

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TREAS-17-0313-I-000086

 before attainment of age 62 (or attainment of normal retirement age under the plan if earlier) or
termination of the plan. 199
Deferrals under a governme ntal section 457(b) plan are subject to in-service distribution
restrictions similar to those applicable to elective deferrals under a section 40l(k) plan, except
that in-service distributions under a governmental section 457(b) plan are permitted only after
attainment of age 70½ (rather than age 59½). 200
Description of Proposal

Under the proposal, in-service distribution s are permitted under a pension plan or a
governmental section 457(b) plan at age 59½, thus making the rules for those plans consistent
with the rules for section 401 (k) plans and section 403(b) plans.
Effective Date

The proposal is effective for plan years beginnin g after December 31, 2017.
3. Modification of rules governing hardship distributions
Present Law

Elective deferral s under a section 40l(k) plan or a section 403(b) plan may not be
distributed before the occurrence of one or more specified events, including financial hardship of
the employee. 201
Applicable Treasury regulations provide that a distribution is made on account of
hardship only if the distribution is made on account of an immediate and heavy financial need of
the employee and is necessary to satisfy the heavy need. 202 The Treasury regulations provide a
safe harbor under which a distribution may be deemed necessary to satisfy an immediate and
heavy financial need. One requirement of this safe harbor is that the employee be prohibited
from making elective deferrals and employee contributions to the plan and all other plans
maintained by the employer for at least six months after receipt of the hardship distribution.
Description of Proposal

The Secretary of the Treasury is directed to modify the applicable regulations within one
year of the date of enactment to (I) delete the requirement that an employee be prohibited from
making elective deferrals and employee contributions for six months after the receipt of a
199

Sec. 401(a)(36) and Treas. Reg. secs. 1.401-l(b)(l)(i) and I.401(a)-l(b).

200

Sec. 457(d)(I )(A).

201

Secs. 40 I (k)(2)(B)(i)(TV) and 403(b )(7)(A)(ii) and (b )( 11)(B). Other types of contributions may also be
subject to this restriction.
202

Treas. Reg. sec. l.40l(k)-l(d)(3 ).

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TREAS-17-0313-I-000087

 hardship distribution in order for the distribution to be deemed necessary to satisfy an immediate
and heavy financial need , and (2) make any other modifications necessary to carry out the
purposes of the rule allowing elective deferrals to be distributed in the case of hardship. Thus ,
under the modified regulations , an employee would not be prevented for any period after the
receipt of a hardship distribution from continuing to make elective deferrals and employee
contributions.

Effective Date
The regulations as revised by the proposal shall apply to plan years beginning after
December 31, 2017.

4. Modification of rules relating to hardship withdrawals from cash or deferred
arrangements
Present Law
Amounts attributable to elective deferrals (including earnings thereon) under a
section 401(k) plan generally may not be distributed before the earliest of the employee's
severance from employment, death , disability or attainment of age 59½ , or termination of the
plan , or as a qualified reservist distribution. 203 Elective deferrals, but not associated earnings ,
may be distributed on account of hardship.
An employer may make nonelective and matching contributions for employees under a
section 40l(k) plan. Elective deferrals , and matching contributions and after-tax employee
contributions, are subject to special tests ("nondiscrimination tests ") to prevent discrimination in
favor of highly compensated employees. Nonelective contributions and matching contributions
that satisfy certain requirements (" qualified nonelective contributions and qualified matching
contributions") may be used to enable the plan to satisfy these nondiscrimination tests. One of
the requirements is that these contributions be subject to the same distribution restrictions as
elective deferrals , except that these contributions (and associated earnings) are not permitted to
be distributed on account of hardship.
Applicable Treasury regulations provide that a distribution is made on account of
hardship only if the distribution is made on account of an immediate and heavy financial need of
the employee and is necessary to satisfy the heavy need. 204 The Treasury regulations provide a
safe harbor under which a distribution may be deemed necessary to satisfy an immediate and
heavy financial need. One requirement of the safe harbor is that the employee represent that the
need cannot be satisfied through currently available plan loans. This in effect requires an
employee to take any available plan loan before receiving a hardship distribution.

203

Sec. 40l(k)(2)(B)(i).

204

Treas. Reg. sec. l.40l(k)-l(d)(3 ).

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 Description of Proposal
The proposal allows earnings on elective deferrals under a sect ion 40l(k) plan , aswell as
qualified nonelective contributions and qualified matchin g contributions (and associatetl
earnings), to be distributed on account of hardship. Further , a distribution is not treated as failing
to be on account of hardship solely because the employee does not take any available plan loan.

Effective Date
The proposal applies to plan years be ginnin g after December 31, 2017.

5. Extended rollover period for the rollover of plan loan offset amounts in certain cases
Present Law
Taxation of retirement plan distributions
A distribution from a tax-favored employer-sponsored retirement plan (that is, a qualified
retirement plan , sec tion 403(b) plan , or a governmen tal section 457(b) plan) is generally
includible in gross income, except in the case of a qualified distribution from a designated Roth
account or to the extent the distribution is a recovery of basis under the plan or the distribution is
contributed to another such plan or an IRA (referred to as eligible retirement plan s) in a tax-free
rollover. 205 In the case of a distribution from a retirement plan to an emp loyee under age 59½,
the distribution ( other than a distribution from a governmental section 457(b) plan) is also
subject to a I 0-p erce nt early distribution tax unless an exception applies. 206
A distribution from a tax-favored emp loyer-sponsored retirement plan that is an eligible
rollover distribution may be rolled over to an eligible retirement plan. 207 The rollover generally
can be achieved by direct rollover (direct payment from the distributing plan to the recipient
plan) or by con tributin g the distribution to the eligible retireme nt plan w ithin 60 da ys of
receiving the distribution ("60-day rollover " ).
Emp loyer-s pon sored retirement plans are required to offer an emp loyee a direct rollover
with respect to any eligible rollover distribution before paying the amount to the emp loyee. If an
eligible rollover distribution is not directly rolled over to an eligible retirement plan , the taxab le
portion of the distribution generally is subje ct to mandatory 20-percent income tax
withholding. 208 Employees who do not elect a direct rollover but who roll over eligible
distributions within 60 days of receipt also defer tax on the rollover amounts ; however, the 20
205

Secs. 402(a) and (c), 402A(d), 403(a) and (b), 457(a) and (e)(l6).

206

Sec. 72(t).

207

Certain distributions are not eligible rollover distributions , such as annuity payments , required
minimum distributions, hardship distributions, and loans that are treated as deemed distribu tions under section 72(p).
208

Treas. Reg. sec. l.402(c)-2 , Q&A-l(b)(3).

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 percent withheld will remain taxable unless the employee substitutes funds within the 60-day
period.
Plan loans

Employer-sponsored retirement plans may provide loans to employees. Unless the loan
satisfies certain requirements in both form and operation , the amount of a retirement plan loan is
a deemed distribution from the retirement plan, including that the terms of the loan provide for a
repayment period of not more than five years (except for a loan specifically to purchase a home)
and for level amortization of loan payments with payments not less frequently than quarterly. 209
Thus , if an employee stops making payments on a loan before the loan is repaid , a deemed
distribution of the outstanding loan balance generally occurs. A deemed distribution of an
unpaid loan balance is generally taxed as though an actual distribution occurred , including being
subject to a 10-percent early distribution tax, if applicable. A deemed distribution is not eligible
for rollover to another eligible retirement plan.
A plan may also provide that, in certain circumstances (for example , if an employee
terminates employment) , an employee's obligation to repay a loan is accelerated and, if the loan
is not repaid , the loan is cancelled and the amount in employee's account balance is offset by the
amount of the unpaid loan balance , referred to as a loan offset. A loan offset is treated as an
actual distribution from the plan equal to the unpaid loan balance (rather than a deemed
distribution) , and (unlike a deemed distribution) the amount of the distribution is eligible for taxfree rollover to another eligible retirement plan within 60 days. However , the plan is not
required to offer a direct rollover with respect to a plan loan offset amount that is an eligible
rollover distribution , and the plan loan offset amount is generally not subject to 20-percent
income tax withholding.
Description of Proposal

Under the proposal , the period during which a qualified plan loan offset amount may be
contributed to an eligible retirement plan as a rollover contribution is extended from 60 days
after the date of the offset to the due date (including extensions) for filing the Federal income tax
return for the taxable year in which the plan loan offset occurs , that is, the taxable year in which
the amount is treated as distributed from the plan). Under the proposal , a qualified plan loan
offset amount is a plan loan offset amount that is treated as distributed from a qualified
retirement plan, a section 403(b) plan or a governmental section 457(b) plan solely by reason of
the termination of the plan or the failure to meet the repayment terms of the loan because of the
employee ' s separation from service, whether due to layoff, cessation of business , termination of
employment , or otherwise. As under present law, a loan offset amount under the proposal is the
amount by which an employee's account balance under the plan is reduced to repay a loan from
the plan.

209

Sec. 72(p).

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TREAS-17-0313-I-000090

 Effective Date

The proposal applies to taxable years beginning after December 31, 2017.
6. Modification of nondiscrimination rules for certain plans providing benefits or
contributions to older, longer service participants
Present Law
In general

Qualified retirement plans are subject to nondiscrimination requirements , under which
the group of employees covered by a plan ("plan coverage") and the contributions or benefits
provided to employees, including benefits , rights, and features under the plan, must not
discriminate in favor of highly compensated employees. 210 The timing of plan amendments must
also not have the effect of discriminating significantly in favor of highly compensated
employees. In addition , in the case of a defined benefit plan, the plan must benefit at least the
lesser of ( 1) 50 employees and (2) the greater of 40 percent of all employees and two employees
(or one employee if the employer has only one employee), referred to as the "minimum
participation " requirements. 2 11 These nondiscrimination requirements are designed to help
ensure that qualified retirement plans achieve the goal of retirement security for both lower and
higher paid employees.
For nondiscrimination purposes, an employee generally is treated as highly compensated
if the employee (1) was a five-percent owner of the employer at any time during the year or the
preceding year, or (2) had compensation for the preceding year in excess of $ 120,000 (for
2017). 212 Employees who are not highly compensated are referred to as nonhighly compensated
employees.
Nondiscriminatory plan coverage

Whether plan coverage of employees is nondiscriminatory is determined by calculating a
plan 's ratio percentage , that is, the ratio of the percentage of nonhighly compensated employees
covered under the plan to the percentage of highly compensated employees covered. For this
purpose, certain portions of a defined contribution plan are treated as separate plans to which the
plan coverage requirements are applied separately, referred to as mandatory disaggregation.
210 Secs. 40l(a)(3)-(5) and 410(b). Detailed rules are provided in Treas. Reg. secs. l.40l(a)(4)-l
through -13 and secs. 1.410(b)-2 through -10. In applying the nondiscrimination requirements , certain emp loyees,
such as those under age 21 or with less than a year of service , genera lly may be disregarded. In addition , employees
of controlled groups and affiliated service groups W1derthe aggregation rules of section 414(b), (c), (m) and (o) are
treated as emplo yed by a sing le emp loyer.
2 11

Sec. 401(a)(26).

212

Sec. 4 l 4(q). At the election of the emp loyer, employees who are highly compensated based on the
amount of their compensation may be limited to employees who were among the top 20 percent of employees based
on compensation.

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 Specifically, the following , if provided under a plan , are treated as separate plans: the portion of
a plan consisting of employee elective deferrals , the portion consisting of employer matching
contributions, the portion consisting of employer nonelective contributions, and the portion
consisting of an employee stock ownership plan ("ESOP"). 213 Subject to mandatory
disaggregation , different qualified retirement plans may otherwise be aggregated and tested
together as a single plan , provided that they use the same plan year. The plan determined under
these rules for plan coverage purposes generally is also treated as the plan for purposes of
applying the other nondiscrimination requirements.
A plan 's coverage is nondiscriminatory if the ratio percentage , as determined above , is 70
percent or greater. If a plan 's ratio percentage is less than 70 percent , a multi-part test applies,
referred to as the average benefit test. First, the plan must meet a "nondiscriminatory
classification requirement ," that is, it must cover a group of employees that is reasonable and
established under objective business criteria and the plan's ratio percentage must be at or above a
level specified in the regulations , which varies depending on the percentage of nonhighl y
compensated employees in the employer's workforce. In addition , the average benefit
percentage test must be satisfied.
Under the average benefit percentage test , in general, the average rate of
employer-provided contributions or benefit accruals for all nonhighly compensated employees
under all plans of the employer must be at least 70 percent of the average contribution or accrual
rate of all highly compensated employees. 214 In applying the average benefit percentage test ,
elective deferrals made by employees, as well as employer matching and nonelective
contributions, are taken into account. Generally, all plans maintained by the employer are taken
into account, includin g ESOPs, regardless of whether plans use the same plan year.
Under a transition rule applicable in the case of the acquisition or disposition of a
business , or portion of a business , or a similar transaction , a plan that satisfied the plan coverage

213

Elective deferrals are contributions that an employee elects to have made to a defined contribution plan
that includes a qualified cash or deferred arrangement (referred to as "section 401 (k) plan") rather than receive the
same amount as current compensation . Employer matching contributions are contributions made by an employer
only if an employee makes elective deferrals or after-tax employee contributions. Employer nonelective
contributions are contributions made by an employer regardless of whether an employee makes elective deferrals or
after-tax employee contributions. Under section 4975(e)(7) , an ESOP is a defined contribution plan, or portion of a
defined contribution plan, that is designated as an ESOP and is designed to invest primarily in employer stock.
214

Contribution and benefit rates are generally determined under the rules for nondiscriminatory
contributions or benefit accrua ls, described below. These rules are generally based on benefit accruals under a
defined benefit plan , other than accruals attributable to after-tax employee contributions , and contributions allocated
to participants ' accounts under a defined contribution plan, other than allocations attributable to after-tax employee
contributions. (Under these rules , contributions allocated to a participants accounts are referred to as "allocat ions,"
with the related rates referred to as "allocation rates," but "contribution rates" is used herein for convenience.)
However , as discussed below , benefit accruals can be converted to actuarially equivalent contributions , and
contributions can be converted to actuar ially equ ivalent benefit accrua ls.

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 requirements before the transaction is deemed to continue to satisfy them for a period after the
transaction , provided coverage under the plan is not significantly changed during that period. 215
Nondiscriminatory contributions or benefit accruals
In general

There are three general approaches to testing the amount of benefits under qualified
retirement plans: (1) design-based safe harbors under which the plan 's contribution or benefit
accrual formula satisfies certain uniformity standards, (2) a general test, described below , and
(3) cross-testing of equivalent contributions or benefit accruals. Employee elective deferrals and
employer matching contributions under defined contribution plans are subject to special testing
rules and generally are not permitted to be taken into account in determining whether other
contributions or benefits are nondiscriminatory. 216
The nondiscrimination rules allow contributions and benefit accruals to be provided to
highly compensated and nonhighly compensated employees at the same percentage of
compensation. 2 17 Thus , the various testing approaches described below are generally applied to
the amount of contributions or accruals provided as a percentage of compensation , referred to as
a contribution rate or accrual rate. In addition , under the "permitted disparity" rules , in
calculating an employee's contribution or accrual rate, credit may be given for the employer paid
portion of Social Security taxes or benefits. 218 The permitted disparity rules do not apply in
testing whether elective deferrals , matching contributions , or ESOP contributions are
nondiscriminatory.
The general test is generally satisfied by measuring the rate of contribution or benefit
accrual for each highly compensated employee to determine if the group of employees with the
same or higher rate (a "rate" group) is a nondiscriminatory group, using the nondiscriminatory
plan coverage standards described above. For this purpose , if the ratio percentage of a rate group
is less than 70 percent , a simplified standard applies, which includes disregarding the reasonable
classification requirement , but requires satisfaction of the average benefit percentage test.
Cross-testing
Cross-testing involves the conversion of contributions under a defined contribution plan
or benefit accruals under a defined benefit plan to actuarially equivalent accruals or
contributions, with the resulting equivalencies tested under the general test. However , employee
215

Sec . 4l0(b )(6)(C).

216
Secs. 40l(k) and (m), the latter of which applies also to after-tax employee contributions under a
defined contribution plan.
217

For this purpose , under section 401 (a)(l 7), compensation generally is limited to $26 5,000 per year (for

2016).
218

See sections 401 (a)(S)(C) and (D) and 401 (I) and Treas. Reg. section I. 401 (a)(4)-7 and 1.401(1)-1
through -6 for rules for detem1ining the amo unt of contributions or benefits that can be attributed to the
employer-paid portion of Social Security taxes or benefits.

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 elective deferrals and employer matching contributions under defined contribution plans are not
permitted to be taken into account for this purpose , and cross-testing of contributions under a
defined contribution plan , or cross-testing of a defined contr ibution plan aggregated with a
defined benefit plan , is permitted only if certain threshold requirements are satisfied.
In order for a defined contribution plan to be tested on an equivalent benefit accrual basis,
one of the following three threshold conditions must be met:

•

The plan has broadly available allocation rates, that is, each allocation rate under the
plan is available to a nondiscriminatory group of employees ( disregarding certain
permitted additional contributions provided to employees as a replacement for
benefits under a frozen defined benefit plan , as discussed below) ;

•

The plan provides allocations that meet prescribed designs under which allocations
gradually increase with age or service or are expected to provide a target level of
annuity benefit; or

•

The plan satisfies a minimum allocation gateway , under which each nonhighly
compensated employee has an allocation rate of (a) at least one-third of the highest
rate for any highly compensated employee , or (b) if less, at least five percent.

In order for an aggregated defined contribution and defined benefit plan to be tested on
an aggregate equivalent benefit accrual basis , one of the following three threshold conditions
must be met:

•

The plan must be primarily defined benefit in character , that is, for more than fifty
percent of the nonhighly compensated employees under the plan, their accrual rate
under the defined benefit plan exceeds their equivalent accrual rate under the defined
contribution plan;

•

The plan consists of broadly available separate defined benefit and defined
contribution plans, that is, the defined benefit plan and the defined contribution plan
would separately satisfy simplified versions of the minimum coverage and
nondiscriminatory amount requirements ; or

•

The plan satisfies a minimum aggregate allocation gateway , under which each
nonhighly compensated employee has an aggregate allocation rate (consisting of
allocations under the defined contribution plan and equivalent allocations under the
defined benefit plan) of (a) at least one-third of the highest aggregate allocation rate
for any nonhighly compensated employee , or (b) if less, at least five percent in the
case of a highest nonhighly compensated employee ' s rate up to 25 percent , increased
by one percentage point for each five-percentage-point increment (or portion thereof)
above 25 percent, subject to a maximum of 7 .5 percent.
Benefits, rights, and features

Each benefit , right, or feature offered under the plan generally must be available to a
group of employees that has a ratio percentage that satisfies the minimum coverage
requirements , including the reasonable classification requirement if applicable , except that the

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 average benefit percentage test does not have to be met, even if the ratio percentage is less than
70 percent.
Multiple-employer and section 403(b) plans

A multiple-employer plan generally is a single plan maintained by two or more unrelated
employers , that is, employers that are not treated as a single employer under the aggregation
rules for related entities. 219 The plan coverage and other nondiscrimination requirements are
applied separately to the portions of a multiple-employer plan covering employees of different
employers. 220
Certain tax-exempt charitable organizations may offer their employees a tax-deferred
annuity plan ("section 403(b) plan). 221 The nondiscrimination requirements , other than the
requirement s applicable to elective deferrals , generally apply to section 403(b) plans of private
tax-exempt organizations. For purposes of applying the nondiscrimination requirements to a
section 403(b) plan, subject to mandatory disaggregation , a qualified retirement plan may be
combined with the section 403(b) plan and treated as a single plan .222 However , a section 403(b)
plan and qualified retirement plan may not be treated as a single plan for purposes of applying
the nondiscrimination requirements to the qualified retirement plan.
Closed and frozen defined benefit plans

A defined benefit plan may be amended to limit participation in the plan to individuals
who are employees as of a certain date. That is, employees hired after that date are not eligible
to participate in the plan. Such a plan is sometimes referred to as a "closed" defined benefit plan
(that is, closed to new entrants). In such a case, it is common for the employer also to maintain a
defined contribution plan and to provide employer matching or nonelective contributions only to
employees not covered by the defined benefit plan or at a higher rate to such employees.
Over time, the group of employees continuing to accrue benefits under the defined
benefit plan may come to consist more heavily of highly compensated employees, for example ,
because of greater turnover among nonhighly compensated employees or because increasing
compensation causes nonhighly compensated employees to become highly compensated. In that
case, the defined benefit plan may have to be combined with the defined contribution plan and
tested on a benefit accrual basis. However, under the regulations, if none of the threshold
219

Sec. 4 l 3(c). Multiple-employer status does not apply if the plan is a multi employer p lan, defined under
sec. 4 l 4(f) as a plan maintained pursuant to one or more collective bargaining agreements with two or more
unrelated employers and to which the employers are required to contribute under the collective bargaining
agreement(s). Multiemployer plans are also known as Taft-Hartley plans.
220

Treas . Reg. sec. 1.4 l 3-2(a)(3)(ii)-(i ii).

22 1

Sec. 403(b). These plans are availab le to employers that are tax-exempt under section 501 (c)(3) , as
well as to educationa l institutions of State or local governments.
222

Treas. Reg . sec. 1.41O(b)-7(f).

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TREAS-17-0313-I-000095

 conditions is met , testing on a benefits basis may not be available. Notwithstanding the
regulations , recent IRS guidance provides relief for a limited period , allowing certain closed
defined benefit plans to be aggregated with a defined contribution plan and tested on an
aggregate equivalent benefits basis without meeting any of the threshold conditions. 223 When
the group of employees continuing to accrue benefits under a closed defined benefit plan consists
more heavily of highly compensated employees , the benefits , rights , and features provided under
the plan may also fail the tests under the existing nondiscrimination rules.
In some cases , if a defined benefit plan is amended to cease future accruals for all
participants , referred to as a "frozen" defined benefit plan , additional contributions to a defined
contribution plan may be provided for participants , in particular for older participants , in order to
make up in part for the loss of the benefits they expected to earn under the defined benefit plan
("make-whole " contributions). As a practical matter , testing on a benefit accrual basis may be
required in that case, but may not be available because the defined contribution plan does not
meet any of the threshold conditions.

Description of Proposal
Closed or frozen defined benefit plans
In general
The proposal provides nondiscrimination relief with respect to benefits , rights , and
features for a closed class of participants ("closed class "), 224 and with respect to benefit accruals
for a closed class , under a defined benefit plan that meets the requirements described below
(referred to herein as an "applicable " defined benefit plan). In addition , the proposal treats a
closed or frozen applicable defined benefit plan as meeting the minimum participation
requirements if the plan met the requirements as of the effective date of the plan amendment by
which the plan was closed or frozen.
If a portion of an applicable defined benefit plan eligible for relief under the proposal is
spun off to another employer , and if the spun-off plan continues to satisfy any ongoing
requirements applicable for the relevant relief as described below , the relevant relief for the
spun-off plan will continue with respect to the other employer.

223

Notic e 2014-5 , 20 14-2 I.R.B. 276, extended by Notic e 2015-2 8, 2015-14 14 I.R.B. 848,
Notice 2016-57 , 2016-40 I.R.B. 432, and Notice 2017-45 , 2017-3 8 1.R.B. 232. Proposed regulations revising the
nondiscrimin ation requirements for closed plans were also issued earlier this year, subject to various conditions.
8 1 Fed. Reg. 4976 (Januar y 29, 2016).
224

References under the propo sal to a closed class of participants and similar references to a closed class
include arrangements under which one or more classes of participants are closed , except that one or more classes of
particip ants closed on different dates are not aggregated for purpos es o f determining the date any such class was
closed.

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 Benefits, rights, or features for a closed class
Under the proposa l, an applicable defined benefit plan that provides benefits , rights , or
features to a closed class does not fail the nondiscrimination requirements by reason of the
composition of the closed class, or the benefits , rights, or features provided to the closed class , if
( 1) for the plan year as of which the class closes and the two succeeding plan years , the benefits ,
rights , and features satisfy the nondiscrimination requirements without regard to the relief under
the proposal , but taking into accou nt the spec ial testing rules described below,225 and (2) after the
date as of which the class was closed , any plan amendment modifying the closed class or the
benefits , rights , and features provided to the closed class does not discriminate significan tly in
favor of highly compensated employees.
For purposes of requirement (1) above , the following spec ial testing rules apply:
•

In applying the plan coverage transition rule for business acquisitions , dispositions ,
and similar transactions , the closing of the class of participants is not treated as a
significant change in coverage ;

•

Two or more plans do not fail to be eligible to be a treated as a single plan solely by
reason of having different plan years ;226 and

•

Changes in employee population are disregarded to the extent attributable to
individuals who become employees or cease to be emp loyees , after the date the class
is closed , by reason of a merger , acquisition , divestiture , or similar event.
Benefit accruals for a closed class

Under the proposal , an applicable defined benefit plan that provides benefits to a closed
class may be aggregated , that is, treated as a single plan , and tested on a benefit accrual basis
with one or more defined contribut ion plans (without having to satisfy the threshold conditions
under present law) if (1) for the plan yea r as of which the class closes and the two succeed ing
plan years, the plan satisfies the plan coverage and nondiscrimina tion requirements without
regard to the relief under the proposal , but taking into account the special testing rules described
above ,227 and (2) after the date as of which the class was closed , any plan amendment modifying
the closed class or the benefits provided to the closed class does not discriminate significantly in
favo r of highly compensated employees.
Under the proposal , defined contributi on plans that may be aggrega ted with an applicable
defined benefit plan and treated as a single plan include the portion of one or more defined
contr ibution plans cons isting of matching contribution s, an ESOP , or matching or non elective
225

Other testing options availab le under present law are also ava ilable for this purpo se.

226

This rule appli es also for purposes applyin g the plan coverage and other nondiscrimination
requir ements to an app licable de fined benefit plan and one or more defined con tribu tions that, under the proposal ,
may be treated as a single p lan as describ ed below.
227

Other testing options available under present law are also availab le for this purpose.

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TREAS-17-0313-I-000097

 contributions under a sec tion 403(b) plan. If an applicable defined benefit plan is aggregated
w ith the portion of a defin ed contribution plan consisting of mat chin g contributions , any portion
of the defined co ntribution plan co nsistin g of elective deferrals must also be aggregated. In
addition, the matching contributions are treate d in the same mann er as nonelective con tribution s,
including for purposes of permitted dispar ity.
Applicable defined ben efit plan
An applicable defined benefit plan to wh ich relie f under the proposal applies is a defined
benefi t plan und er which the class was closed (or the plan frozen) before April 5, 2017, or that
meets the following alternative conditio ns: (1) taking into account any predecessor plan , the
plan has been in effect for at least five yea rs as of the date the class is closed (or the pla n is
frozen) and (2) under the plan , during the five-year period prec ed ing that date , (a) for purpo ses of
the relief pro vided with respect to benefits , rights, and features for a closed class, there has not
been a substantial increase in the coverage or va lue of the benefits , rights , or feature s, or (b) for
purposes of the relief provided w ith respec t to benefit accruals for a closed class or the minimum
participation requirem ent s, there has not been a substant ial increa se in the coverage or benefit s
under the plan.
For purpo ses of (2)(a) above , a plan is treated as hav ing a sub stant ial increase in coverage
or va lue of benefit s, right s, or featu res only if, during the applicable five-year period , either the
number of parti cipant s covered by the ben efits, rights, or features on the date the peri od ends is
more than 50 percent greater than the num ber on the first day of the plan year in which the
period began , or the ben efits, rights , and featur es have been modifi ed by one or mor e plan
amendments in such a way that , as of the date the class is closed , the value of the ben efits, rights,
and features to the closed cla ss as a w hole is sub stant iall y grea ter th an the va lue as of the first
day of the five-year p eriod, so lely as a res ult of the amendments.
For purpo ses of (2)( b) above, a plan is treate d as hav ing had a sub stantial increase in
coverage or benefit s only if, during the applicable five-year period , either the numbe r of
participants benefitin g under the plan on the date the period ends is more than 50 percent greate r
than the numb er of participants on the first day of the plan year in whic h the period began , or the
average benefi t pro vided to part icipant s on the dat e the per iod ends is more than 50 percent
greater than the average benefit provided on the first day of the plan year in w hich the period
began. In applying this requir ement, the average benefit pro v ided to participants und er the plan
is treated as having remained the same between the two relevant dates if the benefit formula
applicable to the parti cipa nts ha s not chan ged bet ween the dates and , if the benefit formu la has
chan ged, the average ben efit under the plan is considered to have incr eased by more than 50
percent only if the target normal cost for all participants benefiting under the p lan for the plan
year in which the five-year perio d end s exceeds the target normal cost for all such participants
for that plan year if determined u sing the benefi t form ula in effect for the participants for the first
plan year in the five-year period by more than 50 percent. 228 In applying these rules, a
228

Under the funding requirements applicable to defined benefit plans, target normal cost for a plan year
(defined in section 430(b)(l)(A)(i)) is genera lly the sum of the present value of the benefits expected to be earned
under the plan during the plan year plus the amount of plan-rela ted expenses to be paid from plan assets during the
plan year. Under the proposa l, in app lying this average benefit rule to certain defined benefit plans maintained by

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 multiple-employer plan is treated as a single plan , rather than as separate plans separately
covering the emp loyees of each participating emplo yer.

In applying these standards, any increase in coverage or value, or in coverage or benefits ,
whichever is applicable , is generally disregarded if it is attributable to coverage and value, or
coverage and benefits , provided to employees who ( 1) became participants as a result of a
merger , acquisition , or similar event that occurred during the 7-year period preceding the date the
class was closed , or (2) became participants by reason of a merger of the plan with another plan
that had been in effect for at least five years as of the date of the merger and , in the case of
benefits , rights , or features for a closed class , under the merger, the benefits , rights, or features
under one plan were conformed to the benefits, rights , or features under the other plan
prospectively.
Make-whole contributions under a defined contribution plan
Under the proposal , a defined contrib ution plan is permitted to be tested on an equivalent
benefit accrual basis (without having to satisfy the threshold cond itions under present law) if the
following requ irements are met:
•

The plan provides make-whole contribution s to a closed class of participants whose
accruals under a defined benefit plan have been reduced or ended ("make-whole
class") ;

•

For the plan year of the defined contribution plan as of which the make-whole class
closes and the two succeeding plan years, the make-whole class satisfies the
nondiscriminatory classification requirem ent under the plan coverage rules , taking
into account the special testing rules described above ;

•

After the date as of which the class was closed , any amendment to the defined
contribution plan modifying the make-whole class or the allocations , benefits , rights ,
and features provided to the make-whole class does not discriminate significantly in
favor of highly compensated employees ; and

•

Either the class was closed before April 5, 2017, or the defined benefit plan is an
applicable defined benefit plan under the alternative conditions applicable for
purpos es of the relief provided with respect to benefit accruals for a closed class.

With respect to one or more defined contribution plans meeting the requirements above ,
in applying the plan coverage and nondiscrimination requirements , the portion of the plan
providing make-whole or other nonelective contributions may also be aggregated and tested on
an equivalent benefit accrual basis with the portion of one or more other defined contribution
plans consisting of matching contrib utions, an ESOP , or matching or nonelective contributions
under a section 403(b) plan. If the plan is aggregated with the portion of a defined contribu tion
plan consisting of matching contributions , any portion of the defined contribution plan consisting
cooperative organizations and charities, referred to as CSEC plans (defined in section 414 (y)), wbicb are subject to
different funding requirements, the CSEC plan 's normal cost under section 433(j)( I)(B) is used instead of target
normal cost.

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 of elective deferrals must also be aggregated. In addition , the matching contributions are treated
in the same manner as nonelective contributions , including for purposes of permitted disparity.
Under the proposal , "make-whole contributions " generally means nonelective
contributions for each employee in the make-whole class that are reasonably calculated , in a
consistent manner, to replace some or all of the retirement benefits that the employee would have
received under the defined benefit plan and any other plan or qualified cash or deferred
arrangement under a section 401(k) plan if no change had been made to the defined benefit plan
and other plan or arrangement. 229 However, under a special rule , in the case of a defined
contribution plan that provides benefits , rights , or features to a closed class of participants whose
accruals under a defined benefit plan have been reduced or eliminated , the plan will not fail to
satisfy the nondiscrimination requirements solely by reason of the composition of the closed
class , or the benefits, rights , or features provided to the closed class , if the defined contribution
plan and defined benefit plan otherwise meet the requirements described above but for the fact
that the make-whole contributions under the defined contribution plan are made in whole or in
part through matching contributions.
If a portion of a defined contribution plan eligible for relief under the proposal is spun off
to another employer , and if the spun-off plan continues to satisfy any ongoing requirements
applicable for the relevant relief as described above , the relevant relief for the spun-off plan will
continue with respect to the other employer.

Effective Date
The proposal is generally effective on the date of enactment without regard to whether
any plan modifications referred to in the proposal are adopted or effective before , on, or after the
date of enactment. However , at the election of a plan sponsor , the proposal will apply to plan
years beginning after December 31 , 2013. For purposes of the proposal , a closed class of
participants under a defined benefit plan is treated as being closed before April 5, 2017 , if the
plan sponsor's intention to create the closed class is reflected in formal written documents and
communicated to partic ipants before that date. In addition , a plan does not fail to be eligible for
the relief under the proposal solely because (1) in the case of benefits , rights , or features for a
closed class under a defined benefit plan , the plan was amended before the date of enactment to
eliminate one or more benefits , rights , or features and is further amended after the date of
enactment to provide the previously eliminated benefits , rights , or features to a closed class of
participants , or (2) in the case of benefit accruals for a closed class under a defined benefit plan
or application of the minimum benefit requirements to a closed or frozen defined benefit plan ,
the plan was amended before the date of the enactment to cease all benefit accruals and is further
amended after the date of enactment to provide benefit accruals to a closed class of participants.
In either case , the relevant relief applies only if the plan otherwise meets the requirements for the
relief , and, in applying the relevant relief , the date the class of participants is closed is the
effective date of the later amendment.

229

For this purpose , consistenc y is not required with respec t to employees who were subject to different
benefit formulas under the defined benefit plan .

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 G. Estate, Gift, and Generation-Skipping Transfer Taxes
1. Increase in estate and gift tax exemption, followed by repeal of estate and generationskipping transfer taxes and reduction in gift tax rate

Present Law

In general
A gift tax is imposed on certain lifetime transfers, and an estate tax is imposed on certain
transfers at death. A generation- skipping transfer tax generally is imposed on transfers, either
directly or in trust or similar arrangement , to a "ski p person" (i.e., a beneficiary in a generation
more than one generation younger than that of the transferor). Transfers subject to the
generat ion-skipping transfer tax include direct skips, taxable terminations , and taxable
distributions .
Income tax rules determine the recipient 's tax basis in property acquired from a decedent
or by gift. Gifts and bequests generally are excluded from the recipient's gross income. 230
Common features of the estate, gift and generation-skipping transfer taxes

Unified credit (exemption) and tax rates
Unified credit-A unified credit is available with respect to taxable transfers by gift and
at death. 23 1 The unified credit offsets tax, computed using the applicable estate and gift tax rates,
on a specified amount of transfer s, referred to as the applicable exclusion amount , or exemption
amount. The exemption amount was set at $5 million for 2011 and is indexed for inflation for
later years. 2 32 For 2017 , the inflation- indexed exemption amount is $5 .49 million. 233 Exemption
used during life to offset taxable gifts reduces the amount of exemption that remains at death to
offset the value of a decedent's estate. An election is available under which exemption that is
not used by a decedent may be used by the decedent's surviving spouse (exemption portability).
Common tax rate table.-A common tax-rate table with a top marginal tax rate of 40
percent is used to compute gift tax and estate tax. The 40-percent rate applies to transfers in
excess of $1 million (to the extent not exempt). Becau se the exemption amount currently shields

230

Sec . I 02.

231

Sec. 20 10.

232

For 2011 and later years, tbe gift and estate taxes were reunified, meaning that the gift tax exemption
amount was increased to equal tbe estate tax exempt ion amount.
233

For 2015, tbe $5.49 exemption amount results in a unified credi t of $2, l4l ,800 , after applying the
applicable rates set forth in section 2001(c) .

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 the first $5.49 million in gifts and bequests from tax , transfers in excess of the exemption amount
generally are subject to tax at the highest marginal rate (40 percent).
Generation-skipping transfer tax exemption and rate. - The generation-skipping transfer
tax is a separate tax that can apply in addition to either the gift tax or the estate tax. The tax rate
and exemption amount for generation-skipping transfer tax purposes, however , are set by
reference to the estate tax rules. Generation-skipping transfer tax is imposed using a flat rate
equal to the highest estate tax rate (40 percent). Tax is imposed on cumulative generationskipping transfers in excess of the generation-skipping transfer tax exemption amount in effect
for the year of the transfer. The generation-skipping transfer tax exemption for a given year is
equal to the estate tax exemption amount in effect for that year (currently $5.49 million).
Transfers between spouses. - A 100-percent marital deduction generally is permitted for
the value of property transferred between spouses. 234 In addition , transfers of " qualified
terminable interest property" also are eligible for the marital deduction. Qualified terminable
interest property is property: ( 1) that passes from the decedent , (2) in which the surviving spouse
bas a "qualifying income interest for life ," and (3) to which an election under these rules applies.
A qualifying income interest for life exists if: (1) the surviving spouse is entitled to all the
income from the property (payable annually or at more frequent intervals) or has the right to use
the property during the spouse's life, and (2) no person has the power to appoint any part of the
property to any person other than the surviving spouse.
A marital deduction generally is denied for property passing to a surviving spouse who is
not a citizen of the United States. A marital deduction is permitted , however , for property
passing to a qualified domestic trust of which the noncitizen surviving spouse is a beneficiary. A
qualified domestic trust is a trust that has as its trustee at least one U.S. citizen or U.S.
corporation. No corpus may be distributed from a qualified domestic trust unless the U.S. trustee
has the right to withhold any estate tax imposed on the distribution.
Tax is imposed on (1) any distribution from a qualified domestic trust before the date of
the death of the noncitizen surviving spouse and (2) the value of the property remaining in a
qualified domestic trust on the date of death of the noncitizen surviving spouse. The tax is
computed as an additional estate tax on the estate of the first spouse to die.
Transfers to charity .-Contributions to section 501 (c )(3) charitable organizations and
certain other organizations may be deducted from the value of a gift or from the value of the
assets in an estate for Federal gift or estate tax purposes .235 The effect of the deduction generally
is to remove the full fair market value of assets transferred to charity from the gift or estate tax
base ; unlike the income tax charitable deduction , there are no percentage limits on the deductible
amount. For estate tax purposes , the charitable deduction is limited to the value of the

234

Secs . 2056 and 2523.

235

Secs. 2055 and 2522.

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 transferred property that is required to be included in the gross estate. 236 A charitable
contribution of a partial interest in property , such as a remainder or future interest, generally is
not deductible for gift or estate tax purposes. 237
The estate tax

Overview
The Code imposes a tax on the transfer of the taxable estate of a decedent who is a citizen
or resident of the United States. 238 The taxable estate is determined by deducting from the value
of the decedent 's gross estate any deductions provided for in the Code. After applying tax rates
to determine a tentativ e amount of estate tax, certain credits are subtracted to determine estate tax
liability. 239
Because the estate tax shares a common unified credit (exemption) and tax rate table with
the gift tax , the exemption amounts and tax rates are described together above, along with certain
other common features of these taxes.
Gross estate
A decedent 's gross estate includes, to the extent provided for in other sections of the
Code, the date-of-death value of all of a decedent's property , real or personal , tangible or
intangible, wherever situated. 240 In general, the value of property for this purpose is the fair
market value of the property as of the date of the decedent's death , although an executor may

236

Sec. 2055(d) .

237

Secs. 2055(e)(2) and 2522(c)(2) .

238

Sec. 200l(a).

239

More mechanically , the taxable estate is combined with the value of adjusted taxable gifts made during
the decedent's life (generally , post-1976 gifts), before applying tax rates to determine a tentative total amount of tax.
The portion of the tentative tax attributable to lifetime gifts is then subtracted from the total tentative tax to
determine the gross estate tax, i.e., the amount of estate tax before considering available credits. Credits are then
subtracted to determine the estate tax liability.
This method of computation was designed to ensure that a taxpayer only gets one run up through the rate
brackets for all lifetime gifts and transfers at death, at a time when the thresholds for app lying the higher marginal
rates exceeded the exemption amount. However , the higher ($5.49 million) present-law exempt ion amount
effectively renders the lower rate bracke ts irrelevant , because the top marginal rate bracket applies to all transfers in
excess of $ 1 million. In other words, all transfers that are not exempt by reason of the $5.49 million exemption
amount are taxed at the highest marginal rate of 40 percent.
240

Sec. 2031 (a).

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 elect to value certain property as of the date that is six months after the decedent 's death (the
alternate valuation date). 241
The gross estate includes not only property directly owned by the decedent , but also other
property in which the decedent had a beneficial interest at the time of his or her death. 242 The
gross estate also includes certain transfers made by the decedent prior to his or her death ,
including: (I) certain gifts made within three years prior to the decedent 's death; 243 (2) certain
transfers of property in which the decedent retained a life estate; 244 (3) certain transfers taking
effect at death ;245 and (4) revocable transfers. 246 In addition , the gross estate also includes
property with respect to which the decedent had, at the time of death, a general power of
appointment (generally , the right to determine who will have beneficial ownership). 247 The
value of a life insurance polic y on the decedent 's life is included in the gross estate if the
proceeds are payable to the decedent 's estate or the decedent had incidents of ownership with
respect to the policy at the time of his or her death. 248
Deduction s from the gross estate
A decedent's taxable estate is determined by subtracting from the value of the gross
estate any deductions provided for in the Code.
Marital and charitable transfers.-As described above, transfers to a surviving spouse or to
charity generally are deductible for estate tax purposes. The effect of the marital and charitable
deductions generally is to remove assets transferred to a surviving spouse or to charity from the
estate tax base.
State death taxes.-An estate tax deduction is permitted for death taxes (e.g., any estate ,
inheritance , legacy, or succession taxes) actually paid to any State or the District of Columbia , in
respect of property included in the gross estate of the decedent. 249 Such State taxes must have
been paid and claimed before the later of: (1) four years after the filing of the estate tax return ;
or (2) (a) 60 days after a decision of the U.S. Tax Court determining the estate tax liability
241

Sec. 2032.

242

Sec. 2033.

243

Sec. 2035.

244

Sec. 2036.

245

Sec . 2037.

246

Sec. 2038 .

247

Sec. 2041.

248

Sec. 2042.

249

Sec . 2058.

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TREAS-17-0313-I-000104

 becomes final , (b) the expiration of the period of extension to pay estate taxes over time under
section 6166 , or (c) the expiration of the period of limitations in which to file a claim for refund
or 60 days after a decision of a court in which such refund suit has become final.
Other deductions. - A deduction is available for funeral expenses , estate administration
expenses , and claims against the estate, including certain taxes. 250 A deduction also is available
for uninsured casualty and theft losses incurred during the settlement of the estate. 251
Credits against tax
After accounting for allowable deductions , a gross amount of estate tax is computed.
Estate tax liability is then determined by subtracting allowable credits from the gross estate tax.
Unified credit-The most significant credit allowed for estate tax purposes is the unified
credit , which is discussed in greater detail above. 252 For 2017 , the value of the unified credit is
$2, 141,800, which has the effect of exempting $5.49 million in transfers from tax. The unified
credit available at death is reduced by the amount of unified credit used to offset gift tax on gifts
made during the decedent's life.
Other credits.-Estate tax credits also are allowed for: (1) gift tax paid on certain pre1977 gifts (before the estate and gift tax computations were integrated) ;25 3 (2) estate tax paid on
certain prior transfers (to limit the estate tax burden when estate tax is imposed on transfers of
the same property in two estates by reason of deaths in rapid succession) ;254 and (3) certain
foreign death taxes paid (generally , where the property is situated in a foreign country but
included in the decedent's U.S. gross estate). 255
Provisions affecting small and family-owned businesses and farms
Special-use valuation.-An executor can elect to value for estate tax purposes certain
"qualified real property " used in farming or another qualifying closely-held trade or business at
its current-use value , rather than its fair market value. 256 The maximum reduction in value for
such real property is $750 ,000 (adjusted for inflation occurring after 1997; the inflation-adjusted
amount for 2017 is $ 1,120,000). In general , real property generally qualifies for special-use
250

Sec. 2053.

251

Sec. 2054.

252

Sec. 2010.

253

Sec. 2012 .

254

Sec. 2013 .

255

Sec. 2014. In certain cases, an election may be made to deduct foreign death taxes. See section

256

Sec. 2032A.

2053(d).

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 valuation only if (1) at least 50 percent of the adjusted value of the decedent's gross estate
(including both real and personal property) consists of a farm or closely-held business property
in the decedent's estate and (2) at least 25 percent of the adjusted value of the gross estate
consists of farm or closely held business real property. In addition, the property must be used in
a qualified use (e.g., farming) by the decedent or a member of the decedent's family for five of
the eight years before the decedent's death.

If, after a special-use va luation election is made , the heir who acquired the real property
ceases to use it in its qualified use within 10 years of the decedent's death , an additional estate
tax is imposed to recapture the entire estate-tax benefit of the special-use valuation. 257
Installment payment of estate tax for closely held businesses .- Under present law , the
estate tax generally is due within nine months of a decedent 's death. Howeve r, an executor
generally may elect to pay estate tax attributab le to an interest in a closely held business in two
or more installments (but no more than 10). 258 An estate is eligible for payment of estate tax in
installments if the va lue of the decedent's interest in a closely held bu siness exceeds 35 percent
of the decedent's adjusted gross estate (i.e., the gross estate less certa in deductio ns). If the
election is made , the estate may defer payment of principal and pay on ly interest for the first five
years , followed by up to 10 annual installments of principal and interest. This provision
effective ly extends the time for paying estate tax by 14 years from the orig inal due date of the
estate tax. A spec ial two-percent interest rate applies to the amount of deferred estate tax
attributable to the first $ 1 million (adjusted annually for inflation occurring after 1998; the
inflation-adjusted amount for 2017 is $ 1,490,000) in taxable value of a closely held business .
The interest rate app licab le to the amount of estate tax attributable to the taxab le value of the
close ly held business in excess of $1 million (adjusted for inflation) is equal to 45 percent of the
257

Prior to 2004, an estate also was permitted to deduct the adjusted value of a qualified family-owned
business interest of the decedent, up to $675,000. Sec. 2057. A qualified family-owned business interest generally
was defined as any interest in a trade or business (regardless of the fonn in which it is held) with a principal place of
business in the United States if the decedent ' s family owns at least 50 percent of the trade or business , two families
own 70 percent , or three families own 90 percent, as long as the decedent's family owns at least 30 percent of the
trade or business. To qualify for the exclusion , the decedent (or a member of the decedent's family) must have
owned and materially participated in the trade or business for at least five of the eight years preceding the decedent's
date of death. In addition , at least one qualified heir (or member of the qualified heir's family) was required to have
materially participated in the trade or business for at least 10 years following the decedent's death. The qualified
family-owned business rules provided a graduated recapture based on the number of years after the decedent's death
within which a disqualifying event occurred.
The qualified family-owned business deduction and the unified credit effective exemption amount were
coordinated. If the maximum deduction amount of $675,000 is elected , then the unified credit effective exemption
amount is $625 ,000, for a total of $ 1.3 million. If the qualified family-owned business deduction is less than
$675,000 , then the unified credit effective exemption amount is equal to $625,000 , increased by the difference
between $675 ,000 and the amount of the qualified family-owned business deduction. However , the unified credit
effective exemption amount cannot be increased above such amount in effect for the taxable year. Because of the
coordination between the qualified family-owned business deduction and the unified credit effective exemption
amount , the qualified family-owned business deduction did not provide a benefit in any year in which the applicable
exclusion amount exceeded $1.3 million.
258

Sec . 6166.

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 rate applicable to underpayments of tax under section 6621 of the Code (i.e., 45 percent of the
Federal short-term rate plus three percentage points). 259 Interest paid on deferred estate taxes is
not deductible for estate or income tax purposes.

The Gift Tax
Overview
The Code imposes a tax for each calendar year on the transfer of property by gift during
such year by any individual , whether a resident or nonresident of the United States. 260 The
amount of taxable gifts for a calendar year is determined by subtracting from the total amount of
gifts made during the year: (1) the gift tax annual exclusion (described below) ; and (2) allowable
deductions.
Gift tax for the current taxable year is determined by: (1) computing a tentative tax on
the combined amount of all taxable gifts for the current and all prior calendar years using the
common gift tax and estate tax rate table ; (2) computing a tentative tax only on all prior-year
gifts ; (3) subtracting the tentative tax on prior-year gifts from the tentative tax computed for all
years to arrive at the portion of the total tentative tax attributable to current-year gifts ; and,
finally , (4) subtracting the amount of unified credit not consumed by prior-year gifts.
Because the gift tax shares a common unified credit (exemption) and tax rate table with
the estate tax, the exemption amounts and tax rates are described together above , along with
certain other common features of these taxes.
Transfers by gift
The gift tax applies to a transfer by gift regardless of whether: ( 1) the transfer is made
outright or in trust ; (2) the gift is direct or indirect ; or (3) the property is real or personal , tangible
or intangible. 261 For gift tax purposes , the value of a gift of property is the fair market value of
the property at the time of the gift. 262 Where property is transferred for less than full
consideration , the amount by which the value of the property exceeds the value of the
consideration is considered a gift and is included in computing the total amount of a taxpayer ' s
gifts for a calendar year. 263
For a gift to occur , a donor generally must relinquish dominion and control over donated
property. For example , if a taxpayer transfers assets to a trust established for the benefit of his or
259

The interest rate on this portion adjust s with the Federal sbort-tenn rate .

260

Sec. 2501 (a).

26 1

Sec. 2511 (a).

262

Sec . 2512( a).

263

Sec . 2512(b).

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TREAS-17-0313-I-000107

 her children, but retains the right to revoke the trust , the taxpayer may not have made a
completed gift, because the taxpayer has retained dominion and control over the transferred
assets. A complete d gift made in trust, on the other hand, often is treated as a gift to the trust
beneficiaries.
By reason of statute, certain transfers are not treated as transfers by gift for gift tax
purposes. These include, for example, certa in transfers for educational and medical purposes, 264
transfers to section 527 political organizations ,265 and transfers to tax-exe mpt organizations
described in sections 501(c)(4), (5), or (6). 266
Taxab le gifts
As stated above, the amount of a taxpayer 's taxable gifts for the year is determined by
subtracting from the total amount of the taxpayer 's gifts for the year the gift tax annual exclusion
and any available deductions.
Gift tax annual exclusion.-Under present law, donors oflifetime gifts are provided an
annual exclusion of $ 14,000 per donee in 2017 (indexed for inflation from the 1997 annual
exclusion amount of $10,000) for gifts of present interests in property during the taxable year. 267
If the non-donor spouse consents to split the gift with the donor spouse, then the annual
exclusion is $28,000 per donee in 2017. In general, unlimited transfers between spouses are
permitted w ithout imposition of a gift tax. Special rules apply to the contributions to a qualified
tuition program ("529 Plan") including an election to treat a contribution that exceeds the annual
exclusion as a contribution made ratably over a five-year period beginning with the year of the
contribution .268
Marital and charitabl e deductions. - As described above , transfers to a surviv ing spouse or
to charity genera lly are deductible for gift tax purposes. The effect of the marital and charitab le
deductions generally is to remove assets transferred to a surviving spouse or to charity from the
gift tax base.
The generation-skipping transfer tax
A generatio n-skipping transfer tax generally is imposed (in addit ion to the gift tax or the
estate tax) on transfers, either directly or in trust or similar arrangement , to a "skip person" (i.e.,
a beneficiary in a generation more than one generation below that of the transferor). Transfers

264

Sec. 2503(e).

265

Sec. 2501 (a)(4).

266

Sec. 2501 (a)(6).

267

Sec. 2503(b).

268

Sec. 529(c)(2).

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 subject to the generation-skipping transfer tax include direct skips, taxable terminations , and
taxable distributions.
Exemption and tax rate
An exemption generally equal to the estate tax exemption amount ($5.49 million for

2017) is provided for each person making generation-skipping transfers. The exemption may be
allocated by a transferor (or his or her executor) to transferred property , and in some cases is
automatically allocated. The allocation of generation-skippin g transfer tax exemption effectively
reduces the tax rate on a generation-skipping transfer.
The tax rate on generation-skipping transfers is a flat rate of tax equal to the maximum
estate and gift tax rate (40 percent) multiplied by the "inclusion ratio. " The inclusion ratio with
respect to any property transferred indicates the amount of "generation-skipping transfer tax
exemption " allocated to a trust (or to property transferred in a direct skip) relative to the total
value of property transferred. 269 If , for example , a taxpayer transfers $5 million in property to a
trust and allocates $5 million of exemption to the transfer, the inclusion ratio is zero , and the
applicable tax rate on any subsequent generation-skipping transfers from the trust is zero percent
(40 percent multiplied by the inclusion ratio of zero). If , however , the taxpayer allocated only
$2.5 million of exemption to the transfer , the inclusion ratio is 0.5 , and the applicable tax rate on
any subsequent generation-skipping transfers from the trust is 20 percent (40 percent multiplied
by the inclusion ratio of 0.5). If the taxpayer allocates no exemption to the transfer , the inclusion
ratio is one, and the applicable tax rate on any subsequent generation-skipping transfers from the
trust is 40 percent (40 percent multiplied by the inclusion ratio of one).
Generation-skipping transfers
Generation-skipping transfer tax generally is imposed at the time of a generationskipping transfer - a direct skip, a taxable termination , or a taxable distribution.
A direct skip is any transfer subject to estate or gift tax of an interest in property to a skip
person. A skip person may be a natural person or certain trusts. All persons assigned to the
second or more remote generation below the transferor are skip persons (e.g., grandchildren and
great-grandchildren). Trusts are skip persons if ( 1) all interests in the trust are held by skip
persons , or (2) no person holds an interest in the trust and at no time after the transfer may a
distribution (including distributions and terminations) be made to a non-skip person.
A taxable termination is a termination (by death , lapse of time, release of power , or
otherwise) of an interest in property held in trust unless , immediately after such termination , a
non-skip person has an interest in the property , or unless at no time after the termination may a
distribution (including a distribution upon termination) be made from the trust to a skip person.

269

The inclusion ratio is one minus the applic able fraction . The applicable fraction is the amount of
exemption allocated to a trust (or to a direct skjp) divided by the value of assets transferred.

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 A taxable distribution is a distribution from a trust to a skip person (other than a taxable
termination or direct skip). If a transferor allocates generation-skipping transfer tax exemption to
a trust prior to the taxable distribution , generation-skipping transfer tax may be avoided.
Income tax basis in property received
In general

Gain or loss, if any, on the disposition of property is measured by the taxpayer's amount
realized (i.e., gross proceeds received) on the disposition , less the taxpayer's basis in such
property. Basis generally represents a taxpayer's investment in property with certain
adjustments required after acquisition. For example , basis is increased by the cost of capital
improvements made to the property and decreased by depreciation deductions taken with respect
to the property.
A gift or bequest of appreciated ( or loss) property is not an income tax realization event
for the transferor. The Code provides special rules for determining a recipient's basis in assets
received by lifetime gift or from a decedent.
Basis in property received by lifetime gift
Under present law, property received from a donor of a lifetime gift generally takes a
carryover basis. "Carryover basis" means that the basis in the hands of the donee is the same as
it was in the hands of the donor. The basis of property transferred by lifetime gift also is
increased , but not above fair market value , by any gift tax paid by the donor. The basis of a
lifetime gift, however , generally cannot exceed the property 's fair market value on the date of the
gift. If a donor's basis in property is greater than the fair market value of the property on the
date of the gift, then, for purposes of determining loss on a subsequent sale of the property , the
donee ' s basis is the property ' s fair market value on the date of the gift.
Basis in property acquired from a decedent
Property acquired from a decedent ' s estate generally takes a stepped-up basis. "Steppedup basis" means that the basis of property acquired from a decedent's estate generally is the fair
market value on the date of the decedent's death (or, if the alternate valuation date is elected , the
earlier of six months after the decedent's death or the date the property is sold or distributed by
the estate). Providing a fair market value basis eliminates the recognition of income on any
appreciation of the property that occurred prior to the decedent 's death and eliminates the tax
benefit from any unrealized loss.
In community property states, a surviving spouse ' s one-half share of community property
held by the decedent and the surviving spouse (under the community property laws of any State,
U.S. possession , or foreign country) generally is treated as having passed from the decedent and,
thus, is eligible for stepped-up basis. Thus , both the decedent's one-half share and the surviving
spouse's one-half share are stepped up to fair market value. This rule applies if at least one-half
of the whole of the community interest is includible in the decedent's gross estate.

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 Stepped-up basis treatment generally is denied to certain interests in foreign entities.
Stock in a passive foreign investment company (including those for which a mark-to-market
election has been made) generally takes a carryover basis , except that stock of a passive foreign
investment company for which a decedent shareholder had made a qualified electing fund
election is allowed a stepped-up basis. Stock owned by a decedent in a domestic international
sales corporation (or former domestic international sales corporation) takes a stepped-up basis
reduced by the amount (if any) which would have been included in gross income under section
995(c) as a dividend if the decedent had lived and sold the stock at its fair market value on the
estate tax valuation date (i.e., generally the date of the decedent 's death unless an alternate
valuation date is elected).
Description of Proposal

The proposal doubles the estate and gift tax exemption amount for decedents dying and
gifts made after December 31, 2017. This is accomplished by increasing the basic exclusion
amount provided in section 2010(c)(3) of the Code from $5 million to $ 10 million. The $ 10
million amount is indexed for inflation occurring after 2011.
For estates of decedents dying and generation-skipping transfers made after December
31, 2023 , the proposal repeals the estate tax and the generation-skipping transfer tax. The
proposal includes a transition rule for assets placed in a qualified domestic trust by a decedent
who died before the effective date of the proposal. Specifically , estate tax will not be imposed
on: ( 1) distributions before the death of a surviving spouse from the trust more than 10 years
after the date of enactment ; or (2) assets remaining in the qualified domestic trust upon the death
of the surviving spouse. The top marginal gift tax rate is reduced to 35 percent for gifts made
after December 31, 2023.
The proposal generally retains the present law rules for determining the income tax basis
of assets acquired by gift and assets acquired from a decedent. As a result, property received
from a donor of a lifetime gift generally will continue to take a carryover basis , and property
acquired from a decedent's estate generally will continue to take a stepped-up basis.
Effective Date

The proposal to double the estate and gift tax exemption is effective for estates of
decedents dying, generation-skipping transfers , and gifts made after December 31, 2017. The
repeal of the estate and generation-skipping transfer taxes, and the reduction in the gift tax rate to
35 percent, are effective for estates of decedents dying , generation-skipping transfers , and gifts
made after December 31, 2023.

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 TITLE II - ALTERNATIVE MINIMUM TAX REPEAL
1. Repeal of alternative minimum tax

Present Law
Individual alternative minimum tax
In general

An alternative minimum tax ("AMT") is imposed on an individual , estate , or trust in an
amount by which the tentative minimum tax exceeds the regular income tax for the taxable year.
For taxable years beginning in 20 I 7, the tentative minimum tax is the sum of (1) 26 percent of so
much of the taxable excess as does not exceed $ 187,800 ($93,900 in the case of a married
individual filing a separate return) and (2) 28 percent of the remaining taxable excess. The
breakpoints are indexed for inflation . The taxable excess is so much of the alternative minimum
taxable income ("AMTI ") as exceeds the exemption amount. The maximum tax rates on net
capital gain and dividends used in computing the regular tax are used in computing the tentative
minimum tax. AMTI is the taxable income adjusted to take account of specified tax preferences
and adjustments.
The exemption amounts for taxabl e years beginning in 2017 are: ( 1) $84,500 in the case
of married individuals filing a joint return and surviving spouses ; (2) $54,300 in the case of other
unmarried individua ls; (3) $42,250 in the case of married individuals filing separate returns ; and
(4) $24,100 in the case of an estate or trust. For taxable years beginning in 2017, the exemption
amounts are phased out by an amount equal to 25 percent of the amount by which the
individual ' s AMTI exceeds (1) $160,900 in the case of married individuals filing a joint return
and surviving spouses , (2) $120,700 in the case of other unmarried individuals, and (3) $80,450
in the case of married individuals filing separate returns or an estate or a trust. The amounts are
indexed for inflation.
AMTI is the taxpayer's taxable income increased by certain preference items and
adjusted by determining the tax treatment of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items.
Preference items in computing AMTI
The minimum tax preference items are:

I. The excess of the deduction for percentage depletion over the adjusted basis of each
mineral property (other than oil and gas properties) at the end of the taxable year.
2. The amount by which excess intangible drilling costs (i.e., expenses in excess the
amount that would have been allowable if amortized over a 10-year period) exceed
65 percent of the net income from oil, gas, and geothermal properties. This preference
applies to independent producers only to the extent it reduces the producer ' s AMTI
(determined without regard to this preference and the net operating loss deduction) by
more than 40 percent.

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 3. Tax-exempt interest income on private activity bonds (other than qualified 50l(c)(3)
bonds, certain housing bonds, and bonds issued in 2009 and 2010) issued after
August 7, 1986.
4. Accelerated depreciation or amortization on certain property placed in service before
January 1, 1987.
5. Seven percent of the amount excluded from income under section 1202 (relating to
gains on the sale of certain small business stock).

In addition , losses from any tax shelter farm activity or passive activities are not taken
into account in computing AMT!.
Adjustments in computing AMTI
The adjustments that individuals must make to compute AMT! are:
1. Depreciation on property placed in service after 1986 and before January 1, 1999, is

computed by using the generally longer class lives prescribed by the alternative
depreciation system of section 168(g) and either (a) the straight- line method in the
case of property subject to the straight-line method under the regular tax or (b) the
150-percent declining balance method in the case of other property. Depreciation on
property placed in service after December 31, 1998, is computed by using the regular
tax recovery periods and the AMT methods described in the previous sentence.
Depreciation on property acquired after September 10, 2001, which is allowed an
additional allowance under section 168(k) for the regular tax is computed without
regard to any AMT adjustments.
2. Mining exploration and development costs are capitalized and amortized over a I 0year period.
3. Taxab le income from a long-term contract (other than a home construction contract)
is computed using the percentage of completion method of accounting.
4. Depreciation on property placed in service after 1986 and before January I , 1999, is
computed by using the generally longer class lives prescribed by the alternative
depreciation system of section l 68(g) and either (a) the straight-line method in the
case of property subject to the straight-line method under the regular tax or (b) the
ISO-percent declining balance method in the case of other property. Depreciation on
property placed in service after December 31, 1998, is computed by using the regular
tax recovery periods and the AMT methods described in the previous sentence.
Depreciation on property acquired after September 10, 2001, which is allowed an
additiona l allowance under section I 68(k) for the regular tax is computed without
regard to any AMT adjustments.
5. Mining exploration and development costs are capitalized and amortized over a 10year period .

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TREAS-17-0313-I-000113

 6. Taxable income from a long-term contract (other than a home construction contract)
is computed using the percentage of completion method of accounting.
7. The amortization deduction allowed for pollution control facilities placed in service
before January 1, 1999 (generally determined using 60-month amortization for a
portion of the cost of the facility under the regular tax), is calculated under the
alternative depreciation system (generally , using longer class lives and the straightline method). The amortization deduction allowed for pollution control facilities
placed in service after December 31, 1998, is calculated using the regular tax
recovery periods and the straight-line method.
8. Miscellaneous itemized deductions are not allowed.
9. Itemized deductions for State, local, and foreign real property taxes; State and local
personal property taxes ; State, local, and foreign income , war profits , and excess
profits taxes; and State and local sales taxes are not allowed.
I 0. Medical expenses are allowed only to the extent they exceed ten percent of the
taxpayer ' s adjusted gross income.
11. Deductions for interest on home equity loans are not allowed.
12. The standard deduction and the deduction for personal exemptions are not allowed.
13. The amount allowable as a deduction for circulation expenditures is capitalized and
amortized over a three-year period.
14. The amount allowable as a deduction for research and experimentation expenditures
from passive activities is capitalized and amortized over a 10-year period.
15. The regular tax rules relating to incentive stock options do not apply.
Other rules
The taxpayer's net operating loss deduction generally cannot reduce the taxpayer ' s AMTI
by more than 90 percent of the AMTI (determined without the net operating loss deduction).
The alternative minimum tax foreign tax credit reduces the tentative minimum tax.
The various nonrefundable business credits allowed under the regular tax generally are
not allowed against the AMT. Certain exceptions apply.
If an individual is subject to AMT in any year, the amount of tax exceeding the
taxpayer ' s regular tax liability is allowed as a credit (the "AMT credit") in any subsequent
taxable year to the extent the taxpayer ' s regular tax liability exceeds his or her tentative
minimum tax liability in such subsequent year. The AMT credit is allowed only to the extent
that the taxpayer ' s AMT liability is the result of adjustments that are timing in nature . The

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TREAS-17-0313-I-000114

 individual AMT adjustments relating to itemized deductions and personal exemptions are not
timing in nature, and no minimum tax credit is allowed with respect to these items.
An individual may elect to write off certain expenditures paid or incurred with respect of
circulation expenses , research and experimental expenses , intangible drilling and development
expenditures , development expenditures , and mining exploration expenditures over a specified
period (three years in the case of circulation expenses , 60 months in the case of intangible
drilling and development expenditures , and IO years in case of other expenditures). The election
applies for purposes of both the regular tax and the alternative minimum tax.
Corporate alternative minimum tax

In general
An AMT is also imposed on a corporation to the extent the corporation's tentative
minimum tax exceeds its regular tax. This tentative minimum tax is computed at the rate of
20 percent on the AMTI in excess of a $40,000 exemption amount that phases out. The
exemption amount is phased out by an amount equal to 25 percent of the amount that the
corporation ' s AMTI exceeds $150,000.
AMTI is the taxpayer's taxable income increased by certain preference items and
adjusted by determining the tax treatment of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items.
A corporation with average gross receipts of less than $7.5 million for the prior three
taxable years is exempt from the corporate minimum tax. The $7 .5 million threshold is reduced
to $5 million for the corporation ' s first three-taxable year period.
Preference items in computing AMTI
The corporate minimum tax preference items are:
1. The excess of the deduction for percentage depletion over the adjusted basis of the
property at the end of the taxable year. This preference does not apply to percentage
depletion allowed with respect to oil and gas properties.
2. The amount by which excess intangible drilling costs arising in the taxable year
exceed 65 percent of the net income from oil, gas, and geothermal properties. This
preference does not apply to an independent producer to the extent the preference
would not reduce the producer's AMTI by more than 40 percent.
3. Tax-exempt interest income on private activity bonds (other than qualified 50l(c)(3)
bonds , certain housing bonds , and bonds issued in 2009 and 2010) issued after
August 7, 1986.
4. Accelerated depreciation or amortization on certain property placed in service before
January 1, 1987.

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TREAS-17-0313-I-000115

 Adjustments in computing AMTI
The adjustments that corporations must make in computing AMTI are:
I. Depreciation on property placed in service after 1986 and before January 1, 1999,
must be computed by using the generally longer class lives prescribed by the
alternative depreciation system of section l 68(g) and either (a) the straight-line
method in the case of property subject to the straight-line method under the regular tax
or (b) the 150-percent declining balance method in the case of other property.
Depreciation on property placed in service after December 31, 1998, is computed by
using the regular tax recovery periods and the AMT methods described in the previous
sentence. Depreciation on property which is allowed "bonus depreciation" for the
regular tax is computed without regard to any AMT adjustments.
2. Mining exploration and development costs must be capitalized and amortized over a

10-year period.
3. Taxable income from a long-term contract (other than a home construction contract)
must be computed using the percentage of completion method of accounting.
4. The amortization deduction allowed for pollution control facilities placed in service

before January 1, 1999 (generally determined using 60-month amortization for a
portion of the cost of the facility under the regular tax), must be calculated under the
alternative depreciation system (generally , using longer class lives and the straight-line
method). The amortization deduction allowed for pollution control facilities placed in
service after December 31, 1998, is calculated using the regular tax recovery periods
and the straight-line method.
5. The special rules applicable to Merchant Marine construction funds are not applicable.
6. The special deduction allowable under section 833(b) for Blue Cross and Blue Shield
organizations is not allowed.
7. The adjusted current earnings adjustment applies , as described below.
Adjusted current earning ("ACE") adjustment
The adjusted current earnings adjustment is the amount equal to 75 percent of the amount
by which the adjusted current earnings of a corporation exceed its AMTI (determined without the
ACE adjustment and the alternative tax net operating loss deduction). In determining ACE the
following rules apply:
1. For property placed in service before 1994, depreciation generally is determined using

the straight-line method and the class life determined under the alternative
depreciation system.
2. Amounts excluded from gross income under the regular tax but included for purposes

of determining earnings and profits are generally included in determining ACE.

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TREAS-17-0313-I-000116

 3. The inside build-up of a life insurance contract is included in ACE (and the related
premiums are deductible).
4. Intangible drilling costs of integrated oil companies must be capitalized and amortized
over a 60-month period.
5. The regular tax rules of section 173 (allowing circulation expenses to be amortized)
and section 248 (allowing organizational expenses to be amortized) do not apply.
6. Inventory must be calculated using the FIFO, rather than LIFO , method.
7. The installment sales method generally may not be used.
8. No loss may be recognized on the exchange of any pool of debt obligations for another
pool of debt obligations having substantially the same effective interest rates and
maturities.
9. Depletion (other than for oil and gas properties) must be calculated using the cost,
rather than the percentage , method.
10. In certain cases, the assets of a corporation that has undergone an ownership change
must be stepped down to their fair market values.
Other rules
The taxpayer's net operating loss carryover generally cannot reduce the taxpayer's AMT
liability by more than 90 percent of AMT! determined without this deduction.
The various nonrefundable business credits allowed under the regular tax generally are
not allowed against the AMT. Certain exceptions apply.

If a corporation is subject to AMT in any year, the amount of AMT is allowed as an
AMT credit in any subsequent taxable year to the extent the taxpayer ' s regular tax liability
exceeds its tentative minimum tax in the subsequent year. Corporations are allowed to claim a
limited amount of AMT credits in lieu of bonus depreciation .
A corporation may elect to write off certain expenditures paid or incurred with respect of
circulation expenses , research and experimental expenses , intangible drilling and development
expenditures , development expenditures , and mining exploration expenditures over a specified
period (three years in the case of circulation expenses , 60 months in the case of intangible
drilling and development expenditures , and 10 years in case of other expenditures). The election
applies for purposes of both the regular tax and the alternative minimum tax.
Description of Proposal

The proposal repeals the individual and corporate alternative minimum tax.

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TREAS-17-0313-I-000117

 The proposal allows the AMT credit to offset the taxpayer ' s regular tax liability for any
taxable year. In addition , the AMT credit is refundable for any taxable year beginning after 2018
and before 2023 in an amount equal to 50 percent (I 00 percent in the case of taxable years
beginning in 2022) of the excess of the minimum tax credit for the taxable year over the amount
of the credit allowable for the year against regular tax liability. Thus , the full amount of the
minimum tax credit will be allowed in taxable years beginning before 2023.
Effective Date
The proposal applies to taxable years beginning after December 31, 2017.

In determining the alternative minimum taxable income for taxable years beginning
before January 1, 2018, the net operating loss deduction carryback from taxable years beginning
after December 31, 2017 , are determined without regard to any AMT adjustments or preferences.
The repeal of the election to write off certain expenditures over a specified period applies
to amounts paid or incurred after December 31, 201 7.

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TREAS-17-0313-I-000118

 TITLE III - BUSINESSTAX REFORM
A. Tax Rates
1. Reduction in corporate tax rate

Present Law

Corporate taxable income is subject to tax under a four-step graduated rate structure. 270
The top corporate tax rate is 35 percent on taxable income in excess of $10 million. The
corporate taxable income brackets and tax rates are as set forth in the table below.

Taxable Income

Tax rate (percent)

Not over $50,000

15

Over $50,000 but not over $75,000

25

Over $75,000 but not over $10,000,000

34

Over $10,000,000

35

An additional five-percent tax is imposed on a corporation ' s taxable income in excess of
$ 100,000. The maximum additional tax is $11,750. Also, a second additional three-percent tax
is imposed on a corporation 's taxable income in excess of $ 15 million. The maximum second
additional tax is $100,000.
Certain personal service corporations pay tax on their entire taxable income at the rate of
35 percent. 271
Present law provides if the maximum corporate tax rate exceeds 35 percent , the
maximum rate on a corporation ' s net capital gain will be 35 percent. 272
Description of Proposal

The proposal eliminates the graduated corporate rate structure and instead taxes corporate
taxable income at 20 percent.
Personal service corporations are taxed at 25 percent.

270

Sec. 11(a) and (b )(I).

271

Sec . 11(b)(2).

272

Sec . 120 l (a).

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TREAS-17-0313-I-000119

 The proposal repeals the maximum corporate tax rate on net capital gain as obsolete.
For taxpayers subject to the normalization method of accounting (e.g., regulated public
utilities) , the proposal provides for the normalization of excess deferred tax reserves resulting
from the reduction of corporate income tax rates (with respect to prior depreciation or recovery
allowances taken on assets placed in service before the date of enactment).
Effective Date
The proposal applies to taxable years beginning after December 31, 2017.

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TREAS-17-0313-I-000120

 B. Cost Recovery
1. Increased expensing

Present Law
A taxpayer generally must capitalize the cost of property used in a trade or business or
held for the production of income and recover such cost over time through annual deductions for
depreciation or amortization. 273 Tangible property genera lly is depreciated under the modified
accelerated cost recovery system ("MACRS"), which determines depreciation for different types
of property based on an assigned applicable depreciation method, recovery period, 274 and
convention. 275
Bonus depreciation
An additional first-year depreciation deduction is allowed equal to 50 percent of the
adjusted basis of qualified property acquired and placed in service before January 1, 2020
(January 1, 2021, for longer production period property 276 and certain aircraft 277 ). 27 8 The 50percent allowance is phased down for property placed in service after December 31, 2017 (after
December 3 1, 2018 for longer production period propert y and certain aircraft). The bonus
depreciation percentage rates are as follows.

273
See secs. 263(a) and 167. However , where prope rty is not used exclus ively in a taxpayer ' s business,
the amount eligible for a deduction must be reduced by the amount related to personal use. See, e.g., section 280A.
274

The applica ble recovery period for an asset is determined in part by statute and in part by historic
Treasury guidance . Exercising authority granted by Congress, the Secretary issued Rev. Proc. 87-56, 1987-2 C.B.
674 , laying out the framework of recovery periods for enumerated classes of assets. The Secretary clarified and
modified the list of asset classes in Rev. Proc. 88-22, 1988-l C.B . 785. In November 1988, Congress revoked the
Secretary 's author ity to modify the class lives of depreciable property. Rev. Proc. 87-56 , as modified, remains in
effect except to the extent that the Congress has, since 1988, statutorily modified the recovery period for certain
depreciable assets , effectively superseding any administrative guidance with regard to such property.
275

Sec. 168.

276

As defined in section 168(k)(2)(B).

277

As defined in section 168(k)(2)(C).

278

Sec. I 68(k). The add itional first-year depreciation deduction is gener.a lly $:tibje(;t to the rules regarding
whether a cost must be capitali zed under section 263A.

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TREAS-17-0313-I-000121

 Bon us Depreciation Percentage
Placed in Service Year

Qualified Property
in General

Longer Production Period
Property and
Certain Aircraft

2017

50 percent

50 percent

2018

40 percent

50 percent 279

2019

30 percent

40 percent

2020

n/a

30 percent 280

The additional first-year depreciation deduction is allowed for both the regular tax and
the alternative minimum tax ("AMT"), 28 1 but is not allowed in computing earnings and
profits. 282 The basis of the property and the depreciation allowances in the year of purchase and
later years are appropriately adjusted to reflect the additional first-year depreciation deduction. 283
The amount of the additional first-year depreciation deduction is not affected by a short taxable
year. 284 The taxpayer may elect out of the additional first-year depreciation for any class of
property for any taxable year. 285
The interaction of the additional first-year depreciation allowance with the otherwise
applicable depreciation allowance may be illustrated as follows. Assume that in 2017 a taxpay er
purchases new depreciable property and places it in service. 286 The property's cost is $10,000,
and it is five-year property subject to the 200 percent declinin g balance method and half-year
convention. The amount of additional first-year depreciation allowed is $5,000. The remaining
$5,000 of the cost of the property is depreciable under the rules applicable to five-year property.
279

It is intended that for longer production period property placed in service in 20 l 8, 50 percent applies to
the entire adjusted basis. Similarly , for longer production period property placed in service in 2019 , 40 percent
applies to the entire adj usted basis. A technical correction may be necessary with respect to longer production
period property placed in service in 2018 and 2019 so that the statute reflects this intent.
280

In the case of longer production period property described in section l 68(k)(2)(B) and placed in service
in 2020 , 30 percent applies to the adjusted basis attributable to manufacture , construction , or production before
January l , 2020 , and the remaining adjusted basis does not qualify for bonus depreciation. Thirty percent applies to
the entire adjusted basis of certain aircraft described in section l 68(k)(2)(C) and placed in service in 2020.
281

Sec. l68(k)(2)(G). See also Treas. Reg . sec . l.l68(k)-l(d).

282

Sec. 3l2(k)(3) and Treas. Reg. sec. l.l68(k )-l(f)(7).

283

Sec. l 68(k)( l )(B).

284

Ibid.

285

Sec. 168(k)(7). For the definition of a class of property , see Treas. Reg . sec. 1.168(k)-1 (e)(2).

286

Assume that the cost of the property is not eligible for expensing under section 179 or Treas . Reg.
sec. l.263(a)- l (f) .

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TREAS-17-0313-I-000122

 Thus, $ 1,000 also is allowed as a depreciation deduction in 2017. 287 The total depreciation
deduction with respect to the property for 20 17 is $6,000. The remain ing $4,000 adjusted basis
of the property genera lly is recovered through otherwise applicable depreciation rules.
Qualified property
Property qualifying for the additional first-year depreciation deduction must meet all of
the following requirements. 288 First, the property must be: (1) property to which MACRS
applies with an applicable recovery period of 20 years or less; (2) water utility property; 289
(3) computer software other than computer software covered by section 197; or (4) qualified
improveme nt property. 290 Second, the origina l use 291 of the property must commence with the
taxpaye r. 292 Third, the taxpayer must acquire the property within the app licable time period (as
described below). Finally, the proper ty must be placed in service before January 1, 2020. As
noted above, an extension of the placed-in-service date of one year (i.e., before January 1, 2021)
is provided for certain property with a recovery period of 10 years or longer, certain
transportat ion property , and certain aircraft. 293

287

$ 1,000 results from the application of the half-year convention and the 200 percent declining balance
method to the remaining $5,000.
288

Requirements relating to actions taken before 2008 are not described herein since they have little (if
any) remaining effect.
289

As defined in section l68(e)(5).

290
The additional first-year depreciation deduction is not available for any property tl1at is required to be
depreciated under the alternative depreciation system ofMACRS. Sec. 168(k)(2)(D)(i).
291

The tenn "origina l use" means the first use to which the property is put, whether or not such use
corresponds to the use of such property by the taxpayer. If in the normal course of its business a taxpayer sells
fractional interests in property to unrelated third parties, then the original use of such property begins with tbe first
user of each fractional interest (i.e., each fractional owner is considered the original user of its proportionate share of
tl1e property). Treas. Reg. sec. l.l68(k)-l(b)(3 ).
292
A special mle applies in the case of certain leased property. 111the case of any property that is
originally placed in service by a person and that is sold to the taxpayer and leased back to such person by the
taxpayer within tllree months after the date that the property was placed in service , the property would be treated as
originally placed in service by the taxpayer not earlier than the date that the property is used under the leaseback. If
property is originally placed in service by a lessor, such property is sold within tliree montlls after the date that tlle
property was placed in service , and the user of such property does not change , tl1en the property is treated as
originally placed in service by the taxpayer not earlier than the date of such sale. Sec. 168(k)(2)(E)(ii) and (iii).
293

Property qua lifying for the extended placed-in-service date must have an estimated production per iod
exceeding one year and a cost exceeding $1 million. Transportation property generally is defined as tangible
personal property used in the trade or business of transporting persons or property. Certain aircraft which is not
transportation property, otl1er than for agricultural or firefighting uses, also qualifies for the extended placed-inservice date, if at the time of tl1e contract for purchase , the purchaser made a nonrefundable deposit of tlle lesser of
IOpercent of the cost or $ 100,000, and which has an estimated production period exceeding four months and a cost
exceeding $200 ,000.

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TREAS-17-0313-I-000123

 To qualify , property must be acquired (1) before January 1, 2020, or (2) pursuant to a
binding written contract which was entered into before January 1, 2020. With respect to
property that is manufactured , constructed, or produced by the taxpayer for use by the taxpayer ,
the taxpayer must begin the manufacture , construction , or production of the property before
January 1, 2020. 294 Property that is manufactured , constructed , or produced for the taxpayer by
another person under a contract that is entered into prior to the manufacture , construction , or
production of the property is considered to be manufactured , constructed, or produced by the
taxpayer. 295 For property eligible for the extended placed-in-service date, a specia l rule limits
the amount of costs eligible for the additional first-year depreciation. With respect to such
property , only the portion of the basis that is properly attributable to the costs incurred before
January 1, 2020 ("progress expenditures ") is eligible for the additional first-year depreciation
deduction. 296
Qualified improvement property
Qualified improvement property is any improvement to an interior portion of a building
that is nonresidential real property if such improvement is placed in service after the date such
building was first placed in service. 297 Qualified improvement property does not include any
improvement for which the expenditure is attributable to the enlargement of the building , any
elevator or escalator, or the internal structura l framework of the building.
Election to accelerate AMT credits in lieu of bonus depreciation

A corporation otherwise eligible for additional first-year depreciation may elect to claim
additional AMT credits in lieu of claiming additional depreciation with respect to qualified
property. 298 In the case of a corporation making this election, the straight line method is used for
the regular tax and the AMT with respect to qualified property. 299
A corporation making an election increases the tax liability limitation under section 53(c)
on the use of minimum tax credits by the bonus depreciation amount. The aggregate increase in
credits allowable by reason of the increased limitation is treated as refundable.

294

Sec. l 68(k)(2)(E)(i).

295

Treas . Reg. sec. l.168(k)-l(b)(4)(iii).

296
Sec. l 68(k)(2)(B)(ii). For purposes of determinin g the amount of eligible progress expenditures , rules
similar to section 46(d)(3) as in effect prior to the Tax Reform Act of 1986 apply.
297

Sec. l 68(k)(3).

298

Sec. 168(k)(4).

299

Sec. 168(k)(4)(A)(ii).

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TREAS-17-0313-I-000124

 The bonus depreciatio n amount generally is equa l to 20 percent of bonu s deprec iation for
qualified property that could be claim ed as a deduction absent an elect ion under this provision. 300
As originally enacted, the bonus depreciation amount for all taxable years was limited to the
lesser of ( 1) $30 milli on or (2) six percent of the minimum tax credits allocable to the adjusted
net minim um tax imposed for taxable years beginning before January 1, 2006. However ,
extensions of this provis ion have provided that this limitation applies separately to property
subject to each extension.
For taxable years ending after December 31, 2015, the bonu s depreciation amount for a
taxable year (as defined under present law with respect to all quali fied property) is limited to the
lesser of ( 1) 50 percent of the minimum tax credit for the first taxable year ending after
Decemb er 3 1, 2015 (determined before the application of any tax liability limitation ) or (2) the
minimum tax credit for the taxable year allocable to the adju sted net minimum tax imposed for
taxable years ending before Januar y 1, 2016 (determined before the application of any tax
liability limitation and determined on a first-in , first-out basis).
All corpora tion s treated as a single employer under section 52(a) are treate d as one
taxpayer for purpo ses of the limitation , as well as for electing the application of this provision. 301
In the case of a corporation making an election which is a partner in a partnership , for
purposes of determining the electing partn er's distributive share of partner ship items, bonus
depreciation does not apply to any qualified property and the straight line method is used with
respect to that property. 302
In the case of a partnership having a single corpora te partn er owning (directly or
indirectly) more than 50 percent of the capital and profit s interes ts in the partne rship, each
partner takes into account its distributive share of partnership depreciation in determ ining its
bonus depreciation amount. 303

Special rules
Passenger automobiles
The limitation under section 280F on the amount of depreciation deduct ions allowed w ith
respect to certain passenger automobiles is increased in the first year by $8,000 for automobiles
that qualify (and for which the taxpayer does not elect out of the additional first-year
300

For this purpose , bonus depreciation is the difference between (i) the aggregate amount of depreciation
determined if section 168(k)( l) applied to all qualified property placed in service during the taxable year and (ii) the
amount of depreciation that would be so detennined if section l 68(k)(l) did not so apply . This determinat ion is
made using the most accelerated deprecia tion method and the shortest life otherwise allowable for each property.
301

Sec. I 68(k)(4)(B)(ii i).

302

Sec. 168(k)(4)(D)(ii).

3 3

o Sec. 168(k)(4)(D)(iii).

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TREAS-17-0313-I-000125

 deduction). 304 The $8,000 amount is phased down from $8,000 by $ 1,600 per calendar year
beginnin g in 2018. Thus , the section 280F increase amount for property placed in service during
2018 is $6,400 , and during 2019 is $4,800. While the underlying section 280F limitation is
indexed for inflation , 305 the section 280F increase amount is not indexed for inflation. The
increase does not apply to a taxpayer who elects to accelerate AMT credits in lieu of bonus
depreciation for a taxable year.
Certain plants bearing fruits and nuts
A special election is provided for certain plants bearing fruits and nuts. 306 Under the
election , the applicable percentage of the adjusted basis of a specified plant which is planted or
grafted after December 31, 2015 , and before January 1, 2020 , is deductible for regular tax and
AMT purposes in the year planted or grafted by the taxpayer , and the adjusted basis is reduced
by the amount of the deduction. 307 The percentage is 50 percent for 2017 , 40 percent for 2018 ,
and 30 percent for 2019. A specified plant is any tree or vine that bears fruits or nuts , and any
other plant that will have more than one yield of fruits or nuts and generally has a preproducti ve
period of more than two years from planting or grafting to the time it begins bearing fruits or
nuts. 308 The election is revocable only with the consent of the Secretary , and if the election is
made with respect to any specified plant , such plant is not treated as qualified property eligible
for bonus depreciation in the sub sequent taxable year in which it is placed in service.
Long-term contracts

In general , in the case of a long-term contract , the taxable income from the contract is
determined under the percentage-of-completion method. 309 Solely for purposes of determining
the percentage of completion under section 460(b )(1 )(A) , the cost of qualified property with a
MACRS recovery period of seven years or less is taken into account as a cost allocated to the
contract as if bonus depreciation had not been enacted for property placed in service before
January 1, 2020 (January 1, 2021 , in the case oflonger production period property). 310

304

Sec. 168(k)(2)(F).

305

Sec . 280F(d)(7) .

306

See sec. 168( k)(5).

307

Any amou nt deduc ted under this election is not subject to capitalizat ion under section 263A.

308

A specifi ed plant does not include any propert y that is plant ed or gra fted outside the United States.

309

Sec . 460.

310

Sec . 460(c)(6). Other dates involving prior years are not described herein.

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TREAS-17-0313-I-000126

 Description of Proposal
Extension of bonus depreciation and temporary 100 percent expensing for certain business
assets

The proposal extends and modifies the additional first-year depreciation deduction
through 2022 (through 2023 for longer production period property and certain aircraft). The 50percent allowance is increased to I 00 percent for property acquired and placed in service after
September 27, 2017 , and before January 1, 2023 (January I, 2024, for longer production period
property and certain aircraft) , as well as for specified plants planted or grafted after
September 27, 2017 , and before January 1, 2023 .
Special rules
The $8,000 increase amount in the limitation on the depreciation deductions allowed with
respect to certain passenger automobiles is increased from $8,000 to $16,000 for passenger
automobiles acquired and placed in service after September 27, 2017 , and before January 1,
2023 .
The proposal extends the special rule under the percenta ge-of-completion method for the
allocation of bonus depreciation to a long-term contract for property placed in service before
January 1, 2023 (January 1, 2024 , in the case of longer production period property).
Application to used property

The proposal removes the requirement that the original use of qualified propert y must
commence with the taxpayer. Thus , the proposal applies to purchases of used as well as new
items. To prevent abuses , the additional first-year depreciation deduction applies only to
property purchased in an arm 's-length transaction . It does not apply to property received as a
gift or from a decedent. 3 11 In the case of trade-in s, like-kind exchange s, or involuntary
conversions , it applies only to any money paid in addition to the traded-in property or in excess
of the adjusted basis of the replaced propert y.3 12 It does not apply to property acquired in a
nontaxable exchange such as a reorganization , nor to propert y bought from a member of the
taxpayer ' s family, includin g a spouse, ancestors , and lineal descendant s, or from another related
entity as defined in section 267, nor from a person who controls , is controlled by, or is under
common control with the taxpayer. 313 Thus it does not apply, for example , if one member of an
affiliated group of corporation s purchases property from another member , or if an individual who
controls a corporation purchases property from that corporation.

3 11

By reference to section I79(d)(2)(C). See also Treas. Reg. sec . 1.l 79-4(c)( I)(iv).

312

By reference to section l 79(d)( 3). See also Treas . Reg. sec. l . l 79-4(d ).

313

By re ference to section I 79(d)(2)( A) and (B). See also Treas. Reg. sec. 1. I 79-4(c).

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 Exception for certain businesses not subiect to limitation on interest expense
The proposal excludes from the definition of qualified propert y any property used in a
real property trade or business, i.e., any real property development , redevelopment , construction ,
reconstruction , acquisition , conversion , rental , operation , management, leasing , or brokerage
trade or business. 3 14
The proposal also excludes from the definition of qualified property any property used in
the trade or business of certain regulated public utilities , i.e., the trade or business of the
furnishing or sale of (1) electrica l energy , water, or sewage disposal services, (2) gas or steam
through a local distribution system, or (3) transportation of gas or steam by pipeline , if the rates
for such furnishing or sale, as the case may be, have been established or approved by a State or
political subdivision thereof , by any agency or instrumentalit y of the United States, or by a
public service or public utility comm ission or other similar body of any State or political
subdi vision thereof. 315
Election to accelerate AMT credits in lieu of bonus depreciation
As a conforming amendment to the repeal of AMT , 316 the proposal repeals the election to
accelerate AMT credits in lieu of bonu s depreciation.
Transition rule
The phase-down of bonus depreciation is maintained for property acquired before
September 28, 2017, and placed in service after September 27, 2017. Under the proposal , in the
case of property acquired and adjusted basis incurred before September 28, 20 17, the bonus
depreciation rates are as follows.

314

As defined in section 330 I of the bill (lnteres t), by cross reference to section 469(c)(7)(C). Note that a
mortgage broker who is a broker o f financial instrume nts is not in a rea l property trade or business for this purpose.
See, e.g., CCA 201504010 (Decembe r 17, 20 14).
315

As defined in section 330 I of the bill (Interes t).

316

See section 200 I of the bill (Repeal o f alternative minimum tax).

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TREAS-17-0313-I-000128

 Phase-Down for Portion of Basis of Qualified Property
Acquired before September 28, 2017
Bonus Depreciation Percentage
Placed in Service Year

Qualified Property
in General

Longer Production Period
Property and
Certain Aircraft

2017

50 percent

50 percent

2018

40 percent

50 percent

2019

30 percent

40 percent

2020

n/a

30 percent

Similarly , the section 280F increase amount in the limitation on the depreciation
deductions allowed with respect to certain passenger automobiles acquired before September 28,
2017, and placed in service after September 27, 2017, is $8,000 for 2017, $6,400 for 2018 , and
$4,800 for 2019.
Effective Date
The proposal generally applies to property acquired 3 17 and placed in service after
September 27, 2017 , and to specified plants planted or grafted after such date.
A transition rule provides that, for a taxpayer's first taxable year ending after
September 27, 2017 , the taxpayer may elect to app ly section 168 without regard to the
amendments made by this proposal.

In the case of any taxable year that includes any portion of the period beginning on
September 28, 2017 , and ending on December 31, 2017 , the amount of any net operating loss for
such taxable year which may be treated as a net operating loss carryback is determined without
regard to the amendments made by this proposal. 318

317

Property is not treated as acquired after the date on which a written bindin g contrac t is entered into for
such acquisition.
318

See section 3302 oftbe bill (Modification of net operatin g loss deduction).

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TREAS-17-0313-I-000129

 C. Small Business Reforms
1. Expansion of section 179 expensing

Present Law
A taxpayer generally must capitalize the cost of property used in a trade or business or
held for the production of income and recover such cost over time through annual deductions for
depreciation or amortization. 319 Tangible property genera lly is depreciated under the modified
acce lerated cost recovery system ("MACRS"), which determines depreciation for different types
of property based on an ass igned applicable depreciation method , recovery period , 320 and
convention. 321

Election to expense certain depreciable business assets
A taxpayer may elect under sectio n 179 to deduct (or "ex pense") the cost of qualifying
property , rather than to recover such costs through depreciation deductions , subject to limitation.
The maximum amount a taxpayer may expense is $500,000 of the cost of qualifying property
placed in service for the taxable year. 322 The $500,000 amount is reduced (but not below zero)
by the amou nt by which the cost of qual ifying property placed in service during the taxable year
exceeds $2,000,000. 323 The $500,000 and $2,000,000 amounts are indexed for inflation for
tax ab le years beginning after 2015. 324

In genera l, qua lifying property is defined as depreciable tangible personal property that is
purc hased for use in the active conduct of a trade or business. 325 Qualifying property also
319 See secs. 263(a) and 167. However , where property is not used exclusively in a taxpayer ' s business ,
the amount eligible for a deduction must be reduced by the amount related to personal use. See, e.g., section 280A.
320

The applicable recovery period for an asset is determined in part by statute and in part by historic
Treasury guidance. Exercising authority granted by Congress, the Secretary issued Rev. Proc. 87-56 , 1987-2 C.B.
674 , laying out the framework of recovery pe riods for enumerated classes of assets. The Secretary clarified and
modified the list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. In November 1988, Congress revoked the
Secretary 's authority to modify the class lives of depreciable property. Rev. Proc. 87-56 , as modified, remains in
effect except to the extent that the Congress has, since 1988, statutorily modified the recovery period for certain
depreciable assets , effectively superseding any administrative guidance with regard to such property.
321

Sec. 168.

322

Sec. 179(b)(I).

323

Sec. 179(b)(2).

324

Sec . 179(b)(6).

325

Passenger automobiles subject to the section 280F limitation are eligible for section 179 expensin g only
to the extent of the dollar limitations in section 280F. For sport utility vehicles above the 6,000 pound weight rating,
which are not subject to the limitation under section 280F , the maximum cost that may be expensed for any taxable
year under sect ion 179 is $25,000. Sec. 179(b)(5).

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 includes off-the-shelf computer software and qualified real property (i.e., qualified leasehold
improvement property , qualified restaurant property, and qualified retail improvement
property) . 326 Qualifyin g property excludes any property described in section 50(b) (i.e., certain
property not eligible for the investment tax credit). 327
The amount eligible to be expensed for a taxable year may not exceed the taxable income
for such taxable year that is derived from the active conduct of a trade or business (determined
without regard to this provision). 328 Any amount that is not allowed as a deduction because of
the taxable income limitation may be carried forward to succeeding taxable years (subject to
limitations) .
No general business credit under section 38 is allowed with respect to any amount for
which a deduction is allowed under section 179. 329 If a corporation makes an election under
section 179 to deduct expenditures, the full amount of the deduction does not reduce earnings
and profits . Rather , the expenditures that are deducted reduce corporate earnings and profits
ratably over a five-year period. 330
An expensing election is made under rules prescribed by the Secretary. 331 In general, any
election or specification made with respect to any property may not be revoked except with the
consent of the Commissioner. However , an election or specification under section 179 may be
revoked by the taxpa yer without consent of the Commissioner.
Description of Proposal

The proposal increases the maximum amount a taxpayer may expense under section 179
to $5,000,000, and increases the phase-out threshold amount to $20,000,000 for five taxable
years, i.e., for taxable years beginning in 2018, 2019, 2020, 2021 and 2022. Thus, the proposal
provides that the maximum amount a taxpayer may expense, for taxable years beginning after
2017 and before 2023, is $5,000,000 of the cost of qualifying property placed in service for the
taxable year. The $5,000 ,000 amount is reduced (but not below zero) by the amount by which
the cost of qualifying property placed in service during the taxable year exceeds $20,000,000.
The $5,000,000 and $20,000,000 amounts are indexed for inflation for taxable years beginnin g
after 2018.
The proposal also expands the definition of qualified real property qualifying for
section 179 to include qualified energy efficient heating and air-conditioning property acquired
326

Sec. I 79(d)(l)(A)( ii) and (f).

327

Sec. I 79(d)(l) flush language.

328

Sec. 179(b)(3).

329

Sec. 179(d)(9).

330

Sec. 3 l2(k)(3)(B).

331

Sec. l 79(c)(l).

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TREAS-17-0313-I-000131

 and placed in service by the taxpayer after November 2, 2017. For purposes of the proposal ,
qualified energy efficient heating and air-conditioning property means any depreciable
section 1250 property that is (i) installed as part of a building's heating , cooling , ventilation , or
hot water system , and (ii) within the scope of Standard 90.1-2007 of the American Society of
Heating , Refrigerating , and Air-Conditioning Engineers and the Illuminating Engineering
Society of North America (as in effect on the day before the date of the adoption of
Standard 90.1-2010 of such Societies) or any successor standard.
Effective Date
The increased dollar limitations under section 179 apply to taxable years beginning after
December 31, 2017.
The expansion of qualified real property to include qualified energy efficient heating and
air-conditioning property applies to property acquired 332 and placed in service after November 2,
2017.
2. Small business accounting method reform and simplification
Present Law
General rule for methods of accounting
Section 446 generally allows a taxpayer to select the method of accounting to be used to
compute taxable income, provided that such method clearly reflects the income of the taxpayer.
The term "method of accounting " includes not only the overall method of accounting used by the
taxpayer , but also the accounting treatment of any one item. 333 Permissible overall methods of
accounting include the cash receipts and disbursements method ("cash method") , an accrual
method , or any other method (including a hybrid method) permitted under regulations prescribed
by the Secretary. 334 Examples of any one item for which an accounting method may be adopted
include cost recovery , 335 revenue recognition ,336 and timing of deductions. 337 For each separate

332

Property is not treated as acquired after the date on which a written binding contrac t is entered into for
such acquisi tion.
333

Treas. Reg. sec. 1.446-1(a)(l ).

334

Sec. 446(c).

335

See, e.g., secs. 167 and 168.

336

See, e.g., secs. 451 and 460 .

337

See, e.g., secs. 46 1 and 467 .

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TREAS-17-0313-I-000132

 trade or business , a taxpayer is entitled to adopt any permissible method , subject to certain
restrictions. 338
A taxpayer filing its first return may adopt any permissible method of accounting in
computing taxable income for such year. 339 Except as otherwise provided, section 446( e)
requires taxpayers to secure consent of the Secretary befor e changing a method of accounting.
The regulations under this section provide rules for determining: (1) what a method of
accounting is, (2) how an adoption of a method of accounting occurs , and (3) how a change in
method of accounting is effectuated. 340
Cash and accrual methods

Taxpayers using the cash method generally recognize items of income when actually or
constructively received and items of expense whe n paid. The cash method is administratively
easy and provides the taxpayer flexibility in the timing of income recognition. It is the method
generally used by most individual taxpayers , including farm and nonfarm sole proprietorships.
Taxpayers using an accrual method genera lly accrue items of income when all the events
have occurred that fix the right to receive the income and the amount of the income can be
determined with reasonable accuracy. 341 Taxpayers using an accrual method of accounting
generally may not deduct items of expense prior to when all events have occurred that fix the
obligation to pay the liability, the amount of the liability can be determined with reasonable
accuracy , and economic performance has occurred. 342 Accrual methods of accounting generally
result in a more accurate measure of economic income than does the cash method. The accrual
method is often used by businesses for financial accounting purposes.
A C corporation , a partnership that has a C corporation as a partner , or a tax-exempt trust
or corporation with unrelated business income genera lly may not use the cash method.
Exceptions are made for farming businesses , qualified personal service corporations , and the
aforementioned entities to the extent their average annual gross receipts do not exceed $5 million
for all prior years (includin g the prior taxable years of any predecessor of the entity) (the "gross
receipts test"). The cash method may not be used by any tax shelter. 343 In addition , the cash
338

Sec. 446(d) ; Treas. Reg. sec. 1.446-l(d).

339

Treas. Reg. sec. 1.446-1 (e)(l).

340

Treas. Reg. sec. 1.446-l(e).

341

See, e.g., sec. 451.

342

See, e.g., sec. 461.

343

Secs. 448(a)(3) and (d)(3) and 46 l(i )(3) and (4). For this purpose , a tax shelter includes: (1) any
enterprise (otber tban a C corporation) if at any time interests in such enterprise have been offered for sale in any
offering required to be registered with any Federal or State agency having the authority to regulate the offerin g of
securities for sale; (2) any syndicate (witbin the meanin g of section l 256(e)(3)( B)); or (3) any tax shelter as defined
in section 6662( d)(2)(C)(ii). In the case of a farming trade or business , a tax shelter includes any tax shelter as
defined in section 6662(d)(2)(C)(ii) or any partnership or any otber enterprise other than a corporation which is not

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TREAS-17-0313-I-000133

 method generally may not be used if the purchase , production , or sale of merchandise is an
income producin g factor. 344 Such taxpayers generally are required to keep inventories and use
an accrual method with respect to inventory items. 345
A farming business is defined as a trade or business of farming, including operating a
nursery or sod farm, or the raising or harvesting of trees bearing fruit , nuts , or other crops,
timber , or ornamental trees. 346 Such farming businesses are not precluded from using the cash
method regardless of whether they meet the gross receipts test. However, section 447 generally
requires a farming C corporation (and any farming partnership if a corporation is a partner in
such partnership) to use an accrual method of accounting. Section 447 does not apply to nursery
or sod farms, to the raising or harvesting of trees (other than fruit and nut trees) , nor to farming
C corporations meeting a gross receipts test with a $1 million threshold. For family farm
C corporations, the threshold under the gross receipts test is $25 million.
A qualified personal service corporation is a corporation: ( 1) substantially all of whose
activities involve the performance of services in the fields of health , law, engineering,
architecture, accounting, actuarial science, performin g arts, or consulting, and (2) substantially
all of the stock of which is owned by current or former employees performing such services ,
their estates, or heirs. Qualified personal service corporations are allowed to use the cash
method without regard to whether they meet the gross receipts test.

Accounting for inventories

In general, for Federal income tax purposes, taxpayers must account for inventories if the
production , purchase , or sale of merchandise is an income-producing factor to the taxpayer. 347
Treasury regulations also provide that in any case in which the use of inventories is necessary to
clearly reflect income , the accrual method must be used with regard to purchases and sales. 348
However, an exception is provided for taxpayers whose average annual gross receipts do not
exceed $1 million. 349 A second exception is provided for taxpayers in certain industries whose
average annual gross receipts do not exceed $ 10 million and that are not otherwise prohibited

an S corporation engaged in the trade or business of farming, (l) if at any time interests in such partnership or
enterprise have been offered for sale in any offering required to be registered with any Federal or State agency
having authority to regulate the offering of securities for sale or (2) if more than 35 percent of the losses during any
period are allocable to limited partners or limited entrepreneurs.
344

Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1.

345

Sec . 471 and Treas. Reg. secs . l.446-l(c)(2) and 1.471-1.

346

Sec. 448(d)( I).

347

Sec. 471(a) and Treas. Reg. sec. 1.471-1.

348

Treas. Reg. sec. 1.446-1 (c)(2).

349

Rev. Proc. 2001 -10, 2001-1 C.B. 272.

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TREAS-17-0313-I-000134

 from using the cash method under section 448. 350 Such taxpayers may account for inventory as
materials and supplies that are not incidental (i.e., "no n-incidental materials and supplies"). 351

In those circumstances in which a taxpayer is required to account for inventory, the
taxpayer must maintain inventory records to determine the cost of goods sold during the taxable
period. Cost of goods sold generally is determined by adding the taxpayer's inventory at the
beginnin g of the period to the purchases made during the period and subtracting from that sum
the taxpayer's inventory at the end of the period .
Because of the difficulty of accounting for inventory on an item-by-item basis, taxpayers
often use conventions that assume certain item or cost flows. Among these conventions are the
first-in, first-out ("FIFO") method , which assumes that the items in ending inventory are those
most recently acquired by the taxpayer, and the last-in , first-out ("LIFO") method, which
assumes that the items in ending inventory are those earliest acquired by the taxpayer.
Uniform capitalization

The uniform capitalization rules require certain direct and indirect costs allocable to real
or tangible personal property produced by the taxpayer to be included in either inventory or
capitalized into the basis of such property, as applicable. 352 For real or personal property
acquired by the taxpay er for resale , section 263A generally requires certain direct and indirect
costs allocable to such property to be included in inventory.
Section 263A provides a number of exceptions to the general uniform capitalization
requirements. One such exception exists for certain small taxpayers who acquire property for
resale and have $10 million or less of average annual gross receipts ;353 such taxpayers are not
required to include additional section 263A costs in inventory. Another exception exists for
taxpayers who raise, harvest, or grow trees. 354 Under this exception, section 263A does not
apply to trees raised, harvested, or grown by the taxpayer (other than trees bearing fruit, nuts, or
other crops, or ornamental trees) and any real property underlying such trees. Similarly, the
uniform capitalization rules do not apply to any plant having a preproductive period of two years
or less or to any animal, which is produced by a taxpayer in a farming busine ss (unless the

350

Rev. Proc. 2002 -28, 2002-1 C.B. 815.

351

Treas. Reg. sec. l. l62-3(a)(l). A deduction is generally permitted for the cost of non-incidental
materials and supplies in the taxable year in which they are first used or are consumed in the taxpayer's operations.
352

Sec. 263A.

353

Sec . 263A(b)(2)(B). No exception is availab le for sma ll taxpayers who produce property subject to
section 263A. However , a de minimis rule under Treasury regulations treats producers with tota l indirect costs of
$200, 000 or less as having no additional indirect costs beyond those normally capitalized for financial accounting
purposes. Treas. Reg. sec. 1.263A-2(b)(3)(iv).
354

Sec . 263A(c)(5).

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TREAS-17-0313-I-000135

 taxpayer is required to use an accrual method of accounting under section 447 or 448(a )(3)). 355
Freelance authors , photographers , and artists also are exempt from section 263A for any
qualified creative expenses. 356

Accounting for long-term contracts

In general , in the case of a long-term contract, the taxable income from the contract is
determined under the percentage-of-completion method. 357 Under this method , the taxpayer
must include in gross income for the taxable year an amount equal to the product of (I) the gross
contract price and (2) the percentage of the contract completed during the taxable year. 358 The
percentage of the contract completed during the taxable year is determined by comparing costs
allocated to the contract and incurred before the end of the taxable year with the estimated total
contract costs. 359 Costs allocated to the contract typicall y include all costs (including
depreciation) that directly benefit or are incurred by reason of the taxpayer 's long-term contract
activities. 360 The allocation of costs to a contract is made in accordance with regulations. 361
Costs incurred with respect to the long-term contract are deductible in the year incurred , subject
to general accrual method of accounting principles and limitations. 362
An exception from the requirement to use the percentage-of-completion method is
provided for certain construction contracts ("small construction contracts"). Contracts within
this exception are those contracts for the construction or improvement of real property if the
contract: (I) is expected (at the time such contract is entered into) to be completed within two
years of commencement of the contract and (2) is performed by a taxpayer whose average annual
gross receipts for the prior three taxable years do not exceed $ 10 million. 363 Thus, long-term
contract income from small construction contracts must be reported consistently using the

355

Sec. 263A(d).

356

Sec. 263A(h). Qualified creative expenses are defined as amounts paid or incurred by an individual in
the trade or business of being a writer , photographer , or artist. However , such term does not include any expense
related to printing , photographic plates, motion picture files, video tapes, or similar items.
357

Sec. 460(a).

358

See Treas. Reg. sec. 1.460-4. This calculation is done on a cumulative basis. Thus, the amount
included in gross income in a particular year is that proportion of the expected contract price that the amount of
costs incur red through the end of the taxable year bears to the total expected costs , reduced by the amounts of gross
contract price included in gross income in previo us taxable years.
359

Sec. 460(b)(l).

360

Sec. 460(c).

36 1

Treas . Reg. sec. 1.460-5.

362

Treas. Reg. secs. 1.460-4(b )(2)(iv) and 1.460-1 (b )(8).

363

Secs. 460(e)(l)(B) and (4).

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TREAS-17-0313-I-000136

 taxpayer 's exempt contract method. 364 Permissible exempt contract methods include the
completed contract method , the exempt-contract percentage-of-completion method , the
percentage-of-completion method , or any other permissible method. 365
Description of Proposal

The proposal expands the universe of taxpayers that may use the cash method of
accounting. Under the proposal , the cash method of accounting may be used by taxpayers , other
than tax shelters, that satisfy the gross receipts test, regardless of whether the purchase ,
production , or sale of merchandise is an income-producing factor. The gross receipts test allows
taxpayers with annual average gross receipts that do not exceed $25 million for the three prior
taxable-year period (the "$25 million gross receipts test ") to use the cash method. The
$25 million amount is indexed for inflation for taxable years beginning after 2018.
The proposal expands the universe of farming C corporations (and farming partnerships
with a C corporation partner) that may use the cash method to include any farming C corporation
(or farming partnership with a C corporation partner) that meets the $25 million gross receipts
test.
The proposal retains the exceptions from the required use of the accrual method for
qualified personal service corporations and taxpayers other than C corporations. Thus, qualified
personal service corporations, partnerships without C corporation partners, S corporations , and
other passthrough entities are allowed to use the cash method without regard to whether they
meet the $25 million gross receipts test, so long as the use of such method clearly reflects
income. 366

In addition , the proposal also exempts certain taxpayers from the requirement to keep
inventories. Specifically, taxpayers that meet the $25 million gross receipts test are not required
to account for inventories under section 4 71 367 , but rather may use a method of accounting for

364

Since such contracts involve the construction of real property , they are subject to the interest
capitalization rules without regard to their duration. See Treas. Re g. sec. l .263A-8 .
365

Treas. Reg. sec. l .460-4(c)(l ).

366

Consistent with present law, the cash method genera lly may not be used by taxpayers, other than those
that meet the $25 million gross receipts test, if the purchase , production , or sale of merchandise is an incomeproducing factor. In addition , the cash method may not be used by a tax shelter.
367
In the case ofa sole proprietorship , the $25 million gross receipts test is applied as if the sole
proprietorship is a corporation or partnership.

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 inventories that either (1) treats inventor ies as non-incidental materials and supplies 368, or
(2) conforms to the taxpay er's financial account ing treatment of inventor ies. 369
The proposa l expa nd s the except ion for sma ll taxpa yers from the uniform cap italizatio n
rules . Under the proposal , any prod ucer or reseller that meets the $25 million gross receipts test
is exempted from the app lication of section 263A. 370 The proposal retains the exemptions from
the unifonn capita lizat ion rules that are not based on a taxpa yer's gross receipt s.
Finally, the proposal expands the except ion for sma ll construct ion contracts from the
requirement to use the percentage-of-completion method. Under the proposal , contracts within
this except ion are those contracts for the constr uction or improvement of rea l property if the
contract: (I) is expected ( at the time such contract is entered into) to be completed within two
years of comme ncement of the contract and (2) is performed by a taxpayer that (for the taxable
year in which the contract was entere d into) meets the $25 million gross receipts test. 371
Under the proposal , a taxpayer who fails the $25 million gross receipts test would not be
eligible for any of the aforementioned exce ptions (i.e., from the accrua l method, from keeping
inventori es, from appl ying the uniform cap italization rules , or from using the perce ntage-of
comple tion method) for such taxable year.

Effective Date
The propo sals to expa nd the universe of taxpayers , including farming C corporations,
eligib le to use the cash met hod, exemp t certain taxpaye rs from the requirement to keep
inventories , and expand the exception from the uniform capitalization rules apply to taxable
years beginning after December 31, 2017. Application of these rules is a change in the
taxpaye r's method of account ing for purposes of sectio n 481.
The proposa l to expand the excep tion for sma ll construc tion contracts from the
requirement to use the percentage-of-completion method applies to contracts entered into after
December 31 , 2017 , in taxab le years endin g after such date. App lication of this rule is a change
in the taxpa yer 's met hod of accou nting for purposes of section 481. Applicat ion of the exception
for small construc tion contracts from the requirement to use the percentage-of-completion
368

Consistent with present law, a deduction is ge nerally pennitted for the cost of non-incidental materials
and supplies in the taxable year in which they are first used or are consumed in the taxpayer 's operations. See Treas.
Reg. sec. l.162-3(a)(l).
369

The taxpayer 's financial accounting treatment of inventor ies is determined by reference to the method
of accountin g used in the taxpayer's applicable financial statement (as defined in section 3202 of the bill (Small
business accounting method refonn and simplification)) or, if the taxpayer does not have an app licable financial
statement, the method of accounting used in the taxpayer 's book and records prepared in accordance with the
taxpayer 's accounting procedures.
370

In the case ofa sole proprietorship , the $25 million gross receipts test is applied as if the sole
proprietorship is a corporation or partnership.
371

In the case of a sole proprietorship , the $25 million gross receipts test is applied as if the sole
proprietorship is a corporation or partnership.

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TREAS-17-0313-I-000138

 method is applied on a cutoff basis for all similarly classified contracts (hence there is no
adjustment under section 48 l(a) for contracts entered into before January 1, 2018).
3. Small business exception from limitation on deduction of business interest
For present law, description of proposal , and effective date for the small business
exception from the limitation on the deduction of business interest , see section 3301 of the bill
(Interest).

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 D. Reform of Business-related Exclusions, Deductions, etc.
1. Interest

Present Law
Interest deduction
Interest paid or accrued by a business genera lly is deductible in the computation of
taxable income subject to a number of limitation s. 372
Interest is generall y deducted by a taxpayer as it is paid or accrued , depending on the
taxpayer's method of acco untin g. For all taxpayers, if an obligation is issued with origina l issue
discount ("01D "), a deduction for interest is allowable over the life of the obligation on a yield to
maturity basis. 373 OID arises whe re the amount to be paid at matu rity exceeds the issue price by
more than a de minimis amount.

Investment interest expense
In the case of a taxpayer other than a corpora tion, the deduction for interest on
indebtedness that is allocable to propert y he ld for investment (" investment interest") is limited to
the taxpayer 's net investment income for the taxab le year. 374 Disallowed investment interest is
carried forward to the next taxable year.
Net investment income is investment income net of investment expenses. Investment
income generally cons ists of gross income from property held for invest ment, and investmen t
expe nse includ es all dedu ctions directly connected with the production of investment income
(e.g., deduction s for investme nt management fees) other than deductions for interest. Investment
income includes only so much of the taxpayer 's net capital gain and qualified dividend income
as the taxpayer elects to take into account as investme nt income.
The two-pe rcent floor on miscellaneous itemized deductions allows taxpayers to deduct
investment expenses connected with investment income only to the extent such deductions

372
Sec. l 63(a). In addition to the limitations discussed herein , other limitat ions include: denia l of the
deduction for the disqualified portion of the original issue discount on an applicable high yield discount obligation
(sec. !63(e)(5)) , denial of deductio n for interest on certain obligations not in registered form (sec. 163(f)), reduction
of the deduction for interest on indebtedness with respect to which a mortgage credit certificate has been issued
under section 25 (sec. l 63(g)) , disallowance of deduction for personal interest (sec. l 63(h)), disallowance of
deduction for interest on debt with respect to certain life insurance contracts (sec. 264) , and disallowance of
deduction for interest relating to tax-exempt income (sec. 265). Interest may also be subject to capitalization. See,
e.g., sections 263A(f) and 46 l(g).
373

Sec. 163(e). But see section 267 (dea ling in part with interest paid to a related or foreign party) .

374

Sec . 163(d).

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 exceed two percent of the taxpayer 's adjusted gross income ("AGI"). 375 Miscellaneous itemized
deductions 376 that are not investment expenses are disallowed first before any investment
expenses are disallowed. 377
For purposes of the investment interest limitation, debt is allocated under a tracing
approach to expenditures in accordance with the use of the debt proceeds, and interest on the
debt is allocated in the same manner. 378 Thus, generally, the disallowance of a deduction for
investment interest depends on the individual's use of the proceeds of the debt. For example, if
an individual pledges corporate stock held for investment as security for a loan and uses the debt
proceeds to purchase a car for personal use, interest expense on the debt is allocated to the
personal expenditure to purchase the car and is treated as nondeductible personal interest rather
than investment interest.
Earnings stripping
Section l 63(j) may disallow a deduction for disqualified interest paid or accrued by a
corporation in a taxable year if two threshold tests are satisfied: the payor 's debt-to-equity ratio
exceeds 1.5 to 1.0 (the safe harbor ratio) and the payor ' s net interest expense exceeds 50 percent
of its adjusted taxable income (generally, taxable income computed without regard to deductions
for net interest expense, net operating losses, domestic production activities under section 199,
depreciation, amortization, and depletion). Disqualified interest includes interest paid or accrued
to: (1) related parties when no Federal income tax is imposed with respect to such interest ;379
(2) unrelated parties in certain instances in which a related party guarantees the debt ; or (3) to a
real estate investment trust ("REIT") by a taxable REIT subsidiary of that trust. 380 Interest
amounts disallowed under these rules can be carried forward indefinitely. 381 In addition, any

375

Sec. 67(a).

376

Miscellaneous itemized deductions include itemized deductions of individuals other than certain
specific itemized deductions. Sec. 67(b). Miscellaneous itemized deductions generally include , for example,
investment management fees and certain employee business expenses , but specifically do not include, for examp le,
interest, taxes, casualty and theft losses, charitable contributions, medical expenses , or other listed itemized
deductions.
377 H.R . Rep. No. 841 , 99th Cong. , 2d Sess., p. II-154 , Sept. 18, 1986 (Conf. Rep.) ("In computing the
amount of expenses that excee d the 2-percent floor, expenses that are not investment expenses are intended to be
disallowed before any investment expenses are disallowed.").
378

Temp . Treas. Reg. sec. l.163-8T(c).

379

If a tax treaty reduces the rate of tax on interest paid or accmed by the taxpayer , the interest is treated as
interest on which no Federal income tax is imposed to the extent of the same proportion of such interest as the rate
of tax imposed without regard to the treaty , reduced by the rate of tax imposed by the treaty , bears to the rate of tax
imposed without regard to the treaty. Sec. 163(i)(5)(B).
380

Sec . l 63(i)(3) .

381

Sec . l 63(i)( 1)(B).

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 excess limitation (i.e., the excess , if any, of 50 percent of the adjusted taxable income of the
payor over the payor ' s net interest expense) can be carried forward three years. 382
Description of Proposal

In general
In the case of any taxpayer for any taxable year, the deduction for business interest is
limited to the sum of business interest income plus 30 percent of the adjusted taxable income of
the taxpayer for the taxable year. The amount of any interest not allowed as a deduction for any
taxable year may be carried forward for up to five years beyond the year in which the business
interest was paid or accrued , treating business interest as allowed as a deduction on a first-in ,
first-out basis. The limitation applies at the taxpayer level. In the case of a group of affiliated
corporations that file a consolidated return, it applies at the consolidated tax return filing level.

Business interest means any interest paid or accrued on indebtedness properly allocable
to a trade or business. Any amount treated as interest for purposes of the Internal Revenue Code
is interest for purposes of the proposal. Business interest income means the amount of interest
includible in the gross income of the taxpayer for the taxable year which is properly allocable to
a trade or business. Busines s interest does not include investment interest , and business interest
income does not include investment income , within the meaning of section 163(d).
By including business interest income in the limitation , the rule operates to limit the
deduction for net interest expense to 30 percent of adjusted taxable income. That is, a deduction
for business interest is permitted to the full extent of business interest income. To the extent that
business interest exceeds business interest income , the deduction for the net interest expense is
limited to 30 percent of adjusted taxable income.
Adjusted taxable income means the taxable income of the taxpayer computed without
regard to ( 1) any item of income , gain, deduction , or loss which is not properly allocable to a
trade or business ; (2) any business interest or business interest income ; (3) the amount of any net
operating loss deduction ; and (4) any deduction allowable for depreciation , amortization , or
depletion. The Secretary may provide other adjustments to the computation of adjusted taxable
mcome .
Application to pass-through entities

In general
In the case of any partnership , the limitation is applied at the partnership level. Any
deduction for business interest is taken into account in determining the nonseparately stated
taxable income or loss of the partnership. 383 To prevent double counting , special rules are
provided for the determination of the adjusted taxable income of each partner of the partnership.
382

Sec. I 63(j)(2)( B)(ii).

383

This amount is the "Ordinar y business income or loss" reflected on Form l 065 (U.S . Return of
Partnership Income). The partner's distributi ve share is reflected in Box I of Schedule K-1 (Form I 065).

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 Similarly, to allow for additional interest deduction by a partner in the case of an excess amount
of unused adjusted taxable income limitation of the partnership , special rules apply. Similar
rules apply with respect to any S corporat ion and its shareholders.
Double counting rule
The adjusted taxable income of each partner (or shareholder , as the case may be) is
determined without regard to such partner 's distributive share of the nonspearately stated income
or loss of such partnership. In the absence of such a rule, the same dollars of adjusted taxable
income of a partnership could generate additional interest deductions as the income is passed
through to the partners.
Examp le I .-ABC is a partnership owned 50-50 by XYZ Corporation and an individual.
ABC generates $200 of noninterest income. Its only expense is $60 of business interest. Under
the proposal the deduction for business interest is limited to 30 percent of adj usted taxable
income, that is, 30 percent* $200 = $60. ABC deducts $60 of business interest and reports
ordinary business income of$140. XYZ 's distributive share of the ordinary business income of
ABC is $70. XYZ has net taxable income of zero from its other operations , none of which is
attributable to interest income and without regard to its business interest expense. XYZ has
business interest expense of $25. In the absence of any special rule, the $70 of taxable income
from its interest in ABC would permit the deduct ion of up to an additiona l $21 of interest
(30 percent* $70 = $21), resulting in a deduction disallowance of only $4. XYZ's $ 100 share of
ABC ' s adjusted taxable income would generate $51 of interest deduction s. If XYZ were instead
a pass-through entity , additional deductions could be available at each tier.
The double counting rule provides that XYZ has adjusted taxable income computed
without regard to the $70 distributive share of the nonspearately stated income of ABC. As a
result it has adjusted taxable income of $0. XYZ ' s deduction for business interest is limited to
30 percent* $0 = $0, resulting in a deduction disallowance of $25.
Additional deduction limit
The limit on the amount allowed as a deduction for business interest is increased by a
partner 's distributive share of the partnership ' s excess amount of unused adjusted taxable income
limitation. The excess amount with respect to any partnership is the excess (if any) of 30 percent
of the adjusted taxable income of the partnership over the amount (if any) by which the business
interest of the partnership exceeds the business interest income of the partnership. This allows a
partner of a partnership to deduct more interest expense the partner may have paid or incurred to
the extent the partnership could have deducted more business interest.
Examp le 2.-The facts are the same as in Examp le I except ABC has only $40 of business
interest but $20 of other deductible expenses. As in Examp le 1, ABC has a limit on its interest
deduction of $60. The excess amount for ABC is $60 - $40 = $20. XYZ ' s distributive share of
the excess amount from ABC partnership is $ 10. XYZ ' s deduction for business interest is
limited to 30 percent of its adjusted taxable income plus its distributive share of the excess
amount from ABC partnership (30 percent* $0 + $ 10 = $ 10). As a result of the rule, XYZ may
deduct $ 10 of business interest and has an interest deduction disallowance of $ 15.

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 Carryforward of disallowed business interest

The amount of any business interest not allowed as a deduction for any taxable year is
treated as business interest paid or accrued in the succeeding taxable year. Business interest may
be carried forward for up to five years. Carryforwards are determined on a first-in , first-out
basis.
A coordination rule is provided with the limitation on deduction of interest by domestic
corporations in international financial reporting groups. 384 Whichever rule imposes the lower
limitation on deduction of interest with respect to the taxable year (and therefore the greatest
amount of interest to be carried forward) governs.
Any carryforward of disallowed interest is an item taken into account in the case of
certain corporate acquisitions described in section 381 and is subject to limitation under
section 382.
Exceptions

The limitation does not apply to any taxpayer that meets the $25 million gross receipts
test of section 448( c), that is, if the average annual gross receipts for the three-taxable-year
period ending with the prior taxable year does not exceed $25 million. 385
The trade or business of performing services as an employee is not treated as a trade or
business for purposes of the limitation. As a result, for example , the wages of an employee are
not counted in the adjusted taxable income of the taxpayer for purposes of determining the
limitation.
The limitation does not apply to a real property trade or business as defined in
section 469(c)(7)(C). Any real property development , redevelopment , construction,
reconstruction , acquisition , conversion, rental, operation , management , leasing, or brokerage
trade or business is not treated as a trade or business for purposes of the limitation.
The limitation does not apply to certa in regulated public utilities. Specifically , the trade
or business of the furnishing or sale of (I) electrical energy, water, or sewage disposal services ,
(2) gas or steam through a local distribution system, or (3) transportation of gas or steam by
pipeline , if the rates for such furnishing or sale, as the case may be, have been established or
approved by a State or political subdivision thereo f, by any agency or instrumentality of the
United States, or by a public service or public utility commission or other similar body of any
State or politi cal subdivision thereof is not treated as a trade or business for purposes of the
limitation.

384

See section 4302 oftbe bill (Limitation on deduction of interest by domestic corporations which are
members of an international financial reporting group).
385

In the case of a sole proprie torship , the $25 million gross receipts test is applied as if the sole
proprietorship were a corporation or partnership.

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TREAS-17-0313-I-000144

 Effective Date

The proposal applies to taxable years beginn ing after December 31, 2017.
2. Modification of net operating loss deduction
Present Law

A net operating loss ("NOL") generally means the amount by which a taxpayer 's
business deduct ions exceed its gross income. 386 In general, an NOL may be carried back two
years and carried over 20 years to offset taxable income in such years. 387 NOLs offset taxable
income in the order of the taxable years to which the NOL may be carried. 388
Different carryback periods apply with respect to NOLs arising in different
circumstances. Extended carrybac k periods are allowed for NO Ls attr ibutable to specified
liability losses and certa in casualty and disaster losses. 389 Limitations are placed on the
carryback of excess interest losses attributable to corporate equity reduction transactions. 390
Description of Proposal

The proposal limits the NOL deduction to 90 percent of taxable income (deter mined
without regard to the deduction). Carryovers to other years are adjusted to take account of this
limitation, and may be carried forward indefinitely. In addition, NOL carryovers attributable to
losses arising in taxable years beginning after December 3 1, 20 17, are increased annually by an
inflation adjustment.
The proposal repeals the two-year carryback and the special carryback provisions , but
provides a one-year carryback in the case of certain disaster losses incurred in the trade or
business of farming, or by certain small businesses. 391 For this purpose , small business means a
corporation, partnership, or sole proprieto rship whose average annual gross receipts for the three-

386

Sec. l 72(c).

387

Sec. l 72(b)(l)(A).

388

Sec. I 72(b)(2).

389

Sec . I 72(b )( 1)(C) and (E).

390

Sec. I 72(b )( 1)(D).

391

Notwithstand ing the amendments made by the propos al and section 1304 of the bill (Repeal of
deduction for personal casualty losses) , the proposal retains the present-la w three-year carryback for the portion of
the NOL for any taxab le year which is a net disaster loss to which section 504(b) of the Disaster Tax Relie f and
Airport and Airway Extension Act of2017 (Pub. L. No. 115-63) applies (i.e., a net disaster loss arising from
hurricane Harvey , Inna , or Maria).

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 taxable-year period ending with such taxable year does not exceed $5,000,000. Aggregation
rules app ly to determine gross receipts.

Effective Date
The proposal allowing indefinite carryovers and modifying carrybacks generally applies
to losses arising in taxable years beginning after December 31, 20 17. 392
The proposa l limitin g the NOL deduction applies to taxable years beginn ing after
December 31, 2017.
The annual increase in carryover amounts applies to taxab le years beginning after
December 31, 2017.

3. Like-kind exchanges of real property
Present Law
An exchange of property, like a sale, generally is a taxable event. However , no gain or
loss is recognized if property held for productive use in a trade or business or for investment is
exchanged for property of a "like kind" wh ich is to be held for prod uctive use in a trade or
business or for investment. 393 In general, section 1031 does not apply to any exchange of stock
in trade (i.e., inventor y) or other property held primarily for sale; stocks, bonds , or notes; other
securi ties or evidences of indebtedness or interest ; interests in a partnership ; certificates of trust
or beneficial interests; or choses in action. 394 Section I 031 also does not apply to certa in
excha nges involv ing livestock 395 or foreign property. 396
For purposes of section 1031, the determination of whether property is of a "like kind "
relates to the nature or character of the property and not its grade or quality , i.e., the
nonrecognition rules do not apply to an exchange of one class or kind of property for propert y of
a different class or kind (e.g., section I 031 doe s not apply to an exchange of real property for
personal property). 397 The different classes of property are : (1) depreciable tangible personal

392

See section 310 I of the bill (Increased expens ing) for a limitation on the amount of any NOL which
may be treated as an NOL carryback in the case of any year which includes any portion of the period beginning
September 28, 2017 , and ending December 3 1, 2017.
393

Sec. I 031 (a)(l ).

394

Sec. I 031 (a)(2). A chose in action is a right that can be enforced by lega l action.

395

Sec. 1031(e).

396

Sec. I 031 (h).

397

Treas. Reg. sec. I.I 03 1(a)- I (b).

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 propert y; 398 (2) intangible or nondepreciable personal property; 399 and (3) real property. 400
However, the rules with respect to whether real estate is "like kind" are applied more liberally
than the rules governing like-kind exchanges of depreciable , intangible, or nondepreciable
personal property. For examp le, improved real estate and unimproved real estate generally are
considered to be property of a "like kind" as this distinction relates to the grade or quality of the
real estate,401 while depreciable tangible personal properties must be either within the same
General Asset Class 402 or within the same Product Class. 403
The nonrecogni tion of gain in a like-kind exchange applies only to the extent that likekind property is received in the exchange. Thus, if an exchange of propert y would meet the
requirement s of section I 03 1, but for the fact that the property received in the transaction
consists not only of the propert y that would be permitted to be exchanged on a tax-free basis, but
also other non-q ualifying property or money ("addi tional consideration"), then the gain to the
recipient of the other propert y or money is required to be recognized , but not in an amount
398

For example, an exchange of a persona l computer classified Wlder asset class 00.12 of Rev. Proc. 8756, 1987-2 C.B. 674, for a printer classified under the same asset class of Rev. Proc. 87-56 would be treated as
property ofa like kind. However, an exchange ofan airplane classified under asset class 00.21 of Rev. Proc. 87-56
for a heavy general purpose truck classified under asset class 00 .242 of Rev. Proc. 87-56 would not be treated as
property of a like kind. See Treas. Reg. sec. l.103 l (a)-2(b)(7).
399
For examp le, an exchan ge of a copyright on a nove l for a copyright on a d ifferent novel wou ld be
treated as property of a like kind. See Treas. Reg. sec. 1.1031 (a)-2(c)(3). However , the goodw ill or going concern
value of one business is not of a like kind to tbe goodw ill or goin g concern value of a different business. See Treas.
Reg. sec. I. I 031 (a)-2(c)(2). The Interna l Revenue Service ("IRS ") has ruled that intangible assets such as
trademarks , trade names, mastheads , and customer -based intangibles that can be separate ly described and valued
apart from goodw ill qual ify as property of a like kind under section I 031. See Chief Counse l Advice 200911006 ,
February 12, 2009.
400

Treas. Reg. sec. l.103l(a)-l(b)

40 1

Treas. Reg. sec. l.103l(a)-l(b).

and (c).

402
Treasury Regulation section 1.1031(a)-2(b )(2) provides the following list of Genera l Asset Classes ,
based on asset classes 00.11 through 00.28 and 00.4 of Rev. Proc. 87-56, 1987-2 C.B. 674: (i) Office furniture ,
fixtures, and equipment (asset class 00.11 ), (ii) Infonnation systems (computers and periphera l equipment) (asset
class 00.12) , (iii) Data handling equipment, except computers (asset class 00.13) , (iv) Airplanes (airframes and
engines) , except those used in commercial or contract carryin g of passengers or freight , and all helicopters
(airframes and engines) (asset class 00.21 ), (v) Automobiles, taxis (asset class 00.22), (vi) Buses (asset class 00.23) ,
(vii) Light general purpose trucks (asset class 00.241), (viii) Heavy genera l purpose trucks (asset class 00.242),
(ix) Railroad cars and locomotives , exce pt those owned by ra ilroad transportation companies (asset class 00.25),
(x) Tractor units for use over-the-road (asset class 00.26) , (xi) Trailers and trailer-mou nted containers (asset class
00.27) , (xii) Vessels, barges , tugs, and similar water -transportat ion equipment, except those used in marine
construction (asset class 00.28) , and (xiii) Industrial steam and electric generat ion and/or distribution systems (asset
class 00.4).
403

Property within a product class consists of depreciable tangible persona l property tbat is described in a
6-digit product class within Sectors 31, 32, and 33 (pertaining to manufacturing industries) of the North Amer ican
Industry Classification System ("NAICS"), set forth in Executi ve Office of the President, Office of Management and
Budget, North American Indus try Classification Sys tem, United States, 2002 (NAICS Manua l), as periodically
updated. Treas. Reg. sec. 1.1031 (a)-2(b)(3).

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 exceeding the fair market value of such other property or money. 404 Additionally, any such gain
realized on a section I 031 exchange as a result of additional consideration being involved
constitutes ordinary income to the extent that the gain is subject to the recapture provisions of
sections 1245 and 1250.405 No losses may be recognized from a like-kind exchange. 406

If section 1031 applies to an exchange of properties , the basis of the property received in
the exchange is equal to the basis of the property transferred. This basis is increased to the
extent of any gain recognized as a result of the receipt of other property or money in the likekind exchange, and decreased to the extent of any money received by the taxpayer. 407 The
holding period of qualifying property received includes the holding period of the qualifying
property transferred , but the nonqualifying property received is required to begin a new holding
period. 408
A like-kind exchange also does not require that the properties be exchanged
simultaneously. Rather, the property to be received in the exchange must be received not more
than 180 days after the date on which the taxpayer relinquishes the original property (but in no
event later than the due date (including extensions) of the taxpayer's income tax return for the
taxable year in which the transfer of the relinquished property occurs). In addition, the taxpayer
must identify the property to be received within 45 days after the date on which the taxpayer
transfers the property relinquished in the exchange. 409
The Treasury Department has issued regulations 410 and revenue procedures 41 1 providing
guidance and safe harbors for taxpayers engaging in deferred like-kind exchanges.

404
Sec. 1031(b). For example , if a taxpayer holding land A having a basis of $40,000 and a fair market
value of $100,000 exchanges the property for land B worth $90,000 plus $ 10,000 in cash, the taxpayer would
recognize $ 10,000 of gain on the transaction , which would be ineluctable in income. The remaining $50,000 of gain
would be deferred until the taxpayer disposes of land B in a taxable sale or exchange.
405

Secs. 1245(b)(4) and 1250(d)(4). For example , ifa taxpayer holding section 1245 property A with an
original cost basis of $ I 1,000, an adjusted basis of $ 10,000, and a fair market value of $ I 5,000 exchanges the
property for section 1245 proper ty B with a fair market value of $ 14,000 plus $ 1,000 in cash, the taxpayer would
recognize $ 1,000 of ordinary income on the transaction. The remaining $4,000 of gain would be deferred until the
taxpayer disposes of section 1245 property B in a taxable sale or exchange.
406

Sec. 103l(c).

407

Sec. I 03 I (d). Thus , in the examp le noted above , the taxpaye r' s basis in B would be $40,000 (the
taxpayer's transferred bas is of $40 ,000, increased by $ 10,000 in gain recogni zed, and decreased by $ 10,000 in
money received).
408

Sec. 1223( I).

409

Sec. I 031 (a)(3).

410

Treas. Reg. sec. I.I 03 l(k)-1 (a) through (o).

411

See Rev. Proc. 2000-37 , 2000-40 I.R.B. 308, as modified by Rev. Proc. 2004-51 , 2004-33 I.R.B. 294.

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 Description of Proposal
The proposal modifies the provision providing for nonrecogn ition of gain in the case of
like-kind exchanges by limiting its application to real property that is not held primarily for sale.

Effective Date
The proposal generally applies to exchanges completed after December 31, 2017.
However , an exception is provided for any exchange if the property disposed ofby the taxpayer
in the exchange is disposed of on or before December 31, 2017 , or the property received by the
taxpayer in the exchange is received on or before such date.

4. Revision of treatment of contributions to capital
Present Law
The gross income of a corporation does not include any contribution to its cap ital. 4 12 For
purposes of this rule, a contribution to the capital of a corporation does not include any
contribution in aid of construction or any other contribution from a customer or potential
customer. 413 A special rule allows certain contributions in aid of construction received by a
regulated public utility that provides water or sewerage disposal services to be treated as a taxfree contribution to the capital of the utilit y. 414 No deduction or credit is allowed for, or by
reason of, any expenditure that constitutes a contribution that is treated as a tax-free contribution
to the capita l of the utility. 4 15

If property is acquired by a corporation as a contribution to capital and is not contributed
by a shareholder as such, the adjusted basis of the property is zero. 416 If the contribution consists
of money , the corporation must first reduce the basis of any propert y acquired with the
contributed money within the following 12-month period, and then reduce the bas is of other
property held by the corporation. 417 Similarly , the adjusted basis of any property acquired by a
utility with a contribution in aid of construction is zero. 418

412

Sec. 1 I 8(a).

413

Sec. J 18(b).

414

Sec. l 18(c)(l).

415

Sec. 1 I 8(c)(4).

416

Sec. 362(c)(l).

417

Sec. 362(c)(2). See also Treas. Reg. sec. l.362-2.

418

Sec. l 18(c)(4).

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 Description of Proposal
The proposal repeals the provision of the Internal Revenue Code under which , generally,
a corporat ion 's gross income does not include contributions of capital to the corporat ion.
Further, the proposal provides that a contribution to capita l, other than a contribution of
money or property made in exchange for stock of a corporation or any interest in an entit y, is
included in gross income of a taxpayer. For example , a contribution of muni cipal land by a
municipalit y that is not in exchange for stock (or for a partner ship interest or other intere st) of
equivalent va lue is considered a con tributi on to capita l that is includable in gross income. By
contrast , a municipal tax abatement for locating a business in a particular municipality is not
considered a contr ibution to capital.
The proposal also provides rules clarif ying the contributee's basis in the property
contrib ut ed.

Effective Date
The proposal app lies to contribution s made , and transactions entered into , after the date
of enactment.

5. Repeal of deduction for local lobbying expenses
Present Law
In general
A taxpayer genera lly is allowed a deduction for ordinary and necessary expenses paid or
incurred in carrying on any trade or business. 41 9 However , section 162(e) denies a deduction for
amounts paid or incurred in connec tion with ( 1) influencing legislat ion, 420 (2) participation in, or
interve ntion in, any political campaign on behalf of (or in opposition to) any candidate for pub lic
office , (3) any attempt to influen ce the general public , or segme nts thereof , with respect to
elections , legislative matters , or refere ndum s, or (4) any direct comm unication with a covered
executive branch official 421 in an attempt to influence the official actions or positions of such

4 19

Sec. 162(a) .

420
The tenn "influencin g legislation" means any attempt to influence any leg islation through
communic ation with any member or employee of a legislative body , or with any government offici al or employee
who may participate in the formulation of legisla tion . The term "legislation " includes actions with respect to Acts,
bills, resolutions , or simi lar items by the Congress , any State legislature , any loca l council , or similar governing
body , or by the public in a referendum, initiative , constitutional amendment, or similar procedure. Secs. 162(e)(4)
and 49 l l (e)(2) .
421

The tenu "covered executive branch official " means (I) the President, (2) the Vice President, (3) any
officer or employee of the White Hou se Office of the Executive Office of the President , and the two most senior
level offic ers of each of the other agencies in such Executive Offic e, (4) any individual servicing in a posit ion in
level I of the Execut ive Schedule under section 5312 of title 5, United States Code, (5) any other individual

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 official. Expenses paid or incurred in connection with lobbying and political activities (such as
research for, or preparat ion, planning , or coordination of, any previous ly described acti vity) also
are not deductible. 422

Exceptions
Local legislation
Notw ithstand ing the above , a deduction is allowed for ord inary and necessary expenses
incurred in connect ion with any legislation of any local council or simi lar govern ing body ("local
legis lation"). 423 Wit h respect to local legis lation, the excep tion perm its a deduction for amo unts
paid or incurred in carry ing on any trad e or business ( 1) in direct connection with appearances
before , submi ssion of stateme nts to, or send ing commun icat ions to the committees or individual
members of such council or body with respect to legislation or proposed legis lation of direct
interest to the taxpayer, or (2) in direct connection with comm unication of information between
the taxpayer and an organiza tion of whic h the taxpayer is a member with respect to any such
legislation or proposed leg islation which is of direct interest to the taxpayer and such
organization , and (3) that port ion of the dues paid or incurred with respect to any organiza tion of
which the taxpayer is a member which is attributabl e to the expenses of the activities described
in (1) or (2) carried on by such organization. 424
For purposes of this except ion, legis lation of an Indian tribal government is treated in the
same manner as local legislation. 425
De minimis
For taxpayers with $2,000 or less of in-house expendi tures related to lobbying and
political activities, a de minim is exception is pro vided that permits a deduction. 426

Description of Proposal
The proposal repea ls the excep tion for amounts paid or incurred related to lobbying local
counci ls or sim ilar governing bodi es, including Indian tribal governments. Thus, the genera l

designated by the President as having Cabinet -level status, and (6) any immediate deputy of an individual described
in (4) or (5). Sec. 162(e)(6).
422

Sec . 162(e)(5)(C).

423

Sec. l 62(e)(2)(A).

424

Sec. 162(e)(2)(B).

425

Sec. 162(e)(7).

426

Sec . 162(e)(5)(B).

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 disallowance rules applicable to lobb ying and political expe nditur es will apply to costs incurred
related to such loca l legislation.

Effective Date
The proposal applies to amounts paid or incurred after December 31, 2017.

6. Repeal of deduction for income attributable to domestic production activities
Present Law
Section 199 provides a deduction from taxable income ( or, in the case of an indi vidual ,
adjusted gross income 427 ) that is equal to nine percent of the lesser of the taxpayer's qualified
produc tion activities income or taxable income (determined withou t regard to the section 199
deduction) for the taxable yea r. 428 For corporat ions subject to the 35-perce nt corpora te income
tax rate , the nine-pe rcent deduction effect ively reduces the corporate income tax rate to slightly
less than 32 percent on qualified production activities income. 429 A similar red uction applies to
the graduat ed rates applicable to individuals with qualifying domestic production activities
mcom e.
In genera l, qualified product ion activities income is equal to domestic production gross
receipts reduced by the sum of: (1) the costs of goods sold that are allocab le to those recei pts;
and (2) other expenses, losses, or deductions which are prop erly alloca ble to tho se rece ipts. 430
Dom est ic production gross receipts genera lly are gross receip ts of a taxpayer that are
derived from: (1) any sale, exchange , or other disposition , or any lease, rental , or license, of
qualifying production property 431 that was manufactured , produced, grown or extrac ted by the
taxpayer in who le or in significa nt part within the United States; 432 (2) any sale , exc han ge, or
427

For this purpose , adjusted gross income is determined after app lication of sections 86, 135, 137, 219,
221 , 222, and 469, without regard to the section 199 deduction. Sec. l 99(d)(2).
428

Sec. 199(a). In the case ofoil related qualified production activities income , the deduction from taxable
income is equal to six percent of the lesser of the taxpayer 's oil related qualified production activities income,
qualified production activities income , or taxable income . Sec. l 99(d)(9).
429

This example assumes the deduction does not exceed the wage limitation discussed below .

430
Sec. 199(c)(l). 1ncomputing qualified production activities income, the domestic production act ivities
deduction itself is not an allocable deduction. Sec. I 99(c)( l)(B)(ii). See Treas. Reg. secs. I.l 99- 1 through I.l 99-9
where the Secretary has prescr ibed rules for the proper allocation of items of income , deduction , expense , and loss
for purposes of determinin g quali fied production activities income.
43 1

Qualifying prod uction property genera lly includes any tangible personal property , computer software ,
and sound recordings. Sec. l99(c)(5).
432

When used in the Code in a geographica l sense, the term "United States" genera lly includes only the
States and the District of Columbia. Sec. 770l(a)(9). A special rule for determining domestic production gross
rece ipts, however, provides that for taxable years beginning after December 31, 2005, and before January I , 2018 , in
the case of any taxpayer with gross receipts from sources within the Commonwealth of Puerto Rico, the term

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TREAS-17-0313-I-000152

 other disposition , or any lease, renta l, or license , of qualified film 433 produced by the taxpayer ;
(3) any sale, exchange, or other disposition , or any lease, rental, or license , of electric ity, natural
gas, or potab le water produced by the taxpayer in the United States; (4) construct ion ofrea l
property performed in the United States by a taxpayer in the ordinary course of a constr uction
trade or business ; or (5) engineering or architectural services performed in the United States for
the construction of real property located in the United States. 434
The amount of the deduction for a taxable year is limited to 50 percent of the W-2 wages
paid by the taxpayer , and properly allocab le to domestic production gross receipts, during the
calendar year that ends in such taxable year. 435
Description of Proposal
The proposa l repeals the deduction for income attributab le to domestic production
activities.
Effective Date
The proposa l app lies to taxable years beginning after December 31, 2017.

"United States" include s the Commonwealth of Puerto Rico , but only if all of the taxpayer 's Puerto Rico-sourced
gross receipts are taxable under the Federal income tax for individuals or corporations for such taxable year.
Secs. 199(d)(8)(A) and (C) , as extended by section 4401 of the bill (Extension of deduction allowab le with respect
to income attributab le to domestic production activities in Puerto Rico). In computing the SO-percent wage
limitation, the taxpayer is pennitted to take into account wages paid to bona fide residents of Puerto Rico for
services performed in Puerto Rico. Sec. 199(d)(8)(B).
433

Qualified film includes any motion picture film or videotape (including live or delayed television
programming , but not including certain sexually explicit productions) if SOpercent or more of the total
compensation relating to the product ion of the film (including compensation in the form of residuals and
participatio ns) constitutes compensation for services performed in the United States by actors , production personnel ,
directors, and producers. Sec. 199(c)(6).
434

Sec. 199(c)(4)(A).

435

Sec. 199(b)(l ). For purposes of the provision , "W-2 wages" include the sum of the amounts of wages
as defined in section 340l(a) and elective deferrals that the taxpayer properly reports to the Social Security
Administration with respect to the employment of employees of the taxpayer during the calendar year ending during
the taxpayer 's taxable year. Elective deferrals include elective deferrals as defined in section 402(g)(3 ), amounts
deferred under section 457 , and designated Roth contributions as defined in section 402A. See sec. 199(b)(2)(A).
The wage limitation for qualified films includes any compensation for services performed in the United States by
actors, product ion personnel , directors , and producers and is not restricted to W-2 wages. Sec. 199(b)(2)(D).

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 7. Entertainment, etc. expenses

Present Law
In general
No deduction is allowed with respect to (1) an activity generally considered to be
entertainment , amusement, or recreation ("entertainment "), unless the taxpayer establishes that
the item was directly related to (or, in certain cases , associated with) the active conduct of the
taxpayer's trade or business , or (2) a fac ility (e.g., an airplane) used in connection w ith such
activity. 436 If the taxpayer establishes that entertainment expenses are directly related to (or
associated with) the active cond uct of its trade or business , the deduction generally is limited to
50 perce nt of the amount otherw ise deductible. 437 Similarly, a deduction for any expense for
food or beverages genera lly is limited to 50 percent of the amount otherw ise deductible. 438 In
addition , no deduction is allowed for membership dues with respect to any club organized for
business , pleasure , recreation , or other social purpose. 439
There are a number of except ions to the genera l rule disallowing deduction of
entertainme nt expenses and the rules limitin g deductions to 50 percent of the otherwise
deductible amount. Under one such exception , those rules do not apply to expenses for goods ,
services , and facilities to the extent that the expenses are reported by the taxpayer as
compensat ion and as wages to an employee. 440 Those rules also do not apply to expenses for
goods , serv ices, and facilities to the extent that the expenses are includibl e in the gross income of
a recipient who is not an emp loyee (e.g., a nonemployee director) as compensation for services
rendered or as a prize or award. 441 The excep tion s apply only to the exten t that amo unts are
properly reported by the company as compensat ion and wages or otherwise includ ible in income.
In no event can the amount of the deduction exceed the amount of the taxpayer's actua l cost ,
even if a greater amount (i.e., fair market value) is includible in income. 442
Those deduction disallowance rules also do not apply to expenses paid or incurred by the
taxpayer , in connection with the performance of services for another perso n ( other than an
employer) , under a reimbursement or other expense allowance arrangement if the taxpayer
436

Sec. 274(a)(l).

437

Sec . 274(n)(l)(B) .

438

Sec. 274(11)(I)(A).

439

Sec. 274(a)(3).

440

Sec. 274(e)(2)(A). See below for a discussion of the recent modification of this rule for certain

individua ls.
441

Sec. 274(e)(9).

442

Treas. Reg. sec. 1. I 62-25T(a).

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TREAS-17-0313-I-000154

 accounts for the expenses to such person. 443 Another exception applies for expenses for
recreational , social , or similar activities primarily for the benefit of employees other than certain
owners and highly compensated employees .444 An exception applies also to the 50 percent
deduction limit for food and beverages provided to crew members of certain commercial vessels
and certain oil or gas platform or drilling rig workers. 445
Expenses treated as compensation

Except as otherwise provided , gross income includes compensat ion for services,
including fees, commissions , fringe benefits , and similar items.446 In general , an employee (or
other service provider) must include in gross income the amount by which the fair market value
of a fringe benefit exceeds the sum of the amount (if any) paid by the individual and the amount
(if any) specifica lly excluded from gross income. 447 Treasury regulations provide detailed rules
regarding the valuation of certain fringe benefits , including flights on an employer-pro vided
aircraft. In general, the value of a non-commercial flight generally is determined under the base
aircraft valuation formula , also known as the Standard Industry Fare Level formula or "SIFL." 448
If the SIFL valuat ion rules do not apply, the value of a flight on an emplo yer-provided aircraft
generally is equal to the amount that an individual would have to pay in an arm' s-length
transaction to charter the same or a comparable aircraft for that period for the same or a
comparable flight. 449

In the context of an employer providing an aircraft to employees for nonbusiness (e.g.,
vacation) flights, the exception for expenses treated as compensation has been interpreted as not
limiting the company ' s deduction for expenses attributable to the operation of the aircraft to the
amount of compensation reportable to its employees. 450 The result of that interpretation is often
a deduction several times larger than the amount required to be included in income. Further , in
many cases, the individual including amounts attributable to personal trave l in income directly
benefits from the enhanced deduction , resulting in a net deduction for the personal use of the
company aircraft.

443

Sec. 274(e)(3).

444

Sec. 274(e)(4) .

445

Sec. 274(n)(2)(E).

446

Sec. 6 1(a)( I).

447

Treas. Reg. sec. l. 6 1-21(b)( l ).

448

Treas. Reg. sec. 1.6 1-21(g)(5).

449

Treas. Reg. sec. l. 6 1-2 1(b)(6).

450

Suther land Lumber-Southwest, I nc. v. Commissione r, 114 T.C. 197 (2000), aff' d, 255 F.3d 495 (8th Cir.

200 1).

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TREAS-17-0313-I-000155

 The exceptions for expenses treated as compensation or otherwise includible income
were subsequently modified in the case of specified individuals such that the exceptions apply
only to the extent of the amount of expenses treated as compensation or includible in income of
the specified individual. 451 Specified individuals are individuals who, with respect to an
employer or other service recipient (or a related party) , are subject to the requirement s of
section 16(a) of the Securities Exchange Act of 1934, or would be subject to such requirements if
the employer or service recipient (or related party) were an issuer of equity securities referred to
in section 16(a).452
As a result, in the case of specified individuals , no deduction is allowed with respect to
expenses for ( 1) a nonbusiness activity generally considered to be entertainment , amusement or
recreation , or (2) a facility (e.g., an airplane) used in connection with such activity to the extent
that such expenses exceed the amount treated as compensation or includible in income to the
specified individual. For example, a company's deduction attributable to aircraft operating costs
and other expenses for a specified individual 's vacation use of a company aircraft is limited to
the amount reported as compensation to the specified individual. However , in the case of other
employees or service providers , the company's deduction is not limited to the amount treated as
compensation or includible in income. 453
Excludable fringe benefits

Certain employer-provided fringe benefits are excluded from an employee's gross
income and wages for employment tax purposes , including de minimis fringes and qualified
transportation fringes. 454 A de minimis fringe generally means any property or service the value
of which is (taking into account the frequency with which similar fringes are provided by the
employer) so small as to make accounting for it unreasonable or administratively
impracticable. 455 Qualified transportation fringes include qualified parking (i.e., on or near the
employer's business premises or on or near a location from which the employee commutes to
work by public transit) , transit passes, vanpoo l benefits , and qualified bicycle commuting
reimbursements. 456 On-premises athletic facilities are gyms or other athletic facilities located on

451

Sec. 274(e)(2)(B)(i). See also Treas . Reg. sec. l.274-9(a).

452

Sec. 274(e)(2)(B)(i i). See also Treas. Reg. sec. 1.274-9(b).

453

See Treas. Reg. sec. 1.274-1 0(a)(2).

454

Secs. l 32(a), 312 I (a)(20) , 3231 (e)(5), 3306(b )(16), and 340 I (a)(l 9).

455

Sec . 132(e)(l) . Examples includ e occasional personal use of an employer's copyin g machine ,
occasional parties or meals for employees and their guests, local telephone calls, and coffee , douglmuts and soft
drinks . Treas . Reg. sec. l.l32-6(e)(l).
456
Sec. 132(t)(l) , (5). The qual ified transportation fringe exclus ions are subject to monthly limits.
Sec . 132(t)(2).

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TREAS-17-0313-I-000156

 the employer ' s premises , operated by the employer , and substantially all the use of which is by
employees of the employer , their spouses , and their dependent children. 457

Description of Proposal
The proposal provides that no deduction is allowed with respect to (1) an activity
generally considered to be entertainment , amusement or recreation , (2) membership dues with
respect to any club organized for business , pleasure , recreation or other social purposes , (3) a de
minimis fringe that is primarily personal in nature and involving property or services that are not
directly related to the taxpayer ' s trade or business , (4) a facility or portion thereof used in
connection with any of the above items , (5) a qualified transportation fringe , including costs of
operating a facility used for qualified parking , and (6) an on-premises athletic facility provided
by an employer to its employees , including costs of operating such a facility. Thus , the proposal
repeals the present-law exception to the deduction disallowance for entertainment , amusement ,
or recreation that is directly related to (or , in certain cases , associated with) the active conduct of
the taxpayer's trade or business (and the related rule applying a 50 percent limit to such
deductions) . The proposal also repeals the present-law exception for recreational , social , or
similar activities prima rily for the benefit of employees. However , taxpayers may still ,
generally , deduct 50 percent of the food and beverage expenses associated with operating their
trade or business (e.g., meals consumed by employees on work travel).
Under the proposal , in the case of all individuals (not just specified individuals) , the
exceptions to the general entertainment expense disallowance rule for expenses treated as
compensation or includible in income apply only to the extent of the amount of expenses treated
as compensation or includible in income. Thus , under those exceptions , no deduction is allowed
with respect to expenses for (1) a nonbusiness activity generall y considered to be entertainment ,
amusement or recreation , or (2) a facility (e.g., an airplane) used in connection with such activity
to the extent that such expenses exceed the amount treated as compensation or includible in
income . As under present law, the exceptions apply only if amounts are properly reported by the
company as compensation and wages or otherwise includible in income.
The proposal amends the present-law exception for reimbursed expenses. The proposal
disallows a deduction for amounts paid or incurred by a taxpayer in connection with the
performance of services for another person (other than an employee) under a reimbursement or
other expense allowance arrangement if the person for whom the services are performed is a taxexempt entity 458 or the arrangement is designated by the Secretary as having the effect of
avoiding the 50 percent deduction disallowance.
The proposal clarifies that the exception to the 50 percent deduction limit for food or
beverages applies to any expense excludible from the gross income of the recipient related to
meals furnished for the convenience of the emplo yer. The proposal thereb y repeals as deadwood
457

Section 132(i)( 4) .

458

As de fined in section 168(b)(2)(A), i.e., Federal, State and local government entities, orga nizations
(other than certain cooperat ives) exempt from income tax , any foreign person or entity, and any Indian tribal
government.

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 the special exceptions for food or beverages provided to crew members of certain commercial
vessels and certain oil or gas platform or drilling rig workers.
Effective Date

The proposal applies to amounts paid or incurred after December 31, 2017.
8. Unrelated business taxable income increased by amount of certain fringe benefit
expenses for which deduction is disallowed
Present Law
Tax exemption for certain organizations

Section 501(a) exempts certain organizations from Federal income tax. Such
organizations include: (1) tax-exempt organizations described in section 501(c) (including
among others section 501 (c)(3) charitable organizations and section 501 (c)( 4) social welfare
organizations) ; (2) religious and apostolic organizations described in section 501 ( d); and
(3) trusts forming part of a pension , profit-sharing , or stock bonus plan of an employer described
in section 40l(a).
Unrelated business income tax, in general

The unrelated business income tax ("UBIT") generally applies to income derived from a
trade or business regularly carried on by the organization that is not substantially related to the
performance of the organization ' s tax-exempt functions. 4 59 An organization that is subject to
UBIT and that has $ 1,000 or more of gross unrelated business taxable income must report that
income on Form 990-T (Exempt Organization Business Income Tax Return).
Most exempt organizations may operate an unrelated trade or business so long as the
organization remains primarily engaged in activities that further its exempt purposes. Therefore ,
an organization may engage in a substantial amount of unrelated business activity without
jeopardizing its exempt status. A section 50l(c)(3) (charitable) organization , however , may not
operate an unrelated trade or business as a substantial part of its activities. 460 Therefore , the
unrelated trade or business activity of a section 50 l (c)(3) organization must be insubstantial.
An organization determines its unrelated business taxable income by subtracting from its
gross unrelated business income deductions directly connected with the unrelated trade or
business. 46 1 Under regulations , in determining unrelated business taxable income , an
organization that operates multiple unrelated trades or businesses aggregates income from all

459

Secs. 511-514.

460

Treas. Reg. sec. 1.S0l(c)(3)-l( e) .

461

Sec. 512(a).

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TREAS-17-0313-I-000158

 such activities and subtracts from the aggregate gross income the aggregate of deductions. 462 As
a result , an orga nizat ion may use a loss from one unre lated trade or business to offset ga in from
another , thereby reducing total u nrelated business taxable income.

Organizations subiect to tax on unrelated business income
Most exempt organizations are subject to the tax on unrelated business income.
Specifica lly, organizations subject to the unrelated business income tax genera lly include:
(1) orga nizatio ns exe mpt from tax under sect ion 50l(a) , includin g organizat ions described in
section 50l(c) (except for U.S. instrumentalities and certain charitable trusts); (2) qualified
pension , profit-sharing , and stock bonus plans described in section 40l(a) ; and (3) certain State
colleges and universities. 463

Exclusions from Unrelated Business Taxable Income
Certain types of income are specifica lly exempt from unrelated business taxable income ,
such as dividends , interes t, royalties , and certain rents ,464 unless derived from debt-financed
property or from certa in 50-percent controlled subs idiaries. 465 Other exempt ions from UBIT are
provided for activities in wh ich substantia lly all the work is performed by volunteers , for income
from the sale of donated goods , and for certain activities carried on for the convenience of
members , studen ts, patients , officers , or emp loyees of a charitab le organization. In addition ,
spec ial UBIT provisions exempt from tax activities of trade shows and State fairs, income from
bingo games, and income from the distribution of low-cost items incidental to the solicitation of
char itable contrib utions. Organizations liable for tax on unrelated business taxable income may
be liable for alternative minimum tax determined after tak ing into acco unt adj ustm ents and tax
preference items.

Description of Proposal
Under the proposal , unrela ted business taxable income includes any expenses paid or
incurred by a tax exempt organization for qualified transportation fringe benefits (as defined in
sect ion 132(f)) , a parking fac ility used in connection with qualified park ing (as defined in
sect ion l 32(f)(5)(C)) , or any on-premises ath letic facility (as defined in sect ion l 32(j)( 4)(B)) ,
provided such amounts are not deductible under section 274 .

Effective Date
The proposal applies to amounts paid or incurred after December 3 1, 2017.

462

Treas. Reg. sec. l. 5 I 2(a)- I (a).

463

Sec. 511(a)(2).

464

Secs. 511-514.

465

Sec . 512(b )( 13).

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 9. Limitation on deduction for FDIC premiums
Present Law
Corporations organized under the laws of any of the 50 States (and the District of
Columbia) generally are subject to the U.S. corporate income tax on their worldwide taxable
income. The taxable income of a C corporation 466 generally comprises gross income less
allowable deductions. A taxpayer generally is allowed a deduction for ordinary and necessary
expenses paid or incurred in carrying on any trade or business.467
Corporations that make a valid election pursuant to section 1362 of subchapter S of the
Code, referred to as S corporations, generally are not subject to corporate-level income tax on its
items of income and loss. Instead, an S corporation passe s through to shareholders its items of
income and loss. The shareholders separately take into account their shares of these items on
their individual income tax returns.

Banks, thrifts, and credit unions

In general
Financial institutions are subject to the same Federal income tax rules and rates as are
applied to other corporations or entities , with specified exceptions.
C corporation banks and thrifts
A bank is generally taxed for Federal income tax purposes as a C corporation. For this
purpose a bank generally means a corporation, a substantial portion of whose business is
receiving deposits and making loans and discounts, or exercising certain fiduciary powers. 4 68 A

466

Corporations subject to tax are commonly referred to as C corporations after subchapter C of the Code,
which sets forth corporate tax rules. Certain specialized entities that invest primarily in real estate related assets
(real estate investment trusts) or in stock and securi ties (regulated investment companies) and that meet other
requirements , genera lly including annual distribution of90 percent of their income, are allowed to deduct their
distributions to shareho lders, thus generally paying little or no corporate -level tax despite otherwise being subject to
subchapter C.
467
Sec. I 62(a). However , certain exceptions apply. No deduction is allowed for (I) any charitable
contribution or gift that would be allowable as a deduction under section 170 were it not for the percentage
limitations, the dollar limitations , or the requirements as to the time of payment , set forth in such section ; (2) any
illegal bribe, illegal kickback , or other illegal payment ; (3) certain lobbying and political expenditures ; (4) any fine
or similar penalty paid to a government for the violation of any law ; (5) two-thirds of treble damage payments under
the antitrust laws; (6) certain foreign advertising expenses ; (7) certain amounts paid or incurred by a corporation in
connection with the reacquisitio n of its stock or of the stock of any related person ; or (8) certain applic able
employee remuneration.
468

Sec. 581. See also Treas. Reg. sec. 1.581-1(a).

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TREAS-17-0313-I-000160

 bank for this purpose generally includes domestic building and loan associations , mutual stock or
savings banks , and certain cooperative banks that are common ly referred to as thrifts. 469
S corporation bank s
A bank is generally elig ible to elect S corporat ion status under section 1362, provided it
meets the other requirements for making this election and it does not use the reserve method of
accounting for bad debts as described in section 585. 470
Special bad debt loss rules for small banks
Section 166 provides a deduction for any debt that b ecomes worthless ( wholly or
partially) within a taxable year. The reserve method of account ing for bad debts , repealed in
I986 4 7l for most taxpayers, is allowed under section 585 for any bank (as defined in section 58 l)
other than a large bank. For this purpose 1 a bank js a large bank if, for the taxable year (or for
any preceding taxable year after 1986), the average adjusted basis of all its assets (or the assets of
the controlled group of which it is a member) exceeds $500 million. Deductions for reserves are
taken in lieu of a worthless debt deduction under section 166. Accord ingly, a small bank is able
to take deductions for additions to a bad debt reserve . Additions to the reserve are detetmined
under an experience method that generally looks to the ratio of ( 1) the total bad debts sustained
during the taxable year and the five preceding taxable years to (2) the sum of the loans
outstand ing at the close of such taxable years. 472
Cred it unions
Credit unions are exempt from Federal income taxation. 473 The exempt ion is based on
their status as not-for-profi t mutual or cooperative organizations (without capital stock) operated
for the benefit of their members, who genera lly must share a common bond . The definition of
commo n bond has been expanded to permit greater use of credit unions. 474 While significant

169

While the general princip les for determining the taxable income ofa corporation are applicable to a
mutual savings bank, a building and loan association , mid a cooperative bank. there are certain exceptions and
spedal mies for such iustit:utions. Treas. Reg. sec. l.581-2(a) .
'

470

Sec. l36J(b)l2)(A ).

~71

Tax Refom1 Act ofl986 , Pub. L. No. 99-514.

m Sec. 585(b)(2) .
m Sec. 50l(c)(l4)(A). For a discus sion of the his tory of and reasons for Federal tax exemption , see
United States Department of the Treasury . Comparing Credit Unions with Other Depositm:v lnsfi/11/ions.Report
3070 , January 15, 2001, available at https ://www.tTeasury.gov/press-cente r/pressreleases/Documeuts /report3070 2.doc .
4711

The Credit Un ion Membership Access Act , Pub. L. No. I 05-2 19. allows multiple common bond credit
unions. The Legislation in part responds to Nntiona/ Credit UnionAd111inistrafio11
v. First National Bank & 1h1st
Co., 522 U.S. 479 (1998), which interpreted the permiss ible membership of tax-exempt credit unions uarrowly .

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TREAS-17-0313-I-000161

 differences between the rule s under which credit union s and bank s operate have existed in the
past , most of those differences have disappeared over time. 475

FDIC premiums
The Federal Deposit Insurance Corporatio n ("FD[C ") provides deposit insurance for
banks and savings institutions. To maintain its stat us as an insured depository institution, a bank
must pay semiannual assessments it1to the deposit insura nce fund. Assessments for deposit
insurance are treated as ordinary and necessaiy business expenses. The se assessments , also
known as premiums , are deductible once the all events test fot the premium is satisfied. 476

Description of Proposal
No deduction is allowed for the applicable percentage of any FDIC premium paid or
incur red by the taxpayer. For taxpayers wjt h total conso lidated assets of $50 bjllion or more, the
applicable percentage is 100 percent. Otherwise , the applicable perc entage is the ratio of the
excess of total conso lidat ed assets over $10 billion to $40 billion. For example , for a taxpayer
with total consolida ted assets of $20 billion , no deduction is allowed for 25 percent of FDIC
premiums. The proposal does not apply to taxpayers with total consolidated assets (as of the
close of the taxabl e year) that do not exceed $10 billion.
FDIC premium means any assessment imposed under sect ion 7(b) of the Federal Deposit
Insurance Act. 477 The term total conso lidat ed assets has the meaning given such term under
section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 478
For purposes of detennining a taxpayer 's total conso lidated assets , member s of an
expanded affiliated group are treated as a single taxpayer. An expand ed affiliated group means
an affiliated group as defined in sect ion l 504(a), determined by substituting "more tl1an 50
percent " for "at least 80 percent " each plac e it appears and without regard to the exceptions from
the definition of includihle corporation for insurance companies and foreign corporations. A
partnership or any other entity other than a corpora tion is treated as a member of an expa nded
affiliated group if such ent ity is contro lled by members of such group.

475

The Treaswy Department bas concluded that any remaining regulatory differences do not rajse
competitive equity concerns between credit unions and banks. United States Department oftbe Treasury ,
Compari ng Cred it Unions wilh Other Deposito,y Jn,sfilltfion,s.Report 3070 , January 15, 2001, p . 2, available at
htt_ps:// www .trcasury.gov /prcss-centcr /prcss--rclcases/Documcnts/reporl30702 .doc .
476

TechuicalAdvicc Memorandum 199924060, Marcl1 5, 1999, and Rev .. Rul. 80-230, 1980-2 C.B. 169,

477

12 U.S.C. sec. 1817(b).

1980.

m Pub. L. No. 111-203.

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 Effective Date

The proposal applies to taxable years beginn ing after December 31, 2017.
10. Repeal of rollover of publicly traded securities gain into specialized small business
investment companies
Present Law

A corporatio n or individual may elect to roll over tax-free any cap ital gain realized on the
sale of publicly-traded securit ies to the extent of the taxpayer 's cost of purchasing commo n stock
or a partnership interest in a specialized small business investment company within 60 days of
the sale. 479 The amount of gain that an individual may elect to roll over under this provision for
a taxable year is limited to (1) $50,000 or (2) $500,000 reduced by the gain previously excluded
under this provision. 48 For corporations, these limits are $250,000 and $ 1 million,
respectively. 481

°

Description of Proposal

The propo sal repeals the election to roll over capital gain realized on the sale of publiclytraded securities.
Effective Date

The proposal applies to sales after December 31, 2017.
11. Certain self-created property not treated as a capital asset
Present Law
In general , property held by a taxpayer (whether or not connected with his trade or
business) is cons idered a capital asset. 482 Certain assets, however , are specifica lly excluded from
the definition of capita l asset. Such excluded assets are: inventory property , property of a
character subject to depreciation (includin g real property) , 483 certain self-created intangibles ,
accounts or notes receivable acquired in the ordinary course of business (e.g., for providing
479

Sec. I 044(a).

480

Sec. 1044(b)(l).

481

Sec. 1044(b)(2).

482

Sec . 1221(a).

483

The net gain from the sale, exchange, or involuntary conversion of certain property used in the
taxpayer's trade or business (in excess of depreciation recapture) is treated as long-term capital gain. Sec. 1231.
However , net gain from such property is treated as ordinary income to the extent that losses from such propert y in
the previous five years were treated as ordinary losses. Sec. 1231(c).

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 services or selling property) , publications of the U.S. Government received by a taxpayer other
than by purchase at the price offered to the public, commodities derivative financial instruments
held by a commodities derivatives dealer unless established to the satisfaction of the Secretary
that any such instrument has no connection to the activities of such dealer as a dealer and clearly
identified as such before the close of the day on which it was acquired, originated, or entered
into, hedging transactions clearly identified as such, and supplies regularly used or consumed by
the taxpayer in the ordinary course of a trade or business of the taxpayer. 484
Self-created intangibles subject to the exception are copyrights, literary , musical , or
artistic compositions, letters or memoranda , or similar property which is held either by the
taxpayer who created the property , or (in the case of a letter, memorandum , or similar property) a
taxpayer for whom the property was produced. 485 For the purpose of determining gain, a
taxpayer with a substituted or transferred basis from the taxpayer who created the property, or for
whom the property was created, also is subject to the exception. 486 However , a taxpayer may
elect to treat musical compositions and copyrights in musical works as capital assets. 487
Since the intent of Congress is that profits and losses arising from everyday business
operations be characterized as ordinary income and loss, the general definition of capital asset is
narrowly applied and the categories of exclusions are broadly interpreted. 488
Description of Proposal
This proposal amends section 122 l(a)(3), resulting in the exclusion of a patent , invention ,
model or design (whether or not patented) , a secret formula or process which is held either by the
taxpayer who created the property or a taxpayer with a substituted or transferred basis from the
taxpayer who created the property (or for whom the property was created) from the definition of
a "capital asset. " Thus, gains or losses from the sale or exchange of a patent , invention , model or
design ( whether or not patented) , or a secret formula or process which is held either by the
taxpayer who created the property or a taxpayer with a substituted or transferred basis from the
taxpayer who created the property (or for whom the property was created) will not receive
capital gain treatment.

484

Sec. 1221(a)( I)-(8).

485

Sec. 1221(a)(3)(A) and (B).

486

Sec. 1221(a)(3)(C).

487

Sec. 1221(b)(3). Thus, ifa taxpayer who owns musical compositions or copyrights in musical works
that the taxpayer created (or if a taxpayer to which the musica l compositions or copyrights have been transferred by
the works' creator in a substituted basis transaction) elects the application of this provis ion, gain from a sale of the
compositions or copyrights is treated as capital gain, not ordinary incom e.
488

Corn Products Refining Co. v. Commissioner , 350 U.S. 46, 52 (1955).

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 The proposal also repeals the elective capital treatment for musical compositions and
copyrights in musical works. Thus , gains or losses from the sale or exchange of musical
compositions and copyrights in musical works will not receive capital gain treatment.
Effective Date

The propo sal applies to dispositions after December 31, 2017.
12. Repeal of special rule for sale or exchange of patents
Present Law

Section 1235 provides that a transfer 489 of all substantial rights to a patent , or an
undivided interest therein which includes a part of all such rights, by any holder shall be
considered the sale or exc hange of a capital asset held for more than one year, regardless of
whether or not payments in consideration of such tran sfer are (1) payable periodi cally over a
period genera lly conterminous with the transferee's use of the patent , or (2) contingent on the
productivity, use, or disposition of the property transferred. 490
A holder is defined as (1) any individual whose efforts created such property , or (2) any
other individual who has acquired his interest in such property in exchange for consideration in
money or money 's wort h paid to such creator prior to actual reduction to practice of the
invention covered by the patent, if such individual is neither the employer of such creator nor
related (as defined) to such creator. 49 1
Description of Proposal

The propo sal repeals section 1235. Thus , the holder of a patented invention may not
transfer his or her rights to the patent and treat amounts receive d as proceeds from the sale of a
capital asset. It is intended that the determination of whether a transfer is a sale or exchange of a
capital asset that produ ces capital gain, or a transaction that produces ordinary income, will be
determined under genera lly applicable princip les. 492
Effective Date

The proposal applies to dispositions after Decemb er 31, 2017.

489

A transfer by gift, inheritance , or devise is not included.

490

Sec. I 235(a).

491

Sec. 1235(b).

492

See also section 331 1 of the bill (Certain self-created property not treated as a capital asset).

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TREAS-17-0313-I-000165

 13. Repeal of technical termination of partnerships
Present Law
A partnership is considered as terminated under specified circumstances.
apply in the case of the merger , consolidation, or division of a partnership. 494

493

Special rules

A partnership is treated as terminated if no part of any business , financial operation, or
ventu re of the partnership continues to be carried on by any of its partners in a partnership. 495
A partnership is also treated as terminated if with in any 12-month period , there is a sale
or exchange of 50 percent or more of the total interest in partnership capital and profits. 496 This
is sometimes referred to as a technical termination. Under regulations , the technical termination
gives rise to a deemed contribution of all the partnership 's assets and liabilities to a new
partnership in exchange for an interest in the new partnership , followed by a deemed distribution
of interests in the new partnership to the purchasing partners and the other remaining partners. 497
The effect of a technical termination is not necessarily the end of the partnership 's
existence , but rather the termination of some tax attributes. Upon a technical termination , the
partnership's taxable year closes , potentially resulting in short taxable years. 498 Partnership-level
elections generally cease to apply following a technical termination. A technical termination
generally results in the restart of partnership depreciation recovery periods.

Description of Proposal
The proposal repeals the section 708(b )(1 )(B) rule providing for technical terminations of
partnerships. The proposal does not change the present-law rule of section 708(b )(1 )(A) that a
partnership is considered as terminated if no part of any business , financial operation , or venture
of the partnership continues to be carried on by any of its partners in a partnership.

Effective Date
The proposal applies to partnership taxable years beginning after December 31, 2017.

493

Sec. 708(b )(I).

494

Sec. 708(b)(2). Mergers, consolidations , and divisions of partnerships take either an assets-over form
or an assets-up form pursuant to Treas. Reg. sec. l.708-l(c).
495

Sec. 708(b)(l)(A).

496

Sec. 708(b )( I)(B).

497

Treas. Reg. sec. 1.708-1 (b)( 4).

498

Sec. 706(c)(I); Treas. Reg. sec. 1.708-l(b)(3).

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TREAS-17-0313-I-000166

 E. Reform of Business Credits
1. Repeal of credit for clinical testing expenses for certain drugs for rare diseases or
conditions

Present Law
Section 45C provides a SO-percent business tax credit for qualified clinical testing
expenses incurred in testing of certain drugs for rare diseases or cond itions, genera lly referred to
as "orphan drugs." Qualified clinical testing expenses are costs incurred to test an orphan drug
after the drug has been approved for human testing by the Food and Drug Administration
("FDA ") but before the drug has been approved for sale by the FDA. 499 A rare disease or
condition is defined as one that (1) affects fewer than 200,000 persons in the United States, or
(2) affects more than 200,000 persons , but for which there is no reasonable expectation that
businesses could recoup the costs of developing a drug for such disease or condition from sales
in the United States of the drug . 5oo
Amounts included in computing the credit under this section are excluded from the
computation of the research credit under section 41. 501
Description of Proposal
This proposal repeals the credit for qualified clinical testing expenses.
Effective Date
The proposal applies to amounts paid or incurred in taxable years beginning after
December 31, 2017.
2. Repeal of employer-provided child care credit
Present Law
Taxpayers are eligible for a tax credit equal to 25 percent of qualified expenditures for
employee chi ld care and 10 percent of qualified expendit ures for child care resource and referra l
services. The maximum total credit that may be claimed by a taxpayer may not exceed $ 150,000
per taxable yea r. The credit is part of the general business credit. 502

499

Sec. 45C(b ).

soo Sec. 45C(d ).
501

Sec . 45C(c ).

502

Sec . 38(b)( I 5).

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TREAS-17-0313-I-000167

 Qualified child care expenditures generally include costs paid or incurred: ( 1) to acquire ,
construct , rehabilitate or expand property that is to be used as part of the taxpayer ' s qualified
child care facility; 503 (2) for the operation of the taxpayer ' s qualified child care facility, including
the costs of training and certain compensation for employees of the child care facility, and
scholarship programs ; or (3) under a contract with a qualified child care facility to provide child
care services to employees of the taxpayer. To be a qualified child care facility, the principal use
of the facility must be for child care (unless it is the principal residence of the taxpayer) , and the
facility must meet all applicable State and local laws and regulations , including any licensing
laws.
Qualified child care expenditures for resource and referral services include amounts paid
under contract to provide child care resource and referral services to a taxpayer's employees.
Description of Proposal

The proposal repeals the credit for qualified child care expenditures and qualified child
care expenditures for resource and referral services.
Effective Date

The proposal applies to taxable years beginning after December 31, 2017.
3. Repeal of rehabilitation credit
Present Law

Section 47 provides a two-tier tax credit for rehabilitation expenditures.
A 20-percent credit is provided for qualified rehabilitation expenditures with respect to a
certified historic structure. For this purpose , a certified historic structure means any building that
is listed in the National Register , or that is located in a registered historic district and is certified
by the Secretary of the Interior to the Secretary of the Treasury as being of historic significance
to the district.
A I 0-percent credit is provided for qualified rehabilitation expenditures with respect to a
qualified rehabilitated building , which generally means a building that was first placed in service
before 1936. A pre-1936 building must meet requirements with respect to retention of existing
external walls and internal structural framework of the building in order for expenditures with
respect to it to qualify for the 10-percent credit. A building is treated as having met the
substantial rehabilitation requirement under the IO-percent credit only if the rehabilitation
expenditures during the 24-month period selected by the taxpayer and ending within the taxable
year exceed the greater of (1) the adjusted basis of the building (and its structural components) ,
or (2) $5,000.
503

In addition , a depreciation deduction (or amor tization in lieu of deprecia tion) must be allowabl e with
respect to the prop erty and the property must not be part o f the principal resid ence of the taxpayer or any emplo yee
of the taxpayer.

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TREAS-17-0313-I-000168

 The provision requires the use of straight- line depreciation or the alternative depreciation
system in order for rehabilitation expenditures to be treated as qualified under the provision.
Description of Proposal
The proposal repeals the rehabilitation credit.
Effective Date
The proposal applies to amounts paid or incurred after December 31, 2017. A transition
rule provides that in the case of qualified rehabilitation expenditures (within the meaning of
present law), with respect to any building owned or leased by the taxpayer at all times on and
after January 1, 20 18, the 24-month period selected by the taxpayer (under section 47(c)(l)(C))
is to begin not later than the end of the 180-day period beginning on the date of the enactment of
the Act, and the amendments made by the proposal apply to such expenditures paid or incurred
after the end of the taxable year in which such 24-month period ends.
4. Repeal of work opportunity tax credit
Present Law
In general
The work opportunity tax credit is available on an elective basis for employers hiring
individuals from one or more often targeted groups. The amount of the credit available to an
employer is determined by the amount of qualified wages paid by the employer. Generally ,
qualified wages consist of wages attributable to services rendered by a member of a targeted
group during the one-year period beginning with the day the individual begins work for the
employer (two years in the case of an individual in the long-term family assistance recipient
category).
Targeted groups eligible for the credit
Generally , an employer is eligible for the credit only for qualified wages paid to members
of a targeted group. These targeted groups are: (1) Families receiving TANF ; (2) Qualified
veterans ; (3) Qualified ex-felons ; (4) Designated community residents ; (5) Vocational
rehabilitation referrals ; (6) Qualified summer youth employees ; (7) Qualified food and nutrition
recipients ; (8) Qualified SSI recipients ; (9) Long-term family assistance recipients ; and
(10) Qualified long-term unemployment recipients.
Qualified wages
Generally , qualified wages are defined as cash wages paid by the employer to a member
of a targeted group. The employer ' s deduction for wages is reduced by the amount of the credit.
For purposes of the credit , generally , wages are defined by reference to the FUTA
definition of wages contained in section 3306(b) (without regard to the dollar limitation therein
contained) . Special rules apply in the case of certain agricultural labor and certain railroad labor.

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TREAS-17-0313-I-000169

 Calculation of the credit

The credit available to an employer for qualified wages paid to members of all targeted
groups (except for long-term family assistance recipients and qualified veterans) equals
40 percent (25 percent for employment of 400 hours or less) of qualified first-year wages.
Generally , qualified first-year wages are qualified wages (not in excess of $6,000) attributable to
service rendered by a member of a targeted group during the one-year period beginning with the
day the individual began work for the employer. Therefore , the maximum credit per employee is
$2,400 (40 percent of the first $6,000 of qualified first-year wages). With respect to qualified
summer youth employees , the maximum credit is $ 1,200 (40 percent of the first $3,000 of
qualified first-year wages). Except for long-term family assistance recipients , no credit is
allowed for second-year wages.
In the case of long-term family assistance recipients , the credit equals 40 percent
(25 percent for employment of 400 hours or less) of $10,000 for qualified first-year wages and
50 percent of the first $10,000 of qualified second-year wages. Generally , qualified second-year
wages are qualified wages (not in excess of $10,000) attributable to service rendered by a
member of the long-term family assistance category during the one-year period beginning on the
day after the one-year period beginning with the day the individual began work for the employer.
Therefore , the maximum credit per employee is $9,000 (40 percent of the first $ 10,000 of
qualified first-year wages plus 50 percent of the first $10,000 of qualified second-year wages).
In the case of a qualified veterans , the credit is calculated as follows: ( 1) in the case of a
qualified veteran who was eligible to receive assistance under a supplemental nutritional
assistance program (for at least a three-month period during the year prior to the hiring date) the
employer is entitled to a maximum credit of 40 percent of $6,000 of qualified first-year wages;
(2) in the case of a qualified veteran who is entitled to compensation for a service connected
disability , who is hired within one year of discharge , the employer is entitled to a maximum
credit of 40 percent of $12,000 of qualified first-year wages ; (3) in the case of a qualified veteran
who is entitled to compensation for a service connected disability , and who has been
unemployed for an aggregate of at least six months during the one-year period ending on the
hiring date, the employer is entitled to a maximum credit of 40 percent of $24,000 of qualified
first-year wages ; (4) in the case of a qualified veteran unemployed for at least four weeks but less
than six months (whether or not consecutive) during the one-year period ending on the date of
hiring, the maximum credit equals 40 percent of $6,000 of qualified first-year wages ; and (5) in
the case of a qualified veteran unemployed for at least six months (whether or not consecutive)
during the one-year period ending on the date of hiring, the maximum credit equals 40 percent of
$14,000 of qualified first-year wages.

Expiration

The work opportunity tax credit is not available with respect to wages paid to individuals
who begin work for an employer after December 31, 2019.
Description of Proposal

The proposal repeals the work opportunity tax credit.

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TREAS-17-0313-I-000170

 Effective Date
The proposal applies to amounts paid or incurred to individuals who begin work for the
employer after December 31, 2017.

5. Repeal of deduction for certain unused business credits
Present Law
The general business credit ("GBC") consists of various individual tax credits allowed
with respect to certain qualified expenditures and activities. 504 In general, the various individual
tax credits contain provisions that prohibit "double benefits ," either by denying deductions in the
case of expendit ure-related credits or by requiring income inclusions in the case of activityrelated credits. Unused cred its may be carried back one year and carried forward 20 years. 505
Section 196 allows a deduction to the extent that certa in portions of the GBC expire
unused after the end of the carry forward period. In general, 100 percent of the unused credit is
allowed as a deduction in the taxable year after such credit expired. However, with respect to the
investment cred it determined under section 46 (other than the rehabilitation credit) and the
research credit determined under section 41(a) (for a taxable year beginning before January 1,
1990) , section 196 limits the deduction to 50 percent of such unused credits. 506

Description of Proposal
This proposal repeals the deduction for certain unu sed business credits.

Effective Date
The proposal applies to taxable years beginning after December 31, 2017.

6. Termination of new markets tax credit
Present Law
Section 450 provides a new markets tax cred it for qualified equity investments made to
acquire stock in a corporation, or a capital interest in a partnership , that is a qualified comm unity
development entity ("COE "). 507 The amount of the credit allowable to the investor (either the
original purchaser or a subsequent holder) is (1) a five-percent credit for the year in which the
equity interest is purchased from the COE and for each of the follow ing two years, and (2) a six504

Sec . 38.

505

Sec . 39.

506

Sec. 196(d) .

507

Section 45D was added by section 12 1(a) of the Commun ity Ren ewal Tax Re lief Act of 2000 , Pub. L.
No. l 06-554.

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TREAS-17-0313-I-000171

 percent credit for each of the following four years. 508 The credit is determined by applying the
applicable percentage (five or six percent ) to the amount paid to the CDE for the investment at
its original issue , and is available to the taxpayer who holds the qualified equity investment on
the date of the initial investment or on the respective anniversary date that occurs during the
taxable year. 509 The credit is recaptured if at any time during the seven-year period that begins
on the date of the original issue of the investment the entity (1) ceases to be a qualified CDE ,
(2) the proceeds of the investment cease to be used as required , or (3) the equity investment is
redeemed. 5 10
A qualified CDE is any domestic corporation or partnership: (1) whose primary mission
is serving or providing investment capital for low-income communities or low-income persons ;
(2) that maintains accountability to residents oflow-income communities by their representation
on any governing board of or any advisory board to the CDE ; and (3) that is certified by the
Secretary as being a qualified CDE. 5 11 A qualified equity investment means stock (other than
nonqualified preferred stock) in a corporation or a capital interest in a partnership that is acquired
at its original issue directly (or through an underwriter) from a CDE for cash , and includes an
investment of a subsequent purchaser if such investment was a qualified equity investment in the
hands of the prior holder. 5 12 Substantially all of the investment proceeds must be used by the
CDE to make qualified low-income communit y investments and the investment must be
designated as a qualified equity investment by the CDE. For this purpose , qualified low-income
community investments include: (1) capital or equity investments in, or loans to, qualified active
low-income community businesses ; (2) certain financial counseling and other services to
businesses and residents in low-income communities ; (3) the purchase from another CDE of any
loan made by such entity that is a qualified low-income communit y investment ; or (4) an equity
investment in, or loan to, another CDE. 513
A "low-income community " is a population census tract with either (1) a poverty rate of
at least 20 percent or (2) median family income which does not exceed 80 percent of the greater
of metropolitan area median family income or statewide median family income (for a nonmetropolitan census tract , does not exceed 80 percent of statewide median family income). In
the case of a population census tract located within a high migration rural county , low-income is
defined by reference to 85 percent (as opposed to 80 percent) of statewide median family
income .514 For this purpose , a high migration rural county is any county that , during the 20-year
period ending with the year in which the most recent census was conducted , has a net out508

Sec. 45D(a)(2).

509

Sec. 45D (a)(3) .

510

Sec. 45D (g).

511

Sec. 45D (c).

512

Sec . 45D(b).

513

Sec. 45D (d).

514

Sec. 45D (e).

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TREAS-17-0313-I-000172

 migration of inhabitants from the county of at least 10 percent of the population of the county at
the beginning of such period.
The Secretary is authorized to designate "targeted populations" as low-income
communities for purposes of the new markets tax credit. 5 15 For this purpose , a "targeted
population " is defined by reference to section 103(20) of the Riegle Community Development
and Regulatory Improvement Act of 1994516 (the "Act") to mean individuals , or an identifiable
group of individuals , including an Indian tribe, who are low-income persons or otherwise lack
adequate access to loans or equity investments. Section 103(17) of the Act provides that "lowincome" means ( 1) for a targeted population within a metropolitan area , less than 80 percent of
the area median family income ; and (2) for a targeted population within a non-metropolitan area,
less than the greater of 80 percent of the area median family income or 80 percent of the
statewide non-metropolitan area median family income. A targeted population is not required to
be within any census tract. In addition , a population census tract with a population of less than
2,000 is treated as a low-income community for purposes of the credit if such tract is within an
empowerment zone, the designation of which is in effect under section 1391, and is contiguous
to one or more low-income communities.
A qualified active low-income community business is defined as a business that satisfies ,
with respect to a taxable year, the following requirements: (1) at least 50 percent of the total
gross income of the business is derived from the active conduct of trade or business activities in
any low-income community ; (2) a substantial portion of the tangible property of the business is
used in a low-income community ; (3) a substantial portion of the services performed for the
business by its employees is performed in a low-income community ; and (4) less than five
percent of the average of the aggregate unadjusted bases of the property of the business is
attributable to certain financial property or to certain collectibles. 517
The maximum annual amount of qualified equity investments is $3.5 billion for calendar
years 2010 through 2019. No amount of unused allocation limitation may be carried to any
calendar year after 2024.
Description of Proposal

This proposal provides that the new markets tax credit limitation is zero for calendar year
2018 and thereafter and no amount of unused allocation limitation may be carried to any
calendar year after 2022.
Effective Date

The proposal applies to calendar years beginning after December 31, 2017.

515

Sec. 45D(e)(2).

5 16

Pub. L. No. 103-325.

5 17

Sec. 45D (d)(2).

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 7. Repeal of credit for expenditures to provide access to disabled individuals
Present Law
Section 44 pro vides a SO-percent credit for eligible access expenditur es paid or incurr ed
by an eligible small bu siness for the taxabl e year. The credit is lim ited to eligible access
expendi tures exceeding $250 but not exceeding $ 10,500. The credit is part of the genera l
business credit. 518
Eligible access expenditures generally means amounts paid or incurred by an eligible
sm all business to com ply with requirements und er the Americans with Disabiliti es Act of
1990. 5 19 These expenditur es 520 incl ude: ( 1) removal of architectural , comm unication , physical
or transportation barrier s which prevent a business from being usable or accessible to individuals
with disabilities ;52 1 (2) provision of qualifi ed interpr eters or other effective methods of makin g
aurally-delivered materials available to individ uals with hearing impairments ; (3) pro vision of
qualified readers , tap ed texts, or other effective methods of makin g visually-de livered materials
available to individual s with visual impairm ents; (4) acquisition or modifi cation of equ ipment or
dev ices for individuals with disabilities ; or (5) provision of other sim ilar serv ices, modifi cations,
materials or equipm ent.
An eligible small business means any person that elects application of section 44 and ,
during the preceding taxable year, (1) had gross receipts not exceed ing $1,000 ,000 or
(2) employed not more than 30 full-time employees. 522

Description of Proposal
The propo sal repeals the credit for e ligible access expendi tures.

Effective Date
The proposal applies to taxable years beginn ing after Decemb er 31, 2017.

5 18

Sec. 38(b)(l7).

5 19

As in effect on Novembe r 5, 1990. Sec. 44(c)(I).

520

These expenditures must be reasonab le and necessary , excluding those unnecessary to accomplish listed
purposes, and meet standards set forth by the Secretary and the Architectural and Transportation Barriers
Compliance Board. Sec. 44(c)(3) and (5).
521

Expenses related to this remova l are not eligible in connection with facilities placed in service after
November 5, 1990. Sec. 44(c)(4).
522
For this de finition, an employee is considered full-time if emp loyed at least 30 hours per week for 20 or
more calendar weeks in the taxab le year.

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 8. Modification of credit for portion of employer social security taxes paid with respect to
employee tips
Present Law
Credit
Certain food or beverage establishments may elect to claim a business tax credit equal to
an employer's taxes under the Federa l Insurance Contributions Act ("FICA") 523 paid on tips in
excess of those treated as wages for purposes of meeting the minimum wage requirements of the
Fair Labor Standards Act (the "FLSA") as in effect on January 1, 2007. 524 The credit applies
only with respect to FICA taxes paid on tips received from customers in connection with the
providing, de! ivering , or serving of food or beverages for consumption if the tipping of
employees delivering or serving food or beverages by customers is customary. The credit is
available whether or not the tips are reported or a percentage of gross receipts is allocated
(described below). No deduction is allowed for any amount taken into account in determining
the tip credit. A taxpa yer may elect not to have the credit apply for a taxab le year.

Reporting and allocation requirements
Employees are required to report monthly tips to their employer. 525 Certain large 526 food
or beverage establishments are required to report to the IRS and employees various information
including gross receipts of the estab lishment , and to allocate among employees who customari ly
receive tip income an amount equal to eight percent of gross receipts in excess of the amount of
tips reported by such employees. 527 Employee tip income that is reported by employees is
treated as employer-provided wages subject to FICA.

Description of Proposal
The proposal revises the amount of the credit for FICA taxes an employer pays on tips, as
an amount equal to the employer's FICA taxes paid on tips in excess of those treated as
minimum wages under the FLSA without regard to the Januar y 1, 2007 date. For 2017, this
amount is $7.25. In addition , the credit is permitted only if the employer satisfies the reporting
523

FICA taxes consist of social security (OASDI , or old age, survivor , and disability insurance ) and
hospital (Medicare) taxes imposed on employers and employees with respect to wages paid to employees under
sections 3101 -3128.
524

Sec. 45B. As of January 1, 2007, the Federal minimum wage under the FLSA was $5.15 per hour. In
the case of tipped employees, the FLSA provided that the minimum wage could be reduced to $2.13 per hour (that
is, the employer is only required to pay cash equal to $2.13 per hour) if the combination of tips and cash income
equa led the Federa l minimum wage.
525

Sec. 6053(a).

526

A large establ ishment for this purpose is one which normally employed more than 10 employees on a
typical business day during the preceding calendar year.
527

Sec. 6053(c).

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 requirements of section 6053( c) to the IRS and employees , and allocates among employees who
customarily receive tip income an amount equal to 10 percent (rather than eight percent) of gross
receipts in excess of the amount of tips reported by such employees. The claiming of the credit
remains elective. However , if any size eligible food or beverage establishment elects to claim
the FICA tip credit for any taxable year after the proposal takes effect, the establishment must
satisfy this reporting and 10 percent allocation requirement for that taxable year. Reporting and
allocation requirements for food and beverage establishments that elect not to claim the credit
remain unchanged.
Effective Date
The proposal applies to taxable years beginning after December 31, 2017.

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 F. Energy Credits
1. Modifications to credit for electricity produced from certain renewable resources

Present Law

In general
An income tax credi t is allowed for the production of electrici ty from qualified energy
resources at qualified facilities (the " renewable electricity production credit"). 528 Qualified
energy resources comprise wind, closed-loop biomass , open-loop biomass , geothe rmal energy ,
municipal solid waste, qualified hydropower production , and marine and hydrokinetic renewable
energy. Qualified faci lities are, genera lly, faci lities that genera te electrici ty using qualified
energy resources. To be eligible for the cred it, electr icity produced from qua lified energy
resources at qualified facilities must be sold by the taxpayer to an unrelated person.

Summary of Credit for Electricity Produced from Certain Renewable Resources
Eligible electricity production
activity (sec. 45)
Wind
Closed- loop bioma ss
Open-loop biomass
(includin g agric ultural livestock waste
nutrient facilities)
Geothermal
Mu nicipa l sol id waste
(including land fill gas facilities and trash
com bustion facilities)
Qualified hydropower
Mar ine and hydrokinet ic
1

Credit amount for 2017
(cents per kilowatt-hour)
2.4
2.4
1.2

December 31, 2019
Decem ber 31, 2016
December 31, 2016

2.4
1.2

Dec ember 31, 2016
December 31, 2016

1.2
1.2

De cember 31, 2016
De cember 31, 2016

Expiration 1

The credit expires for property the construction of which begins after this date.

The credit rate, initially set at 1.5 cents per kilowatt-hour (reduced by one-ha lf for certain
renewable resources) is adjusted annuall y for inflation. 529 In general, the cred it is available for
electrici ty produced during the first l O years after a facility has been placed in service.

528

Sec. 45. In addition to the renewab le e lectr icity production credit , section 45 also provides income tax
credits for the product ion oflndian coal and refined coal at qualified facilities.
529

The most recent inflation adjustment factors can be in IRS Notice 2017 -33, I.R.B. 2017-22, May 30,

2017.

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 Taxpayers may also elect to get a 30-percent investment tax credit in lieu of this production tax
credit. 530
Phase-down for wind facilities

In the case of wind facilities , the available production tax credit or investment tax credit
is reduced by 20 percent for facilities the construction of which begins in 2017 , by 40 percent for
facilities the construction of which begins in 2018 , and by 60 percent for facilities the
construction of which begins in 2019.
Description of Proposal

The proposal eliminates the inflation adjustment for wind facilities the construction of
which begins after the date of enactment. Such facilities are entitled to a credit of 1.5 cents per
kilowatt-hour (i.e., the statutory credit rate unadjusted for inflation). Credits remain subject to
the phase-down based on the year construction begins.
The proposal adds a special rule for determining the beginning of construction of a
qualified facility. Under the proposal , the construction of any facility , modification ,
improvement , addition , or other property is not treated as beginning before any date unless there
is a continuous program of construction which begins before such date and ends on the date that
such property is placed in service.
Effective Date

The proposal terminating the inflation adjustment applies to taxable years ending after the
date of enactment.
The proposal adding a special rule for determining the beginning of construction of a
qualified facility applies to taxable years beginning before , on, or after the date of enactment.
2. Modification of the energy investment tax credit
Present Law

In general
A permanent , nonrefundable , I 0-percent business energy credit 531 is allowed for the cost
of new property that is equipment that either (1) uses solar energy to generate electricity , to heat
or cool a structure , or to provide solar process heat or (2) is used to produce , distribute , or use
energy derived from a geothermal deposit , but only, in the case of electricity generated by
geothermal power , up to the electric transmission stage. Property used to generate energy for the
purposes of heating a swimming pool is not eligible solar energy property.

530

Sec. 48(a)(5).

531

Sec. 48.

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 In addition to the permanent credit , temporary investment credits are available for a
variety of renewable and alternative energy property. The rules governing these temporary
credits are described below.
The energy credit is a component of the general business credit. 532 An unused general
business credit generally may be carried back one year and carried forward 20 years. 533 The
taxpayer ' s basis in the property is reduced by one-half of the amount of the credit claimed. For
projects whose construction time is expected to equal or exceed two years , the credit may be
claimed as progress expenditures are made on the project , rather than during the year the
property is placed in service. The credit is allowed against the alternative minimum tax.
Solar energy property
The credit rate for solar energy property is increased to 30 percent in the case of property
the construction of which begins before January 1, 2020. The rate is increased to 26 percent in
the case of property the construction of which begins in calendar year 2020. The rate is
increased to 22 percent in the case of property the construction of which begins in calendar year
2021. To qualify for the enhanced credit rates, the property must be placed in service before
January 1, 2024.
Additionally , equipment that uses fiber-optic distributed sunlight ("fiber optic solar") to
illuminate the inside of a structure is solar energy property eligible for the 30-percent credit , but
only for property placed in service before January 1, 2017.
Fuel cell property and microturbine property
The energy credit applies to qualified fuel cell power plant property , but only for periods
prior to January 1, 2017. The credit rate is 30 percent.
A qualified fuel cell power plant is an integrated system composed of a fuel cell stack
assembly and associated balance of plant components that (1) converts a fuel into electricity
using electrochemical means , and (2) has an electricity-only generation efficiency of greater than
30 percent and a capacity of at least one-half kilowatt. The credit may not exceed $1,500 for
each 0.5 kilowatt of capacity.
The energy credit applies to qualifying stationary microturbine power plant property for
periods prior to January 1, 2017. The credit is limited to the lesser of 10 percent of the basis of
the property or $200 for each kilowatt of capacity.
A qualified stationary microturbine power plant is an integrated system comprised of a
gas turbine engine , a combustor , a recuperator or regenerator , a generator or alternator , and
associated balance of plant components that converts a fuel into electricity and thermal energy.
Such system also includes all secondary components located between the existing infrastructure
532

Sec. 38(b)(l).

533

Sec. 39.

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 for fuel delivery and the existing infrastructure for power distribution , including equipment and
contro ls for meeting relevant power standards , such as voltage , frequency , and power factors.
Such system must have an electricity-on ly generation efficiency of not less than 26 percent at
International Standard Organization conditions and a capacity of less than 2,000 kilowatts.
Geothermal heat pump property
The energy credit applies to qualified geothermal heat pump property placed in service
prior to January 1, 2017. The credit rate is IO percent. Qua Iified geotherma l heat pump property
is equipment that uses the ground or ground water as a thermal energy source to heat a structure
or as a thermal energy sink to cool a structure.
Small wind property
The energy credit applies to qualified small wind energy property placed in service prior
to January 1, 2017. The credit rate is 30 percent. Qualified small wind energy property is
property that uses a qualified wind turbine to generate electricity. A qualifying wind turbine
means a wind turbine of 100 kilowatts of rated capacity or less.
Combined heat and power property
The energy credit applies to combined heat and power ("CHP") property placed in
service prior to January 1, 2017. The credit rate is 10 percent.
CHP property is property: ( 1) that uses the same energy source for the simultaneous or
sequential generation of electr ical power , mechanical shaft power , or both, in combination with
the generation of steam or other forms of useful thermal energy (including heating and cooling
applications) ; (2) that has an electrical capacity of not more than 50 megawatts or a mechanical
energy capacity of not more than 67,000 horsepower or an equivalent combination of electrical
and mechanical energy capacities ; (3) that produces at least 20 percent of its total useful energy
in the form of thermal energy that is not used to produce electrical or mechanical power , and
produces at least 20 percent of its total useful energy in the form of electrical or mechanical
power (or a combination thereof); and (4) the energy efficiency percentage of which exceeds
60 percent. CHP property does not include property used to transport the energy source to the
generating facility or to distribute energy produced by the facility.
The otherwise allowable credit with respect to CHP property is reduced to the extent the
property has an electrical capacity or mechanical capacity in excess of any applicable limits.
Property in excess of the applicable limit (15 megawatts or a mechanical energy capacity of
more than 20,000 horsepower or an equivalent combination of electrical and mechanical energy
capacities) is permitted to claim a fraction of the otherwise allowable credit. The fraction is
equal to the applicable limit divided by the capacity of the property. For example , a
45 megawatt property wou ld be eligible to claim 15/45ths , or one third, of the otherwise
allowable credit. Again , no credit is allowed if the property exceeds the 50 megawatt or
67,000 horsepower limitations described above.
Additionally , systems whose fuel source is at least 90 percent open-loop biomass and that
would qualify for the credit but for the failure to meet the efficiency standard are eligible for a

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 credit that is reduced in proportion to the degree to which the system fails to meet the efficiency
standard. For example , a system that would otherwise be required to meet the 60-percent
efficiency standard , but which only achieves 30-percent efficiency , would be permitted a credit
equal to one-half of the otherwise allowable credit (i.e., a 5-percent credit).
Election of energy credit in lieu of section 45 production tax credit
A taxpayer may make an irrevocable election to have the property used in certain
qualified renewable power facilities be treated as energy property eligible for a 30-percent
investment credit under section 48. For this purpose , qualified facilities are facilities otherwise
eligible for the renewable electricity production tax credit with respect to which no credit under
section 45 has been allowed. A taxpayer electing to treat a facility as energy property may not
claim the production credit under section 45. The 30-percent credit rate phases down in calendar
years 2017 , 2018 , and 2019.
Description of Proposal

The proposal extends the energy credit for fiber optic solar, fuel cell, microturbine ,
geothermal heat pump , small wind , and combined heat and power property. In each case, the
credit is extended for property the construction of which begins before January 1, 2022. In the
case of fiber optic solar, fuel cell, and small wind property , the credit rate is reduced to
26 percent for property the construction of which begins in calendar year 2020 and to 22 percent
for property the construction of which begins in calendar year 2021. Qualified property must be
placed in service before January 1, 2024.
The proposal terminates the permanent credits for solar and geothermal property the
construction of which begins after December 31, 2027.
The proposal adds a special rule for determining the beginning of construction of
qualified property. Under the proposal , the construction of any facility , modification ,
improvement , addition , or other property is not treated as beginning before any date unless there
is a continuous program of construction which begins before such date and ends on the date that
such property is placed in service.
Effective Date

The proposal generally applies to periods after December 31, 2016 , under rules similar to
the rules of section 48(m), as in effect on the day before the date of enactment of the Revenue
Reconciliation Act of 1990. The extension of the credit for combined heat and power system
property applies to property placed in service after December 31, 2016 . The reduced credit rates
and the termination of the permanent credits are effective on the date of the enactment of the
proposal. The special rule for determining the beginning of construction of qualified property
applies to taxable years beginning before, on, or after the date of enactment of the proposal.

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 3. Exte~~jon and phaseout of residential energy efficient property

Present Law
In general
Section 25D provides a personal tax credit for the purchase of qualified solar electric
property and qualified solar water heating property that is used exclusively for purposes other
than heating swimming pools and hot tubs. The credit is equal to 30 percent of qualifying
expenditures.
Section 25D also provides a 30 percent credit for the purchase of qualified geothermal
heat pump property , qualified small wind energy property , and qualified fuel cell power plants.
The credit for any fuel cell may not exceed $500 for each 0.5 kilowatt of capacity.
The credit is nonrefundable. The credit with respect to all qualifying property may be
claimed against the alternative minimum tax.
With the exception of solar property , the credit expires for property placed in service
after December 31, 2016. In the case of qualified solar electric property and solar water heating
property , the credit expires for property placed in service after December 31, 2021. In addition ,
the credit rate for such solar property is reduced to 26 percent for property placed in service in
calendar year 2020 and to 22 percent for property placed in service in calendar year 2021.

Qualified property
Qualified solar electric property is property that uses solar energy to generate electricity
for use in a dwelling unit. Qualifying solar water heating property is property used to heat water
for use in a dwelling unit located in the United States and used as a residence if at least half of
the energy used by such property for such purpose is derived from the sun.
A qualified fuel cell power plant is an integrated system comprised of a fuel cell stack
assembly and associated balance of plant components that (1) converts a fuel into electricity
using electrochemical means , (2) has an electricity-only generation efficiency of greater than
30 percent , and (3) has a nameplate capacity of at least 0.5 kilowatt. The qualified fuel cell
power plant must be installed on or in connection with a dwelling unit located in the United
States and used by the taxpayer as a principal residence .
Qualified small wind energy property is property that uses a wind turbine to generate
electricity for use in a dwelling unit located in the United States and used as a residence by the
taxpayer.
Qualified geothermal heat pump property means any equipment which (1) uses the
ground or ground water as a thermal energy source to heat the dwelling unit or as a thermal
energy sink to cool such dwelling unit , (2) meets the requirements of the Energy Star program
which are in effect at the time that the expenditure for such equipment is made , and (3) is
installed on or in connection with a dwelling unit located in the United States and used as a
residence by the taxpayer.

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 Additional rules
The depreciable basis of the property is reduced by the amount of the credit.
Expenditures for labor costs allocable to onsite preparation , assembly , or original installation of
property eligible for the credit are eligible expenditures.
Special proration rules apply in the case of jointly owned property , condominiums , and
tenant-stockholders in cooperative housing corporations. If less than 80 percent of the property
is used for nonbusiness purposes , only that portion of expenditures that is used for nonbusiness
purposes is taken into account.

Description of Proposal
The proposal extends the residential energy efficient property credit with respect to nonsolar qualified property through December 31, 2021. The credit rate for such property is reduced
to 26 percent for property placed in service in calendar year 2020 and to 22 percent for property
placed in service in calendar year 2021.

Effective Date
The proposal applies to property placed in service after December 31, 2016.

4. Repeal of enhanced oil recovery credit
Present Law
Section 43 provides a 15-percent credit for expenses associated with an enhanced oil
recovery (" EOR ") project. Qualified EOR costs consist of the following designated expenses
associated with an EOR project: ( 1) amounts paid for depreciable tangible property ;
(2) intangible drilling and development expenses ; (3) tertiary injectant expenses ; and
(4) construction costs for certain Alaskan natural gas treatment facilities. An EOR project is
generally a project that involves increasing the amount of recoverable domestic crude oil through
the use of one or more tertiary recovery methods (as defined in section l 93(b )(3) ), such as
injecting steam or carbon dioxide into a well to effect oil displacement. The credit is reduced as
the price of oil exceeds a certain threshold.

Description of Proposal
The proposal repeals the enhanced oil recovery credit.

Effective Date
The proposal applies to taxable years beginning after December 31, 2017.

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 5. Repeal of credit for producing oil and gas from marginal wells
Present Law
Section 451 provides a $3-per-barrel credit for the production of crude oil and a $0.50
credit per 1,000 cub ic feet of qual ified natural gas production. In both cases , the credit is
available only for production from a "qualifi ed marginal well."
A qualified marginal well is defined as a dome stic well: (1) production from which is
treated as marginal production for purposes of the Code 's percentage depletion rules; or (2) that
during the taxable year had average daily production of not more than 25 barrel equivalents and
produc es water at a rate of not less than 95 percent of total well effluen t. The maximum amount
of production on which credit could be claim ed is 1,095 barrels or barrel equivalents.
The credit is not available to production occurring if the reference price of oil exceeds
$ 18 ($2.00 for natural gas). The credit is reduced proportionately for reference prices between
$ 15 and $ 18 ($1.67 and $2.00 for natural gas).
The credit is treated as a genera l business credit. Unused credits can be carried back for
up to five years rather than the generally applicable carryback period of one year. The credit is
indexed for inflation.

Description of Proposal
The proposal repeal s the credit for produ cing oil and gas from marginal wells.

Effective Date
The propo sal applies to taxable years beginning after December 31, 2017.

6. Modifications of credit for production from advanced nuclear power facilities
Present Law
Taxpayers produ cing electricity at a qual ifying advanced nuclear power facility may
claim a credit equa l to 1.8 cents per kilowatt-hour of electricity produ ced for the eight-year
per iod starting when the faci lity is placed in service. 534 The aggregate amount of credit that a
taxpayer may claim in any year during the eight-year pe riod is subject to limitat ion based on
allocated capacity and an annual limitation as described below.
An advanced nuclear facility is any nuclear facility for the product ion of electricity, the
reactor design for which was approved after 1993 by the Nuclear Regulatory Comm ission. For

534

Sec. 45J. The 1.8-cents credit amount is reduced , but not below zero, iftbe annual average contrac t
price per kilowatt-hour of e lectr icity generated from advanced nuclear power facilities in the preceding year exceeds
eight cents per kilowatt-hour. The eight-cent price comparison level is indexed for inflation after 1992 (12.6 cents
for2017).

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 this purpose , a qualifying advanced nuclear facility does not include any facility for which a
substantially similar design for a facility of comparab le capacity was approved before 1994.
A qualifying advanced nuclear facility is an advanced nuclear facility for wh ich the
taxpayer has received an allocation of megawatt capacity from the Secretary of the Treasury
("the Secretary") and is placed in service before January 1, 2021. The taxpayer may only claim
credit for production of electricity equal to the ratio of the allocated capacity that the taxpayer
receives from the Secretary to the rated nameplate capacity of the taxpayer ' s facility. For
exam ple, if the taxpayer receives an allocation of750 megawatts of capacity from the Secretary
and the taxpayer's faci lity has a rated nameplate capacity of 1,000 megawatts , then the taxpayer
may claim three-quarters of the otherwise allowable cred it, or 1.35 cents per kilowatt-hour , for
each kilowatt-hour of electricity produced at the facility (subject to the annual limitation
described below). The credi t is restricted to 6,000 megawatts of national capacity. Once that
limitation has been reached , the Secretary may make no additiona l allocations. Treasury
guidance required allocation applications to be filed before February l , 2014 .535
A taxpaye r operating a qualified facility may claim no more than $ 125 million in tax
credits per 1,000 megawatts of allocated capacity in any one year of the eight-year credit period.
If the taxpayer operates a 1,350 megawatt rated nameplate capacity system and has received an
allocation from the Secretary for I ,350 megawatts of capacity eligible for the cred it, the
taxpayer ' s annual limitation on credits that may be claimed is equal to 1.35 times $ 125 million ,
or $ 168.75 million. If the taxpayer operates a facility with a nameplate rated capacity of
1,350 megawatts , but has received an allocation from the Secretary for 750 megawatts of credit
eligible capac ity, then the two limitations apply such that the taxpayer may claim a credit
effectively equal to one cent per kilowatt-hour of electricity produced (calculated as described
above) subject to an annual credit limitation of $93.75 million in credits (three-q uarters of
$ 125 million).
The cred it is part of the general business credit.
Description of Proposal

The proposal modifies the national megawatt capacity limitation for the advanced nuclear
power production credit. To the extent any amount of the 6,000 megawatts of authorized
capac ity remains unutili zed, the proposal requires the Secretary to allocate such capacity first to
facilities placed in service before the year 2021 , to the extent such facilities did not receive an
allocation equal to their full nameplate capacity , and then to facilities placed in service after such
date in the order in which such facilities are placed in service. The proposal provides that the
present-law placed- in-service sunset date of January 1, 202 1, does not apply with respect to
allocations of such unuti lized national megawatt capacity.
The proposal also allows qualified public entities to elect to forgo credits to which they
otherwise would be entitled in favor of an eligible proje ct partner. Qualified public entities are
defined as ( 1) a Federal , State, or local government of any political subdivisio n, agency , or
535

I.RS. Notice 20 l3-68, 20 13-46 I.R.B. 50 1.

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 instrumentality thereof; (2) a mutual or cooperative electric company ; or (3) a not-for-profit
electr ic utility which has or had received a loan or loan guarantee under the Rural Electr ification
Act of 1936.536 An eligible proj ect partner under the proposal genera lly includes any person who
designed or constructed the nuclear power plant , participates in the provision of nuclear steam or
nuclear fuel to the power plant , or has an ownership interest in the faci lity. In the case of a
facility owned by a partnership , where the cred it is determined at the partners hip level, any
elect ing qualified public entity is treated as the taxpayer with respect to such entity's distributive
share of such credits , and any other partner is an eligible project partner.

Effective Date
The proposal requirin g the allocation of unutilized nat ional megawatt capacity limitation
is effect ive on the date of enactme nt. The proposal allowing an election by qua lified pub lic
entities to forgo credits in favor of an eligible project partner applies to taxable years beginning
after the date of enactmen t.

536

7 U.S.C. sec. 90 1 et seq.

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 G. Bond Reforms
1. Termination of private activity bonds

Present Law

In general
Under present law , gross income generally does not include interest paid on State or local
bonds. 537 State and local bonds are classified generally as either governmental bonds or private
activity bonds. Governmental bonds are bonds which are primarily used to finance
governmental functions or that are repaid with governmental funds. Private activity bonds are
bonds with respect to which the State or local government serves as a conduit providing
financing to nongovernmental persons (e.g. , private businesses or individuals). The exclusion
from income for State and local bonds only applies to private activity bonds if the bonds are
issued for certain permitted purposes ("qualified private activity bonds ").

Private activity bonds
Present law provides three main tests for determining whether a State or local bond is in
substance a private activity bond , the two-part private business test , the five-percent unrelated or
disproportionate use test, and the private loan test.
Private business test
Private business use and private payments result in State and local bonds being private
activity bonds if both parts of the two-part private business test are satisfied1. More than 10 percent of the bond proceeds is to be used (directly or indirectly) by a

private business (the "private business use test"); and
2. More than 10 percent of the debt service on the bonds is secured by an interest in
property to be used in a private business use or to be derived from payments in respect
of such property (the "private payment test").
Private business use generally includes any use by a business entity (including the
Federal government) , which occurs pursuant to terms not generally available to the general
public . For example , if bond-financed property is leased to a private business (other than
pursuant to certain short-term leases for which safe harbors are provided under Treasury
regulations) , bond proceeds used to finance the property are treated as used in a private business
use , and rental payments are treated as securing the payment of the bonds. Private business use
also can arise when a governmental entity contracts for the operation of a governmental facility
by a private business under a management contract that does not satisfy Treasury regulatory safe

537

Sec. 103.

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 harbors regarding the types of payments made to the private operator and the length of the
contract.
Five-percent unrelated or disproportionate business use test
A second standard to determine whether a bond is to be treated as a private activity bond
is the five percent unrelated or disproportionate business use test. Under this test the private
business use and private payment test (described above) are separately applied substituting five
percent for IO percent and generally only taking into account pri vate business use and private
payments that are not related or not proportionate to the government use of the bond proceeds.
For example , while a bond issue that finances a new State or local government office building
may include a cafeteria , the issue may become a private activity bond if the size of the cafeteria
is excessive (as determined under this rule).
Private loan test
The third standard for determining whether a State or local bond is a private activity bond
is whether an amount exceeding the lesser of (l) five percent of the bond proceeds or
(2) $5 million is used (directly or indirectly) to finance loans to private persons. Private loans
include both business and other (e.g., personal) uses and payments by private persons ; however ,
in the case of business uses and payments , all private loans also constitute private business uses
and payments subject to the private business test. Present law provides that the substance of a
transaction governs in determining whether the transaction gives rise to a private loan. In
general , any transaction which transfers tax ownership of property to a private person is treated
as a private loan.
Special limit on certain output facilities
A special rule for output facilities treats bonds as private activity bonds if more than
$ 15 million of the proceeds of the bond issue are used to finance an output facility (an output
facility includes electric and gas generation , transmission and related facilities but not a facility
for the furnishing of water). 538
Special volume cap requirement for larger transactions
A special volume cap requirement for larger transactions treats bonds as private activity
bonds if the nonqualified amount of private business use or private payments exceeds
$ 15 million (even if that amount is within the general IO-percent private business limitation for
governmental bond s) unless the issuer obtains a private activity bond volume allocation. 539

538

Sec . 14 l(b)(4).

539

Sec . 141(b )(5).

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TREAS-17-0313-I-000188

 Qualified private activity bonds

As stated , interest on private activity bonds is tax.ab)~ilnless the bonds meet the
requirement s for qualified private activity bonds. Qualified private activity bond s permit States
or local governments to act as conduits providing tax-exempt financing for certain private
activities. The definition of qualified private activity bonds includes an exempt facility bond , or
qualified mortgage, veteran s' mortgage, small issue, redevelopment , 50l(c)(3), or student loan
bond. 540 The definition of exempt facility bond includes bonds issued to finance certain
transportation facilities (airports, ports, mass commuting , and high-speed intercity rail facilities);
qualified residential rental projects ; privately owned and/or operated utility facilities (sewage ,
water, solid waste disposal , and local district heating and cooling facilities , certain private
electric and gas facilities, and hydroelectric dam enhancements); pub lic/private educational
facilities; qualified green building and sustainable design projects ; and qualified highway or
surface freight transfer facilities. 541

In most cases, the aggregate volume of these tax-exempt private activity bonds is
restricted by annual aggregate volume limits imposed on bonds issued by issuers within each
State. For 2017 , the State volume limit is the greater of $100 multiplied by the State population ,
or $305.32 million. 542
Description of Proposal

The proposal repeals the except ion from the exclus ion from gross income for interest
paid on qualified private activity bonds issued after December 3 1, 2017. Thus , interest on any
private activity bond is includible in the gross income of the taxpayer. 543
Effective Date

The proposa l applies to bond s issued after December 31, 2017.
2. Repeal of advance refunding bonds
Present Law

Section 103 generally provides that gross income does not include interest received on
State or local bonds. State and local bonds are classified generally as either governmental bond s
or private activity bonds. Governmental bond s are bonds the proceed s of which are primarily
used to finance governmental facilities or the debt is repaid with governmental funds. Private
540

Sec. 14 l(e).

541

Sec. 142(a).

542

Sec. 3.20 ofRev. Proc. 2016-55, 2016-2 C.B. 707.

543
The bill also terminates section 25 o f the Code as it relates to credi ts associated with mortgage credit
certificates issued after December 31, 2017 . See section 1102 of the bill (Repeal of nonrefundable credits).

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TREAS-17-0313-I-000189

 activity bonds are bonds in which the State or local governme nt serves as a conduit providing
financing to nongovernmental persons (e.g., private businesses or individuals).544 Bond s issued
to finance the activities of charitable organizations described in section 50l(c )(3) ("qualified
50l (c)(3) bonds") are one type of private activity bond. The exclusion from income for interest
on State and local bond s only applies if certain Code requirements are met.
The exclusion for income for interest on State and local bond s applies to refund ing bond s
but there are limits on advance refundin g bonds. A refundin g bond is defined as any bond used
to pay principal, interest, or redemption price on a prior bond issue (the refunded bond).
Different rules apply to current as opposed to advance refunding bonds. A current refunding
occurs when the refunded bond is redeemed within 90 days of issuance of the refunding bonds.
Conversely, a bond is classified as an advance refunding if it is issued more than 90 days before
the redemption of the refunded bond. 545 Proceeds of advance refunding bonds are genera lly
invested in an escrow account and held until a future date when the refunded bond may be
redeemed.
Although there is no statutory limitation on the number of times that tax-exempt bonds
may be currently refunde d, the Code limits advance refundings. Generally , governmental bonds
and qualified 501 (c)(3) bonds may be advance refunded one time. 546 Private activity bonds,
other than qualified 50 I (c)(3) bonds, may not be advance refunded at all. 547 Furthermo re, in the
case of an advance refunding bond that results in interest savings (e.g., a high interest rate to low
interest rate refunding) , the refunded bond must be redeemed on the first call date 90 days after
the issuance of the refunding bond that results in debt service savings. 548
Description of Proposal

The proposal repeals the exclusion from gross income for interest on a bond issued to
advance refund another bond.
Effective Date

The proposal applies to advance refund ing bonds issued after December 31, 20 17.

544

Sec. I 4 l.

545

Sec . 149(d)(5).

546

Sec. 149(d)(3). Bonds issued before 1986 and pursuant to certain transition rules contained in the Tax
Reform Act of 1986 may be advance refunded more than one time in certain cases.
547

Sec. 149(d)(2).

548
Sec. 149(d)(3)(A)(iii) and (B); Treas. Reg. sec. l.149(d) - I (t)(3). A "call" provision provides the issuer
of a bond with the right to redeem the bond prior to the stated maturity.

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TREAS-17-0313-I-000190

 3. Repe~d of tax credit bonds
Present Law
In general
Tax-credit bonds provide tax credits to investors to replace a prescribed portion of the
interest cost. The borrowing subsidy generally is measured by reference to the credit rate set by
the Treasury Department. Current tax-credit bonds include qualified tax credit bonds , which
have certain common general requirements , and include new clean renewable ener gy bonds ,
qualified energy conservation bonds , qualified zone academy bonds , and qualified school
construction bonds. 549

Qualified tax-credit bonds
General rules applicable to qualified tax-credit bond s 550
Unlike tax-exempt bonds , qualified tax-credit bonds generally are not interest-bearing
obligations. Rather , the taxpayer holding a qualified tax-credit bond on a credit allowance date
is entitled to a tax credit. The amount of the credit is determined by multipl ying the bond 's
credit rate by the face amount on the holder 's bond. The credit rate for an issue of qualified tax
credit bonds is determined by the Secretar y and is estimated to be a rate that permits issuance of
the qualified tax-credit bonds without discount and interest cost to the qualified issuer. 551 The
credit accrues quarterly and is includible in gross income (as if it were an interest payment on the
bond) , and can be claimed against regular income tax liability and alternative minimum tax
liability. Unused credits may be carried forward to succeeding taxable years. In addition, credits
may be separated from the ownership of the underlying bond similar to how interest coupons can
be stripped for interest-bearing bonds.
New clean renewable energy bonds
New clean renewable energy bonds ("New CREBs ") may be issued by qualified issuers
to finance qualified renewable energy facilities. 552 Qualified renewable energy facilities are
facilities that: (1) qualify for the tax credit under section 45 (other than Indian coal and refined
coal production facilities) , without regard to the placed-in-service date requirement s of that
549

The authority to issue two other types of tax-credit bonds, recovery zone economic development bonds
and Build America Bonds , expired on January 1,2011.

°

55

Certain other mles apply to qualified tax credit bonds, such as maturity limitations , reportin g
requirements , spending mies, and mies relating to arbitrage. Separate mies apply in the case of tax-credit bonds
which are not qualified tax-credit bonds (i.e., "recovery zone economic development bonds ," and "Build America
Bonds").
551

However , for new clean renewable energy bonds and qualified energy conservation bonds , the
applicable credit rate is 70 percent of the otherwise applicable rate.
552

Sec . 54C.

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TREAS-17-0313-I-000191

 section; and (2) are owned by a public power provider , governmental body , or cooperative
electric company.
The term "qualified issuers " includes: (1) public power providers ; (2) a governmenta l
body ; (3) cooperative electric companies; (4) a not-for-profit electric utility that has received a
loan or guarantee under the Rural Electrification Act; and (5) clean renewable energy bond
lenders. There was originally a national limitation for New CREBs of $800 million. The
national limitati on was then increased by an additional $1.6 billion in 2009. As with other tax
credit bonds , a taxpayer holding New CREBs on a credit allowance date is entitled to a tax
credit. However , the credit rate on New CREBs is set by the Secretary at a rate that is 70 percent
of the rate that would permit issuance of such bonds without discount and interest cost to the
issuer. 553
Qualified energy conservation bonds
Qualified energy conservation bonds may be used to finance qualified conservation
purposes.
The term "qualified conservat ion purpose " means:
1. Capital expenditures incurred for purposes of: (a) reducing energy consumption in
publicly owned buildings by at least 20 percent; (b) implementing green community
programs ;554 (c) rural development involving the production of electricity from
renewable energy resources ; or (d) any facility eligible for the production tax credit
under section 45 (other than Indian coal and refined coal production facilities);
2. Expenditures with respect to facilities or grants that support research in:
(a) devel opment of cellulosic ethanol or other nonfossil fuels; (b) technologies for the
capture and sequestration of carbon dioxide produced through the use of fossil fuels ;
(c) increasing the efficiency of existing technologies for producing non fossil fuels;
(d) automobi le battery technologies and other technologies to reduce fossil fuel
consumption in transportation ; and (e) technologies to reduce energy use in buildings ;
3. Mass commuting facilities and related facilities that reduce the consumption of
energy, including expenditures to reduce pollution from vehicles used for mass
commuting;

553

Given the differences in credit quality and other characteristics of individual issuers, the Secretary
cannot set credit rates in a manner that will allow each issuer to issue tax credit bonds at par.
554
Capital expenditures to implement green communityprograms include grants, loans, and other
repayment mechanisms to implement such programs. For example, States may issue these tax credit bonds to
finance retrofits of existing private buildings through loans and/or grants to individual homeownersor businesses, or
through other repayment mechanisms. Other repayment mechanisms can include periodic fees assessed on a
government bill or utility bill that approximatesthe energy savings of energy efficiency or conservation retrofits.
Retrofits can include heating, cooling, lighting, water-saving, stom1 water-reducing,or other efficiency measures.

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TREAS-17-0313-I-000192

 4. Demonstration projects designed to promote the commercialization of: (a) green
buildin g technology ; (b) conversion of agricultural waste for use in the production of
fuel or otherwise; (c) advanced battery manufacturin g technolo gies; (d) technolo gies
to reduce peak-use of electricity; and (e) technologies for the capture and sequestration
of carbon dioxide emitted from combusting fossil fuels in order to produce electricity;
and
5. Public education campaigns to promote energy efficiency (other than movies,
concerts, and other events held primarily for entertainment purpose s).
There was originally a national limitation on qualified energy conserva tion bonds of
$800 million. The national limitation was then increased by an additional $2.4 billion in 2009.
As with other qualified tax credit bonds , the taxpayer holding qualified energy conservation
bonds on a credit allowance date is entitled to a tax credit. The credit rate on the bonds is set by
the Secretary at a rate that is 70 percent of the rate that would permit issuance of such bonds
without discount and interest cost to the issuer. 555
Qualified zone academy bonds
Qualifies zone academy bonds ("QZABs") are defined as any bond issued by a State or
local government, provided that ( 1) at least 95 percent of the proceeds are used for the purpose of
renovating, providing equipment to, developin g course materials for use at, or training teachers
and other school personnel in a "qualified zone academy ," and (2) private entities have promi sed
to contribute to the qualified zone academy certain equipment, technical assistance or training,
employee services, or other property or services with a value equal to at least 10 percent of the
bond proceeds.
A total of $400 million of QZABs has been authorized to be issued annually in calendar
years 1998 through 2008. The authorization was increased to $1.4 billion for calendar year
2009, and also for calendar year 2010. For each of the calendar years 2011 through 2016, the
authorization was set at $400 million .
Qualified school construction bonds
Qualified school construction bonds must meet three requirements: (1) 100 percent of
the available project proceeds of the bond issue is used for the construction, rehabilitation , or
repair of a public school facility or for the acquisition of land on which such a bond-financed
facility is to be constructed; (2) the bonds are issued by a State or local government within which
such school is located; and (3) the issuer designat es such bonds as a qualified school construction
bond.
There is a national limitation on qualified school construction bonds of $ 11 billion for
calendar years 2009 and 2010, and zero after 2010. If an amount allocated is unused for a
calendar year, it may be carried forward to the following and subsequent calendar years. Under a
555 Given the differences in credit quality and other characteristics of individ ual issuers, the Secretary
cannot set credit rates in a manner that will allow each issuer to issue tax cred it bonds at par.

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TREAS-17-0313-I-000193

 separate specia l rule, the Secretary of the Interior may allocate $200 million of school
construction bond authority for Indian schoo ls.
Direct-pay bonds and expired tax-credit bond provisions

The Code provides that an issuer may elect to issue certain tax credit bonds as "direct-pay
bonds." Instead of a credit to the holder, with a "direct-pay bond" the Federal government pays
the issuer a percentage of the interest on the bonds. The following tax cred it bonds may be
issued as direct-pay bonds: new clean renewable energy bonds , qualified energy conservat ion
bonds , and qualified school construction bonds. Qualified zone academy bonds may not be
issued as direct-pay using any national zone academy bond allocation for calendar years after
2011 or any carryforward of such allocations. The ability to issue Build America Bonds and
Recovery Zone bonds , which have direct-pay features , has expired.
Description of Proposal

The proposal prospectively repea ls authority to issue tax-credit bonds and direct-pay
bonds.
Effective Date

The proposal applies to bonds issued after December 31, 2017.
4. No tax-exempt bonds for professional stadiums
Present Law
In general

Section 103 generally provides gross income does not include interest on State or local
bonds. State and local bonds are classified generally as either governmental bonds or private
activity bonds. Governme ntal bonds are bonds the proceeds of which are primarily used to
finance governmenta l facilities or the debt is repaid with governmental funds. Private activity
bonds are bonds in which the State or local government serves as a conduit providing financing
to nongovernmental persons (e.g., private businesses or individuals). The exclusion from income
for State and local bonds does not apply to private activity bonds, unless the bonds are issued for
certain purposes ("qualified private activity bonds") permitted by the Code and other Code
requirements are met.

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TREAS-17-0313-I-000194

 Private activity bond tests

In general
A pri vate activity bond includes any bond that satisfies (1) the "private busines s test"
(consisting of two components: a private bu siness use test and a private security or payment
test) ; or (2) "the private loan financing test. " 556
Two-part private busines s test
Under the private busine ss test, a bond is a private activity bond if it is part of an issue in
which:
(1)

More than 10 percent of the proceeds of the issue (including use of the bondfinanced property) are to be used in the trade or business of any person other than a
governmental unit ("private business use test"); and

(2)

More than 10 percent of the payment of principal or interest on the issue is, directly
or indirectly, secured by (a) property used or to be used for a private business use or
(b) to be derived from payments in respect of property , or borro wed money , used or
to be used for a pri vate business use ("private payment test"). 557

A bond is not a private activity bond unless both parts of the private business test (i.e., the
private business use test and the private payment test) are met. For purposes of the private
payment test, both direct and indirect payment s made by any private person treated as using the
financed property are taken into account. Payments by a person for the use of proceeds generally
do not include payments for ordina ry and necessary expenses (within the meaning of section
162) attributable to the operation and maintenanc e of financed property. 558
Privat e loan financing test
A bond issue satisfies the private loan financing test if proceed s exceeding the lesser of
$5 million or five percent of such proceeds are used directly or indirectly to finance loans to one
or more nongovernmental persons.

Types of qualified private activity bonds
The interest of qualified private activity bonds is tax exempt. A qualified private activit y
bond is a qualified mortga ge, veterans' mortgage, small issue , student loan, redevelopment ,
501( c)(3), or exempt facility bond. 559 To qualify as an exempt facility bond , 95 percent of the
556

Sec. I 41.

557

The 10-percent private business test is reduced to five percent in the case of private business uses (and
payments with respect to such uses) that are unrelated to any governmental use being financed by the issue.
558

Treas. Reg. sec. l.l4l-4(c)(3).

559

Sec. 14J(e).

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TREAS-17-0313-I-000195

 net proceeds must be used to finance: (1) airports ; (2) docks and wharves; (3) mass commuting
facilities ; (4) high-speed intercity rail facilities ; (5) facilities for the furnishing of water;
(6) sewage facilities ; (7) solid waste disposal facilities ; (8) hazardous waste disposal facilities ;
(9) qualified residential rental projects ; ( 10) facilities for the local furnishing of electric energy or
gas; (11) local district heating or cooling facilities ; (12) environmental enhancemen ts of
hydroelectric generating facilities ; (13) qualified public educational facilities ; or (14) qualified
green building and sustainable design projects.
Financing of sports facilities with governmental bonds
In 1986, Congress eliminate d a provision express ly allowing tax-exem pt financing for
sports facilities.560 Nevertheless, professional sports facilities continue to be financed w ith taxexempt bonds despite the fact that privately owned sports teams are the primary (if not
exclusive) users of such facilities. Present law perm its the use of tax-exemp t bond proceeds for
private activities if either part of the two-part private business test is not met. Only if both parts
of the private business test (private use and private payment) are met will the interest on such
bonds be taxable. In the case of bond-financed professional sports facilities , issuers have
intentionally structured the tax-exem pt bond issuance and related transactions to fail the private
payment test. In most of these transactions, the professional sports team is not required to pay
for more than a small portion of its use of the sports facility. As a result, the private payment test
is not met and the bonds financing the facility are not treated as private activity bond s, despite
the existence of substantial private business use.

Description of Proposal

The proposal provides that the interest on bonds, the proceeds of which are to be used to
finance or refinance capital expenditures allocable to a professional sports stadium, is not taxexempt. The term "professional sports stadium" means any facility (or appurtenant real
property) which during at least five days during any calendar year is used as a stadium or arena
for professional sports, exhibitions , games, or training.
Effective Date

The proposal applies to bonds issued after Nove mber 2, 2017.

560

Sec . 1301 of the Tax Reform Act of 1986 (Pub. L. 99-514 , 1986) (prior to amendment ,
sec. I 03(b)(4)(B) of the Internal Revenue Code of 1954 permitted tax-exempt financing for sports facilities).

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TREAS-17-0313-I-000196

 H. Insurance
1. Net operating losses of life insurance companies

Present Law
A net operating loss ("NOL") generally means the amount by which a taxpayer 's
husi:ues:s
deductions exceed its gross income . In general , an NOL may be carried back two years
and .carriedover 20 years to offset taxable income in such years. NOLs offset taxable income in
the, order qf the taxable years to which the NOL may be carried. 561
For purposes of computing the alternative minimum tax ("AMT"), a taxpayer 's NOL
deduction cannot reduce the taxpayer 's alternative minimum taxable income ("AMTI") by more
than 90 percent of the AMTI. 562

In the case of a life insurance company , a deduction is allowed in the taxable yea r for
operations loss carryovers and carrybacks, in lieu of the deduction for net operation losses
allowed to other corporations. 563 A life insurance company is permitted to treat a loss from
operations (as defined under section 8I0(c)) for any taxable year as an operations loss carryback
to each of the three taxable years preceding the loss yea r and an operations loss carryover to each
of the 15 taxable years following the loss year. 564
Description of Proposal
The proposal repeals the operations loss deduction for life insurance companies and
allows the NO L deduction under section 172. This provides the same treatment for losses of life
insurance companies as for losses of property and casualty insurance companies and of other
corporations. The proposal thus limits the companies' NOL deduction to 90 percent of taxable
income (determined without regard to the deduction) , provides that carryovers to other years are
adjusted to take account of this limitation and may be carried forward indefinitely with an
inflation adjustment, and repeals the present-law three-year carryback. The NOL deduction of a
life insurance company is determined by treating the NOL for any taxable year generally as the
excess of the life insurance deductions for such taxable year over the life insurance gross income
for such taxable year.

Effective Date
The proposal applies to losses arising in taxable years beginning after December 31,
2017.

561

Sec. 172(b)(2).

562

Sec. 56(d).

563

Secs. 8 l 0, 805(a)(5).

564

Sec. 81O(b)( l ).

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TREAS-17-0313-I-000197

 2. Repeal of small life insurance company deduction
Present Law

The small life insurance company deduction for any taxable year is 60 percent of so
much of the tentative life insurance company taxable income ("LICTI") for such taxable year as
does not exceed $3 million , reduced by 15 percent of the excess of tentative LICTI over
$3 million. The maximum deduction that can be claimed by a small company is $1.8 million,
and a company with a tentative LICTI of $15 million or more is not ent itled to any small
company deduction. A small life insurance company for this purpose is one with less than
$500 million of assets.
Description of Proposal

The proposal repeals the small life insurance company deduction.
Effective Date

The propo sal applies to taxable years beginning after December 31, 2017.
3. Computation of life insurance tax reserves
Present Law
Reserves

In determining life insurance company taxable income , a life insurance company includes
in gross income any net decrease in reserves , and deducts a net increase in reserves. 565 Methods
for determining reserves for tax purpo ses generally are based on reserves prescribed by the
National Association of Insurance Comm issioners for purposes of financ ial reporting under State
regulatory rules.
In computing the net increase or net decrease in reserves , six items are taken into
account. These are (1) life insurance reserves ; (2) unearned premiums and unpaid losses
included in total reserves ; (3) amounts that are discounted at interest to satisfy obligations under
insurance and annuity contracts that do not involve life, accident , or hea lth contingencies when
the computation is made ; (4) dividend accumulations and other amounts held at interest in
connection w ith insurance and annuity contract s; (5) premiums received in advance and
liabilities for premium deposit funds; and (6) reasonable special contingency reserves under
contracts of group term life insurance or group accident and health insurance that are held for
retired lives, premium stabi lization, or a combinat ion of both.
Life insurance reserves for any contract are the greater of the net surrender value of the
contract or the reserves determined under Federally prescribed rules, but may not exceed the
statutory reserve with respect to the contract (for regulatory reporting). In computing the
565

Sec. 807.

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TREAS-17-0313-I-000198

 Federally prescribed reserve for any type of contract , the taxpayer must use the tax reserve
method applicable to the contract, an interest rate for discounting of reserves to take account of
the time value of money, and the prevailing commissioners ' standard tables for mortality or
morbidity.
Interest rate

The assumed interest rate to be used in computing the Federally prescribed reserve is the
greater of the applicable Federal interest rate or the prevailing State assumed interest rate. The
applicable Federal interest rate is the annual rate determined by the Secretary under the
discounting rules for property and casualty reserves for the calendar year in which the contract is
issued. The prevailing State assumed interest rate is generally the highest assumed interest rate
permitted to be used in at least 26 States in computing life insurance reserves for insurance or
annuity contracts of that type as of the beginning the calendar year in which the contract is
issued. In determining the highest assumed rates permitted in at least 26 States, each State is
treated as permitting the use of every rate below its highest rate.
A one-time election is permitted (revocable only with the consent of the Secretary) to
apply an updated applicable Federal interest rate every five years in calculating life insurance
reserves. The election is provided to take account of the fluctuations in market rates of return
that companies experience with respect to life insurance contracts of long duration. The use of
the updated applicable Federal interest rate under the election does not cause the recalculation of
life insurance reserves for any prior year. Under the election no change is made to the interest
rate used in determining life insurance reserves if the updated applicable Federal interest rate is
less than one-half of one percentage point different from the rate used by the company in
calculating life insurance reserves during the preceding five years.
Description of Proposal

The deductible (or includable) amount of life insurance reserves for any taxable year is an
amount determined as a percentage of the increase (or decrease) in the annual statement reserve
for future unaccrued claims. The applicable percentage is 76.5. The tax reserve is determined
without regard to whether the annual statement reserve is determined by formulaic or stochastic
methodology.
Reserves for future unaccrued claims are defined to include life insurance reserves (for
purposes of the definition of a life insurance company) determined in accordance with the
method prescribed by the National Association of Insurance Commissioners and reported by the
taxpayer on its annual statement for the calendar year that is the taxable year. The term is
defined also to include unpaid losses ( in the amount of the discounted unpaid losses defined in
section 846) that are included in total reserves. The term is defined also to include amounts (not
included as life insurance reserves or unpaid losses) ofreserves solely for claims with respect to
insurance risks that are determined in accordance with the method prescribed by the National
Association of Insurance Commissioners and reported by the taxpayer on its annual statement for
the calendar year that is the taxable year. The term is defined to exclude asset adequacy
reserves , contingency reserves , unearned premium reserves of a life insurance company , and as
provided in guidance promulgated by the Secretary , any other amount not constituting reserves

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TREAS-17-0313-I-000199

 for future unaccrued claims. The Secretary is to require reporting with respect to the opening
and closing balances of reserves and the method of computing reserves for purposes of
determining income.
Effective Date

The proposal applies to taxable years beginning after December 31, 2017. For the first
taxable year beginning after December 31, 2017 , the difference in the amount of the reserve with
respect to any contract at the end of the preceding taxable year and the amount of such reserve
determined as if the proposal had applied for that year is taken into account for each of the eight
taxable years following that preceding year, one-eighth per year.
4. Adjustment for change in computing reserves
Present Law
Change in method of accounting

In general , a taxpa yer may change its method of accounting under section 446 with the
consent of the Secretary ( or may be required to change its method of accounting by the
Secretary). In such instances, a taxpayer generally is required to make an adjustment (a
"section 481(a) adjustment") to prevent amounts from being duplicated in, or omitted from, the
calculation of the taxpayer's income. Pursuant to IRS procedures , negative section 481(a)
adjustments genera lly are deducted from income in the year of the change whereas positive
section 481 (a) adjustments generally are required to be included in income ratably over four
taxable years. 566
However , section 807(f) explicitly provides that changes in the basis for determining life
insurance company reserves are to be taken into account ratably over IO years.
10-year spread for change in computing life insurance company reserves

For Federa l income tax purposes , a life insurance company includes in gross income any
net decrease in reserves , and deducts a net increase in reserves. 567 Methods for determining
reserves for tax purposes generally are based on reserves prescribed by the National Associat ion
of Insurance Comm issioners for purposes of financial reporting under State regulatory rules.
Income or loss resulting from a change in the method of computing reserves is taken into
account ratably over a 10-year period. 568 The rule for a change in basis in computing reserves
applies only if there is a change in basis in computing the Federally prescribed reserve (as
distinguished from the net surrender value). Although life insurance tax reserves require the use
of a Federally prescribed method , interest rate, and mortality or morbidity tabl e, changes in other
566

See, e.g., Rev. Proc. 2015-13 , 2015-5 I.R.B . 419 , and Rev. Proc. 2017-30 , 2017-18 I.R.B. 1131.

567

Sec. 807.

568

Sec. 807( t).

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TREAS-17-0313-I-000200

 assumptions for computing statutory reserves (e.g., when premium s are collected and claims are
paid) may cause increases or decreases in a company's life insurance reserves that must be
spread over a 10-year period. Changes in the net surrender value of a contract are not subject to
the 10-year spread because, apart from its use as a minimum in determining the amount of life
insurance tax reserves , the net surrender value is not a reserve but a current liability.

If for any taxable year the taxpayer is not a life insurance company , the balance of any
adjustments to reserves is taken into account for the preceding taxabl e year.
Description of Proposal

Income or loss resulting from a change in method of computing life insuranc e company
reserves is taken into account consistent with IRS procedures , genera lly ratably over a four-year
period, instead of over a 10-year period.
Effective Date

The propo sal applies to taxabl e years beginni ng after December 31, 2017.
5. Modification of rules for life insurance proration for purposes of determining the
dividends received deduction
Present Law
Reduction of reserve deduction and dividends received deduction to reflect untaxed income

A life insurance company is subject to proration rules in calculating life insurance
company taxable income.
The proration rules reduce the company's deduction s, including reserve deductions and
dividends received deductions , if the life insurance company has tax-exempt income , deductible
dividends received, or other similar untaxed income items, because deductible reserve increases
can be viewed as being funded proportionately out of taxable and tax-exempt income.
Under the proration rules, the net increase and net decrease in reserves are computed by
reducing the ending balanc e of the reserve items by the policyholders ' share of tax-exempt
interest. 569
Similarly, under the prorat ion rules, a life insurance company is allowed a dividendsreceived deduction for intercorporate dividends from nonaffiliates only in proport ion to the
company ' s share of such dividends ,570 but not for the policyholders' share. Fully deductible
dividends from affiliates are excluded from the applicati on of this proration formula , if such
dividends are not themselves distribution s from tax-exempt interest or from dividend income that
would not be fully deductible if received directly by the taxpa yer. In addition , the proration rule
569

Secs. 807(a)(2)(B) and (b)(l)(B).

570

Secs. 805(a)( 4), 8 12.

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TREAS-17-0313-I-000201

 includes in prorated amounts the increase for the taxable year in policy cash values of life
insurance policies and annuity and endowment contracts.
Company's share and policyholder's share
The life insurance company proration rules provide that the company's share, for this
purpose , means the percentage obtained by dividing the company's share of the net investment
income for the taxable year by the net investment income for the taxable year. 571 Net investment
income means 95 percent of gross investment income , in the case of assets held in segregated
asset accounts under variable contracts, and 90 percent of gross investment income in other
cases. 572
Gross investment income includes specified items. 573 The specified items include
interest (including tax-exempt interest) , dividends , rents, royalties and other related specified
items, short-term capital gains, and trade or business income. Gross investment income does not
include gain (other than short-term capital gain to the extent it exceeds net long-term capital loss)
that is, or is considered as, from the sale or exchange of a capital asset. Gross investment income
also does not include the appreciation in the value of assets that is taken into account in
computing the company's tax reserve deduction under section 817.
The company's share of net investment income , for purposes of this calculation, is the net
investment income for the taxable year, reduced by the sum of (a) the policy interest for the
taxable year and (b) a portion of policyholder dividends. 574 Policy interest is defined to include
required interest at the greater of the prevailing State assumed rate or the applicable Federal rate
(plus some other interest items). Present law provides that in any case where neither the
prevailing State assumed interest rate nor the applicable Federal rate is used , "another
appropriate rate" is used for this calculation. No statutory definition of "another appropriate
rate" is provided; the law is unclear as to what rate or rates are appropriate for this purpose . 575

571

Sec. 8 l 2(a).

572

Sec. 812(c).

573

Sec. 812(d).

574

Sec. 812(b)(l) . This portion is defined as gross investment income 's share of policyholder dividends.

575

Legislative history of section 812 mentions that the general concept that items of investment yield
should be allocated between policyholders and the company was retained from prior law. H. Rep. 98-861 ,
Conference Report to accompany H.R. 4170, the Deficit Reduc tion Act of 1984, 98th Cong., 2d Sess., 1065 (June
23, 1984). This concept is referred to in Joint Comm ittee on Taxation, General Exp lanation of the Revenue
Provisions of the Deficit Reduction Act of 1984, JCS-41-84 , December 31, 1984, p. 622 , stating , "[u]nder the Act,
the formula used for purposes of determining the policyholders ' share is based generally on the proration fonnula
used under prior law in computing gain or loss from operations (i.e., by reference to 'required interest')." Thi s may
imply that a reference to pre-1984-law regulations may be appropriate. See Rev. Rul. 2003-120, 2003-2 C.B. 1154,
and Technical Advice Memoranda 20038008 and 200339049 .

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TREAS-17-0313-I-000202

 In 2007 , the IRS issued Rev. Rul. 2007-54 , 576 interpreting required interest under
section 812(b) to be calculated by multipl ying the mean of a contract's beginning-of-year and
end-of-year reserves by the greater of the applicable Federal interest rate or the prevailing State
assumed interest rate, for purposes of determining separate account reserves for variable
contracts. However , Rev. Rul. 2007-54 was suspended by Rev. Rul. 2007-61 , in which the IRS
and the Treasury Department stated that the issues would more appropriately be addressed by
regulation. 577 No regulations have been issued to date.
General account and separate accounts

A variable contract is generally a life insurance (or annuity) contract whose death benefit
(or annuity payout) depends exp licitly on the investment return and market value of underlying
assets. 578 The investment risk is generally that of the policyholder , not the insurer. The assets
underlying variable contracts are maintained in separate accounts held by life insurers. These
separate accounts are distinct from the insurer 's general account in which it maintains assets
supporting products other than variab le contracts.
Reserves

For Federal income tax purposes , a life insuranc e company includes in gross income any
net decrease in reserves , and deducts a net increase in reserves. 579 Methods for determining
reserves for tax purposes generally are based on reserves prescribed by the Nationa l Association
of Insurance Commiss ioners for purposes of financial reporting under State regulatory rules.
For purposes of determining the amount of the tax reserves for variable contracts,
however , a special rule eliminates gains and losses. Under this rule, 580 in determining reserves
for variable contracts , realized and unrealized gains are subtracted , and realized and unrealized
losses are added , whether or not the assets have been disposed of. The basis of assets in the
separate account is increased to reflect appreciation , and reduced to reflect depreciation in value,
that are taken into account in computing reserves for such contracts.

576

2007-38 I.R.B. 604.

577

2007-42 I.R.B. 799.

578

Section 8 l 7(d) provides a more detailed definition of a varia ble contract.

579

Sec. 807 .

580

Sec . 817.

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TREAS-17-0313-I-000203

 Dividends received deduction

A corporate taxpayer may partially or fully deduct dividends received. 58 1 The percentage
of the allowable dividends received deduction depends on the percentage of the stock of the
distributing corporation that the recipient corporation owns.
Limitation on dividends received deduction under section 246(c)( 4)
The dividends received deduction is not allowed with respect to stock either (1) held for
45 days or less during a 91-day period beginning 45 days before the ex-dividend date, or (2) to
the extent the taxpayer is under an obligation to make related payments with respect to positions
in substantially similar or related property. 582 The taxpayer 's holding period is reduced for
periods during which its risk of loss is reduced. 583
Description of Proposal

The proposal modifies the life insurance company proration rule for reducing dividends
received deductions and reserve deductions with respect to untaxed income. For purposes of the
life insurance proration rule of section 805(a)(4) , the company's share is 40 percent. The
policyholder's share is 60 percent.
Effective Date

The propo sal applies to taxable years beginning after December 31, 2017.
6. Repeal of special rule for distributions to shareholders from pre-1984 policyholders
surplus account
Present and Prior Law

Under the law in effect from 1959 through 1983, a life insurance company was subject to
a three-phase taxable income computation under Federa l tax law. Under the three-phase system,
a company was taxed on the lesser of its gain from operations or its taxable investment income
(Phase I) and, if its gain from operations exceeded its taxable investment income, 50 percent of
such excess (Phase II). Federal income tax on the other 50 percent of the gain from operations
was deferred , and was accounted for as part of a policyholder 's surplus accou nt and, subject to
certain limitations, taxed only when distributed to stockholde rs or upon corporate dissolution
581

Sec. 243 et seq . Conce ptually, dividends received by a corporation are retained in corporate solution ;
these amounts are taxed when distributed to noncorporate shareho lders.
582

Sec. 246(c).

583

Sec. 246(c)(4). For this purpose , the holding period is reduced for periods in which (I) the taxpayer has
an obligation to sell or has shorted substantially similar stock; (2) the taxpayer has grante d an option to buy
substantia lly similar stock; or (3) under Treas ury regu lations , the taxpayer has diminished its risk of loss by holding
other positions with respect to substant ially s imilar or related property.

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TREAS-17-0313-I-000204

 (Phase III). To determine whether amounts had been distributed , a company maintained a
shareholders surplus account , which generally included the company's previously taxed income
that would be available for distribution to shareholders. Distributions to shareholders were
treated as being first out of the shareholders surplus account , then out of the policyholders
surplus account , and finally out of other accounts.
The Deficit Reduction Act of 1984584 included provisions that, for 1984 and later years,
eliminated further deferral of tax on amounts (described above) that previously would have been
deferred under the three-phase system. Although for taxable years after 1983, life insurance
companies may not enlarge their policyholders surplus account , the companies are not taxed on
previously deferred amounts unless the amounts are treated as distributed to shareholders or
subtracted from the policyholders surplus account. 585
Any direct or indirect distribution to shareholders from an existing policyholders surplus
account of a stock life insurance company is subject to tax at the corporate rate in the taxable
year of the distribution. Present law (like prior law) provides that any distribution to
shareholders is treated as made (1) first out of the shareholders surplus account , to the extent
thereof , (2) then out of the policyholders surplus account , to the extent thereof , and (3) finally,
out of other accounts.
For taxable years beginning after December 31, 2004 , and before January 1, 2007 , the
application of the rules imposing income tax on distributions to shareholders from the
policyholders surplus account of a life insurance company were suspended. Distributions in
those years were treated as first made out of the policyholders surplus account , to the extent
thereof , and then out of the shareholders surplus account , and lastly out of other accounts.
Description of Proposal

The proposal repeals section 815, the rules imposing income tax on distributions to
shareholders from the policyholders surplus account of a stock life insurance company.
In the case of any stock life insurance company with an existing policyholders surplus
account (as defined in section 815 before its repeal) , tax is imposed on the balance of the account
as of December 31, 2017. A life insurance company is required to pay tax on the balance of the
account ratably over the first eight taxable years beginning after December 31, 2017.
Specifically , the tax imposed on a life insurance company is the tax on the sum of life insurance
company taxable income for the taxable year (but not less than zero) plus 1/8 of the balance of
the existing policyholders surplus account as of December 31, 2017. Thus , life insurance
company losses are not allowed to offset the amount of the policyholders surplus account
balance subject to tax.

584

Pub. L. No. 98-369.

585

Sec. 815.

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TREAS-17-0313-I-000205

 Effective Date

The proposal applies to taxable years beginn ing after Detember 31, 2017.
7. Modification of proration rules for property and casualty insurance companies
Present Law

The taxable income of a property and casualty insurance company is determined as the
sum of its gross income from underwriting income and investme nt income (as well as gains and
other income items), reduced by allowable deductions.
A proration rule applies to property and casualty insurance companies. In calculating the
deductible amount of its reserve for losses incurred, a property and casualty insurance company
must reduce the amount of losses incurred by 15 percent of ( 1) the insurer ' s tax-exempt interest,
(2) the deductible portion of dividends rece ived (with special rules for dividends from affiliates) ,
and (3) the increase for the taxable year in the cash value of life insurance , endowment , or
annuity contracts the company owns. 586 This prorati on rule reflects the fact that reserves are
genera lly funded in part from tax-exempt interest, from deductible dividends , and from other
untaxed amounts.
Description of Proposal

The proposal replaces the 15-percent reduction und er present law with a 26.25-percent
reduction under the proration rule for property and casualty insurance companies. This change
in the percentage takes into account the reduction in the corporate tax rate from 35 to 20 percent
under section 3001 of the bill (Reduction in corporate tax rate) .
Effective Date

The proposal applies to taxable years beginning after December 31, 2017.
8. Modification of discounting rules for property and casualty insurance companies
Present Law
A property and casualty insurance company genera lly is subject to tax on its taxable
income .587 The taxable income of a property and casualty insurance company is determined as
the sum of its underwriting income and investment income (as well as gains and other income
items), reduced by allowab le deductions. 588 Among the items that are deductible in calcula ting
underwriting income are additions to reserves for losses incurred and expenses incurred.

586

Sec. 832(b)(5).

587

Sec. 83 l(a).

588

Sec. 832.

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TREAS-17-0313-I-000206

 To take account of the time value of money , discounting of unpaid losses is required. All
property and casualty loss reserves (unpaid losses and unpaid loss adjustment expenses) for each
line of business (as shown on the annual statement) are required to be discounted for Federa l
income tax purposes.
The discounted reserves are calculated using a prescribed interest rate which is based on
the applicable Federal mid-term rate ("mid-term AFR"). The discount rate is the average of the
mid-term AFRs effective at the beginning of each month over the 60-month period preceding the
calendar year for which the determination is made.
To determine the period over which the reserves are discounted , a prescribed loss
payment pattern applies. The prescribed length of time is either the accident year and the
following three ca lendar years, or the accident year and the following 10 calendar years,
depending on the line of business. In the case of certain "long-tail" lines of business , the 10-year
period is extended, but not by more than five additional years. Thus, present law limits the
maximum duration of any loss payment pattern to the accident year and the following 15 years.
The Treasury Departm ent is directed to determine a loss payment pattern for each line of
business by reference to the historical loss payment pattern for that line of business using
aggregate experience reported on the annual statements of insurance companies, and is required
to make this determination every five years, starting with 1987.
Under the discounting rules, an election is provided permitting a taxpaye r to use its own
(rather than an industry-wide) historical loss payment pattern with respect to all lines of business ,
provided that applicable requirements are met.
Treasury publishes discount factors for each line of business to be applied by taxpayers
for discounting reserves. 589 The discount factors are published annually, based on (1) the interest
rate applicable to the calendar year, and (2) the loss payment pattern for each line of business as
determined every five years.
Description of Proposal

The proposal modifies the reserve discounting rules applicable to property and casualty
insurance compan ies. In general, the proposa l modifies the prescribed interest rate, extends the
periods applicable und er the loss payment pattern , and repeals the election to use a taxpayer's
historical loss payment pattern.
Interest rate

The proposal provides that the interest rate is an annual rate for any calendar year to be
determined by Treasury based on the corpora te bond yield curve (rather than the mid-term AFR
as under present law). Fo r this purpose , the corporate bond yield curve means, with respect to
any month, a yield curve that reflects the average , for the preced ing 24-month period , of monthly
589 The most recent property and casualty reserve discount factors publ ished by Treasury are in Rev. Proc.
2016 -58, 2016-51 I.RB. 839, and see Rev. Proc. 2012 -44, 2012 -49 I.RB. 645.

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TREAS-17-0313-I-000207

 yields on investment grade corporate bonds with varying maturities and that are in the top three
quality levels available. 590 Because the corporate bond yield curve provides for 24-month
averaging , the present-law rule providin g for 60-month averaging to determine the interest rate is
repealed under the proposal. It is expected that Treasur y will determine a 24-month average for
the 24 months preceding the first month of the calendar year for which the determination is
made.

Loss payment patterns
The proposal extends the periods applicable for determining loss payment patterns.
Under the proposal , the maximum duration of the loss payment pattern is determined by the
amount of losses remainin g unpaid usin g aggregate industry experience for each line of business,
rather than by a set number of years as under present law.
Like present law, the proposal provides that Treasury determines a loss payment pattern
for each line of business by reference to the historical loss payment pattern for that line of
busin ess using aggregate experience reported on the annual statement s of insurance companies,
and is required to make this determination every five years.
Under the proposal , the present-law three-year and 10-year periods following the accident
year are extended up to a maximum of 15 more years for the lines of business to which each
period app lies. For lines of busine ss to which the three-year period applies , the amount of losses
that would have been treated as paid in the third year after the accident yea r is treated as paid in
that year and each subsequent year in an amount equal to the amount treated as paid in the
second year (or , if less, the remaining amount). To the extent these unpaid losses have not been
treated as paid before the 18th year after the accident year, they are treated as paid in that 18th
year.
Similarly , for lines of business to which the 10-year period applies, the amount of losses
that would have been treated as paid in the 10th year following the accident year is treated as paid
in that yea r and each subsequent year in an amount equal to the amount treated as paid in the
ninth year (or ifless, the remainin g amount). To the extent these unpaid losse s have not been
treated as paid before the 25 th year after the accident year , they are treated as paid in that 25 th
year.
The proposa l repeals the present-law rule providing that in the case of certain " long-tail "
lines of bu sines s, the IO-year period is extended , but not by more than five additional years. The
proposal does not change the lines of busin ess to which the three- year, and l 0-year, periods ,
respectively, apply.

590

This rule adopts the definition found in section 430(h)(2)(D)(i) of the term "corporate bond yield
curve." Section 430, which relates to minimum funding standards for single -employer defined benefit pension
plans, includes other rules for detemlinin g an "effect ive interest rate," such as segment rate rules. The term
"effec tive interest rate" along with these other rules, includin g the segment rate rules, do not app ly for purposes o f
property and casualty insurance reserve discountin g.

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TREAS-17-0313-I-000208

 Election to use own historical loss payment pattern

The proposal repeals the present-law election permitting a taxpayer to use its own (rather
than an aggregate industry-experience-based) historical loss payment pattern with respect to all
lines of business.
Effective Date

The proposal genera lly applies to taxable years beginning after December 31, 2017.
Under a transitional rule for the first taxable year beginning in 2018 , the amount of unpaid losses
and expenses unpaid (under section 832(b)(5)(B) and (6)) and the unpaid losses (under
sections 807(c)(2) and 805(a)( l)) at the end of the preceding taxable year are determined as if the
proposal had applied to these items in such preceding taxable year, using the interest rate and
loss payment patterns for accident years ending with calendar year 2018. Any adjustment is
spread over eight taxable years, i.e., is included in the taxpayer's gross income ratably in the first
taxable year beginning in 2018 and the seven succeeding taxable years. For taxable years
subsequent to the first taxable year beginning in 2018, the proposal applies to such unpaid losses
and expenses unpaid (i.e., unpaid losses and expenses unpaid at the end of the taxable year
preceding the first taxable year beginning in 2018) by using the interest rate and loss payment
patterns applicable to accident years ending with calendar year 2018.
9. Repeal of special estimated tax payments
Present Law
Allowance of additional deduction and establishment of special loss discount account

Present law allows an insurance company required to discount its reserves an additional
deduction that is not to exceed the excess of ( 1) the amount of the undiscounted unpaid losses
over (2) the amount of the related discounted unpaid losses, to the extent the amount was not
deducted in a preceding taxable year. 591 The provision imposes the requirement that a specia l
loss discount account be established and maintained , and that special estimated tax payments be
made. Unused amounts of special estimated tax payments are treated as a section 6655 estimated
tax payment for the 16th year after the year for which the special estimated tax payment was
made.
The total payments by a taxpayer , including section 6655 estimated tax payments and
other tax payments , together with special estimated tax payments made under this provision , are
generally the same as the total tax payments that the taxpayer would make if the taxpayer did not
elect to have this provision apply, except to the extent amounts can be refunded under the
provision in the 16th year.

591

Sec. 847.

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TREAS-17-0313-I-000209

 Calculation of special estimated tax payments based on tax benefit attributable to
deduction

More specifically , present law imposes a requirement that the taxpayer make special
estimated tax payments in an amount equal to the tax benefit attributable to the additional
deduction allowed under the provision. If amounts are included in gross income as a result of a
reduction in the taxpayer's special loss discount account or the liquidation or termination of the
taxpayer's insurance business , and an additional tax is due for any year as a result of the
inclusion, then an amount of the special estimated tax payments equal to such additional tax is
applied against such additional tax. If there is an adjustment reducing the amount of additional
tax against which the special estimated tax payment was applied , then in lieu of any credit or
refund for the reduction , a special estimated tax payment is treated as made in an amount equal
to the amount that would otherwise be allowable as a credit or refund.
The amount of the tax benefit attributable to the deduction is to be determined (under
Treasury regulations (which have not been promulgated)) by taking into account tax benefits that
would arise from the carryback of any net operating loss for the year as well as current year
benefits. In addition , tax benefits for the current and carryback years are to take into account the
benefit of filing a consolidated return with another insurance company without regard to the
consolidation limitations imposed by section 1503(c).
The taxpayer's estimated tax payments under section 6655 are to be determined without
regard to the additional deduction allowed under this provision and the special estimated tax
payments. Legislative history 592 indicates that it is intended that the taxpayer may apply the
amount of an overpayment of any section 6655 estimated tax payments for the taxable year
against the amount of the special estimated tax payment required under this provision. The
special estimated tax payments under this provision are not treated as estimated tax payments for
purposes of section 6655 (e.g., for purposes of calculating penalties or interest on underpayments
of estimated tax) when such special estimated tax payments are made.
Refundable amount

To the extent that a special estimated tax payment is not used to offset additional tax due
for any of the first 15 taxable years beginning after the year for which the payment was made ,
such special estimated tax payment is treated as an estimated tax payment made under
section 6655 for the 16th year after the year for which the special estimated tax payment was
made. If the amount of such deemed section 6655 payment , together with the taxpayer's other
payments credited against tax liability for such 16th year, exceeds the tax liability for such year,
then the excess (up to the amount of the deemed section 6655 payment) may be refunded to the
taxpayer to the same extent provided under present law with respect to overpayments of tax.

592

See H.R. Rep . No. 100-1104, Conference Report to accompany H.R. 43 33, the Technical and
Miscellan eous Revenue Act of 1988, October 2 1, 1988, p. 174.

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TREAS-17-0313-I-000210

 Regulatory authority

In addition to the regulatory authority to adjust the amount of special estimated tax
payments in the event of a change in the corporate tax rate, authority is provided to Treasury to
prescribe regulations necessary or appropriate to carry out the purposes of the provision.
Such regulations include those providing for the separate application of the provision
with respect to each accident year. Separate application of the provision with respect to each
accident year (i.e., applying a vintaging methodology) may be appropriate under regulations to
determine the amount of tax liability for any taxable year against which special estimated tax
payments are applied, and to determine the amount (if any) of special estimated tax payments
remainin g after the I 5th year which may be available to be refunded to the taxpayer.
Regulatory authority is also provided to make such adjustments in the application of the
provision as may be necessary to take into account the corporate alternative minimum tax.
Under this regulatory authority , rules similar to those applicable in the case of a change in the
corporate tax rate are intended to apply to determine the amount of special estimated tax
payments that may be applied against tax calculated at the corporate alternative minimum tax
rate. The special estimated tax payments are not treated as payments of regular tax for purposes
of determining the taxpayer ' s alternative minimum tax liability.
Regulations have not been promulgated under section 847.
Description of Proposal

The proposal repeals section 847. Thus, the election to apply section 847, the additional
deduction , special loss discount account , special estimated tax payment , and refundable amount
rules of present law are eliminated.
The entire balance of an existing account is included in income of the taxpayer for the
first taxable year beginning after 2017, and the entire amount of existing special estimated tax
payments are applied against the amount of additional tax attributable to this inclusion. Any
specia l estimated tax payments in excess of this amount are treated as estimated tax payments
under section 6655.
Effective Date

The proposal applies to taxable years beginning after December 31, 2017.

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TREAS-17-0313-I-000211

 10. Capitalization of certain policy acquisition expenses
Present Law

In the case of an insurance company , specified policy acquisition expenses for any
taxable year are required to be capitalized , and generally are amortized over the 120-month
period beginning with the first month in the second half of the taxable year. 593
Specified policy acquisition expenses are determined as that portion of the insurance
company's general deductions for the taxable year that does not exceed a specific percentage of
the net premiums for the taxable year on each of three categories of insurance contracts. For
annuity contracts , the percentage is 1.75; for group life insurance contracts , the percentage is
2.05; and for all other specified insurance contracts , the percentage is 7.7.
With certain exceptions , a specified insurance contract is any life insurance , annuity , or
noncancellable accident and health insurance contract or combination thereof. A group life
insurance contract is any life insurance contract that covers a group of individuals defined by
reference to employment relationship , membership in an organization , or similar factor, the
premiums for which are determined on a group basis , and the proceeds of which are payable to
(or for the benefit of) persons other than the employer of the insured , an organization to which
the insured belongs , or other similar person.
Description of Proposal

The three categories of insurance contracts are replaced with two categories: (1) group
contracts and (2) all other specified insurance contracts. The percentage of net premiums that
may be treated as specified policy acquisition expenses is four percent for group insurance
contracts and 11 percent for all other specified insurance contracts.
A group insurance contract is any specified insurance contract that covers a group of
individuals defined by reference to employment relationship , membership in an organization , or
similar factor , the premiums for which are determined on a group basis , and the proceeds of
which are payable to (or for the benefit of) persons other than the employer of the insured, an
organization to which the insured belongs , or other similar person.
Effective Date

The proposal applies to taxable years beginning after December 31, 2017.

593

Sec. 848.

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TREAS-17-0313-I-000212

 I. Compensation
1. Nonqualified deferred compensation

Present Law

In general
Compensation may be received currently or may be deferred to a later time. The tax
treatment of deferred compensation depends on whether it is qualified (that is, eligible for taxfavored treatment) 594 or nonqualified and, if nonqualified , whether it is funded or unfunded . In
the case of a funded nonqua lified deferre d compensa tion arrangemen t, funded amounts are
includ ed in income whe n the right to the compensatio n vests, that is, when it is no longer subj ect
to a substantial risk of forfe iture . 595 Ea rnings after vesting may be taxed annually or when paid .
Un der general tax prin ciple s, unfunded nonqualified deferred compensation generall y is
not included in income unti l actuall y or cons tructively received. 596 Ho wever, under statutor y
ru les genera lly appli cable to nonqualified deferre d com pensation arrangements, income inclu sion
is delayed until receipt only if specific requirements are met. Othe rwise , deferred amounts are
includ ed in income at ves ting, with cer tain additional income taxes. In addition , in the case of
certain arrangements , statut ory ru les requir e nonqu alified deferred compensation to be included
in income at vesting , and depending on the arrangement , earnings after ves ting may be taxed
annually or when paid.

General rules for nongualified deferred compensation

In genera l
Vario u s requir ements apply to a nonqu alified deferred compensa tion plan in order to
avoid income inclusion at vestin g. 597 Absent a specifi c exception , the se requir ement s apply in
addition to any spec ial rules for particular types of nonqualified deferred compensation plan s.

594

For a discuss ion of present law relatin g to tax-favored retirement plans, see Joint Committee on
Taxation, Report to the House Committee on Ways and Means on Present Law and Sugges tions for Reform
Submitted to the Tax Reform Working Groups (JCS-3 - 13), May 6, 2013 , Part II.I.
595

Dependin g on the funding veh icle , the tax treatment of funded nonqualified deferred compensation may
be gove rned by section 83, 402(b), or 403(c). Similar treatment applies under a common law doctrine of economic
benefit, as applied, for example , in Sproull v. Comm issioner, 16 T.C. 244 (1951), ajf'd p er curiam, 194 F.2d 54 1
(6th Cir. 1952), and Rev. Rul. 60-31, Situation 4, 1960- 1 C.B. 174. Under section 404(a)(5), (b), and (d),
nonqualified deferred compensatio n is generally deducti ble by the service recipient for the taxable year in which the
amount is includible in the service provider 's income , subject to any applicable limits on deductibility.
596

Treas . Reg. secs. 1.451-l(a) and 1.451-2; Rev. Rul. 60-31 , 1960-1 C.B. 174.

597
Section 409A , generally effective for amounts deferr ed in taxab le years beginning after Decembe r 31,
2004. For further discussion of the tax treatment ofnonqualified deferred compensation before 2005 and concerns

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 A nonqualified deferred compensation plan must provide that compensation for services
performed during a taxable year generally may be deferred at the service pro vider 's election only
if the election to defer is made no later than the close of the preceding taxable year (or at such
other time as provided in Treasury regulations). In the case of any performance-based
compensation for services performed over a period of at least 12 months, the election may be
made no later than six months before the end of the service per iod. The time and form of
distributions from the plan must be specified at the time of initial deferral. However, subject to
certain requirements , a plan may allow later changes in the tim e and form of distributions.
Distributions from a nonqualified deferred compensation plan may be allowed only upon
separation from service (as determined by the Secretary of the Treasury) , death, a specified time
(or pursuant to a fixed schedule), change in control of a corporation (to the extent pro vided by
the Secretary of the Treasury) , occurrence of an unforeseeable emergency, or if the service
provider becomes disabled. 598 A nonqualified deferred compensation plan may not allow
distributions other than upon the permissible distribution events and, except as provided in
regulations by the Secretary of the Treasury , may not permit acceleration of a distribut ion.
If these requirements are not met , all amounts deferred by a serv ice provider under the
plan are currently includible in income to the extent such amounts are not subject to a substantial
risk of forfeiture and not previously included in gross income .599 For this purpose, a person's
rights to compensation are subject to a substantial risk of forfeiture if the rights are conditioned
on the future performance of substantial services by any person or the occurrence of a condition
related to a purpose of the compensation, provided that the possibility of forfeiture is substantial.
A condit ion imposed on the right to compensation may constitute a substantial risk of forfeiture

that led to the enactment of section 409A , see Joint Committee on Taxation, General Explanation ofTax Legislation
Enacted in the 108th Congress (JCS-5-05) , May 2005.
598 Under a spec ial rule, when a "specified employee" separates from service , distributions may not be
made earlier than six months after the date of the separation from service or, if earlier, the date of the employee's
death. Specified employees are key employees (as defined in section 4l6(i)) of publicly-traded corporations and
generally include officers (limited to 50 employees) having annual compensation greater than $ 170,000 (for 2014) ,
five-percent owners , and one-percent owners having annual compensation from the employer greater than $ 150,000.
599

In the case of an employee , under section 340 I (a), the amount included in income constitutes wages
subject to income tax withho lding. In addition to current income inclusion , interest at the rate applicable to
underpayments of tax 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. The amount required to be included in income is also subject to a 20-percent additional tax. Under
section 409A(b) , current income inclusion , interest , and a 20-percent additional tax may also result from certain
arrangements involving offshore assets set aside to fund nonqualified deferred compensation (regardless of whether
the assets are available to satisfy claims of the general creditors of the service recipient), the restriction of assets to
provide nonqualified deferred compensation in connection with a change in the employer ' s financial health, or
assets set aside to provide nonqualified deferred compensation during a period when the emp loyer (or controlled
group member) maintains an underfunded defined benefit p lan.

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 even if the impo sition of the condition was intended in whole or in part to defer taxat ion of the
compensation to the serv ice provider. 600
Definition of nonqualified deferred compensation plan
A nonqua lified deferred compensation plan subject to these rules gene rall y includes any
plan , agreement or arrangement (includin g an agreement or arrangement that includes one
person) that provides for th e deferra l of compen sation (including actual or notion al income on
deferred compensation) , other than a qualified emplo yer plan , or any bona fide vacatio n leave,
sick leave, comp ensatory tim e, disabili ty pay , or death ben efit plan. 60 1 A qualified employer
plan for this purpose mean s a qualified retirement plan , a tax-deferred annuity plan , a simplified
employee pen sion plan , a simple retirem ent account plan , an eligib le deferred compensation plan
of a tax-exempt or State or local gove rnment emplo yer, a plan establi shed before June 25, 1959,
and funded only by employ ee contributions , or a qualifi ed governmen tal excess benefi t
arrangement. 602
Under Treasury regulation s, certain other types of arrangements are not considered a
deferral of compen sation and thu s are not subj ect to these rules. 603 For example , an exception
applies to amounts that are not deferred beyond a short period of time after the amount is no
longer subje ct to a sub stantial risk of forfeiture (referre d to as a "short-term deferral"). 604 Under
this exception , a deferra l of compen sation genera lly does not occur if the serv ice provider
actually or constructively receives the amount on or before the last day of the applicabl e two and
one-half month perio d. The applicable two and one-half month period is the period ending on
the later of the 15th day of the third month following the end of: (1) the serv ice provider's first
taxabl e year in wh ich the right to the payment is no longer subj ect to a substantial risk of
forfe iture ; or (2) the serv ice recip ient' s first taxable year in which the right to the payment is no
longer subje ct to a sub stantial risk of forfeiture.
In addition , Treasury regulations provide an exce ption for certain separation pay
(severa nce) arrangements. This exception applies to separat ion pay pursuant to a w indow
program , or separati on pay provided upon an invo lunt ary separat ion from serv ice (as defined )
that meets certain requirements as to amount and tim ing of paym ent. The amount canno t excee d
twice the service provide r 's annualized compensation in the preceding taxable year (or if less,
twice the sect ion 40 1(a)(l7) limit in effect for the year in which the separation from serv ice
occurs) ; and the plan mu st requir e this amount to be paid no later than the end of the second
600

Sec. 409A(d)(4) and Treas. Reg. sec. l.409A - l(d). The Secretary of the Treasury is authori zed to
prescribe such regulations as may be necessary or appropriate to carry out the purposes of section 409A.
601

Sec. 409A(d)(I).

602

Secs. 401 (a), 403(a) and (b), 408(k) and (p), 457(b), 501 (c)(l 8), and 4 l 5(m).

603

For a discuss ion of intende d exceptions for certain arrangements, see Conference Report to accompany
H.R. 4520 , the American Jobs Creation Act of 2004, H.R. Rep. No. I 08-755, October 7, 2004 , p . 735.
604

Treas. Reg. sec. l.409A - l(b)(4).

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 taxable year following the end of the service provider 's taxable year in which the separation
from service occurred. 605
Treasury regulations also provide exceptions for certain stock options and stock
appreciation rights ("SARs") with respect to service recipient stock, referred to collectively as
"stock rights. " 606 In general, under the regulations, a stock option or SAR does not provide for
the deferral of compensation if the exercise price of the stock option or SAR cannot be less than
the fair market value, on the date the option or SAR is granted, of the stock subject to the option
or SAR and the stock right does not otherwise include a deferral feature. Similar exceptions
apply to arrangements involving mutual company units and partnership interests. Exceptions
apply also for incenti ve stock options and options under an employee stock purchase plan
("statutory options"). 607
Additional rules
Under Treasury regulations , the term "service provider " includes an individual or any of
specified entities for any taxable year for which the individual or entity accounts for income
from the performance of services under the cash receipts and disbursements method of
accounting. 608 The relevant entities are a corporation, an S corporation, a partnership , a personal
service corporation, a noncorporate entity that would be a personal service corporation if it were
a corporation, a qualified personal service corporation, and a noncorporate entity that would be a
qualified personal service corporation if it were a corporation. However , an exception applies
for a service provider engaged in the trade or business of providing services (other than as an
employee or director of a corporation or in a similar position in the case of an entity that is not a
corporation) if the service provider provides significant services to at least two service recipients
that are not related to each other or the service pro vider . This exception does not apply to the
extent the service provider provides management services, that is, services invol ving the actual
or de facto direction or control of the financial or operational aspects of a trade or business of the
service recipient , or investment management or advisory services provided to a service recipient
whose primary trade or business include s the investment of financial assets (including real estate
investments) , such as a hedge fund or real estate investment trust.

605

Treas. Reg. sec. l.409A-l(b)(9)(iii).

606

Treas. Reg. sec. l .409A-l(b)(5). A SAR is a rigbt to compensation based on the apprec iation in value
of a spec ified number of shares of stock occurring between the date of grant and the date of exercise of the right. In
the case of a SAR, the exercise price is the amount subtracted from the fair market value of the stock on the date the
SAR is exercised to determine the appreciat ion in value since the date of grant.
607

Secs. 421-424.

608

Treas. Reg. sec. l.409A-l(t).

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 Nongualified deferred compensation of State or local government or tax-exempt emp loyers

Special rules apply to "eligible 609 " and "ineligible" deferred compensation plans of State
and local government and tax-exempt employers. 610
Amounts deferred under an eligible deferred compensation plan generally are not
included in income unt il received. In order for a plan to be an eligible plan , the plan must limit
deferral s to a dollar amount ($18,000 for 2017, plus an additional "catch-up " amount for older
participants) or, if less, the participant's includible compensation. The plan must also meet
various other requirements.
In the case of an ineligible deferred compe nsation plan (that is, a plan that does not meet
the requirements to be an eligible plan), deferred amount s are treated as nonqualified deferred
compensation and includible in income for the first taxable year in which there is no substant ial
risk of forfeiture of the rights to such compensation, even though the plan is unfunded. For this
purpo se, a person 's rights to compensation are subject to a substantial risk of forfeiture if the
rights are conditioned on the future performance of substantia l services by any individual. 61 1
Earnings post vesting are generally taxed when pai d.

Certain plans are excl uded from being treated as deferred compensation , including bona
fide vacation leave, sick leave, compensatory time, severance pay, disability pay, and death
benefits. 6 12
Nongualified deferred compensation from certain tax indiffer ent parties

In general
Under special rules, any compensation deferred under a nonqualified deferred
compensat ion plan of a nonqu alified entity is generally includ ible in income by the service
provider when there is no substantial risk of forfeiture of the service provider 's rights to such
compensat ion, regardless of the method of accounting used by the service provider. 6 13 For this
purpo se, a service provider 's rights to compensation are subject to a substant ial risk of forfeiture
609

Some aspects of the rules for eligible deferred compensation plans are quite different for plans of State
or local government employers and plans of tax-exempt employers . In particular , an eligible deferred compensation
plan of a State or local government is a tax-favored, funded arrangement , similar to a qua lified defined contribution
plan, whereas an eligible deferred compensation plan of a tax-exempt employer must be unfunded . These rules in
effect limit the amount of unfunded nonqualified deferred compensation that can be provided on a tax-de ferred basis
by a tax-exempt employer.
610

Sec. 457, which also contains exceptions for various arrangements .

611

Sec. 457(f)(3)(B).

612

Sec. 457(e)(l l)(A).

613
Section 457 A, generally effective for deferred amounts attr ibutable to services performe d after
December 31, 2008.

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 only if the rights are conditioned on the future performance of substantial services by any
individual. 614 A condition related to a purpose of the compensation (other than future
performance of substantial services) does not result in a substantial risk of forfeiture.
If the amount of any deferred compensation is not determinable at the time the
compensation is otherwise includible in income, the compensation is includible when the amount
becomes determinable. In that case, the income tax attributable to the compensation includible
in income is increased by the sum of ( 1) an interest charge, and (2) an amount equal to
20 percent of the includible compensation. The interest charge is equal to the interest at the rate
applicable to underpayments of tax plus one percentage point 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.

Nonqualified entity
The term "nonqualified entity" includes certain foreign corporations and certain
partnerships ( either domestic or foreign). A foreign corporation is a nonqualified entity unless
substantially all of its income is effectively connected with the conduct of a U.S. trade or
business or is subject to a comprehensive foreign income tax. A partnership is a nonqualified
entity unless substantially all of its income is allocated to persons other than foreign persons with
respect to whom such income is not subject to a comprehensive foreign income tax and
organizations exempt from U.S. income tax.
The term comprehensive foreign income tax means with respect to a foreign person , the
income tax of a foreign country if ( 1) the person is eligible for the benefits of a comprehensive
income tax treaty between the foreign country and the United States, or (2) the person
demonstrates to the satisfaction of the Secretary of the Treasury that the foreign country has a
comprehensive income tax.
Nonqualified deferred compensation
For purposes of these special rules, the term "no nqualified deferred compensation plan"
is generally defined in the same manner as under the general rules for nonqualified deferred
compensation (and includes any agreement or arrangement , as well as actual or notional income
on deferred compensation) with certain modifications.
Nonqualified deferred compensation includes any plan that provides a right to
compensation based on the appreciation in value of a specified number of equity units of the

614

Under section 457 A(d)( I )(B) , to the extent provided in regulati ons, if compensation is determined
solely by reference to the amount of gain recognized on the disposition of an investment asset , the compensation is
treated as subject to a substant ial risk of forfeiture until the date of such dispositfon. No regulations or other
guidance applying this rule has been issued.

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TREAS-17-0313-I-000218

 service recipient. 615 However , IRS guidance provides some exceptions. 616 In general , under the
guidance , a stock option is not treated as nonqual ified deferred compensation for this purpose if
the exercise price of the stock option cannot be less than the fair market va lue, on the date the
option is granted , of the stock subject to the option and the option does not otherwise include a
deferral feature. A similar exception applies to arrangements involving the right to purchase an
equity interest in a noncorporate entity. Exceptions apply also for statutory options. Finally , an
exception applies for a SAR if the exercise price of the SAR cannot be less than the fair market
value , on the date the SAR is granted , of the stock subject to the SAR and the SAR does not
otherwise include a deferral feature , but only if the SAR by its terms at all times must be settled
in service recipient stock and is settled in service recipient stock.
A special "short-term deferral" exception applies , under which compensation is not
treated as deferred if the service provider receives payment of the compensation not later than
12 months after the end of the taxable year of the service recipient during which the right to the
payment of such compensation is no longer subject to a substantial risk of forfeiture (within the
meaning of the special rules).

Description of Proposal

In general
Under the proposal , any compensation deferred under a nonqualified deferred
compensation plan is includible in the gross income of the service provider when there is no
substantial risk of forfeiture of the service provider ' s rights to such compensation. For this
purpose , the rights of a service provider to compensation are treated as subject to a substantial
risk of forfeiture only if the rights are conditioned on the future performance of substantial
services by any individual. Under the proposa l, a condition related to a purpose of the
compensation other than the future performance of substantial services (such as a condition
based on achieving a specified performance goal or a condition intended in whole or in part to
defer taxation) does not create a substantial risk of forfeiture , regardless of whether the
possibility of forfeiture is substantial. In addition , a covenant not to compete does not create a
substantial risk of forfeiture.
The proposal applies without regard to the method of accounting of the service provider.
Because of the definition of substantial risk of forfeiture under the proposal , a taxpayer using
either the cash method of accounting or the accrual method of accounting may be required to
include deferred compensation in income earlier than the method of accounting would otherwise
reqmre.

615

Sec . 457 A(d)(3)(A). The Secretary of the Tr easury is authorized to pr escribe such regulations as may
be necessary or appropria te to carry out the purposes o f section 457 A.
616

Notice 2009-8, 2009-1 C.B. 347, A-2(b ). For a discussion of intended exceptions for certain
arrange ments, see Committ ee on Ways and Means Report to accompany H.R. 6049, the Renewable Energy and Job
Creat ion Act of 2008, H.R. Rep. No. 110-6 58, May 20, 2008, pp . 195-196.

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 Nothing under the proposal is to be construed to prevent the inclusion of amounts in
income under any other income tax provision or any other rule of law earlier than the time
provided in the proposal. Any amount included in income under the proposal is not required to
be included in income under any other income tax provision or any other rule of law later than
the time provided under the proposal.
Nongualified deferred compensation

For purposes of the proposal , the term "nonqualified deferred compensation plan" means
any plan that provides for the deferral of compensation , other than a qualified employer plan, a
bona fide vacation leave, sick leave, compensatory time , disability pay or death benefit plan, and
any other plan or arrangement designated by the Secretary of the Treasury consistent with the
purposes of the proposal. The Secretary shall not provide an exception for severance plans, bona
fide or otherwise , in regulations or other guidance. A qualified employer plan for this purpose
means a qualified retirement plan, a tax-deferred annuity plan, a simplified employee pension
plan, a simple retirement account plan , an eligible deferred compensation plan of a State or local
government employer , or a plan established before June 25, 1959, and funded only by employee
contributions.

In addition , a nonqualified deferred compensation plan for purposes of the proposal
specifically includes any plan that provides a right to compensation based on the value of, or the
appreciation in value of, a specified number of equity units of the service recipient. Such a
compensation right does not fail to provide for the deferral of compensation merely because the
compensation is to be paid in cash or by the transfer of equity. The proposal applies to all stock
options and SARs (and similar arrangements involving noncorporate entities) , regardless of how
the exercise price compares to the value of the related stock on the date the option or SAR is
granted. It is intended that no exceptions are to be provided in regulations or other administrative
guidance. However , it is intended that statutory options are not considered nonqualified deferred
compensation for purpo ses of the proposal. An exception is provided for that portion of a plan
consisting of a transfer of property described in section 83 (other than stock options) or which
consists of a trust to which section 402(b) applie s.
For purposes of the proposal , a plan includes any agreement or arrangement , including an
agreement or arrangement that includes one person. In addition , references to deferred
compensation are treated as including references to income (whether actual or notional)
attributable to deferred compensation or income. However , compensation is not treated as
deferred for purposes of the proposal if the service provider receives payment of the
compensation not later than two and one-half months after the end of the service recipient ' s
taxable year during which the right to the payment of such compensation is no longer subject to a
substantial risk of forfeiture (within the meaning of the proposal).
Additional rules

The Secretary of Treasury is directed to prescribe such regulations as may be necessary
or appropriate to carry out the purposes of the proposal , including regulations disregarding a
substantial risk of forfeiture in cases where necessary to carry out the purposes of the proposal.

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 Except as provided by the Secretary of the Treasury , for purposes of the proposal , rules similar to
the controlled group rules for qualified retirement plans apply. 617
Under the proposal , the present-law general rules for nonqualified deferred compensation
and the present-law rules for nonqualified deferred compensation from certain tax indifferent
parties are repealed. In addition , the present-law rules for eligible and ineligible deferred
compensation plans of tax-exempt employers and for ineligible deferred compensation plans of
State and local governments do not apply with respect to deferred amounts attributable to
services performed after December 31, 2017.
In addition , the proposal applies income tax reporting and withholding , as applicable, to
amounts required to be included in gross income of employees and other service providers ,
including nonresident aliens subject to U.S. taxation.

Effective Date

The proposal generally applies to amounts attributable to services performed after
December 31, 2017. In the case of any deferred compensation amount to which the proposal
does not otherwise apply solely by reason of the fact that the amount is attributable to services
performed before January 1, 2018, to the extent such amount is not includible in gross income in
a taxable year beginning before 2026, such amount is includible in income in the later of ( 1) the
last taxable year before 2026 , or (2) the taxable year in which there is no substantial risk of
forfeiture of the rights to such compensation (determined in the same manner as determined
under the proposal). Earnings on deferred amounts attributable to services performed before
January 1, 2018, are subject to the proposal only to the extent that the amounts to which the
earnings are attributable are subject to the proposal.
The Secretary of the Treasury is directed to issue guidance , no later than 120 days after
enactment of the proposal , providing a limited period of time during which a nonqualified
deferred compensation arrangement attributable to services performed on or before
December 31, 2017 , may, without violating the general rules for nonqualified deferred
compensation , be amended to conform the date of distribution to the service provider to the date
amounts are required to be included in income under the proposal. If the service providertaxpayer is also a service recipient and maintains one or more nonqualified deferred
compensation arrangements for its service providers under which any amount is attributable to
services performed on or before December 31, 2017 , the guidance is to permit any such
arrangement to be amended to conform the dates of distribution under that arrangement to the
date amounts are required to be included in the income of the taxpayer. An amendment to a
nonqualified deferred compensation arrangement made pursuant to the guidance is not to be
treated as a material modification of the arrangement for purposes of the general rules for
nonqualified deferred compensation.

617

Sec. 414(b) and (c).

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 2. Modification of limitation on excessive employee remuneration
Present Law
In general
An employer generally may deduct reasonab le compensation for persona l services as an
ordinary and ne cessa ry bu siness expense. Section 162(m) provides an explicit limitatio n on the
deductibi lity of compensation expenses in the case of publicly traded corporate employers. The
otherwise allowable dedu ction for compensation paid or accrued with respect to a cove red
emp loyee of a pub licly held corporation 6 18 is limit ed to no more than $ 1 mill ion per year. 6 19 The
deduction limitation applies when the deduction would otherwise be tak en.

Covered employees
Section 162(m) define s a covered emplo yee as (I) the chief executive officer of the
corporat ion (or an indi vidual acting in such capacity) as of the close of the taxable year and
(2) the four most highly compensated officers 620 for the taxable year (other than the chief
executive officer). Treasury regulat ions under sect ion 162(m) prov ide that whet her an emplo yee
is the chief executive officer or among the four most highly compensated officers should be
determined pursuant to th e exec utive compensation disclos ure ru les promul gated under the
Secur ities Exc hange Act of 1934 ("Exc hange Act ").
In 2006 , the Securities and Exchange Co mmi ssion amended certain rules relatin g to
executive compensation , includin g which officers' compe nsation must be disclosed under the
Exchan ge Act. Under the new rules, such officers are (1) the principa l exec utive officer (or an
individual acting in such capaci ty), (2) the principal financial officer (or an individual acting in
such capacity) , and (3) the three mo st highly compen sated officers , 621 other than the prin cipal
executive officer or prin cipal financ ial officer.
In response to the Securities and Exchange Commission's new disclosure rules , the
Internal Reven ue Serv ice issued updat ed guidance on identifying which emp loyees are covered
by sect ion 162(m). 622 The new guidance pro vides that "cove red emp loyee " means any employee
who is (1) the principal executive officer (or an individual acting in suc h capac ity) defined in
618
A corporation is treated as publicly held if it has a class of common equity securities that is required to
be registered under section 12 of the Securities Exchange Act of 1934.
619

Sec. 162(m). This deduction limitation applies for purposes of the regular income tax and the
alternative minimum tax.
620

Such officers must also be employees whose total compensation is required to be reported to
shareholders under the Securities Exchange Act of 1934.
62 1

Such officers must also be employees whose total compensation is required to be reported to
shareholders under the Securities Exchange Act of 1934.
622

Notice 2007-49 , 2007-25 I.R.B . 1429.

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 reference to the Exchange Act , or (2) among the thre e most highly compensated officers 623 for
the taxable yea r (other than the principal execut ive officer) , again defined by referen ce to the
Exchange Act. Thus , under current guidance , only four emplo yees are cove red under
sect ion l 62(m) for any taxa ble year. Under Treasury regulation s, the requir ement that the
individual mee t the criteria as of the last day of the taxa ble year applies to both the principal
executive officer and the three highe st co mpen sated officers. 624

Definition of publicly held corporation
For purpo ses of the deduction disallowance of section l 62(m), a publicly held
corporation means any corporat ion issuing any class of common equi ty sec urities required to be
registered under sect ion 12 of the Sec uritie s Exchange Act of 1934. All U.S. publicly traded
companies are subje ct to thi s registration requirement , includin g their foreign affiliates (to the
ex tent subject to U.S. tax). A foreign co mp any publicly traded throu gh American depository
receipts ("A D Rs") is also subj ect to thi s registration requirement if more than 50 percen t of the
issuer 's outstanding votin g securitie s are held, directly or indir ectly, by residents of United States
and either (i) the majority of the executive officers or directors are United States citize ns or
residents , (ii) more than 50 per cent of the assets of the issuer are loca ted in the Un ited States , or
(iii) the bu siness of the issuer is administered principally in the United States. Oth er foreign
compan ies are not subj ect to the registration requirement.

Remuneration subject to the deduction limitation

In genera l
Un less spec ifically excl uded , the deduction limitation app lies to all remunera tion for
serv ices, includin g cas h and the cash va lue of all remuneration (includin g benefits) paid in a
medium other than cash. If an indi vidual is a cove red emplo yee for a taxable year , the deduction
limitation applies to all comp ensa tion not explic itly ex clud ed from the deduction lim itation,
regardless of whe ther the compensation is for services as a cove red em plo yee and regardless of
when the compensation was earn ed. Th e $1 million cap is reduced by excess parachute
payments (as defined in sect ion 280G) that are not deductible by the corporation.
Certain types of comp ensa tion are not subje ct to the deductio n lim it and are not taken
into account in determining whe ther othe r com pensa tion excee ds $ 1 million. The following
types of co mpensat ion are not taken into account: (1) remu neration payable on a co mmi ssion
basis ; (2) remuneration payable so lely on account of the attainment of one or mor e performance
goals if certain outside dir ector and shareho lder approval requirements are met
(" performan ce-ba sed co mp ensatio n"); (3) paym ents to a ta x-favored retireme nt plan (includin g
salary reduction contribution s); (4) amounts that are excludable from the executive's gross

623

Such officers must also be employees whose total compensation is required to be reported to
shareholders under the Securities Exchange Act of 1934.
624

Treas. Reg. sec. l.l 62-27(c)(2).

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TREAS-17-0313-I-000223

 income (such as employer-provided health benefits and miscellaneous fringe benefits 625); and
(5) any remuneration payable under a wr itten binding contract which was in effect on
February 17, 1993. In addition , remuneration does not include compensation for which a
deduction is allowable after a covered employee ceases to be a covered employee. Thus , the
deduction limitation often does not apply to deferred compensation that is otherwise subject to
the deduction limitation (e.g., is not performance-based compensation) because the payment of
compensation is deferred until after termination of employment.
Performance-based compensation
Compensation qualifies for the exception for performance-based compensation only if
(1) it is paid solely on account of the attainment of one or more performance goals, (2) the
performance goals are established by a compensation committee consisting solely of two or more
outside directors ,626 (3) the material terms under which the compensation is to be paid, including
the performance goals, are disclosed to and approved by the shareholders in a separate majorityapproved vote prior to payment , and (4) prior to payment , the compensation committee certifies
that the performance goals and any other material term s were in fact satisfied.
Compensation (other than stock options or other stock appreciation rights ("SARs")) is
not treated as paid solely on account of the attainment of one or more performance goals unless
the compensation is paid to the particular executive pursuant to a pre-established objective
performance formula or standard that precludes discretion. A stock option or SAR with an
exercise price not less than the fair market value, on the date the option or SAR is granted , of the
stock subject to the option or SAR, generally is treated as meeting the exception for
performance-based compensation , provided that the requirements for outside director and
shareholder approval are met (without the need for certification that the performance standards
have been met). This is the case because the amount of compensation attributable to the options
or SARs received by the executive would be based solely on an increase in the corporation 's
stock price. Stock-based compensation is not treated as performance-based if it depends on
factors other than corporate performance.
Description of Proposal
Definition of covered employee

The proposal revises the definition of covered employee to include both the principal
executive officer and the principal financial officer. Further, an individual is a covered employee
if the individual holds one of these positions at any time during the taxable year. The proposal
also defines as a covered employee the three (rathe r than four) most highly compensated officers
for the taxable year (other than the principal executive officer or principal financial officer) who
625

Secs. I 05, I06, and 132.

626
A director is considered an outside director ifhe or she is not a current employee of the corporation (or
related entities), is not a former employee of the corporation (or related entities) who is rece iving compensation for
prior services (other than benefits under a qualified retirement p lan), was not an officer of the corporation (or re lated
entities) at any time, and is not currently receiving compensation for personal serv ices in any capacity (e.g ., for
services as a consultant) other than as a director.

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TREAS-17-0313-I-000224

 are required to be reported on the company ' s proxy statement for the taxable year (or who would
be required to be reported on such a statement for a company not required to make such a report
to shareholders).

In addition , if an individual is a covered employee with respect to a corporation for a
taxable year beginning after December 31, 2016 , the individual remains a covered employee for
all future years. Thus , an individual remains a covered employee with respect to compensation
otherwise deductible for subsequent years, including for years during which the individual is no
longer employed by the corporation and years after the individual has died. Compensation does
not fail to be compensation with respect to a covered employee and thus subject to the deduction
limit for a taxable year merely because the compensation is includible in the income of, or paid
to, another individual , such as compensation paid to a beneficiary after the employee's death , or
to a former spouse pursuant to a domestic relations order.
Definition of publicly held corporation
The proposal extends the applicability of section 162(m) to include all domestic publicly
traded corporations and all foreign companies publicly traded through ADRs. The proposed
definition may include certain additional corporations that are not publicly traded , such as large
private C or S corporations.
Performance-based compensation and commissions exceptions
The proposal eliminates the exceptions for commissions and performance-based
compensation from the definition of compensation subject to the deduction limit. Thus , such
compensation is taken into account in determining the amount of compensation with respect to a
covered employee for a taxable year that exceeds $1 million and is thus not deductible under
section 162.
Effective Date
The proposal applies to taxable years beginning after December 31, 2017.
3. Excise tax on excess tax-exempt organization executive compensation
Present Law
Taxable employers and other service recipients are generally allowed a deduction for
reasonable compensation expenses. 627 However , in some cases, compensation in excess of
specific levels is not deductible.
In the case of a publicly held corporation , subject to certain exceptions , the deduction for
a taxable year for compen sation of the corporation ' s principal executive officer or for any of the

627

Sec . 162(a)( I).

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TREAS-17-0313-I-000225

 corporation's three most highly compensated officers other than the principal executive officer is
limited to $1 million ("$1 million limit on deductible compensation"). 628
A "parachute payment" (generally a payment of compensation that is contingent on a
change in corporate ownership or control) made to an officer , shareholder or highly compensated
individual is generally not deductible if the aggregate present value of all such payments to an
individual equals or exceeds three times the individual's base amount (an " excess parachute
payment"). 629 An individual's base amount is the average annual compensation includible in the
individual ' s gross income for the five taxable years ending before the date the change in
ownership or control occurs. Certain amounts are not considered parachute payments , including
payments under a qualified retirement plan , a simplified employee pension plan , or a simple
retirement account. 630
These deduction limits generally do not affect a tax-exempt organization.

Description of Proposal
Under the proposal , an employer is liable for an excise tax equal to 20 percent of the sum
of the (1) remuneration (other than an excess parachute payment) in excess of $1 million paid to
a covered employee by an applicable tax-exempt organization for a taxable year , and (2) any
excess parachute payment (under a new definition for this purpose that relates solely to
separation pay) paid by the applicable tax-exempt organization to a covered employee.
Accordingly , the excise tax applies as a result of an excess parachute payment , even if the
covered employee ' s remuneration does not exceed $1 million.
For purposes of the proposal , a covered employee is an employee (including any former
employee) of an applicable tax-exempt organization if the employee is one of the five highest
compensated employees of the organization for the taxable year or was a covered employee of
the organization (or a predecessor) for any preceding taxable year beginning after December 31,
2016. An "applicable tax-exempt organization " is an organization exempt from tax under
section 501(a) , an exempt farmers ' cooperative , 631 a Federal , State or local governmental entity
with excludable income ,632 or a political organization. 633

628

Sec . 162(m)( 1). Under section 162(m)(6), limits apply to deduc tions for comp ensation of individuals
performin g services for certain heal th insurance providers.
629

Sec . 280G.

630

Secs. 40 1(a), 403(a), 408( k), and 408(p).

631

Sec. 521(b) .

632

Sec . 115( 1).

633

Sec . 527(e) (I) .

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TREAS-17-0313-I-000226

 Remuneration means wages as defined for income tax withholding purpo ses, 634 but does
not include any designated Roth contribution. 635 Remuneration of a covered employee includes
any remuneration paid with respect to employment of the covered employee by any person or
governmental entity related to the applicable tax-ex empt organization. A person or
governmental entity is treated as related to an applicable tax-exempt organization if the person or
governmental entity (1) controls , or is controlled by, the organization , (2) is controlled by one or
more persons that control the organization , (3) is a supported organization 636 during the taxable
year with respect to the organization , (4) is a supporting organization 637 during the taxabl e year
with respect to the organization, or (5) in the case of a voluntary employees' benefic iary
association ("VEBA") ,638 establishes , maintain s, or makes contributions to the VEBA.
However , remuneration of a covered employee that is not deductible by reason of the $1 million
limit on deductible compensation is not taken into account for purposes of the propo sal.
Under the proposal , an excess parachut e payment is the amount by which any parachute
payment exceeds the portion of the base amount allocated to the payment. A parachute payment
is a payment in the nature of compensation to (or for the benefit of a covered employee) if the
payment is contingent on the employee's separation from employm ent and the aggregate present
value of all such payments is three times or more the base amount. The base amount is the
average annual compensation includible in the covered employee's gross income for the five
taxable years ending before the date of the employee's separation from employment. Parachute
payment s do not include payment s under a qua lified retirement plan, a simplified employee
pension plan, a simple retirement account , a tax-deferred annuity , 639 or an eligible deferred
compensation plan of a State or local government employer. 640
The employer of a covered employee is liable for the excise tax. If remunerati on of a
covered employee from more than one employer is taken into account in determining the excise
tax, each employer is liable for the tax in an amount that bears the same ratio to the total tax as
the remuneration paid by that employer bears to the remuneration paid by all employers to the
covered employee.

634

Sec. 3401 (a).

635

Under section 402A(c) , a designat ed Roth contr ibution is an elective deferral (that is, a contribu tion to a
tax-favored employer-sponsored retirement plan made at the election of an employ ee) that the emp loyee designates
as not being excludable from income.
636

Sec. 509(f)(3).

637

Sec. 509(a)(3).

638

Sec. 501(c)(9).

639

Sec. 403(b).

640

Sec. 457(b).

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TREAS-17-0313-I-000227

 Effective Date
The proposal applies to taxable years beginn ing after December 31, 2017.

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TREAS-17-0313-I-000228

 TITLE IV-TAXATION

OF FOREIGN INCOME AND FOREIGN PERSONS

I. PRESENT LAW
Present law combines taxation of all U.S. persons on their worldwide income, whether
derived in the United States or abroad , with limited deferral of taxation of income earned by
foreign subsidiaries of U.S. companies and source-based taxation of the U.S.-source income of
nonresident aliens and foreign ent ities. Under this system (someti mes described as the U.S.
hybrid system), the application of the Code differs depending on whether income arises from
outbound investment or inbound investment. Outbound investment refers to the foreign
activities of U.S. persons , while inbound investment is investment by foreign persons in U.S.
assets or activities , although certain rules are common to both inbound and outbound activities.

A. Principles Common to Inbound and Outbound Taxation
Although the U.S. tax rules differ dependin g on whether the activity in question is
inbound or outbound , there are certain concepts that apply to both inbound and outbound
investme nt. Such areas include the transfer pricing rules, entity classification , the rules for
determination of source , and whether a corporation is foreign or domestic.
1. Residence

U.S. persons are subject to tax on their worldwide income. The Code defines U.S. person
to include all U.S. citizens and residents as well as domestic entities such as partnerships ,
corporations , estates and certain trusts. 641 The term "resident" is defined only with respect to
natural persons. Noncitizens who are lawfully admitted as permanent residents of the United
States in accordance with immigration laws (colloquially referred to as green card holders) are
treated as residents for tax purposes. In addition , noncitizens who meet a substant ial presence
test and are not otherwise exempt from U.S. taxation are also taxable as U.S. residents. 642
For legal entities , the Code determines whether an entity is subject to U.S. taxation on its
worldwide income on the basis of its place of organization. For purposes of U.S. tax law, a
corporation or partnership is treated as domestic if it is organized or created under the laws of the
United States or of any State, unless , in the case of a partnership , the Secretary prescribes
otherwise by regulation. 643 All other partnerships and corporations (that is, those organized
under the laws of foreign countries) are treated as foreign. 644 In contrast , place of organization is
not determinative of residence under taxing jurisdictions that use factors such as situs ,
management and control to determine residence . As a result, lega l entities may have more than
641

Sec. 770l(a)(30).

642

Sec. 7701(b).

643

Sec. 7701 (a)(4).

644
Secs. 770 1(a)(5) and 770l(a)(9). Entities organi zed in a possession or territory of the United States are
not considered to have been organi zed under the laws of the United States.

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TREAS-17-0313-I-000229

 one tax residence , or, in some case, no residence. 645 Only domestic corporations are subject to
U.S. tax on a worldwide basis. Foreign corporations are taxed only on income that has a
sufficient connection with the United States.
Tax benefits otherwise available to a domestic corporation that migrates its tax home
from the United States to foreign jurisdiction may be denied to such corporation, in which case it
continues to be treated as a domestic corporation for ten years following such migration . 646
These sanctions generally apply to a transaction in which, pursuant to a plan or a series of related
transactions: (1) a domestic corporation becomes a subsidiary of a foreign-incorporated entity or
otherwise transfers substantially all of its properties to such an entity in a transaction completed
after March 4, 2003; (2) the former shareholders of the domestic corporation hold (by reason of
the stock they had held in the domestic corporation) at least 60 percent but less than 80 percent
(by vote or value) of the stock of the foreign-incorporated entity after the transaction (this stock
often being referred to as "stock held by reason of,,); and (3) the foreign-incorporated entity,
considered together with all companies connected to it by a chain of greater than 50 percent
ownership (that is, the "ex panded affiliated group,,), does not have substantial business activities
in the entity's country of incorporation , compared to the total worldwide business activities of
the expanded affiliated group. 647
The Treasury Department and the IRS have promulgated detailed guidance, through both
regulations and several notices , addressing these requirements under section 7874 since the
section was enacted in 2004, 648 and have sought to expand the reach of the section or reduce the
tax benefits of invers ion transactions. For example, Notice 2014-52 announced Treasury 's and
the IRS ,s intention to issue regulations and took a two-pronged approached. First, it addressed
the treatment of cross-border combination tran sactions themsel ves. Second, it addressed posttransaction steps that taxpayers may undertake with respect to US-owned foreign subsidiaries
making it more difficult to access foreign earnings without incurring added U.S. tax. On
November 19, 2015, Trea sury and the IRS issued Notice 2015-79, which announced their intent
to issue further regulations to limit cross-border merger transactions , expanding on the guidance
645

"The notion of corporate residence is an important touchstone of taxation, however , in many foreign
income tax systems[ ,]" witb the result that tbe bilateral ITeatiesare often relied upon to resolve conflicting claims of
taxing jurisdiction. Joseph Isenbergh, Vol. I U.S. Taxation of Foreign Persons and Foreign Income , Para. 7.1
(Fourth Ed. 2016).
646

Sec. 7874.

647

Section 7874(a). In addition , an excise tax may be imposed on certain stock compensation of
executives of companies that undertake inversion transactions. Sec. 4985.
648

Notice 2015 -79, 2015 I.R.B. LEXIS 583 (Nov. 19, 2015) , which announced their intent to issue further
regulations to limit cross-border merger transactions , expanding on the guidance issued in Notice 2014-52. On
April 4, 2016, Tr easury and the IRS issued proposed and temporary regulations (T .D. 976 1) that incorporate the
mies previously announced in Notice 2014-52 and Notice 2015- 79 and a new multiple domestic entity acquisition
mle. On January 13, 2017 , Treasury and the IRS issued fuial and temporary regulations under section 7874 (T.D.
9812) , which adopt , with few changes , prior temporary and proposed regulations , which identify certain stock of an
acquiring foreign corporation that is disregarded in calculating the ownership of the foreign corporation for purposes
of section 7874 .

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TREAS-17-0313-I-000230

 issued in Notice 2014-52. In 2016, Treasury and the IRS issued proposed and temporary
regulations that incorporate the rules previously announced in Notice 2014-52 and Not ice 201579 and a new multiple domestic entity acquisition rule. 649
In early 20 17, Treasury issued final and temporary regulations 650 that adopt, with few
changes, the 2016 temporary and proposed regulations.

2. Entity classification
Certain entities are eligible to elect their classification for Federal tax purposes under the
"check-the-box " regulations adopted in 1997.651 Those regulations simplified the entity
classification process for both taxpayers and the IRS by making the entity classification of
unincorporated entities explicitly elective in most instances. 652 The eligibility to elect and the
breadth of an entity's choices depend upon whether it is a "per se corporation" and its number of
beneficial owners. Foreign as well as domestic entities may make the election . As a result, it is
possible for an entity that operates across countries to be treated as a hybrid entity. A hybrid
entity is one which is treated as a flow-through or disregarded entity for U.S. tax purposes but as
a corporation for foreign tax purposes. For "reverse hybrid entities," the oppos ite is true . The
election can affect the determination of the source of the income , availabi lity of tax credits, and
other tax attributes .

3. Source of income rules
The rules for determining the source of certain types of income are specified in the Code
and described briefly below . Various factors determine the source of income for U.S. tax
purposes , including the status or nationality of the payor , the status or nationality of the recipient ,
the location of the recipient's activit ies that generate the income, and the locat ion of the assets
that generate the income. To the extent that the source of income is not specified by statute, the
Treasury Secretary may promulgate regulations that explain the appropriate treatment. However ,
649

T.D. 9761, April 4, 2016. But see , Chamber of Commerce v Int ernal Revenue Service , Cause No l:16CV-944 -LY (W.D. Tex. Sept. 29, 20017) , grantin g swmn ary jud gment to plaintiffin challenge to temporary
regulat ions based on lack of compliance with Administrative Procedur e Requirements.
650

T.D. 9812 , January 13,2017 .

651

Treas. Reg. sec. 301.7701 -1, et seq .

652

The check-the-box regulations replaced Treas. Reg. sec. 30 1.7701 -2, as in effect prior to 1997, under
which the classification of unincorporat ed entities for Federal tax purpose s was determined on the basis of a four
characteristics indicative of status as a corporation: continuity of life, centralization of management , limited
liability , and free transferability of interests. An entity that possessed three or more of these characteristics was
treated as a corporation ; if it possessed two or fewer , then it was treated as a partnership. Thus, to achieve
characterization as a partnership Ullder this system , taxpayers needed to arran ge the governin g instruments of an
entity in such a way as to eliminate two of these corporate characteristics. The advent and proliferation oflimited
liability companies ("LLCs ") Ullder State laws allowed business owners to create customi zed entities that possessed
a critical common featur e- limited liabi lity for investors - as we ll as other corporate characteristics the owners
found desirable . As a consequence, classification was effectively electi ve for well-advised taxpayers.

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TREAS-17-0313-I-000231

 many items of income are not explicitly addressed by either the Code or Treasury regulations ,
sometimes resulting in non taxation of the income. On severa l occasions, courts have determined
the source of such items by applying the rule for the type of income to whic h the disputed
income is most closely ana logous, based on all facts and circumstances. 653
Interest
Interest is derived from U.S. sources if it is paid by the Un ited States or any agency or
instrumentality thereof , a State or any polit ical subdivision thereof , or the District of Columbia .
Interest is also from U.S. sources if it is paid by a resident or a domestic corporation on a bond ,
note, or other interest-bear ing obligation. 654 Special rules apply to treat as foreign-source certain
amounts paid on deposits with foreign comme rcial banking branches of U.S. corporat ions or
partnerships and certain other amounts paid by foreign branches of domestic financial
institutions.655 Interest paid by the U.S. branch of a foreign corporat ion is also treated as US.source income. 656
Dividends
Dividend income is generally sourced by reference to the payor's place of
incorporation. 657 Thus, dividends paid by a domestic corporation are genera lly treated as
entirely U.S.-source income. Similarly, dividends paid by a foreign corporation are generally
treated as entirely foreign-sou rce income. Under a special rule , dividends from certain foreign
corporations that conduct U.S. busine sses are treated in part as U.S.-source income. 658
Rents and royalties
Rental income is sourced by reference to the location or place of use of the leased
property. 659 The nationalit y or the country of residence of the lessor or lessee does not affect the
source ofre ntal income. Rental income from property located or used in the United States (or
from any interest in such property) is U.S.-source income, regardless of whether the property is
real or personal , intangible or tangible.

653

See, e.g., Hunt v. Commissione r, 90 T.C. 1289 (1988).

654

Sec. 861(a)(I); Treas. Reg. sec. 1.861-2(a)(I).

655

Secs. 861 (a)( 1) and 862(a)( 1). For purposes of certain repo rting and withholding obligations the source
mle in section 861 (a)( 1)(B) does not apply to interest paid by the foreign branch of a domestic financial institution.
This results in the payment being treated as a withhold able payment. Sec. 1473(l)(C).
656

Sec. 884(f)(l ).

657

Secs. 86l(a)(2), 862(a)(2) .

658

Sec . 861(a)(2)(B).

659

Sec . 86l(a)(4).

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TREAS-17-0313-I-000232

 Royalties are sourced in the place of use of (or the place of privilege to use) the property
for which the royalties are paid. 660 This source rule applies to royalties for the use of either
tangible or intangible property , including patents, copyrights , secret processes , formulas,
goodwill, trademarks , trade names , and franchises.
Income from sales of personal property
Subject to significant exceptions, income from the sale of personal property is sourced on
the basis of the residence of the seller. 661 For this purpose, special definitions of the terms "U.S.
resident" and "nonresident" are provided. A nonresident is defined as any person who is not a
U.S. resident, 662 while the term "U.S. resident" comprises any juridical entity which is a U.S.
person , all U.S. citizens, as well as any individual who is a U.S. resident without a tax home in a
foreign country or a nonresident alien with a tax home in the United States. 663 As a result,
nonresident includes any foreign corporation. 664
Several special rules apply. For example, income from the sale of inventory property is
generally sourced to the place of sale, which is determined by where title to the property
passes. 665 However, if the sale is by a nonresident and is attributable to an office or other fixed
place of business in the United States, the sale is treated as income from U.S. sources without
regard to the place of sale, unless it is sold for use, disposition , or consumption outside the
United States and a foreign office materially participates in the sale. 666 Income from the sale of
inventory property that a taxpayer produces (in whole or in part) in the United States and sells
outside the United States, or that a taxpayer produce s (in whole or in part) outside the United
States and sells in the United States, is treated as partly U.S.-source and partly foreign-source. 667

660

Ibid.

66 1

Sec. 865(a).

662

Sec. 865(g)( I)(B).

663

Sec. 865(g)( l)(A).

664

Sec. 865(g).

665

Secs. 865(b), 86 l (a)(6), 862(a)(6); Treas. Reg. sec. l.86l-7(c).

666

Sec. 865(e)(2).

667
Sec. 863(b). A taxpayer may elect one of three methods for allocating and apportioning income as
U.S.- or foreign-source: (l) the 50-50 method under which 50 percent of the income from the sale of inventory
property in such a situation is attributable to the production activities and 50 percent to the sales activities, with the
income sourced based on the location of those activit ies; (2) independen t factory price ("IFP") method under which,
in certain circumstances, an IFP may be established by the taxpayer to determine income from production activities ;
(3) the books and records method under which , with advance permission, the taxpayer may use books of account to
detail the allocation ofreceipts and expenditures betwee n production and sales activities. Treas. Reg. sec. l.8633(b ), (c). If production activity occurs only with.in the United States , or only withi n foreign countries , then all
income is sourced to where the production activ ity occurs; when production activit ies occur in both the United
States and one or more foreign countries, the income attributable to production activities must be split between U.S.

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TREAS-17-0313-I-000233

 In determining the source of gain or loss from the sale or exchange of an interest in a
foreign partnership , the IRS has taken the position that to the extent that there is unrealized gain
attributable to partnership assets that are effect ive ly connected with the U.S. business, the foreign
person 's gain or loss from the sale or exchange of a partnership interest is effectively connected
gain or loss to the extent of the partner 's distributive share of such unrealized gain or loss, and
not capital gain or loss. Similarly, to the exten t that the partner 's distributive share of unrealized
gain is attributable to a permanent estab lishm ent of the partnership under an applicable treaty
provision , it may be subject to U.S. tax under a treaty. 668
Gain on the sale of depreciable property is divided between U.S.-so urce and foreignsource in the same ratio that the depreciation was previously deductible for U.S. tax purposes. 669
Payments received on sales of intangible property are sourced in the same manner as royalties to
the extent the payments are con tingent on the productivity , use, or disposition of the intangib le
property. 670
Personal serv ices income
Compensation for labor or perso nal serv ices is generally sourced to the place-ofperformance. Thus, compensation for labor or personal services performed in the United States
generally is treated as U.S.-source income , subject to an exception for amounts that meet certain
de minimis criteria.671 Compe nsat ion for serv ices performed bot h with in and w ithout the United
States is allocated between U .S.-and foreign-source. 672
Insurance income
Underwriting income from issuing insurance or annuit y contracts generally is treated as
U.S.-source income if the contract involves property in, liability arising out of an activity in, or
the lives or health of residents of, the United States. 673

and foreign sources. Treas. Reg. sec. l .863-3(c)(l). The sales activity is generally sourced based on where title to
the property passes. Treas. Reg. secs. l.863-3(c)(2) , l.86 l -7(c).
668
Rev. Rul. 91-32, 1991-1 C.B. 107. But see, Grecian Magnesite Mining, industrial & Shipping Co. SA v
Commissioner, 149 T.C. No. 3 (2017).
669

Sec. 865(c).

670

Sec. 865(d).

671

Sec. 861(a)(3). Gross income ofa nonresident alien individual , who is present in the United States as a
member of the regular crew of a foreign vessel, from the performance of personal services in connection with the
international operation of a ship is generally treated as foreign-source income.
672

Treas. Reg. sec. l.861 -4(b) .

673

Sec. 861(a)(7).

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TREAS-17-0313-I-000234

 Transportation income
Sources rules generally provide that income from furnishing transportation that both
begins and ends in the United States is U.S.-source income, 674 and SO-percent of income
attributable to transportation that either begins or the ends in the United States is treated as
U.S.-source income. However , to the extent that the operator of a shipping or cruise line is
foreign, its ownership structure and the maritime law 675 applicable for determining what
constitutes international shipping as we ll as specific income tax provisions combine to create an
industry-specific departure from the rules generally applicable. 676
Income from space or ocean activities or international communications

In the case of a foreign person , generally no income from a space or ocean activity or
from international communications is treated as U.S.-source income. 677 With respect to the latter ,
an exception is provided if the foreign person maintains an office or other fixed place of business
in the United States, in which case the international communications income attributable to such
fixed place of busines s is treated as U.S.-source income. 678 For U.S. per sons, all income from
space or ocean activities and 50 percent of income from international communications is treated
as U.S.-source income.
Amounts received with respect to guarantees of indebtedness
Amounts received, directl y or indirectly , from a noncorporate resident or from a dome stic
corporation for the provision of a guarantee of indebtedness of such per son are income from U.S.

674

Sec. 863(c).

675

U.S. law on navigation is codified in U.S. Code at title 33, and is in tum consistent with the body of
international maritime law. The normative principles of international maritime law for determining the maritime
zones and territorial sovereignty over seas are embodied in the United Nations Convention on the Law of the Sea,
first opened for signature in 1982. Since 1983, the Executive Branch bas agreed that the treaty is generally
consistent with existing internat ional nom1s of the law of the sea and that the United States would act in conformity
to the principles of the treaty other than those portions regarding deep seabed exploitat ion, even in the absence of
ratification of the treaty.
676

Due to the regulatory framework for aviation , an international flight must either originate or conclude in
the country of residence of the airline 's owner , where income tax for the international flight is assessed. In contrast
to international shipping , international aviation cannot be carried out using flags-of-convenience. Thus , although tax
law treats shipping and aviation similarly, the differences between the two industries and the applicable regulatory
regimes produce different tax outcomes. Full territorial sovereignty applies within 12 nautical 1niles of one 's coast;
the contiguous waters beyond 12 nautical miles but up to 24 nautical miles are subject to some regulation. Within
200 nautical miles, a country may assert an economic zone for exploitation of living marine resources and some
minerals. Beyond 200 nautical miles are the "high seas" in which no soverei gn state may assert exclusive
jurisdiction.
677

Sec. 863(d).

678

Sec . 863(e).

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 sources. 679 This includes payments that are made indirectly for the provision of a guarantee. For
example, U.S.-source income under this rule includes a guarantee fee paid by a foreign bank to a
foreign corporation for the foreign corporation 's guarantee of indebtedness owed to the bank by
the foreign corporation's domestic subsidiary , where the cost of the guarantee fee is passed on to
the domestic subsidiary through , for instance, additional interest charged on the indebtedness. In
this situation, the domest ic subsidiary has paid the guarantee fee as an economic matter through
higher interest costs, and the additional interest payments made by the subsidiary are treated as
indirect payments of the guarantee fee and, therefore , as income from U.S. sources.
Such U.S.-source income also includes amounts received from a foreign person , whether
directly or indirectly, for the provision of a guarantee of indebtedness of that foreign person if
the payments received are connected with income of such person that is effective ly connected
with the conduct of a U.S. trade or business. Amounts received from a foreign person , whether
directly or indirectly, for the provision of a guarantee of that person's debt, are treated as foreignsource income if they are not from sources within the United States under section 861 (a)(9).
4. Intercompany transfers
Transfer pricing
A basic U.S. tax principle applicable in dividing profits from transactions between related
taxpayers is that the amount of profit allocated to each related taxpayer must be measured by
reference to the amount of profit that a similarly situated taxpayer would realize in similar
transactions with unrelated parties. The transfer pricing rules of section 482 and the
accompanying Treasury regulations are intended to preserve the U.S. tax base by ensuring that
taxpayers do not shift income properly attributable to the United States to a related foreign
company through pricing that does not reflect an arm's-length result. 680 Similarly, the domestic
laws of most U.S. trading partners include rules to limit income shifting through transfer pricing.
The arm's-le ngth standard is difficult to administer in situations in which no unrelated party
market prices exist for transactions between related parties . When a foreign person with U.S.
activities has transactions with related U.S. taxpayers , the amount of income attributable to U.S.
activities is determined in part by the same transfer pricing rules of section 482 that apply when
U.S. persons with foreign activities transact with related foreign taxpayer s.

679
Sec. 86I(a)(9). This provision effects a legislative override of the opinion in Container Corp. v.
Commissioner, 134 T.C. 122 (February 17, 2010) , affd 2011 WL1664358 , 107 A.F.T.R.2d201 l-1831 (5th Cir.

May 2, 2011) , in which the Tax Court beld that fees pa id by a domestic corporation to its foreign parent with respect
to guarantees issued by the parent for the debts of the domestic corporation were more closely analogous to
compensation for services than to interest , and determined that the source of the fees should be determined by
reference to the residence of the foreign parent-guarantor. As a result , the income was treated as income from
foreign sources.
680

For a detailed description of the U.S. transfer pricing rules, see Joint Committee on Taxation, Present
Law and Background Related to Possible Income Shifting and TransferPricing (JCX-37-10), July 20, 2010, pp. 1850.

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 Section 482 authorizes the Secretary of the Treasury to allocate income , deductions,
credits, or allowances among related business entities 681 when necessary to clearly reflect
income or otherwise prevent tax avoidance , and comprehensive Treasury regulations under that
section adopt the arm's-length standard as the method for determining whether allocations are
appropriate. 682 The regulations generally attempt to identify the respective amounts of taxable
income of the related parties that would have resulted if the parties had been unrelated parties
dealing at arm's length. For income from intangib le property , section 482 prov ides "in the case
of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)),
the income with respect to such transfer or license shall be commensurate with the income
attributable to the intangible ." By requiring inclusion in income of amounts commensurate with
the income attributable to the intangible, Congress was responding to concerns regarding the
effectiveness of the arm's-length standard with respect to intangible property-including , in
particular , high-profit-potential intangibles. 683
Gain recognition on outbound transfers

If a transfer of intangible property to a foreign affiliate occurs in connection with certain
corporate transactions , nonrecognition rules that may otherwise apply are suspended. The
transferor of intangible property must recognize gain from the transfer as though he had sold the
intangible (regardless of the stage of development of the intangible property) in exchange for
payments contingent on the use , productivit y or disposition of the transferred property in
amounts that would have been received either annually over the useful life of the property or
upon disposition of the property after the transfer. 684 The appropriate amounts of those imputed
payments are determined using transfer-pricing principles. Final regulations issued in 2016
eliminate an exception under temporary regulations that permitted nonrecognition of gain from
outbound transfers of foreign goodwill and going concern value. However, the Secretary
announced that reinstatement of an exception for active trade or business is under consideration
for cases with little potential for abuse and administrative difficulties. 685

68 1

The tenn "re lated" as used herein refers to relationships described in section 482, which refers to "two
or more organizations , trades or businesses (whether or not incorporated , whether or not organized in the United
States , and whether or not affiliated) owned or controlled directly or indirectly by the same interests."
682 Section l059A buttresses section 482 by limiting the extent to which costs used to determine custom
valuat ion can also be used to determine basis in property impor ted from a related party. A taxpayer that imports
property from a related party may not ass ign a value to the property for cost purposes that exceeds its customs value.
683

H.R. Rep. No. 99-426, p. 423.

684

Sec. 367(d).

685

See, T.D. 9803, 81 F.R. 91012 (December 17, 2016). Treas. Reg. sec. l.367(d)-l(b) Property subject to
section 367(d). now provides that tbe rules of section 367(d) apply to transfers of intangible property as defined
under Treas. Sec. 1.367(a)-I (d)(5) after September 14, 2015 , and to any transfers occurring before that date resulting
from entity classification elections filed on or after September 15, 2015 . Noting that comrnenters on the regulations
bad cited legislative history that contemplated active business exceptions , Treasury announced the reconsideration
of the rule. U.S. Treasury Department , Se cond Report to the President on Identifying and Reducing Tax Regulatory
Burden s, Exe cutive Order I 3789 October 2, 2017, TNT Doc 2017-72131. The relevant legislative history is found

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 B. U.S. Tax Rules Applicable to Nonresident Aliens
and Foreign Corporations (Inbound)
Nonresident aliens and foreign corporations are generally subject to U.S. tax only on their
U.S.-source income. Thus, the source and type of income received by a foreign person generally
determines whether there is any U.S. income tax liability and the mechanism by which it is
taxed. The U.S. tax rules for U.S. activities of foreign taxpayers apply differently to two broad
types of income: U.S.-source income that is "fixed or determinable annual or periodical gains,
profits , and income " ("FDAP income ") or income that is "effect ively connected with the conduct
of a trade or business within the United States" ("ECI"). FDAP income generally is subject to a
30-percent gross-basis tax withheld at its source, while ECI is generally subject to the same U.S.
tax rules that apply to business income derived by U.S. persons. That is, deductions are
permitted in determining taxable ECI, which is then taxed at the same rates applicable to U.S.
persons. Much FDAP income and similar income is, however , exempt from tax or is subject to a
reduced rate of tax under the Code 686 or a bilateral income tax treaty. 687
1. Gross-basis taxation of U.S.-source income

Non-business income recei ved by foreign persons from U.S. sources is generally subject
to tax on a gross basis at a rate of 30 percent , which is collected by withholding at the source of
the payment. As explained below , the categories of income subject to the 30-percent tax and the
categories for which withholding is required are generally coextensive, with the result that
determining the withholding tax liability determines the substantive liability.
The income of non-resident aliens or foreign corporations that is subject to tax at a rate of
30-percent includes FDAP income that is not effectively connected with the conduct of a U.S.
trade or busine ss. 688 The items enumerated in defining FDAP income are illustrative ; the
common characteristic of types of FDAP income is that taxes with respect to the income may be
readily computed and collected at the source, in contrast to the administrative difficulty invol ved
in determinin g the seller's basis and resulting gain from sales of property. 689 The words "ann ual
or periodical" are "merely gene rally descriptive" of the payments that could be within the
at in H.R. Rep. No. 98-432, 98 th Cong., 2d Sess. l3 I 8-l 320 (March 5, 1984) and Conference Report , H.R. Rep. No.
98-861, 98 th Cong. 2d Sess. 95 1-957 (June 23, 1984).
686

E.g., the portfolio interest exception in sect ion 871 (h) (d iscussed below).

687

Because each treaty reflects considerations unique to the relationship between the two treaty countries ,
treaty withholding tax rates on each category of income are not uniform across treaties.
688

Secs. 871 (a), 881. If the FDAP income is also ECI, it is taxed on a net basis , at graduated rates.

689
Commissioner v. Wodehouse, 337 U.S. 369, 388-89 (1949). After reviewing legislative history of the
Revenue Act of 1936, the Supreme Court noted that Congress express ly intended to limit taxes on nonresident aliens
to taxes that could be readily collectible , i.e., subject to withholdi ng, in response to "a theoretical system impractical
of administra tion in a great number of cases. H.R. Rep. No. 2475, 74th Cong. , 2d Sess. 9-10 (1936). " In doing so,
the Court rejected P.G. Wodehouse's arguments that an advance royalty payment was not within the purview of the
statutory definition ofFDAP income.

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 purview of the statute and do not preclude application of the withhol ding tax to one-time, lump
sum payments to nonres ident aliens. 690
With respect to income from shipping, the gross basis tax potentially applicable is four
percent , 69 1 unl ess the income is effectively connected with a U.S. trade or business , and thus
subject to the graduated rates , as determined under rules specific to U.S.-source gross
transportation income rather than the more broadly applicable rules defining effect ively
connec ted income in section 864(c). Even if the income is within the purview of those spec ial
rules , it may nevertheless be exempt if the income is derived from the international operation of
a ship or aircraft by a foreign entity organized in a jurisdiction which provides a reciprocal
exempt ion to U.S. entities. 692
Types ofFDAP income
FDAP income encompasses a broad range of types of gross income , but has limited
application to gains on sales of property , including market discoun t on bonds and option
prem iums. 693 Cap ital gains received by nonresident a liens present in the United States for fewer
than 183 days are generally treated as foreign source and are thus not subject to U.S. tax, unless
the gains are effectively connected with a U.S. trade or business ; capital gains received by
nonresident aliens present in the United States for 183 days or more 694 that are treated as income
from U.S. sources are subj ect to gross-bas is taxation .695 In contrast , US-source gains from the
sale or exchange of intangibles are subject to tax and wit hholdin g if they are cont ingent upon the
productivity of the property sold and are not effec tively connected with a U.S. trade or
business. 696
Interest on bank deposits may qualify for exempt ion on two grounds, depending on where
the underlying principal is held on deposit. Interest paid with respect to deposits with domestic

° Commissioner v. Wodehouse, 337 U.S. 369, 393 (1949).

69

691

Sec. 887.

692
Sec. 883(a)(l). In addition , to the extent provided in regulations, income from shipping and aviation is
not subject to the four-percent gross basis tax if the incom e is of a type that is not subject to the reciprocal
exemption for net basis taxation. See sec. 887(b)(l). Comparable rules under section 872(b)(l) ap ply to income of
nonresident alien individuals from shipping operations.

693

Although technically insuranc e premiums paid to a foreign insurer or reinsurer are FDAP income, they
are exempt from withholding under Treas. Reg. sec. l. l 441-2(a)(7) if the insurance contract is subject to the excise
tax under section 4371. Treas. Reg. secs. l.1441-2(b )( l)(i) and l.1441-2(b)(2).
694
For purpos es of this rule, whether a person is considered a resident in the United States is determined
by application of the rules under section 770 I(b).

695

Sec . 87 I(a)(2). In addition , certain capital gains from sales of U.S. real property interests are subject to
tax as effectively connected income (or in some instances as dividend income) under the Foreign Investment in Real
Property Tax Act of 1980 ("FTRPTA") .
696

Secs . 871 (a)( I )(D), 88 I (a)(4).

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 banks and savings and loan associations , and certai n amounts held by insurance companie s, are
U.S.-so urce income but are not subject to the U.S. tax when paid to a foreign person , unless the
interest is effectively connected with a U.S. trade or business of the recipient. 697 Interest on
deposits with foreign branches of domestic banks and domestic savings and loan associations is
not treated as U.S.-so urce income and is thus exemp t from U.S. tax (regardless of whether the
recipi ent is engaged in a U.S. trade or business). 698 Similarl y, interest and original issue discount
on certain short-tern, obligations is also exempt from U.S. tax when paid to a foreign person. 699
Additionally , there is genera lly no information reporting required with respect to payments of
such amounts. 700
Although FDAP income includ es U.S.-so urce portfo lio interest , such interest is
spec ificall y exem pt from the 30-percent gross-bas is tax. Portfolio intere st is any interest
(including original issue discount) that is paid on an obligation that is in registered form and for
which tbe beneficial owner l1as provided to the U.S. withholdin g agent a state ment cert ifying that
the beneficial owner is not a U.S. per son. 701 For obligations issued before March 19, 2012,
portfolio interest also include s interest paid on an obligation that is not in registered form ,
provided that the obligation is shown to be targeted to foreign investors under the conditions
sufficient to establish deductibility of the payment of such interest. 702 Portfolio interest ,
however , doe s not include interest received by a I 0-percent shareholder, 703 certain contingent
interest, 704 interest received by a controlled foreign corporati on from a related person, 705 or

697

Secs. 87l(i)(2)(A) , 881 (d): Treas. Reg. sec. l.1441-l(b)(4)(ii) .

698

Sec. 86l(a)(l)(B) ; Treas. Reg. sec. 1.l441-l(b)(4)(jii).

699

Secs. 87 l( g)(l) (B), 88l(a)(3): Treas. Reg. sec. l.1441-l(b)(4)(iv).

700

Treas. Reg. sec. I .1461-l(c )(2)(ii)(A), (8 ). Regulations require a bank to report interest if the recipieut
is a nouresident alien who resides in a COlllltry with which the United States has a satisfactory exchange of
information program under a bilateral agreement and the deposit is maintained at an office in the United States.
Treas. Reg. secs. l.6049-4(b)(5) and J .6049-8. The lRS publishes lists of the couriu-ies whose residents are sullject
to the rep011ingrequirements, and those cmmti-ies witl1 respect to wh ich the reported information will be
automatically exchanged. Rev. Proc.2017- 3 I, available at https://www.irs.gov/pub/irs-drop /rp-17-31.pdf ,
supplementing Rev. Proc. 2014-64.
701

Sec. 871(h)(2).

702
•

Sec. l 6J(fJ(2 )(B). The exception lo the registration requirem en ts for foreign targeted securities was
repealed in 2010, elTcctive for obligations issued two years afier enactment , thus narrowing the portfolio interest
exemption for obligations issued after March 18, 2012. See Hiring Incent ives to Restore Employment Law of 20 10,
Pub. L. No. 111-147, sec. 502(b).
703

Sec. 87 l(h)(3 ).

70

Sec. 87101)(4).

"

705

Sec. 88l(c)(3)(C).

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 interest received by a bank on an extension of credit made pursuant to a loan agreement entered
into in the ordinary course of its trade or business. 706
Imposition of gross-basis tax and reporting by U.S. withholding agents
The 30-percent tax on FDAP income is generally collected by means ofwithholding. 707
Withholding on FDAP payments to foreign payee s is required unless the withholding agent , 708
i.e., the person making the payment to the foreign person recei ving the income , can establish that
the beneficial owner of the amount is eligible for an exemption from withholding or a reduced
rate of withholding under an income tax treaty .709 The principal statutory exemptions from the
30-percent tax apply to interest on bank deposits , and portfolio interest , described above. 710

In many instances , the income subject to withholding is the only income of the foreign
recipient that is subject to any U.S. tax. N o U.S. Federal income tax return from the foreign
recipient is required with respect to the income from which tax was withheld , if the recipient has
no ECI income and the withholding is sufficient to satisfy the recipient ' s liability. Accordingly ,
although the 30-percent gross-basis tax is a withholding tax, it is also generally the final tax
liability of the foreign recipient (unless the foreign recipients files for a refund).
A withholding agent that makes payments of U.S.- source amounts to a foreign person is
required to report and pay over any amounts of U.S. tax withheld. The reports are due to be filed
with the IRS by March 15 of the calendar year following the year in which the payment is made .
Two types ofreports are required: (1) a summary of the total U.S.-so urce income paid and
withholding tax withheld on foreign persons for the year and (2) a report to both the IRS and the
foreign person of that person ' s U.S.-source income that is subject to reporting. 7 11 The
nonresident withholding rules apply broadl y to any financial institution or other payor, including
foreign financial institutions. 712

706

Sec. 88l(c)(3)(A).

707

Secs. 1441, 1442.

708

Withholding agent is defined broadly to include any U.S. or foreign person that bas the control , receipt,
custody , disposal , or paymen t of an item of income of a foreign person subject to withho lding. Tr eas. Reg. sec.
1.1441-? (a).
709

Secs. 871, 881, 1441, 1442; Treas . Reg. sec. 1.1441-1 (b).

710
A reduced rate of withho lding of 14 percent applies to certain scholarships and fellowships paid to
individua ls temporarily present in the United States. Sec. 144l(b). In add ition to statutory exemptions , the 30percent tax with respect to interest , dividends and royalties may be reduced or eliminated by a tax treaty between the
United States and the country in which the recipient of income otherwise subject to tax is resident.
711

Treas. Reg. sec. 1.1461-1 (b), ( c).

712

See Treas. Reg. sec. 1.1441-? (a) (definition o f withho lding agent includes foreign persons).

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 To the extent that the withholding agent deducts and withholds an amount, the withheld
tax is credited to the recipient of the income. 7 13 If the agent withhold s more than is required , and
results in an overpayment of tax, the excess may be refunded to the recipient of the income upon
filing of a timely claim for refund.
Excise tax on foreign reinsurance premiums
An excise tax applies to premiums paid to foreign insurers and rein surers covering U.S.
risks .
The excise tax is imposed on a gross basis at the rate of one percent on reinsurance and
life insurance premiums , and at the rate of four percent on property and casualty insurance
premiums. The excise tax does not apply to premiums that are effectively connected with the
conduct of a U.S. trade or business or that are exempted from the excise tax under an applicable
income tax treaty. The excise tax paid by one party cannot be credited if, for example, the risk is
reinsured with a second party in a transaction that is also subject to the excise tax.
714

Many U.S. tax treaties provide an exemption from the excise tax , including the treaties
with Germany , Japan, Switzerland, and the United Kingdom. 715 To prevent persons from
inappropriately obtaining the benefits of exemption from the excise tax , the treaties generally
include an anti-conduit rule. The most common anti-conduit rule provides that the treaty
exemption applies to the excise tax only to the extent that the risks covered by the premiums are
not reinsured with a person not entitled to the benefits of the treaty (or any other treaty that
provides exemption from the excise tax) .716

2. Net-basis taxation of U.S.-source income
The United States taxes on a net basis the income of foreign persons that is "effec tively
connected" with the conduct of a trade or business in the United States. 717 Any gross income
derived by the foreign person that is not effectively connected with the person 's U.S. business is

713

Sec. 1462.

714

Secs. 4371-4374 .

715

Generally , when a foreign person qualifies for benefits under such a treaty , the United States is not
permitted to collect the insurance premiums excise tax from that person.
716
In Rev. Rut. 2008-15 , 2008-l C.B. 633, the IRS provided guidance to the effect that the excise tax is
imposed separately on each reinsurance policy covering a U.S. risk. Thus , ifa U.S. insurer or reinsurer reinsures a
U.S. risk with a foreign reinsurer , and that foreign reinsurer in tum reinsures the risk with a second foreign reinsurer ,
the excise tax appl ies to both the premium to the first foreign reinsurer and the premium to the second foreign
reinsurer. In addition , if the first foreign reinsurer is resident in a jurisdiction with a tax treaty containing an excise
tax exemption , the revenue ruling provides that the excise tax still appl ies to both payments to the extent that the
transact ion violates an anti-conduit rule in the applicable tax treaty. Even if no violation of an anti-conduit rule
occurs, under the revenue ruling , the excise tax still applies to the premiums paid to the second foreign reinsurer,
unless the second foreign reinsurer is itself entit led to an excise tax exemption.
717

Secs. 87l(b) , 882.

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 not taken into account in determinin g the rate s of U.S. tax applicable to the person 's income
from the business. 718
U.S. trade or business
A foreign person is subject to U.S. tax on a net basis if the person is engaged in a U.S.
trade or business. Partners in a partnership and beneficiaries of an estate or trust are treated as
engaged in the conduct of a trade or business within the United States if the partnership, estate,
or trust is so engaged. 719
The question whether a foreign person is engaged in a U.S. trade or business is factual
and has generated much case law. Basic issues include whether the activity constitutes business
rather than inves ting , whether sufficient activities in connection with the business are conducted
in the United States, and whether the relationship between the foreign person and persons
performing functions in the United States in respect of the business is sufficient to attribute those
functions to the foreign person.
The trade or business rules differ from one activity to another. The term "trade or
busine ss within the United States" expressly include s the performance of personal services
within the United States. 720 If , however , a nonresident alien individual performs personal
services for a foreign employer, and the individual's total compensation for the services and
period in the United States are minimal ($3,000 or less in total compensation and 90 days or
fewer of physical presence in a year), the individual is not considered to be engaged in a U.S.
trade or business. 721 Detailed rules govern whether trading in stocks or securities or
commodities constitutes the conduct of a U.S. trade or business. 722 A foreign person who trades
in stock or securities or commodities in the United States through an independent agent generally
is not treated as engaged in a U.S. trade or business if the foreign person does not have an office
or other fixed place of business in the United States through which trades are carried out. A
foreign person who trades stock or securities or commodities for the person's own account also
genera lly is not considered to be engaged in a U.S. business so long as the foreign person is not a
dealer in stock or securities or commodities.
For eligible foreign persons , U.S. bilateral income tax treaties restrict the application of
net-basis U.S. taxation. Under each treaty , the United States is permitted to tax business profits
only to the extent those profits are attributable to a U.S. permanent establishment of the foreign
person. The threshold level of activities that constitute a permanent establishment is generally
higher than the threshold level of activities that constitute a U.S. trade or bu sines s. For example ,
718

Secs. 87l(b)(2), 882(a)(2).

719

Sec. 875.

720

Sec. 864(b).

721

Sec. 864(b)(I).

722

Sec. 864(b)(2).

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 a permanent establishment typically requires the maintenance of a fixed place of business over a
significant period of time.
Effectively connected income
A foreign person that is engaged in the conduct of a trade or business within the United
States is subject to U.S. net-basis taxation on the income that is "effectively connected" with the
business. Specific statutory rules govern whether income is ECI. 723

In the case of U.S.-source capital gain and U.S.-source income of a type that would be
subject to gross basis U.S. taxation , the factors taken into account in determining whether the
income is ECI include whether the income is derived from assets used in or held for use in the
conduct of the U.S. trade or business and whether the activities of the trade or business were a
material factor in the realization of the amount (the "asset use" and "business activities " tests). 724
Under the asset use and business activities tests , due regard is given to whether the income , gain ,
or asset was accounted for through the U.S. trade or business. All other U.S.-source income is
treated as ECI. 725
A foreign person who is engaged in a U.S. trade or business may have limited categories
of foreign-source income that are considered to be ECI. 726 Foreign-source income not included
in one of these categories (described next) generally is exempt from U.S. tax.
A foreign person ' s income from foreign sources generally is considered to be ECI only if
the person has an office or other fixed place of business within the United States to which the
income is attributable and the income is in one of the following categories: (1) rents or royalties
for the use of patents , copyrights , secret processes or formulas , good will , trade-marks, trade
brands , franchises , or other like intangible properties derived in the active conduct of the trade or
business; (2) interest or dividends derived in the active conduct of a banking , financing , or
similar business within the United States or received by a corporation the principal business of
which is trading in stocks or securities for its own account; or (3) income derived from the sale
or exchange (outside the United States) , through the U.S. office or fixed place of business , of
inventory or property held by the foreign person primarily for sale to customers in the ordinary
course of the trade or business , unless the sale or exchange is for use, consumption , or
disposition outside the United States and an office or other fixed place of business of the foreign
person in a foreign country participated materially in the sale or exchange. 727 Foreign-source
dividends , interest , and royalties are not treated as ECI if the items are paid by a foreign
723

Sec. 864(c).

724

Sec. 864(c)(2).

725

Sec. 864(c)(3).

726

This income is subject to net-basis U.S. taxation after allowance of a credit for any foreign income tax
imposed on the income. Sec. 906.
727

Sec . 864(c)(4)(B).

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 corporation more than 50 percent (by vote) of which is owned directly, indirectly, or
constructively by the recipient of the income. 728
In determinin g whether a foreign person bas a U.S. office or other fixed place of
business, the office or other fixed place of business of an agent generally is disregarde d. The
place of business of an agent other than an independent agent acting in the ordinary course of
business is not disregarded , however, if the agent either has the authority (regularly exercised) to
negotiate and conclude contrac ts in the name of the foreign person or has a stock of merchandi se
from which he regularly fills orders on behalf of the foreign person .729 If a foreign person has a
U.S. office or fixed place of business , income, gain, deduction , or loss is not considered
attributable to the office unless the office was a material factor in the production of the income,
gain, deduction , or loss and the office regularly carries on activities of the type from which the
income, gain, deduction, or loss was derived. 730
Special rules apply in determining the ECI of an insurance company. The foreign-source
income of a foreign corporation that is subject to tax under the insurance company provisions of
the Code is treated as ECI if the income is attributable to its United States business. 73 1
Income, gain, deduction , or loss for a particular year genera lly is not treated as ECI if the
foreign person is not engage d in a U.S. trade or business in that year. 732 If , however , income or
gain taken into account for a taxable year is attributable to the sale or exchange of property , the
performance of services, or any other transaction that occurred in a prior taxable year, the
determination whether the income or gain is taxab le on a net basis is made as if the income were
taken into account in the earlier year and without regard to the requirement that the taxpay er be
engaged in a trade or business within the United States during the later taxable year. 733 If any
property ceases to be used or held for use in connection w ith the conduct of a U.S. trade or
business and the property is disposed of within 10 years after the cessation , the determination
whether any income or gain attributable to the disposition of the property is taxable on a net
basis is made as if the disposition occurred immedi ately before the property ceased to be used or
held for use in connection with the conduct of a U.S. trade or business and without regard to the
requirement that the taxpayer be engaged in a U.S. business during the taxable year for which the
income or gain is taken into account. 734

728

Sec. 864(c)(4)(D)(i).

729

Sec. 864(c)(5)(A).

730

Sec . 864(c)(5)(B).

731

Sec. 864(c)(4)(C).

732

Sec. 864(c)(l)(B).

733

Sec. 864(c)(6).

734

Sec . 864(c)(7) .

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TREAS-17-0313-I-000245

 Transportation income from U.S. sources is treated as effectively connected with a
foreign person's conduct of a U.S. trade or business only if the foreign person has a fixed place
of bus iness in the United States that is invo lved in the earning of such income and substantially
all of such income of the foreign person is attributable to regularly scheduled transportation. 735
If the transportation income is effectively connected with conduct of a U.S. trade or business , the
transportation income , along with transportation income that is from U.S. sources because the
transportation both begins and ends in the United States , may be subject to net-basis taxation.
Income from the international operation of a ship or aircraft may be eligible for an exemption
under section 883, provided that the foreign jurisdiction has extended reciprocity for U.S.
businesses 736; whether the party claiming an exemption is eligible for the tax relief737; and the
activities that give rise to the income qual ify under relevant regu lations.
Allowance of deductions
Taxable ECI is computed by taking into account deductions associated with gross ECI.
For this purpose , the apportionment and allocation of deductions is addressed in detailed
regulations. The regulations applicable to deductions other than interest expense set forth
general guidelines for allocating deductions among classes of income and apportioning
deductions between ECI and non-ECI. In some circumstances , deductions may be allocated on
the basis of units sold, gross sales or receipts , costs of goods sold , profits contributed, expenses
incurred , assets used , salaries paid, space used , time spent, or gross income received. More
specific guidelines are provided for the allocation and apportionment of research and
experimental expenditures, legal and accounting fees , income taxes , losses on dispositions of
property , and net operating losses. Detailed regulations under section 861 address the allocation
and apportionment of interest deductions. In general , interest is allocated and apportioned based
on assets rather than income.

3. Special rules
FIRPTA
A foreign person's gain or loss from the disposition of a U.S. real property interest
("USRPI") is treated as ECI and, therefore , as taxable at the income tax rates applicable to U.S.
persons , including the rates for net capital gain. A foreign person subject to tax on this income is

735

Sec. 887(b)(4).

736

The most recent compilation of countries that the United States recogni zes as providing exempt ions
lists countries in three groups: Twenty-seven countries are eligible for exemption on tbe basis of a review of the
legislation in the foreign jurisdiction ; 39 nations exchanged diplomatic notes with the United States that grant
exemption to some extent ; and more than 50 nations are parties with the United States to bilateral income tax trea ties
that include a shipping article. Rev. Rul. 2008-17, 2008-l C.B. 626, modified by Ann. 2008-57 , 2008-C. B. l l 92 ,
2008.
737

Sec . 883(c) and regulations thereunder.

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TREAS-17-0313-I-000246

 required to file a U.S. tax return under the normal rules relating to receipt of ECI. 738 In the case
of a foreign corporation , the gain from the dispos ition of a USRPI may also be subject to the
branch profits tax at a 30-percent rate (or lower treaty rate).
The payor of income that FIRPTA treats as ECI ("FIRPTA income ") is generally
required to withhold U.S. tax from the payment. 739 The foreign person can request a refund with
its U.S. tax return , if appropriate, based on that person 's total ECI and deductions (if any) for the
taxable year.
Branch profits taxes
A domestic corporation owned by foreign persons is subject to U.S. income tax on its net
income. The earnings of the domestic corporation are subject to a second tax , this time at the
shareholder level , when dividends are pa id. As described previously , when the shareholders are
foreign , the second-level tax is imposed at a flat rate and collected by withholding. Unless the
portfolio interest exemption or another exemption applies , interest payments made by a domestic
corporation to foreign creditors are likewise subject to U.S. tax. To approximate these secondlevel withholding taxes imposed on payments made by domest ic subsid iaries to their foreign
parent corporations, the United States taxes a foreign corporation that is engaged in a U.S. trade
or business through a U.S. branch on amounts of U.S. earnings and profits that are shifted out of ,
or amounts of interest that are deducted by, the U.S. branch of the foreign corporation. These
branch taxes may be reduced or eliminated under an applicable income tax treaty. 740
Under the branch profits tax, the United States imposes a tax of 30 percent on a foreign
corporation's " dividend equivalent amount." 741 The dividend equivalent amount generally is the
earnings and profits of a U.S. branc h of a foreign corporation attributable to its ECI. 742 Limited
categories of earnings and profits attributable to a foreign corporation ' s ECI are excluded in
calculating the dividend equivalent amount. 743
In arriving at the dividend equivalent amount , a branch 's effectively connected earnings
and profits are adjusted to reflect changes in a branch 's U.S. net equity (that is, the excess of the
branch 's assets over its liabilit ies, taking into account on ly amount s treated as connected with its
U.S. trade or business). 744 The first adjustment reduces the dividend equivalent amount to the
738

Sec. 897(a).

739

Sec. 1445 and Treasury regulations therel.lllder.

740

See Treas. Reg. sec. 1.884-1 (g), -5.

741

Sec. 884(a).

742

Sec. 884(b).

743

See sec. 884(d)(2) (exclud ing, for examp le, earn ings and profits attributable to gain from the sale of
domestic corporation stock that constitutes a U.S. real property interest described in section 897.
744

Sec . 884(b).

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TREAS-17-0313-I-000247

 extent the branch's earnings are reinvested in trade or business assets in the United States (or
reduce U.S. trade or business liabilities). The second adjustment increases the dividend
equivalent amount to the extent prior reinvested earnings are considered remitted to the home
office of the foreign corporation.
Interest paid by a U.S. trade or business of a foreign corporation generally is treated as if
paid by a domestic corporation and therefore is subject to U.S . 30-percent withholding tax (if the
interest is paid to a foreign person and a Code or treaty exemption or reduction would not be
available if the interest were actually paid by a domestic corporation). 745 Certain "excess
interest " of a U.S. trade or business of a foreign corporation is treated as if paid by a U.S .
corporation to a foreign parent and , therefore , is subject to U.S. 30-percent withholding tax. 746
For this purpose , exces s interest is the excess of the interest expense of the foreign corporation
apportioned to the U.S. trade or business over the amount of interest paid by the trade or
business.
Earnings stripping
Taxpa yers are limited in their ability to reduce the U.S. tax on the income derived from
their U.S. operations through certain earnings stripping transactions involving interest payments.
If the payor ' s debt-to-equity ratio exceeds 1.5 to 1 (a debt-to-equity ratio of 1.5 to 1 or less is
considered a "safe harbor "), a deduction for disqualified interest paid or accrued by the payor in
a taxable year is generally disallowed to the extent of the payor ' s excess interest expense . 747
Disqualified interest includes interest paid or accrued to related parties when no Federal income
tax is imposed with respect to such interest ;748 to umelated parties in certain instances in which a
related party guarantees the debt ("guaranteed debt "); or to a REIT by a taxable REIT subsidiary
of that REIT. Excess interest expen se is the amount by which the payor ' s net interest expense
(that is, the excess of interest paid or accrued over interest income) exceeds 50 percent of its
adjusted taxable income (generally taxable income computed without regard to deductions for
net interest expense , net operating losses , domestic production activities under section 199,
depreciation , amortization , and depletion). Interest amounts disallowed under these rules can be
carried forward indefinitely and are allowed as a deduction to the extent of exces s limitation in a
subsequent tax year. In addition , any excess limitation (that is, the excess , if any, of 50 percent
of the adjusted taxable income of the payor over the payor 's net interest expense) can be carried
forward three years.

745

Sec. 884(f)( I )(A).

746

Sec. 884(f)(l )(B).

747

Sec . 163(j).

748

If a tax treaty reduce s the rate of tax on interest pa id or accrued by the taxpayer, the interest is treated as
interest on which no Federal income tax is imposed to the extent of the same proportion of such interest as the rate
of tax impos ed withou t regard to the treaty, reduced by the rate o f tax imposed under the treaty, bears to the rate o f
tax imposed without regard to the treaty. Sec . 163(j)(5)(B) .

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TREAS-17-0313-I-000248

 C. U.S. Tax Rules Applicable to Foreign Activities of U.S. Persons (Outbound)
1. In general

In genera l, income earned directly by a U.S. person from the conduct of a foreign
business is taxed on a current basis, 749 but income earned indirectly from a separate legal entity
operating the foreign business is not. Instead, active foreign business income earned by a U.S.
person indirectly through an interest in a foreign corporat ion genera lly is not subj ect to U.S . tax
until the income is distributed as a dividend to the U.S. person. Certain anti-de ferral regimes
may cause the U.S. owner to be taxed on a current basis in the United States on certain categories
of passive or highly mobile income earned by the foreign corporatio n regardless of whether the
income has been distributed as a dividend to the U.S. owner. The main anti-deferral regimes that
provide such exceptions are the controlled foreign corporation ("CFC") rules of subpart F 750 and
the passive foreign investment company ("PFIC") rules. 751 A foreign tax credit genera lly is
available to offset, in whole or in part, the U.S. tax owed on foreign-so urce income, whether the
income is earned directly by the domestic corporation , repatriated as an actual dividend , or
included in the domestic parent corporat ion 's income under one of the anti-deferral regimes. 752

2. Anti-deferral regimes
Subpart F
Subpart F, 753 applicable to CFCs and their shareholders, is the main anti-deferral regime
of relevance to a U.S. -based multinational corporate group . A CFC generally is defined as any
foreign corporation if U.S. persons own (directly, indirec tly, or constructively) more than 50
percent of the corporation's stock (measured by vote or value), taking into account only those
U.S. persons that are within the meaning of the term "United States shareholder," which refers
only to those U.S. persons who own at least 10 percent of the stock (measured by vote only). 754
Such 10-percent owners

749
A U.S. citizen or resident living abroad may be eligible to exclude from U.S. taxable income certain
foreign earned income and foreign housing costs under section 91 l. For a description ofthis exclusion , see Present
Law and issues in U.S. Taxation of Cross-Border income (JCX-42-11) , September 6, 201 I , p. 52.
750

Secs. 951-964.

751

Secs. 1291- 1298.

752

Secs. 901, 902,960 , 1293(f).

753

Secs. 951-964.

754
Secs. 951(b) , 957, 958. The term "United States shareholder" is used interchangeab ly herein with "U.S.
shareholder."

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 Subpart F income
Under the subpart F rules, the United States generally taxes the IO-percent U.S.
shareholder s of a CFC on their pro rata shares of certain income of the CFC (referred to as
"subpart F income"), without regard to whether the income is distributed to the shareho lders. 755
In effect, the Un ited States treats the 10-percent U.S. shareholders of a CFC as having received a
current distribution of the corporation 's subpart F income. With exceptions described below,
subpart F income generally includes passive income and other income that is readily movable
from one taxing juri sdiction to another. Subpart F income consists of foreign base company
income, 756 insurance income, 757 and certain income relating to international boycotts and other
violation s of public policy. 758
Foreign base company income consists of foreign personal holding company income,
which includes passive income such as dividends, interest, rents, and royalties , and a number of
categories of income from business operations , includin g foreign base company sales income,
foreign base company services income, and foreign base company oil-related income . 759
Insurance income subject to current inclusion under the subpart F rules include s any
income of a CFC attributable to the issuing or reinsuring of any insurance or annuity contract in
connection with risks located in a countr y other than the CFC's country of organization.
Subpart F insurance income also includes income attributable to an insurance contract in
connection w ith risks located within the CFC's country of organization , as the result of an
lii)T
ang@nent under which another corpora tion receives a substantially equal amount of
consideration for insurance of other country risks. Finally, special rules apply under subpart F
with respect to related person insurance income 760 in order to address captive insurance
companies. 761 Under these rules, the threshold for determining control is reduced to 25-percent,
and any level of stock ownership by a U.S. person in such corporation is sufficient to be treated
as:a U.S. shareholder.

755

Sec. 95 l(a) .

756

Sec. 954.

757

Sec. 953.

758

Sec. 952(a)(3) -(5).

759

Sec . 954.

760

Sec. 953(c). Related person insurance income is defined for this purpose to mean any insurance income
attributable to a policy of insurance or reinsurance with respect to which the primary insured is either a U.S.
shareholder (within the meaning of the provision) in the foreign corporation receiving the income or a person related
to such a shareho lder.
761

Joint Conm1ittee on Taxation, General Explanation of the Tax Reform Act of 1986 (JCS-10-87), May 4 ,
1987, p. 968 .

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TREAS-17-0313-I-000250

 Investments in U.S. property
The 10-percent U.S. shareholders of a CFC also are required to include currently in
income for U.S. tax purposes their pro rata shares of the corporation's untaxed earnings invested
in certain items of U.S. property. 762 This U.S. property generally includes tangible property
located in the United States, stock of a U.S. corporation , an obligation of a U.S. person , and
certain intangible assets, such as patents and copyrights , acquired or developed by the CFC for
use in the Un ited States. 763 There are specific exceptions to the general definition of U.S.
property , including for bank deposits, certain export property , and certain trade or business
obligations. 764 The inclusion rule for investment of earnings in U.S. property is intended to
prevent taxpayers from avoiding U.S. tax on dividend repatriations by repatriating CFC earnings
through non-dividend payments , such as loans to U.S. persons.
Subpart F exceptions
Several exceptions to the broad definition of subpart F income permit continued deferral
for certain transactions , dividends , interest and certain rents and royalties received by a CFC
from a related corporation organized and operating in the same foreign country in which the CFC
is organized. 765 The same-country exception is not available to the extent that the payments
reduce the subpart F income of the payor. A second exception from foreign base company
income and insurance income is available for any item of income received by a CFC if the
taxpayer establishes that the income was subject to an effective foreign income tax rate greater
than 90 percent of the maximum U.S. corporate income tax rate (that is, more than 90 percent of
35 percent , or 31.5 percent). 766
A provision colloquially referred to as the "CFC look-through " rule excludes from
foreign personal holding company income dividends , interest , rents , and royalties received or
accrued by one CFC from a related CFC (with relation based on control) to the extent
attributable or properly allocable to non-subpart-F income of the payor. 767 The look-through rule
applies to taxable years of foreign corporations beginning before January 1, 2020 , and to taxable
years of U.S. shareholders with or within which such taxable years of foreign corporations
end_768

762

Secs. 95l(a)(l)(B), 956.

763

Sec. 956(c)(l).

764

Sec. 956(c)(2).

765

Sec. 954(c)(3).

766

Sec. 954(b)(4) .

767

Sec. 954(c)(6).

768

See section 144 of the Protecting Americans from Tax Hikes Act of 2015 (Division Q of Pub. L. No.
114-113), H.R. 2029 ["the PATH Act of 20 15"], which extended section 954(c)(6) for five years. Congress has
previously extended tbe application of section 954( c)(6) several times, most recently in the Tax Increase Prevention

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TREAS-17-0313-I-000251

 There is also an exclusion from subpart F income for certain income of a CFC that is
derived in the active conduct of banking or financing business ("active financing income "),
which applies to all taxable years of the foreign corporation beginning after December 31, 2014 ,
and for taxable years of the shareholders that end during or within such taxable years of the
corporation. 769 With respect to income derived in the active conduct of a banking , financing , or
similar business , a CFC is required to be predominantly engaged in such business and to conduct
substantial activity with respect to such business in order to qualify for the active financing
exceptions. In addition , certain nexus requirements apply, which provide that income derived by
a CFC or a qualified business unit ("QBU") of a CFC from transactions with customers is
eligible for the exceptions if, among other things, substantially all of the activities in connection
with such transactions are conducted directly by the CFC or QBU in its home country, and such
income is treated as earned by the CFC or QBU in its home country for purposes of such
country's tax laws. Moreover , the exceptions apply to income derived from certain cross border
transactions , provided that certain requirements are met.
In the case of a securities dealer, an exception from foreign personal holding company
income applies to any interest or dividend (or certain equivalent amounts) from any transaction ,
including a hedging transaction or a transaction consisting of a deposit of collateral or margin ,
entered into in the ordinary course of the dealer ' s trade or business as a dealer in securities
within the meaning of section 475. In the case of a QBU of the dealer, the income is required to
be attributable to activities of the QBU in the country of incorporation , or to a QBU in the
country in which the QBU both maintains its principal office and conducts substantial business
activity. A coordination rule provides that this exception generally takes precedence over the
exception for income of a banking , financing or similar business , in the case of a securities
dealer.
Income is treated as active financing income only if, among other requirements , it is
derived by a CFC or by a QBU of that CFC. Certain activities conducted by persons related to
the CFC or its QBU are treated as conducted directly by the CFC or qualified business unit. 770
An activity qualifies under this rule if the activity is performed by employees of the related
person and if the related person is an eligible CFC, the home country of which is the same as the
home country of the related CFC or QBU; the activity is performed in the home country of the
related person ; and the related person receives arm ' s-length compensation that is treated as
earned in the home country . Income from an activity qualifying under this rule is excluded from
subpart F income so long as the other active financing requirements are satisfied.
Certain income of a qualifying branch of a qualifying insurance company with respect to
risks located within the home country of the branch or within the CFC's country of creation or
Act of 2014 , Pub. L. No. 113-295; Pub. L. No. 107-147, sec. 6 14, 2002; Pub. L. No. 106-170, sec. 503, 1999; Pub.
L. No . 105-277, 1998.
769

Sec. 954(h) . See section 128 of the PATH Act of 2015, which made the active financing exception

permanent.
770

Sec. 954(b)( 3)(E).

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TREAS-17-0313-I-000252

 organization are also excepted from foreign personal holding company income , provided that
certain requirements are met. Further, additional exceptions from insurance income and from
foreign personal holding company income apply for certain income of certain CFCs or branches
with respect to risks located in a country other than the United States, provided that the
requirements for these exceptions, including reserve requirements, are met. 77 1
Exclusion of previously taxed earnings and profits
A 10-percent U.S. shareholder of a CFC may exclude from its income actual distributions
of earnings and profits from the CFC that were previously included in the 10-percent U.S.
shareholder's income under subpart F. 772 Any income inclusion (under section 956) resulting
from investments in U.S. property may also be excluded from the IO-percent U.S. shareholder's
income when such earnings are ultimately distributed. 773 Ordering rules provide that
distributions from a CFC are treated as coming first out of earnings and profits of the CFC that
have been previously taxed under subpart F, then out of other earnings and profits. 774
Basis adjustments

In general, a 10-percent U.S. shareholder of a CFC receives a basis increase with respect
to its stock in the CFC equal to the amount of the CFC's earnings that are included in the
IO-percent U.S. shareholder's income under subpart F. 775 Similarly, a IO-percent U.S.
shareholder of a CFC generally reduces its basis in the CFC's stock in an amount equal to any
distributions that the I 0-percent U.S. shareholder receives from the CFC that are excluded from
its income as previously taxed under subpart F. 776
Passive foreign investment companies

The Tax Reform Act of 1986777 established the PFIC anti-deferral regime. A PFIC is
generally defined as any foreign corporation if 75 percent or more of its gross income for the
771

Subject to approval by the IRS, a taxpayer may establish that the reserve of a life insurance company
for life insurance and annuity contracts is the am ount taken into account in determining the foreign statement reserve
for the contract (reduced by catastrophe , equalization , or deficiency reserve or any similar reserve). IRS approval is
to be based on wheth er the method , the interest rate, the mortality and morbidity assumptions , and any other factors
taken into account in determining foreign statement reserves (taken together or separately) provide an appropriate
means of measuring income for Federal income tax purposes.
772

Sec. 959(a)(1).

773

Sec. 959(a)(2).

774

Sec. 959(c).

775

Sec. 961 (a).

776

Sec. 961(b).

777

Pub. L. No. 99-514.

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TREAS-17-0313-I-000253

 taxable year consists of passive income , or 50 percent or more of its assets consists of assets that
produce , or are held for the production of, passive income. 778 Alternative sets of income
inclusion rules apply to U.S. persons that are shareholders in a PFIC, regardless of their
percentage ownership in the company. One set of rules applies to PFICs that are qualified
electing funds , under which electing U.S. shareholders currently include in gross income their
respective shares of the company ' s earnings , with a separate election to defer payment of tax,
subject to an interest charge , on income not currently received. 779 A second set of rules applies
to PFICs that are not qualified electing funds , under which U.S. shareholders pay tax on certain
income or gain realized through the company , plus an interest charge that is attributable to the
value of deferral. 780 A third set of rules applies to PFIC stock that is marketable , under which
electing U.S. shareholders currently take into account as income (or loss) the difference between
the fair market value of the stock as of the close of the taxable year and their adjusted basis in
such stock (subject to certain limitations) , often referred to as "marking to market. " 781
Under the PFIC regime , passive income is any income which is of a kind that would be
foreign personal holding company income , including dividends , interest , royalties , rents , and
certain gains on the sale or exchange of property , commodities , or foreign currency. However ,
among other exceptions , passive income does not include any income derived in the active
conduct of an insurance business by a corporation that is predominantly engaged in an insurance
business and that would be subject to tax under subchapter L if it were a domestic corporation. 782
In applying the insurance exception , the IRS analyzes whether risks assumed under contracts
issued by a foreign company organized as an insurer are truly insurance risks , whether the risks
are limited under the terms of the contracts , and the status of the company as an insurance
company. 783

Other anti-deferral rules
The subpart F and PFIC rules are not the only anti-deferral regimes. Other rules that
impose current U.S . taxation on income earned through corporations include the accumulated
earnings tax rules 784 and the personal holding company rule s.

778

Sec . I 297 .

779

Secs. 1293-1295.

780

Sec. 129 1.

781

Sec . I 296.

782

Sec . 1297(b)(2)(B).

783
Notice 2003 -34, 2003-C.B . I 990, June 9, 2003. See al so, Prop. Treas . Reg. sec. 1.1297-4, 26 CFR Part
1, REG-1082 14-15, April 24, 2015.
784

Secs. 531-537 .

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TREAS-17-0313-I-000254

 Rules for coo rdinati on among the anti-deferral regi mes are provi ded to prevent U.S.
persons from being subject to U.S. tax on the same item of income under multiple regimes . For
example , a corporat ion genera lly is not treated as a PFIC with respect to a particular share holder
if the corpora tion is also a CFC and the shareho lder is a IO-percent U.S. shareholder. Th us,
subpart F is allowed to trump the PFIC rules.

3. Foreign tax credit
Subject to certain limitati ons, U.S. citizens , resident individua ls, and domestic
corporations are allowed to claim credit for foreign income taxes they pay. A domestic
corporation that owns at least 10 percent of the voting stock of a foreign corporation is allowe d a
"dee med-pa id" credit for foreign income taxes paid by the fore ign corporat ion that the domestic
corporat ion is deemed to have paid when the related income is distributed as a dividend or is
includ ed in the domestic corporatio n' s income under the ant i-deferra l rules. 785
The foreign tax credit generall y is limited to a taxpayer ' s U.S. tax liabi lity on its foreignsource taxab le incom e (as determined under U.S. tax accounting princ iples). This limit is
intended to ensure that the credit serves its purpose of mitigat ing double taxation of foreignsource income without offsett ing U.S. tax on U.S.-so urce income. 786 The limit is compu ted by
multiplying a taxpayer ' s total U.S. tax liabi lity for the year by the ratio of the taxpayer ' s foreignsource taxab le income for the year to the taxpayer's total taxable income for the year. If the total
amount of foreign income taxes paid and deem ed paid for the year exceeds the taxpayer ' s
foreign tax credi t limitation for the year , the taxpayer may carry back the excess foreign taxes to
the previous year or carry forward the excess taxes to one of the succee ding 10 years. 787
The computation of the fore ign tax credit limitat ion requ ires a taxpayer to determ ine the
amount of its taxable income from fore ign sources in each lim itation category (described below)
by allocating and apportio ning deductions between U.S.-source gross income , on the one hand ,
and foreign-source gross income in each limitatio n catego ry, on the other. In genera l, deductions
are allocated and apportioned to the gross income to whic h the deductions factua lly relate. 788
However , subje ct to certain except ions, deductions for interest expense and research and
experimen tal expenses are apportioned based on taxpayer ratios. 789 In the case of interest
expense , this ratio is the ratio of the corporation ' s foreign or domestic (as applicable) assets to its
wo rldwide assets. In the case of researc h and experimenta l expenses , the apport ionm ent ratio is
based on either sales or gross income. All members of an affiliated group of corpora tions

785

Secs. 901,9 02, 960, 1291(g).

786

Secs. 90 I, 904.

787

Sec. 904(c) .

788

Treas. Reg. sec. l. 86 1-8(b), Temp. Treas. Reg. sec. l. 861-8T(c).

789

Temp. Treas . Reg. sec. 1.86 1-9T, Treas. Reg. sec. 1.86 1-17.

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TREAS-17-0313-I-000255

 generally are treated as a single corporation for purposes of determinin g the apportionment
ratios. 790
The term "affi liated group " is determined generall y by refer ence to the rule s for
determining whether corporations are eligible to file consolidated returns. 791 These rules exclud e
foreign corporations from an affiliated group. 792 AJCA mod ified the interest expense allocation
rule s for taxable years beginning after December 31, 2008 . 793 The effective date of the modifi ed
rule s has been delayed to January 1, 202 1. 794 The new rule s permit a U.S. affiliated group to
apportion the interest expe nse of the members of th e U.S. affiliated group on a worldw ide-group
basis (that is, as if all domestic and foreign affiliates are a sing le corporation). A result of this
rule is that interest expense of foreign memb ers of a U.S. affiliated group is taken into account in
determinin g whether a portion of the intere st expense of the domestic member s of the group
must be allocated to foreign-source incom e. An allocation to foreign-source income generally is
required only if, in broad terms, the dom estic members of the group are more highly leveraged
than is the entire wor ldwide group. The new rules are genera lly expected to reduce the amount
of the U.S. group 's interest expense that is allocated to foreign-source income.
The foreign tax credit limitat ion is applied separa tely to passive category income and to
general category income. 795 Passive catego ry income include s passive income , such as portfol io
interest and dividend income , and certa in specifi ed types of income. General category income
include s all other income. Passive income is treated as general category income if it is earned by
a qualifying financial services entity. Passive incom e is also treated as gene ral category income
if it is highly taxed (that is, if the foreign tax rate is determined to exceed the highest rate of tax
spec ified in Co de section 1 or 11, as applicable). Dividend s (and subpart F inclu sions), intere st,
rent s, and royalties received by a 10-percent U.S. shareholder from a CFC are assigned to a
separat e limitation category by reference to the category of income out of which the dividends or
790

Sec. 864(e)(l), (6) ; Temp. Treas. Reg. sec. l.86l-l4T(e)(2).

791

Secs. 864(e)(5) , 1504.

792

Sec. 1504(b)(3).

793

AJCA sec. 40 l.

794

Hiring Incentives to Restore Emp loyment Act, Pub. L. No. 111- 147, sec. 55l(a).

795

Sec. 904(d). AJCA genera lly reduced the number of income categories from nine to two, effective for
tax years beginning in 2006 . Before AJCA, the foreign tax credit limitation was applied separately to the follo wing
categories of income : (l) passi ve income, (2) high withholding tax interest , (3) financial services income , (4)
shipping income , (5) certain dividends received from nonco ntrolled section 902 foreign corporations (also known as
" 10/50 companies") , (6) certain dividends from a domestic international sales corporat ion or former domestic
international sales corporatio n, (7) taxable income attributable to certain foreign trade income, (8) certain
distributions from a foreign sales corporation or former foreign sales corporation , and (9) any other income not
described in items (1) through (8) (so-called "genera l basket" income) . A number of other provisions of the Code,
includin g several enacted in 20 IO as part of Pub. L. No . 111-226, create addit ional separate categories in specific
circumstances or limit the ava ilability of the foreign tax credit in other ways. See, e.g., secs. 865(h), 90 l(j) ,
904(d)(6), 904(b)(l0).

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TREAS-17-0313-I-000256

 other payments were made .796 Dividends received by a 10-percent corporate shareholder of a
foreign corporation that is not a CFC are also categorized on a look-through basis. 797
Special rules apply to the allocation of income and losses from foreign and U.S. sources
within each category of income. 798 Foreign losses of one category will first be used to offset
income from foreign sources of other categories. If there remains an overall foreign loss, it will
be deducted against income from U.S. sources. The same principle applies to losses from U.S.
sources. In subsequent years, the losses that were deducted against another category or source of
income will be recaptured. That is, an equal amount of income from same the category or source
that generated a loss in the prior year will be recharacterized as income from the other category
or source against which the loss was deducted . Up to 50 percent of income from one source in
any subsequent year will be recharacterized as income from the other source, whereas foreignsource income in a particular category can be fully recharacterized as income in another category
until the losses from prior years are fully recaptured. 799

In addition to the foreign tax credit limitation just described , a taxpayer 's abilit y to claim
a foreign tax credit may be further limited by a matching rule that prevents the separation of
creditable foreign taxes from the associated foreign income. Under this rule , a foreign tax
generally is not taken into account for U.S. tax purposes , and thus no foreign tax credit is
available with respect to that foreign tax, until the taxable year in which the related income is
taken into account for U.S. tax purposes . 800
4. Special rules
Dual consolidated loss rules
Under the rules applicable to corporations filing consolidated returns , a dual consolidated
loss ("DCL") is any net operating loss of a domestic corporation if the corporation is subject to
an income tax of a foreign country without regard to whether such income is from sources in or
outside of such foreign country, or if the corporation is subject to such a tax on a residence basis
(a "dual resident corporation"). 801 A DCL generally cannot be used to reduce the taxable income
of any member of the corporation's affiliated group. Losses of a separate unit of a domestic
corporation (a foreign branch or an interest in a hybrid entity owned by the corporation) are
subject to this limitation in the same manner as if the unit were a wholly owned subsidiary of

796

Sec. 904(d)(3). The subpart f rules applicable to CFCs and their IO-percent U.S. shareholders are
described below.
797

Sec. 904(d)(4).

798

Secs. 904(f) , (g).

799

Secs. 904(f)( l ), (g)( l ).

800

Sec. 909.

801

Sec. l503(d).

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TREAS-17-0313-I-000257

 such corporation. An exemption is available under Treasury regulations in the case of DCLs for
whic h a domestic use election (that is, an election to use the loss only for domestic , and not
foreig n, tax purposes) has been made. 802 Recapture is required , however , upon the occurrence of
certain triggering events , including the conversion of a separate unit to a foreign corporation and
the transfer of 50 percent or more of the assets of a separate unit within a twelve-month
period. 803
Temporary dividends-received

deduction for repatriated fore ign earnings

AJCA section 421 added to the Code section 965 , a temporary provision intended to
encourage U.S. multinational companies to repatriate foreign earnings. Under section 965 , for
one taxable year certa in dividends received by a U.S. corporation fro m its CFCs we re eligible for
an 85-percent dividends-received deduction. At the taxpayer's elect ion , this deduction was
availab le for di vidends received either during the taxpayer 's first taxable year beginning on or
after October 22 , 2004 , or during the taxpayer's last taxable year beginning before such date.
The temporary deduction was subject to a number of genera l limitat ions. F irst, it app lied
only to cash repatriations genera lly in excess of the taxpayer ' s average repatriation level
calculated for a three-year base period preceding the year of the dedu ction. Second, the amo unt
of dividends eligible for the deduction was generally limited to the amo unt of earnings shown as
perma nently invested outs ide the U nited States on the taxpayer's recent audited financial
stateme nts. Third , to qualify for the deduction , div idends were required to be invested in the
Uni ted States according to a domestic reinvestment plan approved by th e taxpayer ' s senior
management and board of directors. 804
No fore ign tax cred it (or deduction) was allowed for fore ign taxes attributab le to the
deductible portion of any dividend. 805 For this purpose , the taxpayer was perm itted to
specifically identify which dividends were treated as carrying the deduction and which dividends
were not. In other words , the taxpayer was allowed to choose which of its dividends were
treated as meet ing the base-period repatr iat ion leve l (and thus carry fore ign tax cred its, to the
exte nt ot herw ise allowable) , and wh ich of its dividends were treated as part of the excess eligib le
for the deduction (and thus subj ect to proportional disallowance of any associated foreign tax

802

Treas. Reg. sec. l .1503(d) -6(d).

803

See Tr eas. Reg. sec. 1. 1503( d)-6( e )(I ).

804

Section 965(b)(4). The plan was required to provide for the reinvestment of the repatriated dividends in
the United States, includin g as a source for the fundin g of worker hiring and trainin g, infrastructure , research and
development , capital investments , and the financial stabilization of the corporation for the purposes of job retention
or creation.
805

Sec . 965(d)(l).

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TREAS-17-0313-I-000258

 credits). 806 Deductions were disallowed for expenses that were directly allocable to the
deductible portion of any dividend. 807
Domestic international sales corporations
A domestic international sales corporation ("DISC") is a domestic corporation that
satisfies the following conditions: 95 percent of its gross receipts must be qualified export
receipts ; 95 percent of the sum of the adjusted bases of all its assets must be attributable to the
sum of the adjusted bases of qualified export assets ;808 the corporation must have no more than
one class of stock; the par or stated value of the outstanding stock must be at least $2,500 on
each day of the taxable year; and an election must be in effect to be taxed as a DISC. 809 In
general , a DISC is not subject to corporate-level tax and offers limited deferral of tax liability to
its shareholders. 810 DISC income attributable to a maximum of$10 million annually of qualified
export receipts is generally exempt from corporate and shareholder level income tax.
Shareholders must pay interest to account for the benefit of deferring the tax liability on
undistributed DISC income related to this $IO million maximum annual amount. 81 1
Shareholders of a DISC are deemed to receive a dividend out of current earnings and profits of
qualified export receipts in excess of $10 million. 812 Gain on the sale of DISC stock is treated as
a dividend to the extent of accumulated DISC income. 813 The shareholders of a corporation
which is not a DISC , but was a DISC in a previous taxable year, and which has previously taxed
income or accumulated DISC income , are also required to pay intere st on the deferral benefit ,
and gain on the sale or exchange of stock in such corporation is treated as a dividend.

806

Accordingly, taxpayers generally were expected to pay regular dividends out of high-taxed CFC
earnings (thereby generating deemed-paid credits available to offset foreign-source incom e) and section 965
dividends out oflow-taxed CFC earnings (thereby availing themselves of the 85-percent deduction).
807

Sec. 965(d)(2).

808

If a corporation fails to satisfy either or both of the 95-percent tests , it is deemed to satisfy such tests if
it makes a pro rata distribution of its gross receipts which are not qualified export receipts and the fair market value
of its assets which are not qualified export assets. Sec. 992(c).
809

Secs. 992(a) and (b).

810

Sec. 991.

811
The rate is the average of I -year constant maturity Treasury yields. The deferral benefit is the excess of
the amount of tax the shareholder would be liable if deferred DISC income were included as ordinary income over
the actual tax liability of such shareholder. Sec. 995(f).
812

The amount of the deemed distribution is the sum of several items, including qualified export receipts
in excess of $ 10 million. See sec. 955(b).
813

Sec . 995(c).

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TREAS-17-0313-I-000259

 II. TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS

A. Establishment of Participation Exemption System for Taxation of Foreign Income
1. Deduction for foreign-source portion of dividends received by domestic corporations

from specified 10-percent owned foreign corporations
Description of Proposal
In general
The proposal generally establishes a participation exemption system for foreign income.
This exemption is provided for by means of a 100-percent deduction (referred to here as
"participation DRD ") for the foreign-source portion of dividends received from specified 10percent owned foreign corporations by domestic corporations that are Un ited States shareholders
of those foreign corporations within the meaning of section 951 (b). 814
A specified 10-percent owned foreign corporation is any foreign corporation with respect
to which any domestic corporation is a United States shareholder. The term does not include a
PFIC that is not also a CFC. 8 15
The phrase "dividend received " is intended to be interpreted broadly, consistently with
the meaning of the phrases "amount received as dividends" and "dividends received" under
sections 243 and 245, respectively .8 16 Under proposed section 245A(e) , the Secretary of the
Treasury may prescribe such regulations or other guidance as may be necessary or appropriate to
carry out the rules of section 245A, including clarifying the broad intended scope of the term
"dividend received."
For example, if a domestic corporation indirectly owns stock of a foreign corporation
through a foreign partnership and the domestic corporation would qualify for the participation
DRD with respect to dividends from the foreign corporation if the domestic corporation owned
such stock directly, the domestic corporation would be allowed a participation DRD with respect
to its distributive share of the dividend of the foreign partnership from the foreign corporation.

814

Under section 95 l(b) , a domestic corporation is a United States sbareho lder of a foreign corporation if
it owns, within the meaning of section 958(a) , or is considered as owning by applying the rules of section 958(b ), l 0
percent or more of the voting stock of the foreign corporation.
8 15

Secs. 1297 and 1298.

816 Consequently , for examp le, gain included in gross income as a dividend under section 1248(a) or
964(e) would constitute a dividend received for which tbe deduction under section 245A may be available.

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TREAS-17-0313-I-000260

 Foreign-source portion of a dividend

The participation DRD is available only for the foreign-source portion of dividends
received from specified JO-percent owned foreign corporation s. The foreign-source portion of
any dividend is the amount that bears the same ratio to the dividend as the specified foreign
corporation 's post-1986 undi stributed foreign earnings bears to the corporation ' s total post-1986
undistributed earnings. Post-1986 undistributed earnings are the amount of the earnings and
profits of a specified 10-percent owned foreign corporatio n accumulated in taxable years
beginning after December 31, 1986, as of the close of the taxable year of the foreign corporation
in which the dividend is distributed and not reduced by dividends817 distributed during that year.
Post-1986 undistributed foreign earnings are, in general, the portion of post-1986 undi stributed
earnings that is not attributable to post-1986 undistributed U.S. earnings. Post-1986
undistributed U.S. earnings are, in general, undistribut ed earnings attributable to: (a) the
corporation ' s income that is effectively connecte d with the conduct of a trade or business within
the United States, or (b) any dividend received ( directly or through a wholly owned foreign
corporation) from an 80-percent-owned (by vote or value) domestic corporat ion.
Rules similar to the rules described above apply when a dividend is paid out of earnings
and profits of a specifie d 10-percent owned foreign corporation accumulated in taxable years
beginning before January 1, 1987. As a consequence, the participation exemption system is
available for both post-1986 and pre-1987 foreign earnings. An ordering rule provides that
dividends are treated as first being paid out of post-1986 undistributed earn ings to the exten t of
those earnings.
An additional rule provides for the treatment of distributions of a spec ified 10-percent owned
foreign corporation in excess of undi stributed earnings. Under section 316(a)(2) , a distribution
of earnings and profits of a corporation in the taxable year of the distribution is treated as a
dividend even if the distribution exceeds accumulated earnings and profits. 818 The
determination of the foreign-source portion of such a distribution is calculated in a similar
manner as for other types of dividends.

Foreign tax credit disallowance; foreign tax credit limitation

No foreign tax credit or deduction is allowed for any taxes (including withholding taxes)
paid or accrued with respect to a dividend that qualifies for the participation DRD .
For purposes of computing the sectio n 904(a) foreign tax credit limitation, a domestic
corporation that is a United States shareholder of a specified 10-percent owned foreign
corporation must compute its foreign-source taxable income (and entire taxable income) by
disregarding the foreign-source portion of any dividend received from that foreign corporation

817

Pursu ant to sect ion 959(d), a distribution of previously taxed incom e do es not cons titute a dividend
even if it reduces earning s and profits.
818

Called a " nimble dividend. " See, Boris I. Bittker and James S. Eustice , Federal Income Taxation of
Corporations and Shareholders, (7th ed . 2016) para. 8-12.

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TREAS-17-0313-I-000261

 for which the participation DRD is taken , as well as and any deductions properly allocable or
apportioned to that foreign-source portion or the stock with respect to which it is paid.
Six-month holding period requirement

A domestic corporation is not permitted a participation ORD in respect of any dividend
on any share of stock that is held by the domestic corporation for 180 days or less during the
361-day period beginning on the date that is 180 days before the date on which the share
becomes ex-dividend with respect to the dividend. For this purpose , a domestic corporation is
treated as holding a share of stock for any period only if the corporation is a specified 10-percent
owned foreign corporation and the taxpayer is a United States shareholder with respect to such
corporation during that period.
The participation ORD is permitted in respect of any dividend on any share of stock to
the extent the domestic corporation that owns the share is under an obligation (under a short sale
or otherwise) to make related payments with respect to positions in substantially similar or
related property. There are also other holding period requirements , such as the rule requiring
holding periods to be reduced , in a manner provided for by regulations provided for by the
Secretary of the Treasury , for any period during which the taxpayer has diminished its risk of
loss in respect of stock on which a dividend is paid.
Effective Date

The proposal applies to distributions made (and, for purposes of determining a taxpayer 's
foreign tax credit limitation under section 904, deductions with respect to taxable years ending)
after December 31, 2017.
2. Application of participation exemption to investments in United States property
Description of Proposal

Under the proposal , the amount determined under section 956 (relating to CFC
investments in United States property) with respect to a domestic corporation is zero. A similar
rule is intended for domestic corporations that own a CFC through a domestic partnership. The
proposal includes a specific grant of authority to the Secretary to issue regulations to effect that
intent.
Effective Date

The proposal applies to taxable years of foreign corporations beginning after December
31, 2017.

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TREAS-17-0313-I-000262

 3. Limitation on losses with respect to specified 10-percent owned foreign corporations
Description of Proposal
Reduction in basis of certain foreign stock
Under the proposal , solely for the purpose of determining a loss, a domestic corporate
shareholder' s adjusted basis in the stock of a specified 10-percent owned foreign corporation (as
defined in new sect ion 245A) is reduced , but not below zero , by an amount equal to the portion
of any dividend received w ith respect to such stock from such foreign corporation that was not
taxed by reason of a dividends received deduction allowable under section 245A in any taxable
year of such domestic corporation. This rule applies in coordination with section 1059, such that
any reduction in basi s required pursuant to this proposal will be disregarded , to the extent the
basis in the 10-percent owned foreign corporation's stock has already been reduced pursuant to
section 1059.
Inclusion of transferred loss amount in certain assets transfers
Under the proposal , if a domestic corporation transfers substantiall y all of the assets of a
foreign branch (within the meanin g of sect ion 367(a)(3)(C)) to a foreign corporation which , after
such transfer , is a specified 10-percent owned foreign corporation with respect to which the
domestic corpora tion is a United States shareho lder , the domestic corporation includes in gross
income an amount equal to the transferred loss amount , subject to certain limitations.
The transferred loss amount is the excess of: (1) losses incurred by the foreign branch
after December 31, 2017 for which a deduction was allowed to the domestic corporation, over
(2) the sum of taxable income earned by the foreign branch and gain recognized by reason of an
overall foreign loss recapture arising out of disposition of assets on account of the underlying
transfer. For the purpose s of (2), only taxable income of the foreign branch in taxable years after
the loss is incurred through the close of the taxable year of the transfer is included.
For transfers not covered by section 367(a)(3)(C), the transferred loss amount is reduced
by the amount of gain recognized by the domestic corporation on the transfer (other than gains
recognized by reason of overall foreign loss recapture). For transfers covered by section
367(a)(3)(C), the tran sferred loss amount is reduced by the amount of gain recognized by reason
of such subpara graph.
Amounts included in gross income by reason of the proposal or by reason of section
367(a)(3)(C) are treated as derived from sources within the United States.
The proposal provides authority for the Secretary of the Treasury to pr escribe regulations
or other guidance for proper adjustments to the adjusted basis of the specified IO-percent owned
foreign corpora tion to which the transfer is made, and to the adjusted basis of the propert y
transferred , to reflect amounts included in gross income under the proposal.

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TREAS-17-0313-I-000263

 Effective Date

The proposal relating to reduction of basis in certain foreign stock for purposes of
determining a loss is effect ive for distributions made after December 31, 2017.
The proposal relating to transfers of loss amounts from foreign branches to certain
foreign corporations is effective for transfers after December 31, 20 17.
4. Treatment of deferred foreign income upon transition to participation exemption system
of taxation
Description of Proposal

In general
The proposa l generally requires that, for the last taxable year beginning before January 1,
20 18, all U.S. shareholders of any CFC or other foreign corporation that is at least 10-percent
U.S.-owned but not controlled (other than a PFIC) must include in income their pro rata share of
the accumul ated post-1986 deferred foreign income and which was not previously taxed. A
portion of that pro rata share of deferred foreign income is deductible ; the amount deductible
varies depending upon whether the deferred foreign income is held in the form of liquid or
illiquid assets. The deduction results in a reduced rate of tax applicable to the included deferred
foreign income. A correspo nding portion of the credit for foreign taxes is disallowed , thus
limiting the credit to the taxable portion of the included income. The increased tax liability
generally may be paid over an eight-year period.
Subpart F inclusion of deferred foreign income

The mechanism for the mandatory inclusion of pre-effective date foreign earnings is
subpart F. The proposal provides that the subpart F income of all specified foreign corporations
is increased for the last taxable year 819 that begins before January I , 2018, by its accumulated
post-1986 deferred foreign income. In contrast to the participation exempt ion deduction
available only to domestic corporatio ns that are U.S. shareholders under subpart F, the transition
rule applies to all U.S. shareholders 820 of a specified foreign corporation. A specified foreign
corporatio n means ( 1) a CFC or (2) any foreign corporat ion in which a domestic corporat ion is a
U.S. shareholder (determined without regard to the special attribution rules of section 958(b )(4)),
other than a PFIC that is not a CFC .821 A specified foreign corporation that has deferred foreign
income is a deferred foreign income corporat ion. Consistent w ith the general operatio n of
819 Foreign corporations no longer in existence and for which there is no taxable year beginning or ending
in 2017 are not with.in the scope of this provision.
820

Sec. 95 l(b) , which defines United States shareholder as any U.S. person that owns IO percent or more
of the voting classes of stock of a foreign corporat ion.
821 Taxation of income earned by PFICs rema ins subject to the antideferral PFJC regime and are ineligible
for the dividend received deduction under new section 245A.

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TREAS-17-0313-I-000264

 subpart F, each U.S. shareholder of a specified foreign corporation must include in income its
pro rata share of the foreign corporation ' s subpart F income attributable to its accumulated
deferred foreign income. 822
Acc umulat ed post-1986 deferred foreign income
Accumulated post-1986 deferred foreign income of a specified foreign corporation that is
the subject of the mandat ory inclus ion under this proposal is the greater of the accumulated postI 986 deferred foreign income determined as of November 2, 2017 (the date of introduction of
the bill) or as of December 31 , 2017. The incl udibl e portion of the accum ulated post-1986
deferred foreign income is all post- 1986 earnings and profits ("E&P ") that are (1) not
attributable to income that is effective ly connected with the conduct of a trade or business in the
United State s and thus subject to current U.S. income tax, or (2) when distributed , not exclud ible
from the gross income of a U.S. shareho lder as previously taxed income und er section 959.
Post-1986 earnings and profits are those earnings that accumulat ed in taxable years
beginning after 1986, comput ed in in accordance with sections 964(a) and 986 , even if arising
from periods during which the U. S. shareholder did not own stock of the foreign corporation.
Post-1986 earnings are not reduced by distributions dur ing the taxable year to which section 965
applies. Such earnings are increased by the amoun t of qualified deficits 823 that arose in a taxable
year beginning before January 1, 2018 , if such deficit is also treated as a qualified deficit for
purposes of taxable years beginning after December 31, 2017. Fina lly, the post-1986 earn ings
and profits are determined by reference to the foreign corporation ' s total earnings and profits ,
irrespective of the foreign tax credit separate category limitations.
The Secretary may prescribe appropriate rules regarding the treatment of accumulated
post-1986 foreign deferred income of specified foreign corporations that have shareho lders who
are no t U.S. shareholders. Such rules may also include rules that are appropriate to implement
the intent of the revised section 965 and the use of the date of introduction as one of the
measurement dates in order to estab lish a floor for determining the post- 1986 deferred fore ign
earnings and profits. For examp le, gu idance may address the extent to which retroactive
effective dates selected in entity classification elections filed after introd uction of the bill will be
permitted. 824
Reductions of amounts included in income of U.S. shareholder of foreign
corporations with deficits in E&P
The income incl usion required of a U.S. shareholder under this transition rule is reduced
by the portion of aggregate foreign earnings and profits deficit allocated to that person by reason
822 For purposes of taking into account its subp art F income unde r this rule, a noncon trolled 10/50
corporation is treated as a CFC.
823

Sec . 952(c)(l )(B)(ii).

824
See Treas, Reg, 301.770 1-3(c), under which an election may specify an effective date up to 75 days
prior to the date on which the election is filed.

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TREAS-17-0313-I-000265

 of that person's interest in one or more E&P deficit foreign corporations. An E&P deficit
foreign corporation is defined as any specified foreign corporation owned by the U.S.
shareholder as of the date on which accumulated earnings and profits are measure for that
corporation (November 2, 2017 or December 31, 2017, as the case may be) and which also has a
deficit in post-1986 earnings and profits as of that date. Accordingly, the deficits of a foreign
subsidiary that accumulated prior to its acquisition by the U.S. shareholder may be taken into
account in determining the aggregate foreign earnings and profits deficit of a U.S.
shareholder. 825
The U.S. shareholder aggregates its pro rata share in the foreign E&P deficits of each
such company and allocates such aggregate amount among the deferred foreign income
corporations in which the shareholder is a U.S. shareholder. The aggregate foreign E & P deficit
is allocable to a specified foreign corporation in the same ratio as the U.S. shareholder's pro rata
share of post-1 986 deferred income in that corporation bears to the U.S. shareholder ' s pro rata
share of accumulated po st-1986 deferred foreign income from all deferred income companies of
suc h shareholder.
To illustrate the ratio , assume that Z, a domestic corporation , is a U.S. shareho lder with
respect to each of four spec ified foreign corporations , two of which are E&P deficit foreign
corporations. Assume further the foreign companies have the following accumulated post-1986
deferred foreign income or foreign E&P deficits as of November 2, 2017 and December 31,
2017:

Examp le
Specified Foreign
Corp.

Percentage Owned

Post-1986
profit/deficit USD

A

60%

($1,000)

($600)

B

10%

($200)

($20)

C

70%

$2,000

$1,400

D

100%

$1,000

$1,000

Pro Rata Share

The aggregate foreign E & P deficit of the U. S. shareholder is ($620), and the aggregate
share of accumulated post-1986 deferred foreign income is $2,400. Thus, the portion of the
aggregate foreign E&P deficit allocable to Corpora tion C is ($362) , that is, ($620) x 1400/2400.
825

For examp le, assume that a foreign corporation organized after December 31, 1986 has $ 100 of
accumulated earnings and profits as of November l , 2017 , and December 31, 2017 (determined without diminution
by reason of dividends distributed during the taxable year and after any increase for qualified deficits ), which consist
of $ 120 general limitation earnings and profits and a $20 passive limitation deficit , the foreign corporation 's post1986 earnings and profits wou ld be $100, even if the $20 passive limitation deficit was a hovering deficit described
in Treas. Reg. sec. l.367(b)-l 7(d)( 2). Foreign income taxes related to the hovering deficit , however , would not be
deemed paid by the U.S. shareholder recogni zing an incremental income inclusion.

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 The remainder of the aggregate foreign E&P deficit is allocable to Corporation D. The U.S.
shareholder has a net surplus ofE&P in the amount of $1,780.
The proposal also permits intragroup netting among U.S. shareholders in an affiliated
group in which there is at least one U.S. shareholder with a net E&P surplus and another with a
net E&P deficit. The net E&P surplus shareholder may reduce its net surplus by the
shareholder ' s applicable share of aggregate unused E&P deficit, based on the group ' s ownership
percentage of the members. For example , a U.S. corporation may have two domestic
subsidiaries , X and Y, in which it owns 100 percent and 80 percent , respectively. If X has a
$ 1,000 net E&P surplus , and Y has $1,000 net E&P deficit, Xis an E&P net surplus shareholder ,
and Y is an E&P net deficit shareholder. The net E&P surplus of X may be reduced by the net
E&P deficit of Y to the extent of the group's ownership percentage in Y, which is 80-percent.
The remaining net E&P deficit ofY is unused. If the U.S. shareholder Z is also a wholly owned
subsidiary of the same U.S. parent as X and Y, the group ownership percentage ofY is
unchanged , and the surpluses ofX and Z are reduced ratably by 800 of the net E&P deficit of Y.
Participation exemption applied to accumulated post-1986 deferred foreign income
A U.S. shareholder of a specified foreign corporation is allowed a deduction of a portion
of the increased subpart F income attributable to the inclusion of pre-effective date deferred
foreign income. The amount of the deduction is the sum of the 12-percent rate equivalent
percentage of the inclusion amount that is the shareholder's aggregate cash position and the 5percent rate equivalent percentage of the portion of the inclusion that exceeds the aggregate cash
position. By stating the permitted deduction in the form of a tax rate equivalent percentage, the
proposal ensures that all pre-effective date accumulated post-1986 deferred foreign income is
subject to either a 5-percent or 12-percent rate of tax, depending on the underlying assets as of
the measurement date, without regard to the corporate tax rate that may be in effect at the time of
the inclusion. For example , corporate taxpayers that use a fiscal year as the taxable year may
report the increased subpart F income in a taxable year for which a reduced corporate tax rate
would otherwise apply (on a pro-rated basis under section 15), but the allowable deduction
would be reduced such that the rate of U.S. tax on the income inclusion would be 5 or 12
percent.
Aggregate cash position
The aggregate cash position of a U.S. shareholder is the average of the sum of the
shareholder ' s pro rata share of the cash position of each specified foreign corporation with
respect to which that shareholder is a U.S. shareholder on each of three dates: Date of
introduction (November 2, 2017) and the last day of the two most recent taxable years ending
before the date of introduction. Appropriate adjustments are made if a specified foreign
corporation is not in existence on one or more of those dates. By using a three-year average as
the aggregate cash position for a U.S. shareholders , the effect of unusual or anomalous
transactions is muted.
For purposes of this computation , the cash position of certain non-corporate entities that
would be treated as specified foreign corporations if they were foreign corporations is also
included . The cash position of an entity consists of all cash, net accounts receivables , and the

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 fair market value of similarly liquid assets , specifically including personal property that is
actively traded on an established financial market , government securities , certificates of deposit ,
commercial paper , foreign currency , and short-term obligations. In addition , the Secretary may
identify other assets that are economically equivalent to the enumerated assets that are included.
Certain reductions from aggregate cash position are specified in the proposal. First, rules
are provided to avoid the double counting of cash position of specified foreign corporations in an
affiliated group , while ensuring that all of the cash position is taken into account. Second ,
regardless of the form in which a specified foreign corporation holds earnings , to the extent that
the earnings constitute blocked income that could not be distributed by the corporation due to
local jurisdiction restrictions , 826 such earnings are not included in the cash position of that
specified foreign corporation. The blocked income remains within the scope of the accumulated
post-1986 deferred foreign income that is subject to inclusion under this proposal.

In addition to the authority to identify other assets that are subject to the cash position
determination by regulation , the proposal also authorizes the Secretary to disregard transactions
that he determines had the principal purpose of reducing the aggregate foreign cash position.
Foreign tax credits reduced

The portion of foreign income taxes deemed paid or accrued with respect to the inclusion
required by the proposal are not creditable against the Federal income tax attributable to the
inclusion, nor are they deductible. The disallowed portion of foreign tax credits is 85.7-percent
of foreign taxes paid attributable to the portion of the section 965 inclusion attributable to the
aggregate cash position plus 65.7-percent of foreign taxes paid attributable to the remaining
portion of the section 965 inclusion. 827 A U.S. shareholder is not required to gross-up income
under section 78 to the extent of the taxes for which no foreign tax credit is allowed.
The amount of deferred foreign income required to be included in subpart F income
under this proposal is disregarded for purposes of determining the amount of income from
foreign sources and the combined foreign oil and gas income that a U.S. shareholder has for
purposes of the recapture rules applicable to overall foreign losses, separate limitation losses, and
foreign oil and gas losses under sections 904(f)(l) and 907(c)(4).
The foreign income taxes deemed paid with respect to the inclusion required by the
proposal and for which no credit is allowed in the year of inclusion by reason of section 904
limitations (e.g., because part or all of the inclusion required by the proposal is offset by a net
operating loss deduction) are eligible for a special 20 year carry forward period , rather than the
otherwise available 10 year period.

826

Sec. 964(b) and regulations thereunder.

827

Otber foreign tax credits used by a taxpayer against tax liability resultin g from tbe deemed inclusion

apply in full.

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 Installment payments
A U.S. shareholder may elect to pay the net tax liability resulting from the mandatory
inclusion of pre-effective-date undistributed CFC earnings in eight equal installments. The net
tax liability that may be paid in installments is the excess of the U.S. shareholder ' s net income
tax for the taxable year in which the pre-effective-date undistributed CFC earnings are included
in income over the taxpayer ' s net income tax for that year determined without regard to the
inclusion. Net income tax means net income tax as defined for purposes of the general business
credit , but reduced by the amount of that credit.
An election to pay tax in installments must be made by the due date for the tax return for
the taxable year in which the pre-effective-date undistributed CFC earnings are included in
income. The Treasury Secretary has authority to prescribe the manner of making the election.
The first installment must be paid on the due date (determined without regard to extensions) for
the tax return for the taxable year of the income inclusion. Succeeding installments must be paid
annually no later than the due dates (without extensions) for the income tax return of each
succeeding year. If a deficiency is later determined with respect to the net tax liability , the
additional tax due may be prorated among all installment payments in most circumstances. The
portions of the deficiency prorated to an installment that was due before the deficiency was
assessed must be paid upon notice and demand. The portion prorated to any remaining
installment is payable with the timely payment of that installment payment , unless the deficiency
is attributable to negligence , intentional disregard of rules or regulations , or fraud with intent to
evade tax , in which case the entire deficiency is payable upon notice and demand.
The timely payment of an installment does not incur interest. If a deficiency is
determined that is attributable to an understatement of the net tax liability due under this
proposal , the deficiency is payable with underpayment interest for the period beginning on the
date on which the net tax liability would have been due, without regard to an election to pay in
installments , and ending with the payment of the deficiency. Furthermore , any amount of
deficiency prorated to a remaining installment also bears interest on the deficiency , but not on
the original installment amount.
The proposal also includes an acceleration rule. If (1) there is a failure to pay timely any
required installment , (2) there is a liquidation or sale of substantiall y all of the U.S. shareholder ' s
assets (including in a bankruptcy case) , (3) the U.S. shareholder ceases business , or (4) another
similar circumstance arises , the unpaid portion of all remaining installments is due on the date of
the event ( or, in a title 11 or similar case , the day before the petition is filed) .

Special rule for S corporations
A special rule permits deferral of the transition net tax liability for shareholders of a U. S.
shareholder that is a flow-through entity known as an S corporation. 828 The S corporation is
required to report on its income tax return the amount includible in gross income by reason of
828

Section 136 1 de fines an S corporation as a domestic small business corporation that bas an election in
effect for status as an S corporation , with fewer than 100 shareholders, none of whom are nonresident aliens, and all
of whom are individuals , estates, trusts or certain exemp t organizations .

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 this proposal , as well as the amount of deduction that would be allowable , and provide a copy of
such information to its shareholders. Any shareholder of the S corporation may elect to defer
his portion of the net tax liability at transition to the participation exemption system until the
shareholder ' s taxable year in which a triggering event occurs. The election to defer the tax is due
not later than the due date for the return of the S corporation for its last taxable year that begins
before January 1, 2018.
Three types of events may trigger an end to deferral of the net tax liability. The first type
of triggering event is a change in the status of the corporation as an S corporation. The second
category includes liquidation , sale of substantially all corporate assets , termination of the
company or end of business , or similar event , including reorganization in bankruptcy. The third
type of triggering event is a transfer of shares of stock in the S corporation by the electing
taxpayer , whether by sale, death or otherwise , unless the transferee of the stock agrees with the
Secretary to be liable for net tax liability in the same manner as the transferor. Partial transfers
trigger the end of deferral only with respect to the portion of tax properly allocable to the portion
of stock sold.

If a shareholder of an S corporation has elected deferral under the special rule for S
corporation shareholders and a triggering event occurs , the S corporation and the electing
shareholder are jointly and severally liable for any net tax liability and related interest or
penalties. The period within which the IRS may collect such liability does not begin before the
date of an event that triggers the end of the deferral. If an election to defer payment of the net
tax liability is in effect for a shareholder , that shareholder must report the amount of the deferred
net tax liability on each income tax return due during the period that the election is in effect.
Failure to include that information with each income tax return will result in a penalty equal to
five-percent of the amount that should have been reported.
After a triggering event occurs , a shareholder is the S corporation may elect to pay the net
tax liability in eight equal installments , subject to rules similar to those generally applicable
absent deferral. Whether a shareholder may elect to pay in installments depends upon the type of
event that triggered the end of deferral. If the triggering event is a liquidation , sale of
substantially all corporate assets , termination of the company or end of business , or similar
event , the installment payment election is not available. Instead , the entire net tax liability is due
upon notice and demand. The installment election is due with the timely return for the year in
which the triggering event occurs. The first installment payment is required by the due date of
the same return , determined without regard to extensions of time to file.

Effective Date
The proposal is effective for the last taxable year of a foreign corporation that begins
before January 1, 2018 , and with respect to U.S. shareholders , for the taxable years in which or
with which such taxable years of the foreign corporations end.

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 B. Modifications Related to Foreign Tax Credit System
1. Repeal of section 902 indirect foreign tax credits; determination of section 960 credit on
current year basis

Description of Proposal
The proposal repeals the deemed-paid credit with respect to dividends received by a
domestic corporation which owns 10 percent or more of the voting stock of a foreign
corporation.
A deemed-paid credit is provided with respect to any income inclusion under subpart F.
The deemed-paid credit is limited to the amount of foreign income taxes properly attributable to
the subpart F inclusion. Foreign income taxes under the proposal include income, war profits , or
excess profits taxes paid or accrued by the CFC to any foreign country or possession of the
United States. The proposal eliminates the need for computing and tracking cumulative tax
pools.
Additionally, the proposal provides rules applicable to foreign taxes attributable to
distributions from previously taxed earnings and profits , including distributions made through
tiered-CFCs.
The Secretary is granted authority under the proposal to provide regulations and other
guidance as may be necessary and appropriate to carry out the purposes of this proposal. It is
anticipated that the Secretary would provide regulations with rules for allocating taxes similar to
rules in place for purposes of determining the allocation of taxes to specific foreign tax credit
baskets. 829 Under such rules, taxes are not attributable to an item of subpart F income if the base
upon which the tax was imposed does not include the item of subpart F income. For example , if
foreign law exempts a certain type of income from its tax base, no deemed-paid credit results
from the inclusion of such income as subpart F. Tax imposed on income that is not included in
subpart F income , is not considered attributable to subpart F income.

In addition to the rules described in this section , the proposa l makes several conforming
amendments to various other sections of the Code reflecting the repeal of section 902 and the
modification of section 960. These conforming amendments include amending the section 78
gross-up provision to apply solely to taxes deemed paid under the amended section 960.
Effective Date
The proposa l applies to taxable years beginning after December 31, 2017.

829

See Treas. Reg. sec. l .904-6(a).

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 2. Source of income from sales of inventory determined solely on basis of production
activities
Description of Proposal
Under this proposal , gains, profits , and income from the sale or exchange of inventory
property produced partly in, and partly outside, the United States is allocated and apportioned on
the basis of the location of production with respect to the property. For example , income derived
from the sale of inventory propert y to a foreign juri sdiction is sourced who lly within the United
States if the property was produced entirely in the United States, even if title passage occurred
elsewhere. Likewise , income derived from inventory property sold in the United States, but
produced entirely in another country , is sourced in that country even if title passage occurs in the
United States. If the inventory property is produced partly in, and partly outside, the Un ited
States, however, the income derived from its sale is sourced partly in the United States.
Effective Date
The proposal is effective for taxable years beginning after December 31, 2017 .

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TREAS-17-0313-I-000272

 C. Modification of Subpart F Provisions
1. Repeal of inclusion based on withdrawal of previously excluded subpart F income from
qualified investment

Description of Proposal

The proposal repeals section 955. As a result , a U.S. shareholder in a CFC that invested
its previously excluded subpart F income in qualified foreign base company shipping operations
is no longer required to include in income a pro rata share of the previously excluded subpart F
income when the CFC decreases such investments.
Effective Date

The proposal is effective for taxable years of foreign corporations beginning after
December 31, 2017 , and to taxable years of U.S. shareholders in which or with which such
taxable years of foreign corporations end.
2. Repeal of treatment of foreign base company oil related income as subpart F income
Description of Proposal

The proposal eliminates foreign base company oil related income as a category of foreign
base company income.
Effective Date

The proposal is effective for taxable years of foreign corporations beginning after
December 31, 2017 , and for taxable years of U.S. shareholders in which or with which such
taxable years of foreign corporations end.
3. Inflation adjustment of de minimis exception for foreign base company income
Description of Proposal

In the case of any taxable year beginning after 2017 , the proposal indexes for inflation the
$ 1,000,000 de minimis amount for foreign base company income , with all increases rounded to
the nearest multiple of $50,000.
Effective Date

The proposal is effective for taxable years of foreign corporations beginning after
December 31, 2017 , and for taxable years of U.S . shareholders in which or with which such
taxable years of foreign corporations end.

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 4. Look-thru rule for related controlled foreign corporations made permanent
Description of Proposal
The proposa l make s the exclusion from foreign personal holding company income for
certain dividends , interest (includ ing factoring inco me that is treated as equivale nt to interest
under section 9 54( c)( 1)(E) ), rents , and royalties received or accrued by one contro lled foreign
corporation from a related controlled foreign corporation permane nt.

Effective Date
The propo sal is effec tive for taxable years of foreign corporations beginning after
December 3 1, 2019 , and for taxable years of U.S. shareholders in which or with which such
taxable years of foreign co rporation s end.

5. Modification of stock attribution rules for determining status as a controlled foreign
corporation
Description of Proposal
The proposa l amends the ownership attribution rules of sect ion 958(b) so that certain
stoc k of a fore ign corporation owned by a foreign perso n is attributed to a related U.S. person for
purpo ses of determining whether the related U. S. person is a U.S. shareho lder of the foreign
corporation and , therefore , whet her the foreign corporation is a CFC. In other words , the
proposal provides "downward attribution" from a foreign person to a related U.S. person in
circum stances in whic h present law does not so provide. The pro rata share of a CFC's subpar t F
income that a U.S. share holder is required to include in gross income , however , contin ues to be
determined based on direct or indirect ownership of the CFC , without application of the new
downward attribution rule.

Effective Date
The proposal is effective for taxab le years of foreign corporations beginning after
December 3 1, 2017, and for taxab le years of U.S. shareho lders in which or with which such
taxable years of foreign co rporati ons end.

6. Elimination of requirement that corporation must be controlled for 30 days before
subpart F inclusions apply
Description of Proposal
The proposa l eliminat es the requ ireme nt that a corporat ion must be owned for an
uninterrupted period of 30 days before subpart F inclu sions apply.

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 Effective Date
The proposal is effective for taxable years of fore ign corporat ions beginning after
December 31, 2017 , and for taxab le years of U.S. share holders with or within which such taxab le
years of foreign corporatio ns end.

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 D. Prevention of Base Erosion
1. Current year inclusion by United States shareholders with foreign high returns

Description of Proposal
Under the proposal , a U.S. shareholder of any CFC must include in gross income for a
taxable year an amount equal to 50 percent of its foreign high return amount ("FHRA ") in a
manner generally similar to inclusions of subpart F income. FHRA means , with respect to any
U.S. shareholder for the shareholder ' s taxable year, the shareholder 's net CFC tested income less
an amount equal to the excess (if any) of (1) the applicable percentage of the aggregate of the
shareholder ' s pro rata share of the qualified business asset investment ("QBAI ") of each CFC
with respect to which it is a U.S. shareholder over (2) the amount of interest expense taken into
account in determining the shareholder ' s net CFC tested income. The applicable percentage is
the Federal short-term rate (determined under section 1274(d) for the month in which such
shareholder ' s taxable year ends) plus seven percentage points.

Net CFC tested income
Net CFC tested income means, with respect to any U.S. shareholder , the excess of the
aggregate of its pro rata share of the tested income of each CFC with respect to which it is a U.S.
shareholder over the aggregate of its pro rata share of the tested loss of each CFC with respect to
which it is a U.S. shareholder. Pro rata shares are determined under the rules of section
95l(a)(2).
The tested income of a CFC means the excess (if any) of the gross income of the
corporation determined without regard to: (1) the corporation ' s ECI if subject to tax ; (2) any
gross income taken into account in determining the corporation ' s subpart F income ; (3) any
amount , except as otherwise provided by the Secretary , that qualifies for CFC look-through
treatment , but only to the extent that any deduction allowable for the payment or accrual of such
amount does not result in a reduction of the FHRA of any U.S. shareholder (determine without
regard to such amount) ; (4) any gross income excluded as foreign personal holding company
income by reason of the exceptions for active financing income and active insurance income ; (5)
any gross income excluded from foreign base company income or insurance income by reason
the high-tax exception under section 954(b )(4) ; ( 6) any dividend received from a related person
(as defined in section 954(d)(3)) ; and (7) any commodities gross income , over deductions
(including taxes) properly allocable to such gross income. Commodities gross income means the
corporation's gross income from the disposition of commodities that it has produced or extracted
and that are commodities described in sections 475(e)(2)(A) and 475(e)(2)(D).
The tested loss of a CFC means the excess (if any) of the deductions (including taxes)
properly allocable to the corporation 's gross income determined without regard to items (1)
through (7) in the preceding paragraph , above , over the amount of such gross income.

Qualified business asset investment
QBAI means , with respect to any CFC for a taxable year, the aggregate of its adjusted
bases (determined as of the close of the taxable year and after any adjustments with respect to

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 such taxable year) in specified tangible property used in its trade or business and with respect to
which a deduction is allowable under section 168. Specified tangible property means any
tangible property to the extent such property is used in the production of tested income or tested
loss. The adjusted basis in any property is determined without regard to any provision of law
which is enacted after the date of enactment of this proposal.

If a CFC holds an interest in a partnership as of the close of the corporation's taxable
year, the corporation takes into account its distributive share of the aggregate of the partnership's
adjusted bases (determined as of such date in the hands of the partnership) in tangible property
held by the partnership to the extent that such property is used in the trade or business of the
partnership and is used in the production of tested income or tested loss (determined with respect
to the corporation's distributive share of income or loss with respect to such property). The
corporation's distributive share of the adjusted basis of any property is the corporation ' s
distributive share of income and loss with respect to such property.
For purposes of determining QBAI, the Secretary is authorized to issue anti-avoidance
regulations or other guidance as the Secretary determines appropriate , including regulations or
other guidance that provide for the treatment of property if the property is transferred or held
temporarily , or if avoidance was a factor in the transfer or holding of the property.
Foreign tax credits and coordination with subpart F

Deemed-paid credit for taxes properly attributable to tested income
For any FHRA included in the gross income of a domestic corporation, the corporation is
deemed to have paid foreign income taxes equal to 80 percent of its foreign high return
percentage multiplied by the aggregate tested foreign income taxes paid or accrued by each CFC
with respect to which the corporation is a U.S. shareholder. The foreign high return percentage
is the corporation's FHRA divided by the aggregate amount of its pro rata share of the tested
income of each CFC with respect to which it is a U.S. shareholder. Tested foreign income taxes
are the foreign income taxes paid or accrued by a CFC that are properly attributable to gross
income taken into account in determining tested income or tested loss.
The proposal creates a separate foreign tax credit basket for FHRA , with no carryforward
available for excess credits. The taxes deemed to have been paid are treated as an increase in
FHRA for purposes of section 78, determined by taking into account 100 percent of the
aggregate tested foreign income taxes.
Coordination with subpart F
With respect to any CFC any pro rata amount from which is taken into account in
determining the FHRA included in gross income of a U.S. shareholder , such amount , except as
otherwise provided by the Secretary , is treated in the same manner as an amount included under
section 95l(a)(l)(A) for purposes of applying sections 168(h)(2)(B), 535(b)(l0), 85l(b) ,
904(h)(l) , 959, 961, 962(c) , 962(d) , 993(a)(l)(E) , 996(£)(1), 1248(b)(l) , 1248(d)(l) ,
650l(e)(l)(C) , 6654(d)(2)(D) , and 6655(e)(4).

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 The portion of the FHRA treated as being with respect to a CFC equals zero for a
corporation with tested loss and, for a corporation with tested income , the portion of the FHRA
which bears the same ratio to the FHRA as the shareholder ' s pro rata amount of tested income of
such corporation bears to the aggregate amount of the shareholder's pro rata share of the tested
income of each CFC with respect to which it is a U.S. shareholder.
Tested losses taken into account in determining a U.S. shareholder ' s FHRA cannot also
reduce the shareholder's inclusions in gross income under section 95l(a)(l)(A) by reason of the
earnings and profits limitation in section 952(c). Accordingly , a U.S. shareholder's amount
included in gross income under section 95l(a)(l)(A) with respect to a CFC is determined by
increasing the earnings and profits of such corporation (solely for purposes of determining such
amount) by an amount that bears the same ratio (not greater than 1) to the shareholder ' s pro rata
share of the tested loss of such CFC as ( 1) the aggregate amount of the shareholder ' s pro rata
share of the tested income of each CFC with respect to which it is a U.S. shareholder bears to (2)
the aggregate amount of the shareholder's tested loss of each CFC with respect to which it is a
U.S. shareholder. If this increase in earnings and profits results in an incremental inclusion
under section 95l(a)(l)(A , the CFC will increases its earnings and profits described in section
959(c)(2) by that amount and decrease its earnings and profits in section 959(c)(3) by that
amount (even if that results in, or increases , a deficit).
Taxable years for which persons are treated as U. S. shareholders of a CFC
For purposes of the FHRA inclusion , a U.S. shareholder of a CFC is treated as a U.S.
shareholder of the corporation for any taxable year of the shareholder if a taxable year of the
corporation ends in or with the taxable year of such person and the person owns (within the
meaning of section 958(a)) stock in the corporation on the last day in the taxable year of the
corporation on which the corporation is a CFC. A corporation is generally treated as a CFC for
any taxable year if the corporation is a CFC at any time during the taxable year.

Effective Date
The proposal is effective for taxable years of foreign corporations beginning after
December 31 , 2017 , and for taxable years of U.S. shareholders in which or with which such
taxable years of foreign corporations end.

2. Limitation on deduction of interest by domestic corporations which are members of an
international financial reporting group
Description of Proposal
The proposal limits the amount of U.S. interest expense that a domestic corporation
which is a member of an international financial reporting group can deduct to the sum of the
member 's interest income plus the allowable percentage of 110 percent of net interest expense.
An international financial reporting group is a group that: ( 1) includes at least one foreign
corporation engaged in a U.S. trade or business or at least one domestic corporation and one
foreign corporation at any time during the group's reporting year , (2) prepares consolidated
financial statements in accordance with U.S. Generally Accepted Accounting Principles
("GAAP "), International Financial Reporting Standards ("IFRS "), or any other comparable

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 method identified by the Secretary , 830 and (3) reports in such statements average annual gross
receipts in excess of $100 ,000,000 (determined in the aggregate with respect to all entities which
are part of such group) for the three-reporting-year period ending with such reporting year.
The allowable percentage is the ratio of a corporation ' s allocable share of the
international financial reporting group ' s net interest expense over such corporation ' s reported net
interest expense. A corporation's allocable share of an international financial reporting group's
net interest expense is determined based on the corporation's share of the group's earnings
(computed by adding back net interest expense , taxes, depreciation , and amortization) as
reflected in the group ' s consolidated financial statements. A corporation's reported net interest
expense is its net interest expense reported in the books and records used to prepare the group ' s
consolidated financial statements. For international financial reporting groups that do not
prepare consolidated financial statements under U.S. GAAP , IFRS, or any other comparable
method identified by the Secretary and which are filed with the United States Securities and
Exchange Commission , the proposal provides a hierarchy of other audited consolidated financial
statements that may be relied upon by such group.
The proposal applies to partnerships at the partnership level under rules similar to the
rules of section 3301 of the bill. The proposal also applies to foreign corporations engaged in a
U.S. trade or business. A U.S. consolidated group is considered a single corporation under this
proposal.
The amount of any interest not allowed as a deduction for any taxable year by reason of
this proposal or section 3301 of the bill (depending on whichever imposes the lower limitation
with respect to such taxable year) can be carried forward as interest (and as business interest for
purposes of section 330 I of the bill) for up to five years.
Effective Date

The proposal is effective for taxable years beginning after December 31, 2017.

830

The Interna tional Financial Reportin g Standards are a set of accoun ting standards commonly used for
the preparation o f financial statements of public companies listed in countri es outside the United States.

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TREAS-17-0313-I-000279

 3. Excise tax on certain payments from domestic corporations to related foreign
corporations; election to treat such payments as effectively connected income
Description of Proposal

In general
This proposal imposes an excise tax on certain amounts paid by U.S. payers to certain
related fore ign recipient s to the exte nt the amounts are deductible by the U.S. payor. However,
the excise tax does not apply if the foreign recipient elects to be subject to U.S. income tax on
the amounts received. In calc ulating the U.S. income tax liabi lity imposed under such an
election, deemed ex penses are allowed as a deduction. No foreign tax credits are allowed agains t
the U.S. tax liabili ty imp osed by this proposal.

Excise tax
The proposal provides for an excise tax on specified amounts paid or incurred by a
domestic corporation to a foreign corporation if both the foreign and domestic corporat ion s are
members of the same international financial repo rtin g grou p . The amount of the tax is equa l to
20 percent of the spec ified amount s paid or incurred. The exc ise tax is not impo sed with respect
to amounts that are or are deemed to be effec tively connected wit h a U.S. trade or business of the
foreign corpora tion.

A spec ified amount is any amount which is allowable by the payor as a deduction or
includible in costs of goods sold, or inventory , or in the basis of an amorti zab le or depreciable
asset. A spec ified amount does not includ e: (i) interest , (ii) an amount paid or incurred for the
acqui sition of a commodity defined in sections 47 5( e )(2)(A) or (d), that is, a commo dit y actively
traded within the meanin g of sectio n 1092(d)(l) or an identifi ed hedge of such commodity , or,
(iii) for a payor which has elected to use a serv ices cost method under section 482 , an amount
paid or incurred for services if such amount is the total services cost with no markup.
An international financia l reporting group is any group of entities that prepares
conso lidated financ ial stateme nts 831 if the average annua l aggregate payme nt amount for the
group for the three-year period ending in the reporting year exceeds $ 100,000 ,000. The annual
aggregate payment amount means the aggregate of the specifie d amounts made by U.S. members
of the group to fore ign mem bers of the gro up durin g the reporting year.

831

This term is de fined in new section 163(n)(4) as a financial state ment certified as being prepared in
accorda nce with genera lly accepted accounting princip les, international financial reporting standards , or any other
comparable method of accounting identified by the Secretary of the Tr easury and which is: (i) a 10-K (or successor
form), or annual statement to shareho lders required to be filed with the United States Securities and Exchange
Commission , or, if this is not availab le, (ii) an audited financial statement used for (I) credit purposes, (2) reporting
to shareholders, partners or other proprietors , or to beneficiaries , or (3) any other substantia l nontax purpose , or, if
(i) and (ii) are not available, (iii) filed with any other Federal or State agency for nontax purposes , or, if (i), (ii), or
(iii) are not available, a financial statement used for a purpose described in (ii)(!) , (2) and (3), or filed with any
regu latory or governmenta l body, within or outside the Un ited States, specified by the Secretary of the Trea sury.

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TREAS-17-0313-I-000280

 Partnerships and branches

For purposes of this proposal , a partnership is treated as an aggregate of its partners.
According ly, a payment made to a partnership is treated as a payment to the partners , and a
payment from a partnership is treated as a payment from the partners , in an amount equal to the
partner ' s distributive share of the relevant item of income, gain, deduction , or loss.
For purposes of this proposal , U.S. branches are treated as separate entities for purposes
of determining the treatment of payments between a branch and entities other than its owner and
for purposes of deemed payments between a branch and its owner.
Election to treat payments as effectively connected income

If a specified amount is paid or incurred by a domestic corporation with respect to a
foreign corporation and both the foreign and domestic corporat ions are members of the same
international financial reporting group, the foreign corporation may elect to take into account all
such specified amounts as if the foreign corporation were engaged in a U.S. trade or business and
had a permanent establishment and as if the payment were effectively connected with that U. S.
trade or business and were attributable to the permanent establishment. If the foreign
corporation makes such election , the excise tax is not imposed. The election applies for the
taxable year for which the election is made and all subsequent taxable years unless revoked with
consent of the Secretary of the Treasury.
The deemed expenses with respect to any specified amount received by a foreign
corporation during any reporting year is the amount of expenses such that the net income ratio of
the foreign corporation with respect to the specified amount (taking into account only such
deemed expenses) is equal to the net income ratio of the international financia l reporting group
determined for the reporting year with respect to the product line to which the specified amount
relates. The net income ratio is the ratio of net income determined without regard to income
taxes, interest income , and interest expense , divided by revenue. The net income ratio is
calculated in accordance w ith the book s and records used in preparing the group ' s consolidated
financial statements.
In general , the amount treated as effectively connected income under this proposal is
treated as such for all purposes of the Code. For example , it is subject to the branch profit tax
and is not subject to the excise tax under section 4371. However , for purposes of section 245
and new sectio n 245A, these amounts are not treated as effectively connected income .
Therefore , a distribution of earnings attributable to the amounts described in this proposal is
eligible for the participation DRD under new section 245A.

Coordination with FDAP

Amounts treated as effect ively connected income under this proposal are not excluded
from the definition of fixed or determinable annual or periodical ("FDAP ") income. Payments
subject to tax under section 88 1 do not constitute specified payments under this proposal except
to the extent that the rate of tax imposed under section 881 is reduced by a bilateral incom e tax
treaty.

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TREAS-17-0313-I-000281

 Joint and several liability
If there is an underpayment with respect to any taxable year of an electing foreign
corporation which is a member of an international financial accounting group , each domestic
corporation in the group is jointly and severally liable for as much of the underpayment as does
not exceed the excess of such underpayment over the amount of such underpayment determined
without regard to this rule and any penalty , addition to tax , or additional amount attributable to
the above amount.

Foreign tax credits and deductions
No credit or deduction is allowed for any taxes (including withholding taxes) paid or
accrued with respect to any amount to which this proposal applies.

Reporting
An electing foreign corporation that receives a specified amount is required to report ,
with respect to each member of the international financial reporting group from which any such
amount is received: (i) the name and taxpayer identification number of each member , (ii) the
aggregate amounts received from each member , (iii) the product lines to which such amounts
relate , the aggregate amounts relating to each product line, and the net income ratio for each
product line , and (iv) a summary of changes in financial accounting methods that affect the
computation of any net income ratio described above.
A domestic corporation that pays or accrues a specified amount with respect to which a
foreign corporation has made the election is required to make a return according to the forms and
regulations prescribed by the Secretary of the Treasury containing certain information and to
maintain sufficient records to determine the tax liability imposed by this proposal. The
information required to be provided is as follows: (I) the name and taxpayer identification
number of the common parent of the international financial reporting group of which the
domestic corporation is a member , and (2) with respect to a specified amount: (A) the name and
taxpayer identification number of the recipient of the amount , (B) the aggregate amounts
received by the recipient , (C) the product lines to which the amounts relate and the aggregate
amounts for each product line, and the net income ratio for each product line , and (D) a summary
of any changes in financial accounting methods that affect the computation of any net income
ratio described in (C).

Effective Date
The proposal to amounts paid or incurred after December 31, 2018 .

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TREAS-17-0313-I-000282

 E. Provisions Related to Possessions of the United States
1. Extension of deduction allowable with respect to income attributable to domestic
production activities in Puerto Rico

Present Law
General
Present law generall y provides a deduction from taxable income (or, in the case of an
indi vidual , adjusted gross income) that is equal to nine percent of the lesser of the taxpayer's
qualified production activities income or taxable income for the taxable year. For taxpayers
subject to the 35-percent corporate income tax rate , the nine-percent deduction effectively
reduces the corporate income tax rate to slightly less than 32 perc ent on qualified production
activities income.

In general , qual ified production activities income is equal to domestic production gross
receipts reduced by the sum of: (1) the costs of goods sold that are allocable to those receipts ;
and (2) other expenses , losses, or deductions which are properly allocable to those receipts.
Domestic production gross rece ipts generally are gross receipts of a taxpayer that are
derived from: (1) any sale, exchange , or other disposition , or any lease, rental , or license , of
qualifying production property 832 that was manufactured , produced , grown or extracted by the
taxpayer in who le or in significant part with in the U nited States ; (2) any sale , exchange , or other
disposition , or any lease , rental , or licen se, of qualified film 833 produced by the taxpayer ; (3) any
lease, rental , license, sale , exchange, or other disposition of electricity, natural gas, or potable
water produced by the taxpayer in the U nited State s; (4) cons truction of real prop erty performed
in the United States by a taxpayer in the ordinary course of a construction trade or business ; or
(5) engineering or architectural serv ices performed in the United States for the con struction of
real property located in the United States.
The amount of the deduction for a taxab le year is lim ited to 50 percent of the wages paid
by the taxpayer , and properly allocable to domestic production gross receipts , during the
calendar year that ends in such tax able year. 834 Wages paid to bona fide residents of Puerto Rico
832

Qualifying produc tion proper ty generally includes any tangible personal prope rty, computer software,
and sound recordings.
833
Qualified film includes any motion pictur e film or videotap e (includ ing live or delayed television
programming , but not includin g certain sexually explicit produc tions) if 50 percent or more of the total
compensation relating to the produc tion of the film (including compensation in the form of residuals and
participatio ns) constitutes compensa tion for services performed in the United States by actors , production personnel ,
directors, and producers.
834

For purposes of the propo sal, "wages" includ e the sum of the amo unts o f wages as defined in
section 340 I (a) and elective deferrals that the taxpaye r properl y reports to the Social Security Administration with
respect to the employment of employees of the taxpayer during the calendar year ending during the taxpayer's
taxable year .

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TREAS-17-0313-I-000283

 generally are not included in the definition of wages for purposes of computing the wage
limitation amount. 835
Rules for Puerto Rico
When used in the Code in a geographical sense, the term "United States" generally
includes only the States and the District of Columbia. 836 A special rule for determining domestic
production gross receipts , however , provides that in the case of any taxpayer with gros s receipts
from sources within the Commonwealth of Puerto Rico , the term "United States" includes the
Commonwealth of Puerto Rico , but only if all of the taxpayer's Puerto Rico-sourced gross
receipts are taxable under the Federal income tax for individuals or corporations. 837 In
computing the SO-percent wage limitation , the taxpayer is permitted to take into account wages
paid to bona fide residents of Puerto Rico for services performed in Puerto Rico. 838
The special rules for Puerto Rico apply only with respect to the first 11 taxable years of a
taxpayer beginning after December 31, 2005 and before January 1, 2017.
Description of Proposal
The proposal extends the special domestic production activities rules for Puerto Rico to
apply for the first 12 taxable years of a taxpayer beginning after December 31, 2005 and before
January 1, 2018.
Effective Date
The proposal applies to taxable years beginning after December 31, 2016.
2. Extension of temporary increase in limit on cover over of rum excise taxes to Puerto
Rico and the Virgin Islands
Present Law
A $13.50 per proof gallon 839 excise tax is imposed on distilled spirits produced in or
imported into the United States. 840 The excise tax doe s not apply to distilled spirits that are

835

Section 340 I(a)(8)( C) exclud es wages paid to United States citizens who are bona fide res idents of
Puerto Rico from the term wages for purposes of income tax withholdin g.
836

Sec . 7701 (a)(9).

837

Sec. I 99(d)( 8)(A).

838

Sec. 199(d)( 8)(B).

839

A proof gallon is a liquid ga llon consisting of 50 percent alcohol. See secs. 5002(a)(I 0) and ( 11).

840

Sec . 500 1(a)( I).

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TREAS-17-0313-I-000284

 exported from the United States, including exports to U.S. possessions (e.g., Puerto Rico and the
Virgin Islands). 841
The Code provides for cover over (payment) to Puerto Rico and the Virgin Islands of the
excise tax imposed on rum imported (or brought) into the United States, without regard to the
country of origin. 842 The amount of the cover over is limited under Code section 7652(f) to
$ 10.50 per proof gallon ($13 .25 per proof gallon before January 1, 2017).
Tax amounts attributable to shipments to the United States of rum produced in Puerto
Rico are covered over to Puerto Rico. Tax amounts attributable to shipments to the United
States of rum produced in the Virgin Islands are covered over to the Virgin Islands. Tax
amounts attributable to shipments to the United States of rum produced in neither Puerto Rico
nor the Virgin Islands are divided and covered over to the two possessions under a formula. 843
Amounts covered over to Puerto Rico and the Virgin Islands are deposited into the treasuries of
the two possessions for use as those possessions determine. 844 All of the amounts covered over
are subject to the limitation.
Description of Proposal

The proposal suspends for six years the $10.50 per proof gallon limitation on the amount
of excise taxes on rum covered over to Puerto Rico and the Virgin Islands. Under the proposal ,
the cover-over limitation of $13.25 per proof gallon is extended for rum brought into the United
States after December 31, 2016 and before January 1, 2023. After December 31, 2022 , the cover
over amount reverts to $ 10.50 per proof gallon.
Effective Date

The proposal applies to distilled spirits brought into the United States after December 31,
2016.
3. Extension of American Samoa economic development credit
Present Law

A domestic corporation that was an existing credit claimant with respect to American
Samoa and that elected the application of section 936 for its last taxable year beginning before
January 1, 2006 is allowed a credit based on the corporation ' s economic activity-based limitation
841

Secs. 5214(a)( l)(A), 5002(a)( 15), 7653(b) and (c).

842

Secs. 7652(a)(3), (b)(3), and (e)( l ). One percent of the amount of excise tax collected from imports
into the United States of artic les produced in the Virgin Islands is retained by the United States under section
7652(b)(3).
843

Sec. 7652(e)(2).

844

Secs. 7652(a)(3), (b)(3), and (e)(l ).

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TREAS-17-0313-I-000285

 with respect to American Samoa. The credit is not part of the Code but is computed based on the
rules of sections 30A and 936. The credit is allowed for the first eleven taxable years of a
corporation that begin after December 31, 2005, and before January 1, 2017.
A corporation was an existing credit claimant with respect to a American Samoa if ( 1) the
corporation was engaged in the active conduct of a trade or business within American Samoa on
October 13, 1995, and (2) the corporation elected the benefits of the possession tax credit 845 in an
election in effect for its taxable year that included October 13, 1995.846 A corporation that added
a substantial new line of business (other than in a qualifying acquisition of all the assets of a
trade or business of an existing credit claimant) ceased to be an existing credit claimant as of the
close of the taxable year ending before the date on which that new line of business was added.
The amount of the credit allowed to a qualifying domestic corporation under the proposal
is equal to the sum of the amounts used in computing the corporation's economic activity-based
limitation with respect to American Samoa, except that no credit is allowed for the amount of
any American Samoa income taxes. Thus , for any qualifying corporation the amount of the
credit equals the sum of (1) 60 percent of the corporation's qualified American Samoa wages and
allocable employee fringe benefit expenses and (2) 15 percent of the corporation's depreciation
allowances with respect to short-life qualified American Samoa tangible property, plus 40
percent of the corporation's depreciation allowances with respect to medium-life qualified

845

For taxable years beginning before January 1, 2006, certain domestic corporations with business
operations in the U.S. possessions were e ligible for the possession tax credit. Secs. 27(b) and 936. This credit offset
the U.S. tax imposed on certain income related to operations in the U.S. possessions. Subject to certain limitations,
the amount of the possession tax credit allowed to any domestic corporation equaled the portion of that corporation's
U.S. tax that was attributable to the corporation's non-U.S. source taxable income from (1) the active conduct ofa
trade or business within a U.S. possession, (2) the sale or exchange of substantially all of the assets that were used in
such a trade or business, or (3) certain possessions investment. No deduction or foreign tax credit was allowed for
any possess ions or foreign tax paid or accrued with respect to taxable income that was taken into account in
computing the credit under section 936. Under the economic activity -based limit, the amount of the credit could not
exceed an amount equal to the sum of(l) 60 percent of the taxpayer's qualified possession wages and allocable
employee fringe benefit expenses, (2) 15 percent of depreciation allowances with respect to short-life qualified
tangible property , plus 40 percent of depreciation allowances with respect to medium-life qualified tangible
property , plus 65 percent of deprecia tion allowances with respect to long-life qualified tangible property , and (3) in
certain cases, a portion of the taxpayer's possession income taxes. A taxpayer could elect , instead of the economic
activity-based limit, a limit equal to the applicable percenta ge of the credit that otherwise would have been
allowable with respect to possess ion business income , beginning in 1998, the applicable percentage was 40 percent.
To qualify for the possession tax credit for a taxable year, a domestic corporation was required to satisfy
two conditions. First, the corporation was required to derive at least 80 percent of its gross income for the three-year
period immediately preceding the close of the taxable year from sources within a possession. Second , the
corporation was required to derive at least 75 percent of its gross income for that same period from the active
conduct of a possession business. Sec. 936(a)(2). The section 936 credit genera lly expired for taxab le years
beginning after December 31, 2005.
846

A corporation will qualify as an exist ing credit claimant if it acquired all the assets of a trade or
business of a corporation that (1) actively conducted that trade or business in a possession on October 13, 1995, and
(2) had elected the benefits of the possession tax credit in an election in effect for the taxable year that included
October 13, 1995.

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TREAS-17-0313-I-000286

 American Samoa tangible property , plus 65 percent of the corporatio n's depreciation allowances
with respect to long-life qualified American Samoa tangible property.
The sect ion 936(c) rule denying a credit or deduction for any possessions or foreign tax
paid with respect to taxable income taken into account in computing the credit under section 936
does not apply with respect to the credit allowed by the proposal.
For taxable years beginning after December 31, 2016 the credit rules are modifi ed in two
ways. First , domestic corporations with operations in Amer ican Samoa are allowed the credit
even if those corporations are not existing credit claimants. Second , the credit is available to a
domestic corporation ( either an existing credit claimant or a new credit claimant) only if, in
addition to satisfy ing all the present law requirements for claiming the cred it, the corporation
also has qualifi ed production activities income (as defined in section 199(c) by substituting
"American Samoa" for "the United States" in each place that latter term appears).

In the case of a corpora tion that is an existing credit claimant with respect to American
Samoa and that elected the application of section 936 for its last taxable year beginning before
January 1, 2006, the credit applies to the first nine taxable years of the corporat ion which begin
after December 31, 2005 , and before January 1, 2017. For any other corporation , the credit
applies to the first three taxable years of that corporatio n which begin after December 31, 201 1
and before January 1, 2017.
Description of Proposal
The proposal extends the credit for five years to apply (a) in the case of a corporation that
is an existing credit claimant with respect to American Samoa and that elected the application of
sect ion 936 for its last taxable year beginning before January 1, 2006, to the first 17 taxable years
of the corporati on which begin after December 31, 2005, and before January 1, 2023 , and (b) in
the case of any other corporation, to the first 11 taxable years of the corporation which begin
after December 31, 2011 and before January 1, 2023.
Effective Date
The proposal applies to taxable years beginning after December 31, 2016.

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TREAS-17-0313-I-000287

 F. Other International Reforms
1. Restriction on insurance business exception to the passive foreign investment company
rules

Description of Proposal
The proposal modifies the requirements for a corporation the income of which is not
includ ed in passive income for purposes of the PFIC rules. The pro posa l replaces the test based
on whether a corpora tion is predominantly engaged in an insurance business with a test based on
the corporation's insurance liabilities. The requirement that the foreign corporation would be
subject to tax under subchapter L if it were a domestic corpora tion is retained.
Under the proposal , passive incom e for purposes of the PFIC rules does not includ e
income derived in the active conduc t of an insurance business by a corporatio n (1) that would be
subject to tax un der subchapter L if it were a domestic corporation; and (2) the appl icable
insurance liabilities of which constit ute more than 25 percent of its total asse ts as reported on the
company's app licable financial statemen t for the last year ending wit h or within the taxable year.
For the purpose of the propo sal' s except ion from pass ive income , applicab le insurance
liabilities means , with respect to any property and casualty or life insurance business ( 1) loss and
loss adjustment expenses , (2) reserves (other than deficiency , contingency , or unearned premium
reserves) for life and heal th insurance risks and life and healt h insurance claims with respect to
contracts providing coverage for mortality or morbidity risks. This includes loss reserves for
property and casualty , life , and health insurance contracts and annuity contracts. Unearned
premium reserves wi th respect to any type of risk are not treated as appl icable insuran ce
liabilities for purposes of the proposal. For purposes of the proposal , the amount of any
appl icable insurance liability may not exceed the lesse r of such amount (1) as reported to the
applicable insurance regulatory body in the applicable financial statement (or, if less, the amount
required by applicable law or regulation) , or (2) as determined under regulations prescribed by
the Secretary.
An app licable financial statement is a statement for financial reporting purposes that (I)
is made on the basis of generally accepted accoun ting principles , (2) is made on the basis of
international financia l reporting standards , but on ly if there is no statement made on the basis of
genera lly accepted accou ntin g principles , or (3) except as otherwise provided by the Secretary in
regulations , is the annua l stateme nt requ ired to be filed with the applicable insurance regulatory
body , but only if there is no statement made on either of the foregoing bases. Unless otherwise
provided in regulations , it is intended that generally accep ted accounting principles means U.S.
GAAP.
The applicable insurance regulatory body means , with respect to any insurance business ,
the enti ty estab lished by law to license , authorize , or regulate such insurance business and to
which the applicable financial statement is provided . For examp le, in the United States , the
applicable insurance regulatory body is the State insurance regulator to which the corporation
prov ides its annual stateme nt.

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TREAS-17-0313-I-000288

 If a corporation fails to qualify solely because its applicable insurance liabilities
constitute 25 percent or less of its total assets , a Un ited States person who owns stock of the
corporat ion may elect in such manner as the Secretary prescribes to treat the stock as stock of a
qualifying insurance corporation if ( 1) the corpora tion 's applicable insurance liabiliti es
constitute at least 10 percent of its total assets, and (2) based on the applicab le facts and
circumstances , the corporation is predominantl y engaged in an insurance business , and its failure
to qualify under the 25 percent thres hold is due solely to runoff-re lated or rating-related
circumstances involving such insurance business. Such circums tances include, for example, the
fact that the company is in runoff, that is, it is not taking on new insurance business (and
consequently has little or no premium income), and is using its remaining assets to pay off
claims with respect to pre-existing insurance risks on its book s. Such circumstances also include,
for example , the application to the company of specific requirements with respect to capital and
surplu s relating to insurance liabilities imposed by a rating agency as a condition of obtaining a
rating necessary to write new insurance business for the current year.

Effective Date

The propo sal applies to taxable years beginning after December 31, 2017.
2. Limitation on treaty benefits for certain deductible payments
Description of Proposal

The proposal limits tax treaty benefits with respect to U.S. withholding tax imposed on
deductible related-party payments. Under the propo sal, the amount of U.S. withholding tax
imposed on deductible related-party payments may not be reduced under any U.S. income tax
treaty unless such withholding tax would have been reduced under a U.S. income tax treaty if the
payment were made directly to the foreign parent corporation of the payee. A payment is a
deductible related-party payment if it is made directly or indirectly by any person to any other
person, if it is allowable as a deduction for U.S . tax purposes, and if both persons are members of
the same foreign controlled group of entities.
For purposes of the proposal , a foreign contro lled group of entities is a contro lled group
of corporations as defined in section 1563(a)(l) , modified as described below , in which the
common parent company is a foreign corporation. Such common parent company is referred to
as the foreign parent corporation. A controlled group of corporat ions cons ists of a chain or
chains of corporations connected through direct stock ownership of at least 80 percent of the
total combined voting power of all classes of stock entitled to vote or at least 80 percent of the
total value of shares of all classes of stock of each of the corporations . For purposes of the
proposal , the relevant ownership threshold is lowered from at least 80 percent to more than 50
percent , certain members of the controlled group of corporations that would otherwise be treated
as excluded members are not treated as excluded members,847 and insurance companies are not
847

Under section 1563(b)(2), a corporation that is a member of a controlled group of corporations on
December 31 of a taxable year is treated as an excluded member of the group for the taxable year that includes such
December 31 if such corporation (A) is a member of the gro up for less than one-half the number of days in such
taxable year which precedes such December 31; (B) is exempt from taxation under section 501 (a) for such taxable

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TREAS-17-0313-I-000289

 treated as members of a separate controlled group of corporations. In addition, a partne rship or
other noncorporate entity is treated as a member of a controlled group of corporations if such
entity is controlled (within the meaning of section 954(d)(3)) by members of the group.
The Secretary may prescribe regulations or other guidance as are necessary or appropriate
to carry out the purposes of the proposal , including regulations or other guidance providing for
the treatment of two or more persons as members of a foreign controlled group of entities if such
persons would be the common parent of such group if treated as one corporation, and regulations
providing for the treatment of any member of a foreign controlled group of entities as the
common parent of that group if such treatment is appropriate taking into account the economic
relationships among the group entities.
As an example of the operation of the proposal , a deductible payment made by a U.S.
entity to an intermediate foreign entity (the payee) with a foreign parent corporation that is
resident in a country with respect to which the United States does not have an income tax treaty
is always subject to the statutory U.S. withholding tax rate of 30 percent , irrespective of whether
the payee qualifies for benefits under a tax treaty . If, instead , the foreign parent corporation is a
resident of a country with respect to which the United States does have an income tax treaty that
would reduce the withholding tax rate on a payment made directly to the foreign parent
corporation (regardless of the amount of such reduction) , and the payment would qualify for
benefits under that treaty if the payment were made directl y to the foreign parent corporation,
then the payee entity will continue to be eligible for the reduced withholding tax rate under the
U.S. income tax treaty with the payee entity's residence country (even if such reduced treaty rate
is lower than the rate that would be imposed on a hypothetical direct payment to the foreign
parent corporation).

Effective Date
The proposal is effective for payments made after the date of enactment.

year; (C) is a foreign corporation subject to tax under section 881 for such taxable year; (D) is an insurance company
subject to taxation under section 801; or (E) is a franchised corporation (as defined in section l563(f)(4)).

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 TITLE V - EXEMPT ORGANIZATIONS
A. Unrelated Business Income Tax
1. Clarification of unrelated business income tax treatment of entities exempt from tax

under section 501(a)
Present Law
Tax exemption for certain organizations
Section 50l (a) exe mpts certain organizations from Federa l income tax. Suc h
organizations include: (1) tax-exempt organizat ions described in section 50l(c) (including
among others section 50 l (c)(3) charitable organizations and section 50l(c)(4) social welfare
organizations); (2) religious and aposto lic organ izat ions described in sect ion 50 1(d); and (3)
trusts forming part of a pension , profit-shar ing, or stock bonus plan of an employer described in
section 40l(a).
Section 115 excl udes from gross income certain income of entities that perform an
essential governme nt function. The exemption app lies to: (1) income derived from any public
utility or the exerc ise of any essentia l governmenta l funct ion and accruing to a State or any
political subdivision thereof , or the District of Columbia ; or (2) income accruing to the
government of any possession of the United States, or any political sub division thereof.

Unrelated business income tax, in general
An exemp t organization genera lly may have revenue from four sources: contr ibutions ,
gifts, and grants; trade or business income that is related to exempt activit ies (e.g., program
service reven ue); investment income; and trade or business income that is not related to exempt
act ivities. The Federal income tax exemption generally extends to the first three categories , and
does not extend to an organ izat ion's unrelated trade or business income. In some cases ,
however, the investment income of an organization is taxed as if it were unrela ted trade or
business income. 848
The unrelated bu siness income tax ("UBIT") generally applies to income deri ved from a
trade or busine ss regularly carried on by the organ izat ion that is not substant ially related to the
performance of the organization's tax-exempt functions .849 An organization that is subjec t to
UBIT and that has $ 1,000 or more of gross unre lated business taxable income must report that
income on Form 990-T (Exempt Organization Business Income Tax Return).
Most exempt organ izat ions may operate an unre lated trade or business so long as the
organization remains primarily engaged in activities that further its exempt purposes. Therefore ,
848
This is the case for social clubs (sec. 50 I(c)(7)), voluntary employees' beneficiary associat ions (sec.
50l(c)(9)), and organizat ions and trusts described in sections 501(c)(17) and 501(c)(20). Sec. 512(a)(3).
849

Secs. 511-514 .

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 an organization may engage in a substantial amount of unrelated business activity without
jeopardizin g exempt status. A section 501(c)(3) (charitable) organization , however, may not
operate an unrelated trade or business as a substantial part of its activities. 850 Therefore, the
unrelated trade or business activity of a sect ion 50 l(c)(3) organization must be insubstantial.
Organizations subiect to tax on unrelat ed business income

Most exempt organizations are subject to the tax on unrelated business income.
Specifically, organizations subject to the unrelated business income tax generally include: (1)
organizations exemp t from tax under section 50l(a), including organizations described in section
50 1(c) (except for U.S. instrumentalities and certain charitable trusts) ;851 (2) qualified pension ,
profit-sharing , and stock bonu s plans described in sect ion 40l(a) ;852 and (3) certain State
colleges and universities. 853
Description of Proposal

The propo sal clarifies that an organization does not fail to be subject to tax on its
unrelated business income as an organization exempt from tax under section 50 I ( a) solely
because the organization also is exempt, or excludes amounts from gross income , by reason of
another provision of the Code. For example, if an organization is described in section 40l (a)
(and thus is exempt from tax under section 50l(a)) and its income also is described in section
115 (relating to the exclusio n from gross income of certain income derived from the exercise of
an essential governrnental function) , its status under section 115 does not cause it to be exempt
from tax on its unrelated business income.
Effective Date

The proposal is effective for taxable years beginning after December 31, 2017 .
2. Exclusion of research income from unrelated business taxable income limited to publicly
available research
Present Law
Tax exemption for certain organizations

Section 501(a) exempts certain organizations from Federa l income tax. Such
organizations include: (1) tax-exem pt organizations described in section 50l (c) (including
among others section 50l (c)(3) charitable organizations and section 50l(c)(4) social welfare
850

Treas. Reg. sec. l.50l(c )(3)- 1(e).

851

Sec. 5 l l(a)(2)(A ) .

852

Sec. 511(a)(2)(A).

853

Sec . 511(a)(2)(B).

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TREAS-17-0313-I-000292

 organizations) ; (2) religio us and aposto lic organizations described in section 50 1( d); and (3)
trusts forming part of a pension , profit-sharing , or stock bonus plan of an employer described in
section 401(a).
Unrelated business income tax, in general
The unrelated business income tax ("UBIT") generally applies to income derived from a
trade or business regularly carried on by the organ ization that is not substa ntially related to the
performance of the organization ' s tax-exempt functions. 854 An organization that is subject to
UBIT and that has $ 1,000 or more of gross unrelated business taxable income must report that
income on Form 990-T (Exempt Organization Business Income Tax Return).
Most exempt organizations may operate an unrelated trade or business so long as the
organization rema ins primarily engaged in activities that further its exempt purpo ses. Therefore ,
an organization may engage in a substantial amount of unr elated business activity without
jeopardizing exempt status. A section 50 l (c)(3) (charitable) organization , however , may not
operate an unrelated trade or business as a substant ial part of its activ ities. 855 Therefore , the
unrelated trade or business activity of a sect ion 501 (c)(3) organization must be insubstantial.
Organizations subiect to tax on unrelated business income
Most exempt organizations are subject to the tax on unrelated business income.
Specifica lly, organizat ions subject to the unrelated business income tax generally include : (1)
organizations exempt from tax under section 50l(a) , including organizations described in section
501( c) (except for U.S. instrumentalities and certain charitable trusts);856 (2) qualified pension ,
profit-sharing , and stock bonus plans described in section 40l (a);857 and (3) certain State
colleges and universities. 858
Exclusions from Unrelated Business Taxable Income
In general
Certain types of income are specifica lly exempt from unrelated business taxable income,
such as dividends , interest, royalt ies, and certain rents ,859 unless derived from debt-financed
property or from certa in SO-percent controlled subsidiaries. 860 Other exe mptions from UBIT are
854

Secs. 511-514.

855

Treas. Reg. sec. l.501(c )(3) -l( e).

856

Sec . S l l(a)(2)(A) .

857

Sec . S 11(a)(2)(A) .

858

Sec. S 11(a)(2)(B).

859

Secs. Sl l-514.

860

Sec . Sl 2(b)(l 3).

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 provided for activities in whic h substantially all the work is performed by volunteers , for income
from the sale of donated goods , and for certa in activities carried on for the conven ience of
memb ers, students, patients, officers , or employees of a charitabl e organizat ion. In addition ,
special UBIT provisions exemp t from tax activities of trade shows and State fairs, income from
bingo games, and income from the distribution of low-cost items incidental to the solicitation of
charitabl e contribution s. Organizations liable for tax on unrelated business taxable income may
be liable for alternative minimum tax determined after taking into account adjustments and tax
preference items.
Research income
Certain income derived from research activ ities of exempt organizat ions is excluded from
unre lated business taxable income. For example , income derived from research performed for
the Uni ted States, a State, and certa in agenc ies and subdivisions is excl uded. 86 1 Income from
research performed by a co llege, university, or hospital for any person also is excluded. 862
Finally , if an organ ization is operated primarily for purp oses of carrying on fundamental research
the results of which are freely ava ilable to the general public, all incom e derived by research
performed by such organization for any person , not just income derived from research available
to the general public , is excluded. 863
Description of Proposal
The proposal modifie s the exclusion of income from research performe d by an
organization operated primarily for purpo ses of carrying on fund amental research the resu lts of
whic h are freely available to the general public (section 5 12(b )(9)). Under the proposal , the
organization may exclude from unrelated business taxable income under section 5 l 2(b )(9) only
income from such fundamental researc h the results of which are freely ava ilable to the general
public.
Effective Date
The proposal is effective for taxable years beginning after December 3 1, 2017.

861

Sec. 512(b)(7).

862

Sec. 5 l2(b)(8).

863

Sec. 5 l2(b)(9).

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 B. Excise Taxes
1. Simplification of excise tax on private foundation investment income

Present Law
Excise tax on the net investment income of private foundations
Un der section 4940(a) , private foundation s that are recognized as exem pt from Federal
incom e tax under section 50 1(a) (other than exe mpt operating foundations 864) are subje ct to a
two-pe rcent excise tax on their net investment incom e. Net investment incom e genera lly
includes interest , dividends , rents , royalties (and income from sim ilar sources), and capital gain
net income, and is reduced by expenses incurred to earn thi s income. The two-percent rate of tax
is reduced to one-percent in any year in which a foundation exceeds the average histori cal leve l
of its charitable distribut ions. Specifi cally, the exc ise tax rate is reduced if the foundation's
qualifying distributions (generally, amounts paid to accompli sh exempt purposes) 865 equal or
excee d the sum of (1) the amoun t of the foundation 's assets for the taxable year multiplied by the
average percentage of the foundation 's quali fying distributions over the five taxable years
immedi atel y preceding the taxable yea r in question , and (2) one per cent of the net investment
income of the foundation for the taxable year. 866 In addition , the foundation cannot have been
subj ect to tax in any of th e five prece ding years for failure to meet minimum qualifying
distribution requirements in section 4942.
Pri vate founda tions that are not exempt from tax und er section 50l(a), such as certain
charitabl e trusts, are subj ect to an excise tax under section 4940 (b). The tax is equal to the
excess of the sum of the exc ise tax that wo uld have been imposed under section 4940(a) if the
fou ndation we re tax exe mpt and the amount of the tax on unrelat ed bu siness income that wou ld
have been impo sed if the found ation we re tax exempt , over the income tax imposed on the
foundation und er subtitl e A of the Code.
Private foundations are required to make a minimum amount of qualifying distributions
each year to avoid tax under sect ion 4942. The minimum amount of qualifying distributions a
foundation has to make to avoid tax und er section 4942 is reduced by the amount of sect ion 4940
excise taxes paid . 867

864

Sec. 4940(d)(l ). Exempt operating foundations genera lly include organ izations such as museums or
libraries that devote their assets to operating charitable programs but have difficulty meeting the "publ ic suppor t"
tests necessary not to be classified as a private foundation. To be an exempt operating foundation , an organization
must: (I) be an operating foundation (as defined in section 4942(j)(3)); (2) be pub licly supported for at least 10
taxable years; (3) have a govern ing body no more than 25 percent of whom are disqualified persons and that is
broadly representative of the genera l public; and (4) have no officers who are disqualified persons. Sec. 4940(d)(2).
865

Sec. 4942(g).

866

Sec. 4940(e).

867

Sec. 4942(d)(2).

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 Description of Proposal
The proposal replaces the two rates of excise tax on tax-exempt private foundations with
a single rate of tax of 1.4 percent. Thus , under the proposal, a tax-exempt private foundation
generally is subject to an excise tax of 1.4 percent on its net investment income. A taxable
private foundation is subject to an excise tax equal to the excess (if any) of the sum of the 1.4percent net investment income excise tax and the amount of the tax on unrelated business income
(both calculated as if the foundation were tax-exempt) , over the income tax imposed on the
foundation. The proposal repeals the special reduced excise tax rate for private foundations that
exceed their historical level of qualifying distributions.

Effective Date
The proposal is effective for taxable years be ginning after December 31, 2017.

2. Private operating foundation requirements relating to operation of an art museum
Present Law
Public charities and private foundations
An organization qualifying for tax-exempt status under section 501(c)(3) is further
classified as either a public charity or a private foundation. An organization may qualify as a
public charity in several ways. 868 Certain organizations are classified as public charities per se,
regardless of their sources of support. These include churches, certain schools, hospitals and
other medical organizations , certain organ izations providing assistance to colleges and
universities , and governmental units. 869 Other organizat ions qualify as public charities because
they are broadly publicly supported. First , a charity may qualify as publicly supported if at least
one-third of its total support is from gifts, grants or other contributions from governmental units
or the general public. 870 Alternatively, it may qualify as publicly supported if it receives more
than one-third of its total support from a combination of gifts, grants, and contributions from
governmental units and the public plus revenue arising from activities related to its exempt
purposes (e.g., fee for service income). In addition, this category of public charity must not rely
excessively on endowment income as a source of support . 871 A supporting organization , i.e., an
868

The Code does not expressly define the term "public charity," but rather provides exceptions to those
entities that are treated as private foundations.
869
Sec. 509(a)(l) (referring to sections l 70(b)(l)(A)(i) through (iv) for a description of these
organizations).
870

Treas. Reg. sec. l. l 70A-9(t)(2). Failing this mechanical test, the organization may qualify as a public
charity if it passes a "facts and circumstances" test. Treas. Reg. sec. l. l 70A-9(t)(3) .
87 1

To meet this requirement , the organization must nonnally receive more than one-third of its support
from a combination of (I) gifts, grants , contributions, or membership fees and (2) certain gross receipts from
admissions , sales of merchandise , performance of services, and furnishing of facilities in connection with activities
that are related to the organization's exempt purposes. Sec. 509(a)(2)(A). In add ition, the organization must not
normally receive more than one-third of its public support in each taxable year from the sum of (1) gross investment

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 organization that provides support to another section 501 (c)(3) entity that is not a private
fou ndati on and meets certa in other requirements of the Code , also is classified as a publi c
charit y. 872
A section 501 (c)(3) organization that does not fit within any of the above categories is a
private foundation. In genera l, private foundatio ns receive funding from a lim ited number of
sources (e.g., an individua l, a fam ily, or a corporat ion).
The deduction for char itable contributi ons to private foundations is in some instances less
genero u s than the deduction for charitab le contrib utions to public charities. In addition , private
found ations are subject to a number of operational rules and restrictions that do not app ly to
public cha rities. 873

Tax on failure to distribute income by private nonoperating foundations
Private nonoperat ing foundations are required to pay out a minimum amount each year as
qualifying distribu tio ns. 874 In general, a qualifying distribution is an amo unt paid to accomplish
one or more of the organ ization's exempt purposes, includ ing reasonable and necessary
admini strat ive expe nses. 875 Failur e to pay out the minimum required amount resu lts in an initial
excise tax on the foundation of 30 percent of the undi strib uted amount. An additional tax of 100
percent of the undistributed amount applies if an initial tax is impo sed and the required
distribution s have not been made by the end of the applicab le taxable period. 876 A foundation
income and (2) the excess of unrelated business taxable income as determined under section 512 over the amount of
unrelated business income tax imposed by sect ion 511. Sec. 509(a)(2)(B).
872 Sec. 509(a)(3). Supporting organizations are further classified as Type I, II, or III depending on the
relationship they have with the organizations they support. Supporting organizations must support public charities
listed in one of the other categories (i.e. , per se public charities , broad ly supported public charities , or revenue
generating public charities) , and they are not permitted to support other supportin g organizations or testing for
public safety organizations.

Organizations organized and operated exclusively for testing for public safety also are classifi ed as public
charities. Sec. 509(a)( 4). Such organizations , however, are not eligible to rece ive deductible charitable
contributions under section 170.
873
Unlike public charities, private foundations are subject to tax on their net investment income at a rate of
two percent (one percent in some cases). Sec . 4940. Private foundations also are subject to more restrictions on
their activities than are public charities. For example , private foundations are prohibited from engaging in selfdealing transactions (sec. 494 l ), are required to make a minimum amount of charitable distributions each year, (sec.
4942) , are limited in the extent to which they may control a business (sec. 4943), may not make speculative
investments (sec. 4944) , and may not make certain expenditures (sec. 4945). Violations of these rules result in
excise taxes on the foundation and , in some cases , may result in excise taxes on the managers of the foundation.
874

Sec. 4942.

875

Sec. 4942(g)(1 )(A).

876

Sec. 4942(a) and (b). Taxes imposed may be abated if certain conditions are met. Secs. 4961 and 4962.

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 may include as a qualifying distribution the salaries , occupancy expenses , travel costs , and other
reasonable and necessary administrative expenses that the foundation incurs in operating a grant
program. A qualifying distribution also includes any amount paid to acquire an asset used (or
held for use) directly in carrying out one or more of the organization ' s exempt purposes and
certain amounts set aside for exempt purposes. 877
Private operating foundations

The tax on failure to distribute income does not apply to the undistributed income of a
private foundation for any taxable year for which it is an operating foundation. 878 Private
operating foundations generally operate their own charitable programs directly , rather than
serving primarily as a grantmaking entity.
Private operating foundations must satisfy several tests designed to distinguish them from
nonoperating (grantmaking) foundations. First , an operating foundation generally must make
qualifying distributions for the direct conduct of activities that are related to its exempt purpose
(as opposed to making such distributions in the form of grants to other charities) equal to 85
percent of the lesser of its adjusted net income or its minimum investment return, each as defined
under section 4942. 879 In addition , an operating foundation must satisfy one of the following
three alternative tests: (1) an asset test, under which substantially more than half of the
organization's assets (generally , 65 percent) are devoted to the direct conduct of exempt
activities or to functionally related businesses ; (2) an endowment test, under which the
organization normally makes qualifying distributions for the direct conduct of activities related
to its exempt purpose in an amount not less than two-thirds of its minimum investment return ; or
(3) a support test, under which the organization must meet certain measures to show that it
receives public support. 880
Description of Proposal

Under the proposal , an organization that operates an art museum as a substantial activity
does not qualify as a private operating foundation unless the museum is open during normal
business hours to the public for at least 1,000 hours during the taxable year.
Effective Date

The proposal is effective for taxable years beginning after December 31, 2017.

877

Sec . 4942(g)(l )(B) and 4942( g)(2) . In general, an organization is permitt ed to adjust the distribu table
amount in those cases where distributions during the five preceding years have exceeded the payout requirements.
Sec. 4942(i) .
878

Sec. 4942( a)(I ).

879

Sec. 4942(j)( 3)(A); Tr eas. Reg. sec. 53.4942(b)-l(c) .

880

Sec . 4942(j)( 3)(B).

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 3. Excise tax based on investment income of private colleges and universities
Present Law
Public charities and private foundations
An organization qualifying for tax-exempt status under section 501 (c)(3) is further
classified as either a public charity or a private foundation . An organization may quali fy as a
public charity in severa l ways. 881 Certain organizations are classified as public charities per se,
regardless of their sources of support. These include churches, certain schools, hosp itals and
other medical organizations, certain organizations providing assistance to colleges and
universities , and governmen tal units. 882 Other organizations qualify as public charities because
they are broadly publicly supported . First , a charity may qualify as publicly supported if at least
one-third of its total support is from gifts, grants or other contributions from governmental units
or the genera l public. 883 Alternatively , it may qualify as publicly supported if it receives more
than one-third of its total support from a combination of gifts, grants, and contributions from
governmental units and the public plus revenue arising from activities related to its exe mpt
purposes (e.g., fee for service income). In addition , this category of public charity must not rely
excessively on endowment income as a source of support. 884 A supportin g organization , i.e., an
organization that provides support to another section 501 (c)(3) entity that is not a pri vate
foundation and meets the requireme nts of the Code, also is classified as a publ ic charity. 885

881
The Code does not expressly define the term "public charity ," but rather provides exceptions to those
entities that are treated as private foundations.
882

Sec. 509(a)(l) (referring to sections l 70(b)(l)(A)( i) through (iv) for a description of these
organizations).
883

Treas. Reg. sec. l. l 70A-9(f)(2). Failing this mechanical test, the organizati on may qualify as a public
charity if it passes a "facts and circumstances" test. Treas. Reg. sec. l. l 70A-9(f)(3) .
884

To meet this requirement , the organization must normally receive more than one-third of its support
from a combination of ( 1) gifts, grants , contributions , or membership fees and (2) certain gross receipts from
admiss ions, sales of merchandise , performance of services, and furnishing of facilities in connection with activ ities
that are related to the organization's exempt purposes. Sec. 509(a)(2)(A). In addition , the organization must not
normally receive more than one-third of its public support in each taxable year from the swn of ( 1) gross investment
income and (2) the excess of unrelated business taxab le income as determined under section 512 over the amoun t of
unrelated business income tax imposed by section 511. Sec. 509(a)(2)(B).
885

Sec. 509(a)(3). Supporting organizations are further classified as Type I, II, or III depending on the
relationship they have with the organizations they support. Supporting organizations must support public charities
listed in one of the other categories (i.e., per se public charities , broadl y supported public charities , or revenue
generating public charities) , and they are not permitted to support other supporting organizations or testing for
pub lic safety orga nizations.

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TREAS-17-0313-I-000299

 A sect ion 501 (c)(3) organization that doe s not fit within any of the above categories is a
private foundation. In general , private foundations receive fundin g from a limit ed number of
sources (e.g., an individual , a family , or a corporation).
The deduction for charitable contributions to private foundations is in some instances less
generou s than the deduction for charitable contributions to publi c char ities. In addition , private
foundations are subject to a number of operational rule s and restrictions that do not apply to
public charities. 886

Excise tax on investment income of private foundations
Under section 4940(a) , private foundations that are recognized as exem pt from Federal
incom e tax under section 50l (a) (other than exempt operating foundations) 887 are subject to a
two-pe rcent excise tax on their net investme nt income. Net investment income generall y
includes interest , dividend s, rent s, royalties (and income from similar sources), and capital gain
net income, and is reduced by expenses incurred to earn this income. The two-percent rate of tax
is reduced to one-percent in any year in which a foundation exceeds the average historical level
of its charitable distribution s. Specifically , the excise tax rate is reduced if the foundation 's
qualifying distributions (generally, amounts paid to accomplish exempt purpo ses) 888 equal or
excee d the sum of (l) the amount of the foundation 's assets for the taxable year multiplied by the
average percentage of the foundation 's qualif ying distribution s over the five taxable years
immediat ely preceding the taxable year in question , and (2) one per cent of the net investment
income of the foundation for the taxable year. 889 In addition , the foundation cannot have been

Organizat ions organized and opera ted exclusively for testing for public safety also are classified as public
charities. Sec. 509(a)(4). Such organ iza tions, however, are not eligible to receive deduc tible charitab le
contributions under section 170.
886

Unlike public charities , private foundatio ns are subject to tax on their net investment income at a rate of
two percent (one percent in some cases). Sec . 4940. Private foundations also are subject to more restr ictions on
their activ ities than are public charities. For example , private foundations are prohibited from enga ging in selfdealing transactions (sec. 4941), are required to make a minimum amount of charitable distributions each year, (sec .
4942) , are limited in the extent to which they may contro l a business (sec. 4943) , may not make speculative
investments (sec. 4944), and may not make certain expenditures (sec. 4945) . Violations of these rules result in
excise taxes on the foundation and , in some cases , may result in excise taxes on the managers of the foundation.
887
Exempt operating foundations are exempt from the section 4940 tax. Sec. 4940(d)(l) . Exempt
operatin g foundations genera lly include organi zations such as museums or libraries that devote their assets to
operatin g charita ble programs but have difficulty meeting the "public support" tests necessary not to be classified as
a private foundation. To be an exempt operatin g foundation , an organization must: ( l ) be an operating foundation
(as defined in section 4942(i)(3)); (2) be publicl y supported for at least 10 taxable years; (3) have a governing body
no more than 25 percent of whom are disqualified persons and that is broadl y representative of the general public ;
and (4) have no officers who are disqualified persons. Sec. 4940(d)(2).

888

Sec. 4942(g).

889

Sec . 4940(e).

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 subject to tax in any of the five preceding years for failure to meet minimum qualifying
distribution requirements in section 4942. 890
Private foundations that are not exempt from tax under section 501(a), such as certain
charitable trusts, are subject to an excise tax under section 4940(b ). The tax is equal to the
excess of the sum of the excise tax that would have been imposed under section 4940(a) if the
foundation were tax exempt and the amount of the tax on unrelated business income that wou ld
have been imposed if the foundatio n were tax exempt, over the income tax imposed on the
foundation under subtitle A of the Code.
Private foundations are required to make a minimum amount of qualifying distributions
each year to avoid tax under section 4942. The minimum amount of qualifyin g distributions a
foundation has to make to avoid tax under section 4942 is reduced by the amount of section 4940
excise taxes paid. 891
Private colleges and universities
Private colleges and universities generally are treated as pub lic charit ies rather than
private foundations 892 and thus are not subject to the private foundation excise tax on net
investment income.
Description of Proposal
The proposa l imposes an excise tax on an app licable educationa l institution for each
taxable year equa l to 1.4 percent of the net investment income of the institution for the taxable
year. Net investment income is determined using rules simi lar to the rules of section 4940( c)
(relating to the net investment income of a private foundation).
For purposes of the proposal, an applicable educational institution is an institution : (1)
that has at least 500 students during the preceding taxable year; (2) that is an eligible educat ion
institution as described in section 25A of the Code 893;(3) that is not described in the first section
of section 5 l l(a)(2)(B) of the Code (generally describing State colleges and universities); and (4)
the aggregate fair market value of the assets of which at the end of the preceding taxable year
(other than those assets wh ich are used direct ly in carry ing out the institut ion's exempt purpose)
is at least $100,000 per student. For these purposes , the number of students of an instit ution is

890

Under a separate proposal , the private foundation excise tax would be simplified by replacing the twotier rate structure with a single-rate tax set at 1.4 percent.
891

Sec. 4942(d)( 2).

892

Secs. 509(a)(I) and 170(b)(I )(A)( ii).

893

Section 25A defines an e ligib le educationa l institution as an institution (I) which is described in sect ion
481 of the Higher Education Act of 1965 (20 U.S.C. sec. I 088) , as in effect on August 5, 1977, and (2) which is
eligible to participate in a program under title IV of such Act.

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 based on the daily average number of full-time student s attending the institution , with part-t ime
students being taken into account on a full-time student equivalent basis.
Effective Date

The proposal is effective for taxable years beginning after December 31, 2017.
4. Provide an exception to the private foundation excess business holdings rules for
philanthropic business holdings
Present Law
Public charities and private foundations
An organization qualifying for tax-exempt status under section 50l (c)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") is further classified as either a pub lic charity or
a private foundation. An organization may qualify as a public cha rity in several ways. 894
Certain organizations are classified as public charities per se, regardless of their sources of
support. These include churches, certain schoo ls, hospitals and other medical organizatio ns
(includ ing medical research organizations) , certain organizatio ns providing assistance to colleges
and universities , and governmenta l un its. 895 Other organizations qualify as public charities
because they are broadly publicly supported. First , a charity may qualify as public ly supported if
at least one-third of its total support is from gifts, grants or other contributions from
governmental units or the genera l public. 896 Alternative ly, it may qualify as publicly supported
if it receives more than one-th ird of its total support from a combination of gifts, grants, and
contribution s from governmenta l units and the public plus revenue arising from activities related
to its exempt purpo ses (e.g., fee for service income). In addition, this category of public charity
must not rely excessively on endowment income as a source of support . 897 A supportin g
organization , i.e., an organization that provides support to another section 50l(c)(3) entity that is

894

The Code does not expressly define the term "public charity ," but rather provides exceptions to those
entities that are treated as private foundations.
895

Sec. 509(a)(l) (referring to sections l 70(b)(l)(A)(i) through (iv) for a description of these
organizations).
896
Treas. Reg. sec. l. l 70A-9(f)(2). Failing this mechanical test, the organization may qualify as a public
charity if it passes a "facts and circumstances" test. Treas . Reg . sec. l. l 70A-9(f)(3).
897

To meet this requirement, the organizat ion must nonna lly receive more than one-third of its support
from a comb ination of ( l) gifts, grants, contributions, or membership fees and (2) certain gross receipts from
admissions, sales of merchandise , performance of services, and furnishing of facilities in connection with activities
that are related to the organizatio n's exempt purposes. Sec. 509(a)(2)(A). In addition, the organization must not
normally receive more than one-third of its public support in each taxable year from the sum of ( l) gross investment
income and (2) the excess of unrelated business taxable income as determined under section 512 over the amount of
unrelated business income tax imposed by sect ion 511. Sec. 509(a)(2)(B).

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TREAS-17-0313-I-000302

 not a private foundation and meets certain other requ irement s of the Code, also is classifie d as a
public charit y. 898
A section 501 (c)(3) organization that does not fit within any of the above categor ies is a
private foundation. In genera l, private foundations receive funding from a limited number of
sources (e.g., an individual , a family , or a corporat ion).
The deduc tion for charitabl e contribution s to private foundations is in some instances less
generou s than the dedu ction for charitabl e contributions to public charities. In addition , private
foundati ons are subject to a numb er of operational rules and restrictions that do not apply to
public charities, as well as a tax on their net investment income. 899

Excess business holdings of private foundations
Pri vate foundations are subje ct to tax on excess business holdin gs. 900 In genera l, a
private foundation is permitted to hold 20 percent of the voting stock in a corporation , reduced
by the amount of voting stock held by all disqualified persons (as defined in section 4946). If it
is established that no disqualified per son has effect ive control of the corporation , a private
foundation and disqualified persons together may own up to 35 percent of the voting stock of a
corporation. A private foundation shall not be treated as having excess business holdings in any
corporat ion if it owns (together with certain other related private foundations) not more than two
percent of the vot ing stock and not more than two percent in value of all outstanding shares of all
classes of stock in that corporation. Sim ilar rule s apply with respe ct to ho ldings in a partn ership
(substitutin g "profit s interest" for "v oting stock" and "cap ital interest" for " nonvoting stock")
and to other unincorporat ed enterprises (by sub stitut ing "beneficia l interest " for "vo ting stock") .
Private found ation s are not permitted to have hold ings in a proprietorship. Foundation s
genera lly have a five-year period to dispose of excess business holdings (acquir ed other than by
purchase) without being subje ct to tax. 901 This five-year period may be extend ed an additional
five years in limit ed circum stances. 902 The excess business holdin gs rules do not apply to

898

Sec. 509(a)(3). Organizations organized and operated exclusively for testing for public safety also are
classified as public char ities. Sec. 509(a)(4). Such organizations , however, are not eligible to receive deductible
charitable contributions under section 170.
899
Unlike public charities, private foundations are subject to tax on their net investment income at a rate of
two percent (one percent in some cases). Sec . 4940. Private foundations also are subject to more restrictions on
their activities than are public charities. For example , private foundations are prohibited from engaging in selfdealin g transactions (sec. 4941 ), are required to make a minimum amount of charitable distr ibutions each year (sec.
4942), are limited in the extent to which they may control a business (sec. 4 943), may not make speculat ive
investments (sec. 4944), and may not make certain expenditures (sec. 4945). Violations of these rules result in
excise taxes on the foundation and , in some cases , may result in excise taxes on the managers of the foundation.
900

Sec. 4943. Taxes imposed may be abated if certain conditions are met. Secs. 4961 and 4962.

901

Sec. 4943(c)(6).

902

Sec . 4943(c)(7).

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TREAS-17-0313-I-000303

 holdings in a functionally related business or to holdings in a trade or business at least 95 percent
of the gross income of which is derived from passi ve sources. 903
The initial tax is equal to five percent of the va lue of the excess business holdings held
during the foundation ' s applicable taxable year. An additional tax is imposed if an initial tax is
imposed and at the close of the applicable taxable period , the foundation continues to hold excess
business holdings. The amount of the additional tax is equal to 200 percent of such holdings.

Description of Proposal
The proposal creates an exception to the excess business holdings rules for certain
philanthropic business holdings. Specifically , the tax on excess business holdings does not apply
w ith respect to the holdings of a private foundation in any business enterprise that , for the
taxable year , satisfies the following requirements: (1) the ownership requirements ; (2) the "all
profits to charity" distribution requirement ; and (3) the independent operation requirements.
The ownership requirements are satisfied if: ( 1) all ownership interests in the business
enterprise are held by the private foundation at all times during the taxable year ; and (2) all the
private foundation's ownership interests in the business enterprise were acquired not by purchase.
The "all profits to charity " distribution requirement is satisfied if the business enterprise ,
not later than 120 days after the close of the taxable year , distributes an amount equal to its net
operating income for such taxable year to the private foundation. For this purpose , the net
operating income of any business enterprise for any taxable year is an amount equal to the gross
income of the business enterprise for the taxable year , reduced by the sum of: (1) the deductions
allowed by chapter 1 of the Code for the taxable year that are directly connected with the
production of the income ; (2) the tax imposed by chapter 1 on the business enterprise for the
taxable year ; and (3) an amount for a reasonable reserve for working capital and other business
needs of the business enterprise.
The independent operation requirements are met if, at all times during the taxable year ,
the following three requirements are satisfied. First , no substantia l contributor to the private
foundation , or family member of such a contributor , is a director , officer , trustee , manager ,
employee , or contractor of the business enterprise (or an individual having powers or
responsibilities similar to any of the foregoing). Second , at least a majority of the board of
directors of the private foundation are not also directors or officers of the business enterprise or
members of the family of a substantial contributor to the private foundation. Third , there is no
loan outstanding from the business enterprise to a substantial contributor to the private
foundation or a family member of such contributor. For purposes of the independent operation
requirements , "substantial contributor" has the meaning given to the term under section
4958(c)(3)(C) , and family members are determined under section 4958(t)(4).
The proposal does not apply to the following organizations: (1) donor advised funds or
supporting organizations that are subject to the excess business holding s rules by reason of

903

Sec . 4943(d)(3).

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TREAS-17-0313-I-000304

 section 4943(e) or (f); (2) any trust described in section 4947(a)(l) (relating to charitab le trusts) ;
or (3) any trust described in section 4947(a)(2) (relat ing to split-interest trusts).
Effective Date

The proposal is effective for taxable years beginning after December 31, 2017.

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TREAS-17-0313-I-000305

 C. Requirements for Organizations Exempt From Tax
1. Churches and certain other organizations permitted to make statements relating to
political campaign in ordinary course of activities in carrying out exempt purpose

Present Law
Section 501(c)(3) organizations
Charitable organizations , i.e., organizations described in section 50l(c)(3) , generally are
exempt from Federal income tax and are eligible to receive tax deductible contributions. A
charitable organization must operate primarily in pursuance of one or more tax-exempt purposes
constituting the basis of its tax exemption. 904 The Code specifies such purposes as religious ,
charitable , scientific , testing for public safety , literary , or educational purposes , or to foster
international amateur sports competition , or for the prevention of cruelty to children or
animals. 905 In general , an organization is organized and operated for charitable purposes if it
provides relief for the poor and distressed or the underprivileged. In order to qualify as operating
primarily for a purpose described in section 50l(c)(3) , an organization must satisfy the following
operational requirements: (1) its net earnings may not inure to the benefit of any person in a
position to influence the activities of the organization; (2) it must operate to provide a public
benefit , not a private benefit ;906 (3) it may not be operated primarily to conduct an unrelated
trade or business ;907 (4) it may not engage in substantial legislative lobbying ; and (5) it may not
participate or intervene in any political campaign.
Section 501 (c)(3) organizations are classified either as "public charities " or "private
foundations. " 908 Private foundations generally are defined under section 509(a) as all
organizations described in section 501(c)(3) other than an organization granted public charity
status by reason of: ( 1) being a specified type of organization (i.e., churches , educational
institutions , hospitals and certain other medical organizations, certain organizations providing
assistance to colleges and universities , or a governmental unit) ; (2) receiving a substantial part of
its support from governmental units or direct or indirect contributions from the general public ; or
(3) providing support to another section 50l(c)(3) entity that is not a private foundation. In
contrast to public charities , private foundations generally are funded from a limited number of

904

Treas. Reg. sec. l.50l(c )(3)-l(c) ( l).

905

Treas. Reg. sec. l.501(c )(3)-l(d )(2).

906

Treas. Reg. sec. 1.50l(c )(3)-l(d )(l )(ii).

907

Treas. Reg. sec. 1.50 I(c)(3)-I (e)(I ). Conduct ing a certain level of unrelated trade or business activity
will not j eopardi ze tax-exempt status.
908

Sec. 509(a) .

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TREAS-17-0313-I-000306

 sources (e.g ., an individual , family , or corporation). Donors to private foundations and persons
related to such donors together often control the operations of private foundations.
Because private foundations receive support from, and typically are controlled by, a small
number of supporters , private foundations are subject to a number of anti-abuse rules and excise
taxes not applicable to public charities. 909 Public charities also have certain advantages over
private foundations regarding the deductibility of contributions.
Political campaign activities

Charitable organizations may not participate in, or intervene in (including the publishing
or distributing of statements) , any political campaign on behalf of (or in opposition to) any
candidate for public office. 910 The prohibition on such political campaign activity is absolute
and, in general, includes activities such as making contributions to a candidate's political
campaign , endorsements of a candidate , lending employees to work in a political campaign , or
providing facilities for use by a candidate. Many other activities may constitute political
campaign activity , depending on the facts and circumstances. The sanction for a violation of the
prohibition is loss of the organization ' s tax-exempt status.
For organizations that engage in prohibited political campaign activity , the Code provides
three penalties that may be applied either as alternatives to revocation of tax exemption or in
addition to loss of tax-exempt status: an excise tax on political expenditures ,911 termination
assessment of all taxes due, 912 and an injunction against further political expenditures. 913
Description of Proposal

The proposal modifies the present-law rules relating to political campaign activity by
churches , their integrated auxiliaries , and conventions or associations of churches for the
following purposes: (1) section 50l(c)(3) status ; (2) qualifying as an eligible recipient of tax-

909

Secs. 4940-4945 .

910

Sec. 50l (c)(3) .

911

Sec. 4955.

912

Sec. 6852(a)(I ).

913

Sec. 7409.

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TREAS-17-0313-I-000307

 deductible contributions for income , 914 gift, 9 15 and estate tax 916 purposes ; and (3) applicat ion of
the excise tax on political expenditures by sect ion 50 1(c)(3) organ izati ons. 917
For such purposes, a church, an integrated auxiliary of a church, or a conve ntion or
association of churches shall not fail to be treated as organized and operated exclusively for a
religious purpose , nor shall it be deemed to have participated in, or intervened in any political
campaign on behalf of (or in oppos ition to) any candidat e for public office, solely because of the
conte nt of any homily , sermo n, teaching , dialectic, or other presentat ion made during religious
services or gatherings, but only if the preparation and presentation of such content: (A) is in the
ordinary course of the organ ization's regular and customary activities in carrying out its exempt
purpo se; and (B) results in the orga nization incurring not more than de minimis increme ntal
expe nses.

Effective Date
The proposal is effective for taxable years ending after the date of enactment.

2. Additional reporting requirements for donor advised fund sponsoring organizations
Present Law
Overview
Some charitable organizations (includ ing comm unity founda tions) establi sh accounts to
which donors may contr ibut e and thereafter provide nonbindin g advice or recom mendatio ns wit h
regard to distributions from the fund or the investment of assets in the fund. Such accounts are
common ly referred to as "donor advised funds." Donors who make contrib ution s to charities for
maintenance in a donor advised fund generally claim a charitable contrib ution deduction at the
time of the contr ibution .918 Although sponsoring charities freque ntly perm it donors (or other
914

Sec. l 70(c)(2).

915

Sec. 2522.

916

Secs . 2055 and 2 I 06.

917

Sec. 4955.

918

Contributions to a sponsoring organization for maintenance in a donor advised fund are not eligible for
a charitable deduction for income tax purposes if the sponsoring organizat ion is a veterans' organization describ ed
in section l 70(c)(3) , a fraternal society described in section l 70(c)(4), or a cemetery company described in section
l 70(c)(5); for gift tax purposes if the sponsoring organization is a fraternal society described in section 2522(a)(3) or
a veterans' organization described in section 2522(a)(4); or for estate tax purposes if the sponsoring organization is a
fraternal society described in section 2055(a)(3) or a veterans' organization described in section 2055(a)(4) . In
addition, contributio ns to a sponsoring organization for maintenance in a donor advised fund are not elig ible for a
charitable deduc tion for income , gift, or estate tax purposes if the sponsoring organization is a Type III supporting
organizatio n (other than a functionally integrated Type III supporting organization). In addition to satisfying
genera lly app licable substantiation requirements under section 170(f), a donor must obtain , with respect to each
charitable contribution to a sponsoring organizat ion to be maintained in a donor advised fund, a contemporaneous

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TREAS-17-0313-I-000308

 persons appointed by donors) to provide nonbinding recommendations concerning the
distribution or investment of assets in a donor advised fund , spo nsor ing charit ies genera lly must
have legal ownership and contro l of such assets following the contribut ion. If the spo nsor ing
charit y does not have such control (or permits a donor to exercise control over amo unts
contrib ut ed), the donor 's contrib ut ions may no t qualify for a charitab le deduction , and, in the
case of a com munit y found ation, the contributi on ma y be treated as being subject to a material
restriction or cond ition by the donor.

Statutory definition of a donor advised fund
The Code defines a "donor advised fund " as a fund or acco unt that is: (1) separately
identified by reference to contribut ions of a donor or donors ; (2) owned and contro lled by a
spo nsor ing organization ; and (3) with respect to which a donor (or any person appointed or
designated by such donor (a "donor advisor")) has, or reasonably expec ts to have , advisory
privileges with respec t to the distribution or investment of amounts held in the separate ly
identified fund or account by reason of the donor 's status as a donor. All three prongs of the
definition must be met in order for a fund or account to be treated as a donor advised fund. 919
A "s ponsoring organization " is an organization that: (1) is described in section 170(c) 920
(other than a governmental entity described in section 170(c)( 1), and witho ut regard to any
requirement that the organ izat ion be organized in the Un ited States 921); (2) is not a private
fou ndation (as defined in sect ion 509(a)); and (3) ma intains one or more donor adv ised funds. 922

Reporting and disclosure
Each sponsoring organization must disclose on its information return: ( 1) the total
number of donor advised funds it owns ; (2) the aggregate value of assets held in those funds at
the end of the organization 's taxable year; and (3) the aggregate contribut ions to and grants made

written acknowledgment from the sponsoring organization providing that the sponsoring organization has exclusive
legal control over the assets contributed.
9 19

See sec. 4966(d)(2)(A). A donor advised fund does not include a fund or account that makes
distributions only to a single identified organization or governmental entity. A donor advised fund also does not
include certain funds or acco unts with respect to wh ich a donor or donor advisor provides advice as to which
individuals rece ive grants for travel, study , or other similar purposes. In addition, the Secretary may exempt a fund
or account from treatment as a donor advised fund if such fund or account is advised by a committee not directly or
indirectly controlled by a donor , donor advisor , or persons related to a donor or donor advisor. The Secretary also
may exempt a fund or account from treatment as a donor advised fund if such fund or account benefits a single
identified charitable purpose. Secs. 4966(d)(2)(B) and (C).
920

Section 170(c) describes organizations to which charitable contributions that are deducti ble for income
tax purposes can be made.
92 1

See sec. 170(c)(2)(A).

922

Sec. 4966(d)(l ).

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TREAS-17-0313-I-000309

 from those funds during the year. 923 In addition , when seeking recognition of its tax-exempt
status, a sponsoring organization must disclose whether it intends to maintain donor advised
funds. 924
Description of Proposal

The proposal requires a sponsoring organization to report additional information on its
annual information return (Form 990). Sponsoring organizations must indicate: (I) the average
amount of grants made from donor advised funds during the taxable year (expressed as a
percentage of the value of assets held in such funds at the beginning of the taxable year), and (2)
whether the organization has a policy with respect to donor advised funds relating to the
frequency and minimum level of distributions from donor advised funds. The sponsoring
organization must include with its return a copy of any such policy.
Effective Date

The proposal is effective for returns filed for taxable years beginning after December 31,
2017.

923

Sec. 6033(k).

924

Sec. 508(f).

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TREAS-17-0313-I-000310

 DISTRIBU TION EFFECTS OF THE CHAIRMAN'S AMENDMENT IN T HE NAT URE OF A SUBS T ITUT E TO H.R.1,
T HE "TAX CUTS AND JOBS ACT ,"
SCHEDU LED FOR MARKUP BY T HE COMMITTEE ON WAYS AND MEANS ON NOVEMBER 6, 2017
Ca lenda r Yea r 2019

INCOME
CATEGORY (2)
Less than $10 ,000 ..........
$10,000 to $20 ,000 .........
$20,000 to $30, 000 ....... ..
$30,000 to $40 ,000 .........
$40,000 to $50, 000 ........ .
$50,000 to $75 ,000 .........
$75,000 to $100 ,000 .......
$100 ,000 to $200 ,000 ......
$20 0,000 to $50 0,000 ......
$500 ,000 to $1 ,000,000 ...
$1 ,000,000 and over ........
Total , All Taxpayers .......

CHANGE IN
FEDERAL
TAXES (3)
Millions
Percent
-$557
-7 .9%
-$2,435
(5)
-$3,00 1
-13 .6%
-$4, 181
-8 .9%
-$5,532
-8 .2%
-$20 ,921
-7.9%
-$ 19,483
-7 .0%
-$57 ,066
-6.1%
-$26 ,446
-3 .7%
-$ 10,912
-4.3%
-$41,557
-6 .7%
-$192 ,092
-5.9%

FEDERA L TAXES (3)
UNDER
PRESENT LAW
Billions
Percent
$7 .0
0 .2%
-$2.4
-0 .1%
$22 .1
0.7%
$47.0
1.5%
$67 .3
2 .1%
$265.3
8.2%
$279.5
8.7%
$939 .8
29. 1%
$724 .3
22.4 %
$254 .7
7.9%
$624 .1
19.3%
$3,228 .7
100.0%

FEDERAL TAXES (3)
UNDER
PROPOSAL
Billions
Percent
$6.5
0.2%
-$4.8
-0 .2%
$19.1
0.6%
$42 .8
1.4%
$61 .7
2 .0%
$244.4
8.0%
$260 .1
8.6%
$882.7
29.1 %
$697 .8
23.0%
$243.8
8.0%
$582.5
19.2%
$3,036 .7
100.0%

Ave rage Tax Rate (4)
Present
Law
Proposa l
Percent
Percent
9 .1%
8.4%
-0.7%
-1.4%
3.9%
3.4%
7.9%
7.2%
10 .9%
10.0%
14.8%
13.6%
17.0%
15.8%
20.9%
19.6%
26.4%
25 .3%
30.9%
29.4 %
32 .5%
29.9%
20 .7%
19.4%

TREAS-17-0313-I-000311

JOI NT COMMITTE E ON TAXAT IO N
Novemb er 3, 2017
JC X-49-17

Sou rce : Joint Committee on Taxation
Detail may not add to total due to round ing.

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

J-

UST 001290

( 1) Th is tab le is a distributional analys is of the proposa l in revenu e tab le JCX-47-17 , excluding the following sect ions under I. Tax Reform for Individuals : B.2.c.
C.2 ., C.3., E.1.- E.6., F.1 - F.6 ., and H.
(2) The income concept used to place tax returns into income categor ies is adjusted gross income (AGI) plus: (1) tax-exempt interest ,
(2) employe r contributions for health plans and life insurance , (3) employer share of FICA tax , (4) wo rker's compensation ,
(5) nontaxable Socia l Security benefits , (6) insurance value of Medicare benefits, (7) alternative minimum tax preference items ,
(8) indiv idual share of business taxes , and (9) excluded income of U.S. citizens living abroad. Categories are measured at 2017 levels .
(3) Federa l taxes are equa l to indiv idual income tax (including the outlay portion of refundable cred its) , employment tax (attributed to emp loyees),
excise taxes (attributed to consumers) , and corporate income taxes . The estimates of Federal taxes are prelim inary and subjec t to change .
Individuals who are dependents of other taxpaye rs and taxpayers with negat ive income are excluded from the analys is.
Does not include indirect effects.
(4) The average tax rate is equal to Federal taxes descr ibed in footno te (3) divided by income described in footnote (2).
(5) For returns in the $10 ,000 to $20 ,000 income category , Federal taxes would decrease from -$2.4 12 billion to -$4.848 billion.

:::c:
C,

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< 00

ua:
(L W
LL >

Page I

~~

 DISTRIBU TION EFFECTS OF THE CHAIRMAN'S AMENDMENT IN T HE NAT URE OF A SUBS T ITUT E TO H.R.1,
T HE "TAX CUTS AND JOBS ACT ,"
SCHEDU LED FOR MARKUP BY T HE COMMITTEE ON WAYS AND MEANS ON NOVEMBER 6, 2017
Ca lenda r Yea r 2021

INCOME
CATEGORY (2)
Less than $10 ,000 ..........
$10,000 to $20 ,000 .........
$20,000 to $30, 000 ....... ..
$30,000 to $40 ,000 .........
$40,000 to $50, 000 ........ .
$50,000 to $75 ,000 .........
$75,000 to $100 ,000 .......
$100 ,000 to $200 ,000 ......
$20 0,000 to $50 0,000 ......
$500 ,000 to $1 ,000,000 ...
$1 ,000,000 and over ........
Total , All Taxpayers .......

CHANGE IN
FEDERAL
TAXES (3)
Millions
Percent
-$422
-6 .1%
-$2,084
(5)
-$2,636
-1 1.7%
-$3,695
-7 .7%
-$5,28 1
-7 .2%
-$20 , 189
-7.1%
-$ 18,029
-6 .0%
-$51 ,751
-5.1%
-$ 18,670
-2 .3%
-$7,806
-2.8%
-$33,346
-5 .0%
-$163 ,909
-4.7%

FEDERA L TAXES (3)
UNDER
PRESENT LAW
Billions
Percent
$6.9
0 .2%
-$4.9
-0 .1%
$22 .5
0.6%
$47.7
1.4%
$73 .7
2 .1%
$283.4
8.1%
$300.3
8.6%
$1 ,017.6
29. 1%
$799.8
22 .9%
$279.4
8.0%
$671 .8
19.2%
$3,498 .3
100.0%

FEDERAL TAXES (3)
UNDER
PROPOSAL
Billions
Percent
$6.5
0.2%
-$7.0
-0 .2%
$19.9
0.6%
$44 .0
1.3%
$68.4
2 .1%
$263.3
7.9%
$282 .3
8.5%
$965.8
29.0 %
$78 1.1
23.4%
$27 1.6
8.1%
$638.5
19.1%
$3,334 .4
100.0%

Ave rage Tax Rate (4)
Present
Law
Proposa l
Percent
Percent
8 .2%
7.7%
-1.4%
-1 .9%
3.7%
3.3%
7.6 %
7.0%
10 .9%
10.1%
14.7%
13.6%
16.8%
15.8%
20.9%
19.8%
26 .5%
25 .8%
31.0%
30 .1%
32.4%
30.7%
20 .7%
19.7%

TREAS-17-0313-I-000312

JOI NT COMMITTE E ON TAXAT IO N
Novemb er 3, 2017
JC X-49-17

Sou rce : Joint Committee on Taxation
Detail may not add to total due to round ing.

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

J-

UST 001291

( 1) Th is tab le is a distributional analys is of the proposa l in revenu e tab le JCX-47-17 , excluding the following sect ions under I. Tax Reform for Individuals : B.2.c.
C.2 ., C.3., E.1.- E.6., F.1 - F.6 ., and H.
(2) The income concept used to place tax returns into income categor ies is adjusted gross income (AGI) plus: (1) tax-exempt interest ,
(2) employe r contributions for health plans and life insurance , (3) employer share of FICA tax , (4) wo rker's compensation ,
(5) nontaxable Socia l Security benefits , (6) insurance value of Medicare benefits, (7) alternative minimum tax preference items ,
(8) indiv idual share of business taxes , and (9) excluded income of U.S. citizens living abroad. Categories are measured at 2017 levels .
(3) Federa l taxes are equa l to indiv idual income tax (including the outlay portion of refundable cred its) , employment tax (attributed to emp loyees),
excise taxes (attributed to consumers) , and corporate income taxes . The estimates of Federal taxes are prelim inary and subjec t to change .
Individuals who are dependents of other taxpaye rs and taxpayers with negat ive income are excluded from the analys is.
Does not include indirect effects.
(4) The average tax rate is equal to Federal taxes descr ibed in footno te (3) divided by income described in footnote (2).
(5) For returns in the $10 ,000 to $20 ,000 income category , Federal taxes would decrease from -$4.888 billion to -$6.972 billion.

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Page 2

~~

 DISTRIBU TION EFFECTS OF THE CHAIRMAN'S AMENDMENT IN T HE NAT URE OF A SUBS T ITUT E TO H.R.1,
T HE "TAX CUTS AND JOBS ACT ,"
SCHEDU LED FOR MARKUP BY T HE COMMITTEE ON WAYS AND MEANS ON NOVEMBER 6, 2017
Ca lenda r Yea r 2023

INCOME
CATEGORY (2)
Less than $10 ,000 ..........
$10,000 to $20 ,000 .........
$20,000 to $30, 000 ........ .
$30,000 to $40 ,000 .........
$40,000 to $50, 000 ........ .
$50,000 to $75 ,000 .........
$75,000 to $100 ,000 .......
$100 ,000 to $200 ,000 ......
$20 0,000 to $50 0,000 ......
$500 ,000 to $1 ,000,000 ...
$1 ,000,000 and over ........
Total , All Taxpayers .......

CHANGE IN
FEDERAL
TAXES (3)
Millions
Percent
$100
1.6%
$638
(5)
$1,170
4 .7%
$653
1.3%
-$30 0
-0.4%
-$6 ,359
-2.1%
-$4,475
- 1.4%
-$ 17,442
- 1.6%
$3,405
0.4%
$744
0.3%
-$8,885
- 1.2%
-$30,752
-0.8%

FEDERA L TAXES (3)
UNDER
PRESENT LAW
Billions
Percent
$6.4
0.2%
-$5.0
-0 .1%
$24 .7
0.7%
$5 1.0
1.4%
$80 .9
2 .1%
$305.2
8.1%
$325.9
8.6%
$1 ,103.4
29.3%
$863 .6
22 .9%
$297 .6
7.9%
$7 17.5
19.0%
$3,771 .1
100.0%

FEDERAL TAXES (3)
UNDER
PROPOSAL
Billions
Percent
$6 .5
0.2%
-$4.4
-0 .1%
$25.8
0.7%
$51 .7
1.4%
$80 .6
2 .2%
$298.8
8.0%
$32 1.4
8.6%
$1 ,086.0
29.0 %
$867 .0
23.2%
$298.3
8.0%
$708 .7
18.9%
$3,740 .3
100.0%

Ave rage Tax Rate (4)
Present
Law
Proposa l
Percent
Percent
7.0%
7. 1%
-1.3%
-1 .1%
3.7%
3.9%
7.6 %
7.7%
10 .8%
10.8%
14.6%
14.3%
16.6%
16.4%
20.8%
20.5 %
26 .5%
26 .5%
30.8%
30 .8%
32 .2%
31 .7%
20.5%
20 .3%

TREAS-17-0313-I-000313

JOI NT COMMITTE E ON TAXAT IO N
Novemb er 3, 2017
JC X-49-17

Sou rce : Joint Committee on Taxation
Detail may not add to total due to round ing.

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

J-

UST 001292

( 1) Th is tab le is a distributional analys is of the proposa l in revenu e tab le JCX-47-17 , excluding the following sect ions under I. Tax Reform for Individuals : B.2.c.
C.2 ., C.3., E.1.- E.6., F.1 - F.6 ., and H.
(2) The income concept used to place tax returns into income categor ies is adjusted gross income (AGI) plus: (1) tax-exempt interest ,
(2) employe r contributions for health plans and life insurance , (3) employer share of FICA tax , (4) wo rker's compensation ,
(5) nontaxable Socia l Security benefits , (6) insurance value of Medicare benefits, (7) alternative minimum tax preference items ,
(8) indiv idual share of business taxes , and (9) excluded income of U.S. citizens living abroad. Categories are measured at 2017 levels .
(3) Federa l taxes are equa l to indiv idual income tax (including the outlay portion of refundable cred its) , employment tax (attributed to emp loyees),
excise taxes (attributed to consumers) , and corporate income taxes . The estimates of Federal taxes are prelim inary and subjec t to change .
Individuals who are dependents of other taxpaye rs and taxpayers with negat ive income are excluded from the analys is.
Does not include indirect effects.
(4) The average tax rate is equal to Federal taxes descr ibed in footno te (3) divided by income described in footnote (2).
(5) For returns in the $10 ,000 to $20 ,000 income category , Federal taxes would increase from -$5 .044 billion to -$4.406 billion.

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Page 3

~~

 DISTRIBU TION EFFECTS OF THE CHAIRMAN'S AMENDMENT IN T HE NAT URE OF A SUBS T ITUT E TO H.R.1,
THE "TAX CUTS AND JOBS ACT ,"
SCHEDU LED FOR MARKUP BY T HE COMMITTEE ON WAYS AND MEANS ON NOVEMBER 6, 2017
Ca lenda r Yea r 2025

INCOME
CATEGORY (2)
Less than $10 ,000 ..........
$10,000 to $20 ,000 .........
$20,000 to $30, 000 ........ .
$30,000 to $40 ,000 .........
$40,000 to $50, 000 ........ .
$50,000 to $75 ,000 .........
$75,000 to $100 ,000 .......
$100 ,000 to $200 ,000 ......
$20 0,000 to $50 0,000 ......
$500 ,000 to $1 ,000,000 ...
$1 ,000,000 and over ........
Total , All Taxpayers .......

CHANGE IN
FEDERAL
TAXES (3)
Millions
Percent
-$80
- 1.4%
$268
(5)
$1,070
3.9%
$388
0.7%
-$679
-0 .8%
-$8 ,103
-2.5%
-$6, 128
- 1.7%
-$23 ,309
- 1.9%
-$2,228
-0 .2%
-$2,883
-0.9%
-$21,694
-2 .8%
-$63,379
-1.5%

FEDERA L TAXES (3)
UNDER
PRESENT LAW
Billions
Percent
$5.9
0 .1%
-$4.7
-0 .1%
$27 .2
0.7%
$53.7
1.3%
$88 .0
2 .2%
$328.1
8.0%
$350.6
8.6%
$1 ,197.4
29.3%
$943 .3
23 .1%
$321 .5
7.9%
$780 .2
19.1%
$4,091 .1
100.0%

FEDERAL TAXES (3)
UNDER
PROPOSAL
Billions
Percent
$5 .8
0.1%
-$4.4
-0 .1%
$28.3
0.7%
$54 .1
1.3%
$87 .3
2 .2%
$320.0
7.9%
$344.4
8.6%
$1 ,174.1
29.1 %
$94 1.0
23.4%
$318.6
7.9%
$758.5
18.8%
$4,027 .7
100.0%

Ave rage Tax Rate (4)
Present
Law
Proposa l
Percent
Percent
5.8%
5.7%
-1.1%
-1 .1%
3.8%
4.0 %
7.5 %
7.6%
10 .9%
10.8%
14.5%
14.1%
16.5%
16.2%
20.7%
20.3 %
26 .5%
26.4%
30.8%
30 .5%
32 .1%
31.2%
20.5%
20 .2%

TREAS-17-0313-I-000314

JOI NT COMMITTE E ON TAXAT IO N
Novemb er 3, 2017
JC X-49-17

Sou rce : Joint Committee on Taxation
Detail may not add to total due to round ing.

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

J-

UST 001293

( 1) Th is tab le is a distributional analys is of the proposa l in revenu e tab le JCX-47-17 , excluding the following sect ions under I. Tax Reform for Individuals : B.2.c.
C.2 ., C.3., E.1.- E.6., F.1 - F.6 ., and H.
(2) The income concept used to place tax returns into income categor ies is adjusted gross income (AGI) plus: (1) tax-exempt interest ,
(2) employe r contributions for health plans and life insurance , (3) employer share of FICA tax , (4) wo rker's compensation ,
(5) nontaxable Socia l Security benefits , (6) insurance value of Medicare benefits, (7) alternative minimum tax preference items ,
(8) indiv idual share of business taxes , and (9) excluded income of U.S. citizens living abroad. Categories are measured at 2017 levels .
(3) Federa l taxes are equa l to indiv idual income tax (including the outlay portion of refundable cred its) , employment tax (attributed to emp loyees),
excise taxes (attributed to consumers) , and corporate income taxes . The estimates of Federal taxes are prelim inary and subjec t to change .
Individuals who are dependents of other taxpaye rs and taxpayers with negat ive income are excluded from the analys is.
Does not include indirect effects.
(4) The average tax rate is equal to Federal taxes descr ibed in footno te (3) divided by income described in footnote (2).
(5) For returns in the $10 ,000 to $20 ,000 income category , Federal taxes would increase from -$4 .664 billion to -$4.397 billion.

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Page 4

~~

 DISTRIBU TION EFFECTS OF THE CHAIRMAN'S AMENDMENT IN T HE NAT URE OF A SUBS T ITUT E TO H.R.1,
T HE "TAX CUTS AND JOBS ACT ,"
SCHEDU LED FOR MARKUP BY T HE COMMITTEE ON WAYS AND MEANS ON NOVEMBER 6, 2017
Ca lenda r Yea r 2027

INCOME
CATEGORY (2)
Less than $10 ,000 ..........
$10,000 to $20 ,000 .........
$20,000 to $30, 000 ........ .
$30,000 to $40 ,000 .........
$40,000 to $50, 000 ........ .
$50,000 to $75 ,000 .........
$75,000 to $100 ,000 .......
$100 ,000 to $200 ,000 ......
$20 0,000 to $50 0,000 ......
$500 ,000 to $1 ,000,000 ...
$1 ,000,000 and over ........
Total , All Taxpayers .......

CHANGE IN
FEDERAL
TAXES (3)
Millions
Percent
-$518
-9 .9%
-$726
(5)
$43 1
1.4%
-$443
-0 .7%
-$1 ,902
- 1.9%
-$ 11,501
-3.3%
-$9,545
-2 .5%
-$34 ,747
-2.7%
-$ 12 ,881
- 1.3%
-$7,337
-2.1%
-$36,6 17
-4 .3%
-$115 ,787
-2.6%

FEDERA L TAXES (3)
UNDER
PRESENT LAW
Billions
Percent
$5.2
0 .1%
-$3.4
-0 .1%
$3 1.4
0.7%
$59.4
1.3%
$98 .0
2 .2%
$352.2
7.9%
$380.3
8.6%
$1 ,302.4
29.3%
$1,026 .5
23 .1%
$345 .7
7.8%
$848 .7
19.1%
$4,446 .4
100.0%

FEDERAL TAXES (3)
UNDER
PROPOSAL
Billions
Percent
$4.7
0.1%
-$4. 1
-0 .1%
$31.8
0.7%
$59 .0
1.4%
$96 .1
2 .2%
$340.7
7.9%
$370 .8
8.6%
$1 ,267.6
29.3 %
$1,013 .6
23.4%
$338.3
7.8%
$8 12.0
18.8%
$4,330 .6
100.0%

Ave rage Tax Rate (4)
Present
Law
Proposa l
Percent
Percent
4 .7%
4.2%
-0.8%
-1 .0%
4 .1%
4.1 %
7.6 %
7.6%
11.0%
10.8%
14.5%
14.0%
16.3%
15.9%
20.7%
20.1 %
26 .6%
26.2%
30.8%
30 .1%
32 .1%
30.6%
20 .5%
20 .0%

TREAS-17-0313-I-000315

JOI NT COMMITTE E ON TAXAT IO N
Novemb er 3, 2017
JC X-49-17

Sou rce : Joint Committee on Taxation
Detail may not add to total due to round ing.

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

J-

UST 001294

( 1) Th is tab le is a distributional analys is of the proposa l in revenu e tab le JCX-47-17 , excluding the following sect ions under I. Tax Reform for Individuals : B.2.c.
C.2 ., C.3., E.1.- E.6., F.1 - F.6 ., and H.
(2) The income concept used to place tax returns into income categor ies is adjusted gross income (AGI) plus: (1) tax-exempt interest ,
(2) employe r contributions for health plans and life insurance , (3) employer share of FICA tax , (4) wo rker's compensation ,
(5) nontaxable Socia l Security benefits , (6) insurance value of Medicare benefits, (7) alternative minimum tax preference items ,
(8) indiv idual share of business taxes , and (9) excluded income of U.S. citizens living abroad. Categories are measured at 2017 levels .
(3) Federa l taxes are equa l to indiv idual income tax (including the outlay portion of refundable cred its) , employment tax (attributed to emp loyees),
excise taxes (attributed to consumers) , and corporate income taxes . The estimates of Federal taxes are prelim inary and subjec t to change .
Individuals who are dependents of other taxpaye rs and taxpayers with negat ive income are excluded from the analys is.
Does not include indirect effects.
(4) The average tax rate is equal to Federal taxes descr ibed in footno te (3) divided by income described in footnote (2).
(5) For returns in the $10 ,000 to $20 ,000 income category , Federal taxes would decrease from -$3.4 15 billion to -$4.141 billion.
(6) Less than 0.05 %.

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Page 5

~~

 JO INT COMMITT EE ON TAXATIO N
November 3, 2017
JCX-49-17
COMPONENT S OF THE DISTRIBUTION EFFE CTS OF
THE CHA IRMAN 'S A MENDMENT IN THE NA T URE OF A SUBSTITUTE TO H.R.1,
THE "TAX CUTS AND JOBS A CT ,"

Distri but io n of Indi vid ual Incom e Tax Si de of the Pro po sal
CHANGE IN FEDERAL TAXES ($ millions )
INCOME CATE GORY
Less than $10,000 ...

2019

2021

-$28 7

2023

-$252

-$118

2025

2027

-$120

-$315

$10 ,000 to $20,000 .............

-$1,817

-$1,731

-$134

$111

-$189

$20 ,000 to $30,000 .............

-$2,314

-$2 , 136

$782

$1 ,235

$1,444

$30 ,000 to $40,000 .............

-$3 ,278

-$3 ,027

$347

$699

$857

$40 ,000 to $50,000 . ...........

-$4 ,393

-$4 ,383

-$496

-$158

-$106

$50 ,000 to $75,000 .............

-$17 ,046

-$17,139

-$6,622

-$6,151

-$5 ,607

$75 ,000 to $100 ,000 .......... .

-$14,690

-$14,377

-$4,642

-$3,853

-$2,930

$100 ,000 to $200 ,000 ..........

-$39 ,491

-$38,341

-$17 ,695

-$14 ,944

-$11 ,179
$7 ,190

$200 ,000 to $500 ,000 ..........

-$8 ,643

-$5,738

$1 ,076

$4 ,183

$500 ,000 to $1,000,000 .......

-$2,794

-$2,280

-$1,687

-$1, 150

-$74

$1,000,000 and over ............

-$18 ,914

-$19,379

-$18,877

-$19,916

-$20,550

Total, All Taxpayers ..........

-$113 ,667

-$108,784

-$48 ,068

-$40 ,065

-$31 ,460

Distribution of Business Side of the Pro posal
CHANGE IN FEDERAL TAXES ($ millions)
INCOME CATEGORY

2019

2021

2023

2025

2027

Less than $10,000 .............

-$270

-$170

$218

$40

-$203

$10 ,000 to $20,000 .............

- $618

-$353

$773

$156

-$538

$20 ,000 to $30,000 .............

-$687

-$500

$388

-$165

-$1,013

$30 ,000 to $40,000 .............

-$903

-$668

$307

-$310

-$1 ,300

$40 ,000 to $50,000 .............

-$1 , 139

-$898

$196

-$521

-$1 ,795

$50 ,000 to $75,000 .............

-$3,875

-$3,050

$263

-$1,952

-$5,894

$75 ,000 to $100 ,000 ...........

-$4,794

-$3,652

$167

-$2 ,275

-$6 ,615

$100 ,000 to $200 ,000 ..........

-$17 ,575

-$13,410

$253

-$8 ,365

-$23 ,568
-$20 ,071

$200 ,000 to $500 ,000 ..........

-$17 ,803

-$12,933

$2 ,329

-$6 ,412

$500 ,000 to $1,000,000 .......

-$8,118

-$5,526

$2 ,431

-$1,732

-$7,263

$1,000,000 and over ............

-$22,643

-$13,966

$9 ,992

-$1,778

-$16,067

Total, All Taxpayers ..........

-$78 ,425

-$55 , 125

$17 ,316

-$23 ,314

-$84 ,327

Distribution of the Proposa l
CHANGE IN FEDERAL TAXES ($ millions)
INCOME CATEGORY
Less than $10,000 .............

2019

2021

2023

2025

2027

-$557

-$422

$100

-$80

-$518

$10 ,000 to $20,000 .............

-$2,435

-$2,084

$638

$268

-$726

$20 ,000 to $30,000 .............

-$3,001

-$2 ,636

$1,170

$1 ,070

$431

$30 ,000 to $40,000 .............

-$4 ,181

-$3 ,695

$653

$388

-$443

$40 ,000 to $50,000 .............

-$5 ,532

-$5 ,281

-$300

-$679

-$1 ,902

$50 ,000 to $75,000 .............

-$20,921

-$20, 189

-$6,359

-$8, 103

-$11,501

$75 ,000 to $100 ,000 ...........

-$19,483

-$18 ,029

-$4,475

-$6, 128

-$9 ,545

$100 ,000 to $200 ,000 . .......

-$57 ,066

-$51,751

-$17 ,442

-$23 ,309

-$34 ,747

$200 ,000 to $500 ,000 ..........

-$26 ,446

-$18,670

$3 ,405

-$2 ,228

-$12 ,881

$500 ,000 to $1,000,000 .......

-$10,912

-$7,806

$744

-$2,883

-$7,337

$1,000,000 and over ............

-$41,557

-$33,346

-$8,885

-$21,694

-$36,617

Total, All Taxpaye rs ..........

-$192 ,092

-$163 ,909

-$30 ,752

-$63 ,379

-$115 ,787

So urce: Jo int Co mm itte e o n Taxatio n

/\MERICAi\

UST 001295
pVERSIGHT

Page 6

TREAS-17-0313-I-000316

 Senator Johnson's tax reform anal sis
From:

"Mcllheran, Patrick (Ron Johnson)" <patrick _mcilheran@ronjohnson.senate.gov>

To:

"Kowalski, Daniel" <daniel.kowalski@treasury.gov>

Date:

Sat, 04 Nov 2017 12:36:33-0400

Attachments:

tax reform analysis 171104.pdf (100.55 kB)

Dan, Senator Johnson asked that I forward to you his one-page analysis, which is attached. He
sent it this morning to every Republican senator.
Pat.

Patrick Mcllheran
Senior commu nicat ions and policy advise r
Senator Ron Johnson
328 Hart Senate Office Building
Wash ington, OC 205 10
(202) 228-6958

Dear Colleagues,
I' ve attached a one page analysis/summary of the JCT score of the House Tax Reform Plan
I've highlighted the provisions with significant deficit impacts, and roughly grouped them by
their impact on: 1) Middle Class taxpayers ; 2) Higher Income taxpayers ; and 3) Businesse s.
I've also included two scores on my Corporate Tax plan (best and worst case scenarios) for
comparison purpo ses. I sincerely hope the Senate will give my plan serious consideration. I'm
happy to provide additional information and answer any questions you might have . Ron

/\Mlf

ll Al\

UST 001296
pVERSIGHT

TREAS-17-0313-I-000317

 House tax plan
Individual taxes

dollars in billions

provision

revenue+(-)

Tax rate changes
Repeal personal exempt

(1,089)
1,568

Increase standard deduc

(913)

Child tax credit increase

(640)

subtotal

15

Repeal itemized deducts

1,253

Misc other changes

207

Middle classtax increase

386

Repeal AMT

(695)

Estate and gift tax

(172)

High income net tax decrease

(867)

total score , individual tax reform

(481)

Businesstaxes

dollars in billions

provision

revenue+(-)

Corporate rate cut

(1,462)

Pass-through cut

{448)

Limit interest deduct

172

Modify net aper loss

156

repeal production deduct

95

foreign & tax exempt modify

288

Other biz tax modify

193

total, business

(1,006)

total deficit score

(1,487)

Johnson corporate tax proposal
dollars in billions

provision

revenue+(-)
Bestcase
scenario

Worst case
scenario

C-corps treated as pass-throughs

{216)

(467)

25% backup withholding

{716)

{1,361)

(11)

(11)

Repeal corporate tax expends

797

714

Repeal defer of foreign income

408

408

Deemed repatriation

260

138

Total corporate tax reform score

522

(579)

House expansion of full
expensing (JCT)

Scores are from Tax Foundation and Joint Committee on Taxation

/\MER

UST 001297
pVERSIGHT

TREAS-17-0313-I-000318

 Re: JCT Docs
From :
To:
Date :

"Angus, Barbara" <barbara.angus@mail.house.gov>
"Muzinich, Justin" <justin.muzinich@treasury.gov>
Sun, 05 Nov 2017 00:53 :22 -0400

,Sorry for delay. Buried fn email today. •
Please let me know if you have furth er questions . And enjoy the wee kend!

Barbara M. AJ1gus
Chief Tax Counsel
Committeeon Ways and Means
202,225 .5522

From: "Justin.Muz inich@treasury .gov" <Justin.Muzinic h@treasury .gov>

Date: Saturday, Novemb er 4 2017 at 8:31 AM
To: Shahira Knight

, "Angus, Barba ra"

<Barbara.Angus@maii.house.gov
>
Subject: Re: JCT Docs
Thanks Barbara. b(5)

From: Angus, Barbara <Barbara.Angus@maiLhouse.gov >
Date : November 3, 2017 at 9 :52:19 PM EDT
To: Muzinich, Justin <Justin.Muzinich@treasury.gov >, Knight, Shahira E. EOP/WHO
<Shahira.E.Knight@who.eop.gov >
Subject:JCT Docs

Wanted to make sure you see these new documents from JCT- dfstribution analysis and technical exp lanation

Barbara M. Angus
Chief Tax Counsel
Committee on Ways and Means
1136 Longworth House Office Building
202.225.5522
barbara.ang:us@mail.
house.gov

UST 001298

TREAS-17-0313-I-000319

 sis
From:

To:

"Mcllheran, Patrick (Ron Johnson)" <patrick_mcilheran@ronjohnson.senate.gov>
"Kowalski, Daniel" <daniel.kowalski@treasury.gov>

Date:

Sun, 05 Nov 2017 07:22:13 -0500

Very good. Thanks!

Pat
(202) 228 -6958

From: Daniel .Kowalski@treasury.gov [mailto :Daniel.Kowalski@treasury.gov]
Sent: Sunday, November 5, 2017 7:22 AM
To : Mcllheran, Patrick (Ron Johnson) <Patrick_Mcllheran@ronjohnson .senate.gov>
Subject: RE: Senator Johnson's tax reform analysis

It's already been done. But will use this one in the future .

From: Mcllheran, Patrick (Ron Johnson) <Patrick Mcllheran@ronjohnson.senate
Date: November 5, 2017 at 7:20:22 AM EST
To: Kowalski, Daniel <Daniel.Kowalski@treasury .gov>
Subject: RE:Senator Johnson's tax reform analysis

.gov>

If you do, how about you forward this one, Dan? Some tidying-up of the labels took place. The
numbers are the same, but it'll be a little easier to read.

Pat
(202 ) 228-6958

From: Mcllheran, Patrick (Ron Johnson)
Sent : Saturday, November 4, 2017 3:24 PM
To : 'Daniel.Kowalsk i@treas ury.gov' <Dan iel.Kowalski@treasury .gov>
Subject: RE: Senator Johnson 's tax reform analysis

You most certainly may.

Pat
(202) 228-6958

From: Daniel .Kowalski@treasury .gov [mailto :Daniel.Kowalski@treasury.gov ]
Sent: Saturday, November 4, 20171 :21 PM
To: Mcllheran, Patrick (Ron Johnson) <Patrick Mcllheran@ronjohnson.s enate .gov>
Subject: Re: Senator Johnson 's tax reform analysis

Thanks. He brought up the first part of the analysis yesterday, and mentioned that he was
going to do the second. I'll take a careful look.
Can I share with folks at Treasury?

/\Mlf

ll Al\

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TREAS-17-0313-I-000320

 From: Mcllh eran , Patrick (Ron Johnson) <Patrick Mc l lheran@ronjohnson.senate.gov >

Date: November 4, 2017 at 12:36:43 PM EDT
To: Kow alski, Daniel <Daniel.Kowalski@treasury .gov>
Subject: Senato r Johnson's tax reform analysi s

Dan, Senator Johnson asked that I forward to yo u his one-page analysis, which is attached. He
sent it this morning to every Republi can senator.
Pat.

Patrick Mcllheran
Senior communications and policy adviser
Senator Ron Johnson
328 Hart Senate Office Building
Washington, OC 20510
(202) 228 -6958

Dear Colleagues.
I've attac hed a one page analys is/summary of the JCT score of the House Tax Reform Plan.
I' ve highlighted the provisions with significant deficit impacts, and roughly group ed them by
their impact on: 1) Middl e C lass taxp ayers ; 2) Higher Income taxpayers ; and 3) Businesses.
I've also included two scores on my Corporate Tax plan (best and worst case sce narios) for
comparison purpo ses. I sincere ly hope the Senate will give my plan serious consideration. I'm
happy to provide additi onal information and answer any questions you might have. Ron

/\Mlf

ll Al\

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pVERSIGHT

TREAS-17-0313-I-000321

 Re: RE:
From :

"Specht , Brittan" <brittan.specht@mail.house.gov>

To:

"Maloney, Drew" <drew.maloney@treasury.gov>

Date :

Sun , 05 Nov 2017 19:51:01 -0500

b(5)

Brittan G. Specht, CFA
Majority Leade r Kevin McCarthy
On Nov 5, 2017, at 7:50 PM, "Drew.Maloney@treasury.gov " <Drew.Maloney@treasury.gov > wrote:
b(5)

Drew Maloney
Assistant Secretary of the Treasury
Legislative Affairs
United States Department of the Treasury
1500 Pennsylvania Avenue, NW Suite 3134
Washington, DC 20220
Office : 202-622-1900
Cell : ,__
drew. malo ney@treasury.gov

From: Specht, Brittan <Brittan .Specht@mail.house.gov >
Date : November 5, 2017 at 7:20 :09 PM EST
To: Maloney, Drew <Drew .Malonev@t reasury.gov >
Subject: RE:

From: Drew.Maloney@treasury.gov [Drew.Maloney@treasury.gov]

Sent: Sunday, November05, 2017 6:26 PM
To: Specht, Brittan

Subject:

b(5)

Drew Maloney
Assistant Secretary of the Treasury
Legislative Affairs
United States Department of the Treasury
1500 Pennsylvan ia Avenue , NW Suite 3134

UST 001301

TREAS-17-0313-I-000322

 Washington, DC20220
Offic-- 00
Cell: • •

drew.ma oney@treasury.gov

/\Mlf

ll Al\

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TREAS-17-0313-I-000323

 Fwd: Le islative Text of Chairman's Amendment
From :

"DuBose, Danielle" <danielle.dubose@mail.house.gov>

To:

"Bailey , Bradley" <brad ley.bailey@trea sury .gov>

Date:

Mon, 06 Nov 201717:51 :14-0500

Attachments:

BRADTX_047 _xml.pdf (97.25 kB}

Danielle DuBose
Begin forwarded message:

From: "DuBose, Danielle" < Danielle.DuBose@mail.house .gov>
Date : November 6, 2017 at 5:41 :37 PM EST
To: WAMR Tax FULL LAs <WAMRTaxFullLAs@mail.house .gov>
Subject: Legislative Text of Chairman's Amendment

Hi allPlease see attached for legislative text of the Chairman's Amendment . Please let us know if you have
any questions.
Best,
Danielle

From: "DuBose, Danielle" <Danielle .DuBose@mail.house .gov>

Date: Monday, November 6, 2017 at 5:34 PM
To : WAMR Tax FULLLAs <WAMRTaxFullLAs@mail.house .gov>
Subject: Summary of Chairman's Amendment
Hi allSee attached for summary of the amendment that the Chairman j ust offered.
Best,
Danielle

Danielle DuBose
Legislative Assistant- Tax Staff
Committee on Ways and Means
1136 LongworthHOB
(202) 225-5522
danielle.dubose@mail.house.gov

/\Mlf

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TREAS-17-0313-I-000324

 G:\M\ I5\BRADTX\BRADTX_047.XML

AMENDMENT TO THE AMENDMENT
NATURE OF A SUBSTITUTE
OFFERED BY

MR. BRADY

TO

IN THE

H.R. 1

OF TEXAS

In section 1005(a), redesignat e para graph s (1)
thr ough (37) as para graph s (3) throu gh (39), respectively, and insert before such para graph (3) (as so redesignat ed) th e following:
1

(1) Section 32 (b)(2)(B)(ii)(II) is amended by

2

strikin g " section 1 (f) (3) for th e calendar year in

3

which th e taxable year begins determin ed by sub-

4

stit ut ing 'calenda r year 200 8' for 'calendar year

5

1992 ' in subpara gr aph (B) th ereof" and in sert ing

6

"se ction l( c)(2)(A) for th e calenda r year in which

7

th e taxable year begins determin ed by substitut ing

8

'calendar year 200 8' for 'calendar year 2016 ' in

9

clause (ii) th ereof" .
(2) Section 32(j)(l )(B) is amended-

10

/\ML

11

(A) in th e matt er preceding clause (i), by

12

striking "section l (f)( 3)" and inserting "section

13

l(c)(2)( A)",

14

(B) in clause (i), by strikin g "for 'calendar

15

year 1992 ' in subpara graph (B) th ereof" and

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2
1

inserting "for 'calendar year 2016' in clause (ii)

2

ther eof", and

3

(C) in clause (ii), by striking "for 'calendar

4

year 1992 ' in subparagraph (B) of such section

5

1" and insert ing "for 'calendar year 2016' in

6

clause (ii) th ereof".
Page 76, after line 20, insert the following:

7

SEC. 1104. PROCEDURES TO REDUCE IMPROPER CLAIMS

8
9

OF EARNED INCOME CREDIT.

(a) CLARIF' ICA'rION RBGARDING DE'I'ERMINA' L'ION OF'

10 SELF-El\IPLOYMEN'l'INCOMEv\TIIICII Is TREATED AS

11 EARNED INCOl\IE.
- Section 32(c)(2)(B) is amende d by
12 striking "and" at the end of clause (v), by striking the

13 period at the end of clause (vi) and inserting",

and ", and

14 by adding at th e end th e following new clau se:

15

"(vii) in determ ining th e taA'})ayer's

16

net earning s from self-employment under

17

subpa r agraph (A)(ii) th ere shall not fail to

18

be taken into account any deduction which

19

is allowable to th e taA'})a
yer und er this sub-

20

titl e.".

21

(b) RBQUIRED QUAR'l'ERLY REPOR' l'I NG OF' \~TAGES

22 OF E MPLOYEES
.- Section 6011 is amended by adding at
23 the end th e following new subsection:

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3
1

"(i) EMPLOYERREPOR'l'INGOF'vVAGES
.-Every

per -

2 son required to deduct and ·withhold from an employee a
3 tax under section 3101 or 3402 shall include on each re4 turn or state ment submitt ed with respect to such tax, the

5 name and address of such employee and the amount of
6 wages for such employee on which such tax was ·with-

7 held. " .

8

(c) EF'PECrITVED N l' E.-

9

(1) IN GENERAL.- Except as provided in para-

10

graph (2), the amendments made by this section

11

shall apply to taxable years ending after the date of

12

the enact ment of thi s Act.

13

(2) REPORTING.-The Secretary of th e Tr eas-

14

ury, or his designee, may delay the application of the

15

amendment made by subsection (b) for such period

16

as such Secretary (or designee) determines to be

17

reasonable to allow persons adequate time to modify

18

electroni c (or other) syst ems to perrnit such person

19

to comply with the requirem ent s of su ch amend -

20

ment .

21 SEC. 1105. CERTAIN INCOME DISALLOWED FOR PURPOSES
22

OF THE EARNED INCOME TAX CREDIT.

23

(a) SUBSTA
.1
'-JTIATION REQUIRElVIENT.
- Section 32 is

24 amended by adding at the end the following new sub 25 section:

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TREAS-17-0313-I-000327

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4

1

"( n) L CONSJS'
l'EN'J' INCOME REPOR'l'ING.-lf

th e

2 ear ned incom e of a ta)..,'Pa
yer claimed on a return for pur3 poses of this sect ion is not substa ntiated by statements
4 or return s und er sections 6051, 6052, 6041(a), or 6050vV

5 with respect to su ch taArpayer, the Secretary may require
6 such ta>-1>a
yer to provide books and records to sub sta ntiat e
7 such in come, including for th e purpose of pr event ing
8 fraud.".
9

(b) EXCLUSION OF UNSUBSTA!Yl'IATEDAMOUNT

10 FROM EARNED l NCOME.- Section 32(c)(2) is amended by

11 adding at the end the follovving new subpa ragraph:
12

"(C) ExCLUSION.-In

th e case of a tax -

13

payer with respect to which there is an incon-

14

sistency described in sub section (n) who fails to

15

substa ntiat e such inconsistency to the sat isfac -

16

tion of the Secretary, the term 'ea rn ed in come'

17

shall not in clud e amounts to the extent of such

18

inconsistency.'' .

19

(c) EI<'l<'ECTIVE DATE.-'rh e amen dm ents made by

20 thi s section shaJI apply to taxab le years ending after th e

21 date of the enact ment of this Act .
Page

138, stri ke line 19, and all that

follows

through page 139 , line 24, and in sert the following :

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5
1 SEC. 1404. SUNSET OF EXCLUSION FOR DEPENDENT CARE

2

ASSISTANCE PROGRAMS.

3

(a) IN GENERAL.-S ection 129 is amended by adding

4 at the end the following nevvsub section:

5

"( f) TERMINATION.- Subsection (a) shall not apply

6 to taxab le years beginning after December 31, 2022.".

7

(b) EFFE CTIVE DATE.- rrhe amendment mad e by

8 thi s section shall tak e effect on th e dat e of th e ena ctm ent
9 of th is Act.
Pag e 246, str ike lines 7 throu gh 20, and insert th e
following:
(b)

10

CON.F'ORM
ING

AlVIEN
DivlENT.-S ection

11 123 1(b)(l)( C) is amended by inserting "a patent, inven -

12 tion , model or design (whether or not patented), a secret

13 formu la or process," before "a copyright " .
14

(c) EF'li'EC'rTVE DNrE.-rI'h e amendments mad e by

15 th is section shall apply to disposition s after December 31,
16 2017.
Pag e 24 8, aft er line 3, insert th e follmving:

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TREAS-17-0313-I-000329

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6
1

SEC. 3314. RECHARACTERIZATION OF CERTAIN GAINS IN

2

THE CASE OF PARTNERSHIP PROFITS INTER-

3

ESTS HELD IN CONNECTION WITH PERFORM-

4

ANCE OF INVESTMENT SERVICES.

5

(a) I N GENERAL.- Part IV of subchapt er O of chap-

6 ter 1 is amended-

7
8

(1) by redesignat ing section 1061 as section
1062, and

9

10
11

(2) by insertin g after section 1060 the following
nevv secti on:
"SEC. 1061. PARTNERSHIP

12

13

INTERESTS HELD IN CONNEC-

TION WITH PERFORMANCE OF SERVICES.

"(a) IN GENERAL.- If one or more applicable part-

14 nership interests are held by a taxpayer at any time dur ing
15 the taxable year, the excess (if any) of16

"( 1) the taxpayer's net long-term capita l gam.

17

with respect to such int erests for such taxab le year,

18

over

19

"(2) the ta.A'})ayer'snet long-term capital gam

20

with respect to such interests for such tax able year

21

comput ed by applying paragraphs (3) and (4) of sec-

22

tions 1222 by substitutin g '3 years' for '1 year ',

23 shall be t reate d as short -term capital gain.
24

"(b) SPECIALRULE.- To the extent provided by the

25 Secreta ry, subsection (a) shall not apply to income or gain

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7
1 attributabl e to any asset not held for portfolio investm ent
2 on behalf of third part y investors .
3

"(c) APPLICABLE PARTNERSHIP l N'l'EREST.- For

4 purpo ses of thi s section-

/\ML

s

" (1) IN GENERAL.- Except as provided in thi s

6

para gra ph or par agraph (4), th e term 'applicable

7

partn ership int erest' means any int erest in a part -

8

nership which, directly or indir ectly, is tr ansferr ed to

9

(or is held by) th e ta,'\.l)ayer in connection with the

10

performan ce of substantial services by th e taA'J)ayer,

11

or any other related person , in any applicable t rade

12

or business. rrhe pr eviou s sent ence shall not apply to

13

an int erest held by a person ·who is employed by an-

14

other entit y tha t is conducting a trade or business

15

(other than an applicable trad e or business) and

16

only provides services to such other entit y.

17

"(2 ) APPLI CABLE TRADE OR BUSINESS .- Th e

18

term ' applicable tr ade or business' means any activ-

19

ity conduct ed on a regular , continuous, and substan-

20

tial ba sis ·which, regardless of ·wheth er the activity is

21

condu cted in one or more enti t ies, consists, in whole

22

or in part , of-

23

"(A) rai sing or return ing capital , and

24

"(B) either-

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TREAS-17-0313-I-000331

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8
1

"( i) investin g m (or disposing of)

2

specified assets (or identifying specified as -

3

set s for such investing or disposition) , or

4

"( ii) developing specified assets .

5

"(3) SPECIFIED ASSET.- The term 'specified

6

asset'

7

475(c)(2) ·without regard to th e last sent ence there-

8

of), co.mmodities (as defined in section 475(e)(2)),

9

real estate held for rental or investment, cash or

10

cash equivalents, options or derivative contracts with

11

respect to any of th e foregoing, and an inter est in

12

a partner ship to th e eA't ent of th e partn ership's pro -

13

portionate int erest in any of th e foregoing.

14
15

securiti es

(as defined in

section

" (4) Ex CEP'l'IONS.-Th e term 'applicable part nership int erest' shall not include"(A) any int erest in a partnersh ip directly

16
17

/\ML

means

or indir ectly held by a corporation , or

18

"(B) any capita l int erest in t he partn er-

19

ship ·which provides th e t a:iqJayer,~~th a right to

20

shar e in partn ership

21

with-

capital

commensurat e

22

"( i) th e amount of capital contr ibuted

23

(determin ed at the time of receipt of such

24

partn ership int erest), or

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9
1

"( ii) th e valu e of such int erest subj ect

2

to ta,'<und er section 83 upon th e receipt or

3

vesting of such int erest.

4

5

"(5 ) rfIIIRD PARTY U\f\TESTOR.- Th e t erm 'third

part y investor' means a person '"'ho-

6

"(A) holds an int erest in th e partn ership

7

which does not constitut e property held in con-

8

nection with an applicable trade or business;

9

and

10

"(B) is not (and ha s not been) actively en-

11

gaged, and is (and was) not relat ed to a person

12

so engaged, in (directly or indirectly) providing

13

substantial services described in paragraph (1)

14

for such partn ership or any applicable trad e or

15

business .

16

"(d) TR ANSFER OF APPLI CABLE P ARTNERS HIP l N-

17 TERE ST TO RELATED PER SON .-

18

/\ML

"( 1) I N GENERAL .-If

a taxpayer tran sfers any

19

applicable partnership inter est , directly or indire ctly,

20

to a person related to th e ta 1q)ayer, th e taArpayer

21

shall include in gross income (as short term capita l

22

gain) th e excess (if any) of-

23

"(A) so much of the taAl)ayer's long-term

24

capital gains with respect to such intere st for

25

such ta.,'<able year attributable to th e sale or ex-

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10
1

change of any asset held for not more th an 3

2

years as is allocable to such int erest, over

3

"(B) any amount treat ed as short term

4

capital gain und er subsection (a) ·with respect

5

to th e tran sfer of such int erest .

6

"(2) RELA'l'ED PERSON.-For

7

purposes of thi s

l)a yer ifpara graph, a person is related to th e ta:>..

8

" (A) the pers on is a member of th e tax-

9

payer's family ·within th e meaning of section

10

318(a)(l) , or

11

"(B) the person perform ed a service ·within

12

the curr ent calendar year or the preceding three

13

calendar years in any applicable tr ade or busi-

14

ness in ·which or for which th e ta :>..
l)a yer per -

15

form ed a service.

16

"(e) REPORTING.- rrh e Secretary shall require such

17 reporting (at th e time and in t he manner pr escribed by

18 th e Secretary) as is necessary to carry out the purpo ses
19 of thi s section.
20

"( f) REGULNrIONS.-Th e Secretar y shall issue such

21 regulations or other g11idance as is necessary or appro-

22 priate to carry out th e purpo ses of thi s section " .
23

(b) COORDINA
TION vVrrn SECTION 83.- Subsection

24 (e) of section 83 is amended by stril{ing "or" at the end
25 of para graph (4), by strikin g th e period at the end of para-

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11
1 gr aph (5) and insertin g '', or ' ', and by addin g at th e end
2 the follm~,jng new par agrap h :
" (6) a tran sfer of an applicable pa r tnership in -

3

4

terest to which section 1061 app lies." .

5

(c) CLERICAL AMENDl\lENT.- Th e tab le of section s

6 for part IV of sub chapt er O of chapt er 1 is am ended by
7 strikin g th e item r elatin g to 1061 and insertin g th e fol8 lowing new items:
"Sec . 106 1. Pa l't 11e 1·ship inte rests held in connect ion wit h perfo rm ance of"sen ·ices .
"Sec . 1062 . C,·oss ref'el'e nces." .

9

( cl) Eli'Ji'EC'I'IVB DATE.-rrh e amendm ent s mad e by

10 th is section shal l apply to t axabl e year s beginning aft er

11 D ecember 31, 2017.
Pag e 309 , aft er line 21 , insert th e following:
12 SEC. 3804. TREATMENT OF QUALIFIED EQUITY GRANTS.

13

/\ML

(a) I N GENERAL.-

14

(1) E LEC1'10N 'I'0 J)Eli'ER INC0ME.-S ection 83

15

1s amended by addin g at the end the follmving new

16

sub section:

17

"( i) Q UALIFIED EQ UITY GI ~\.l'•.T'I'S .-

18

" (1) IN GENEfu\.L.- F or purpo ses of thi s sub -

19

tit le, if qualified stock is tran sferr ed t o a qua lified

20

employee who malrns an election ·with respect to such

21

stock und er thi s subsection-

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12
1

" (A) except as provided in subp aragraph

2

(B ), no amount shall be included in income

3

und er subsection (a) for th e first taxable year

4

in which th e right s of th e employee in such

5

stock ar c tran sferabl e or arc not subj ect to a

6

substanti al risk of forfeitur e, ·whichever is appli-

7

cable, and

8

" (B) an amount equal t o th e amount

9

·which would be included in income of the em-

10

ployee und er subsection (a) (determin ed with out

11

regard t o thi s sub section) shall be in cluded in

12

income for th e taxable year of th e employee

13

which includes the earliest of-

14

" (i) the first date such qualified stock

15

becomes t ransferable (including tran sfer-

16

able to th e employer ),
"( ii) th e date th e employee fir st bc-

17

cornes an excluded employee,

18

/\ML

19

"( iii) the first date on which any stock

20

of the corporation which issued the quali-

21

fied stock becomes readily tradablc on an

22

establi shed securiti es market (as deter-

23

mined by th e Secretary, but not including

24

any market unless such market is recog-

25

nized as an established secur ities mar ket

g:\VH LC\ 1106 17\ 110617.356 .xml

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(679683 113)

TREAS-17-0313-I-000336

 G:\M\ I 5\BRADTX\BRADTX_047.XML

13
1

by th e Secretary for purp oses of a provi-

2

sion of this title other than thi s sub -

3

section),

4

"( iv) the dat e that is 5 year s aft er the

5

first dat e the rights of the employee in

6

su ch stock are tran sferable or are not sub -

7

j ect t o a substanti al risk of forfeitur e,

8

v.rhichever occur s earlier , or

9

"(v) th e dat e on which the employee

10

revokes (at such time and in such mann er

11

as th e Secretar y may pr ovide) the election

12

und er this subsection with respect to such

13

stock.

14

"(2 ) Q U.1\LIF'IED STOCK.-

15

" (A) IN GENERAL.- F or pur poses of this

16

subsection , the term 'qualified stock' means,

17

with respect to any qualified employee, any

18

stock in a corporation ·which is th e employer of

19

such employee, if-

20

" (i) such stock is received-

21

" (I) in connection with th e exer -

22

cise of an option, or
" (II ) in set tlement of a rest ricted

23
24

/\ML

stock unit , and

g:\V HLC\ 1106 17\ 1106 17.356 .xml

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TREAS-17-0313-I-000337

 G:\M\ I 5\BRADTX\BRADTX_047.XML

14
"( ii) such option or restri cted stock

1

2

unit was provided by th e corporation-

3

" (I) in connection ·with the per-

4

formance of services as an employee,

5

and

6

" (II) during a calendar year in

7

·which such corporation ·was an eligible

8

corporation .
"(B)

9

10

stock' shall not include any stock if th e em-

11

ployee may sell such stock to , or otherwise re-

12

ceive cash in lieu of stock from, th e corporat ion

13

at th e time that the right s of the employee in

14

such stock first become tran sferabl e or not sub-

15

j ect to a substa ntial risk of forfeitur e.
"(C) ELIGIBLE C0RP0RATI0N.- For pur-

16

poses of subparagraph (A)(ii)(II )-

17

/\ML

LIMITATI0N.- The term 'qualified

18

.-Th e term 'eligible
"( i) lN GENERAL

19

corporation ' means, with respect to any

20

calendar year, any corporation if-

21

" (I) no stock of such corporat ion

22

(or any pr edecessor of such corpora -

23

tion) is read ily tradab le on an esta b-

24

lished securitie s mark et (as deter-

25

mined und er para graph

g:\VHLC\110617\1106 17.356 .xml

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(l)(B)( iii))

TREAS-17-0313-I-000338

 G:\M\ I 5\BRADTX\BRADTX_047.XML

15
1

durin g any pr eceding calendar year,

2

and

3

"( II ) such corporation has a writ-

4

ten plan under which, in such cal-

5

endar year , not less than 80 percent

6

of all employees who provide sen~ces

7

to such corporat ion in the Unit ed

8

Stat es

9

United States) arc granted stock op-

10

tions, or restri ct ed stock unit s, with

11

the same right s and privileges to re-

12

ceive qualifi ed stock .

13

" (n..)

14

/\ML

(or

any possession of the

SAME

RIGII'J'S

AND

PRIVl-

LEGES.- For purpo ses of clause (i)(II)-

15

" (I) except as provided in sub-

16

clau ses (II ) and (III ), the determina-

17

tion of right s and privileges with re-

18

spect to stock shall be determined in

19

a similar manner as prm~ded under

20

section 423( b)(5),

21

"( II ) employees shall not fail to

22

be tr eated as having th e same right s

23

and

24

stock solely because the number of

25

shar es available to all employees is not

g:\VHLC\110617\1106 17.356 .xml

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(679683113)

privileges to receive qualified

TREAS-17-0313-I-000339

 G:\M\ I 5\BRADTX\BRADTX_047.XML

16
1

equal in amount , so long as the num -

2

ber of shar es available to each em-

3

ployee is more than

4

amount, and

5

"( III ) right s and pri vileges with

6

respect to th e exercise of an option

7

shall not be tr eated as the same as

8

right s and pri vileges ·with respect to

9

th e settl ement of a restri cted stock

10

unit.

11

"( iii) EMPLOYEE.- F or purpo ses of

12

clause (i)(II), the term 'employee' shall not

13

include any employee describ ed in section

14

498OE(d) (4) or any exclud ed employee.

15

"( iv) SPECIAL RULE FOR CALENDAR
BEFORE 2018.- In th e case of any

16

YEARS

17

calendar year beginnin g before Janu ary 1,

18

201 8, clau se (i)(II) sha ll be applied with-

19

out regar d to whether the right s and privi-

20

leges with respect to t he qualified stock are

21

the same.

22
23

"(3)

" (A) L

g:\VHLC\110617\110 617.356 .xml
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GENERAL.-Th e term 'qualifi ed

employee' means any individual who-

25

001319
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QUALIFIED El\IPLOYEE; EXCLUDE
D El\I-

PLOYEE.- For purposes of this subsection-

24

/\ML

a de minimis

p.m.)

(679683 113)

TREAS-17-0313-I-000340

 G:\M\ I 5\BRADTX\BRADTX_047.XML

17
1

"( i) is not an excluded employee, and

2

"( ii) agrees in th e election made

3

und er thi s subsection to meet such requir e-

4

ment s as det ermined by the Secretary to

5

be necessary to ensur e that

6

holding requir ement s of th e corporat ion

7

und er chapt er 24 ·with respect to the quali-

8

fied stock ar e met.

9

"(B) EXCLUDED EMPLOYEE
.- The ter m

10

'excluded employee' means, v,rith respect to any

11

corporat ion, any individual-

12

" (i) who was a 1-percent owner (-with-

13

in th e meaning of section 416( i)(l)(B)( ii))

14

at any time durin g the 10 preceding cal-

15

endar years,
"( ii) who is or ha s been at any prior

16

time-

17
18

" (I) the chief executive officer of

19

such corporation or an individua1 act -

20

ing in such a capacity, or

21

'' (II ) th e chief finan cia1 officer of

22

such corporation or an indi,ridual act-

23

ing in such a capacity,

24

"( iii) who bears a relationsh ip described in section 318(a)(l)

25

/\ML

the with-

g:\VHLC\110617\1106 17.356 .xml

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(679683113)

to any indi-

TREAS-17-0313-I-000341

 G:\M\ I 5\BRADTX\BRADTX_047.XML

18
1

vidual described in subclause (I) or (II ) of

2

clause (ii), or

3

"( iv) who has been for any of the 10

4

preceding taxable years one of t he 4 high-

5

est compensate d officers of such corpora -

6

tion determined with respect to each such

7

taxable year on th e ba sis of the share -

8

ho]der disclosure rul es for compensation

9

und er th e Sccm·iti cs Exchang e Act of 1934

10

(as if such ru les applied to such corpora -

11

ti.on).
"(4) ELEC'l'ION.-

12
13

"(A)

Jl'OH, MAKING ELECrrl ON.-An

14

election ·with respect to qualified stock shall be

15

mad e und er thi s subsection no later than 30

16

days after th e first time the right s of th e em-

17

ployee in such stock arc tran sferab le or arc not

18

subject to a substantial

19

whichever occurs earlier, and shall be made in

20

a mann er similar to th e manner in which an

21

election is made und er subsection (b) .

22

/\ML

11 IME

"(B) LIMI'l'ATIONS
.-No

risk of forfeitur e,

election may be

23

mad e und er this section with respect to any

24

qualified stock if-

g:\VHLC\110617\1106 17.356.xml

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TREAS-17-0313-I-000342

 G:\M\ I 5\BRADTX\BRADTX_047.XML

19

/\ML

1

"( i) th e qualified employee ha s made

2

an election und er subsection (b) ,vith re-

3

spect to such qualified stock ,

4

"( ii) any stock of th e corporation

5

which issued th e qualified stock is readily

6

tradabl e on an establi shed securiti es mar-

7

ket

8

(l)(B)(iii)) at any time before th e election

9

is made, or

(as

determi ned

und er

paragraph

10

"( iii) such corporation pur chased any

11

of its outstanding stock in th e calendar

12

year pr eceding the calendar year which in-

13

cludes the first time th e right s of th e em-

14

ployee in such stock ar e tran sferabl e or are

15

not subject to a substa ntial risk of for-

16

feiture, unless-

17

" (I) not less than 25 percent of

18

th e total dollar amount of th e stock so

19

pur chased is deferral stock, and

20

" (II) the determination of which

21

individual s from whom deferral stock

22

is purchased is mad e on a reasonable

23

basis.

g:\VHLC\110617\1106 17.356 .xml

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TREAS-17-0313-I-000343

 G:\M\ I5\BRADTX\BRADTX_047.XML

20
1

" (C) DEI <'l 11TIONS Al'\JD SPECIAL RULES

2

RELATED TO LllVJITA'l'ION ON STOCK REDEl\lP-

3

TIONS.-

4

"( i)

STOCK - For

pu r-

5

poses of thi s para grap h , the t erm 'd eferra l

6

stock' mean s stock ,~rith respect to which

7

an election is in effect und er this sub -

8

section .
" (ii) D EFERRAL

9

STOCK WITH RE-

10

SPECT TO Al\TY INDIVIDUAL NOT T1UIBN

11

INTO ACCOUNT IF INDIVID UAL HOLD S DE-

12

l<'ERRAL S'l'OCK WITH LONGER DEl<'ERRAL

13

PERIOD.-Sto ck pu r cha sed by a corpora-

14

tion from any individu al sha ll not be tr eat -

15

ed as deferra l st ock for purpo ses of clau se

16

(iii) if such indi vidua l (imm ediat ely aft er

17

su ch pur cha se ) holds any deferra l stoc k

18

with respect to which an electi on ha s been

19

in effect und er thi s sub secti on for a longer

20

per iod th an t he election ·wit h r espect t o the

21

stock so pur chased .

22

/\ML

DEFERRAL

"( iii)

P URCIIASE

OF

JU_;L

OUT-

23

STAl"\T
DING DEFERRAL

24

quir ement s of subc lau ses (I ) and (II ) of

25

subpa r agTaph (B) (iii) sha ll be treat ed as

g:\V HLC\ 1106 17\ 1106 17.356 .xml

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STOCK - Th e

re -

TREAS-17-0313-I-000344

 G:\M\ I 5\BRADTX\BRADTX_047.XML

21

/\ML

1

met if th e stock so pur cha sed includes all

2

of th e corporation' s outstandin g deferra l

3

stock.

4

"(iv) REPORTING.- Any corporation

5

which ha s outstandin g deferra l st ock as of

6

th e beginnin g of any calendar year and

7

which pur cha ses any of it s outstand ing

8

stock durin g such calendar year shall in-

9

elude on it s return of tax for the taxable

10

year in which, or with which , such calendar

11

year ends th e tota l dollar amount of its

12

outstandin g stock so purcha sed durin g

13

su ch calendar year and such other infor-

14

mation as th e Secreta ry may require for

15

purpo ses of administering thi s paragraph .

16

"(5) CONTROLLEDGROUPS.- For purpo ses of

17

thi s subsection , all corporation s which arc members

18

of th e same controlled group of corporation s (as de-

19

fined in section 1563( a)) shaJl be tr eated as one cor-

20

poration.

21

" (6) NOTICE REQUIREMENT.- Any corporat ion

22

that tran sfers qualified stock to a qualified employee

23

shall, at the time that (or a reasonable period bc-

24

fore) an amount attributabl e to such stock would

g:\V HLC\ 1106 17\ 110617 .356.xml

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TREAS-17-0313-I-000345

 G:\M\ I 5\BRADTX\BRADTX_047.XML

22
1

(but for th is subsection) first be includible m the

2

gross income of such employee-

3

"(A) certify to such employee that such

4

stock is qualified st ock, and

5

"(B) notify su ch employee-

6

" (i) that th e employee may elect to

7

defer income on su ch stock und er th is sub-

8

section, and

9

"( ii) that , if the employee makes such

10

/\ML

an clection-

11

"( I) th e amount of income recog-

12

nized at th e end of th e deferra l period

13

vvill be ba sed on the value of the stock

14

at th e time at which the right s of the

15

employee in such stock first become

16

transferab le or not subject to substa n-

17

tial risk of forfeiture, notwithsta nding

18

whether the value of th e st ock has de-

19

clined during the deferra l period,

20

"( II) the amount of such income

21

recognized at the end of the deferra l

22

period will be subj ect to ,vithholding

23

under section 3401(i) at th e rat e de-

24

termined und er section 3402(t), and

g:\VHLC\110617\110 617.356.xml

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TREAS-17-0313-I-000346

 G:\M\ I 5\BRADTX\BRADTX_047.XML

23

1

'' (III ) th e r esponsibiliti es of th e

2

employee (as determin ed by th e Sec-

3

retar y und er

4

with r espect to such withholdin g." .

par agra ph

(3)(A)( ii))

5

(2) DEDUCTION BY EMPLOYER.- Subsecti on (h)

6

of sect ion 83 is amend ed by strik ing "or (d)(2 )" and

7

in sertin g "( d)(2) , or (i)" .

8

(b) \ iVJrrIIIIOLDT NG .-

9

(1) 'rr ME OF vVITIIIIOLDING.- Secti on 340 1 is

10

amended by addin g at th e end th e follo-vvin g new

11

subsecti on :

12

"( i) QUALIF'IED S'rOCK F'OR v\TIIICII

13 I N EF FECT UN DE R SECTION 83(i).-For

J\N

ELBC'l'IOr Is

purpo ses of sub-

14 section (a ), qualifi ed st ock (as defined in secti on 83 (i))
15 vvith respect to ,,vhich an elect ion is made und er section
16 83(i) shall be tr eated as wages" ( 1) received on th e ear liest date describ ed m

17

section 83( i)(l )(B) , and

18

/\ML

19

" (2) in an amount equa l to th e amount in-

20

eluded in income und er secti on 83 for th e ta xable

21

year which includ es such dat e." .

22

(2 ) Al\IOUNT 01<' WITIIIIOLDING.-Sec tion 34 02

23

is amend ed by adding at th e end th e followin g new

24

sub section:

g:\VH LC\ 1106 17\ 110617 .356 .xml

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(679683 113)

TREAS-17-0313-I-000347

 G:\M\ I 5\BRADTX\BRADTX_047.XML

24

1

"( t )

RA'l'E

OF' VVI'l'IIIIOLDING F'OR CER'l'AlN

2 S'l'OCK.-In th e case of any qua lified stock (as defined in
3 section 83(i)) vvith respect to which an electio n is mad e
4 und er sectio n 83( i)-

5

"( 1) th e rat e of tax und er sub sect ion (a) shall

6

not be less th.an th e ma..:'<imurnrat e of tax in effect

7

und er section 1, and

8
9

"(2) such stoc k sha11 be tr eated for purposes of
secti on 35 01(b) in th e same mann er as a non-cash

10

fringe benefit." .

11

(c) COORDINATION"\~
Trrn OTHER DEFERRED Col\I-

12 PE t SATION Ruu ~s .13

14

(1) ELECTION TO APPLY DEF'ERRAL '1'0 STA'l'UTORYOP'l'lONS.-

15

(A) I NCENTIVE STOCK OPTIONS.- Sectio n

16

422(b) is amended by add ing at th e end the fol-

17

lowing: "Suc h term sh all not includ e any option

18

if an election is made und er sect ion 83( i) with

19

r espect to th e stoc k r eceived in conn ection ,vi.th

20

th e exerc ise of su ch option.".
(B)

21

/\ML

EMPLOYEE

STOCK

PURCHASE

22

Pl.u-\J'\TS
.-Sect ion 423(a) is amend ed by add ing

23

at the end the following flu sh senten ce:

g:\VHLC\110617\110 617.356 .xml

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TREAS-17-0313-I-000348

 G:\M\ I 5\BRADTX\BRADTX_047.XML

25
1 " The pr eceding sent ence shall not apply to any shar e of
2 stock v.rith respect to which an election is made und er sec3 tion 83(i)." .
(2) E XCLUS ION FROl\I DEFI NITIO N OF NON-

4

5

QUALIFIED

6

tion 409B (b), as added by thi s Act, is amended by

7

adding at the end th e follm~ringnew paragraph:

8

DEFERRED

CO1\'1
PE NSAT IO N PL Al'\T.-

" (8) 1"REA'J'i\fENT Oll'

Sec -

QUAL.1
ll l'rnm STOCK-An

9

arrangement und er which an employee may receive

10

qualified stock (as defined in section 83(i)(2)) shall

11

not be tr eated as a nonqualifi ed deferr ed compensa-

12

. pan
1 .."
t10n

13

(cl) l NPORMAT
ION REPOR'J'J
NG.-S ection 6051(a) is

14 amended by strikin g "a nd" at th e end of para gTaph (13),
15 by striking the period at th e end of paragraph (14) and
16 inserting a comma , and by inserting aft er pa ragra ph (14)
17 th e follm~ng new paragraph s:
18
19

/\ML

"( 15) th e amount excludabl e from gross income
und er subpar agTaph (A) of section 83(i)(l),

20

"( 16) the amount includible in gross mcome

21

und er subparagraph (B) of section 83(i)(l) with re-

22

spect to an event described in such subparag raph

23

,,vhich occurs in such calendar year, and

24

" (17) th e aggregate amount of income which is

25

being deferr ed pur suant to elections und er section

g:\VHLC\110617\110 617.356.xml

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TREAS-17-0313-I-000349

 G:\M\ I 5\BRADTX\BRADTX_047.XML

26

1

83(i), determined as of the close of the calendar

2

year ." .

3

(e) PE NALTY FOR F AILURE OF E MPLOYER To PR 0-

4 VIDE NOT ICE OF rrJL-x CONSEQUENCES .- Sect io n 6652 is

5 amended by adding at the end the following new sub 6 section:
7

"(o) FA ll.1URE 'l'O PROVIDE NO'rICE UNDER SEC'l'ION

8 83(i).-In

th e case of each failure t o provide a notice as

9 requir ed by section 83(i)(6), at the time prescribed there10 for, unless it is shown that such failure is due to reason11 able cause and not to willful neglect, there shall be paid,
12 on notice and demand of the Secretary and in the same
13 manner as ta x, by th e person failing to provide such no14 tice, an amount equal to $100 for each such failure, but
15 the total amount imposed on such person for all such fail16 ures durin g any calendar year shall not exceed $50,000. " .
17

/\ML

(f) EFFECTIVE

D ATES .-

18

(1) I N GENERA
L.-E xcept as provided in para-

19

graph (2), the amendments made by thi s section

20

shall apply to stock attribut able to options exercised,

21

or restricted stock units sett led, after December 31,

22

2017.

23

(2) R EQU I REMEN T TO PRO VIDE NOTIC E .- Th e

24

amendments made by subsection (e) shall apply to

25

failures after December 31, 2017.

g:\VHLC\110617\110 617.356 .xml

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TREAS-17-0313-I-000350

 G:\M\ I 5\BRADTX\BRADTX_047.XML

27
1

(g) TR ANSI'rIO N RULE.- Until su ch tim e as th e Sec-

2 ret ary (or the Secretary's delegate) issue regulations or
3 oth er guidan ce for pur poses of implementin g the requir e4 ment s of par agraph (2)(C)(i)(II) of section 83(i) of th e
5 Int ernal Revenue Code of 1986 (as added by thi s section ),
6 or th e requirement s of par agraph (6) of such section, a
7 corporati on shall be tr eated as being in compliance with
8 such r equir ement s (respectively) if such corp orati on com9 plies vvith a reasonable good faith int erpr etati on of such
10 requir ement s.
P age 344, strik e lines 9 th rough 12, and insert th e
following:
11

ith
" (4) C OORDI NATI ON \VITI! SECTIO N 78.- :\i\T

12

respect to th e t axes tre ated as paid or accrued by a

13

domestic corporation "'~th respect to am.cunt s which

14

are includible in gross income of such domestic cor -

15

porat ion by reason of this section , secti on 78 shall

16

apply only to so much of such taxes as bear s th e

17

same prop orti on to th e amount of such t axes as-

18

/\ML

"(A) th e excess of-

19

"( i) the amount s which ar e includible

20

in gross income of such domestic corpora-

21

tion by reason of thi s section , over

g:\VH LC\ 1106 17\ 110617.356 .xml

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TREAS-17-0313-I-000351

 G:\M\ I 5\BRADTX\BRADTX_047.XML

28
11 the deduction allowable und er
" C)

1

(c)

2

subsection

with

3

amounts, bears to

4

"(B) such amounts." .

respect

to

such

Page 372, line 12, strike "subsection (h) or (i)" and
insert "s ubsection (c)(2)(C), (h), or (i)" .
P age 376, str ike lines 3 through 7, and insert the
following:
5

"( 1) COiHi\lOD
ITIES GROSSlNCOiVIE
.-Th e t erm

6

'commodities gross income' means, ,vith respect to

7

any coq Joration-

8

"(A)

gross mcome of such corporat ion

9

from the disposition of commodities which arc

10

produced or extracte d by such corporation (or a

11

partnershi p in ·which such corporation is a part -

12

ner), and

13

"(B)

gross mcome of such corpora tion

14

fr om the disposition of property which gives rise

15

to income described in subp arag raph (A)." .
Page 398, str ike lines 7 through 10, and insert the

following:

/\ML

16

"(C) the foreign corporat ion shall be al-

17

lowed a deducti on for th e taxable year referred

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29
1

to in subparagTaph (A) equal to th e product

2

of-

3

"( i) th e sum of 104 percent plus the

4

annual

Fed eral short-term

rate

(deter-

5

mined und er section 127 4( d)) for the last

6

month ending before th e beginnin g of the

7

taxable year, multipli ed by
"( ii) the deemed e:>-'})enses
·with respect

8

to such amount ." .

9

Page 398, strike lines 21 through 25, and insert th e
following:
10

"( ii) any amount paid or incurred for

11

the acquisition of any security described in

12

section 475(c)(2) or any commodity de-

13

scribed in section 475( e)(2),'' .
Pag e 399, str ike Jines 10 through 14 and insert the

following:
14

"(C) A .lVIOU 'I'S NO'!' 'l'RE A 'l'ED AS EF'F'EC-

15

TIVELY

16

BASIS TA.-~
.- Subpara graph (B)(iii) shall only

17

apply to so much of any specified amount as

18

bear s th e proportion to such amount as-" .

CON NE CTE D TO

EXTE NT

OF

GROSS -

Pag e 400, line 1, insert "such specified amount
and" before "deemed e)...
l) enses" .

/\ML

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30
Pag e 400, strik e lines 13 throu gh 19, and insert th e
follmving:

1

"(C)

l\llE 'I'IIOD

OF'

DETERMINA'l'ION.-

2

Amount s described in subpar agrap h (B) shall

3

be determined ,,rith respect to the int ernational

4

financia l reportin g group on th e basis of the

5

consolidated financia l stat ement s referred to in

6

paragTaph (4)(A)(i) and the books and records

7

of the members of th e int ernational finan cial

8

reporting group which ar c used in pr eparing

9

such sta tement s, tak ing into account only reve-

10

nues and expenses of th e members of such

11

group (other than th e members of such group

12

which are tr eat ed as domesti c for purpo ses of

13

thi s subsection) derived from, or incurr ed ,vi.th

14

respect to-

15

'' (i) persons who ar c not members of

16

such group, and

17

"( ii) members of such gToup which

18

are treat ed as a domestic corporation for

19

purpo ses of this subsection." .
Pa ge 403, strik e line 20 and all that follows throu gh

page 404 , line 9, and insert th e follm,ring:

20
/\ML

"(8) T REA'l'l\iIENT OF FOREI GN TA,TIS .-

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TREAS-17-0313-I-000354

 G:\M\ I 5\BRADTX\BRADTX_047.XML

31
1

"(A) ALI.iOWAl'\J
CE

CREDIT.-ln

the

2

case of any foreign corporation which receives

3

specified amounts to which paragraph (1) ap-

4

plies during any ta,xable year, there shall be al-

5

lowed as a credit against the tax imposed by

6

this chapt er for such taxable year an amount

7

equal to the product of" (i) the excess (if any) of-

8

the

" (I )

9

aggTegate

specified

10

amounts received by such foreign cor-

11

porat ion to ·which parag raph ( 1) ap-

12

plies for such taxable year, over
"(II)

13

the aggregate amount of

14

deductions allowed under paragraph

15

(l )(C) with respect to such foreign

16

corporation

17

multiplied by

18

"( ii) the lesser of-

19

" (I)

for such taxable year,

50 percent

of the inter-

20

national financial reporting

21

effective foreign tax rate for the re-

22

porting year during which or with

23

·which such taxable year ends, or

24

/\ML

01<'

"(II) 20 percent.

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32
1

"(B)

OF' F'OREIGN

TAX

2

CREDIT

3

tion 901 for any taxes paid or accrued (or

4

tr eat ed as paid or accrued) with respect to any

5

specified amount to which paragraph

6

plies.

.-No

credit shall be allowed under sec-

( 1) ap-

7

"(C) DENW., OF' DEDUC'l'ION.-No deduc-

8

tion shall be allowed und er thi s chapter for any

9

tax for which credit is not allo-wable under sec-

10

tion 901 by reason of subparagraph (B) (deter -

11

mined by treating th e ta;q)ayer as having elect-

12

ed th e benefits of subpa r t A of part III of sub-

13

chapter N) .

14

/\ML

DI SAJ.,lDWAN CE

" (D)

El <'l<'EC'l'
IVE l<'OREIGN 'l'AX RATE.-

15

For purpo ses of thi s paragraph, th e term 'effec-

16

tive foreign tax rat e' means, with respect to any

17

reporting year of any int ernational finan cial re-

18

porting group , th e rat io (expressed as a per-

19

centage and not less than zero) of-

20

" (i) th e foreign income taxes paid by

21

the int ernational finan cial reporting group

22

during such reporting year , divided by

23

"( ii) th e net income of the int er-

24

national financial reportin g group deter-

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33

1

mined with out regard to int erest income,

2

int erest eA'])ense, and income taxes .

3

Amount s described in thi s subpara graph shall

4

be determined as provid ed in paragraph (3)(C) .

5

" (E ) FOREIGN INCOME T.1
L"'illS.- F or pur-

6

poses of thi s paragTaph , th e term 'foreign in-

7

come ta xes' means any income, ·war profit s, or

8

excess profits taxes paid to any foreign countr y

9

or possession of th e Unit ed Stat es." .
P age 41 8, line 12, strik e "$ 100 ,000 " and insert

"$ 250,000 " .
.A.m end t he long titl e so as to read: "A bill to provide
for reconciliati on pur suant to titl es II and V of the concurr ent resolution on th e bud get for fiscal year 2018 ." .

/\ML

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TREAS-17-0313-I-000357

 Re:
From:

"Muzinich, Justin" <"/o=ustreasury/ou=exchange administrative group
(fydibohf23spdlt)/cn=recipients/cn=3d2afce60d7 e464fbd30ff8dbedefecb-muzinich.

To:

"Schneider, Donald" <donald.schneider@mail.house.gov>

Date:

Tue, 07 Nov 2017 12:30:11 -05 00

jus">

Thank you!

From : Schneider, Donald <Donald.Schneider@mail.house.gov>
Date: November 7, 2017 at 12:20 :15 PM EST
To: Muzinich, Justin <Justin.Muzinich@treasury.gov>
Subject : (No subject)

CURRENT LAW:
$59,000 AGI
-$12,700 in standard deduction
-$16,200 in 4x personal exemptions
= $30,100 taxable income
10% X $18,650 = $1 ,865
15% X $11,450 = $1 ,717 .50
= $3,582 .50 preliminary liability
- $2,000 in 2x child tax credits
= $1,582 .50 in tax liability under current law

Donald Schneider
Donald.Schneider@mail .house .gov
Senior Economist, Committee on Ways and Mean s
1136 Longworth HOB
Main : 202-225 -3625
Direct: 202-226-5475

Sent from my iPhone

/\Mlf

ll Al\

UST 001337
pVERSIGHT

TREAS-17-0313-I-000358

 RE:
From :

"Schneider, Donald" <donald.schneider@mail.house.gov>

To:

b(6)

Date :

Tue , 07 Nov 2017 13:54:25 -0500

@treasury.gov>

I'll talk to our press team and speaker's office so we can all be on the same page
From:~

treasury.gov [mailto:
@t reasury.gov]
17 1:36 PM
To: Schneider, Donald <Donald .Schneider@mail.house .gov>
Sent: ~

Subject: FW:

Hey Donald,
Justin suggested that I share these suggestions about your very popular $59,000 example. These are
just thoughts and, of course, I don't know the context of your example.
Happy to talk,

-

From: Muzinich, Justin
Sent : Tuesda , November 07 , 2017 1:30 PM

tre s r

To:

ov>

SubJec :

Thanksm!

Good points. Feel free to share directly w Donald .

b(6)

,

treas r . ov>
Date: November 7, 2017 at 1:11:12 PM EST
To: Muzinich, Justin <Justin.Muzinich@treasury.gov >
From:

Subject: RE:

UST 001338

TREAS-17-0313-I-000359

 From: Muz inich, Justin
Sent : Tuesday , November 07, 2017 12:23 PM

To: • •
Subject:

treasur . ov >

b(S)

From: Schneider, Donald <Donald.Schneider@mail.house.gov >

Date: November 7, 2017 at 12:20:15 PM EST
To: Muzinich, Justin <Justin.Muzinich@treasury.gov >
Subject: (No subject)

CURRENT LAW:
$59,000 AGI
-$ 12,700 in standar d deduction
-$16,200 in 4x per sonal exemptions
= $30,100 taxable income
10% X $18,650 = $1,865
15% X $1] ,450 = $ 1,717.50
= $3,582.50 preliminaiy liability
- $2,000 in 2x child tax credits
= $ 1,582.50 in tax liability under current law
TAXREFORM:

Donald Schneider

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TREAS-17-0313-I-000360

 Donald.Scbneider@mail.house.gov
Senior Economist, Committee on Ways and Means
1136 LongworthHOB
Main: 202-225-3625
Direct: 202-226-5475

Sent from my iPhone

/\Mlf ll Al\

UST 001340
pVERSIGHT

TREAS-17-0313-I-000361

 Can ou take a look at this?
From :

"Schneider, Donald" <donald.schneider@mafl.house.gov>

To :

treasury.gov>

Date :
Attachments:

UST 001341

Tue, 07 Nov 2017 15:28:25-0500
WMC dem members tax cuts.xlsx (19.15 kB)

TREAS-17-0313-I-000362

 ou take a look at this?
From:
To:

"Sch neider, Donald" <donald.schneider@mail.house.gov>
b(6)
, treas ury.gov>

Date :

Tue, 07 Nov 2017 16:32:3 1 -0500

So glad I sent it to you.
Thanks again
From: • •

@treasury.gov[mailto:

treasury.gov]

Se nt : November 7, 2017 4:23 PM
To: Schneider, Donald <Donald.Schneider@mail.house.gov>
Subject: RE: Can you take a look at this?
Importance: High

From : Schneider, Donald [mailto :Donald.Schneider@matl.house.gov
November 07 2017 3:28 PM
To:• •
Subject: Can you take a look at this?

]

Sent : Tuesda

UST 001342

TREAS-17-0313-I-000363

 UST 001343 

From :
To:

"Schneider, Donald" <donald .schneider@mail.house .gov>
b(6)
• treasury .gov>

Cc :

"Sandell , John" <john .sandell@mail.house .gov>

Date :

Wed , 08 Nov 2017 08:08:30 -0500

Attachments :

WMC members tax cuts_brittan.xlsx (34. 1.3 kB)

Fixed it. You were right .

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pVERSIGHT

TREAS-17-0313-I-000365

 From :

b(6)

To :

<"/o=ustreasury/o u=do/cn=recipfents/cn="Schneider, Donald" <donald.schneider@mail.house.gov>

Cc:

"Sandell, John" <john .sandell@mail.house.gov>

Date :

Wed, 08 Nov 2017 09:34:35 -0500

CTC numbers look right.
Happy to help .
From: Schneider , Donald [mailto :Donald.Schneider@ma ll.house.gov]
Sent : Wednesda
November 08 2017 8:09 AM

To:
@treasury.gov>
Cc: Sandell, John <John.Sandell@mail.house .gov>
Subject : WMC members tax cuts_br ittan .xlsx

Fixed it . You were right .

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pVERSIGHT

TREAS-17-0313-I-000366

 From :

"Bailey, Bradley" <b radley.bailey@t reasury.gov>

To:

"Specht, Brittan" <brittan .specht@mail.house.gov>, donald.schneider@ mail .house.gov

Cc:

"Dunham , Will" <will.dunham@m ail.house. ov>, "Malone , Drew"
<

,r,,\t 'rO<:>C,l

>

@treasury.gov>,
treasury.gov>, "Muzinich , Justin"

<justin.muzinich@treasury.gov>
Date:

Wed, 08 Nov 2017 10:14:23 -0500

Attachments :

CL and HWM Example Calculator 11072017 FINAL.XLSX (45 .97 kB)

Brittan/

Donald :

In advance of our 1pm meeting, wanted to share the attached calculator that OTA has been working
on . It allows the user to enter income, dependents , and deductions for each filing status (e.g., single ,
mfj ) and from that info rmation automatically computes tax liabili ty. The income and deduction items
can be customized for a state or congressional district using the taxpayer advocate or IRSdata .
Brad
Brad Bailey
Deputy Assistant Secretary for Tax and Budget
Office of Legislative Affairs
U.S. Department of the Treasu ry
Bradley.bailey@treasurv.gov
C: (202) 615-2 125

0: ••

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TREAS-17-0313-I-000367

 Chairman's Final Amendment
From :

"Angus , Barba ra" <barbara .angl.ls@mail.house.gov>

To:

"Knight, Shahira E. EOP/WHO" <
<jus tin.muzinich@treasury.g ov>

Cc :

"Stewart, David" <dav id.stewart@ma il.house.gov >

Date :
Attachments:

Thu, 09 Nov 201713:32 :53 -0500

, "Muzinich , Justin"

Summary of Chairman' s Amendment #2 .pdf ( 113.21 kB); BRADT X_048_xml[3] .pdf (93.02
kB)

Here is the Chairman 's final amendment -

text and summary . Very exciting!

Barbara M . Angus
Chief T ax Counsel
Committee on Ways and Means
1136 Longworth House Office Building
202.225.5522
barbara .angus @mail.house.go v

UST 001347

TREAS-17-0313-I-000368

 Summary of Chairman 's Amendment #2 to the Amendm ent in the Nature of a Substitute
H.R. 1, Tax Cuts and Jobs Act

Section 1004 - Maximum rate on business income of individuals (reduced rate for small
businesses with net active business income)
The amendment prov ides a 9-percent tax rate , in lieu of the ordinary 12-percent tax rate , for the
first $75,000 in net business taxab le income of an active owner or shareholder earning less than
$150,000 in taxab le income through a pass-thr ough business. As taxable income exceeds
$150 ,000, the benefit of the 9-percent rate relative to the 12-percent rate is reduce d, and it is fully
phased out at $225 ,000. Businesses of all types are eligi ble for the preferen tial 9-percent rate ,
and such rate appli es to all business income up to the $75,000 level. The 9-percent rate is phased
in over five taxab le years , such that the rate for 2018 and 2019 is 11 percent , the rate for 2020
and 202 1 is 10 percent , and the rate for 2022 and thereafte r is 9 percent. For unmarr ied
individual s, the $75,000 and $ 150,000 amount s are $37,500 and $75,000, and for heads of
household , those amo unts are $56 ,250 and $ 112,500.
Section 1004 - Maximum rate on business income of individuals ( eliminate provisions
related to Self-Employment Contributions Act)
The amendment preserves the curren t-law rules on the app licat ion of payroll taxes to amount s
received through a pass-through entity.
Section 1102 - Repeal of nonrefundable credits
The amendment preserves the current law non-refundab le credit for qualified adoption expenses.
Section 1103 - Refundable credit program integrity
The amendment requires a taxpayer to provide an SSN for the child in order to claim the entire
amount of the enhanced child tax credit.
Section 1205 - Rollovers between qualified tuition programs and qualified able programs
The amendment would allow rollovers from section 529 plans to ABLE programs.
Section 1405 - Repeal of exclusion for qualified moving expense reimbursement
The ame ndment preserves the curre nt law tax treatment for moving expenses in the case of a
member of the Armed Forces of the United States on active duty who moves pursuant to a
military order.
Section 3001 - Reduction in corporate tax rate
The ame ndme nt lowers the 80-percen t dividends received ded uction to 65 percent and the 70percent dividends received ded uction to 50 percen t, preserving the curren t law effective tax rates
on income from such dividends.
Section 3101, 3301 - Interest
The ame ndment provides an exclusion from the limitation on deductibility of net business
interest for taxpayers that paid or accrued interest on "floor plan financing indebtedness. " Full
expens ing wou ld no longer be allowed for any trade or business that has floor plan financ ing
indebtedness .

/\MERICAi\

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TREAS-17-0313-I-000369

 Section 3204 - Modify treatment of S corporation conversions into C corporations
The amendment provides that distributions from an eligible terminated S corporation would be
treated as paid from its accumulated adjustments account and from its earnings and profits on a
pro-rata basis. The amendment provides that any section 48l(a) adjustment would be taken into
account ratably over a 6-year period. For this purpose , an eligible terminated S corporation
means any C corporation which (i) was an S corporation on the date before the enactment date ,
(ii) revoked its S corporation election during the 2-year period beginning on the enactment date,
and (iii) had the same owners on the enactment date and on the revocation date.
Section 3315 -Am ortization of Research and Experimentation Expenditures
The amendment provide s that certain research or experimental expenditures are required to be
capitalized and amortized over a 5-year period (15 years in the case of expenditur es attributable
to research conducted outside the United State s) . The ame ndment provides that this rule applies
to research or experimenta l expenditures paid or incurred during taxable years beginning after
2023.
Section 3316 - Uniform treatment of expenses in contingent fee cases
The amendment disallows an immediate deduction for litigation costs advanced by an attorney to
a client in contingent-fee litigation until the contingency is resolved , thus creating parity
throughout the United States as to when, if ever, such expenses are deductible in such
litigation. Under current law, certain attorneys within the N inth Circuit who work on a
contingency basis can immediately deduct expenses that ordinarily would be considered fees
paid on behalf of clients , in the form of loans to those clients , and therefore not deductible when
paid or incurred . This provision creates parity on this issue throughout the United States by
essentially repealing the Ninth Circuit case, Boccardo v. Commissioner,56 F.3d I 016 (9th Cir.
1995), wh ich created a circuit split on this issue.
Section 3703 - Surtax on life insurance company taxable income
The amendment genera lly preserves current law tax treatment of insurance company deferred
acquisition costs, life insurance company reserves , and pro-ration , and imposes an 8% surtax on
life insurance income. This provision is intended as a placeholder.
Section 3801 - Nonqualified deferred compensation
The amendment strikes Section 3801 so that the current-law tax treatment of nonqualified
deferred compensation is preserved.
Section 3805 - Modification of treatment of qualified equity grants
The amendment clarifies that restricted stock units (RSU) are not eligible for section
83(b) elections. Other than new section 83(i), section 83 does not apply to RSUs.
Section 4004 - Treatment of def erred foreign income upon transition to participation
exemption system of taxation
The amendment provides for effective tax rates on deemed repatriated earnings of 7% on
earnings held in illiquid assets and 14% on earnings held in liquid assets.

/\MERICAi\

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TREAS-17-0313-I-000370

 Section 4303 - Excise tax on certain payments from domestic corporations to related
foreign corporations; election to treat such payments as effectively connect ed income.
The amendment modifies the bill 's internation al base erosion rules in two respects. First, the
provision eliminates the mark-up on deemed expenses. Second , the amendment expands the
foreign tax credit to apply to 80% of foreign taxes and refines the measurement of foreign taxes
paid by refe rence to section 906 of current law rather than a formula based on financial
accounting information.
Section 4969 - Excise taxed based on investment income of private colleges and universities
The amendment ensures that endowment assets of a private university that are formally held by
organizations related to the university, and not merely those that are directly held by the
university, are subject to the 1.4-percent excise tax on net investment income .
Section 5201 - Churches permitted to make statements relating to political campaign in
ordinary course of religious services and activities
Thi s ame ndment ensures that all 50 l (c)(3) organizations will not fail to be treated as organized
and operated excl usively for their respective non-profit purposes because of engageme nt in
certain political speech, as long as the speech is in the ordinary course of the organization's
busine ss and the organization' s expenses related to such speech are de minimis. This provision
is effec tive for tax years beginning after December 31, 2018 and is sunset for tax years beginning
after Dece mber 3 1, 2023.

/\MERICAi\

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TREAS-17-0313-I-000371

 G:\M\ I5\BRADT X\BRADTX_048.XM L

AMENDMENT TO THE AMENDMENT
NATURE OF A SUBSTITUTE
OFFERED BY

MR. BRADY

TO

IN THE

H.R. 1

OF TEXAS

Page 8, line 25, strike "subsection (b)" and insert
"su bsections (b) and (e)(3)" .
Page 16, strike lines 6 and 7, and insert the follo·wing:
1

"(B) in the case of a married individual fil-

2

mg a separate return, an amount equal to 1/2

3

of th e amount in effect for the taxable year

4

und er subparagraph (A), and
" (C) in th e case of any other individual ,

5

$1,000,000." .

6

Page 46, after line 3, insert the folio-wing:

7

"(g) REDU CED RATE FOR SlVIALL B USINE SSE S vVrrn

8 NET ACTIVE B USINES S l NCOME .-

9

"(1) IN GENERA
L.-Th e tax imposed by section

10

1 shall be reduced by 3 percent of th e excess (if any)

11

of"(A) the least of-

12

13

/\ML

"( i) qualified active business income,

g:\VHLC\110917\1109 17.120 .xml

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TREAS-17-0313-I-000372

 G:\M\ I 5\BRADTX\BRADTX_048.XML

2
1

"( ii) taxable incom e reduced by net

2

capital

3

l(h)(ll)

(as

defined

m

section

(A) ), or

"( iii) t he 9-percent br acket thr eshold

4

5

amount , over

6

" (B) the excess (if any) of taxable income

7

over th e appli cable thr eshold amount.

8

" (2) PII1\SE-IN Oli' RA'l'E REDUCTION.-ln

th e

9

case of any t axable year beginnin g befor e Januar y 1,

10

2022 , para graph (1) shall be applied by sub stit ut ing

11

for '3 per cent' -

12

" (A) in th e case of any ta xable yea r begin-

13

nin g aft er December 31, 2017, and befor e Jan-

14

u ary 1, 2020, ' 1 percent ', and

15

" (B) in th e case of any t axable yea r begin-

16

nin g aft er December 31, 2019 , and befor e Jan -

17

uar y 1, 2022 , '2 percent ' .

18

" (3 ) QUALIF'IED ACTIVE BUSINESS INCOi\IE.-

19

F or purp oses of thi s sub section , th e t erm 'qualifi ed

20

active bu siness income' means the excess (if any)

21

of-

22

" (A) any net business income derived from

23

any active business activity, over
" (B) any net business loss derived from

24
25

/\ML

gam

any active business activity.

g:\VH LC\ 1109 17\ 110917.120 .xml

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(680101 19)

TREAS-17-0313-I-000373

 G:\M\ I5\BRADTX\BRADTX_ 048.XM L

3
1

" (4)

2

Al\IOUN'r.-For

3

'9-percent bra cket thr eshold amount' means-

4

BRACKET

THRE SHOLD

purpo ses of thi s subsection, th e term

" (A) in th e case of a join t return or sur-

5

viving spouse, $75,000,

6

"(B)

in th e case of an individual who is

7

th e head of a household (as defined in section

8

2 (b)), ¾ of the amount in effect for th e taxabl e

9

year und er subparagraph (A), and

10

" (C) in th e case of any other individual , ½

11

of th e amount in effect for th e taxab le year

12

und er subp ara graph (A).

13

" (5) APPLICABLE 'l'IIRESHOLD AiV
lOUNT.-For

14

purpo ses of thi s sub section , th e term 'applicable

15

thr eshold amount ' means"(A) in th e case of a joint return or sur-

16

viving spouse, $150,000 ,

17

/\ML

9 -PER CE N'l'

18

" (B) in th e case of an individual who is

19

th e head of a household (as defined in section

20

2 (b)), ¾ of th e amount in effect for th e ta xable

21

year und er subparagraph (A), and

22

"(C) in th e case of any other individua l, ½

23

of th e amount in effect for th e taxab le year

24

un der subp ara graph (A).

g:\V HLC\ 1109 17\ 110917 .120.xml

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(680101 19)

TREAS-17-0313-I-000374

 G:\M\ I 5\BRADTX\BRADTX_048.XML

4

1

2

"(6) ESTATES AND 'l'RUSTS.-Pa ragTaph (1)
shall not apply to any esta te or trust.

3

T.- In the case of
"(7) INFLATION ADJUSTMEN

4

any ta,-xable year beginning after 2018, t he dollar

5

amounts in paragraphs (4)(A) an d (5)(A) shall each

6

be increased by an amount equal to-

7

"(A) such dollar amount, multiplied by

8

"(B) th e cost-of-living adju stment deter-

9

mined und er subsection (c)(2)(A) for the cal-

lO

endar year in which the taxab le year begins, de-

11

termined by substituting 'calendar year 2017'

12

for 'calendar year 2016 ' in clause (ii) thereof.

13

If any increase determined under the preceding sen-

14

tence is not a multiple of $100 , such increase shall

15

be rounded to the neA'tlowest multiple of $100. " .
Pao·e
and insert ''(h)"
o 46 , line 4 , strike "(o·)''
o

·

P age 46, line 17, str ike "( h) " and insert "( i)" .
Pa ge 4 7, str ike line 25, and all that follows through
page 50, line 10.
Page 50, line 11, str ike "(d)" and insert "(c)" .
Page 50, line 15, strik e "(e)" and insert "(d)" .
Page 50, line 18, str ike "(f)" and insert "(e)" .

/\ML

g:\VHLC\110917\110 917.120 .xml

001354
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(68010119)

TREAS-17-0313-I-000375

 G:\M\ I 5\BRADTX\BRADTX_048.XML

5

Page 62, line 15, str ike the space before "section
l(f)( 3)" .
Pa ge 64, after line 15, insert th e follmving:
1

(38) Section 219(b)(5)(C)(i)(II)

is amended by

2

st riking "section l (f)(3) for the calendar year

3

which the taxab le year begins, determin ed by sub-

4

stituting 'calendar year 2007' for 'calenda r year

5

1992' in subp aragTaph (B) thereof" and inserting

6

"section l(c)(2)(A) for the calendar year in which

7

the taxable year begins, determined by substitutin g

8

'calendar year 2007' for 'calendar year 2016' in

9

clause (ii) thereof'' .

111

10

(39) Section 219(g)(8)(B) is amended by strik-

11

mg "section l(f)(3) for the calenda r year in which

12

th e taxable year begins, determined by substitut ing

13

'calendar year 2005' for 'calendar year 1992 ' in sub-

14

paragraph

15

l( c)(2)(A) for the calendar year in which the taxable

16

year begins, determi ned by substitutin g 'calendar

17

year 2005' for 'calenda r year 2016' in clause (ii)

18

thereof''.

(B) thereof"

and inserting

"section

Page 69, strik e the teAi, between lines 14 and 15,
and insert the following:
"Sec . 24. Child a nd family ta x c1·cd it." .

/\ML

g:\VHLC\110917\1109 17.120 .xml

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TREAS-17-0313-I-000376

 G:\M\ I 5\BRADTX\BRADTX_048.XML

6
Page 72 , stril{e lines 15 throu gh 18 .
Page 72 , line 19, str ike "(c)" and insert "(b )" .
Page 72, line 25, strike "(d)" and insert "(c)" .
Page 73, line 13, str ike "(e)" and insert "(d)" .
Page 73 , line 18, strik e "SUBSEC'l'lON (c)" and insert "SUJ-3SEC
TION (b)".
Pa ge 73, line 21, strik e "SUBSECTION (d)" and msert "SUBSECTION (c)" .
Pa ge 7 4, strik e line 2 and all that follows through
page 75, line 4, and insert the following:
1

(a)

2

1\.l'-JD F Al\fI LY

3

REQ U IREl\IENTS

FOR

C HILD

TA~-x
CRE DIT. -

(1) IN GENERALJ.-Section 24(e) is amended to

4

read as follows:

5

"(e) lD EN'I'lF'I CA'l'ION REQUIREi\ IEN'l'S.-

6

/\ML

IDE NTIFICA TION

"( 1)

REQ UIREME NTS

FOR

QUAL IFYING

7

CIIILD.- No credit shall be allO\,ved und er this sec-

8

tion to a ta:A.-payerVirith respect to any qualifying

9

child unless the ta :xpayer includes the name and so-

lO

cial securit y numb er of such qualifying child on th e

11

return of tax for the taxab le year . 'fhe pr eceding

12

sentence shall not prevent a qualifjring child from

g:\VHLC\ 110917\110917 .120.xml

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(680 10119)

TREAS-17-0313-I-000377

 G:\M\ I 5\BRADTX\BRADTX_048.XML

7
1

being trea ted as a dependent described in subsection

2

(a)(2) .
"(2)

3

O'l'IIER

IDE NTIFI CA'l'I0 N

REQUIRE-

4

l\IENTS.- No credit shall be allowed und er thi s sec-

5

tion with respect to any individual unless th e tax -

6

payer identification numb er of such individual is in-

7

eluded on th e return of tax for the taxable year and

8

such identi fying numb er was issued before the due

9

dat e for filing th e return for th e taxable year .

10

"(3)

SOCIAL SECURITY NUMBER- For pur-

11

poses of this subsection, th e term 'social securit y

12

number' means a social securit y number issued by

13

th e Social Securit y Administration (but only if th e

14

social security number is issued to a citizen of th e

15

United Stat es or purs uant to subclause (I) (or that

16

portion of subclau se (III ) that relat es to subclau se

17

(I)) of section 205(c)(2)(B)(i) of the Social Securit y

18

Act)) ." .
Pa ge 75, startin g line 10, strik e "required und er

section 24(d)(5) (relatin g to refundab le portion of child
. )" .
tax ered1t

Pa ge 75, line 12, insert a comma aft er " TI N" .
Pa ge 75, strik e lines 15 thr ough 18.

/\ML

g:\VHLC\110917\110 917.120.xml

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(680101 19)

TREAS-17-0313-I-000378

 G:\M\ I 5\BRADTX\BRADTX_048.XML

8

Page 96 , strik e lines 6 throu gh 8, and insert th e following:
1

(c) CONF' ORl\II NG AivlENDMENTS RELA'l'ED rro SE C-

2 '!'ION 222 .3
4

(1) Section 62(a) is amended by strikin g paragraph (18) .
(2) Section 74(d)(2)(B ) is amended by strikin g

5

6

"222, " .
(3) Section 86(b)(2) (A) is amen ded by strikin g

7

8

"222," .
( 4) Section

9

10

219( g)(3)(A)( ii) 1s amended by

st rikin g "222," .
Pag e 97, after line 15, insert th e following:

11

(f) CONF ORl\lIING AMENDMENT S REL ATE D TO SEC-

12 'l'IO N 135.-

(1) Section 74(d)(2)(B) is amended by strikin g

13
14

" 135," .

15
16

(2) Section 86(b)(2)( A) is amended by striking
" 135," .
(3) Section 219(g)(3)(A)( ii) 1s amended by

17
18

stril{ing " 135," .
Pa ge 97 , line 16, strik e "(f)" and insert "(g)".
Pa ge 97 , after line 24, insert th e fol10v
ving:

/\ML

g:\VHLC\110917\110 917.120 .xml

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(680 10119)

TREAS-17-0313-I-000379

 G:\M\ I5\BRADTX\BRADTX_048.XML

9
1

SEC. 1205. ROLLOVERS BETWEEN QUALIFIED TUITION PRO-

2
3

GRAMS AND QUALIFIED ABLE PROGRAMS.

(a) ROLLO VERS FROl\I QUALIF'IED ~rurrION

4 GRAl'dS 'l'O QUJ\LIF'IED ABLE

PRO-

PROGRAMS.-S ection

5 529(c)(3)(C)(i) is amend ed by striking "or " at the end
6 of subclau se (I ), by striking the period at the end of sub7 clause (II ) and in serting ", or" , and by adding at the end
8 the following nevvsub clau se:
9

"( III) to an ABLE account (as

10

defined in section 529A(e)(6)) of th e

11

designa te d beneficiary or a member of

12

th e family of the designated bene-

13

ficiary.

14

Subclause (III) shall not app ly to so much

15

of a distribution which, wh en add ed to all

16

other contrib ution s mad e to th e ABLE ac-

17

coun t for the taxabl e year , exceeds the lim-

18

itation under section 529A(b)(2)(B) ." .

19

(b) EFFE CTIVE DATE.-Th e amendm ent s mad e by

20 thi s section shall apply to distrib uti ons after December 31,
21 2017.

Pa ge 101 , strik e lines 21 throu gh 24 and insert th e
follmving:

22

(B) Section 163(h) is amended by strikin g

23

/\ML

subpara grap hs (E) and (F) in paragraph (4) .

g:\VHLC\110917\110 917.120.xml

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TREAS-17-0313-I-000380

 G:\M\ I 5\BRADTX\BRADTX_048.XML

10
Pag e 102, startin g line 7, strik e "Ru les similar " and
all that follows through "the preceding sentence ." on line
9.

Page 102, starting line 19, str ike ", and t he second
sent ence of paragraph (4)(A)(i)," .
Pag e 111 , line 7, strike "table of section" and insert
"tab le of section s" .
Pag e 120, line 23, strike "tab le of section" and insert "tabl e of sections" .
Page 124, Jine 7, str ike "table of section" and insert
"tabl e of sections" .
Pag e 124, aft er line 8, insert th e following:
1

(b) RETENTION01;, lV[OVING E2(PENSESli'OR MEl\I-

2 BERS Oli' ARl\IED FORCES.-Sec tion 134(b) is amended by
3 adding at the end th e follovvingnew parag raph :
4

"(7) l\[OVINGEXPENSES.- The term 'qua lified

5

military benefit' includes any benefit described in

6

section 217 (g) (as in effect before th e enactment of

7

the rr ax Cut s And J obs Act) ." .
Pag e 124, line 9, strik e "( b) " and inser t "(c)" .
Pag e 124, line 22, strike "(c)" and insert "( d)" .
Pag e 13 7, strike lines 1 thr ough 3.

/\ML

g:\VHLC\110917\1109 17.120 .xml

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TREAS-17-0313-I-000381

 G:\M\ I 5\BRADTX\BRADTX_048.XML

11
Page 137, line 4, str ike "(2)" and insert "( 1)" .
Page 137, line 7, st rike "(as" and all that follows
thr ough "paragraph (1) )" on line 8.
Page 137, line 15, strik e "(3)" and inser t "(2)" .
Page 166, line 20, str ike "2 023 " and insert "2 024" .
Page 166, line 24, strike "2 023 " and insert "2 024" .
Page 168, line 13, str ike "2 023 " and insert "2 024" .
Pa ge 168, line 23, strike "2 023" and insert "2 024" .
Pa ge 169 , line 2, stri ke "2 023" an d insert "2 024 " .
Pa ge 169, line 9, strik e "2 023" an d insert "2 024" .
Pa ge 169, line 11, str ike "2 023 " and insert "2 024" .
Pa ge 170, line 11, strike "2 023" and insert "2 024" .
Pa ge 170, strik e lines 16 through 20, and insert the
folluwing:

1

"(ii) the cost-of-living adjustment de-

2

term ined under section l (c)(2)(A) of such

3

calendar year by substituting

4

year 2011' for 'calendar year 2016' in

5

clause (ii) thereof.".

'calendar

Pa ge 171, line 5, strik e "2 023" and insert "2 024" .

/\ML

g:\VHLC\110917\110 917.120 .xml

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.)

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TREAS-17-0313-I-000382

 G:\M\ I 5\BRADTX\BRADTX_048.XML

12
Pa ge 171, line 6, strike " 2023 " and insert " 2024" .
Pa ge 171 , line 12, strik e "2 023" and insert "2024" .
Pa ge 176, strilrn lines 17 throu gh 21.
Pa ge 190, aft er line 13, insert th e following:

1

(c) RED UCTI ON IN DI VIDE ND RE CE IVED DE DUC-

2 TIO NS '1'0 REF 'LEC 'J' LOW ER, C ORPOR ATE I NCOME 'I' A..c
'C

3 RATES.4

(1) DI VIDENDS RECEIVED BY CORPORATIONS .-

5

(A ) IN GENERAL.- Section 243(a)(l ) is

6

amended by strik ing " 70 percent " and insert ing

7

"5 0 percent " .

8

(B ) D IVIDE NDS F'ROM 20-PERCE N'I' OViTNED

9

CORPORATIONS.-Sec tion 243(c)( l ) is amend ed-

10

(i) by strikin g " 80 percent " and

11

sertin g " 65 percent ", and

12

(ii) by stri king " 70 percent " and m-

13

/\ML

111-

14

sertin g "5 0 percent " .

15

(C)

CONFORl\IING

Al\IENDMENT .-

The

16

heading for section 243(c) is amended by str ik -

17

ing "RE TE NTION OF 8 0 -PERCENT D IVI DE ND

18

RE CEIVED

19

CREASED P ERCE N'l'AGE" .

g:\VH LC\ 1109 17\ 1109 17.120 .xml

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DED UCTION"

and inserting "I N-

TREAS-17-0313-I-000383

 G:\M\ I 5\BRADTX\BRADTX_048.XML

13
1

2

(2) DIVIDENDS RECEIVED F'ROi\il F'SC.-S ection
245( c) (l)(B) is amended-

3

(A) by str ikin g " 70 perc ent" and ins erting

4

"5 0 percent", and

5

(B) by striking "80 percent " and ins erting

6

"65 percent " .

7

(3) LIMITATION ON AGGREGATEAMOUN'l' OF'

8

DEDUC'rIONS.-Section

(A) by striking "8 0 per cent" in subpara-

9

10

graph (A) and in serting "65 percent", and

11

(B) by striking " 70 percent"

12

graph (B) and in sertin g "5 0 percent " .

13

(4) REDUC'J'lON IN DEDUC'l'ION WIIERE POR'l'-

14

F'OLlO

15

246A(a)(l)

16

STOCK

is amended -

(B) by striking "8 0 perce nt " and insert ing

19

"65 percent " .

20

( 5)

(A) by striking " 100/70th " and in serting

23

" 100/ 50th" in subparagraph

24

(B), and

(B) in the flu sh sen tence at th e end-

g:\VHLC\110917\1109 17.120 .xml
20~7V12:s1

I NCOME PROM SOURCES WI'l'IIIN THE

UNITED STATES.- Section 861(a)(2) is am end ed-

22

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DEB'l'-I<INANCED
'
.-S ection

"5 0 percent ", and

18

21

IS

in subpara-

(A) by str ikin g " 70 percent" and ins erting

17

/\ML

246(b)(3) is amended-

p.m.)

(68010119)

TREAS-17-0313-I-000384

 G:\M\ I 5\BRADTX\BRADTX_048.XML

14

1

(i) by strilring " 100/SOth" and insert-

2

ing " 100/65th " , and

3

(ii) by striking "1 00/70th " and insert ing " 100/50th " .

4

Pag e 190, line 14, strik e "(c )" and insert "( d)".
Pag e 190, line 23, strik e "( d)" and insert "(e)" .
Pag e 196, strik e lines 9 through 14, and insert th e
following:
" (G) EX CEPTION FOR PROPERTY OF CER -

5

6

'f'A IN BUSINESSES

7

ON IN'l'EREST EXPENSE.-'r he term 'qualified

8

prop erty' shall not include any propert y u sed

9

111-

NO'l' SUBJE C'I' '1'0 LIMI'J'A'l'ION

"( i) a trad e or business described in

10
11

subparagraph

12

163(j)(7), or

(B)

or

(C)

of

section

13

"( ii) a t rade or business th at ha s had

14

floor plan finan cing indebtedne ss (as de-

15

fined in paragraph (9) of section 163 (j)) ,

16

if the floor plan finan cing int erest related

17

to such indebtedness was ta ken into ac-

18

count und er par agr aph (l)(C) of such sec-

19

tion. " .
Pa ge 215, after line 3, insert th e follnwing:

/\ML

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TREAS-17-0313-I-000385

 G:\M\ I5\BRADT X\BRADTX_048.XM L

15
1 SEC. 3204. MODIFICATION OF TREATMENT OF S CORPORA2

3

TION CONVERSIONS TO C CORPORATIONS.

(a) A.DJUS'l'MEN
'l'S A:rTRIBUrrABLErro CONVERSION

4 FROlV
I S CORPORJ\'l'ION'1'0 C CORPORNl'lON.-Sec ti on 481
5 is amended by add ing at th e end the following new sub-

6 section:
7

"(d) ADJ USTMENTS A:rTRIBUTABLETO COl\T'\TE
RSION

8 FRO.M S CORPORJ\'
l'ION '1'0 C CORPORA
TION.9

" (l) IN GENERAL.-ln

10

ter minat ed S corporation , any incr ease in tax und er

11

thi s chapter of by rea son of an adju st ment required

12

by sub section (a)(2), and whi ch is attr ibutabl e to

13

such co11)oration 's revocation describ ed in parag r ap h

14

(2)(A)( ii), sha ll be take n int o accou nt ratabl y dur ing

15

th e 6-ta xable yea r period beginnin g with the year of

16

cha nge.

17

"(2)

ELIGIBLE

TERMINATED

S

CORPORA.-

18

TION.- For purpo ses of thi s sub section, the ter m 'el-

19

igible ter minat ed S corporation'

20

poration-

21

/\ML

th e case of an eligible

mea ns any C cor-

"(A) ·which-

22

"( i) was an S cor poratio n on the day

23

before th e dat e of th e ena ctm ent of th e

24

Tax Cuts and Job s Act, and

25

"( ii) during th e 2-year period begin-

26

nin g on the date of su ch enac tm ent makes

g:\VHLC\110917\110 917 .120.xml

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TREAS-17-0313-I-000386

 G:\M\I 5\BRADTX\BRADTX_048.XML

16

1

a r evocation of it s election und er section

2

1362(a) , and

3

"(B) the m,vncr s of the sto ck of which, dc-

4

tcrmin cd on the dat e such revocation is mad e,

5

arc th e same owners (and in identi cal propor-

6

tion s) as on th e dat e of such ena ctm ent. ".

7

l1(b) CASII DIS'rRIBU'l'IONS FOLLOWINGPOST-'l'ER1V

8 NNl'IONrl"RANS
J'I'JONPBRIOD FROM S CORPORJ\'rIONS'I'A9 TUS.- Scction 1371 is am end ed by adding at the end th e

10 following new subsect ion:
11

"(f) CASH DISTRIBUTIONS FOLLOWING POST-TERMl-

12 NN!'ION rl"RANSI'I'ION
PRRJOD.-ln

th e case of a distribu -

13 tion of mon ey by an eligib le termin ate d S corpora t ion (as

14 define d in secti on 48l(d)),

th e accumulated adju stm ent s

15 account sha ll be allocated to such distribution , and th e dis16 tribution shall be charg eable to accumulated earnings and
17 profits, in t he same ratio as the amount of such accumu -

18 lated adj ustm ent s account bear s to th e amount of such

19 accumu lated earnings and profit s." .
Pa ge 215, line 15 , st rik e " plus" .
Pa ge 215, line 17, strik e the per iod at the end and
in sert ", plu s" .
Pag e 215, after line 17, insert th e fol1m-ving:

/\ML

g:\VHLC\110917\110917 .120.xml

001366
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TREAS-17-0313-I-000387

 G:\M\ I 5\BRADTX\BRADTX_048.XML

17

1

" (C) th e floor plan financin g int erest of

such taxpayer for such taxable year. " .

2

P age 217 , line 2, aft er "of the partn ership " insert
", reduced by floor plan finan cing int erest ,"
Pa ge 219 , after line 12, insert th e followin g
3

4

"(9) FLOOR PLAN F INANCING IN'l'ERE ST DE -

FINED.- F or purpo ses of thi s subsection :

5

" (A) I N GENERAL.- The term 'floor plan

6

finan cing int erest' means int erest paid or ac-

7

cru ed on floor plan finan cing indebt edness.

8

"(B) FL OOR PLA N F'lNANCI NG INDEB TED-

9

NESS.- 'rI1e term 'floor plan financing indebt -

10

edness' means indebtedness-

11

"( i) used to finance th e acquisiti on of

12

motor vehicles held for sale to retail cus-

13

tomers, and
"( ii) secur ed by th e invent ory so ac-

14

/\ML

15

quir ed.

16

" (C) ~[ OTOR VEIIICLE.- The t erm 'motor

17

vehicle' mean s a motor vehicle that is any of

18

th e foUowing:

19

"( i) An aut omobile.

20

"( ii) A truck.

21

"( iii) A recreational vehicle.

g:\VH LC\ 1109 17\ 110917.120 .xml

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TREAS-17-0313-I-000388

 G:\M\I 5\BRADTX\BRADTX_048.XML

18
1

"( iv) A motorcycle.

2

"(v) A boat.

3

"(vi) Farm machinery or equipment .

4

"(vii)

Const ruction

machiner y

or

equipment.''.

5

Pag e 233 , line 23 , insert "219(g)(3)(A)(ii),"

after

" 13 7 (b) (3) (A),".
Page 248, after line 3, insert th e follov,~.ng:
6 SEC. 3315. AMORTIZATION OF RESEARCH AND EXPERI-

7

MENTAL EXPENDITURES.

(a) I N GENERAL.-Section 174 is amended to read

8

9 as follovvs:

10 "SEC.

174. AMORTIZATION OF RESEARCH

11

AND EX.PERI-

MENTAL EXPENDITURES.

12

"(a) IN GENERAL.-In th e case of a taA'J)ayer's speci-

13 fied research or e>..l)er
imental e:>.l)end
itures for any taxabl e
14 year-

"( 1) except as provided in paragraph

15

16

deduction shall be allowed for such e>..l)enditures,

17

and
"(2) the ta :>.l)ayershall-

18

19

"(A) charge such e:>.l)enditures to capital

20

/\ML

(2), no

account, and

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19
1

" (B) be allowed an an1ortization deduction

2

of such e:xpenditur es ratab ly over th e 5-yea r pe-

3

riod (1 5-year period in th e case of any specified

4

r esearch or CJq)erim cntal C}q)cnditur cs which ar c

5

attr ibut able to for eign resear ch (within th e

6

mearung of section

7

with th e midp oint of th e ta xable yea r in which

8

r:penditur es ar e paid or incurr ed.
such e:>..

9

41(d)(4) (F ))) beginnin g

"(b) SPECIFIED RESEARCH OR E XPERil\TENTAL E x -

10 PENDITURES.- For purp oses of thi s section , th e t erm
11 'specified resear ch or c:>
q)erim cntal CA
'})enditur es' means,

12 with respect to any t axab le yea r, r esea rch or e21..
1)erim ental
13 e21..
1)enditur es which are paid or incurr ed by th e ta:>..r:pa
yer

14 durin g such ta xable year in conn ecti on ·with th e taxpayer's
15 trad e or busin ess .

16

/\ML

"(c) SPECIALR ULES.-

17

"( 1) LAND AND OTHER PROPERTY.
- 'rhi s scc-

18

tion shall not apply to any e21..'Pen
ditur e for th e acqui-

19

sition or improvement of land , or for th e acquisition

20

or impro vement of prop ert y to be u sed in conn ection

21

with th e r esear ch or eA
'})erim entation an d of a char -

22

actcr which is subj ect to the allowance und er section

23

167 (relating to allowance for depr eciation , etc .) or

24

secti on 611 (r elatin g to allowance for depletion ); but

25

for purpo ses of thi s secti on allowan ces und er section

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20
1

167 , and allowances und er section 611, shall be con-

2

sidered as e}q)enditur es .

3

"(2) EXPLOR A'rIO N EXPENDI'l'URES .-Th

is

scc-

4

nclittll'C paid or intion shall not apply to any Ch'})C

5

curred for the purpose of' ascertaining the existence,

6

location, e>-1,en
t , or qua lity of any deposit of ore or

7

other mineral (includin g oil and gas) .

8

"(3) SOF'l'WAREDE\TJ
3::
LOPi\lEN'l'.-For purposes

9

of' this sectio n, any amount paid or in curr ed in con-

10

ncction with the development of' any softwar e shall

11

be treated

12

tur e.

13

"( d) TRE A'l'ME N'l' UPON DISPO SI'l'ION, RE'l'IRElVIEN'I',

as a resea r ch or Ch'})Crimcnta
l C}.1)C
ndi-

14 OR ABANDONMEN
T.-If

any prop erty with respect to

15 ·which specified research or Ch'})C
rim cnta l C}.
1)Cndi turcs arc
16 paid or incurre d is disposed, retired, or abandoned during
17 the period during which such C}.
1)cnditur cs arc allowed as
18 an amortization deduct ion und er this section, no deduction

19 shall be allowed "'~th respect to such expenditur es on ac 20 coun t of such disposition, r etire ment, or abandonm ent and
21 such amortization deduction shall continue with respect to
22 such C}q)cndi turcs." .
23

.-T hc tab le of' sect ions
(b) CLERICAL JuVIENDMENT

24 for part VI of sub chapter B of chapter 1 is amended by

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21

1 strikin g th e it em relatin g to section 174 and insertin g th e
2 following new item:
" Sec. 174 . Amo1t i;r,a tio11of' 1·ese111·
ch and experimental expenditur es." .

3

(c) EF'll'ECTIVE DNf'E.-1" he amendments made by

4 thi s section shall apply to amount s paid or incurr ed in tax5 able years beginnin g after December 31, 2022.
6 SEC. 3316. UNIFORM TREATMENT OF EXPENSES IN CONTIN7

8

GENCY FEE CASES.

(a) I N GENERAL.-S ection 162 is amended by redes-

9 ignatin g sub section (q) as subsection (r ) and by insert ing
10 aft er sub section (p) th e following new sub section:
11

" (q) E XPENSES IN C ONTI NGENCY FEE CAS E S .- N o

12 deduction shall be allowed und er subsection (a) to a tax13 payer for any expense14

15

" (1) paid or incurr ed in th e cour se of th e trade

or bu siness of pr acticing lavv, and

16

"(2) resultin g from a case for which th e tax -

17

payer 1s compensated pri mar ily on a contingent

18

basis,

19 until such time as such cont ingency is resolved.'' .
20

(b) El l'li'ECTlVE DATE.-rrh e amendment made by

21 thi s section shall apply to expenses and costs paid or in-

22 curr ed in taxa ble year s begim1ing aft er th e dat e of the en 23 actm ent of thi s Act .

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22
Pa ge 280, strik e line 1, and all that follows through
page 285, line 4, and insert the follmving:
1 SEC. 3703. SURTAX ON LIFE INSURANC E COMPANY TAX2

3

ABLE INCOME.

(a) IN GENERAL.- Section 801(a)(l ) is amended-

4
5

( 1) by str iking '' consist of a t ax'' and insert
"consist of the sum of" (A) a tax", and

6
7
8

(2) by strikin g th e period at the end and insert ing ", and ", and

9
10

(3) by adding at th e end the following new sub para gTaph:

11

" (B) a tax equal to 8 percent of th e life in -

12

suran ce company taxable income." .
Pa ge 286, strik e lines 4 th rough 25 .
P age 292, strike line 12 and all that follows through

page 293, line 9.
Pa ge 293, strik e line 11, and all that follows
through page 301, line 10.
Pa ge 303, line 3, insert "or prin cipal financial officer " after "pr incipal executive officer" .
Pa ge 309, after line 21, insert th e following:

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23
1 SEC. 3805. MODIFICATION OF TREATMENT OF QUALIFIED

2

3

EQUITY GRANTS.

(a) Section 83(i) of the Int ern al Revenue Code of

4 1986 , as added by section 3804, is amended by add ing
5 at th e end t he follm,ving new paragrap h:

6

"(7) RESTRICTED STOCK UNITS.-T hi s section

7

( other than thi s sub section) , in cluding any election

8

und er subsection (b), shall not apply to restricted

9

sto ck unit s." .

10

(a) Section 3804(c)(2) of th is Act is amended to rea d

11 as follows:
12

"(2) EXCLUSION FROM DEFINITION OF NON-

13

QUALIFIED DEFERRED COMPENSATION PLA.1
'\T.- Sub-

14

secti on (d) of section 409A is amended by addin g at

15

th e end th e following new par agr aph:

16

"'( 7) TREA'I'MEN'I' 0 1<" (~UALIFIEDS'f'OCK.-An

17

arrangement

und er which an emp loyee ma y receive

18

qua lified stock (as defin ed in section 83( i)(2)) shall

19

not be treated as a nonqua lified deferr ed compensa -

20

tion plan solely because of an employee's election, or

21

abilit y to mak e an election , to defer recognition of

22

incom e und er section 83( i). ' ." .

23

(b) Th e amendments mad e by thi s section sha ll tak e

24 effect as if in clud ed in the provisions of sect ion 3804 of
25 th is Act to which the y relat e.

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24
Page 330, line 19, strilrn "5" and insert " 7".
Pa ge 331, line 4, str ike "12" and insert " 14".
Page 331, line 9, strike "5" and insert " 7" .
Page 331, line 9, str ike "12" and insert "14".
Page 331, line 11, strilrn "5" and insert " 7".
Page 331, line 12, str ike "5" and insert " 7".
Page 331, line 17, strik e "5" and inser t " 7".
Page 332, line 6, str ike "12" and insert "14".
Page 332, line 7, str ike "12" and insert "14".
Page 332, line 11, str ike "12" and insert " 14" .
Page 332, line 12, strik e "5" and insert " 7".
Page 343, line 17, strik e "85 .7" and insert "8 0" .
Page 343, line 23, strilrn "65 .7" and insert "6 0" .
Page 354, line 1, strike "section" and insert "sec tions" .
Pa ge 397, strik e line 9 and all that follows through
page 398, line 10, and insert the following:

/\ML

1

"( 1) IN GENERAL
.- In the case of any specified

2

amount paid or incurr ed by a domestic corporation

3

to a foreign corporation which is a member of the

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25

1

same int ernational financial reportin g group as such

2

domestic corporation and which has elected to be

3

subject to th e provisions of thi s subsection-

4

"(A ) such amount shall be tak en int o ac-

5

count (other than for purposes of sections 245,

6

245A, and 88 1) as if-

7

"( i) su ch foreign corporation ,;i.
rere en-

8

gaged in a trad e or business ·within the

9

United States,

10

"( ii) such foreign corporation had a

11

permanent

12

St ates durin g the ta xable year, and

13

"( iii) such payment were effectively

14

com1ected with th e condu ct of a trad e or

15

business within the United States and were

16

attributab le to such permanent establish -

17

ment,

18

"(B) for purpo ses of subsection (c)( l )(A),

19

no dedu cti on shall be allowed with respect to

20

such amount and such subsection shalJ be ap-

21

plied without regard to such amount , and
"(C) there shall be allowed as a deduction

22

/\ML

estab lishment in th e Unit ed

23

the

24

amount ." .

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deemed

(68010119)

eA'Penses

with

respect

such

TREAS-17-0313-I-000396

 G:\M\ I 5\BRADTX\BRADTX_048.XML

26
Pag e 403, strik e line 20 and all that follows throu gh
page 404, line 18, and insert the follo-wing :
1

"(8 ) FOREIGN

'l'A.,'C

CREDIT

ALLO \ VED.-Th
1

e

2

credit allowed und er section 906(a) with re spect to

3

amounts tak en into account in income und er para-

4

graph (l)(A) shall be limit ed to 80 percent of th e

5

amount of ta xes paid or accrued and det ermin ed

6

without reg ard to section 906(b)(l).

7
8

"( 9) ELECTION.- Any election und er parag Taph
(1)-

9

" (A) shall be mad e at such time and in

10

such form and manner as th e Secretar y may

11

pro vide, and

12

"(B) shall apply for th e ta xable year for

13

·which mad e and all sub sequent ta xable years

14

unl ess revoked with the consent of th e Sec-

15

retar y." .
Pag e 410, aft er line 20, insert th e following:

16

(b) TREATMENTOF CERTAIN REFERENCES.- Sec-

17 tion 119(e) of division A of the Tax Relief and H ealth
18 Care Act of 2006 is amended by adding at the end the

19 following: "References in thi s subsection to section 199
20 of the Int ernal Revenue Code of 1986 shall be t reated as

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27

1 references to su ch section as in effect before it s repeal by
2 the Tax Cut s and Job s Act.".
Pa ge 410, line 21, strik e "( b) " and insert " (c)" .
Pa ge 418, aft er line 22, insert the folJmving:
3

"(d) AsSE' l'S AN D NE'r l l\TVES'l'l\lE N'I' lN COl\IE OF' RE-

4 LATED ORGANIZATI0 NS .-

5

"( 1) I N GENERAL.- For

6

section s (b)(l)(C) and (c), the assets and net invest-

7

ment income of any relat ed organization shall be

8

tr eated as th e assets and net investment income of

9

th e eligible educational institution.

10

"(2) RELATED ORGA
.'\T
.1IZATION.- For purposes

11

of this subsection, the term 're lated organi zation'

12

means, with respect to an eligible educational insti-

13

tuti on, any organization ·which"(A) control s, or is controJled by, such m-

14

st itution ,

15

"( B) is controlled by one or more persons

16

that control such institu tion , or

17

/\ML

purpo ses of sub-

18

"(C) is a supporte d organ izat ion (as de-

19

fined in section 509(f)( 3)), or an organizat ion

20

described in section 509(a )(3), durin g th e tax -

21

able year ,~rithrespect to such instituti on. " .

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28
Page 423, line 3, strik e "CHUR CHES " and insert
"501(c)(3)

ORGANIZATIONS ".

Pa ge 423, line 5, strik e "RELIGIOUS SERVI CES
AND ''.

Pa ge 423, startin g line 10, st rike "CIIURCIIES, INTEGRATEDAUXILIARIES,E'l'C" and insert "ORGANIZA'l'IONS DE SCRIBED IN SUBSECTION (c)(3)".

Pa ge 423, starti ng line 14, strike "desc ribed in section 508(c)(l)(A)" .
Page 423, hne 16, st rike "re ligiou s purpo se" and insert "p urp ose described in subsection (c) (3)".
Pa ge 423, sta rtin g line 20, strik e "conten t of any
homily, ser mon" and all that follows throu gh "su ch content " on line 23, and insert "conte nt of any state ment
,,vhich " .
Pag e 424 , line 1, str ike "is in" and insert "is mad e
in " .
Pag e 424, after line 6, insert th e following:
1

/\ML

"(2) 'rERMINATION
.- Paragraph

(1) shall not

2

apply to taxable years begi1ming aft er December 31,

3

2023.".

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29
Pa ge 424, startin g line 8, strik e "en ding after th e
date of th e enactment of thi s Act " and insert "beginnin g
after December 31, 201 8" .

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TREAS-17-0313-I-000400

 of Senate Tax bill
From :

"Alety, Saat (Scott)" <saat_alety@scott.senate.gov>

To:

"Alety, Saat (Scott)" <saat_alety@scott.senate.gov>

Date:

Thu , 09 Nov 2017 15:46:00-05 00

Attachments:

11.9.17 Senate Tax Reform Summary .pdf (130.35 kB)

Actual PDF attached.
From: Alety, Saat (Scott)
Sent : Thursday, November 9, 2017 3:21 PM
To : Alety, Saat (Scott) <Saat_Alety@scott.sena t e.gov>
Subject : Summary of Senate Tax bill

Past embargo.
Saat Alety
Legislative Assistant
U.S. Senator Tim Scott (R-SC)

717 Hart Senate Office Building I Washington, DC 20510
202-224-6121 I saat alety@scott.senate.gov

/\Mlf

ll Al\

UST 001380
pVERSIGHT

TREAS-17-0313-I-000401

 . ..TAXCUTS&
JOBS
ACT

Policy
Highlights
TheTax Cuts andJobsAct providesfiscally responsible middle-class tax relief by cutting tax rates acrossthe board,
reducingthe tax burdenon Americanjob creatorsc1ndmodernizingour tax system.Underthis proposal, a typical familyof
four earningthe medianfamilyincome(around$73,000)will see its taxes cut by nearly $1,500.Thebill will also reduce
the tax burdenon small businessesand put Americancompanieson a level playingfield with their foreigncompetitorsin
mderto growthe economyandcreate morejobs hereat home.
Combined,all of this will meanbiggerpaychecksfor middle-class workersandfamilies, moreAmericanjobs and a stronger
U.S. economy.

RELIEF
FOR
AMERICAN
WORKERS
AND
FAMILIES
The TaxCuts and JobsAct.
►

Lowersindividualtax rates for low· and middle-incomeAmericansby effectivelyexpandingthe zerotax bracketand
maintaininga 10 percentbracket,allowinghardworkingtaxpayersto keepmoreof their hard-earnedmoney, makeends
meet, and savefor retirement.Thebill includesa reformedrate structure that targets t ax reliefto the middle class
while maintaining the existingtax distribution,anda 38.5 percentbracketfor high-incomeearners.

►

Nearlydoubles the standarddeductionto reduceor eliminatethe federalincometax burdenfor tens of millionsof
Americanfamilies. The standarddeductionwill increasefrom $6,350to $12,000for individualsandfrom $12,700to
$24,000for marriedcouples.For single parents, the standarddeductionwill increasefrom $9,300 to $18,000.

►

Recognizes the uniquechallengesfaced by parentswith youngchildrenby:
• Expandingthe child tax credit from $1,000 to $1,650 and allowingmanymoreparentsto claimthe credit by
substantially lifting existing caps;
• Preservingthe child anddependentcaretax credit to helpworkingparentscarefor their childrenandolder
dependents- such as an aginggrandparent- who needsupport;
• Preservingthe adoptiontax credit to helpfamilies with the high costs of adoptingchildren;and
• Allowingparents to moreeffectivelysavefor the educationcosts of unbornchildren.

►

Preservesthe deductionfor charitable contributions,continuinga longrecognition of the importanceof private
philanthropyfor the churchesandcommunityorganizationsthat dailyprovideaid and assistanceto those in need.

►

Protectsthe homemortgageinterest deductionfor existingmortgagesand maintainsthe deductionfor newly
purchasedhomesup to $1 million.Thisincentivefor homeownership
providestax reliefto current andaspiring
homeowners
.

►

Continuespopular retirementsavingsprogramssuch as 401(k)s and IndividualRetirementAccounts,to help
Americans build their retirementnest eggsand preparefor the future.

UST 001381 eeon Finance
J.9V~S~if

TREAS-17-0313-I-000402

 RELIEF
FOR
AMERICAN
WORKERS
ANO
FAMILIES
(continued)
►

Preservesthe earnedincometax credit to providetax reliefto low-incomeAmericansworking to buildbetter lives
for themselves.

►

Preservesadditional importantelementsof the existing individualtax system, including:
• Deductionfor medicalexpenses
• Enhancedstandarddeductionfor the blindand elderly
• Educationrelieffor graduatestudents

►

Repealsthe alternativeminimumtax (AMT)to simplifythe tax codeandeliminateuncertaintyfor millionsof
Americanswho arerequiredto calculate their taxes twice eachyear.

►

Providesrelieffrom the death tax by doubling the current exemption.Thiswill reduceuncertaintyand costs for
family-ownedfarms and businessesby makingit less likelythat Washingtonwill imposean unnecessary1·ayerof
taxation on Americanswho want to passon their life's workto the next generation.

RELIEF
FOR
JOB
CREATORS
OfALL
SIZES
►

Permanent
ly lowersthe corporatetax rate to 20 percentso Americancompaniesno longerhaveto face the
highesttax rate in the industrializedworld, which will allowthem to better competein the globalmarketplace.
,
create morejobs and increasewages.

►

Substantially lowersthe tax burdenon MainStreet job creatorsthrough:
• A simpleand easy-to-administerdeductionfor pass-throughbusinessesof all sizes,allowingmoresmall
businessesto grow, invest,hire new workersand increasewageswhile also preventingabuseof the
reformedsystem;
• EnhancedSection179 expensingto promotebusinessinvestmentandgrowth; and
• Enhancedcash accounting,allowingmorebusinessesto usethe simplecash-basisaccountingmethod.

►

Full andimmediateexpensingof new equipmen
t , which encouragesgrowth and increasesinvestment,
productivityandwages.

►

Protectsthe ability of smallbusinessesto deduct interest on loansthat allows MainStreet employersto expand,
invest, andhire new workers.

►

Preservesimportantelementsof the existingbusinesstax system,including:
• Low-incomehousingcredit to continueencouragingbusinessesto invest in affordablehousingandprovide
individualsandfamilies with expandedopportunities.
• Researchanddevelopmenttax credit, which enhancesinvestmentsin Americanproducts,technologyand
innovations.

.► Permanently modernizesour outdatedinternationaltax system byeliminatingthe antiquated,!worldwide"system,
in orderto eliminatedouble taxation, enhancethe competitivenessof Americancompanies,and bringbusiness
and investmentbackto the UnitedStates.
►

Eliminatesthe ''lock-outeffect" by makingit simplerandless onerousfor Americanmultinationalsto bringforeign
earningsbackto Americafor investmentandgrowth hereat home.

►

Makesthe UnitedStates a better placeto do businessby eliminatingincentivesfor companiesto shift jobs,
profits andintellectual propertyoverseas,and by creatingincentivesfor companiesto both locatein Americaand
bringeconomicactivity backto America.

,b~rOO"r ttee
on Finance
UST 001382

TREAS-17-0313-I-000403

2

 SFC Chairman's Mark and Revenue Table
From:

"Prater, Mark (Finance)" <mark_prater@finance.senate.gov>

To:

"Dunn, Brendan McConnell" <brendan dunn
E. EOP/WHO''
<justin.m uzinich@treasury .gov>

Cc:

"Khosla, Jay (Finance)" <jay_khosla@finance.senate.gov>, "Hickman, Bryan (Finance)"
<bryan_hickman@finance .senate .gov> , "Niederee, Katie (Finance)"
<katie_niederee@finance.senate .gov>, "Lawless , Julia (Finance)"
<julia_lawless@finance .senate.gov>

Date:

Thu, 09 Nov 2017 20:19 :45-0500

Attachments:

JCX-51-17 SFC Markup 11-9 .pdf (898.53 kB); JCX5217.pdf (34.12 kB)

mcconnell.senate.gov>, "Knight, Shahira
, "Muzinich, Justin"

FYI..
Please hold tight for 30 minutes . We want to send to SFCmember offices first per committee
protoc o l. Thanks .

UST 001383

TREAS-17-0313-I-000404

 DESCRIPTION OF THE CHAIRMAN'S MARK
OFTHE
"TAX CUTS AND JOBS ACT"

Scheduled for Markup
by the
SENATE COMMITTEE ON FINANCE
on November 13, 2017

Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION

November 9, 2017
JCX-51-17

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UST 001384
pVERSIGHT

TREAS-17-0313-I-000405

 CONTENTS

INTRODUCTION ..........................................................................................................................
I.

TAX REFORM FOR INDIVIDUALS ...............................................................................

1
2

A. Simplification and Reform of Rates , Standard Deductions , and Exemptions .............. 2
1. Reduction and simplification of individual income tax rates and modification
of inflat ion adjustment ............................................................................................
2
2. Increase in standard deduction .............................................................................. 11
3. Repeal of the deduction for per sona l exemptions ................................................. 11

B. Treatment of Bu siness Income of Individual s ............................................................ 14
1. Allow 17.4-percent deduction to certain pass-through income ............................ 14
2. Limitation on losses for taxpa yers other than corporations .................................. 18
C. Reform of the Child Tax Credit.. ................................................................................

21

D. Simplification and Reform of Deductions and Exclusions ......................................... 23
1. Repeal of deduction for taxes not paid or accrued in a trade or business ............. 23
2. Modification of deduction for home mortgage intere st ........................................ 24
3. Modification of deduction for personal casualty and theft losses ......................... 25
4. Repeal of deduction for tax preparation expenses ................................................ 26
5. Repeal of miscellaneou s itemized deductions subject to the two-percent floor ... 26
6. Increase percentage limit for charitable contributions of cash to public
charities .................................................................................................................
29
7. Repeal of overall limitation on itemized deductions .......... ................. ................. 33
8. Modification of exclusion of gain from sale of a principal residence ................. . 33
9. Repeal of exclusion for qualified bicycle commuting reimbursement ................. 34
10. Repeal of exclusion for qualified moving expense reimbursement ...................... 35
11. Repeal of deduction for moving expenses ............................................................ 35
12. Modification to the limitation on wagering losses ................................................ 36
E. Increase in Estate and Gift Tax Exemption .............. ............ ...................................... 38
II. ALTERNATIVE MINIMUM TAX REPEAL ................................................................. 48
1. Repeal of alternative minimum tax ......... ................... ............ ............ ................... 48

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III. BUSINESS TAX REFORM .............................................................................................

55

A. Tax Rates ....................................................................................................................
l. Reduction in corporate tax rate .............................................................................
2. Reduction of dividends received deductions to reflect lower corporate
tax rate ...................................................................................................................

55
55

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TREAS-17-0313-I-000406

 B. Small Business Reforms ............................................................................................. 58
1. Modification of rules for expensing depreciable business assets ......................... 58
2. Modifications of gross receipts test for use of cash method of accounting
by corporations and partnerships .......................................................................... 60
3. Clarification of inventory accounting rules for small businesses ......................... 64
4. Modification of rules for uniform capitalization of certain expenses ................... 65
5. Increase in gross receipts test for construction contract exception to percentage
of completion method ........................................................................................... 67
C. Cost Recovery , etc ...................................................................................................... 69
1. Limitation on deduction for interest ..................................................................... 69
2. Temporary 100-percent expensing for certain business assets ............................. 74
3. Modifications to depreciation limitation s on luxury automobiles and personal
use prope rty ........................................................................................................... 80
4. Modifications of treatment of certain farm property ............................................ 83
5. Modification of net operating loss deduction ....................................................... 85
6. Like-kind exchanges of real property ................................................................... 86
7. Applicable recovery period for real property ........................................................ 89
D. Business-Re lated Deductions ............................................. ......................................... 96
1. Repeal of deduction for income attributable to domestic production activities ... 96
2. Limitation on deduction by employers of expenses for fringe benefits ................ 97
E. Accounting Methods ....................... .......................................................................... 102
1. Certain special rules for taxable year of inclusion .............................................. 102
F. Business Credits ........................................................................................................
1. Modification of credit for clinical testing expenses for certain drugs for rare
diseases or conditions .........................................................................................
2. Modification of rehabilitation credit.. .................................................................
3. Repeal of deduction for certain unused business credits ....................................

106
106
107
108

G. Bank s and Financial Instruments .............................................................................. 109
1. Limitation on deduction for FDIC premiums ..................................................... 109
2. Repeal of advance refunding bonds ............................. ....................................... 112
3. Cost basis of specified securities determined without regard to identification .. 113
H. Compe nsation ........................................................................................................... 116
1. Nonqualified deferred compensation .................................................................. 116
2. Modification of limitation on excessive employee remuneration ....................... 125
3. Excise tax on excess tax-exempt organization executive compensation ............ 128

I. Insurance ................................................................................................................... 132
1. Net operating losses of life insurance compan ies ............................................... 132
2. Repeal of small life insurance company deduction ............................................ 133
3. Adjustment for change in computing reserves .................................................... 133

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TREAS-17-0313-I-000407

 4. Repeal of spec ial rule for distributions to shareholders from pre-1984
policyholders surplus account .................................... .........................................
5. Modification of proration rules for property and casualty insurance
companies ...........................................................................................................
6. Repeal of special estimated tax payments ..........................................................
7. Capitalization of certain policy acquisition expenses .........................................
8. Tax reporting for life settlement transactions , clarification of tax basis of
life insurance contracts , and exception to transfer for valuable consideration
rules .....................................................................................................................
J. Partner ships ............ ................................. ......................... ............ .............................
1. Tax gain on the sale of a partnership interest on look-throu gh basis ..................
2. Modification of the definition of substantial built-in loss in the case of
transfer of partner ship interest ............................................................................
3. Charitable contributions and foreign taxes taken into account in determinin g
limitat ion on allowance of partner's share ofloss ..............................................

K. Determination of Worker Classification and Information Reporting
Requirements ............................................................................................................

134
136
136
139

140
144
144
147
148

151

L. Tax-Exempt Organization s ....................................................................................... 160
1. Excise tax based on investment income of private colleges and universities ..... 160
2. Na me and logo royalties treated as unrelated business taxable income ............. 163
3. Unrelated business taxable income separately computed for each trade or
business ...............................................................................................................
165
4. Repeal of tax-exempt status for professional sports leagues .............................. 168
5. Modification of taxes on excess benefit transactions ( intermediate sanctions) .. 169
6. Denial of deduction for amounts paid in exchange for college athletic seating
rights ................................................................................................................ ... 175
M. Retirement Savings .. ... ..... .... ... ..... .... ... ..... .... ... ..... .... ... .... .... .... .... .... .... .... .... .... .... .... .. 177
1. Conformity of contribution limits for employer-sponsored retirement plans ..... 177
2. Application of IO-percent early withdrawal tax to govern mental section
457(b) plans ........................................................................................................ 179
3. Elimination of catch-up contributions for high-wage employees ....................... 180
TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS ........................... ............. 182
PRESEN'T LAW ........................................................... ................................................ .............. 182
A. General Overview of International Principles of Taxation .......................................
1. Origin and destination principles ........................................................................
2. Source and residence principle s ..........................................................................
3. Resolving overlapping or confl icting juri sdiction to tax ....................................
4. International principles as applied in the U.S. system ....................... .................

182
183
184
185
186

B. Principles Common to Inbound and Outbound Taxation ......................................... 186
1. Residence ............................. ................................................ ............................... 186

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 2. Entity classification .............................................................................................
3. Source of income rule s ........................................................................................
4. Intercompany transfers ........................................................................................

188
189
194

C. U.S. Tax Rule s Applicable to No nresident Aliens and Foreign Corpora tions
(Inbound) ...................................................................................................................
195
1. Gross-basi s taxation ofU.S.-source income ............ ......... ............ ............. ......... 196
2. Net-basis taxation of U.S.-source income ........................................................... 200
3. Special rules ........................................................................................................
204
D. U.S. Tax Rule s Applicable to Foreign Activities of U.S. Per sons (Outbound) ........ 207
1. In general ............................................................................................................
207
2. Anti-deferral regimes ..........................................................................................
207
3. Foreign tax credit ................................................................................................
213
4. Special rule s ........................................................................................................
2I5
IV. INTERNATIONAL TAX REFORM ................... ............ ............ ............ .............. ........ 218
A. Establishment of Participation Exemption System for Taxation of Foreign
Income .......................................................................................................................
1. Deduction for foreign-source portion of dividends received by domestic
corporation s from specified 10-percent owned foreign corporations .................
2. Special rules relating to sales or transfers involving specified 10-percent
owned foreign corporations ................................................................................
3. Treatment of deferred foreign income upon transition to parti cipation
exemption system of taxation .............................................................................
B. Rule s Relat ed to Passive and Mobile Income ...........................................................
1. Current year inclusion of global intan gible low-taxed income by United
States shareholders ..............................................................................................
2. Deduction for foreign-derived intangible income ...............................................
3. Special rules for trans fers of intangible prop erty from controll ed foreign
corporations to United States shareholders .........................................................

218
218
220
221
227
227
229
231

C. Other Modifications of Subpart F Provisions ........................................................... 232
1. Elimination of inc lusion of foreign base company oil related income ............... 232
2. Inflation adjustment of de minimis exception for foreign base company
income .................................................................................................................
232
3. Repeal of inclusion ba sed on withdra wa l of previously excluded subpart F
incom e from qualifi ed investment ...................................................................... 232
4. Modification of stock attribution rules for determin ing statu s as a controll ed
foreign corporation ..............................................................................................
233
5. Modification of definition of United States shareholder .................................... 233
6. Elimination of requirement that corporation must be controlled for 30 day s
before subpart F inclusions apply ...................................................................... . 233
7. Loo k-thru rule for related controlled foreign corporations made permanent ..... 234

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TREAS-17-0313-I-000409

 8. Corporations eligible for deduction s for dividends exempted from subpart F
inclusions for increased investment s in United States property ......................... 234
D. Prevention of Base Erosion ....................................................................................... 235
1. Denial of deduction for interest expense of United States shareholders which
are members of worldwide affiliated groups with excess domestic
indebtedness ........................................................................................................ 235
2. Limitations on income shifting through intangible property transfers ............... 236
3. Certain related party amounts paid or accrued in hybrid transactions or with
hybrid entities ...................................................................................................... 237
4. Termination of special rules for domestic internationa l sales corporation s ....... 238
5. Surrogate foreign corporations not eligible for reduced rate on
dividends ............................................................................................................. 239
E. Modifications Related to Foreign Tax Credit System .............................................. 240
1. Repeal of section 902 indirect foreign tax credits; determinat ion of
section 960 credit on current year basis ............................ .................................. 240
2. Separate foreign tax credit limitation basket for foreign branch income ............ 241
3. Acceleration of election to allocate interest, etc., on a worldwide basis ............ 241
4. Source of income from sales of inventory determined solely on basis of
production activities ............................................................................................ 241
F. Inbound Provisions ................................................................................................... 242
1. Base erosion and anti-abuse tax .......................................................................... 242
G. Other Provisions........................................................................................................ 245
1. Taxation of passenger cruise gross income of foreign corporat ions and
nonresident alien individuals .............................................................................. 245
2. Modification of insurance exception to the passive foreign investme nt
company rules ..................................................................................................... 246
3. Repeal of fair market value of interest expense apportionment ......................... 247

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TREAS-17-0313-I-000410

 INTRODUCTION

The Senate Committee on Finance has scheduled a markup on November 13, 2017 , of an
original bill, the "Tax Cuts and Jobs Act ,'1 which provides for reconciliation pursuant to section
200 I of the concunent resolution on the budget for fiscal yea r 2018. This document, 1 prepared
by the staff of the Joint Conunittee on Taxation , provides a description of the Chairman's Mark
of the "Tax Cuts and Jobs Act."

1

This documentmay be cited as follows: Joint Committeeon Taxation.Desc ription of the Chaim,an 's
Mark of the ''Tax C11ts and Jobs Act " (JCX-51-17 ), November9, 2017 . 171isdocument can be fowid also on the
Joint Committee on Taxation website at wwv,r.jcl.gov
. All section referencesherein are lo t}1c lntemaJ Revenue
Code or 1986. as amended, unless othe1wisestated.

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 I. TAX REFORM FOR INDIVIDUALS
A. Simplification and Reform of Rates , Standard Deductions , and Exemptions
1. Reduction and simplification of individual income tax rates and modification of inflation

adjustment
Pres ent Law

In general
To determine regular tax liability, an individual taxpayer generally must apply the tax
rate schedules (or the tax tables) to his or her regular taxable i,ncome. The rate sched ules are
broken into severa l ranges of income, known as income brackets , and the marginal tax rate
increases as a taxpayer ' s income increases .
Tax rate schedules

Separate rate schedu les apply based on an individual's filing status. For 2017, the regular
individual income tax rate schedules are as follows:
TabJe !.- Federal Individual Incom e Tax Rat es for 2017 1
~-

:

•

•

'

•

•

-

t

•

I

I'

:_f hen _11
-,~~1iie ta~ eq~ nl~::

.If hl\ab re in<,:omeis:_

-

-

-

-

Single lntli vit/1111/
s
Not over $9,325

10% of the taxable income

Over $9,325 but not over $37,950

$932.50 plus 15% of the excess over $9,325

Over $37,950 but not over $9 1,900

$5,226.25 phis 25% of the excess over $37,950

Over $9 1,900 but not over $ 191,650

$18,713.75 plus 28% of the excess over $9 1,900

Over $191,650 but not over $4 16,700

$46,643.75 plus 33% of the excess over $ 191,650

Over $416,700 but not over $4 18,400

$120 ,910.25 plus 35% of the excess ove r $416,700

Over $418,400

$121,505 .25 plus 39.6% of the excess over $418,400

Heads of Households
Not over $13)50

I 0% of the taxable income

Over $ 13,350 but not over $50,800

$1,335 plus 15% of the excess over $13,350

Over $50,800 but not over $ 13 1,200

$6,952.50 plus 25% of the excess over $50,800

Over $ 13 L.200 but not over $2 12,500

$27,052.50 plus 28% of the excess over $13 1,200

Over $2 12,500 but not over $416 ,700

$49,816.50 plus 33% of the excess over $2 12,500

Over $416,700 but not over $444,550

$ 117,202.50 plus 35% of the excess over $4 16,700

Over $444,550

$126,950 plus 39.6% of the excess over $444,550

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TREAS-17-0313-I-000412

I

 .

.Ifu,~i1bt.e,ii!~0ti1e is_:

'Then
,int.91i1e
,ta~, et.1ua
l.s:,:
..
.

M arrie d lmli viduol s F iling .foint Ret11n,s and S urviv ing Spo uses
Not over $18 ,650

10% of the taxable income

Over $ 18,650 but not over $75,900

$ 1,865 plus 15% of the excess over $ 18,650

Over $75 ,900 but not over $153,100

$ L0,452.50 plus 25% of the excess over $75 ,900

Over $ 153, I00 but not over $233 ,350

$29,752.50 plus 28% of the excess over $ 153, 100

Over $233,350 but not over $416,700

$52 ,222.50 plus 33% of the excess over $233 ,350

Over $416 ,700 but not over $470 ,700

$112 ,728 plus 35 % oftbe excess over $4 16,700

Over $470 ,700

$ 131,628 plus 39 .6% of the excess over $470 ,700
Married Indi vidu als Fili11
g Separ ate Returns

Not over $9,325

to¾ of the taxable income

Over $9,3 25 but not over $37 ,950

$932.50 pl us 15% of the excess over $9,325

Over $37 ,950 but not over $ 76,550

$5,226.25 plus 25% of the excess over $37,950

Over $76,550 but not over $ 116,675

$ 14,876.25 plus 28% of the excess over $76,550

Over $116,675 but not over $208 ,350

$26 , 111.25 plus 33% ofthe excess over $1 16,675

Over $208 ,350 but not over $235 ,350

$56,364 plus 35% of the excess over $208 ,350

Over $235,350

$65 ,814 plus 39.6 % of the excess over $235 ,350
Estates a111I
Trusts

Not over $2,550

15% of the taxable income

Over $2, 550 but not over $6,000

$382.50 plus 25% of the ex cess over $2,550

Over $6,000 but not over $9,150

$ 1,245 plus 28% of the excess over $6,000

Over $9, I 50 but not over $12 ,500

$2, 127 plus 33% of the excess over $9, 150

Over $ 12,500

$3,23 2.50 plus 39.6 % of the excess over $12 ,500

1

Rev. Proc. 2016-55 , 2016-45 I..R.B. 707, sec. 3.01.

U nearned income of children
Spec ial rules (genera lly referred to as the " kiddie tax ") app ly to the net unearned income
of certa in children.2 Genera lly, the k idd ie tax applies to a child if: ( l) the ch ild has not reached
the age of 19 by the close of the ta'<ahle year , or the chi ld is a full-time student under the age of
24 , and eithe r of the chi ld 's parents is alive at such time ; (2) the child 's un earne d income exceeds
1
Sec. l (g). Unless otherwise stated, alJ section references are to the Internal Revenue Code of I 986, as
amended (the "Code" ).

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TREAS-17-0313-I-000413

 $2, 100 (for 2017); and (3) the child does not file a joint return. 3 The kiddie tax applies
regardless of whether the child may be claimed as a dependent by either or both parents. For
children above age 17, the kiddie tax applies only to children whose earned income does not
exceed one-half of the amount of their support.
Under these rules, the net unearned income of a child (for 2017, unearned income over
$2, 100) is taxed at the parents' tax rates if the parents' tax rates are higher than the tax rates of
the child.4 The remainder of a child's taxable income (i.e., earned income, plus unearned income
up to $2, 100 (for 2017) , less the child's standard deduction) is taxed at the child's rates,
regardless of whether the kiddie tax applies to the child. For these purposes , unearned income is
income other than wages , salaries , professional fees, other amounts received as compensation for
personal services actually rendered , and distributions from qualified disability trusts. 5 In general ,
a child is eligible to use the preferential tax rates for qualified dividends and capital gains. 6
The kiddie tax is calculated by computing the "allocable parental tax." This involves
adding the net unearned income of the child to the parent 's income and then applying the
parent ' s tax rate. A child's "net unearned income" is the child's unearned income less the sum
of (1) the minimum standard deduction allowed to dependents ($1,050 for 2017 7) , and (2) the
greater of (a) such minimum standard deduction amount or (b) the amount of allowable itemized
deductions that are directly connected with the production of the unearned income. 8
The allocable parental tax equals the hypothetical increase in tax to the parent that results
from adding the child's net unearned income to the parent's taxable income. 9 If the child bas net
capital gains or qualified dividends , these items are allocated to the parent's hypothetical taxable
income according to the ratio of net unearned income to the child's total unearned income. If a
parent has more than one child subject to the kiddie tax , the net unearned income of all children
is combined , and a single kiddie tax is calculated. Each child is then allocated a proportionate
share of the hypothetical increase , based upon the child ' s net unearned income relative to the
aggregate net unearned income of all of the parent's children subject to the tax.

3

Sec. I(g)(2).

4

Special mies apply for detenninin g which paren t' s rate applies where a joint return is not filed.

5

Sec. l( g)(4) and sec . 91 l(d)(2 ).

6

Sec. l(h).

7

Sec. 3.02 of Rev. Proc. 20 16-55, supra.

8

Sec. l( g)(4).

9

Sec. l( g)(3).

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TREAS-17-0313-I-000414

 Generally , a child must file a separate return to report his or her income. 10 In such case,
items on the parents ' return are not affected by the child ' s income , and the total tax due from the
child is the greater of:
1. The sum of (a) the tax payable by the child on the child ' s earned income and unearned

income up to $2,100 (for 2017) , plus (b) the allocable parental tax on the child's
uneamedincome , or
2. The tax on the child's income without regard to the kiddie tax provisions.

11

Under certain circumstances , a parent may elect to report a child 's unearned income on
the parent ' s return. 12
Indexing tax provisions for inflation

Under present law, many parameters of the tax system are adjusted for inflation to protect
taxpayers from the effects of rising prices. Most of the adjustments are based on annual changes
in the level of the Consumer Price Index for all Urban Consumers ("CPI-U "). 13 The CPI-U is an
index that measures prices paid by typical urban consumers on a broad range of products , and is
developed and published by the Department of Labor.
Among the inflation-indexed tax parameters are the following individual income tax
amounts: (1) the regular income tax brackets ; (2) the basic standard deduction ; (3) the additional
standard deduction for aged and blind; (4) the personal exemption amount; (5) the thresholds for
the overall limitation on itemized deductions and the personal exemption phase-out ; (6) the
phase-in and phase-out thresholds of the earned income credit ; (7) IRA contribution limits and
deductible amount s; and (8) the saver ' s credit
Capita l gains rates
In general

In the case of an individual , estate, or trust, any adjusted net capital gain which otherwise
would be taxed at the I 0- or 15-percent rate is not taxed. Any adjusted net capital gain which
otherwise would be taxed at rates over 15-percent and below 39.6 percent is taxed at a 15percent rate. Any adjusted net capital gain which otherwise would be taxed at a 39.6-percent rate
is taxed at a 20-percent rate.
The unrecaptured section 1250 gain is taxed at a maximum rate of 25 percent , and 28percent rate gain is taxed at a maximum rate of 28 percent. Any amount of umecaptured section
10

Sec. l(g)(6). See Form 86 15, Tax for Certain Children Who Have Unearned Income.

11

Sec. 1(g)( l ).

12

Sec. l( g)(7).

13

Sec. l (f)(5) .

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TREAS-17-0313-I-000415

 1250 gain or 28-percent rate gain otherwise taxed at a 10- or 15-percent rate is taxed at the
otherwise applicable rate.
In addition , a tax is imposed on net investment income in the case of an individual , estate,
or trust. In the case of an individual , the tax is 3.8 percent of the lesser of net investment income,
which includes gains and dividends , or the excess of modified adjusted gross income over the
threshold amount. The threshold amount is $250,000 in the case of a joint return or surviving
spouse, $ 125,000 in the case of a married individual filing a separate return, and $200,000 in the
case of any other individual.
Definitions
Net capital gain
In general, gain or loss reflected in the value of an asset is not recognized for income tax
purposes until a taxpayer disposes of the asset. On the sale or exchange of a capital asset, any
gain genera lly is included in income. Net capital gain is the excess of the net long-term capital
gain for the taxable year over the net short-term capital loss for the year. Gain or loss is treated
as long-term if the asset is held for more than one year.
A cap ital asset genera lly means any property except (1) inventory , stock in trade , or
property held primarily for sale to customers in the ordinary course of the taxpayer ' s trade or
business , (2) depreciable or real property used in the taxpayer ' s trade or business , (3) specified
literary or artistic property , (4) business accounts or notes receivable , (5) certain U.S.
publications , (6) certain commod ity derivative financial instruments, (7) hedging transactions ,
and (8) business supplies. In addition , the net gain from the disposition of certa in property used
in the taxpayer ' s trade or business is treated as long-term capital gain. Gain from the disposition
of depreciable personal property is not treated as capital gain to the extent of all previous
depreciation allowances. Gain from the disposition of depreciable real property is generally not
treated as cap ital gain to the extent of the depreciation allowances in excess of the allowances
available under the straight-line method of depreciation.
Adjusted net capital gain
The "adjusted net cap ital gain" of an individual is the net capital gain reduced (but not
below zero) by the sum of the 28-percent rate gain and the unrecaptured section 1250 gain. The
net capital gain is reduced by the amount of gain that the individual treats as investment income
for purposes of determining the investment interest limitation under section 163(d).
Qua lified dividend income
Adjusted net capita l gain is increased by the amount of qualified dividend income.
A dividend is the distribution of property made by a corporation to its shareholders out of
its after-tax earnings and profits. Qualified dividends generally includes dividends received from
domestic corporations and qualified foreign corporations. The term "qualified foreign
corporation " includes a foreign corporation that is eligible for the benefits of a compre hensive
income tax treaty with the United States which the Treasury Department determines to be

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TREAS-17-0313-I-000416

 satisfactory and which includes an exchange of information program. In addition , a foreign
corporation is treated as a qualified foreign corporation for any dividend paid by the corporation
with respect to stock that is readily tradable on an established securities market in the United
States.
If a shareholder does not bold a share of stock for more than 60 days during the 121-day
period beginning 60 days before the ex-dividend date (as measured under section 246(c)) ,
dividends received on the stock are not eligible for the reduced rates. Also , the reduced rates are
not available for dividends to the extent that the taxpayer is obligated to make related payments
with respect to positions in substantially similar or related property.
Dividends received from a corporation that is a passive foreign investment company (as
defined in section 1297) in either the taxable year of the distribution , or the preceding taxable
year , are not qualified dividends.
A dividend is treated as investment income for purposes of determining the amount of
deductible investment interest only if the taxpayer elects to treat the dividend as not eligible for
the reduced rates.
The amount of dividends qualifying for reduced rates that may be paid by a regulated
investment company ("RIC") for any taxable year in which the qualified dividend income
received by the RIC is less than 95 percent of its gross income (as specially computed) may not
exceed the sum of ( 1) the qualified dividend income of the RIC for the taxable year and (2) the
amount of earnings and profits accumulated in a non-RIC taxable year that were distributed by
the RIC during the taxable year.
The amount of qualified dividend income that may be paid by a real estate investment
trust ("REIT ") for any taxable year may not exceed the sum of (1) the qualified dividend income
of the REIT for the taxable year , (2) an amount equal to the excess of the income subject to the
taxes imposed by section 857(b)(J) and the regulations prescribed under section 337(d) for the
preceding taxable year over the amount of these taxes for the preceding taxable year , and (3) the
amount of earnings and profits accumulated in a non-REIT taxable year that were distributed by
the REIT during the taxable year.
Dividends received from an organization that was exempt from tax under section 50 l or
was a tax-exempt farmers ' cooperative in either the taxable year of the distribution or the
preceding taxable year ; dividends received from a mutual savings bank that received a deduction
under section 591 ; or deductible dividends paid on employer securities are not qualified dividend
mcome.
28-percent rate gain
The term "28-percent rate gain " means the excess of the sum of the amount of net gain
attributable to long-term capital gains and losses from the sale or exchange of collectibles (as
defined in section 408(m) without regard to paragraph (3) thereof) and the amount of gain equal
to the additional amount of gain that would be excluded from gross income under section 1202
(relating to certain small business stock) if the percentage limitations of section 1202(a) did not

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TREAS-17-0313-I-000417

 apply, over the sum of the net short-term capital loss for the taxab le year and any long-term
capita l loss carryove r to the taxab le year.
Unrecaptured section 1250 gain
"Unrecaptured section 1250 gain" means any long-term capita l gain from the sale or
exchange of section 1250 property (i.e., depreciab le real estate) held more than one year to the
extent of the gain that would have been treated as ordinary income if section 1250 applied to all
depreciation , reduced by the net loss (if any) attributable to the items taken into account in
computing 28-percent rate gain. The amount of unrecapt ured section 1250 gain (before the
reduct ion for the net loss) attr ibutable to the disposition of property to which section 1231
(relating to certain property used in a trade or business) applies may not exceed the net section
1231 gain for the year.

Description of Proposal
Modification of rates
The proposal replaces the individual income tax rate structure with a new rate structure .

Tab]e 2.-Prop osed Federal Individual ln come Tax Rates for 2018

-

If ta\abf~ ,income is :

Then focome t,ax e_quals:
Single lndivitl ua/s

Not over $9,525

10% of the taxable income

Over $9, 525 but not over $38 ,700

$952.5 0 plus 12% of the excess over $9,525

Over $38, 700 but not over $60,000

$4,453.50 plus 22.5%, of the excess over $38,7 00

Over $60,000 but not over$} 70.,000

$9,246 plus 25% of the excess over $60.000

Over $ 170,000 but not over $200,000

$36,746 plus 32.5% of the excess over $170 ,000

Over $200,000 but not over $500,000

$46,496 plus 35% of the excess over $200,000

Over $500,000

$151,496 plus 38.5% of the excess over $500,000

R emis of H011se/wltfs
Not over $ L3,600

10% of the taxable income

Over $ 13,600 but not over $5 1,800

$ 1,360 plus 12%1of the excess over$ l 3,600

Over $5 1,800 but not over $60,000

$5,944 plus 22.5% of the excess over $51, 800

Over $60, 000 but not over $ 170,000

$7,78 9 plus 25% of the excess over $60,000

Over $ 170,000 but not over $20 0,000

$35,289 plus 32.5% of the excess over $170 ,000

Over $200,000 b'ut not over $500,000

$45,039 plus 35% of the excess over $200,Q00

Over $500,000

$ 150,039 plus 38.5% of the excess over $500,000

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TREAS-17-0313-I-000418

 '

.Ifll1~llb1_e,ii!~0ti1e is_:

.

Tlt~ll focome ~;i~ e<J_U
_als·::

Married lmlividuols Filing .foint Ret11rns and Surviving Spouses
Not over $ 19,050

10% of the taxable income

Over $ l9 ,050 but not over $77,400

$ 1,905 plus 12% of tbe excess over $19, 050

Over $77, 400 but not over $ I 20,000

$8,907 plus 22.5 % of the excess over $77, 400

Over $ 120,000 but not over $290,000

$ 18,492 plus 25% of the excess over $ 120,000

Over $29 0,000 but no t over $39 0,000

$60,992 plus 32.5% of the excess over $290,000

Over $39 0,000 but not over $ 1,000 ,000

$93, 492 plus 35% of the excess over $390,000

Over $ 1,000,000

$306,99 2 plus 38.5% of the excess over $1,000,000
Married Individuals Filing Sepatnte Retums

Not over $9,525

l 0% of the taxable income

Over $9,5 25 but not over $38,700

$952.50 plus 12% oftbc excess over $9,525

Over $38,7 00 but not over $60,000

$4 ,453.50 plus 22.5% oftbe excess over $38,7 00

Over $6 0,000 but not over $ 145,000

$9,246 plus 25% of the excess over $60,000

Over $ 145,000 but not over$ 195,000

$30,496 plus 32.5% of the excess over $145 ,000

Over $ 195,000 but not over $500 ,000

$46,746 plus 35% of tbe excess over $ I 95,000

Over $5 00,000

$ 153,496 plus 38.5°Aiof the excess over $500,000

Estates

0111I Trusts

Not over $2, 550

10% of the taxable income

Over $2,55 0 but not over $9, 150

$255 plus 25% of the excess over $2,5 50

Over $9, 150 but not over $12 ,500

$ 1,905 plus 35% of the excess over $9, 150

Over $ 12,500

$3,077.50 plus 38.5% of the excess over $ 12,500

The bracket thresholds are all adjusted for inflation and then rounded to the next lowest
multiple of$ I 00 in future years. Unlike present law (which uses a mea sure of the consumer
pri ce index for all-mban consumer s), the new inflation adjustment uses the chained consumer
price index for all-urban consumers.
Simplification of tax on unearn ed income of children

The propo sal simplifies the "kiddie tax " by effectively applying ordinary and capital
gains rates applicable to trusts and estates to the net unearned income of a child . Thus, taxable
income attributable to earned income is taxed according to an unmatTied taxpaye rs' bracket s and
rates. Taxable income attributable to net unearned income is taxed according to the brackets
applicable to trusts and estates, with respect to both ordinary income and income taxed at

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TREAS-17-0313-I-000419

 preferential rates. The child' s tax is no longer affected by the tax situation of the child's parent
or the unearned income of any siblings.
Replacing CPI-U with chained CPI-U

The proposal requires the use of the chained CPI-U ("C-CPI-U ") to index tax parameters
current ly indexed by the CPI-U. The C-CPI-U is also developed and publ ished by the
Department of Labor , and differs from the CPI-U in that it accounts for the ability of individuals
to alter their cons umption patterns in response to relative price changes. Values that are reset for
2018, such as the bracket thresho lds and standard deduction , are indexed by the C-CPI-U in
taxable years beginning after December 31, 2018. Other indexed values in the code switch from
CPI-U indexing to C-CPI-U indexing going forward in taxable years beginning after December
31,2 017.
Maximum rates on capital gains and qualified dividends

The proposal genera lly retains the present-law maximum rates on net cap ital gain and
qualified dividends. The breakpoints between the zero- and 15-percent rates (" 15-percent
breakpoint ") and the 15- and 20-percent rates ("20-percent breakpoint ") are the same amounts as
the breakpoints under present law, except the breakpoint s are indexed using the C-CPI-U in
taxable years beginning after 2017. Thus , for 2018, the 15-percent breakpoint is $77,200 for
joint returns and surviving spouses (one-half of this amount for married taxpayers filing
separately) , $51,700 for heads of household , $2,600 for estates and trusts , and $38,600 for other
unmarried individua ls. The 20-percent breakpoint is $479,000 for joi nt returns and surviving
spou ses (one-half of this amount for married taxpayers filing separately), $452,400 for heads of
household , $12,700 for estates and trusts, and $425,800 for other unmarried individuals.
Therefore , in the case of an individual (including an estate or trust) with adjusted net
capital gain, to the extent the gain would not result in taxable income exceeding the 15-percent
breakpoint , such gain is not taxed. Any adjusted net capital gain which would result in taxable
income exceeding the 15-percent breakpoint but not exceeding the 20-percen t breakpoint is taxed
at 15 percent. The remaining adjusted net capital gain is taxed at 20 percent.
As under present law , unrecaptured section 1250 gain genera lly is taxed at a maximum
rate of 25 percent , and 28-pe rcent rate gain is taxed at a maximum rate of 28 percent.
Paid prepar er due diligence requirement for head of household status

The proposal directs the Secretary of the Treasury to promulgate due diligence
requirements for pa id preparers in determining eligibility for a taxpayer to file as head of
household. A penalty of $500 is imposed for each failure to meet these requirements.
Effective Date

The proposal is effec tive for taxable years beginning after December 31, 2017.

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TREAS-17-0313-I-000420

 2. Increase in standard deduction
Present Law
Under present law, an individual who does not elect to itemize deductions may reduce his
adjusted gross income ("AGI ") by the amount of the applicable standard deduction in arriving at
his taxable income. The standard deduction is the sum of the basic standard deduction and, if
applicable , the additional standard deduction. The basic standard deduction varies depending
upon a taxpayer's filing status. For 2017 , the amount of the basic standard deduction is $6,350
for sing le individuals and married individuals filing separate returns , $9,350 for heads of
households , and $12,700 for married individuals filing a joint return and surviving spouses. An
additional standard deduction is allowed with respect to any individual who is elderly or blind. 14
The amount of the standard deduction is indexed annually for inflation.
In the case of a dependent for whom a deduction for a personal exemption is allowed to
another taxpayer , the standard deduction may not exceed the greater of (i) $ 1,050 (in 2017) or
(ii) the sum of $350 (in 2017) plus the individual ' s earned income.

Description of Proposal
The proposal increases the basic standard deduction for individuals across all filing
statuses. Under the proposal , the amount of the standard deduction is increased to $24,000 for
married individuals filing a joint return , $18 ,000 for head-of-household filers , and $12,000 for all
other taxpayers. The amount of the standard deduction is indexed for inflation using the chained
consumer price index for all-urban consumers for taxable years beginning after December 31,
2018.
The additional standard deduction for the elderly and the blind is not changed by the
proposal.

Effective Date
The proposal is effective for taxable years beginning after December 31 , 2017.

3. Repeal of the deduction for personal exemptions
Present Law
Under present law, in determining taxab le income , an individual reduces AGI by any
personal exemption deductions and either the applicable standard deduction or his or her
itemized deductions. Personal exemptions generally are allowed for the taxpayer , his or her
spouse , and any dependents. For 2017 , the amount deductible for each personal exemption is
$4,050. This amount is indexed annually for inflation. The personal exemption amount is
14

For 2017, the additional amount is $ 1,250 for married taxpayers (for each spouse meeting the applicable
criterion ) and surviving spouses. The additional amount for single individuals and heads of households is $ 1,550.
An individual who qualifies as both blind and elderly is entitled to two additional standard deductions , for a total
additional amount (for 2017) of $2,500 or $3, l 00, as applicable .

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TREAS-17-0313-I-000421

 phased out in the case of an individual with AGI in excess of $313,800 for taxpayers filing
jointly , $287,650 for heads of household and $261,500 for all other filers. In addition , no
personal exemption is allowed in the case of a dependent if a deduction is allowed to another
taxpayer.
Withholding rules
Under present law, the amount of tax required to be withheld by employers from a
taxpayer's wages is based in part on the number of withholding exemptions a taxpayer claims on
his Form W-4. An employee is entitled to the following exemptions: (1) an exemption for
himself , unless he allowed to be claimed as a dependent of another person ; (2) an exemption to
which the employee ' s spouse would be entitled , if that spouse does not file a Form W-4 for that
taxable year claiming an exemption described in ( 1); (3) an exemption for each individual who is
a dependent (but only if the employee's spouse bas not also claimed such a withholding
exemption on a Form W-4); (4) additional withholding allowances (taking into account estimated
itemized deductions , estimated tax credits , and additional deductions as provided by the
Secretary of the Treasury) ; and (5) a standard deduction allowance.
Filing requirements
Under present law, an unmarried individual is required to file a tax return for the taxable
year if in that year the individual had income which equals or exceeds the exemption amount
plus the standard deduction applicable to such individual (i.e., single, head of household , or
surviving spouse). An individual entitled to file a joint return is required to do so unless that
individual ' s gross income, when combined with the individual ' s spouse ' s gross income for the
taxable year , is less than the sum of twice the exemption amount plus the basic standard
deduction applicable to a joint return, provided that such individual and his spouse, at the close
of the taxable year , had the same household as their home.
Trusts and estates
In lieu of the deduction for personal exemptions , an estate is allowed a deduction of $600. A
trust is allowed a deduction of $ 100; $300 if required to distribute all its income currently ; and
an amount equal to the personal exemption of an individual in the case of a qualified disability
trust.
Description of Proposal

The proposal repeals the deduction for personal exemptions.
The proposal modifies the requirements for those who are required to file a tax return. In
the case of an individual who is not married , such individual is required to file a tax return if the
taxpayer's gross income for the taxable year exceeds the applicable standard deduction.
Married individuals are required to file a return if that individual ' s gross income, when combined
with the individual's spouse ' s gross income for the taxable year , is more than the standard
deduction applicable to a joint return, provided that: (i) such individual and his spouse , at the
close of the taxable year , had the same household as their home ; (ii) the individual ' s spouse does
not make a separate return ; and (iii) neither the individual nor his spouse is a dependent of

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TREAS-17-0313-I-000422

 another taxpayer who has income (other than earned income ) in excess of $500 (indexed for
inflation).

Effective Date
The proposal is effect ive for taxab le years beginnin g after De cember 31 , 2017 .

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TREAS-17-0313-I-000423

 B. Treatment of Business Income of Individuals
1. Allow 17.4-percent deduction to certain pass-th rough income
Present Law
Individual income tax rates
To determine regular tax liability, an individual taxpayer generally must apply the tax
rate schedules (or the tax tables) to his or her regular taxable income. The rate schedules are
broken into several ranges of income, known as income brackets , and the marginal tax rate
increases as a taxpayer ' s income increases. Separate rate schedules apply based on an
individual ' s filing status (i.e, single, head of house hold, married filing jointly , or married filing
separately). For 2017 , the regular individual income tax rate schedule provides rates of 10, 15,
25, 28, 33, 35, and 39.6 percent.

Partnerships
Partnerships generally are treated for Federal income tax purposes as pass-through
entities not subject to tax at the entity level. 15 Items of income (including tax-exempt income),
gain, loss, deduction , and credit of the partnership are taken into account by the partners in
computing their income tax liability (based on the partnership's method of accounting and
regard less of whether the income is distributed to the partners). 16 A partner's deduction for
partnership losses is limited to the partner's adjusted basis in its partnership interest. 17 Losses
not allowed as a result of that limitation generally are carried forward to the next year. A
partner ' s adjusted basis in the partnership interest generally equals the sum of (1) the partner ' s
capita l contributions to the partnership , (2) the partner ' s distributive share of partnership income,
and (3) the partner ' s share of partnership liabilities , less (1) the partner ' s distributive share of
losses allowed as a deduction and certain nondeductible expenditures , and (2) any partnership
distributions to the partner. 18 Partners generally may receive distributions of partnership
property without recognition of gain or loss, subject to some exceptions. 19

15

Sec. 701.

16

Sec . 702(a) .

17

Sec. 704(d). In addition , passive loss and at-risk limitations limit the extent to which certain types of
income can be offset by partnership deductions (sections 469 and 465). These limitations do not apply to corporate
partners (excep t certain closely-held corporations) and may not be important to individual partners who have
partner-le vel passi ve income from other investments .
18

Sec. 705.

19

Sec. 73 1. Gain or loss may nevertheless be recogni zed, for example , on the distribution of money or
marke table securit ies, distributions with respect to contributed propert y, or in the case of disproportionate
distributions (which can resul t in ordinary income).

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TREAS-17-0313-I-000424

 Partnerships may allocate items of income, ga in, loss, deduct ion, and credit among the
partners, provi ded the allocatio ns have substantial economic effect. 20 In genera l, an allocation
has substantia l economic effect to the extent the partner to which the allocation is made receives
the econo mic benefit or bears the economic burde n of such allocatio n and the allocat ion
sub stantia lly affec ts the do llar amounts to be rece ived by the partne rs from the partne rship
independent of tax conseq uences. 21
State laws of every State provide for limited liability companies 22 ("LLCs"), which are
neither part nersh ips nor corporat ions unde r applicable State law, but which are genera lly treated
as partne rships for Federa l tax purposes. 23
Under present law , a pub licly traded partnership genera lly is treated as a corporation for
Federal tax purposes. 24 For this purpose, a publ icly traded partners hip means any partnersh ip if
interests in the partners hip are traded on an established secur ities market or interests in the
partnership are read ily trada ble on a secondary market ( or the substantial equivale nt thereot). 25

An except ion from corpora te treatme nt is provided for certain publicly traded
partne rships, 90 perce nt or more of whose gross income is qu alifying income. 26

20

Sec. 704(b)(2).

21

Treas. Reg. sec . l.704-l(b)(2).

22

The first LLC statute was enacted in Wyoming in 1977. All States (and the District of Columbia) now
have an LLC statute , though the tax treatment ofLLCs for State tax purposes may differ.
23

Under Treasury regu lations promu lgated in 1996, any domestic nonpublicly traded unincorporated entity
with two or more members genera lly is treated as a partnership for federal income tax purposes , while any singlemember domestic unincorporated entity generally is treated as disregarded for Federa l income tax purposes (i.e.,
treated as not separate from its owner). Instead of the applicable default treatment , however , an LLC may elect to be
treated as a corporation for Federa l income tax purposes . Treas. Reg. sec. 301.7701 -3. These are known as the
"check-the-box" regulations.
24

Sec. 7704(a).

25

Sec. 7704(b).

26

Sec. 7704(c)(2). Qualifying income is defined to include interest, dividends , and gains from the
disposition of a capital asset (or of property described in section 123 l (b)) that is held for the production of income
that is qua lifying income. Sec. 7704(d). Qualifying income also includes rents from real property , gains from the
sale or other disposition ofreal property , and income and gains from the exploration , development , mining or
production , processing, refining, transportation (including pipelines transporting gas, oil, or products thereof) , or the
marketing of any mineral or natural resource (includin g fertilizer , geothermal energy , and timber) , industrial source
carbon dioxide , or the transportation or storage of certain fuel mixtures, alternative fuel, alcohol fuel, or biodiesel
fuel. It also includes income and gains from commodities (not described in section 122l(a)(l)) or futures, options ,
or forward contracts with respect to such commodities (including foreign currency transactions of a commodity
pool) where a principal activity of the partnership is the buying and selling of such commodities , futures , options , or
forward contracts. However , the exce ption for partnerships with qualifying income does not apply to any
partnership resembling a mutual fund (i.e., that would be described in section 85l(a) if it were a domestic

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TREAS-17-0313-I-000425

 S corporations
For Federa l income tax purposes , an S corporation 27 genera lly is not subject to tax at the
corporate level. 28 Items of income (inc luding tax-exempt income) , gain, loss, deduction , and
cred it of the S corporat ion are taken into account by the S corporat ion sharehold ers in computin g
their income tax liab ilities (based on the S corporat ion 's method of accounti ng and regard less of
whether the income is distributed to the shareho lders). A shareho lder's deduction for corpora te
losses is limited to the sum of the shareho lder's adj usted basis in its S corporation stock and the
indebtedness of the S corporation to such shareholder. Losses not allowed as a result of that
limitation generally are carried forward to the next year. A shareho lder's adjusted basis in the
S corporation stock genera lly equals the sum of ( 1) the shareho lder's capital contrib utions to the
S corporation and (2) the shareholder's pro rata share of S corporation income , less ( 1) the
share hold er's pro rata share of losses allowed as a deduct ion and certa in nondeductible
expend itu res, and (2) any S corporation distributions to the sha reho lder.29
In general, an S corporation shareholder is not subject to tax on corporate distributions
unless the distributions exceed the share holder's basis in the stock of the corporation .
Electing S corporat ion status
To be eligible to elect S corporation status , a corporation may not have more than
100 shareholders and may not have more than one class of stock. 30 Only individ ual s ( other than
nonresident aliens), certain tax-exem pt organizations, and certai n trusts and estates are permitte d
shareho lders of an S corporatio n .

Sole proprietorships
Un like a C corporat ion, partnership, or S corporation, a business conducted as a sole
proprietorship is not treated as an entity distinct from its owner for Federal income tax

corporation) , which includes a corporation registered under the Investment Company Act of 1940 (Pub. L. No. 76768 (1940)) as a management company or unit investment trust (sec. 7704(c)(3)).
27

An S corporation is so named because its Federa l tax treatment is governed by subcbapter S of the Code.

28

Secs. 1363 and 1366.

29

Sec. 1367. If any amount that would reduce the adjusted basis ofa shareholder's S corporation stock
exceeds the amount that would reduce that basis to zero, the excess is applied to reduce (but not below zero) the
shareholder ' s basis in any indebtedness of the S corporation to the shareholder. If , after a reducti on in the basis of
such indebtedness, there is an event that would increase the adjusted basis of the shareholder ' s S corporation stock ,
such increase is instead first applied to restore the reduction in the basis of the shareholder 's indebtedness .
Sec. 1367(b)(2).
30
Sec. 1361. For this purpose , a husband and wife and all members ofa family are treated as one
shareholder. Sec. 136l(c)(l ).

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TREAS-17-0313-I-000426

 purposes. 3 1 Rather , the business owner is taxed directly on business income, and files
Schedule C (sole proprietorships generally) , Schedule E (rental real estate and royalties) , or
Schedule F (farms) with his or her individual tax return. Furthermore , transfer of a sole
proprietorship is treated as a transfer of each individual asset of the business. Nonetheless , a sole
proprietorship is treated as an entity separate from its owner for employment tax purposes ,32 for
certain excise taxes,33 and certain information reporting requirements. 34
Description of Proposal

An individual taxpayer generally may deduct 17.4 percent of domestic qualified business
income from a partnership , S corporation , or sole proprietorship.
The deduction does not apply to specified service businesses , except in the case of a
taxpayer whose taxable income does not exceed $ 150,000 (for married individuals filing jointly ;
$75,000 for other individuals). The benefit of the deduction for service providers is phased out
over a $50,000 range (for married individuals filing jointly ; $25,000 for other individuals). The
phaseout applies for taxable income exceeding $150,000 (for married individuals filing jointly ;
$75,000 for other individuals).

In the case of a taxpayer who bas qualified business income from a partnership or S
corporation , the amount of the deduction is limited to 50 percent of the W-2 wages of the
taxpayer. W-2 wages of a person is the sum of wages subject to wage withholding , elective
deferrals , and deferred compensation paid by the person during the calendar year ending during
the taxable year. Only those wages that are properly allocable to qualified business income are
taken into account.
Qualified business income for a taxable year means the net amount of domestic qualified
items of income, gain, deduction , and loss with respect to the taxpayer's qualified businesses
(that is, any trade or business other than specified service trades or businesses , defined below).
The determination of qualified items of income, gain, deduction , and loss takes into account
these items only to the extent included or allowed in the determination of taxable income for the
year. For example , if in a taxable year, a qualified business has 100 of ordinary income from
inventory sales, and makes an expenditure of 25 that is required to be capitalized and amortized
over 5 years under applicable tax rules, the net business income is l 00 minus 5 (current-year
ordinary amortization deduction) , or 95. The qualified business income is not reduced by the

31

A single-member unincorpora ted entity is disre garded for Federal income tax purposes , unless its owner
elects to be treated as a C corporat ion. Treas. Reg . sec. 301.7701- 3(b)(l )(ii). Sole proprie torships often are
conduct ed through lega l entities for nontax reasons . While sole proprie torships generall y may have no more than
one owner, a married couple that files a j oint return and jointl y owns and operates a business may elect to have that
business treated as a sole proprietorship under section 76 1(f) .
32

Treas . Reg. sec. 301.7701-2 (c)(2)(iv).

33

Trea s. Reg. sec . 301.7701-2(c)(2)(v) .

34

Treas. Reg . sec. 301.7701-2(c )(2)(vi).

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TREAS-17-0313-I-000427

 entire amount of the cap ital expenditure , only by the amount deductible in determining taxable
income for the year.
Dividends from a real estate investment trust (other than any portion that is a capital gain
dividend) are qualified items of income for this purpose. Simi larly, dividends that are ineluctable
in gross income from certa in cooperative are qualified items of income for this purpose.
If the amount of qua lified business income is less than zero for a taxable year , i.e., is a
loss, the amount of the loss is treated as a loss from qualified businesses in the next taxable year.
Qualified business income does not include any amount paid by an S corporat ion that is
treated as reasonab le compensat ion of the taxpayer. Similarly, qua lified business income does
not include any amount allocated or distributed by a partnership to a partner who is acting other
than in his or her capacity as a partner for services , and does not include any amount that is a
guaranteed payment for services actua lly rendered to or on behalf of a partnership to the extent
that the payment is in the nature of remuneration for those serv ices.
Qualified business income or loss does not include certain investment-related income ,
gain, deductions , or loss.
A specified service trade or business means any trade or business activity involving the
performance of services in the fields of health , law, eng ineering , architecture , account ing,
actuar ial science , performing arts , consulting , athletics , financia l services , brokerage services , or
any trade or business where the principal asset of such trade or business is the reputation or skill
of one or more of its emp loyees.

Effec tive Date
The proposal is effective for taxable years beginning after December 31, 2017.

2. Limitation on losses for taxpayers other than corpor ations
Present Law
Loss limitation rules applicable to individuals
Passive loss rules
The passive loss rules limit deductions and credits from passive trade or business
activities. 35 The passive loss rules apply to individuals , estates and trusts , and closely held
corporations. A pass ive activ ity for this purpose is a trade or business activ ity in which the
taxpayer owns an interest , but in which the taxpayer does not materially participate. A taxpayer
is treated as materially participating in an activity only if the taxpayer is involved in the

35

Sec. 469.

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TREAS-17-0313-I-000428

 operation of the activity on a basis that is regular , continuous , and substantial. 36 Deductions
attributable to passive activities , to the extent they exceed income from passive activities ,
generally may not be deducted against other income. Deductions and credits that are suspended
under these rules are carried forward and treated as deductions and credits from passive activities
in the next year. The suspended losses from a passive activity are allowed in full when a
taxpayer disposes of his entire interest in the passive activity to an unrelated person.
Excess farm loss rules
A limitation on excess farm losses applies to taxpayers other than C corporations. 37 If a
taxpayer other than a C corporation receives an applicable subsidy for the taxable year , the
amount of the excess farm loss is not allowed for the taxable year , and is carried forward and
treated as a deduction attributable to farming businesses in the next taxable year. An excess farm
loss for a taxable year means the excess of aggregate deductions that are attributable to farming
businesses over the sum of aggregate gross income or gain attributable to farming businesses
plus the threshold amount. The threshold amount is the greater of (1) $300 ,000 ($150 ,000 for
married individuals filing separately) , or (2) for the five-consecutive-year period preceding the
taxable year , the excess of the aggregate gross income or gain attributable to the taxpayer's
farming businesses over the aggregate deductions attributable to the taxpayer's farming
businesses.

Description of Proposal
The proposal expands the limitation on excess farm losses. Under the proposal , excess
business losses of a taxpayer other than a C corporation are not allowed for the taxable year.
Such losses are carried forward and treated as part of the taxpayer's net operating loss (NOL)
carryforward in subsequent taxable years. NOL carryovers are allowed for a taxable year up to
the lesser of the carryover amount or 90 percent of taxable income determined without regard to
the deduction for NOLs.
An excess business loss for the taxable year is the excess of aggregate deductions of the
taxpayer attributable to trades or businesses of the taxpayer , over the sum of aggregate gross
income or gain of the taxpayer plus a threshold amount. The threshold amount for a taxable year
is $500 ,000 for married individuals filing jointly , and $250 ,000 for other individuals. The
$500 ,000 and $250 ,000 thresholds are indexed for inflation.

In the case of a partnership or S corporation , the proposal applies at the partner or
shareholder level. Each partner's or S corporation shareholder's share of items of income , gain ,
deduction , or loss of the partnership or S corporation are taken into account in applying the
limitation under the proposal for the taxable year of the partner or S corporation. Regulatory
authority is provided to apply the proposal to any other passthrough entity to the extent necessary

36

Regulations prov ide more detailed standards for material participation. See Treas. Reg. sec. 1.469-5

37

Sec. 461 (j ).

and -ST.

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TREAS-17-0313-I-000429

 to carry out the proposal. Regulatory authori ty is also provided to require any additional
reporting as the Secretary determines is appropriate to carry out the purposes of the proposal.
Effective Date

The proposal is effect ive for taxable years beginning after December 31, 2017.

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TREAS-17-0313-I-000430

 C. Reform of the Child Tax Credit
Present Law
An individual may claim a tax credit for each qualifying child under the age of 17. The
amount of the credit per child is $1,000. A child who is not a citizen , national , or resident of the
United States cannot be a qualifying child.
The aggregate amount of child credits that may be claimed is phased out for individuals
with income over certain threshold amounts. Specifically , the otherwise allowable child tax
credit is reduced by $50 for each $1 ,000 (or fraction thereof) of modified adjusted gross income
("AGI") over $75 ,000 for single individuals or heads of households , $110 ,000 for married
individuals filing joint returns , and $55,000 for married individuals filing separate returns. For
purposes of this limitation , modified AGI includes certain otherwise excludable income earned
by U.S. citizens or residents living abroad or in certain U.S. territories.
The credit is allowable against both the regular tax and the alternative minimum tax
("AMT "). To the extent the child credit exceeds the taxpayer ' s tax liability , the taxpayer is
eligible for a refundable credit 38 (the "additional child tax credit ") equal to 15 percent of earned
income in excess of $3,000 (the "earned income " formula).
Families with three or more children may determine the additional child tax credit using
the "alternative formula ," if this results in a larger credit than determined under the earned
income formula . Under the alternative formula , the additional child tax credit equals the amount
by which the taxpayer ' s Social Security taxes exceed the taxpayer's earned income credit
("EIC").
Earned income is defined as the sum of wages , salaries , tips , and other taxable employee
compensation plus net self-employment earnings. At the taxpayer's election , combat pay may be
treated as earned income for these purposes. U nlike the EiC , which also includes the preceding
items in its definition of earned income , the additional child tax credit is based only on earned
income to the extent it is included in computing taxable income. For example , some ministers'
parsonage allowances are considered self-employment income , and thus are considered earned
income for purposes of computing the EiC , but the allowances are excluded from gross income
for individual income tax purposes , and thus are not considered earned income for purposes of
the additional child tax credit since the income is not included in taxable income.
Any credit or refund allowed or made to an individual under this provision (including to
any resident of a U. S. possession) is not taken into account as income and is not be taken into
account as resources for the month of receipt and the following two months for purposes of
determining eligibility of such individual or any other individual for benefits or assistance , or the
amount or extent of benefits or assistance , under any Federal program or under any State or local
program financed in whole or in part with Federal funds.

38

Th e re fundable credit may not exceed the maximum credit per child of $ 1,000.

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TREAS-17-0313-I-000431

 Description of Proposal
The proposal increases the child tax credit to $1,650 per qualifying child. Additionally,
the age limit for a qualifying child is increased by one year, such that a taxpayer may claim the
credit with respe ct to any qualifying child under the age of 18.
The credit is further modified to provide for a $500 nonrefundable credit for qualifyin g
dependents other than qualifying children. The proposal generally retain s the present-law
definition of dependent.

In 2018, the thre shold at which the credit begins to phase out is increased to $1,000,000
for married taxpayers filing a joint return and $500,000 in the case of all other taxpaye rs. These
amounts are not indexed for inflation.
The propo sal lower the earned income threshold for the refundable child tax credit to
$2,500. As under present law, the maximum amount refundable may not exceed $1,000 per
qualifying child. Under the proposal , this $1,000 thre shold is indexed for inflation with a base
year of 2017 , rounding up to the nearest $ 100 ( such that the threshold is $1,100 in 2018). In
order to receive the refundable portion of the child tax credit , a taxpayer must include a Social
Security number for each qualifyin g child for whom the credit is claimed on the tax return.
Effective Date
The proposal is effective for taxable years beginning after December 31, 2017.

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TREAS-17-0313-I-000432

 D. Simplification and Reform of Deductions and Exclusions
1. Repeal of deduction for taxes not paid or accrued in a trade or business

Present Law
Individuals are permitted a deduction for certain taxes paid or accrued, whether or not
incurred in a taxpayer's trade or business. These taxes are: (i) State, local and foreign real
property taxes; 39 (ii) State and local personal property taxes ;40 (iii) State, local and foreign
income, war profits , and excess profits taxes.41 At the election of the taxpayer , an itemized
deduction may be taken for State and local general sales taxes in lieu of the itemized deduction
for State and local income taxes.42
Property taxes may be allowed as a deduction in computing adjusted gross income if
incurred in connection with property used in a trade or business ; otherwise they are an itemized
deduction. In the case of State and local income taxes, the deduction is an itemized deduction
notwithstandin g that the tax may be imposed on profits from a trade or business. 43
Individuals also are permitted a deduction for Federal and State generation skipping
transfer tax ("GST tax") imposed on certain income distributions that are included in the gross
income of the distributee. 44

In determining a taxpayer 's alternative minimum taxable income, no itemized deduction
for property, income, or sales tax is allowed.

Description of Proposal
The proposal provides that in the case of an individual , State, local and foreign property
taxes and State and local sales taxes are allowed as a deduction only when paid or accrued in
carrying on a trade or business or an activity described in section 212 (relating to expenses for
the production of income) .45 Thus, the proposal allows only those deductions for State, local and
foreign property taxes, and sales taxes, that are presently deductible in computing income on an
individual 's Schedule C, Schedule E, or Schedule Fon such individual' s tax return . For
39

Sec. 164(a)(l) .

40

Sec. 164(a)(2).

41

Sec. 164(a)(3). A foreign tax credit, in lieu ofa deduction , is allowable for foreign taxes if the taxpayer

42

Sec. 164(b)(5).

so elects.

43

See H. Rep. No. 1365 to accompany Indiv idual Income Tax Bill of 1944 (78' 1' Cong. , 2d. Sess.),
reprinted at 19 C.B. 839 ( 1944).
44

Sec. 164(a)(4).

45

The proposal does not modify the deductibility ofGST tax imposed on certain income distributions.

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TREAS-17-0313-I-000433

 instance, in the case of property taxes, an individual may deduct such items only if these taxes
were imposed on business assets (such as residential rental property).
The proposal also provides that in the case of an individual , State and local income , war
profits , and excess profits taxes are not allowable as a deduction.
Effective Date

The proposal is effective for taxable years beginning after December 31, 2017.
2. Modification of deduction for home mortgage interest
Present Law

As a general matter, personal interest is not deductible. 46 Qualified residence interest is
not treated as personal interest and is allowed as an itemized deduction , subject to limitations. 4 7
Qualified residence interest means interest paid or accrued during the taxable year on either
acquisition indebtedness or home equity indebtedness. A qualified residence means the
taxpayer ' s principal residence and one other residence of the taxpayer selected to be a qualified
residence. A qualified residence can be a house , condominium , cooperative , mobile home , house
trailer, or boat.
Acquisition indebtedness
Acquisition indebtedness is indebtedness that is incurred in acquiring , constructing or
substantially improving a qualified residence of the taxpayer and which secures the residence.
The maximum amount treated as acquisition indebtedness is $1 million ($500,000 in the case of
a married person filing a separate return).
Acquisition indebtedness also includes indebtedness from the refinancing of other
acquisition indebtedness but only to the extent of the amount (and term) of the refinanced
indebtedness. Thus , for example, if the taxpayer incurs $200,000 of acquisition indebtedness to
acquire a principal residence and pays down the debt to $150,000, the taxpayer ' s acquisition
indebtedness with respect to the residence cannot thereafter be increased above $150,000 ( except
by indebtedness incurred to substantially improve the residence).
Interest on acquisition indebtedness is allowable in computing alternative minimum
taxable income. However , in the case of a second residence , the acquisition indebtedness may
only be incurred with respect to a house , apartment , condominium , or a mobile home that is not
used on a transient basis.

46

Sec. 163(b)(l ).

47

Sec. I 63(b)(2)(D) and (b)(3).

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TREAS-17-0313-I-000434

 Home equity indebtedness
Home equity indebtedness is indebtedness (other than acquisition indebtedness) secured
by a qualified residence.
The amount of home equity indebtedness may not exceed $100 ,000 ($50,000 in the case
of a married individual filing a separate return) and may not exceed the fair market value of the
residence reduced by the acquisition indebtedness.
Interest on home equity indebtedness is not deductible in computing alternative minimum
taxable income.
Interest on qualifying home equity indebtedness is deductible , regardless of how the
proceeds of the indebtedness are used. For example , personal expenditures may include health
costs and education expenses for the taxpayer's family members or any other personal expenses
such as vacations , furniture , or automobiles. A taxpayer and a mortgage company can contract
for the home equity indebtedness loan proceeds to be transferred to the taxpayer in a lump sum
payment (e.g., a traditional mortgage) , a series of payments (e.g., a reverse mortgage) , or the
lender may extend the borrower a line of credit up to a fixed limit over the term of the loan (e.g.,
a home equity line of credit).
Thus , the aggregate limitation on the total amount of a taxpayer 's acquisition
indebtedness and home equity indebtedness with respect to a taxpayer 's principal residence and a
second residence that may give rise to deductible interest is $ 1, 100,000 ($550,000 , for married
persons filing a separate return).

Description of Proposal
The proposal repeals the deduction for interest on home equity indebtedness.

Effective Date
The proposal is effective for taxable years beginning after December 31 , 2017.

3. Modification of deduction for personal casualty and theft losses
Present Law
A taxpayer may generally claim a deduction for any loss sustained during the taxable
year, not compensated by insurance or otherwise. For indi vidual taxpaye rs, deductible losses
must be incurred in a trade or business or other profit-seeking activity or consist of property
losses arising from fire, storm, shipwreck, or other casualty, or from theft. 48 Personal casualty or
theft losses are deductible only if they exceed $100 per casualty or theft. In addition, aggregate

48

Sec. 165(c).

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TREAS-17-0313-I-000435

 net casualty and theft losses are deductible only to the exte nt they exceed ten percent of an
individual taxpayer ' s adjusted gross income.
Description of Proposal

The proposal modifies the deduction for personal casualty and theft losses. Under the
proposal , a taxpayer may claim a persona l casualty loss (subject to the limitations described
above) if such loss was incurred in a disaster declared by the President under section 401 of the
Robert T. Stafford Disaster Relief and Emergency Assistance Act.
Effective Date

The proposal is effect ive for losses incurred in taxable years beginning after December
31, 2017.
4. Repeal of deduction for tax preparation expenses
Present Law

For regular income tax purposes, individuals are allowed an itemized deduction for
expenses for the production of income. These expenses are defined as ordinary and necessary
expenses paid or incurred in a taxable year: ( 1) for the production or collection of income ; (2) for
the management , conservation, or mainte nance of property held for the produ ction of income; or
(3) in connection with the determination , collection, or refund of any tax.49
Description of Proposal

The proposal repea ls the deduction for expenses in connec tion with the determination ,
collection, or refund of any tax.
Effective Date

The proposal is effec tive for taxable years beginning after December 31, 2017.
5. Repeal of miscellaneous itemized deductions subject to the two-percent floor
Present Law

Individuals may claim itemized deductions for certain miscellaneous expenses. Certain of
these expenses are not deductible unless, in aggrega te, they exceed two percent of the taxpayer ' s

49

Sec. 2 12.

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TREAS-17-0313-I-000436

 adjusted gross income ("AGI"). 50 The deductions described below are subj ect to the aggregate
two-percent floor. 51
Expenses for the production or collection of income
Individuals may deduct all ordinary and necessary expen ses paid or incurred during the
taxable year for the production or collection of income.52
Present law and IRS guidance provide examp les of items that may be deducte d under this
prov1s10n. This non-exhaustive list includes: 53
•

Appraisal fees for a casualty loss or charitable contribution ;

•

Casua lty and theft losses from property used in performing services as an employee;

•

Clerical help and office rent in caring for investments ;

•

Depreciat ion on home computers used for investments;

•

Excess deductions (including administrative expenses) allowed a ben eficiary on
termination of an estate or trust;

•

Fees to co llect interest and dividends;

•

Hobby expenses, but genera lly not more than bobby income;

•

Ind irect miscellaneous deductions from pass-thro ugh entities ;

•

Investment fees and expenses ;

•

Loss on deposits in an insolve nt or bankrupt financial institution ;

•

Loss on traditional IRAs or Roth IRAs, when all amounts have been distributed ;

•

Repayme nts of income ;

•

Safe deposit box rental fees, except for storing jewe lry and other personal effects;

•

Service charges on dividend reinvestment plans ; and

•

Trustee's fees for an IRA , if separately billed and paid.

so Sec. 67(a).
51

The miscellaneous itemized deduction for tax preparation expenses is described in a separate section of
this document.
52

Sec. 212( l ).

53

See IRS Publicat ion 529, "Miscellaneous Deductions" (2016) , p. 9.

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TREAS-17-0313-I-000437

 Unreimbursed expenses attributable to the trade or business of being an employee

In genera l, unreimbursed business expenses incurred by an employee are deductible , but
only as an itemized deduction and only to the extent the expenses exceed two percent of adjusted
gross income. 54
Present law and IRS guidance provide examples of items that may be deducted under this
prov1s1on. This non-exha ustive list includes: 55
•

Business bad debt of an employee ;

•

Business liability insurance premiums ;

•

Damages paid to a former employer for breach of an employment contract ;

•

Depreciation on a computer a taxpayer's employer requires him to use in his work;

•

Dues to a chamber of commerce if membership helps the taxpayer perform his job ;

•

Dues to professional societies ;

•

Educator expenses ;56

•

Home office or part of a taxpayer's home used regularly and exclusively in the
taxpayer ' s work;

•

Job search expenses in the taxpayer ' s present occupation ;

•

Laboratory breakage fees;

•

Legal fees related to the taxpayer's job ;

•

Licenses and regulatory fees;

•

Malpractice insurance premiums ;

•

Medical examina tions required by an employer ;

•

Occupational taxes;

•

Passport fees for a business trip;

•

Repayment of an income aid payment received under an employer's plan ;

•

Research expenses of a college professor ;

•

Rural mail carriers' vehicle expenses ;

•

Subscriptions to professional journals and trade magazines related to the taxpayer ' s
work ;

54

Secs. 62(a)( I) and 67.

55

See IRS Publication 529, "Miscellaneous Deductions" (2016), p. 3.

56

Und er a special pro vision , these expenses are deductibl e "above the line" up to $250.

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TREAS-17-0313-I-000438

 •

Tools and supplies used in the taxpayer's work;

•

Purchase of travel, transportation , meals , entertainment, gifts, and local lodging
related to the taxpayer ' s work;

•

Union dues and expenses ;

•

Work clothes and uniforms if required and not suitable for everyday use; and

•

Work-re lated education.

Other miscellaneous itemized deductions subject to the two-percent floor

Other miscellaneous itemized deductions subject to the two-percent floor include:
•

Repayments of income received under a cla im of right (only subject to the twopercent floor ifless than $3,000);

•

Repayments of Social Security benefits ; and

•

The share of deductible investment expenses from pass-through entities.
Description of Proposal

The proposal repeals all miscellaneo us itemized deductions that are subject to the twopercent floor under prese nt law. 57
Effective Date

The proposal is effective for taxable years beginning after December 31, 2017.
6. Increase percentage limit for charitable contributions of cash to public charities
Present Law
In general

The Code allows taxpayers to reduce their income tax liability by taking deductions for
contributions to certain organizations , including charit ies, Federa l, State, local and Indian tribal
governments, and certain other organizations.
To be deductible , a charitable contribution generally must meet severa l threshold
requirements . First, the recipient of the transfer must be eligible to receive charitable
contributions (i.e., an organization or entity described in section l 70(c)). Second, the transfer
must be made with gratuitous intent and without the expectat ion of a benefit of substantia l
57
For a descrip tion of the repeal of the deduction for tax prepara tion expenses , please see "Repeal of
deduction for tax preparation expenses ."

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TREAS-17-0313-I-000439

 economic value in return. Third , the transfer must be complete and genera lly must be a transfer
of a donor 's entire interest in the contributed property (i.e., not a contingent or partial interest
contribution). To qualify for a current year charitable deduction , payment of the contribution
must be made within the taxable year. 58 Fourth , the transfer must be of money or propertycontributions of services are not dedu ctible. Finally , the transfer must be substant iated and in the
proper form.
As discussed below , special rule s limit the dedu ctibilit y of a taxpayer's charitable
contributions in a give n year to a percenta ge of income, and those rules, in part , turn on whether
the organization receiving the cont ribution s is a public charity or a private foundation. Other
special rules determ ine the dedu ctible value of contributed prop erty for each type of propert y.

Percentage limits on charitable contributions
Individual taxpayers
Charitable contributions by individual taxpayers are limited to a spec ified percentage of
the individual's con tribution base. The contribution base is the taxpayer's adju sted gross income
("A GI") for a taxable year, disregarding any net operating loss carryback to the year under
sect ion 172.59 In genera l, more favorable (higher) percentage limits apply to contributions of
cash and ordinary income property than to contributions of capital gain property. Mo re
favorable limits also genera lly apply to contributions to publi c charities (and certain operating
foundations) than to contributions to nonoperating private foundations.
More spec ifically, the deduction for charitable contribution s by an individual taxpayer of
cash and property that is not appreciated to a charitable organization described in sect ion
l 70( b)( 1)(A) (publi c chari ties, pri vate foundations other than nonoperating private foundations ,
and certa in gove rnmental units) may not exceed 50 percent of the taxp ayer's contribution base.
Contributions of this type of property to nonoperatin g private foundations genera lly may be
deducted up to the lesser of 30 per cent of the taxpaye r' s contribution base or the excess of (i) 50
percent of the contribution base over (i i) the amount of contribution s subject to the 50 percen t
limita tion.
Contr ibution s of appreciated capital gain prope rty to public charities and other
organizations described in sect ion 170(b)(1 )(A) genera lly are deductible up to 30 percent of the
taxpayer's contribution base (after takin g into account contributions other than contributions of
capital gain property) . An individual may elect, however , to brin g all these con tribution s of
appreciated capital gain property for a taxable year within the SO-percent limitation category by
reducing the amount of the contribution deduction by the amount of the appreciation in the
capital gain prop erty. Contri bution s of appreciated capital gain prop erty to nonop erat ing private
foundations are dedu ctible up to the lesser of 20 percen t of the taxpayer ' s contribution base or

58

Sec. 170(a)(l) .

59

Sec. 170(b)(l)(G).

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TREAS-17-0313-I-000440

 the excess of (i) 30 percent of the contribution base over (ii) the amount of contributions subject
to the 30 percent limitati on.
Finally, contr ibutions that are for the use of (not to) the donee chatity get less favorable
percenta ge limits. Contribution s of capital gain property for the use of public charities and other
organizat ions described in section 170(b)(l )(A) also are limited to 20 percent of the taxpayer 's
contribution base. Property contribut ed for the use of an organization generally has been
interpreted to mean property contributed in trust for the organization. 60 Charitable contributions
of income interests (where deductible) also genera lly are treated as contributions for the use of
the donee organization.
Table 3.-Charitable Contribution Percentage Limits For Individual Taxpayers 61

-- - -i1\co111c
·
Propc,:ty-and·Cnsli

0rdi1iary

1

Public Charitie s, Private
Operating Foundations , and
P1ivate Distrib uting Foundations

50%

Nonoperating Pri vate
Foundations

30%

C~pk1IGain
,Pr~pcrty•lo d1c
Rccipicni+130%

6

'

20%

-

-

-

'Capital G.iin••
· P.ropclly,fcwthcuse
nf the Recipient .
20%

20%

Corporate taxpayers
A corporation generally may deduct charitable contrib utions up to 10 percent of the
corporation 's taxable income for the yea r. 64 For this purpose, taxable income is determined
w ithout regard to: ( 1) the charitab le contribution s dedu ction; (2) any net opera.ting loss
can-yback to the taxable ye ar; (3) deduction s for dividends received; (4) deducti ons for dividends

:w (2d C ir. 1982).

GO

Rockefeller v. Commissi oner, 676 F.2d 35.

61

Percenta ges shown are U1epercentage of an individual's contribu tion base .

62 Capi tal gaiu property con1Tibuted to public chm·ities, priv ate operating fow1dations , or private
distributing foundations will be subject to tbe SO-percent limitation if the donor elects to reduce tbe fair market value
of the property by the amouu t that would have been long-term capital gain if tl1e property had been sold .
63

Certain qualified conservation contributions to public charities (generall y, conservation easements ),
qualify for more generous contribution limits. In general , the 30-percen t limit app licable to contr ibutions of cap ita l
ga in property is increased to I 00 percent Iftbe indi vidual making the qualified conservation contributio n is a
qu alified farmer or ranche r or to 50 percent if the individual is not a qualified fam1er or rancher.
&i

Sec. 170(b)(2)(A).

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TREAS-17-0313-I-000441

 paid on certain preferred stock of public utilities ; and (5) any capital loss carryback to the taxable
year.65
Carryforwards of excess contributions
Charitable contributions that exceed the applicable percentage limit generally may be
carried forward for up to five years. 66 In general , contributions carried over from a prior year are
taken into account after contributions for the current year that are subject to the same percentage
limit. Excess contributions made for the use of (rather than to) an organization generally may
not be carried forward.
Qualified conservation contributions
Preferential percentage limits and carryforward rules apply for qualified conservation
contributions. 67 In general , the 30-percent contribution base limitation on contributions of
capital gain property by individuals does not apply to qualified conservation contributions.
Instead , individuals may deduct the fair market value of any qualified conservation contribution
to an organization described in section l 70(b )( 1)(A) (generally , public charities) to the extent of
the excess of 50 percent of the contribution base over the amount of all other allowable
charitable contributions. These contributions are not taken into account in determining the
amount of other allowable charitable contributions. Individuals are allowed to carry forward any
qualified conservation contributions that exceed the SO-percent limitation for up to 15 years. In
the case of an individual who is a qualified farmer or rancher for the taxable year in which the
contribution is made, a qualified conservation contribution is allowable up to 100 percent of the
excess of the taxpayer ' s contribution base over the amount of all other allowable charitable
contributions.
In the case of a corporation (other than a publicly traded corporation) that is a qualified
farmer or rancher for the taxable year in which the contribution is made, any qualified
conservation contribution is allowable up to 100 percent of the excess of the corporation ' s
taxable income (as computed under section l 70(b )(2)) over the amount of all other allowable
charitable contributions. Any excess may be carried forward for up to 15 years as a contribution
subject to the 100-percent limitation. 68
A qualified farmer or rancher means a taxpayer whose gross income from the trade or
business of farming (within the meaning of section 2032A(e)(5)) is greater than 50 percent of the
taxpayer ' s gross income for the taxable year.

65

Sec. 170(b)(2)(C).

66

Sec. 170(d).

67

Sec. 170(b)(I )(E) .

68

Sec. 170(b)(2)(B).

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TREAS-17-0313-I-000442

 Description of Proposal

The proposal increases the income-based percentage limit described in section
l 70(b )( 1)(A) for certain charitable contributions by an individual taxpayer of cash to public
charities and certain other organizations from 50 percent to 60 percent.
Effective Date

The proposal is effective for contributions made in taxable years beginning after
December 31, 2017.
7. Repeal of overall limitation on itemized deductions
Present Law

The total amount of most otherwise allowable itemized deductions (other than the
deductions for medical expenses , investment interest and casualty , theft or gambling losses) is
limited for certain upper-income taxpayers. 69 All other limitations applicable to such deductions
(such as the separate floors) are first applied and, then, the otherwise allowable total amount of
itemized deductions is reduced by three percent of the amount by which the taxpayer's adjusted
gross income exceeds a threshold amount.
For 2017, the threshold amounts are $261,500 for single taxpayers , $287,650 for heads of
household , $313,800 for married couples filing jointly , and $ 156,900 for married taxpayers filing
separately. These threshold amounts are indexed for inflation. The otherwise allowable
itemized deductions may not be reduced by more than 80 percent by reason of the overall limit
on itemized deductions.
Description of Proposal

The proposal repeals the overall limitation on itemized deductions.
Effective Date

The proposal is effective for taxable years beginning after December 31, 2017.
8. Modification of exclusion of gain from sale of a principal residence
Present Law

A taxpayer who is an individual may exclude up to $250,000 ($500,000 if married filing
a joint return) of gain realized on the sale or exchange of a principal residence. To be eligible for
the exclusion , the taxpayer must have owned and used the residence as a principal residence for
at least two of the five years ending on the date of the sale or exchange. A taxpayer who fails to
meet these requirements by reason of a change of place of employment , health , or, to the extent
provided under regulations , unforeseen circumstances , is able to exclude an amount equal to the
69

Sec. 68.

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TREAS-17-0313-I-000443

 fraction of the $250,000 ($500,000 if married filing a joint return) that is equal to the fraction of
the two years that the ownership and use requirements are met.
The exclusion under this provision may not be claimed for more than one sale or
exchange during any two-yea r period.
Description of Proposal
The proposal extends the length of time a taxpayer must own and use a residence to
qualify for this exclusion. Specifically , under this proposal , the exclusion is avai lable only if the
taxpayer has owned and used the residence as a principal residence for at least five of the eight
years ending on the date of the sale or excha nge. A taxpayer who fails to meet these
requirements by reason of a change of place of employment, health , or, to the extent provided
under regulations , unforeseen circumstances, is able to exclude an amount equal to the fraction
of the $250,000 ($500,000 if married filing a joint return) that is equal to the fraction of the five
years that the ownership and use requirements are met.
Under the proposal , a taxpayer may benefit from the exclusion only once every five
years.
Effective Date
The proposal is effec tive for sales and exc hanges after December 31, 2017.
9. Repeal of exclusion for qualified bicycle commuting reimbursement
Present Law
Qualified bicycle commutin g reimbu rsements of up to $20 per qualifying bicycle
commuting month are excludible from an employee ' s gross income .70 A qualifying bicycle
comm uting month is any month during which the employee regularly uses the bicycle for a
substantial portion of travel to a place of employment and during which the employee does not
receive transportation in a commu ter highway vehicle, a transit pass, or qualified parking from
an employer.
Qualified reimbursements are any amount received from an employer during a 15-month
period beginning with the first day of the calendar year as payment for reasona ble expenses
during a calendar year. Reasonable expenses are those incurred in a calendar year for the
purchase of a bicycle and bicycle improvements, repair, and storage, if the bicycle is regularly
used for travel between the employee ' s residence and place of employment.
Amounts that are exc ludible from gross income for income tax purposes are also
excluded from wages for employment tax purpo ses.

70

Section 132(a)(5) and 132(f)(l )(D) .

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TREAS-17-0313-I-000444

 Description of Proposal
The propo sal repeals the exclusion from gross income and wages for qualified bicycle
comm uting reimbursements.

Effective Date
The proposal is effec tive for taxable years beginning afte r De cember 31, 2017.

10. Repeal of exclusion for qualified moving expense reimbursement
Present Law
Qualified moving expe nse reimbur sements are excludib le fro m an employee 's gross
income , and are defined as any amount rece ived (directly or indir ectly) from an employer as
payment for (or reimbursement of) expe nses which wo uld be deductible as movi ng expenses
under section 2 1772 if directly paid or incurred by the emp loyee . How ever, qualified moving
expen se reimbursements do not include amounts actually deducted by the individual.
71

Amount s excludibl e from gross income for income tax purposes as qualified moving
expense reimbursements are also excl uded from wages for emp loyme nt tax purposes.

Description of Proposal
The proposal repeals the exclusion from gross income and wages for qualified moving
expense reimbur seme nts.

Effective Date
The proposal is effec tive for taxable years beginning after December 31 , 2017.

11. Repeal of deduction for moving expenses
Present Law
Individuals are permitted an above- the-line deduction for moving expenses paid or
inc urred during the taxable year in connection with the commence ment of work by the taxpayer
as an employee or as a self-employed individual at a new principal place ofwork. 73 Such
71

Section l 32(a)(6) and 132(g).

72

Sec. 2 l 7(a). Individuals are allowed an itemized deduction for moving expenses pa id or incurred during
the taxable year in connection with the commencement of work by the taxpayer as an employee or as a selfemployed individual at a new principal place of work. Such expenses are deduc tible only if the move meets certain
conditions related to distance from the taxpayer's previous residence and the taxpayer 's status as a foll-time
employee in the new location.
73

Sec. 2 l 7(a).

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TREAS-17-0313-I-000445

 expenses are deductible only if the move meets certain cond itions related to distance from the
taxpayer's previous residence and the taxpayer ' s status as a full-time employee in the new
location.
Special rules apply in the case of a member of the Armed Forces of the Un ited States. In
the case of any such individua l who is on active duty, who moves pursuant to a military order
and incident to a permanent change of station, the limitations related to distance from the
taxpayer's previous residence and status as a full-time employee in the new location do not
apply. 74 Additionally , any moving and storage expenses which are furnished in kind to such an
individual, spouse, or dependents , or if such expenses are reimbursed or an allowance for such
expenses is provided , such amounts are excluded from gross income .75 Rules also apply to
exclude amounts furnished to the spouse and dependents of such an individual in the event that
such individuals move to a location other than to where the member of the Armed Forces is
moving.
Description of Proposal

The proposal genera lly repeals the deduction for moving expenses. However , under the
proposa l, rules providing for exclusio ns of amounts attributable to in-kind moving and storage
expenses (and reimbursements or allowances for these expenses) for members of the Armed
Forces of the United States (or their spouse or dependents) are not repealed.
Effective Date

The proposal is effective for taxable years beginning after December 31, 2017.
12. Modification to the limitation on wagering losses
Present Law

Losses sustained during the taxable year on wagering transactions are allowed as a
deduction only to the extent of the gains during the taxable year from such transactions. 76
Description of Proposal

The proposal clarifies the scope of "losses from wagering transactions " as that term is
used in section 165(d). The proposal provides that this term includes any deduction otherw ise
allowab le under chapter I of the Code incurred in carrying on any wager ing transaction.
The proposa l is intended to clar ify that the limitat ion on losses from wagering
transactions applies not only to the actua l costs of wagers incurred by an individual, but to other
74

Sec. 2 l 7(g).

75

Sec. 217(g)(2).

76

Sec. 165(d).

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TREAS-17-0313-I-000446

 expenses incurred by the individual in connection with the conduct of that individual's gambling
activity.77 The proposal clarifies, for instance, an individual's otherwise deductib le expenses in
traveling to or from a casino are subject to the limitation under section 165( d).
Effective Date

The propo sal is effec tive for taxable years beginning after December 3 1, 20 17.

77

The proposa l thus reverses the result reached by the Tax Court in Ronald A. Mayo v. Commissio ner, 136
T.C. 81 (2011). In that case, the Court held that a taxpayer's expenses incurred in the conduct oftbe trade or
business of gamb ling, other than the cost of wagers , were not limited by sec. l 65(d), and were thus ded uctible under
sec. 162(a).

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TREAS-17-0313-I-000447

 E. Increase in Estate and Gift Tax Exemption
Present Law
In general
A gift tax is imposed on certain lifetime transfers , and an estate tax is imposed on certain
transfers at death. A generation-skipping transfer tax generally is imposed on transfers , either
directly or in trust or similar arrangement , to a "skip person " (i.e., a beneficiary in a generation
more than one generation younger than that of the transferor). Transfers subject to the
generation-skipping transfer tax include direct skips, taxable terminations , and taxable
distributions.
Income tax rules determine the recipient ' s tax basis in property acquired from a decedent
or by gift. Gifts and bequests generally are excluded from the recipient's gross income. 78
Common features of the estate, gift and generation-skipping transfer taxes
Unified credit (exemption) and tax rates
Unified credit-A unified credit is available with respect to taxable transfers by gift and
at death. 79 The unified credit offsets tax, computed using the applicable estate and gift tax rates,
on a specified amount of transfers , referred to as the applicable exclusion amount , or exemption
amount. The exemption amount was set at $5 million for 201 l and is indexed for inflation for
later years. 8 For 2017, the inflation-indexed exemption amount is $5.49 million. 8 1 Exemption
used during life to offset taxable gifts reduces the amount of exemption that remains at death to
offset the value of a decedent's estate. An election is available under which exemption that is
not used by a decedent may be used by the decedent's surviving spouse (exemption portability).

°

Common tax rate table.-A common tax-rate table with a top marginal tax rate of 40
percent is used to compute gift tax and estate tax. The 40-percent rate applies to transfers in
excess of $1 million (to the extent not exempt). Because the exemption amount currently shields
the first $5.49 million in gifts and bequests from tax, transfers in excess of the exemption amount
generally are subject to tax at the highest marginal rate (40 percent).
Generation-skipping transfer tax exemption and rate.-The generation-skipping transfer
tax is a separate tax that can apply in addition to either the gift tax or the estate tax. The tax rate
78

Sec. 102.

79

Sec . 2010 .

°

8

For 2011 and later years, the gift and estate taxes were reunified , meanin g that the gift tax exemption
amount was increased to equal the estate tax exemption amount.
81
For 2017, the $5.49 exemption amount results in a unified credit of $2, 141,800 , after app lying the
applicable rates set forth in section 200l(c).

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 and exemption amount for generation-skipping transfer tax purposes , however , are set by
reference to the estate tax rules . Generation-skipping transfer tax is imposed using a flat rate
equal to the highest estate tax rate (40 percent). Tax is imposed on cumulative generationskipping transfers in excess of the generation-skipping transfer tax exemption amount in effect
for the year of the transfer. The generation-skipping transfer tax exemption for a given year is
equal to the estate tax exemption amount in effect for that year (currently $5.49 million).
Transfers between spouses.-A 100-percent marital deduction generally is permitted for
the value of property transferred between spouses. 82 In addition , transfers of "qualified
terminable interest property" also are eligible for the marital deduction. Qualified terminable
interest property is property: (1) that passes from the decedent , (2) in which the surviving spouse
has a "qualifying income interest for life ," and (3) to which an election under these rules applies.
A qualifying income interest for life exists if: (I) the surviving spouse is entitled to all the
income from the property (payable annually or at more frequent intervals) or has the right to use
the property during the spouse's life , and (2) no person has the power to appoint any part of the
property to any person other than the surviving spouse.
A marital deduction generally is denied for property passing to a surviving spouse who is
not a citizen of the United States. A marital deduction is permitted , however , for property
passing to a qualified domestic trust of which the noncitizen surviving spouse is a beneficiary. A
qualified domestic trust is a trust that has as its trustee at least one U.S. citizen or U.S.
corporation. No corpus may be distributed from a qualified domestic trust unless the U.S. trustee
has the right to withhold any estate tax imposed on the distribution.
Tax is imposed on ( 1) any distribution from a qualified domestic trust before the date of
the death of the noncitizen surviving spouse and (2) the value of the property remaining in a
qualified domestic trust on the date of death of the noncitizen surviving spouse. The tax is
computed as an additional estate tax on the estate of the first spouse to die.
Transfers to charity.-Contributions to section 501 (c)(3) charitable organizations and
certain other organizations may be deducted from the value of a gift or from the value of the
assets in an estate for Federal gift or estate tax purposes. 83 The effect of the deduction generally
is to remove the full fair market value of assets transferred to charity from the gift or estate tax
base; unlike the income tax charitable deduction , there are no percentage limits on the deductible
amount. For estate tax purposes , the charitable deduction is limited to the value of the
transferred property that is required to be included in the gross estate. 84 A charitable contribution

82

Secs. 2056 and 2523.

83

Secs. 2055 and 2522.

84

Sec. 2055(d).

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TREAS-17-0313-I-000449

 of a partial interest in property , such as a remainder or future interest, generally is not deductible
for gift or estate tax purposes. 85
Estate tax
Overview
The Code imposes a tax on the transfer of the taxable estate of a decedent who is a citizen
or resident of the United States. 86 The taxable estate is determined by deducting from the value
of the decedent 's gross estate any deductions provided for in the Code. After applying tax rates
to determine a tentative amount of estate tax, certain credits are subtracted to determine estate tax
liability. 87
Because the estate tax shares a common unified credit ( exemption) and tax rate table with
the gift tax, the exemption amounts and tax rates are described together above, along with certain
other common features of these taxes.
Gross estate
A decedent's gross estate includes, to the extent provided for in other sections of the
Code, the date-of-death value of all of a decedent 's property , real or personal , tangible or
intangible , wherever situated. 88 In general, the value of property for this purpose is the fair
market value of the property as of the date of the decedent's death, although an executor may
elect to value certain property as of the date that is six months after the decedent's death (the
alternate valuation date). 89

85

Secs. 2055(e)(2) and 2522(c)(2).

86

Sec. 200l(a).

87

More mechanically , the taxable estate is combined with the value of adjusted taxable gifts made during
the decedent's life (generally , post-I 976 gifts), before applying tax rates to determine a tentative tota l amount of tax.
The portion of the tentative tax attributable to lifetime g ifts is then subtracted from the tota l tentative tax to
determine the gross estate tax, i.e., the amount of estate tax before considering availab le credits. Credits are then
subtracted to determine the estate tax Liability.
This method of computation was designed to ensure that a taxpayer only gets one run up through the rate
brackets for all lifetime gifts and transfers at death, at a time when the thresholds for applying the higher marginal
rates exceeded the exemption amount. However , the higher ($5.49 million) present-law exemption amount
effectively renders the lower rate brackets irrelevant, because the top marginal rate bracket applies to all transfers in
excess of $ ! million. In other words , all transfers that are not exempt by reason of the $5.49 million exemption
amount are taxed at the highest marginal rate of 40 percent.
88

Sec. 203l(a) .

89

Sec. 2032.

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TREAS-17-0313-I-000450

 The gross estate includes not only property directly owned by the decedent , but also other
property in which the decedent had a beneficial interest at the time of his or her death. 90 The
gross estate also includes certain transfers made by the decedent prior to his or her death ,
including: (1) certain gifts made within three years prior to the decedent's death; 9 1 (2) certain
transfers of property in which the decedent retained a life estate ;92 (3) certain transfers taking
effect at death; 93 and (4) revocable transfers. 94 In addition , the gross estate also includes
property with respect to which the decedent had, at the time of death, a general power of
appointment (generally , the right to determine who will have beneficial ownership). 95 The value
of a life insurance policy on the decedent's life is included in the gross estate if the proceeds are
payable to the decedent's estate or the decedent had incidents of ownership with respect to the
policy at the time of his or her death. 96
Deductions from the gross estate
A decedent's taxable estate is determined by subtracting from the value of the gross
estate any deductions provided for in the Code.
Marital and charitable transfers.-As described above , transfers to a surviving spouse or to
charity generally are deductible for estate tax purposes. The effect of the marital and charitable
deductions generally is to remove assets transferred to a surviving spouse or to charity from the
estate tax base.
State death taxes.-An estate tax deduction is permitted for death taxes (e.g., any estate ,
inheritance , legacy, or succession taxes) actually paid to any State or the District of Columbia , in
respect of property included in the gross estate of the decedent. 97 Such State taxes must have
been paid and claimed before the later of: (1) four years after the filing of the estate tax return ;
or (2) (a) 60 days after a decision of the U.S. Tax Court determining the estate tax liability
becomes final, (b) the expiration of the period of extension to pay estate taxes over time under
section 6166, or (c) the expiration of the period of limitations in which to file a claim for refund
or 60 days after a decision of a court in which such refund suit has become final.

90

Sec . 2033.

91

Sec . 2035.

92

Sec. 2036.

93

Sec. 2037.

94

Sec . 2038.

95

Sec. 204 l.

96

Sec. 2042 .

97

Sec . 2058.

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TREAS-17-0313-I-000451

 Other deductions.-A deduction is available for funeral expenses , estate administration
expenses , and claims against the estate, including certain taxes.98 A deduction also is available
for uninsured casualty and theft losses incurred during the settlement of the estate. 99
Credits against tax
After accounting for allowable deductions , a gross amount of estate tax is computed.
Estate tax liability is then determined by subtracting allowable credits from the gross estate tax.
Unified credit - The most significant credit allowed for estate tax purposes is the unified
credit, which is discussed in greater detail above. 10 For 2017 , the value of the unified credit is
$2, 141,800, which bas the effect of exempting $5.49 million in transfers from tax . The unified
credit available at death is reduced by the amount of unified credit used to offset gift tax on gifts
made during the decedent's life.

°

Other credits. - Estate tax credits also are allowed for: ( 1) gift tax paid on certain pre1977 gifts (before the estate and gift tax computations were integrated) ; 101 (2) estate tax paid on
certain prior transfers (to limit the estate tax burden when estate tax is imposed on transfers of
the same property in two estates by reason of deaths in rapid succession); 102 and (3) certain
foreign death taxes paid (generally , where the property is situated in a foreign country but
included in the decedent 's U.S. gross estate). 103
Provisions affecting small and family-owned businesses and farms
Special-use valuation .-An executor can elect to value for estate tax purposes certain
"qualified real property" used in farming or another qualifyin g closely-held trade or busines s at
its current-use value, rather than its fair market value. 104 The maximum reduction in value for
such real property is $750,000 (adjusted for inflation occurring after 1997; the inflation-adjusted
amount for 2017 is $1, 120,000). In general , real property qualifies for special-use valuation only
if (1) at least 50 percent of the adjusted value of the decedent 's gross estate (including both real
and personal property) consists of a farm or closely-held business property in the decedent 's
estate and (2) at least 25 percent of the adjusted value of the gross estate consists of farm or

98

Sec. 2053.

99

Sec. 2054.

100

Sec. 20 I0.

101

Sec. 2012.

102

Sec.2013.

103

Sec. 2014. In certain cases, an election may be made to deduct foreign death taxes. See section

104

Sec. 2032A.

2053(d).

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TREAS-17-0313-I-000452

 closely held business real property. In addition , the property must be used in a qualified use
(e.g., farming) by the decedent or a member of the decedent's family for five of the eight years
before the decedent's death.

If , after a specia l-use valuation election is made , the heir who acquired the real property
ceases to use it in its qual ified use with in 10 years of the decedent ' s death , an additional estate
tax is imposed to recapture the entire estate-tax benefit of the special-use valuation.
Installment payment of estate tax for closely held businesses.-Under present law , the
estate tax generally is due within nine months of a decedent's death. However , an executor
generally may elect to pay estate tax attributab le to an interest in a close ly held business in two
or more installments (but no more than 10). 105 An estate is eligible for payment of estate tax in
installments if the value of the decedent ' s interest in a closely held business exceeds 35 percent
of the decedent's adjusted gross estate (i.e., the gross estate less certain deductions ). If the
election is made , the estate may defer payment of principal and pay only interest for the first five
years , followed by up to 10 annual installments of principal and interest. This provision
effectively extends the time for paying estate tax by 14 yea rs from the original due date of the
estate tax. A spec ial two-percent interest rate applies to the amount of deferred estate tax
attributable to the first $1 million (adjusted annua lly for inflation occurring after 1998; the
inflation-adjusted amount for 2017 is $1,490 ,000) in taxable value of a closely held busines s.
The interest rate applicable to the amount of estate tax attributable to the taxable value of the
closely held business in excess of $1 million (adjusted for inflation) is equal to 45 percent of the
rate applicable to underpayments of tax under section 6621 of the Code (i.e., 45 percent oftbe
Federal short-term rate plus three percentage points). 106 Interest paid on deferred estate taxes is
not deductible for estate or income tax purposes.

The gift tax
Overview
The Code imposes a tax for each calendar year on the transfer of property by gift during
such year by any individual , whether a resident or nonresident of the United States. 107 The
amount of taxable gifts for a calendar year is determined by subtracting from the total amount of
gifts made during the year: (1) the gift tax annual exclus ion (described below) ; and (2) allowable
deductions.
Gift tax for the current taxable year is determined by: ( 1) computing a tentative tax on
the comb ined amount of all taxab le gifts for the current and all p rior calendar years using the
common gift tax and estate tax rate table ; (2) computing a tentative tax only on all prior-year
gifts ; (3) subtracting the tentative tax on prior-year gifts from the tentative tax computed for all

105

Sec. 6 166.

106

The interest rate on this portion adju sts w ith the Federal sho rt-tenn rate.

107

Sec . 250 I (a) .

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TREAS-17-0313-I-000453

 years to arrive at the portion of the total tentative tax attributable to current-year gifts ; and ,
finally , (4) subtracting the amount of unified credit not consumed by prior-year gifts.
Because the gift tax shares a common unified credit (exemption) and tax rate table with
the estate tax, the exemption amounts and tax rates are described together above , along with
certain other common features of these taxes.
Transfers by gift
The gift tax applies to a transfer by gift regardless of whether: (1) the transfer is made
outright or in trust ; (2) the gift is direct or indirect ; or (3) the property is real or personal , tangible
or intangible. 108 For gift tax purposes , the value of a gift of property is the fair market value of
the property at the time of the gift. 109 Where property is transferred for less than full
consideration , the amount by which the value of the property exceeds the value of the
consideration is considered a gift and is included in computing the total amount of a taxpayer's
gifts for a calendar year. 110
For a gift to occur , a donor generally must relinquish dominion and control over donated
property. For example , if a taxpayer transfers assets to a trust established for the benefit of his or
her children , but retains the right to revoke the trust , the taxpayer may not have made a
completed gift, because the taxpayer has retained dominion and control over the transferred
assets. A completed gift made in trust , on the other hand , often is treated as a gift to the trust
beneficiaries.
By reason of statute , certain transfers are not treated as transfers by gift for gift tax
purposes. These include , for example , certain transfers for educational and medical purposes , 111
transfers to section 527 political organizations , 112 and transfers to tax-exempt organizations
described in sections 50l(c)(4) , (5), or (6). 113
Taxable gifts
As stated above , the amount of a taxpayer ' s taxable gifts for the year is determined by
subtracting from the total amount of the taxpayer's gifts for the year the gift tax annual exclusion
and any available deductions.

108

Sec. 2511 (a).

109

Sec. 2512(a).

110

Sec. 2512(b).

111

Sec. 2503(e).

112

Sec. 250l(a)(4 ).

113

Sec. 250l(a)( 6).

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 Gift tax annual exclusion.-Under present law, donors oflifetime gifts are provided an
annual exclusion of $ 14,000 per donee in 2017 (indexed for inflation from the 1997 annual
exclusion amount of $10,000) for gifts of present interests in property during the taxable year. 114
If the non-dono r spouse consents to split the gift with the donor spouse, then the annual
exclusion is $28,000 per donee in 2017. In general , unlimited transfers between spouses are
permitted without imposition of a gift tax. Special rules apply to the contributions to a qualified
tuition program ("529 Plan") including an election to treat a contri bution that exceeds the annual
exclusion as a contribution made ratably over a five-year period beginning with the year of the
contribution. 115
Marital and charitable deductions.-As describe d above , transfers to a surviving spouse or
to charity genera lly are deductible for gift tax purposes . The effect of the marital and charitab le
deductions genera lly is to remove assets transferred to a surviv ing spouse or to charity from the
gift tax base.
The generation-skipping transfer tax

A generation-skipping transfer tax genera lly is imposed (in addition to the gift tax or the
estate tax) on transfers , either directly or in trust or similar arrangement , to a "skip person" (i.e.,
a beneficiary in a generation more than one generation below that of the transferor). Transfers
subject to the generatio n-skipping transfer tax include direct skips, taxable termination s, and
taxable distributions.
Exemption and tax rate
An exemption generally equal to the estate tax exemption amount ($5.49 million for
20 17) is provided for each person making generation-skip ping transfers. The exemption may be
allocated by a transferor (or his or her executor) to transferred property, and in some cases is
automatically allocated. The allocat ion of generation-skipping tran sfer tax exemption effectively
reduces the tax rate on a generatio n-skipping tran sfer.
The tax rate on generation-skipping transfers is a flat rate of tax equal to the maximum
estate and gift tax rate (40 percent) multipl ied by the "inclusion ratio." The inclusion rat io with
respect to any property transferred indicates the amount of "generation-skipping transfer tax
exemption " allocated to a trust (or to property transferred in a direct skip) relative to the total
value of property transferred. 116 If , for examp le, a taxpayer transfers $5 million in property to a
trust and allocates $5 million of exemption to the transfer , the inclusion ratio is zero, and the
applicable tax rate on any subsequent generatio n-skipping transfers from the trust is zero percent
(40 percent multip lied by the inclusion ratio of zero). If , however, the taxpayer allocated only
$2.5 million of exemp tion to the transfer , the inclusion ratio is 0.5, and the applicable tax rate on
114

Sec. 2503(b ).

115

Sec. 529(c)(2) .

116

The inclusion ratio is one minus the appl icable fraction. The appl icable fraction is the amount of
exempt ion allocated to a trust (or to a direc t skip) divided by the value of assets transferred.

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TREAS-17-0313-I-000455

 any subsequent generation-skipping transfers from the trust is 20 percent (40 percent multiplied
by the inclusion ratio of 0.5). If the taxpayer allocates no exemption to the transfer , the inclusion
ratio is one , and the applicable tax rate on any subsequent generation-skipping transfers from the
trust is 40 percent (40 percent multiplied by the inclusion ratio of one).
Generation-skipping transfers
Generation-skipping transfer tax generally is imposed at the time of a generationskipping transfer - a direct skip , a taxable termination , or a taxable distribution.
A direct skip is any transfer subject to estate or gift tax of an interest in property to a skip
person. A skip person may be a natural person or certain trusts. All persons assigned to the
second or more remote generation below the transferor are skip persons (e.g., grandchildren and
great-grandchildren). Trusts are skip persons if (1) all interests in the trust are held by skip
persons , or (2) no person holds an interest in the trust and at no time after the transfer may a
distribution (including distributions and terminations) be made to a non-skip person.
A taxable termination is a termination (by death , lapse of time , release of power , or
otherwise) of an interest in property held in trust unless , immediately after such termination , a
non-skip person has an interest in the property , or unless at no time after the termination may a
distribution (including a distribution upon termination) be made from the trust to a skip person.
A taxable distribution is a distribution from a trust to a skip person (other than a taxable
termination or direct skip). If a transferor allocates generation-skipping transfer tax exemption to
a trust prior to the taxable distribution , generation-skipping transfer tax may be avoided.

Income tax basis in property received
In general
Gain or loss , if any, on the disposition of property is measured by the taxpayer ' s amount
realized (i.e., gross proceeds received) on the disposition , less the taxpayer ' s basis in such
property. Basis generally represents a taxpayer ' s investment in property with certain
adjustments required after acquisition. For example , basis is increased by the cost of capital
improvements made to the property and decreased by depreciation deductions taken with respect
to the property.
A gift or bequest of appreciated (or loss) property is not an income tax realization event
for the transferor. The Code provides special rules for determining a recipient's basis in assets
received by lifetime gift or from a decedent.
Basis in property received by lifetime gift
Under present law, property received from a donor of a lifetime gift generally takes a
carryover basis. "Carryover basis" means that the basis in the hands of the donee is the same as
it was in the hands of the donor. The basis of property transferred by lifetime gift also is
increased , but not above fair market value , by any gift tax paid by the donor. The basis of a
lifetime gift, however , generally cannot exceed the property's fair market value on the date of the

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TREAS-17-0313-I-000456

 gift. If a donor's basis in property is greater than the fair market value of the property on the
date of the gift, then, for purposes of determining loss on a subsequent sale of the property , the
donee's basis is the property's fair market value on the date of the gift.
Basis in property acquired from a decedent
Property acqui red from a decedent's estate generally takes a stepped-up basis. "Steppedup basis" means that the basis of property acquired from a decedent's estate generally is the fair
market value on the date of the decedent's death ( or, if the alternate valuation date is elected , the
earlier of six months after the decedent's death or the date the property is sold or distributed by
the estate). Providing a fair market value basis eliminates the recognition of income on any
appreciation of the property that occurred prior to the decedent's death and eliminates the tax
benefit from any unrealized loss.
In commun ity property states, a surviving spouse ' s one-ha lf share of commu nity property
held by the decedent and the surviving spouse (under the community property laws of any State,
U.S. possession , or foreign country) generally is treated as having passed from the decedent and,
thus, is eligible for stepped-up basis. Thus , both the decedent's one-half share and the surviving
spouse's one-half share are stepped up to fair market value. This rule applies if at least one-half
of the whole of the commun ity interest is includible in the decedent's gross estate.
Stepped-up basis treatment generally is denied to certain interests in foreign entities.
Stock in a passive foreign investment company (including those for which a mark-to-market
election has been made) generally takes a carryover basis , except that stock of a passive foreign
investment company for which a decedent shareho lder had made a qualified electing fund
election is allowed a stepped-up basis. Stock owned by a decedent in a domestic international
sales corporation ( or former domestic international sales corporation) takes a stepped-up basis
reduced by the amount (if any) which would have been included in gross income under section
995( c) as a dividend if the decedent bad lived and sold the stock at its fair market value on the
estate tax valuation date (i.e., generally the date of the decedent's death unless an alternate
valuation date is elected).
Description of Proposal

The proposal doubles the estate and gift tax exemption amount. This is accomplished by
increasing the basic exclusion amount provided in section 2010(c)(3) of the Code from $5
million to $10 million. The $10 million amount is indexed for inflation occurring after 201 1.
Effective Date

The proposa l is effective for estates of decedents dying, generation-skipp ing transfers ,
and gifts made after December 31, 20 17.

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TREAS-17-0313-I-000457

 II. ALTERNATIVEMINIMUMTAX REPEAL
1. Repeal of alternative minimum tax

Present Law
Individual alternative minimum tax

In general
An alternative minimum tax ("AMT") is imposed on an individual , estate , or trust in an

amount by which the tentative minimum tax exceeds the regular income tax for the taxable year.
For taxable years beginning in 2017 , the tentative minimum tax is the sum of ( 1) 26 percent of so
much of the taxab le excess as does not exceed $187,800 ($93,900 in the case of a married
individual filing a separate return) and (2) 28 percent of the remaining taxable excess. The
breakpoints are indexed for inflation. The taxable excess is so much of the alternative minimum
taxable income ("AMT!") as exceeds the exempt ion amount. The maximum tax rates on net
capital gain and dividends used in computing the regular tax are used in computing the tentative
minimum tax. AMT! is the taxable income adjusted to take account of specified tax preferences
and adjustments.
The exemption amounts for taxable years beginning in 2017 are: (1) $84,500 in the case
of married individuals filing a joint return and surviving spouses ; (2) $54,300 in the case of other
unmarried individuals; (3) $42,250 in the case of married individuals filing separate returns ; and
(4) $24,100 in the case of an estate or trust. For taxable years beginning in 2017 , the exemption
amounts are phased out by an amount equal to 25 percent of the amount by which the
individual ' s AMT! exceeds (1) $160,900 in the case of married individuals filing a joint return
and surviving spouses , (2) $120,700 in the case of other unmarried individuals , and (3) $80,450
in the case of married individuals filing separate returns or an estate or a trust. The amounts are
indexed for inflation.
AMT! is the taxpayer's taxable income increased by certain preference items and
adjusted by determining the tax treatment of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items.
Preference items in computing AMT!
The minimum tax preference items are :
1. The excess of the deduction for percentage depletion over the adjusted basis of each

mineral property (other than oil and gas properties) at the end of the taxable year.
2. The amount by which excess intangible drilling costs (i.e., expenses in excess the
amount that would have been allowable if amortized over a 10-year period) exceed
65 percent of the net income from oil, gas , and geothermal properties. This preference
applies to independent producers only to the extent it reduces the producer ' s AMTI
(determined without regard to this preference and the net operating loss deduction) by
more than 40 percent.

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TREAS-17-0313-I-000458

 3. Tax-exempt interest income on private activity bonds (other than qualified 501(c)(3)
bonds, certain housing bonds, and bonds issued in 2009 and 2010) issued after
August 7, 1986.
4. Accelerated depreciation or amortization on certain property placed in service before
January 1, 1987.
5. Seven percent of the amount excluded from income under section 1202 (relating to
gains on the sale of certain small business stock).

In addition , losses from any tax shelter farm activity or passive activities are not taken
into account in computing AMTI.
Adjustments in computing AMTI
The adjustments that individuals must make to compute AMTI are:
I. Depreciation on property placed in service after 1986 and before January 1, 1999, is
computed by using the generally longer class lives prescribed by the alternative
depreciation system of section 168(g) and either (a) the straight-line method in the
case of property subject to the straight-line method under the regular tax or (b) the
150-percent declining balance method in the case of other property. Depreciation on
property placed in service after December 31, 1998, is computed by using the regular
tax recovery periods and the AMT methods described in the previous sentence.
Depreciation on property acquired after September 10, 2001, which is allowed an
additional allowance under section l 68(k) for the regular tax is computed without
regard to any AMT adjustments.
2. Mining exploration and development costs are capitalized and amortized over a 10year period.
3. Taxable income from a long-term contract (other than a home construction contract)
is computed using the percentage of completion method of accounting.
4. Depreciation on property placed in service after 1986 and before January 1, 1999, is
computed by using the generally longer class lives prescribed by the alternative
depreciation system of section 168(g) and either (a) the straight-line method in the
case of property subject to the straight-line method under the regular tax or (b) the
150-percent declining balance method in the case of other property. Depreciation on
property placed in service after December 31, 1998, is computed by using the regular
tax recovery periods and the AMT methods described in the previous sentence.
Depreciation on property acquired after September 10, 2001, which is allowed an
additional allowance under section l 68(k) for the regular tax is computed without
regard to any AMT adjustments.
5. Mining exploration and development costs are capitali zed and amortized over a 10year period.

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TREAS-17-0313-I-000459

 6. Ta xable income from a long-term cont rac t (other than a home construc tion contract)
is comp ut ed using the percentage of completion method of accounting.
7. The amortization deduction allowed for pollution con trol facilities plac ed in service
befor e January 1, 1999 (gene rall y dete rmined us ing 60-month amortization for a
portion of the cost of the facility und er the regular tax) , is calculated under the
alternative depreciation system (ge nera lly , using longer class lives and the straigh tline method). The amortization deduction allowed for pollution control facilities
p laced in serv ice after Dece mber 31, 1998, is calcu lated using the regular tax
recovery periods and the stra ight-line method.
8.

Miscellaneous itemized deductions are not allowed.

9. Itemize d dedu ction s for State , local , and foreig n real prop erty taxes ; State and loca l
per sona l propert y taxes ; State, local, and foreign income , war profits , and excess
profit s taxes ; and State and local sales taxes are not allowed.
10. Me dical expenses are allowed only to the exten t they exceed ten percent of the
taxpayer ' s adjusted gross income.
11. Deductions for interest on home equity loan s are not allowed.

I 2. The standa rd deduction and the deduction for personal exe mption s are not allowed.
13. The amount allowable as a deduc tion for circ ulat ion expenditu res is capitalized and
amortized over a three-year period.
14. The amount allowable as a deduc tion for research and experim entat ion expenditures
from passive activities is cap italiz ed and amortized over a l 0-yea r period.

15. The regular ta x rul es relating to incentive stock options do not appl y.
Other rules
The taxpayer ' s net operating loss deduction generall y cannot reduce the taxpayer ' s AMII
by more than 90 per cent of the AMII (determ ined without the net operating loss deduction).
The alterna tive minimum tax foreign tax credi t reduces the tentative minimum tax.
The vario us nonrefundable business credits allowed under the regular tax genera lly are
not allowed against the AMT. Ce rtain exce ption s apply .
If an individual is subj ect to AMT in any year , the amount of tax exceedi ng the
taxpayer's regu lar tax liability is allowed as a credit (the "AMT credit ") in any subsequent
taxable year to the exte nt the taxpaye r' s regular tax liabi lity exceeds his or her tentative
min imum tax liabilit y in such subseque nt year. The AMT cred it is allowed only to the extent
that the taxpayer ' s AMT liab ility is the result of adjustments that are timing in natu re. The

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TREAS-17-0313-I-000460

 individual AMT adjustments relating to itemized deductions and personal exemptions are not
timing in nature , and no minimum tax credit is allowed with respect to these items.
An individual may elect to write off certain expenditures paid or incurred with respect of
circulation expenses , research and experimental expenses , intangible drilling and development
expenditures , development expenditures , and mining exploration expenditures over a specified
period (three years in the case of circulation expenses , 60 months in the case of intangible
drilling and development expenditures , and 10 years in case of other expenditures). The election
applies for purposes of both the regular tax and the alternative minimum tax.

Corporate alternative minimum tax
In general
An AMT is also imposed on a corporation to the extent the corporation's tentative
minimum tax exceeds its regular tax. This tentative minimum tax is computed at the rate of
20 percent on the AMT! in excess of a $40,000 exemption amount that phases out. The
exemption amount is phased out by an amount equal to 25 percent of the amount that the
corporation's AMT! exceeds $150 ,000.

AMT! is the taxpayer's taxable income increased by certain preference items and
adjusted by determining the tax treatment of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items.
A corporation with average gross receipts ofless than $7.5 million for the prior three
taxable years is exempt from the corporate minimum tax. The $7.5 million threshold is reduced
to $5 million for the corporation ' s first three-taxable year period.
Preference items in computing AMT!
The corporate minimum tax preference items are :
I. The excess of the deduction for percentage depletion over the adjusted basis of the
property at the end of the taxable year. This preference does not apply to percentage
depletion allowed with respect to oil and gas properties .
2. The amount by which excess intangible drilling costs arising in the taxable year
exceed 65 percent of the net income from oil, gas, and geothermal properties. This
preference does not apply to an independent producer to the extent the preference
would not reduce the producer ' s AMT! by more than 40 percent.
3. Tax-exempt interest income on private activity bonds (other than qualified 50l(c)(3)
bonds , certain housing bonds , and bonds issued in 2009 and 2010) issued after
August 7, 1986.
4. Accelerated depreciation or amortization on certain property placed in service before
January 1, 1987.

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TREAS-17-0313-I-000461

 Adjustments in computing AMT!
The adjustments that corporations must make in computing AMTI are:
1. Depreciation on property placed in service after 1986 and before January 1, 1999,
must be computed by using the generally longer class lives prescribed by the
alternative depreciation system of section 168(g) and either (a) the straight-line
method in the case of property subject to the straight-line method under the regular tax
or (b) the 150-percent declining balance method in the case of other property.
Depreciation on property placed in service after December 31, 1998, is computed by
using the regular tax recovery periods and the AMT methods described in the previous
sentence. Depreciation on property which is allowed "bonus depreciation " for the
regular tax is computed without regard to any AMT adjustments.
2. Mining exploration and development costs must be capitalized and amortized over a
10-year period.
3. Taxable income from a long-term contract (other than a home construction contract)
must be computed using the percentage of completion method of accounting.
4. The amortization deduction allowed for pollution control facilities placed in service
before January 1, 1999 (generally determined using 60-month amortization for a
portion of the cost of the facility under the regular tax) , must be calculated under the
alternative depreciation system (generally , using longer class lives and the straight-line
method). The amortization deduction allowed for pollution control facilities placed in
service after December 31, 1998, is calculated using the regular tax recovery periods
and the straight-line method.
5. The special rules applicable to Merchant Marine construction funds are not applicable.
6. The special deduction allowable under section 833(b) for Blue Cross and Blue Shield
organizations is not allowed.
7. The adjusted current earnings adjustment applies , as described below.
Adjusted current earning ("ACE ") adjustment
The adjusted current earnings adjustment is the amount equal to 75 percent of the amount
by which the adjusted current earnings of a corporation exceed its AMTI (determined without the
ACE adjustment and the alternative tax net operating loss deduction). In determining ACE the
following rules apply:
I. For property placed in service before 1994, depreciation generally is determined using
the straight-line method and the class life determined under the alternative
depreciation system.

2. Amounts excluded from gross income under the regular tax but included for purposes
of determining earnings and profits are generally included in determining ACE.

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TREAS-17-0313-I-000462

 3. The inside build-up of a life insuranc e contract is included in ACE (and the related
premiums are deductible).
4. Intangible drilling costs of integrate d oil comp anies must be capitalized and amortized
over a 60-month period.
5. The regular tax rules of section 173 (allowing circulation expenses to be amortized)
and section 248 (allowing organizational expenses to be amortized) do not apply.
6. Inventory must be calculated using the FIFO , rather than LIFO , method.
7. The installment sales method generally may not be used.
8. No loss may be recognized on the exchange of any pool of debt obligations for another
pool of debt obligations having substantially the same effective interest rates and
maturities.
9. Depletion (other than for oil and gas properties) must be calculated usin g the cost ,
rather than the percentage , method .
10. In certain cases , the assets of a corporation that has under gone an ownership change
must be stepped down to their fair market values.
Other rules
The taxpayer 's net operating loss carryover generall y cannot reduce the taxpa ye r 's AMT
liability by more than 90 percent of AMTI determined without this deduction.
The various nonrefundable business credits allowed under the regular tax generally are
not allowed against the AMT. Certain exceptions apply.
If a corporation is subject to AMT in any year , the amount of AMT is allowed as an
AMT credit in any subsequent taxable year to the extent the taxpayer's regular tax liability
exceeds its tentative minimum tax in the subsequent year. Corporations are allowed to claim a
limited amount of AMT credits in lieu of bonu s depreciation.
A corporation may elect to w rite off certain expenditures paid or incurred w ith respect of
circulation expenses , research and experimental expenses , intangible drilling and development
expenditures , development expenditures , and mining exploration expenditures over a specifie d
period (three years in the case of circulation expenses , 60 months in the case of intangible
drillin g and development expenditures , and 10 years in case of other expenditures). The election
applies for purposes of both the regular tax and the alternative minimum tax.

Description of Proposal
The propo sal repeals the individual and corporate alternative minimum tax.

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TREAS-17-0313-I-000463

 The proposal allows the AMT credit to offset the taxpayer ' s regular tax liabil ity for any
taxable year. In addition , the AMT credit is refundable for any taxable year beginning after 2017
and before 2022 in an amount equal to 50 percent (100 percent in the case of taxable years
beginning in 2021) of the excess of the minimum tax credit for the taxable year over the amount
of the credit allowable for the year against regular tax liability. Thus , the full amount of the
minimum tax credit will be allowed in taxable years beginning before 2022.
Effective Date

The proposal applies to taxable years beginning after December 31, 2017.

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TREAS-17-0313-I-000464

 III. BUSINESS TAX REFORM
A. Tax Rates
1. Reduction in corporate tax rate

Present Law
Corporate taxable income is subject to tax under a four-step graduated rate structure. 117
The top corporate tax rate is 35 percent on taxable income in excess of $10 million. The
corporate taxable income brackets and tax rates are as set forth in the table below.

Taxable Income

Tax rate (percent)

Not over $50 ,000

15

Over $50,000 but not over $75,000

25

Over $75,000 but not over $10,000 ,000

34

Over $10,000,000

35

An additional five-percent tax is imposed on a corporation ' s taxable income in excess of

$ 100,000. The maximum additional tax is $ 11,750. Also , a second additional three-percent tax
is imposed on a corporation's taxable income in excess of$15 million. The maximum second
additional tax is $100 ,000.
Certain personal service corporations pay tax on their entire taxable income at the rate of
35 percent. 118
Present law provides if the maximum corporate tax rate exceeds 35 percent , the
maximum rate on a corporation's net capital gain will be 35 percent. 119

Description of Proposal
The proposal eliminates the graduated corporate rate structure and instead taxes corporate
taxable income at 20 percent.
The proposal eliminates the special tax rate for personal service corporations.

117

Sec. 1 l(a) and (b)(l).

118

Sec. 11(b)(2).

119

Sec . 1201(a).

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TREAS-17-0313-I-000465

 The proposal repeals the maximum corporate tax rate on net capital gain as obsolete.
For taxpayers subject to the normalization method of accounting (e.g., regulated public
utilities) , the proposal provides for the normalization of excess deferred tax reserves resulting
from the reduction of corporate income tax rates (with respect to prior depreciation or recovery
allowances taken on assets placed in service before the date of enactment).
Effective Date

The proposal applies to taxable years beginning after December 31, 2018.
2. Reduction of dividends received deductions to reflect lower corporate tax rate
Present Law

Corporations are generally taxable on their income. 120 With respect to dividends receive d
from other taxable domestic corporatio ns, however , a corporation is allowed a deduction. I2 I The
amount of the deduction is generally equal to 70 percent of the dividend received.

In the case of any dividend received from a 20-percent owned corporation, the amount of
the deduction is equal to 80 percent of the dividend received. 122 The term "20-percent owned
corpora tion" means any corporation if 20 percent or more of the stock of such corporation (by
vote and value) is owned by the taxpayer. For this purpose , certain preferred stock is not taken
into account.
In the case of a dividend received from a corporatio n that is a member of the same
affiliated group , a corporation is generally allowed a deduction equal to 100 percent of the
dividend received. I23
Description of Proposal

The proposal reduces the 70 perce nt dividends rece ived deduction to 50 percent and the
80 percent dividends received deduction to 65 percent. 124

120

Sec. 11(a).

121

Sec. 243(a). Such dividends are taxed at a maximum rate of I 0.5 percent (30 percent of the top
corporate tax rate of 35 percent).
122
Sec. 243(c). Such dividends are taxed at a maximum rate of7 percent (20 percent of the top corporate
tax rate of 35 percen t).
123

Sec. 243(a)(3) and (b)(I). For this purpose , the tenn "affiliated group" genera lly has the meaning given
such tenn by section l 504(a). Sec. 243(b )(2).
124

Such dividends would be taxed at a maximum rate of IO percent (50 percent of the top corporate tax
rate of 20 percent) and 7 percent (35 percent of the top corporate tax rate of 20 percent) , respectively.

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 Effective Date

The proposal applies to taxable years beginning after December 31, 2018.

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TREAS-17-0313-I-000467

 B. Small Business Reforms
1. Modification of rules for expensing depreciable business assets

Present Law
A taxpayer generall y must capitalize the cost of propert y used in a trade or business or
held for the production of income and recover such cost over time through annual deductions for
depreciation or amortization. 125 Tangible property generally is depreciated under the modified
accelerated cost recovery system ("MACRS"), which determines depreciation for different types
of property based on an assigned applicable depreciation method , recovery period , 126 and
convention. 127

Election to expense certain depreciable business assets
A taxpayer may elect under section 179 to deduct ( or "ex pense ") the cost of qualifying
property , rather than to recover such costs through depreciation deductions , subject to limitation.
The maximum amount a taxpayer may expense is $500,000 of the cost of qualifying property
placed in service for the taxable year. 128 The $500,000 amount is reduced (but not below zero)
by the amount by which the cost of qualifying property placed in service during the taxable year
exceeds $2,000 ,000. 129 The $500,000 and $2,000 ,000 amounts are indexed for inflation for
taxable years beginning after 2015. 130

In general, qualifying property is defined as depreciable tangible personal property that is
purchased for use in the active conduct of a trade or business. Qualifying property also includes
off-the-shelf computer software and qualified real property (i.e., qualified leasehold
improvement property , qualified restaurant property , and qualified retail improvement

125

See secs. 263(a) and 167. However , where property is not used exc lusively in a taxpayer's business,
the amount eligible for a deduction must be reduced by the amount related to persona l use. See, e.g., section 280A.
126

The applicable recovery period for an asset is determined in part by statute and in part by historic
Treasury gu idance. Exercisi.n g authority granted by Congress , the Secretary issued Rev. Proc. 87-56 , 1987-2 C.B.
674 , laying out the framework of recovery periods for enumerated classes of assets. The Secretary clarified and
modified the list of asset classes in Rev. Proc . 88-22, 1988-l C.B. 785. In November 1988, Congress revoked the
Secretary's authority to modify the class lives of depreciable property. Rev. Proc. 87-56 , as modified , remains in
effect except to the extent that the Congress has, since l 988, statutorily mod ified the recovery period for certain
depreciable assets , effectively superseding any administrative guidance with regard to such property.
127

Sec. 168.

128

Sec. l79(b)(l).

129

Sec. 179(b)(2).

130

Sec. l 79(b )(6).

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 property). 131 Qualifying property excludes any property described in section S0(b) (i.e., certain
property not eligible for the investment tax credit). 132
Passenger automobiles subject to the section 280F limitation are eligible for section 179
expensing only to the extent of the dollar limitations in section 280F. For sport utility vehicles
above the 6,000 pound weight rating and not more than the 14,000 pound weight rating , which
are not subject to the limitation under section 280F, the maximum cost that may be expensed for
any taxable year under section 179 is $25,000 (the "sport utility vehicle limitation "). 133
The amount eligible to be expensed for a taxable year may not exceed the taxable income
for such taxable year that is derived from the active conduct of a trade or business (determined
without regard to this provision). 134 Any amount that is not allowed as a deduction because of
the taxable income limitation may be carried forward to succeeding taxable years (subject to
limitations ).
No general business credit under section 38 is allowed with respect to any amount for
which a deduction is allowed under section 179. 135 If a corporation makes an election under
section 179 to deduct expenditures , the full amount of the deduction doe s not reduce earnings
and profits. Rather, the expenditures that are deducted reduce corporate earnings and profits
ratably over a five-year period. 136
An expensing election is made under rules prescribed by the Secretary. 137 In general, any
election or specification made with respect to any property may not be revoked except with the
consent of the Commi ssioner. However, an election or spec ification under section 179 may be
revoked by the taxpayer without consent of the Commi ssioner.

131

Sec. 179(d)(l)(A)(ii) and (f).

132

Sec. I 79( d)(I) flush language. Property described in section 50(b) is generally property used outside
the United States, certain property used for lodging, property used by certain tax exempt organ izations, and property
used by governmenta l units and foreign persons or entities.
133
Sec . 179(b)(5) . For this purpose, a sport utility vehicle is defined to exclude any vehicle that: (I) is
designed for more than nine individuals in seating rearward of the driver 's seat; (2) is equipped with an open cargo
area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length;
or (3) has an integral enclosure , fully enclosing the driver compartment and load carrying device, does not have
seating rearward of the driver 's seat, and has no body section protruding more than 30 inches ahead of the leading
edge of the windshield.
134

Sec. l 79(b )(3).

135

Sec. l 79(d)(9).

136

Sec. 3 l 2(k)(3)(B).

137

Sec. l79 (c)(l).

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 Description of Proposal

The proposal increases the maximum amount a taxpayer may expense under section 179
to $1,000,000 , and increases the phase-out threshold amount to $2,500,000. Thus, the proposal
provides that the maximum amount a taxpayer may expense , for taxable years beginning after
2017, is $1,000,000 of the cost of qualifying property placed in service for the taxable year. The
$ 1,000,000 amount is reduced (but not below zero) by the amount by which the cost of
qualifying property placed in service during the taxable year exceeds $2,500,000. The
$ 1,000,000 and $2,500,000 amounts , as we ll as the $25,000 sport utility vehicle limitation , are
indexed for inflation for taxable years beginning after 2018.
The proposal expands the definition of section 179 property to include certain depreciable
tangible personal property used predominantly to furnish lodging or in connection with
furnishing lodging. 138
The proposal also expands the definition of qualified real property eligible for
section 179 expensing to include any of the following improvements to nonresidential real
property placed in service after the date such property was first placed in service: roofs; heating ,
ventilation , and air-conditioning property ; fire protection and alarm systems ; and secur ity
systems.
Effective Date

The proposal applies to property placed in service in taxable years beginning after
bee -em~ .; 31, 2017.
2. Modifications of gross receipts test for use of cash method of accounting by corporations
and pgrtnerships
Present Law
General rule for methods of accounting

Section 446 generally allows a taxpayer to select the method of accou nting to be used to
compute taxable income, provided that such method clearly reflects the income of the taxpayer.
The term "method of accounting" includes not only the overall method of accounting used by the
taxpayer , but also the accounting treatment of any one item. 139 Permissible overall methods of
accounting include the cash receipts and disbursements method ("cash method") , an accrual
method , or any other method (including a hybrid method) permitted under regulations prescribed

138

As defined in section S0(b )(2). Property used predominantl y to furnish lodging or in collUection with
furnishin g lodging generall y includes , e.g., beds and other furniture , refrigerators , ranges, and other equipment used
in the living quarters of a lodging facility such as au apartment house , dormitory , or any other facility (or part of a
facility) where sleepin g accommodat ions are provided and let. See Treas. Reg. sec. 1.48-l(h).
139

Treas. Reg. sec. 1.446-1(a)( l ).

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 by the Secretary. 140 Examples of any one item for whic h an accounting method may be adopted
include cost recovery , 14 1 revenue recognition , 142 and timing of deductions. 143 For each separate
trade or business , a taxpayer is entitled to adopt any permissible method , subject to certain
restrictions. 144
A taxpayer filing its first return may adopt any permissible method of accounting in
comp uting taxable income for such year. 145 Except as otherwise provided , section 446( e)
requires taxpayers to secure consent of the Secretary before chang ing a method of accounting.
The regulations under this section provide rules for determining: (1) what a method of
accounting is, (2) how an adopt ion of a method of accou nting occurs , and (3) how a change in
method of accounting is effectuated. 146

Cash and accrual methods
Taxpayers using the cash method genera lly recognize items of income when actually or
construct ive ly received and items of expense when paid. The cash method is administratively
easy and provides the taxpayer flexibility in the timing of income recognition. It is the method
generally used by most individual taxpayers , including farm and nonfarm sole proprietorships.
Taxpayers using an accrual method genera lly accrue items of income when all the events
have occurred that fix the right to receive the income and the amount of the income can be
determined with reasonable accuracy. 147 Taxpayers using an accrual method of accounting
generally may not deduct items of expense prior to when all events have occurred that fix the
ob ligation to pay the liability, the amount of the liab ility can be determined with reasonable
accuracy , and economi c performance has occurred. 148 Accrua l methods of accounti ng generally
result in a more accurate measure of economic income than does the cash method. The accrua l
method is often used by businesses for financial accounting purposes.
A C corporation , a partnership that has a C corporation as a partner , or a tax-exempt trust
or corporat ion with unrelated business income genera lly may not use the cas h method.
140

Sec. 446(c).

141

See, e.g., secs. 167 and 168.

142

See, e.g., secs. 45 l and 460.

143

See, e.g., secs. 46 l and 467.

144

Sec. 446(d); Treas. Reg. sec. l.44 6-l (d).

145

Treas. Reg. sec. l.44 6-l(e )( l) .

146

Treas. Reg. sec. l.446-l(e ).

147

See,e.g., sec.451.

148

See, e.g., sec. 46 1.

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TREAS-17-0313-I-000471

 Exceptions are made for farming businesses , qualified personal service corporations, and the
aforementioned entities to the extent their average annual gross receipts do not exceed $5 million
for all prior years (including the prior taxable years of any predecessor of the entity) (the "gross
receipts test"). The cash method may not be used by any tax shelter. 149 In addition , the cash
method generally may not be used if the purchase, production , or sale of merchandise is an
income producing factor. 150 Such taxpayers generally are required to keep inventories and use
an accrual method with respect to inventory items. 151
A farming business is defined as a trade or business of farming, including operating a
nursery or sod farm, or the raising or harvesting of trees bearing fruit, nuts, or other crops,
timber , or ornamental trees. 152 Such farming businesses are not precluded from using the cash
method regardless of whether they meet the gross receipts test. However , section 447 generally
requires a farming C corporation (and any farming partnership if a corporation is a partner in
such partnership) to use an accrual method of accounting. Section 44 7 does not apply to nursery
or sod farms, to the raising or harvesting of trees (other than fruit and nut trees), nor to farming
C corporations meeting a gross receipts test with a $1 million threshold. For family farm
C corporations, the threshold under the gross receipts test is $25 million.
A qualified personal service corporation is a corporation: (1) substantially all of whose
activities involve the performance of services in the fields of health , law, engineering ,
architecture , accounting, actuarial science , performing arts , or consulting , and (2) substantially
all of the stock of which is owned by current or former employees performing such services,
their estates, or heirs. Qualified personal service corporations are allowed to use the cash
method without regard to whether they meet the gross receipts test.
Description of Proposal

The proposal expands the universe of taxpayers that may use the cash method of
accounting. Under the proposal, the cash method of accounting may be used by taxpayers , other
than tax shelters , that satisfy the gross receipts test. The gross receipts test allows taxpayers with
annual average gross receipts that do not exceed $ 15 million for the three prior taxable-year
149

Secs. 448(a)(3) and (d)(3) and 461 (i)(3) and (4). For this purpose, a tax shelter includes: (I) any
enterpr ise (other than a C corporation) if at any time interests in such enterprise have been offered for sale in any
offering required to be registered with any Federa l or State agency having the author ity to regulate the offering of
securities for sale; (2) any syndicate (within the meaning of section 1256(e)(3)(B)) ; or (3) any tax shelter as defined
in section 6662( d)(2)(C)(ii) . In the case of a farming trade or business , a tax shelter includes any tax shelter as
defined in section 6662(d)(2)(C)(ii) or any partnership or any other enterprise other than a corporation which is not
an S corporation engaged in the trade or business of farming , (1) if at any time interests in such partnership or
enterprise have been offered for sale in any offering required to be registered with any Federal or State agency
having authority to regulate the offering of securities for sale or (2) if more than 35 percent of the losses during any
period are allocable to limited partners or limited entrepreneurs.
150

Treas . Reg. secs. l.446-l(c)(2) and 1.471-1.

151

Sec. 471 and Treas. Reg. secs. l.446-l(c)(2) and 1.471-1.

152

Sec. 448(d)(l).

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TREAS-17-0313-I-000472

 period (the "$15 million gross receipts test") to use the cash method.
is indexed for inflation for taxable years beginning after 20 18.

153

The $ 15 milli on amount

The proposal retains the exceptions from the required u se of the accrua l method for
qualified personal serv ice corporations and taxpayers other than C corporat ions. Thus , qualified
pe rsonal serv ice corpora tions, partner ship s w ithout C co rporation part ners, S corporations , and
other passthrough entities are allowed to u se the cas h method wit hout regard to whe the r they
meet the $15 million gross receipts test , so lon g as the use of such method clearly reflects
incom e. 154
The proposal expa nd s the universe of far min g C co rpo rat ions (and farmin g partnerships
with a C corpora tion partner) that may use the cash method to include any farming C corpora tion
(or farming partnership with a C corporat ion partner) that meets the $ 15 million gross receipts
test. The prop osa l reta ins tbe $25 millio n dollar limit for fami ly farmin g corpora tions, but uses
the $15 million gross receipts test in section 448 (su bstitutin g a $25 million thresho ld for the $15
million threshold). The $25 million amount is indexed for inflation for taxab le years beginning
after 20 18.
If a taxpayer chan ges its method of acco untin g be cause it is either prohibited or no longer
prohibited from using the cas h method by reason of this proposal , such cha nge is treated as
initiated by the taxpayer and made wi th the consent of the Secretary.

Effective Date
The proposal app lies to taxable years be gin nin g after De ce mber 31, 2017. App licati on of
these rul es is a cha nge in the taxpayer's method of accounting for purposes of sect ion 481.

153

Consistent with present law, the cash method generally may not be used by taxpayers iftb e purchase,
product ion, or sale of merchandise is an income-producin g factor. However , for taxable years beginnin g after
December 31, 2017, under other provisions described in this document , an exception to the requ irement to use
inventories is provided for taxpayers that meet the $ l 5 million gross receipts test, thus allowing such taxpayers to
also use the cash method . See section Ill.B.3 . of this docUlllent (Clarification of inventory accountin g rules for
small businesses). In addition, the cash method may not be used by a tax shelter.
154

Consistent with present law, the cash method generally may not be used by taxpayers if the purchase ,
production , or sale of merchandise is an income-producin g factor. However , for taxable years beginning after
December 3 l , 2017, under other provisions of described in this document , an exception to the requirement to use
inventories is provided for taxpayers that meet the $ 15 million gross receipts test, thus allowing such taxpayers to
also use the cash method. See section Ill.B.3. of this doclllllent (Clarification of inventory accounting rules for
small businesses). In addition, the cash method may not be used by a tax shelter.

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TREAS-17-0313-I-000473

 3. Clarificatio n of inventory accounting rules for small businesses
Present Law
In genera l, for Federal income tax purposes, taxpayers must account for inventories if the
production, purchase, or sale of merchandise is an income-produ cing factor to the taxpayer . 155
Treasury regulations also provide that in any case in which the use of inventories is necessary to
clearly reflect income, the accrual method must be used with regard to purchases and sales. 156
However, an exception is provided for taxpayers whose average annual gross receipts do not
exceed $1 million .157 A second exception is provided for taxpayers in certain industries whose
average annual gross receipts do not exceed $10 million and that are not otherwise prohibited
from using the cash method under section 448. 158 Such taxpayers may account for inventory as
materials and supplies that are not incidental (i.e., "no n-incidental materials and supplies"). 159
In those circumstances in which a taxpayer is required to account for inventory, the
taxpayer must maintain inventory records to determine the cost of goods sold during the taxab le
period. Cost of goods sold genera lly is determined by adding the taxpayer's inventory at the
beginning of the period to the purchases made during the period and subtracting from that sum
the taxpayer's inventory at the end of the period .
Because of the difficulty of accounting for inventory on an item-by-item basis , taxpaye rs
often use conventions that assume certain item or cost flows. Among these conventions are the
first-in, first-out ("FIFO") method, which assumes that the items in ending inventory are those
most recently acquired by the taxpayer , and the last-in, first-out ("LIFO") method , which
assumes that the items in ending inventory are those earliest acquired by the taxpayer.

Description of Proposal
The propo sal exempts certain taxpayers from the requirement to keep inventories.
Specifically, taxpayers that meet the $15 million gross receipts test 160 are not required to account
for inventories under sect ion 471 161, but rather may use a method of accounting for inventories
155

Sec. 47l(a) and Treas. Reg. sec. 1.471- 1.

156

Treas. Reg. sec. l.446 - l(c)(2).

157

Rev. Proc . 2001 - 10, 2001- 1 C.B. 272.

158

Rev. Proc. 2002 -28, 2002- 1 C.B. 815.

159

Treas. Reg. sec. l. l 62-3(a)( l ). A deduction is genera lly permitted for the cost of non-incidental
materials and supplies in the taxable year in which they are first used or are consumed in the taxpayer's operations.
160

The $ 15 million gross receipts test is described in section III.B.2. of this documen t (Modifications of
gross receipts test for use of cash method of accounting by corporations and partnerships) .
161

In the case of a sole proprie torship , the $ 15 million gross receipts test is applied as if the sole
proprietorship were a corporation. The cash method genera lly may not be used by taxpayers if the purchase ,
production , or sale of merchandise is an income-producin g factor. However , for taxpayers that meet the $ 15 million

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TREAS-17-0313-I-000474

 that either (1) treats inventories as non-incidental materials and supplies
the taxpayer's financial accounting treatment of inventorie s. 163

162
,

or (2) conforms to

If a taxpayer changes its method of accounting because it is either no longer required or is
required to use inventories by reason of this proposal , such change is treated as initiated by the
taxpa yer and made with the consent of the Secretary.

Effective Date
The propo sal applies to taxable years beginning after December 31, 2017. Application of
these rules is a change in the taxpayer 's method of accounting for purposes of section 481.

4. Modification of rules for uniform capitalization of certain expenses
Present Law
The uniform capitalization rules require certain direct and indirect costs allocable to real
or tangible personal property produced by the taxpayer to be included in either inventor y or
capitalized into the basis of such property, as applicable. 164 For real or personal property
acquired by the taxpayer for resale , section 263A generally requires certain direct and indirect
costs allocable to such property to be included in inventory .
Section 263A provides a number of exceptions to the general uniform capitalization
requirements . One such exception exists for certain small taxpayers who acquire property for
resal e and have $10 million or less of average annual gross receipts ; 165 such taxpayers are not
required to include additional section 263A costs in inventory.

gross receipts test to be exempt from accounting for inventories under section 471, such taxpayers are thus also
eligible to use the cash method under the proposal. See section JTI.B.2. of this document (Modifications of gross
receipts test for use of cash method of accounting by corporations and partnerships).
162

Consistent with present law, a deduction is generally permitted for the cost of non-incidental materials
and supp lies in the taxable year in which they are first used or are consumed in the taxpayer 's operations. See Treas.
Reg. sec. l.162-3(a)(I ).
163
The taxpayer's financial accounting treatment of inventor ies is determined by reference to the method
of accounting used in the taxpayer 's applicable financial statement (as defined in section III.E. l. of this document
(Certain special rules for taxable year of inclusion)) or, if the taxpayer does not have an applicable financial
statement, the method of accounting used in the taxpayer's book and records prepared in accordance with the
taxpayer's accounting procedures.
164

Sec. 263A.

165

Sec. 263A(b)(2)(B). No exception is available for small taxpayers who produce property subject to
section 263A. However , a de minimis rule under Treasury regulations treats producers with tota l indirect costs of
$200 ,000 or less as having no additional indirect costs beyond those normally capitalized for financial account ing
purposes. Treas. Reg. sec. l.263A-2(b)(3)(iv).

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TREAS-17-0313-I-000475

 Another exception exists for taxpayers who raise , harvest , or grow trees. 166 Under this
exception , section 263A does not apply to trees raised , harvested , or grown by the taxpayer
(other than trees bearing fruit , nuts, or other crops , or ornamental trees) and any real property
underlying such trees. Similarly , the uniform capitalization rules do not apply to any plant
having a preproductive period of two years or less or to any animal , which is produced by a
taxpayer in a farming business (unless the taxpayer is required to use an accrual method of
accounting under section 447 or 448(a)(3)). 167
Freelance authors , photographers , and artists also are exempt from section 263A for any
qualified creative expenses. 168

Description of Proposal
The proposal expands the exception for small taxpayers from the uniform capitalization
rules. Under the proposal , any producer or reseller that meets the $15 million gross receipts
test 169 is exempted from the application of section 263A. 170 The proposal retains the exemptions
from the uniform capitalization rules that are not based on a taxpayer's gross receipts.
If a taxpayer changes its method of accounting because it is either no longer required or is
required to apply section 263A by reason of this proposal , such change is treated as initiated by
the taxpayer and made with the consent of the Secretary.

Effective Date
The proposal applies to taxable years beginning after December 31, 2017. Application of
these rules is a change in the taxpayer's method of accounting for purposes of section 481.

166

Sec. 263A(c)(5).

167

Sec. 263A(d).

168

Sec. 263A(h). Qualified creative expenses are defined as amounts paid or incurred by an individua l in
the trade or business of being a writer , photo grapher , or artist. However , such term does not include any expense
related to printin g, photo graphic plates , motion picture files, video tapes, or similar items.
169

The $ I 5 million gross receipts test is described in section III.B.2. of this document (Modifications of
gross receipts test for use of cash method of accountin g by corporations and partnerships) .
170
In the case of a sole proprietorship , the $ 15 million gross receipts test is applied as if the sole
proprietorship were a corporation.

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TREAS-17-0313-I-000476

 5. Increase in gross receipts test for construction contract exception to percentage of
completion method
Present Law

In genera l, in the case of a long-term contract , the taxable income from the contract is
determined under the percentage-of-completion method. 171 Under this method, the taxpayer
must include in gross income for the taxable year an amount equal to the product of ( 1) the gross
contract price and (2) the percentage of the contract completed during the taxable year. 172 The
percentage of the contract completed during the taxable year is determined by comparing costs
allocated to the contract and incurred before the end of the taxab le year with the est imated total
contract costs. 173 Costs allocated to the contract typically include all costs (including
depreciation) that directly benefit or are incurred by reason of the taxpayer 's long-term contract
activities. 174 The allocation of costs to a contract is made in accordance with regulations . 175
Costs incurred with respect to the long-term contract are deductible in the year incurred , subject
to general accrual method of accounting principles and limitations . 176
An exception from the requirement to use the percentage-of-completion method is
prov ided for certa in construction contracts ("small construction contracts"). Contracts within
this exception are those contracts for the constructio n or improvement of real property if the
contract: ( 1) is expected (at the time such contract is entered into) to be completed within two
years of commencement of the contract and (2) is performed by a taxpayer whose average annual
gross receipts for the prior three taxable years do not exceed $10 million . 177 Thus, long-term
contract income from small construction contracts must be reported consistently using the
taxpayer 's exempt contract method. 178 Permissible exempt contract methods include the

17 1

Sec. 460(a).

172

See Treas. Reg. sec. 1.460-4. This calculation is done on a cumulative basis. Thus , the amount
'includeci 'iti.g ross income in a particular year is that proportion of the expected contract price that the amount of
costs mcun:ed through the end of the taxable year bears to the total expected costs , reduced by the amounts of gross
contract price included in gross income in previous taxable years.
173

Sec. 460(b)(I).

174

Sec. 460(c).

ti~

Treas . Reg. sec. 1.460-5.

176

Treas . Reg. secs. l.460-4(b)(2)(iv) and l.4 60-l (b)(8) .

177

Secs. 460(e)(l)(B) and (4).

178
Since such contracts involve the construction of real property , they are subject to the interest
capitalization rules without regard to their duration. See Treas. Reg . sec. l.263A-8.

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TREAS-17-0313-I-000477

 completed contract method , the exempt-contract percentage-of -completion method, the
percentage-of-completion method , or any other permissible method. 179
Description of Proposal

The proposal expands the exception for small construction contracts from the
requirement to use the percentage-of-completion method . Under the propo sal, contracts within
this exception are those contracts for the construction or improvement of real property if the
contract: (1) is expected (at the time such contract is entered into) to be completed within two
years of commencement of the contract and (2) is performed by a taxpayer that (for the taxable
year in which the contract was entered into) meets the $15 million gross receipts test. 180
Effective Date

The proposal applies to contracts entered into after December 31, 2017, in taxable years
ending after such date.
Application of this rule is a change in the taxpayer's method of account ing for purposes
of section 481, but is applied on a cutoff basis for all similarly classified contrac ts (hence there is
no adjustment under section 48 l(a) for contracts entered into before Januar y 1, 2018).

179

Treas. Reg. sec. l.460 -4(c)(l).

180

The $15 million gross receipts test is descri bed in section III.B.2. of this document (Modifications of
gross receipts test for use of cash method of accounting by corporations and partnersh ips). In the case of a sole
proprietorship , the $15 million gross receipts test is applied as iftb e sole propr ietorsh ip were a corporation.

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TREAS-17-0313-I-000478

 C. Cost Recovery, etc.
1. Limitation on deduction for interest

Present Law
Interest deduction

Interest paid or accrued by a business generally is deductible in the computation of
taxable income subject to a number of limitations. 181
Interest is generally deducted by a taxpayer as it is paid or accrued , depending on the
taxpayer's method of accounting. For all taxpayers, if an obligation is issued with original issue
discount ("OID") , a deduction for interest is allowable over the life of the obligation on a yield to
maturity basis. I82 Generally , OID arises where interest on a debt instrument is not calculated
based on a qualified rate and required to be paid at least annually .
Investment interest expense

In the case of a taxpayer other than a corporation , the deduction for interest on
indebtedness that is allocable to property held for investment ("investment interest") is limited to
the taxpayer 's net investment income for the taxable year. 183 Disallowed investment interest is
carried forward to the next taxable year.
Net investment income is investment income net of investment expenses. Investment
income generally consists of gross income from property held for investment , and investment
expense includes all deductions directly connected with the production of investment income
(e.g., deductions for investment management fees) other than deductions for interest. Investment
income includes only so much of the taxpayer ' s net capital gain and qualified dividend income
as the taxpayer elects to take into account as investment income.
The two-percent floor on miscellaneous itemized deductions allows taxpay ers to deduct
investment expenses connected with investment income only to the extent such deductions

181
Sec. 163(a) . In add ition to the limitations discussed herein , other limitations include: denial of the
deduction for the disqualified portion of the original issue discount on an applicable high yield discount obligation
(sec. !63(e)(5) ), denial of deduction for interest on certain obligations not in registered fonn (sec. !63(f)) , reduction
of the deduction for interest on indebtedness with respect to which a mortgage credit certificate has been issued
under section 25 (sec. l 63(g)) , disallowance of deduction for personal interest (sec. i 63(h)), disallowance of
deduction for interest on debt with respect to certain life insurance contracts (sec. 264), and disallowance of
deduction for interest relating to tax-exempt income (sec. 265). Interest may also be subject to capitalizati on. See,
e.g., sections 263A(f) and 46l( g) .
182

Sec. 163(e). But see section 267 (dealing in part with interest paid to a related or foreign party).

183

Sec. 163(d).

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TREAS-17-0313-I-000479

 exceed two percent of the taxpayer 's adjusted gross income ("AGl"). 184 Miscellaneous itemized
deductions 185 that are not investment expenses are disallowed first before any investment
expenses are disallowed. I 86
For purposes of the investment interest limitation, debt is allocated under a tracing
approach to expenditures in accordance with the use of the debt proceeds, and interest on the
debt is allocated in the same manner. 187 Thus, generally, the disallowance of a deduction for
investment interest depends on the individual's use of the proceeds of the debt. For example , if
an individual pledges corporate stock held for investment as security for a loan and uses the debt
proceeds to purchase a car for personal use , interest expense on the debt is allocated to the
personal expenditure to purchase the car and is treated as nondeductible personal interest rather
than investment interest.

Earnings stripping
Section 163(j) may disallow a deduction for disqualified interest paid or accrued by a
corporation in a taxable year if two threshold tests are satisfied: the payer 's debt-to-equity ratio
exceeds 1.5 to 1.0 (the safe harbor ratio) and the payer 's net interest expense exceeds 50 percent
of its adjusted taxable income (generally, taxable income computed without regard to deductions
for net interest expense, net operating losses , domestic production activities under section 199,
depreciation, amortization, and depletion). Disqualified interest includes interest paid or accrued
to: (1) related parties when no Federal income tax is imposed with respect to such interest ; 188
(2) unrelated parties in certain instance s in which a related party guarantees the debt ; or (3) to a
real estate investment trust ("REIT") by a taxable REIT subsidiary of that trust. 189 Interest
amounts disallowed under these rules can be carried forward indefinitely. 190 In addition, any

184

Sec. 67(a).

185

Miscellaneous itemized deductions include itemized deductions of individuals other than certain
specific itemized deductions. Sec. 67(b). Miscellaneous itemized deductions generally include, for example ,
investment management fees and certain employee business expenses, but specifically do not include, for examp le,
interest, taxes, casualty and theft losses, charitable contributions , medical expenses , or other listed itemized
deductions.
186
H.R . Rep. No. 84 l, 99th Cong., 2d Sess., p. II-154 , Sept. 18, 1986 (Conf. Rep.) ("In compu ting the
amount of expenses that excee d the 2-percen t floor, expenses that are not investment expenses are intended to be
disallowed before any investment expenses are disallowed. ").
187

Temp. Treas. Reg. sec. 1.163-8T(c).

188

If a tax treaty reduces the rate of tax on interest paid or accrued by the taxpayer , the interest is treated as
interest on which no Federal income tax is imposed to the extent of the same proportion of such interest as the rate
of tax imposed without regard to the treaty, reduced by the rate of tax imposed by the treaty, bears to the rate of tax
imposed without regard to the treaty. Sec. 163(j)(5)(B).
189

Sec. l 63(j)(3).

190

Sec. l 63(j)( l )(B).

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TREAS-17-0313-I-000480

 excess limitation (i.e., the excess, if any, of 50 percent of the adjusted taxable income of the
payor over the payor's net interest expense) can be carried forward three years. 191
Description of Proposal
In general

In the case of any taxpayer for any taxable year, the deduction for business interest is
limited to the sum of business interest income plus 30 percent of the adjusted taxable income of
the taxpayer for the taxable year. The amount of any interest not allowed as a deduction for any
taxable year may be carried forward indefinitely. The limitation applies at the taxpayer level. In
the case of a group of affi liated corporat ions that file a consolidated return, it applies at the
consolidated tax return filing level.
Business interest means any interest paid or accrued on indebtedness properly allocable
to a trade or business. Any amount treated as interest for purposes of the Internal Revenue Code
is interest for purposes of the proposa l. Business interest income means the amount of interest
includible in the gross income of the taxpayer for the taxable year which is properly allocable to
a trade or business. Business interest does not include investment interest, and business interest
income does not include investment income , within the meaning of section 163(d).
By including business interest income in the limitation, the rule operates to limit the
deduction for net interest expense to 30 percent of adjusted taxable income. That is, a deduction
for business interest is permitted to the full extent of business interest income. To the extent that
business interest exceeds business interest income, the deduction for the net interest expense is
limited to 30 perce nt of adjusted taxable income.
Adjusted taxable income means the taxable income of the taxpayer computed without
regard to: ( 1) any item of income, gain, deduction , or loss which is not properly allocable to a
trade or business ; (2) any business interest or business interest income ; (3) the 17.4 percent
deduction for certain pass-through income; 192 and (4) the amount of any net operat ing loss
deduction. The Secretary may provide other adjustments to the computation of adjusted taxable
mcome .
Application to pass-through entities

In general

In the case of any partnership, the limitation is applied at the partnership level. Any
deduction for business interest is taken into acco unt in determining the nonseparately stated
taxable income or loss of the partnership. 193 To prevent double counting, special rules are
191

Sec. l 63(i)(2)(B)(ii).

192

See section LB. I. of this document (A llow 17.4 percent deduction to certain pass-through income).

193

This amount is the "Ordinary business income or loss" reflected on Form I 065 (U.S. Return of
Partnership Income). The partner 's distributive share is reflected in Box I of Schedule K-1 (Form 1065).

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TREAS-17-0313-I-000481

 provided for the determination of the adjusted taxable income of each partner of the partnership.
Similarly , to allow for additional interest deduction by a partner in the case of an excess amount
of unused adjusted taxable income limitation of the partnership , special rules apply. Similar
rules apply with respect to any S corporation and its shareholders.
Double counting rule
The adjusted taxable income of each partner (or shareholder , as the case may be) is
determined without regard to such partner's distributive share of the nonseparately stated income
or loss of such partnership. In the absence of such a rule, the same dollars of adjusted taxable
income of a partnership could generate additional interest deductions as the income is passed
through to the partners.
Example 1.-ABC is a partnership owned 50-50 by XYZ Corporation and an individual.
ABC generates $200 of noninterest income. Its only expense is $60 of business interest. Under
the proposal the deduction for business interest is limited to 30 percent of adjusted taxable
income , that is, 30 percent* $200 = $60. ABC deducts $60 of business interest and reports
ordinary business income of $ 140. XYZ's distributive share of the ordinary business income of
ABC is $70. XYZ has net taxable income of zero from its other operations , none of which is
attributable to interest income and without regard to its business interest expense. XYZ has
business interest expense of $25 . In the absence of a double counting rule , the $70 of taxable
income from XYZ ' s distributive share of ABC's income would permit XYZ to deduct up to an
additional $21 of interest (30 percent* $70 = $21) , and XYZ ' s $100 share of ABC's adjusted
taxable income would generate $51 of interest deductions , well in excess of the intended 30%
limitation. If XYZ were a pass-through entity rather than a corporation , additional deductions
might be available to its partners as well , and so on.
The double counting rule prevents this result by providing that XYZ has adjusted taxable
income computed without regard to the $70 distributive share of the nonseparately stated income
of ABC. As a result it has adjusted taxable income of $0. XYZ ' s deduction for business interest
is limited to 30 percent * $0 = $0, resulting in a deduction disallowance of $25.
Additional deduction limit
The limit on the amount allowed as a deduction for business interest is increased by a
partner ' s distributive share of the partnership ' s excess taxable income . The excess taxable
income with respect to any partnership is the amount which bears the same ratio to the
partnership ' s adjusted taxable income as the excess (if any) of 30 percent of the adjusted taxable
income of the partnership over the amount (if any) by which the business interest of the
partnership exceeds the business interest income of the partnership bears to 30 percent of the
adjusted taxable income of the partnership. This allows a partner of a partnership to deduct
additional interest expense the partner may have paid or incurred to the extent the partnership
could have deducted more business interest. The proposal requires that excess taxable income be
allocated in the same manner as nonseparately stated income and loss.
Example 2.-The facts are the same as in Example 1 except ABC has only $40 of business
interest. As in Example 1, ABC has a limit on its interest deduction of $60. The excess of this

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 limit over the business interest of the partnership is $60 - $40 = $20. The excess taxable income
for ABC is $20 / $60 * $200 = $66.67 . XYZ's distr ibutive share of the excess taxable income
from ABC partnership is $33.33 . XYZ's deduction for business interest is limited to 30 percent
of the sum of its adjusted taxable income plus its distributi ve share of the excess taxable income
from ABC partnership (30 percent* ($0 + $33.33) = $ 10). As a result of the rule , XYZ may
deduct $ 10 of business interest and ha s an interest ded uction disallowance of $15.

Carryforward of disallowed business interest
The amount of any business interest not allowed as a dedu ction for any taxable year is
treated as business interest paid or accrued in the succeedi ng taxable year. Business interest may
be carried forward indefinite ly. With respect to the limitati on on deduction of interest by
domestic corporat ions which are United States sharehol ders that are members of worldwi de
affiliated groups with excess domestic indebtedness, 194 whic hever rule imposes the lower
limitation on the deduction of interest with respect to the taxab le year (and therefore the greatest
amount of interest to be carried forward) governs.
Any carryforward of disallowed interest is an item taken into acco unt in the case of
certain corpora te acquisitions described in section 381 and is subject to limitation und er
section 382.

Exceptions
The limitation does not apply to any taxpayer that meets the $ 15 million gross receipts
test of sect ion 448( c), that is, if the average annua l gross receipts for the three-taxable-year
period end ing with the prior taxab le year does not exceed $15 million. 195
The trade or business of performing serv ices as an employee is not treated as a trade or
business for purposes of the limitation. As a result , for example , the wages of an employee are
not cou nted in the adjusted taxab le income of the taxpayer for purpo ses of determining the
limitation.
At the taxpayer's election, any real prop erty development , redeve lopment, cons truction,
reconstruction , acquisition , conversion, rental , operation , managemen t, leasing, or brokerage
trade or business is not treated as a trade or business for purposes of the limitation, and therefore
the limitation does not app ly to such trades or busine sses.
The limitation also does not apply to certa in regulated publ ic utilities. Specifically, the
trade or business of the furnishing or sale of (1) electrica l energy , water, or sewage disposal
services, (2) gas or steam through a local distribut ion system, or (3) transportation of gas or
steam by pipeline , if the rates for such furnishing or sale, as the case may be, have been
194

See section IV.D. l. of this document (Denial of deduc tion for interest expense of United States
shareholders wh ich are members of worldwide affiliated groups with excess domestic indebtedness).
195

See section III.B .2. of tbis document (Modifications of gross receipts test for use of casb method of
accounting by corporations and partnerships). In the case of a sole proprie torship , the $ 15 million gross receipts test
is appl ied as if the sole proprietorship were a corporation or partnership.

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 established or approved by a State or political subdivision thereof, by any agency or
instrumentality of the United States, or by a public service or public utility commission or other
similar body of any State or political subdivision thereof is not treated as a trade or business for
purposes of the limitation.
Effective Date
The proposal applies to taxable years beginning after December 31, 2017.
2. Temporary 100-percent expensing for certain business assets
Present Law
A taxpayer generally must capitalize the cost of property used in a trade or business or
held for the production of income and recover such cost over time through annual deductions for
depreciation or amortization. 196 Tangible property generally is depreciated under the modified
accelerated cost recovery system ("MACRS"), which determines depreciation for different types
of property based on an assigned applicable depreciation method , recovery period , 197 and
convention. 198
Bonus depreciation
An additional first-year depreciation deduction is allowed equal to 50 percent of the
adjusted basis of qualified property acquired and placed in service before January 1, 2020
(January 1, 2021, for longer production period property 199 and certain aircraft 200 ). 201 The 50percent allowance is phased down for property placed in service after December 31, 2017 (after
December 31, 2018 for longer production period property and certain aircraft). The bonus
depreciation percentage rates are as follows.

196
See secs. 263(a) and 167. However , where property is not used exclus ively in a taxpayer's business ,
the amount eligib le for a deduction must be reduced by the amount related to personal use. See, e.g., section 280A.
197

The applicable recovery period for an asset is determined in part by statute and in part by historic
Treasury guidance. Exercising authority granted by Congress , the Secretary issued Rev. Proc. 87-56 , 1987-2 C.B.
674 , laying out the framework of recovery periods for enumerated classes of assets. The Secretary clarified and
modified the list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. In November 1988, Congress revoked the
Secretary's authority to modify the class lives of depreciable property. Rev. Proc. 87-56 , as modified, remains in
effect except to the extent that the Congress has, since 1988, statutor ily modified the recovery period for certain
depreciable assets , effectively superseding any administrat ive guidance with regard to such property.
198

Sec. 168.

199

As defined in section 168(k)(2)(B).

200

As defined in section l 68(k)(2)(C).

201

Sec. 168(k). The additional first-year depreciation deduction is generally su~ject to the mies regarding
whether a cost must be capitalized under section 263A.

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TREAS-17-0313-I-000484

 Bon us Depreciation Percentage
Placed in Service Year

Qualified Property
in General

Longer Production Period
Property and
Certain Aircraft

2017

50 percent

50 percent

2018

40 percent

50 percent 202

2019

30 percent

40 percent

2020

n/a

30 percent 203

The additional first-year depreciat ion deduction is allowed for both the regular tax and
the alternative minimum tax ("AMT"), 204 but is not allowed in computing earnings and profits. 205
The basis of the property and the depreciation allowances in the year of purchase and later years
are appropriately adjusted to reflect the additional first-year depreciation deduction. 206 The
amount of the additional first-year deprec iation deduction is not affected by a short taxable
year. 207 The taxpayer may elect out of the additional first-year deprec iation for any class of
property for any taxable year. 208
The interaction of the additional first-year depreciation allowance with the otherwise
applicab le depreciation allowance may be illustrated as follows. Assume that in 2017 a taxpayer
purchase s new depreciab le property and places it in service. 209 The property 's cost is $10,000,
and it is five-year property subject to the 200 percent declining balance method and half-year
convention. The amount of additional first-year depreciation allowed is $5,000. The remainin g
$5,000 of the cost of the property is depreciable under the rules applicable to five-year property "
202

It is intended that for longer production period property placed in service in 2018, 50 percent. applies to
the entire adjusted basis. Similarly , for longer product ion period property placed in service in 2019, 40 percient
app lies to the entire adjusted basis. A technica l correction may be necessary with respect to longer product ion
period property placed in service in 2018 and 2019 so that tbe statute reflects this intent.
203

In the case of longer production period property described in section 168(k)(2)(B) and placed in service
in 2020 , 30 percent app lies to the adju sted basis attributable to manufacture , construction , or production before
January 1, 2020, and the remaining adjusted basis does not qua lify for bonus depreciation. Thirty percent applies to
the entire adjusted basis of certain aircraft described in section l 68(k)(2)(C) and placed in service in 2020.
204

Sec. 168(k)(2)(G). See also Treas. Reg. sec. l.168(k)-l(d).

205

Sec. 312(k)(3) and Treas. Reg. sec. l.168(k)-l(f)(7).

206

Sec. l 68(k)( I)(B).

201

Ibid.

208

Sec. I68(k)(7). For the definition of a class of property , see Treas. Reg. sec. I.I 68(k)-l (e)(2) .

209

Assume that the cost of the property is not eligible for expensing under section 179 or Treas. Reg.
sec. l.263(a)- l (f).

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 Thus, $1,000 also is allowed as a depreciation deduction in 2017. 210 The total depreciation
deduction with respect to the property for 2017 is $6,000. The remaining $4,000 adjusted basis
of the property generally is recovered through otherwise applicable depreciation rules.
Qualified property
Property qualifying for the additional first-year depreciation deduction must meet all of
the following requirements.211 First, the property must be: (1) property to which MACRS
applies with an applicable recovery period of 20 years or less; (2) water utility property; 212
(3) computer software other than computer software covered by section 197; or (4) qualified
improvement property. 213 Second, the original use 214 of the property must commence with the
taxpayer. 215 Third, the taxpayer must acquire the property within the applicable time period (as
described below). Finally, the property must be placed in service before January 1, 2020. As
noted above, an extension oftbe placed-in-service date of one year (i.e., before January 1, 2021)
is provided for certain prope rty with a recovery period of 10 years or longer, certain
transportation property , and certain aircraft. 216

210

$1,000 results from the application of the half-year convent ion and the 200 percent declining balance
method to the remaining $5,000.
2 11

Requirements relating to actions taken before 2008 are not described herein since they have little (if
any) remai ning effect.
2 12

As defined in section 168(e)(5).

213
The additional first-year depreciation deduction is not available for any property that is required to be
depreciated under the alternat ive depreciation system of MACRS. Sec. l 68(k)(2)(D)(i).

2 14

The term "original use" means the first use to which the property is put, whether or not such use
corresponds to the use of such property by the taxpayer. If in the normal course of its business a taxpayer sells
fractional interests in property to unrelated third parties , then the original use of such property begins with the first
user of each fractional interest (i.e., each fractional owner is considered the original user of its proportionate share of
the property). Treas. Reg. sec. l. l 68(k)- l (b)(3) .
2 15
A special rule applies in the case of certain leased property. In the case of any property that is
originally placed in service by a person and that is so ld to the taxpayer and leased back to such person by the
taxpayer within three months after the date that the property was placed in service, the property wou ld be treated as
originally placed in service by the taxpayer not earlier than the date that the property is used under the leaseback. If
property is originally placed in service by a lessor, such property is sold within three months after the date that the
property was placed in service, and the user of such property does not change , then the property is treated as
originally placed in service by the taxpayer not earlier than the date of such sale. Sec. 168(k)(2)(E)(ii) and (iii).
2 16

Property qualifying for the extended placed-in-service date must have an estimated production period
exceeding one year and a cost exceeding $1 million. Transportati on property genera lly is defined as tangible
personal property used in the trade or business of transporting persons or property. Certain aircraft which is not
transportat ion property , other than for agricultural or firefighting uses, also qualifies for the extended placed-inservice date, if at the time of the contract for purchase , the purchaser made a nonrefimdable deposit of the lesser of
10 percent of the cost or $100,000 , and which has an estimated production period exceeding four months and a cost
exceeding $200 ,000.

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 To qualify , property must be acquired (1) before January 1, 2020, or (2) pursuant to a
binding written contract which was entered into before January 1, 2020. With respect to
property that is manufactured , constructed, or produced by the taxpayer for use by the taxpayer ,
the taxpayer must begin the manufacture , construction, or production of the property before
January 1, 2020. 2 17 Property that is manufactured , constructed , or produced for the taxpayer by
another person under a contract that is entered into prior to the manufacture , construction, or
production of the property is considered to be manufactured, constructed, or produced by the
taxpayer. 2 18 For property eligible for the extended placed-in-service date, a special rule limits
the amount of costs eligible for the additional first-year depreciation. With respect to such
property , only the portion of the basis that is properly attributable to the costs incurred before
January 1, 2020 ("progress expenditures ") is eligible for the additional first-year depreciation
deduction. 219
Qualified improvement property
Qualified improvement property is any improvement to an interior portion of a building
that is nonresidential real property if such improvement is placed in service after the date such
building was first placed in service. 220 Qualified improvement property does not include any
improvement for which the expenditure is attributable to the enlargement of the building , any
elevator or escalator , or the internal structural framework of the building.
Election to accelerate AMT credits in lieu of bonus depreciation

A corporation otherwise eligible for additional first-year depreciation may elect to claim
additional AMT credits in lieu of claiming additional depreciation with respect to qualified
property .221 In the case of a corporation making this election , the straight line method is used for
the regular tax and the AMT with respect to qualified property .222
A corporation making an election increases the tax liability limitation under section 53(c)
on the use of minimum tax credits by the bonus depreciation amount. The aggregate increase in
credits allowable by reason of the increased limitation is treated as refundable.

217

Sec. 168(k)(2)(E)(i).

218

Treas. Reg. sec. l.l68(k)-l(b)(4)(iii).

219
Sec. l 68(k)(2)(B)(ii). For purposes of determining the amount of eligible progress expenditures , rules
similar to section 46(d)(3) as in effect prior to the Tax Reform Act of 1986 apply.
220

Sec. 168(k)(3).

221

Sec. l68(k)(4).

222

Sec. l68(k)(4)(A)(ii).

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 The bonus depreciation amount generally is equa l to 20 percent of bonus depreciation for
qualified property that could be claimed as a deduction absent an election under this provision. 223
As originally enacted, the bonus deprecia tion amount for all taxable years was limited to the
lesser of (1) $30 million or (2) six percent of the minimum tax credits allocable to the adjusted
net minimum tax imposed for taxab le years beginning before January 1, 2006. However ,
extens ions of this provision have provided that this limitation applies separate ly to property
subject to each exten sion.
For taxable years ending after December 31, 2015, the bonus depreciation amount for a
taxable year (as defined under prese nt law with respect to all qualified property) is limited to the
lesser of ( 1) 50 percent of the minimum tax credit for the first taxable year endin g after
December 31, 2015 ( determined before the application of any tax liability limitati on) or (2) the
min imum tax credit for the taxable year allocable to the adjusted net minimum tax imposed for
taxable years endin g before January 1, 2016 (determined before the application of any tax
liability limitation and determined on a first-in, first-out basis).
All corpora tion s treated as a sing le employer under sect ion 52( a) are treated as one
taxpayer for purposes of the limitation, as well as for electing the application of this provision. 224
In the case of a corporat ion making an election which is a partner in a partnership , for
purposes of determining the electing partner 's distributive share of partnership items, bonus
depreciation does not apply to any qualified property and the straight line method is used with
respect to that prope rty. 225
In the case of a partnership having a single corporate partner own ing (directly or
indirectly) more than 50 percent of the capita l and profits interests in the partnership , each
partner takes into account its distributive share of partnership depreciation in determining its
bonus depreciation amount. 22 6
Special rules
Passenger automobi les
The limitation under section 280F on the amount of depreciation deductions allowed with
respect to certain passenger automobile s is increased in the first yea r by $8,000 for automobiles
that qualify (and for wh ich the taxpayer does not elect out of the additional first-year
223

For this purpose , bonus depreciation is the difference between (i) the aggregate amount of depreciation
determined if section 168(k)(l) applied to all qualified proper ty placed in service during the taxable year and (ii) the
amount of depreciat ion that would be so detennined if section l 68(k)(l) did not so apply. This determination is
made using the most accelerated deprec iation method and the shortest life otherwise allowable for each property.
224

Sec. l 68(k)( 4)(B)(iii).

225

Sec. 168(k)(4)(D)(ii).

226

Sec. l 68(k)( 4)(D)( iii).

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TREAS-17-0313-I-000488

 deduction). 227 The $8,000 amount is phased down from $8,000 by $1,600 per calendar year
beginning in 2018. Thus , the section 280F increase amount for property placed in service during
2018 is $6,400, and during 2019 is $4,800. While the underlying section 280F limitation is
indexed for inflation,228 the section 280F increase amount is not indexed for inflation. The
increase does not apply to a taxpayer who elects to accelerate AMT credits in lieu of bonus
depreciation for a taxable year.
Certain plants bearing fruits and nuts
A special election is provided for certain plants bearing fruits and nuts.229 Under the
election , the applicable percentage of the adjusted basis of a specified plant which is planted or
grafted after December 31, 2015 , and before January 1, 2020 , is deductible for regular tax and
AMT purposes in the year planted or grafted by the taxpayer , and the adjusted basis is reduced
by the amount of the deduction. 230 The percentage is 50 percent for 2017, 40 percent for 2018 ,
and 30 percent for 2019. A specified plant is any tree or vine that bear s fruits or nuts, and any
other plant that will have more than one yield of fruits or nuts and genera lly has a preproductive
period of more than two years from planting or grafting to the time it begins bearing fruits or
nuts.231 The election is revocable only with the consent of the Secretary, and if the electio n is
made with respect to any specified plant , such plant is not treated as qualified property eligible
for bonus depreciation in the subsequent taxable year in which it is placed in service.
Long-term contracts
In genera l, in the case of a long-term contract, the taxable income from the contract is
determined under the percentage-of-completion method. 232 Solely for purposes of determining
the percentage of completion under section 460(b )( 1)(A), the cost of qualified property with a
MACRS recovery period of seven years or less is taken into account as a cost allocated to the
contract as if bonus depreciation had not been enacted for property placed in service before
January 1, 2020 (January l , 2021, in the case of longer production period property). 233
Description of Proposal

The proposal extends and modifies the additional first-year depreciation deduction
through 2022 (through 2023 for longer production period property and certain aircraft). The 50227

Sec. l68(k)(2)(F).

228

Sec. 280F(d)(7).

229

See sec. l68(k)(5).

230

Any amount deducted under this election is not subject to capitali zation under section 263A.

231

A specified plant does not include any property that is planted or grafted outs ide the United States.

232

Sec. 460.

233

Sec. 460(c)(6). Other dates involvin g prior years are not describ ed herein.

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 percent allowance is increased to 100 percent for property placed in service after September 27,
2017 , and before January 1, 2023 (January 1, 2024, for longer production period property and
certain aircraft) , as well as for specified plants planted or grafted after September 27, 2017 , and
before January 1, 2023. Thus, the proposal repeals the phase-dow n of the additional first-year
depreciation deduct ion for property placed in service after December 31, 2017 , and for specified
plants planted or grafted after such date. Similarly , the proposal maintains the section 280F
increase amount of $8,000 for passenger automobi les placed in service after December 31, 2017.
The proposal excludes from the definition of qualified property certain public utility
property , i.e., property used predominantly in the trade or business of the furnishing or sale of (1)
electrical energy , water, or sewage disposal services, (2) gas or steam through a local distribution
system , or (3) transportation of gas or steam by pipeline , if the rates for such furnish ing or sale,
as the case may be, have been estab lished or approved by a State or political subdivision thereof ,
by any agency or instrumentality of the Un ited States, or by a public service or public utility
commission or other similar body of any State or politica l subdivision thereof. 234
As a conforming amendment to the repeal of AMT, the proposal repeals the election to
accelerate AMT credits in lieu of bonus depreciation.
Effective Date

The propo sal genera lly applies to property placed in service after September 27, 2017 ,
and to specified plants planted or grafted after such date.
A transition rule provides that , for a taxpayer's first taxable year ending after
Septembe r 27, 2017 , the taxpayer may elect to apply a 50-perce nt allowance.

3. Modifications to depreciation limitations on luxury automobiles and personal use
property
Present Law

Section 280F(a) limits the annual cost recovery deduction with respect to certain
passenger autom obiles. This limitation is common ly referred to as the "luxury automobile
depreciation limitation." For passenger automobiles placed in service in 20 17, and for which the
additional first-year depreciation deduction under sect ion 168(k) is not claimed , the maximum
amount of allowable depreciation is $3,160 for the year in which the vehicle is placed in service,
$5, 100 for the second year, $3,050 for the third year , and $ 1,875 for the fourth and later years in
the recovery period .235 This limitation is indexed for inflation and applies to the aggregate
deduction provided under present law for depreciation and section 179 expensing. Hence ,
passenger automobiles subj ect to sect ion 280F are eligible for section 179 expen sing only to the
extent of the applicable limits contained in section 280F. For passenger automobiles eligible for
234

As defined in section I 68(i)(l 0) w ithout regard to subpara graph (C) of such sec tion.

235

Rev.Proc .2 017-29, Table 3, 2017-14I.R.B. l0 65.

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 the addit ional first-year depreciation allowa nce in 2017, the first-year limitat ion is increa sed by
an additiona l $8, 000. 236
For purposes of the depreciation limitation, passenger automobiles are defined broadly to
includ e any four-w hee led ve hic les that ar e manufactured pri maril y for use on public stree ts,
roads , and highways and w hich are rated at 6,000 pou nds unloaded gross ve hicle we ight or
less. 237 In the case of a truck or a van , the deprecia tio n limitation applies to vehicles that are
rated at 6,000 pounds gross vehicle weight or less. Sport utilit y vehicles are treated as a truck for
the purpose of applyin g the section 280F limitatio n.
Basis not recovered in the recovery period of a passenger automob ile is allowab le as an
expense in subseq uent taxable years. 238 The expensed amount is limited in each such subseq uent
taxable year to the amount of the limitation in the fourth year in the recovery period .

Listed property

In the case of certa in listed property , spec ial rules apply. Listed prope rty genera lly is
defined as ( 1) any passenger automobile; (2) any other property used as a means of
transportation ;239 (3) any property of a type generally used for purp oses of entertainment,
recreation , or amusement ; (4) any compute r or peripheral equipm ent;240 and (5) any other
property of a type specified in Treasury regulations .241
First, if for the taxable year in which the property is placed in service, the use of the
property for trade or bu siness purposes does not exceed 50 percent of the total use of the
property , then the depreciation deduction w ith respect to such property is determined under the
alternative depreciation syste m.242 The alternative depreciation system ge nerally requ ires the use

236

Sec. I68(k)(2)(F). For proposed changes to section l 68(k), see section III.C.2. of this document
(Temporary I 00-percent expensing for certain business assets).
237
Sec. 280F(d)(5). Exceptions are provided for any ambulance , hearse , or combination ambulance-hearse
used by the taxpayer directly in a trade or business, or any vehicle used by the taxpayer directly in the trade or
business of trans porting persons or property for compensation or hire.
238

Sec. 280F(a)(l)( B).

239
Property substantially all of the use of which is in a trade or business of providing transportat ion to
lll.1felatedpersons for hire is not considered other property used as a means of transportation. Sec. 280F( d)( 4)(C) .
24

°

Computer or periphera l equipment used exclus ively at a regular business establishment and owned or
leased by the person operating such estab lishment , however , is not listed property. Sec. 280F(d)(4)(B).
241

Sec. 280F(d)(4)(A).

242
Sec. 280F(b )( l ). If for any taxab le year after the year in which tl1e property is placed in service the use
of the property for trade or business purposes decreases to 50 percent or less of the total use oftbe property , then the
amount of depreciation allowed in prior years in excess of the amount of depreciation that would have been allowed
for such prior years tmder the alternative depreciation system is recaptured (i.e., included in gross income) for such
taxable year.

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TREAS-17-0313-I-000491

 of the straight-line method and a recovery period equal to the class Iife of the property. 243
Second , if an individual owns or leases listed property that is used by the individual in
connection with the performance of services as an employee , no depreciation deduction ,
expensin g allowance , or deduction for lease payments is available with respect to such use unless
the use of the property is for the convenience of the employer and required as a condition of
employment. 244 Both limitations apply for purposes of section 179 expensing.
For listed property , no deduction is allowed unless the taxpayer adequately substantiates
the expense and business usage of the property. 245 A taxpayer must substantiate the elements of
each expenditure or use of listed property , including (1) the amount (e.g., cost) of each separate
expenditure and the amount of business or investment use, based on the appropriate measure
(e.g., mileage for automobiles) , and the total use of the property for the taxable period , (2) the
date of the expenditure or use, and (3) the business purposes for the expenditure or use. 246 The
level of substantiation for business or investment use of listed property varies depending on the
facts and circumstances. In general , the substantiation must contain sufficient information as to
each element of every business or investment use. 247

Description of Proposal
The proposal increases the depreciation limitations under section 280F that apply to listed
propert y. For passenger automobiles placed in service after December 31, 2017 , and for which
the additional first-year depreciation deduction under section l 68(k) is not claimed , the
maximum amount of allowable depreciation is $ I 0,000 for the year in which the vehicle is
placed in service , $16,000 for the second year , $9,600 for the third year , and $5,760 for the
fourth and later years in the recovery period. 248 The limitations are indexed for inflation for
passenger automobiles placed in service after 2018.
The proposal removes computer or peripheral equipment from the definition of listed
property. Such property is therefore not subject to the heightened substantiation requirements
that apply to listed property.

Effective Date
The propo sal is effective for property placed in service after December 31, 2017.

243

Sec. l 68(g).

244

Sec. 280F(d)(3).

245

Sec. 274(d)(4).

246

Temp. Reg. sec. l .274-5T(b)(6).

247

Temp. Reg. sec. l. 274-5T(c)(2)( ii)(C).

248

Rev.Proc .2 0l 7-29, Table 3, 20l 7-l4I.R.B. l 065.

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TREAS-17-0313-I-000492

 4. Modifications of treatment of certain farm property
Present Law
A taxpayer generally must capitalize the cost of property used in a trade or business or
held for the product ion of income and recover such cost over time through annual deductions for
depreciation or amortization. 249 Tangible property generally is depreciated under the modified
accelerated cost recovery system ("MACRS") , which determines depreciation for different types
of property based on an assigned applicable depreciation method, recovery period, and
convention. 250
The applicab le recovery period for an asset is determined in part by statute and in part by
historic Treasury guidance. 251 The "type of property " of an asset is used to determine the "class
life" of the asset, which in turn dictates the applicable recovery period for the asset.
The MACRS recovery periods applicable to most tangible personal property range from
three to 20 years. The depreciation methods generally applicable to tangible personal property
are the 200-percent and 150-percent declining balance methods, 252 switching to the straight line
method for the first taxable year where using the straight line method with respect to the adjusted
basis as of the beginning of that year yields a larger depreciation allowance . The recovery
periods for most real property are 39 years for nonresidentia l real property and 27.5 years for
residential rental property. The straight line depreciation method is required for the
aforementioned real property.

249
See secs. 263(a) and 167. However, where property is not used exclusively in a taxpayer ' s business ,
the amount eligible for a deduction must be reduced by the amount related to personal use. See, e.g., section 280A .
250

Sec. 168.

25 1

Exercising authority granted by Congress, the Secretary issued Rev. Proc. 87-56 , 1987-2 C.B. 674,
laying out the framework of recovery periods for enumerated classes of assets. The Secretary clarified and modified
the list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. In November 1988, Congress revoked the Secretary's
authority to modify the class lives of depreciable property. Rev. Proc. 87-56, as modified , remains in effect except
to the extent that the Congress bas, since 1988, statutorily modified the recovery period for certa in depreciable
assets , effectively supersedin g any administrative guidance with regard to such property.
252
Under the declining balance method the depreciation rate is determined by dividing the appropriate
percentage (here 150 or 200) by the appropriate recovery period. This leads to acce lerated depreciation when the
declining balance percentage is greater than 100. The table below illustrates depreciation for an asset with a cost of
$ 1,000 and a seve n-year recovery period under the 200 -percent declining balance method, the I SO-percent declining
balance method, and the straight line method.

Recoverymethod
200-percentdecliningbalance
150-perceutdecliningbalance
Strnight-lin
e

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Year I
Year2 Year 3 Year4 Year 5 Year6 Year 7
Total
285.71 20408
145.77 104. 12
86.77
86.77
86.77 1,000.00
214.29 168.37 132.29 121.26 121.26 121.26 121.26 1,000.00
142.86 142.86 142.86 142.86 142.86 142.86 142.86 1,000.00

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 Property used in a farming business is assigned var ious recovery periods in the same
manner as other business property. For examp le, depreciable assets used in agriculture activities
that are assigned a recovery period of 7 years include machinery and equipment, grain bins, and
fences (but no other land improvements), that are used in the product ion of crops or plants, vines,
and trees ; livestoc k; the operation of farm dairies , nurseries, greenhouses, sod farms, mushrooms
cellars , cranberry bogs, apiaries , and fur farms ; and the performance of agriculture , animal
husbandry, and horticultural services. 253 Cotton ginning assets are also assigned a recovery
period of 7 years, 254 while land improvements such as drainage facilities, paved lots, and water
wells are assigned a recovery period of 15 years. 255 A 5-year recovery period was assigned to
new farm machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other
land improvement) which was used in a farming business,256 the original use of which
commenced with the taxpaye r after December 3 I, 2008, and which was placed in service before
January 1, 20 10.257
Any property (other than nonresidential real property, 258 residential rental property ,259
and trees or vines bearing fruits or nuts260 ) used in a farming business 261 is subject to the 150percent declining balance method. 262
Under a special accounting rule, certain taxpayers engaged in the business of farming
who elect to deduct preproductive period expenditures are required to depreciate all farming
assets using the alternative depreciatio n system (i.e., using longer recovery periods and the
straight line method).263

253

Rev. Proc . 87-56, Asset class 01.1 , Agricu lture.

254

Rev. Proc. 87-56, Asset class 0 1.11, Cotton ginn ing assets.

255
Rev. Proc. 87-56, Asset class 00.3, Land improvements. See also, IRS Publication 225, Farmer's Tax
Guide (20 I 7).
256

As defined in section 263A(e)(4).

257

Sec. !68(e)(3)(B)(vii).

258

Sec. 168(b)(3)(A).

259

Sec. 168(b)(3)(B).

260

Sec. !68(b)(3)( E).

261

Within the meaning of section 263A(e)(4).

262

Sec. 168(b)(2)(B).

263

Sec. 263A(d)(3) and (e)(2).

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TREAS-17-0313-I-000494

 Description of Proposal
The proposal shortens the recovery period from 7 to 5 years for any machinery or
equipment (other than any grain bin , cotton ginning asset , fence, or other land improvement)
used in a farming business , the original use of which commences with the taxpayer and is placed
in serv ice after December 31, 2017.
The proposal also repeals the required use of the 150-percent declining balance method
for property used in a farming business (i.e., for 3-, 5- , 7- , and 10-year property). The 150percent declining balance method will continue to apply to any 15-year or 20-year property used
in the farming business to which the stra ight line method does not apply , or to property for which
the taxpayer elects the use of the 150-percent declining balance method.

Effective Date
The proposal is effective for property placed in serv ice after December 31, 2017.

5. Modification of net operating loss deduction
Present Law
A net operating loss ("NOL ") genera lly means the amount by which a taxpayer ' s
business deductions exceed its gross income. 264 In genera l, an NOL may be carried back two
years and carried over 20 years to offset taxable income in such years. 265 NOLs offset taxable
income in the order of the taxable years to which the NOL may be carried. 266
Different carryback periods apply with respect to NOLs arising in different
circumstances. Extended carryback periods are allowed for NO Ls attributable to specified
liabilit y losses and certa in casualty and disaster losses. 267 Limitations are placed on the
carryback of excess interest losses attributable to corporate equity reduction transactions. 268

Description of Proposal
The proposal limits the N OL deduction to 90 percent of taxable income (determined
without regard to the deduction). Carryovers to other years are adjusted to take account of this
limitation , and may be carried forward indefinitely.

264

Sec . l 72(c).

265

Sec. l72(b)(l)(A).

266

Sec. I72(b )(2).

267

Sec. 172(b)(l)(C) and (E) .

268

Sec. l 72(b )( 1)(D) .

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 The proposal repe als the two-year carryback and the special carry back provisions , but
provides a two-year carryback in the case of certa in losses incurred in the trad e or business of
farming.

Effective Date
The proposal allowing indefin ite carryovers and modify ing carryba cks applies to losses
arising in taxable yea rs beginning after December 31, 2017.
The propo sal limiting the NOL dedu ction applies to losses arising in taxable years
beginning after Dece mber 31, 20 17.

6. Like-kind exchanges of real property
Present Law
An exchan ge of property , like a sale, generally is a taxable even t. However , no ga in or
loss is recogn ized if prop erty he ld for productive use in a trade or business or for investment is
exchanged for property of a " like kind" which is to be held for productive use in a trade or
business or for investment. 269 In genera l, section 1031 does not app ly to any exchange of stock
in trade (i.e., inventory) or other property held primarily for sale; stocks , bonds , or notes; other
secu rities or ev iden ces of indebtedne ss or interest; interests in a partn ership; certificates of trust
or beneficial interests; or choses in action. 270 Sectio n I031 also does not apply to certain
exchanges involving livestock 271 or foreign property. 272
For purpo ses of section 1031, the determi nation of whe ther property is of a "like kind "
relates to the nature or character of the property and not its grade or quality , i.e., the
nonrecognition rules do not apply to an exchange of one class or kind of property for property of
a different class or kind (e.g., section 1031 does not apply to an exchange of real property for
personal property). 273 The different cla sses of pro perty are: (1) depreciable tangible personal

269

Sec. l 03 l (a)( l ).

270

Sec. l 03 l (a)(2). A chose in action is a right that can be enforced by legal act ion.

271

Sec. l03l(e).

272

Sec. l 03 l (h).

273

Treas. Reg. sec. l.l03l(a)- l (b).

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TREAS-17-0313-I-000496

 property;274 (2) intangible or nondepreciab le personal property;275 and (3) real property. 276
However , the rules with respect to whether real estate is "like kind" are applied more liberally
than the rules governing like-kind exchanges of deprecia ble, intangib le, or nondeprec iable
personal property. For exa mple, improve d real estate and unimproved real estate generally are
cons idered to be property of a "like kind" as this distinction relates to the grade or quality of the
real estate, 277 while depreciab le tangible personal properties must be either within the same
Genera l Asset Class 278 or within the same Product Class.279
The nonrecogn ition of gain in a like-kind exchange applies only to the exte nt that likekind property is received in the exchange. Thus, if an exchange of property would meet the
requireme nts of section 1031, but for the fact that the property receive d in the transactio n
consists not only of the proper ty that wo uld be permitted to be exchange d on a tax-free basis, but
also other non-qualifying property or money ("additional considerat ion"), then the gain to the
recipient of the other property or money is required to be recognized , but not in an amount
274

For example, an exchange of a personal computer classified under asset class 00.12 of Rev. Proc. 8756, 1987-2 C.B. 674, for a printer classified under the same asset class of Rev. Proc. 87-56 would be treated as
property of a like kind. However, an exchange of an airplane classified under asset class 00.21 of Rev. Proc. 87-56
for a heavy general purpose truck classified under asset class 00.242 of Rev. Proc. 87-56 would not be treated as
property of a like kind. See Treas. Reg. sec. l.103 l(a)-2(b)(7).
275
For example, an exchange of a copyright on a novel for a copyright on a different nove l would be
treated as property of a like kind. See Treas. Reg. sec. 1.1031(a)-2(c)(3). However , the goodwill or going concern
value of one business is not of a like kind to the goodwill or going concern value of a different business. See Treas.
Reg. sec. l.10 3 l(a)-2(c)(2). The Internal Revenue Service ("IRS") has rnled that intangible assets such as
trademarks, trade names, mastheads , and customer-based intangibles that can be separately described and va lued
apart from goodwill qualify as property of a like kind under section l 031. See Chief Counse l Advice 20091 l 006,
February 12, 2009.
276

Treas. Reg. sec. 1.103 l(a)-l( b) and (c).

277

Treas. Reg. sec. 1.1031(a)-l (b).

278
Treasury Regula tion section 1.1031 (a)-2(b )(2) provid es the following list of General Asset Classes ,
based on asset classes 00.11 through 00.28 and 00.4 of Rev. Proc. 87-56, 1987-2 C.B. 674: (i) Office furniture,
fixtures, and equ ipmen t (asset class 00.11 ), (ii) Tnfonnation systems (computers and peripheral equipment) (asset
class 00.12), (iii) Data handlin g equipment, except computers (asset class 00.13) , (iv) Airplanes (airfram es and
engines), except those used in commercial or contrac t carryin g of passengers or freight, and all helicopters
(airframes and engines) (asset class 00.21 ), (v) Automobi les, taxis (asset class 00.22), (vi) Buses (asset class 00.23) ,
(vii) Light genera l purpose trucks (asset class 00.241 ), (viii) Heavy ge neral purpos e trncks (asset class 00.242),
(ix) Railroad cars and locomotives , except those owned by railroad transportation companies (asset class 00.25),
(x) Tractor units for use over-the-road (asset class 00.26), (xi) Trailers and trailer-mounted containers (asset class
00.27), (xii) Vessels, barges, tugs, and similar water-transportation equipment , except those used in marine
construction (asset class 00.28), and (xiii) Industrial steam and electric generation and/or distribution systems (asset
class 00.4).
279

Property within a product class consists of depreciable tangible personal property that is described in a
6-digi t product class within Sectors 31, 32, and 33 (pertainin g to manufacturing industries) of the North Amer ican
Industry Classification System ("NA ICS"), set forth in Executi ve Office of the President , Office of Management and
Budget, North American Industry Classification System, United States , 2002 (NAICS Manual) , as periodically
updated. Treas . Reg. sec. l.103 l(a)-2(b) (3) .

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 exceeding the fair market value of such other propert y or money .280 Additionally , any such ga in
realized on a section 1031 exchange as a result of additional consideration being involved
constitutes ordinary income to the extent that the gain is subject to the recapture provisions of
sections 1245 and 1250.281 No losses may be recognized from a like-kind exchange. 282
If section 1031 applies to an exchange of properties , the basis of the property received in
the exchange is equal to the basis of the propert y transferred . This basis is increa sed to the
extent of any gain recognized as a result of the receipt of other propert y or money in the likekind exchange, and decreased to the extent of any money received by the taxpayer. 283 The
holdin g period of qualifying property received includes the holdin g period of the qua lifying
property transferred , but the nonqualifying propert y recei ved is required to begin a new holding
period .284
A like-kind exchange also does not require that the properties be exchanged
simultaneousl y. Rather , the property to be recei ved in the exchange must be received not more
than 180 days after the date on which the taxpa yer relinqui shes the original property (but in no
event later than the due date (including extensions) of the taxpa yer's income tax return for the
taxable year in which the transfer of the relinqui shed property occur s). In addition , the taxpa yer
must identify the prop erty to be received within 45 days after the date on which the taxpaye r
transfers the property relinqui shed in the exchange. 285
The Trea sury Department has issued regulation s286 and revenue procedu res 287 providing
guidance and safe harbor s for taxpayers engaging in deferred like-kind exchanges.

280
Sec. 1031(b). For example , if a taxpayer holding land A having a basis of $40,000 and a fair market
value of $ 100,000 exchan ges the property for land B worth $90,000 plus $ I 0,000 in cash , the taxpayer wou ld
recogni ze $10 ,000 of gain on the transaction , which wou ld be includable in income. The remaining $50,000 of gain
wou ld be deferred until the taxpaye r disposes of land B in a taxab le sale or exchange.
281

Secs. l 245(b )( 4) and l 250(d)( 4). For examp le, if a taxpayer holding section 1245 property A with an
original cost basis of $ 11,000, an adjusted basis of $ 10,000, and a fair market va lue of $ 15,000 exchan ges the
property for section 1245 property B with a fair market value of $ 14,000 p lus $ 1,000 in cash, the taxpayer would
recognize $ 1,000 of ordinary income on the transact ion. The rema ining $4,000 of gain would be deferred until the
taxpayer disposes of section 1245 property Bin a taxable sale or exchan ge.
282

Sec. 103l(c).

283

Sec. 103 l(d). Thus , in the example noted above, the taxpayer's basis in B wou ld be $40,000 (the
taxpayer's transferred basis of $40 ,000, increased by $ 10,000 in gain recognized , and decreased by $ 10,000 in
money received).
284

Sec. 1223(1).

285

Sec. 103 I (a)(3) .

286

Treas. Reg. sec. 1.103l(k)-l(a) through (o).

287

See Rev. Proc. 2000-37 , 2000-40 I.R.B. 308, as modified by Rev. Proc. 2004-5 1, 2004-33 I.RB. 294.

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TREAS-17-0313-I-000498

 Description of Proposal

The proposal modifies the provision providing for nonrecognition of gain in the case of
like-kind exchanges by limiting its application to real property that is not held primarily for sale.
Effective Date

The proposal genera lly applies to exchanges completed after December 3 1, 2017.
However , an exception is provided for any exchange if the property disposed ofby the taxpayer
in the exchange is disposed of on or before December 31, 2017, or the property received by the
taxpayer in the exchange is received on or before such date.
7. Applicable recovery period for real property

Present Law
In general

A taxpayer generally must capitalize the cost of property used in a trade or business or
held for the production of income and recover such cost over time through annual deductions for
depreciation or amortization. 288 Tangible property generally is depreciated under the modified
accelerated cost recovery system ("MACRS"), which determines depreciation for different types
of property based on an assigned applicable depreciation method , recovery period , and
convention. 289
Recovery periods and depreciation methods
The applicable recovery period for an asset is determined in part by statute and in part by
historic Treasury guidance.290 The "type of property " of an asset is used to determine the "cl ass
life" of the asset, wh ich in turn dictates the applicable recovery period for the asset.
The MACRS recovery periods applicable to most tangible personal property range from
three to 20 years. The depreciation methods generally applicable to tangible personal property
are the 200-percent and 150-percent declining balance methods, 291 switching to the straight line
288

See secs. 263(a) and 167. However , where property is not used exc lusively in a taxpayer's business,
the amount eligible for a deduction must be reduced by the amount related to personal use. See, e.g., section 280A.
289

Sec. 168.

290

Exercising authority granted by Congress, the Secretary issued Rev. Proc. 87-56, 1987-2 C.B. 674,
laying out the framework of recovery periods for enumerated classes of assets. The Secretary clarified and modified
the list of asset classes in Rev. Proc. 88-22, I 988-1 C.B. 785. In November I 988, Congress revoked the Secretary ' s
authority to modify the class lives of depreciable property. Rev. Proc. 87-56, as modified , remains in effect except
to the extent that the Congress has, since 1988, statutorily modified the recovery period for certain depreci able
assets , effectively superseding any administrative guidance with regard to such property.
291
Under the declining balance method the depreciation rate is determined by dividing the appropriate
percentage (here 150 or 200) by the appropriate recovery period. This leads to accelerated depreciation when the

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TREAS-17-0313-I-000499

 method for the first taxable year where using the straight line method with respect to the adju sted
basis as of the beginning of that year yie lds a larger depreciation allowance. The recovery
periods for most real property are 39 years for nonresidential real property and 27.5 years for
residential rental property. The straight line depreciat ion method is required for the
aforementioned real property.
Placed-in-service conventions
Depreciation of an asset begins when the asset is deemed to be placed in service under
the applicable convention.292 Under MACRS , nonresidential real property , residentia l rental
property, and any railroad grading or tunnel bore generally are subject to the mid-month
convention, which treats all property placed in service during any month ( or disposed of during
any month) as placed in service (or disposed of) on the mid-point of such month .293 All other
property generally is subject to the half-year convention, which treats all property placed in
service during any taxable year (or disposed of during any taxable year) as placed in service (or
disposed of) on the mid-point of such taxable year to reflect the assumption that assets are placed
in service ratably throughout the year. 294 However , if substantial property is placed in service
during the last three months of a taxable year, a special rule requires use of the mid-quarter
convent ion,295 designed to prevent the recognition of disproportionately large amounts of firstyear depreciation under the half-year convention.
Depreciation of additions or improvements to property
The recovery period for any addition or improvement to real or persona l property begins
on the later of ( 1) the date on which the addition or improvement is placed in service, or (2) the
date on which the property with respect to which such addition or improvement is made is placed
in service. 296 Any MACRS deduction for an addition or improvement to any property is to be

declining balance percentage is greate r than I 00. The table below illustrates depreciation for an asset with a cost of
$ 1,000 and a seve n-year recovery period under the 200 -percent declinin g balance method , the I SO-percent declining
balance method, and the straight line method.
Recoverymethod
200-percentdecliningbalance
150-percent declining balance
Straight-line

Year I
Year2 Year 3
285.71 204.08 145.77
214.29 168.37 132.29
142.86 142.86 142.86

292

Treas. Reg. sec. l.l67(a)-IO(b).

293

Sec. I68(d)(2) and (d)(4)(B) .

294

Sec. 168(d)(l) and (d)(4)(A).

Year4
Year 5 Year6 Year 7
Total
104.12
86.77
86.77
86.77 1,000.00
121.26 121.26 121.26 121.26 1,000.00
142.86 142.86 142.86 142.86 1,000.00

295

The mid-quarter convention treats all property placed in service (or disposed of) during any quarter as
placed in service (or disposed of) on the mid-point of such quarter. Sec. 168(d)(3) and (d)(4)(C).
296

Sec. 168(i)(6).

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TREAS-17-0313-I-000500

 computed in the same manner as the deduction for the underlying property would be if such
property were placed in service at the same time as such addition or improvement. Thus , for
example , the cost of an improvement to a building that constitutes nonresidential real property is
recovered over 39 years using the straight line method and mid-month convention. Certain
improvements to nonresidential real property are eligible for the additional first-year
depreciation deduction if the other requirements of section l 68(k) are met (i.e., improvements
that constitute "qualified improvement property ").297
Qualified improvement property
Qualified improvement property is any improvement to an interior portion of a building
that is nonresidential real property if such improvement is placed in service after the date such
building was first placed in service. 298 Qualified improvement property does not include any
improvement for which the expenditure is attributable to the enlargement of the building , any
elevator or escalator , or the internal structural framework of the building.
Depreciation of leasehold improvements
Generally , depreciation allowances for improvements made on leased property are
determined under MACRS , even if the MACRS recovery period assigned to the property is
longer than the term of the lease. 299 This rule applies regardless of whether the lessor or the
lessee places the leasehold improvements in service. If a leasehold improvement constitutes an
addition or improvement to nonresidential real property already placed in service , the
improvement generally is depreciated using the straight-line method over a 39-year recovery
period , beginning in the month the addition or improvement was placed in service. However ,
exceptions to the 39-year recovery period exist for certain qualified leasehold improvements ,
qualified restaurant property , and qualified retail improvement property .
Qualified leasehold improvement property
Section 168(e)(3)(E)(iv) provides a statutory 15-year recovery period for qualified
leasehold improvement property. Qualified leasehold improvement property is any improvement
to an interior portion of a building that is nonresidential real property , provided certain
requirements are met. 300 The improvement must be made under or pursuant to a lease either by
the lessee (or sub lessee) , or by the lessor , of that portion of the building to be occupied
exclusively by the lessee (or sublessee). The improvement must be placed in service more than
three years after the date the building was first placed in service. Qualified leasehold
improvement property does not include any improvement for which the expenditure is
attributable to the enlargement of the building , any elevator or escalator , any structural
297
Sec. I 68(k)(2)(A)(i)(IV ) and (k)(3). See also section III.C.2. of this document (Temporary I 00-percent
expensing for certain business assets).
298

Sec. 168(k)( 3).

299

Sec. l 68(i)(8).

300

Sec . l 68(e)(6) .

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TREAS-17-0313-I-000501

 component benefiting a common area, or the internal structural framework of the building. If a
lessor makes an improvement that qualifies as qualified leasehold improvement property , such
improvement does not qualify as qualified leasehold improvement property to any subsequent
owner of such improvement. An exception to the rule applies in the case of death and certain
transfers of property that qualify for non-recognition treatment.
Qualified leasehold improvement property is generally recovered using the straight-line
method and a half-year convention ,30 1 and is eligible for the additional first-year depreciation
deduction if the other requirements of section 168(k) are met. 302
Qualified restaurant property
Section 168(e)(3)(E)( v) provides a statutory 15-year recovery period for qualified
restaurant property. Qualified restaurant property is any section 1250 property that is a building
or an improvement to a building , if more than 50 percent of the building 's square footage is
devoted to the preparation of, and seating for on-premises consumption of, prepared meals.303
Qualified restaurant property is recovered using the straight-line method and a half-year
convention. 304 Additionally , qualified restaurant property is not eligible for the additional firstyear depreciation deduction unless it also satisfies the definition of qualified improvement
property. 305
Qualified retail improvement property
Section 168(e)(3)(E)(ix) provides a statutory 15-year recovery period for qualified retail
improvement propert y. Qualified retail improvement property is any improvement to an interior
portion of a buildin g which is nonresidential real property if such portion is open to the general
public 306 and is used in the retail trade or business of selling tangible personal property to the
general public , and such improvement is placed in service more than three years after the date
the building was first placed in service. 307 Qualified retail improvement property does not
include any improvement for which the expenditure is attributable to the enlargement of the
building , any elevator or escalator, any structural component benefiting a common area, or the

3

o, Sec. 168(b)(3)(G) and (d).

302

Sec. 168(k)(2)(A)(i)(IV) and (k)(3) . See section III.C.2. of this document (Temporary 100-percent
expensin g for certain business assets).
303

Sec. 168(e)(7).

304

Sec. 168(b)(3)(H) and (d).

305

Sec. 168(e)(7)(B).

306

Improvements to portions of a buildin g not open to the general public (e.g., stock room in back ofret ail
space) do not qualify under the provision.
307

Sec. 168(e)(8).

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TREAS-17-0313-I-000502

 internal structural framework of the buildin g. 308 In the case of an improvement made by the
owner of such improvement , the improvement is a qualified retail improvement only so long as
the improvement is held by such owner. 309
Retail establishments that qualify for the 15-year recovery period include those primaril y
engaged in the sale of goods. Examples of these retail establishments include , but are not limited
to, grocery stores, clothing stores, hardware stores, and convenience stores. Establishments
primarily engaged in provid ing services, suc h as professional services, financial services ,
personal services , health services , and entertainment , do not qualif y. Generally , it is intended
that businesses defined as a store retailer under the curre nt Nort h American Industry
Classification System (industry sub-sectors 441 through 453) qualify while those in other
industry classes do not qualify. 3 10
Qualified retail impro ve ment property is recovered usin g the straight-line method and a
half-year convention,31 1 and is eligible for the additional first-year depreciation deduction if the
other requirements of section 168(k) are met. 3 12
Alternative depreciation system
The alternative depreciation system ("ADS") is required to be used for tangible property
used predominantly outside the United States , certain tax-exempt use property , tax-exempt bond
financed property , and certain imported property covered by an Executive order. 313 An election
to use ADS is available to taxpayers for any class of property for any taxable year. 3 14 Under
ADS , all property is depreciated usin g the stra ight line method over recovery periods which
ge nerall y are equal to the class life of the property , with certain exceptions. 315

308

Sec. 168( e)(8)(C).

309
Sec. 168(e)(8)(B). Rules similar to section 168(e)(6)(B) apply in the case of death and certain transfers
of property that qualify for non-recognition treatment.
310

Joint Committee on Taxation , General Exp lanation of Tax Legislation Enacted in the 1 J(Jh Congress
(JCS-1-09) , March 2009 , p. 402.
311

Sec. I68(b)( 3)(I) and (d).

312

Sec. I 68(k)(2)(A)(i)(lV) and (k)(3). See section III.C.2. of this document (Temporary 100-percent
expensin g for certain business assets).
313

Sec. 168(g).

314

Sec. 168(g)(7).

315

Sec. 168(g)(2) .

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 Description of Proposal

The proposal shortens the recovery period for determining the depreciation deduction
with respect to nonresidential real and residential rental property to 25 years. As a conforming
amendment , the proposal changes the statutory recovery period for nonresidential real and
residential rental property to 25 years for purposes of determining whether a rental agreement is
a long-term agreement under the section 467 rules applicable to certain payments for the use of
property or services. 3 16
The proposal eliminates the separate definitions of qualified leasehold improvement ,
qualified restaurant , and qualified retail improvement property , and provides a genera l I 0-year
recovery period for qualified improvement property, 3 17 and a 20-year ADS recovery period for
such property. Thus , for exam ple, qualified improvement property placed in service after
December 31, 2017, is genera lly depreciable over 10 yea rs using the straight line method and
half-year convent ion, without regard to whether the improvements are property subject to a
lease, placed in service more than three years after the date the building was first placed in
service, or made to a restaurant building. Restaurant building property placed in service after
December 31, 2017, that does not meet the definition of qualifi ed improvement property is
depreciable over 25 years as nonresidential real property , using the straight line method and the
mid-month convention.
As a conforming amendment, the proposal replaces the references in section l 79(f) to
qualified leaseho ld improvement property , qualified restaurant property , and qualified retail
improvement property with a referen ce to qualified improvement property. 318 Thus, for
example, the proposal allows section 179 expensing for improvement property without regard to
whether the improvements are property subject to a lease, placed in service more than three years
after the date the building was first placed in service, or made to a restaurant building.
Restaurant building property placed in service after December 31, 2017, that does not meet the
definition of qualified improvement property is not eligible for section 179 expensing.
The proposal also requires a real property trade or business 3 19 electing out of the
limitation on the deduction for interest to use ADS to depreciate any of its nonresidential real
property , residential rental property , and qualified improvement property.

316
A long-term section 467 rental agreement is a lease of property for a term in excess of75 percent of the
property 's statutory recovery period. Sec. 467(b)(4)(A) and (e)(3)(A). A disqualified long-term agreement is one
that has as one of its principal purposes the avoidance of taxes. Sec. 467(b )( 4)(B).
317

Described in section l68(k)(3).

318

For additional proposed changes to section 179, see section lll.B. l. of this document (Modification of
rules for expensing depreciable business assets).
319

As defined in section III.C.l. of this document (Limitation on deduction for interest) , by cross reference
to section 469(c)(7)(C) (i.e. , any real property development , redevelopment , construction , reconstruction ,
acquisition , convers ion, rental , operation , management , leasing , or brokerage trade or business). Note that a

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 Effective Date
The propo sal is effective for property placed in service after December 31, 2017.

mortgage broker who is a broker of financia l instruments is not in a real property trade or business for this purpose.
See, e.g., CCA 201504010 (December 17, 2014).

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TREAS-17-0313-I-000505

 D. Business -Related Deductions
1. Repeal of deduction for income attributab le to domestic production activities

Present Law

Section 199 provides a deduct ion from taxable income ( or, in the case of an individual,
adjusted gross income 320 ) that is equal to nine percent of the lesser of the taxpayer's qualified
production activities income or taxable income (determined without regard to the section 199
deduction) for the taxable year. 321 For corporations subject to the 35-percent corporate income
tax rate, the nine-percen t deduction effectively reduces the corporate income tax rate to slightly
less than 32 percent on qualified production activities income. 322 A similar reduction applies to
the graduated rates applicable to individuals with qualifying domestic production activities
mcome.

In genera l, qualified product ion activities income is equal to domestic production gross
receipts reduced by the sum of: (l) the costs of goods sold that are allocab le to those receipts ;
and (2) other expenses, losses, or deductions which are properly allocab le to those rece ipts.323
Domestic production gross receipts genera lly are gross receipts of a taxpayer that are
derived from: (1) any sale, exchange, or other disposition , or any lease, rental, or license, of
qualifying production property 324 that was manufactured , produced , grown or extracted by the
taxpayer in whole or in significant part within the United States;325 (2) any sale, excha nge, or
320

For this purpose , adjusted gross income is detemlined after appl ication of sections 86, 135, 137, 219,
221 , 222 , and 469, without regard to the section 199 deduction. Sec. I99(d)(2).
321
Sec. 199(a). In the case of oil related qualified production activities income, the deduction from taxable
income is equal to six percent of the lesser of the taxpayer's oil related qualified production activities income,
qua lified production activities income , or taxable income. Sec. I99(d)(9).
322

Ibis examp le assumes the deduction does not exceed the wage limitation discussed below.

323

Sec. 199(c)(l ). In computing qua lified production activities income , the domestic production activities
deduction itself is not an allocable deduction. Sec. I99(c)(l)(B)(i i). See Treas. Reg. secs. 1.199- 1 through 1.199-9
where the Secretary has prescribed rules for the proper allocation of items of income, deduction , expense, and loss
for purposes of determining qua lified production activities income.
324
Qualify ing prod uction property genera lly includes any tang ible persona l property , computer software ,
and sound recordings. Sec. !99(c)(5).
325

When used in the Code in a geograph ical sense , the term "United States" generally includes only the
States and the District of Columbia. Sec. 770l(a)(9) . A special rule for determinin g domestic production gross
receipts, however, provides that for taxable years beginning after December 31, 2005, and before January 1, 2017, in
the case of any taxpayer with gross receipts from sources within the Commonwealth of Puerto Rico , the term
"United States" includes the Commonwealth of Puerto Rico , but only if all of the taxpayer's Puerto Rico-sourced
gross receipts are taxable under the Federal income tax for individuals or corpora tions for such taxable year.
Secs. I 99(d)(8)(A) and (C). 1ncomputing the SO-percent wage limitation, the taxpayer is permitted to take into
account wages paid to bona fide residents of Puerto Rico for services performed in Puerto Rico. Sec. 199(d)(8)(B).

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TREAS-17-0313-I-000506

 other disposition , or any lease, rental, or license, of qualified film326 produced by the taxpayer ;
(3) any sale, exchange , or other disposition , or any lease , rental , or license , of electricity, natural
gas, or potable water produced by the taxpayer in the United States; (4) construction of real
property performed in the United States by a taxpayer in the ordinary course of a construction
trade or business ; or (5) engineering or architectural services performed in the United States for
the construction of rea l property located in the United States. 327
The amount of the deduction for a taxable year is limited to 50 percent of the W-2 wages
paid by the taxpayer , and properly allocable to domestic productio n gross receipts, during the
calendar year that ends in such taxable year. 328
Description of Proposal

The proposal repeal s the deduction for income attributable to domestic production
activities.
Effective Date

The proposal applies to taxable years beginning after December 31, 2018.
2. Limitation on deduction by employers of expenses for fringe benefits
Present Law
In general

No deduction is allowed with respect to ( 1) an activity genera lly considered to be
entertainme nt, amusement, or recreation ("entertainment "), unless the taxpayer establishes that
the item was directly related to (or, in certa in cases, associated with) the active conduct of the
taxpayer 's trade or business , or (2) a facility (e.g., an airplane) used in connectio n with such

326

Quali fied film includes any motion picture film or videotape (includ ing live or delayed television
programming , but not including certain sexually exp licit productions) if 50 percent or more of the total
compensation relating to the production of the film (including compensation in the form of residuals and
participa tions) cons titutes compensation for serv ices perfonned in the United States by actors , production personnel ,
directors, and producers. Sec. 199(c)(6) .
327

Sec. 199(c)(4)(A).

328

Sec. !99(b)(l). For purposes of the provision , "W-2 wages" include the sum of the amounts of wages
as defined in section 340 l(a) and elective deferrals that the taxpayer properly reports to the Social Security
Administration with respec t to the employment of employees of the taxpayer during the calendar year ending during
the taxpayer 's taxable year. Elective deferrals include elective deferrals as defined in sect ion 402(g)(3 ), amounts
deferred under section 457, and designated Roth contributions as defined in section 402A. See sec. l 99(b)(2)(A).
The wage limitation for qualified films includes any compensation for services performed in the United States by
actors, production personnel , direc tors, and producers and is not restricted to W-2 wages . Sec. 199(b)(2)(D) .

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TREAS-17-0313-I-000507

 activity. 329 If the taxpayer establishes that entertainment expenses are directly related to (or
associated with) the active conduct of its trade or business, the deduction generally is limited to
50 percent of the amount otherwise deductible. 330 Similarly, a deduction for any expense for
food or beverages generally is limited to 50 percent of the amount otherwise deductible. 33 1 In
addition , no deduction is allowed for membership dues with respect to any club organized for
business , pleasure , recreation , or other social purpose. 332
There are a number of exceptions to the general rule disallowing deduction of
entertainment expenses and the rules limiting deductions to 50 percent of the otherwise
deductible amount. Under one such exception, those rules do not apply to expenses for goods,
services , and facilities to the extent that the expenses are reported by the taxpayer as
compensation and as wages to an employee. 333 Those rules also do not apply to expenses for
goods , services, and facilities to the extent that the expenses are includible in the gross income of
a recipient who is not an employee (e.g., a nonemployee director) as compensation for services
rendered or as a prize or award. 334 The exceptions apply only to the extent that amounts are
properly reported by the company as compensation and wages or otherwise includible in income.
In no event can the amount of the deduction exceed the amount of the taxpayer 's actual cost,
even if a greater amount (i.e., fair market value) is includible in income. 335
Those deduction disallowance rules also do not apply to expenses paid or incurred by the
taxpayer , in connection with the performance of services for another person ( other than an
employer) , under a reimbursement or other expense allowance arrangement if the taxpayer
accounts for the expenses to such person. 336 Another exception applies for expenses for
recreational , social, or similar activities primarily for the benefit of employees other than certain
owners and highly compensated employees. 337 An exception applies also to the 50 percent

329

Sec. 274(a)(I).

330

Sec. 274(n)(l)(B).

331

Sec. 274(n)(l)(A).

332

Sec. 274(a)(3).

333

Sec. 274(e)(2)(A). See below for a discussion of the recent modification of this rule for certain

individuals.
334

Sec. 274(e)(9).

335

Treas. Reg. sec. l.162-25T(a).

336

Sec. 274(e)(3).

337

Sec. 274(e)(4).

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TREAS-17-0313-I-000508

 deduction limit for food and bevera ges provided to crew members of certain commercial vessels
and certain oil or gas platform or drilling rig workers. 338

Expenses treated as compensation
Except as otherwise provided , gross income includes compensation for services ,
includin g fees, commissions , fringe benefits , and similar items. 339 In general , an employee (or
other service provider) must include in gross income the amount by which the fair market value
of a fringe benefit exceeds the sum of the amount (if any) paid by the individual and the amount
(if any) specifically excluded from gross income. 340 Treasury regulations provide detailed rules
regarding the valuation of certain fringe benefits , including flights on an employer-provided
aircraft . In general , the value of a non-commercial flight generally is determined under the base
aircraft valuation formula , also known as the Standard Industry Fare Level formula or "SIFL. " 341
If the SIFL valuation rules do not apply, the value of a flight on an employer-provided aircraft
generally is equal to the amount that an individual would have to pay in an arm ' s-length
transaction to charter the same or a comparable aircraft for that period for the same or a
comparable flight. 342
In the context of an employer providing an aircraft to employees for nonbusiness (e.g.,
vacation) flights , the exception for expenses treated as compensation has been interpreted as not
limiting the company 's deduction for expenses attributable to the operation of the aircraft to the
amount of compensation reportable to its employees. 343 The result of that interpretation is often
a deduction several times larger than the amount required to be included in income. Further , in
many cases , the individual including amounts attributable to personal travel in income directly
benefits from the enhanced deduction , resulting in a net deduction for the personal use of the
company aircraft.
The exceptions for expenses treated as compensation or otherwise includible income
were subsequently modified in the case of specified individuals such that the exceptions apply
only to the extent of the amount of expenses treated as compensation or includible in income of
the specified individual. 344 Specified individuals are individuals who , with respect to an
employer or other service recipient (or a related party) , are subject to the requirements of
338

Sec. 274(n)(2)(E).

339

Sec. 6 I(a)( l ).

340

Treas. Reg. sec. l. 6 l- 2 l(b)(l ).

341

Treas. Reg. sec. l. 6 l- 2 l(g)(5).

342

Treas. Reg. sec. l. 6 l- 2l(b )(6).

343

Sutherland Lumber-Southwest, Inc. v. Commissioner, 114 T.C. 197 (2000), aff d, 255 F.3d 495 (8th Cir.

344

Sec. 274(e)(2)(B)(i). See also Treas. Reg. sec. l. 274-9(a) .

2001).

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TREAS-17-0313-I-000509

 section 16(a) of the Securities Exchange Act of 1934, or would be subject to such requirements if
the employer or service recipient (or related party) were an issuer of equity securities referred to
in section 16(a).345
As a result, in the case of specified individuals , no deduction is allowed with respect to
expenses for (1) a nonbusiness activity generally considered to be entertainment, amusement or
recreation , or (2) a facility (e.g., an airplane) used in connection with such activity to the extent
that such expenses exceed the amount treated as compensation or includible in income to the
specified individual. For example, a company's deduction attributable to aircraft operating costs
and other expenses for a specified individual's vacation use of a company aircraft is limited to
the amount reported as compensation to the specified individual. However , in the case of other
employees or service providers , the company's deduction is not limited to the amount treated as
compensation or includible in income. 346

Excludable fringe benefits
Certain employer-provided fringe benefits are excluded from an employee's gross
income and wages for employment tax purposes , including , but not limited to, de minimis
fringes , qualified transportation fringes , and meals provided for the "co nvenience of the
employer. " 347
A de minimis fringe generally means any property or service the value of which is
(taking into account the frequency with which similar fringes are provided by the employer) so
small as to make accounting for it unreasonable or administratively impracticable, 348 and also
includes food and beverages provided to employees through an eating facility operated by the
employer that is located on or near the employer's business premises and meets certain
requirements .349
Qualified transportation fringes include qualified parking (parking on or near the
employer's business premises or on or near a location from which the employee commutes to

345

Sec. 274(e)(2)(B)( ii). See also Treas. Reg. sec. 1.274-9(b).

346

See Treas. Reg. sec. l.274-I0(a)(2).

347

Secs. 132(a), I 19(a), 312 l(a)(l9) and (20), 323l(e)(5) and (9), 3306(b)(l4) and (16), and 340l(a)(l9) .

348

Sec. 132(e)(l). Examples include occasional personal use of an employer 's copying machine ,
occasional parties or meals for employees and their guests, local telephone calls, and coffee, doughnuts and soft
drinks. Treas. Reg. sec. l.132-6(e)(l).
349

Sec. 132(e)(2). Revenue derived from such a facility must normally equal or exceed the direct operating
costs of the facility. Employees who are entitled , under Section 119, to exclude the value ofa meal provided at such
a facility are treated as having paid an amount for the meal equal to the direct operating costs of the facility
attributable to such meal.

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TREAS-17-0313-I-000510

 work by public transit) , transit passes , vanpool benefits , and qualified bicycle commuting
reimbursements. 350
The value of meals furnished to an employee or the employee ' s spouse or dependents by
or on behalf of an employer for the convenience of the employer is excludible from the
employee ' s gross income , but only if such meals are provided on the employer ' s business
premises. 35 1
Description of Proposal

The proposal provides that no deduction is allowed with respect to (I) an activity
generally considered to be entertainment , amusement or recreation , (2) membership dues with
respect to any club organized for business , pleasure , recreation or other social purposes , or (3) a
facility or portion thereof used in connection with any of the above items. Thus, the proposal
repeals the present-law exception to the deduction disallowance for entertainment , amusement ,
or recreation that is directly related to (or, in certain cases, associated with) the active conduct of
the taxpayer's trade or business (and the related rule applying a 50 percent limit to such
deductions) .
While taxpayers may still generally deduct 50 percent of the food and beverage expenses
associated with operating their trade or business (e.g., meals consumed by employees on work
travel) , the proposal expands this 50 percent limitation to expenses of the employer associated
with providing food and beverages to employees through an eating facility that meets
requirements for de minimis fringes.

In addition , the proposal disallows a deduction for expenses associated with providing
any qualified transportation fringe to employees of the taxpayer , and except as necessary for
ensuring the safety of an employee , any expense incurred for providing transportation ( or any
payment or reimbursement) for commuting between the employee's residence and place of
employment.
Effective Date

The proposal applies to amounts paid or incurred after December 31, 2017.

350

Sec . 132(1)(1), (5). The qua lified transpor tation fringe exclusions are subject to monthly limits.
Sec. 132(1)(2).
351

Sec. I l 9(a).

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TREAS-17-0313-I-000511

 E. Accounting Methods
1. Certain special rules for taxable year of inclusion

Present Law
In general
A taxpayer genera lly is required to include an item in income no later than the time of its
actual or constructive receipt , unless the item properly is acco unt ed for in a different period
under the taxpayer 's method of acco untin g. 352 If a taxpayer has an unrestricted right to demand
the payment of an amount , the taxpaye r is in construct ive rece ipt of that amount whether or not
the taxpayer makes the demand and actua lly rece ives the payment. 353

In general , for a cash basis taxpayer , an amount is included in income whe n actua lly or
constructive ly received. For an accrua l basis taxpayer , an amount is included in income when all
the events have occu rred that fix the right to receive such income and the amount thereof can be
determined with reasonable accuracy, unless an exception permits deferral or exclus ion .354
A numb er of except ions that exist to permit deferral of income relate to advance
payments . An advance payment is when a ta xpayer receives payment before the taxpayer
provides goo ds or serv ices to its customer. The exceptions of ten allow tax deferral to mirror
financial accounting deferral (e.g., income is recognized as the goods are provided or the
services are performed). 355

Interest income
A taxpayer genera lly must include in gross income the amount of interest rece ived or
accrued wit hin the taxable year on indebtedness held by the taxpa yer. 356

352

Sec. 451 (a).

353

See Treas. Reg. sec. 1.451-2.

354

See Treas. Reg. sec. l.45 1-l(a).

355

For examples of provisions permitting deferral of advance payments , see Treas. Reg. sec. 1.451-5 and
Rev. Proc. 2004-34, 2004-1 C.B. 99 1, as modified and clarified by Rev. Proc. 20 11-18, 2011-5 I.RB. 443, and Rev.
Proc. 2013-29, 2013-331.R.B. 141.
356

Secs. 6l(a)(4) and 451.

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 Original issue discount
The holder of a debt instrument with original issue discount ("OID") generally accrues
and includes the OID in gross income as interest over the term of the instrument, regardless of
when the stated interest (if any) is paid. 357
The amount of O1D with respect to a debt instrument is the excess of the stated
redemption price at maturity over the issue price of the debt instrument. 358 The stated
redemption price at maturity is the sum of all payments provided by the debt instrument other
than qualified stated interest payments. 359 The holder includes in gross income an amount equal
to the sum of the daily portions of the O1D for each day during the taxable year the holder held
such debt instrument. The daily portion is determined by allocating to each day in any accrual
period its ratable portion of the increase during such accrual period in the adjusted issue price of
the debt instrument. 360 The adjustment to the issue price is determined by multiplying the
adjusted issue price (i.e., the issue price increased by adjustments prior to the accrual period) by
the instrument's yield to maturity , and then subtracting the interest payable during the accrual
period. Thus, to compute the amount of OID and the portion of OID allocable to a period , the
stated redemption price at maturity and the term must be known. Issuers of OID instruments
accrue and deduct the amount of OID as interest expense in the same manner as the holder .361

Debt instruments subject to acceleration
Special rules for determining the amount of O1D allocated to a period apply to certain
instruments that may be subject to prepayment. If a borrower can reduce the yield on a debt by
exercising a prepa yment option, the OID rules assume that the borrower will prepay the debt. 362
In addition, in the case of ( 1) any regular interest in a real estate mortgage investment conduit
("REMIC") or qualified mortgages held by a REMIC or (2) any other debt instrument if
payments under the instrument may be accelerated by reason of prepayments of other obligations
securing the instrument , the daily portions of the OID on such debt instrument s are determined
by taking into account an assumption regarding the prepayment of principal for such
instruments. 363

357

Sec. 1272.

358

Sec. l273(a)(l).

359

Sec. l273(a)(2) and Treas. Reg. sec. l.1273-l(b).

360

Sec. l272(a)(l) and (3).

361

Sec. l63(e).

362

Treas. Reg. sec. l.l272-l(c)(5).

363

Sec. l272(a)(6).

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 The Taxpayer Relief Act of 1997364 extended these rules to any poo l of debt instruments
the payments on which may be accelerated by reason of prepayments. 365 Thus , if a taxpayer
holds a pool of credit card receivables that require interest to be paid only if the borrowers do not
pay their accounts by a specified date ("grace- period interest"), the taxpayer is required to accrue
interest or OTOon such pool based upon a reasonable assumption regarding the timing of the
payments of the accounts in the pool. Under these rules, certain amounts (other than graceperiod interest) related to credit card tran sactions, such as late-paymen t fees, 366 cash-advance
fees,367 and interchange fees, 368 have been determined to create OID or increase the amount of
01D on the pool of credit card receivables to which the amounts relate. 369
Description of Proposal

The proposal revises the rules assoc iated with the recognition of income. Specifically ,
the proposal requires a taxpayer to recognize income no later than the taxable year in which such
income is taken into account as income on an applicable financial statement370 or another
financial statement under rules specified by the Secretary, but provides an except ion for longterm contract income to which section 460 applies. 371

364

Pub. L. No. I 05-34 , sec. I 004(a).

365

Sec. 1272(a)(6)(C)(iii).

366

Rev. Proc. 2004-33 , 2004-l C.B. 989.

367

Rev. Proc . 2005-47 , 2005-2 C.B. 269.

368

Capital One Financial Corp. and Subsidiaries v. Commissioner , 133 T.C. No. 8 (2009); IRS Chief
Counsel Notice CC-2010-018, September 27 , 2010.
369

See also Rev. Proc. 2013-26, 2013-22 l.R. B. 1160, for a safe harbor method of accounting for OID on a
pool of credit card recei vables for purposes of section l272(a)(6).
370

For purposes of the proposal , the tem1 " applica ble financial statement" means: (A) a financ ial
statement which is certified as being prepared in acco rdance with genera lly accepted accounting principles and
which is (i) a 10--K (or successor form), or annual statement to shareholders , required to be filed by the taxpayer
with the United States Securities and Exchange Commission ("SEC"), (ii) an audited financial statement of the
taxpayer which is used for (I) credit purposes, (II) reporting to shareholders , partners , or other proprietors, or to
beneficiaries , or (III) any other substantial non tax purpose, but only if there is no statement of the tax payer described
in clause (i), or (iii) filed by the taxpayer with any other Federal agency for purpo ses other than Federal tax
purposes , but on ly if there is no statement of the taxpayer described in claus e (i) or (ii); (B) a financial statement
which is made on the basis of international financia l reportin g standards and is filed by the taxpayer with an agency
of a foreign government which is equivalent to the SEC and which has reportin g standards not less stringent than the
standards required by such Commission , but only if there is no statement of the taxpaye r described in
subparagraph (A); or (C) a fmancia l statement filed by the taxpayer with any other regu latory or governmenta l body
specified by the Secretary , but only if there is no statement of the taxpayer described in subparagraph (A) or (B).
371
For exam ple, under the proposal , any unbilled receivab les for par tially perform ed services must be
recognized to the extent the amounts are taken into income for financial statement purposes.

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TREAS-17-0313-I-000514

 The proposal also codifies the current deferral method of accountin g for advance
payments for goods and services provided by the IRS under Revenue Procedure 2004-34. 372
That is, the proposal allows taxpayers to defer the inclusion of income associated with certain
advance payments to the end of the tax year following the tax year ofreceipt if such income also
is deferred for financial statement purposes. 373
In addition , the proposal directs taxpayers to apply the revenue recognition rule s under
section 451 before applying the OID rules under section 1272. Thus, for example , to the extent
amounts are included in income for financial statement purposes when received (e.g., latepayment fees, cash-advance fees, or interchange fees), such amounts generally are includable in
income at such time in accordance with the general recognition principle s under section 451 .
In the case of any taxpayer required by this proposal to change its method of accountin g
for its first taxable year beginning after December 31, 2017, such change is treated as initiated by
the taxpayer and made with the consent of the Secretary .
Effective Date

The proposal applies to taxable years beginning after December 3 1, 2017 , and application
of these rules is a change in the taxpayer' s method of accounting for purpo ses of section 481.

372

2004-1 C.B . 99 1, as modifi ed and clarifie d by Rev. Proc. 20 11-18, 20 11-5 I.R.B. 443, and Rev. Proc.
20 13-29 , 20 13-33 I.RB. 14 1.
373

Thus, tJ1e prop osal is intende d to override the exception in Treasury Regu lation sect ion 1.45 1-S(c) for
inventoriable goods.

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 F. Business Credits
1. Modification of credit for clinica l testing expenses for certain drugs for rare diseases or
conditions

Present Law
A SO-percent business tax credit is available for qualified clinica l testing expenses
incurred in the testing of certain drugs to treat rare diseases or conditions. 374 Such drugs are
generally referred to as "orphan drugs" and the credit is generally referred to as the "orphan drug
credit. " Qualified clinica l testing expenses are costs incurred to test an orphan drug after the
drug bas been approved for human testing by the Food and Drug Administration (" FDA ") but
before the drug has been approved for sale by the FDA. 375 A rare disease or condition is defined
as one that (1) affects fewer than 200 ,000 persons in the United States , or (2) affects more than
200 ,000 persons , but for which there is no reasonable expectation that businesses cou ld recoup
the costs of developing a drug for such disease or condition from sales in the United States of the
drug_376
Amounts included in computing the credit under this section are excluded from the
computation of the research credit under sect ion 41. 377 Deductions allowed to a taxpayer are
reduced by an amount equal to 100 percent of the taxpayer ' s orphan drug credit determined for
the taxable year. 378

Description of Proposa l
The proposal limits the orphan drug credit to 50 percent of so much of qua lified clinical
testing expenses for the taxab le year as exceeds 50 percent of the average qua lified clinical
testing expenses for the three taxable years preceding the taxable year for which the credit is
being determined. In the case where there are no qualified clinical expenses during at least one
of the three preceding taxable years , the credit is equa l to 25 percent of qualified expenses.
Aggregation and other special rules simi lar to those applicable to the research credit apply where
there are controlled groups of corporations , estates and trusts claiming the credit , mergers and
acquisitions of taxpayers , and short taxable years . Under the proposal , taxpayers may elect a
reduced credit in lieu of reducing otherwise allowable deductions in a manner similar to the
research credit under section 280C.
In addition , the proposal limits qualified clinical testing expenses to the extent the testing
giving rise to such expenses is related to the use of a drug which has previously been approved
374

Sec. 45C .

375

Sec. 45C(b ).

376

Sec. 45C(d ).

377

Sec. 45C(c).

378

Sec. 280C(b).

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 under section 505 of the Federal Food , Drug, and Cosmetic Act for use in the treatment of any
other disease or condition , if all such diseases or conditions in the aggre,gate (ind udin g the rare
disease or condition with respect to which the credit is otherwise being determined) affect more
than 200,000 persons in the United States.
Effective Date
The proposal applies to amounts paid or incurred in taxable years beginning after
December 31, 2017.
2. Modification of rehabilitation credit
Present Law
Section 47 provides a two-tier tax credit for rehabilitation expenditures.
A 20-percent credit is provided for qualified rehabilitation expenditures with respect to a
certified historic structure. For this purpose , a certified historic structure means any building that
is listed in the National Register , or that is located in a registered historic district and is certified
by the Secretary of the Interior to the Secretary of the Treasury as being of historic significance
to the district.
A 10-percent credit is provided for qualified rehabilitation expenditures with respect to a
qualified rehabilitated building , which generally means a building that was first placed in service
before 1936. A pre-1936 building must meet requirements with respect to retention of existing
external walls and internal structural framework of the building in order for expenditures with
respect to it to qualify for the IO-percent credit. A building is treated as having met the
substantial rehabilitation requirement under the 10-percent credit only if the rehabilitation
expenditures during the 24-month period selected by the taxpayer and ending within the taxable
year exceed the greater of ( 1) the adjusted basis of the building (and its structural components) ,
or (2) $5,000.
The provision requires the use of straight-line depreciation or the alternative depreciation
system in order for rehabilitation expenditures to be treated as qualified under the provision.
Description of Proposal
The proposal repeals the 10-percent credit for pre-1936 buildings. Under the proposal , a
10-percent credit (not 20-percent) is provided for qualified rehabilitation expenditures with
respect to a certified historic structure.
Effective Date
The proposal applies to amounts paid or incurred after December 31, 2017. A transition
rule provides that in the case of qualified rehabilitation expenditures (for either a certified
historic structure or a pre-1936 building) , with respect to any building owned or leased by the
taxpayer at all times on and after January 1, 2018, the 24-month period selected by the taxpayer
(under section 47(c)(l)(C)) is to begin not later than the end of the 180-day period beginning on

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 the date of the enactment of the Act, and the amendments made by the proposal apply to such
expenditures paid or incurred after the end of the taxable year in which such 24-month period
ends.

3. Repeal of deduction for certain unused business credits
Present Law
The general business credit ("GBC") consists of various individual tax credits allowed
with respect to certain qualified expenditures and activities. 379 In general , the various individual
tax credits contain provisions that prohibit "double benefits ," either by denying deductions in the
case of expenditure-related credits or by requiring income inclusions in the case of activityrelated credits. Unused credits may be carried back one year and carried forward 20 years. 380
Section 196 allows a deduction to the extent that certain portions of the GBC expire
unused after the end of the carry forward period. In general , I 00 percent of the unused credit is
allowed as a deduction in the taxable year after such credit expired. However , with respect to the
investment credit determined under section 46 (other than the rehabilitation credit) and the
research credit determined under section 41(a) (for a taxable year beginning before January 1,
1990), section 196 limits the deduction to 50 percent of such unused credits. 38 1

Description of Proposal
This proposal repeals the deduction for certain unused business credits.

Effective Date
The proposal applies to taxable years beginning after December 31, 2017.

379

Sec. 38.

380

Sec. 39.

381

Sec. 196(d).

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 G. Banks and Financial Instruments
1. Limitation on deduction for FDIC premiums

Present Law
Corporat ions organized under the laws of any of the 50 States ( and the District of
Columbia) generally are subject to the U.S . corporate income tax on their wor ldwide taxab le
income. The taxab le income of a C corpora tion 382 genera lly comprises gross income less
allowable deductions. A taxpayer generally is allowed a deduction for ordinary and necessary
expenses paid or incurred in carry ing on any trade or business. 383
Corporation s that make a valid election pursuant to sect ion 1362 of subchap ter S of the
Code, referre d to as S corporatio ns, genera lly are not subj ect to corpora te-leve l income tax on its
items of income and loss. Instead , an S corporation passes through to shareho lders its items of
income and loss. The shareho lders separat ely take into account their shares of these items on
their individual income tax returns.

Banks, thrifts, and credit unions
In general
Financial institutions are subject to the same Federa l income tax rules and rates as are
applied to other corpora tions or entities, with spec ified exceptio ns.
C corporatio n banks and thrifts
A bank is generally taxed for Federal income tax purposes as a C corpora tion . For this
purpose a bank generally means a corpora tion, a substa ntial porti on of whose business is
receiving deposits and making loans and discounts , or exerc ising certai n fiduciar y powers. 384 A

382

Corporations subject to tax are commonly referred to as C corporations after subchapter C of the Code,
which sets forth corporate tax rules. Certain specia lized entities that invest primar ily in real estate related assets
(real estate investment trusts) or in stock and securit ies (regulated investment companies) and that meet other
requirements, genera lly including annual distribution of90 percent of their income, are allowed to deduct their
distributions to shareholders , thus genera lly paying little or no corporate-leve l tax despite otherwise being subject to
subcbapt er C.
383
Sec. 162(a). However , certain exceptions apply. No deduction is allowed for (I) any charitable
contribution or gift that would be allowable as a deduction under section 170 were it not for the percentage
limitations , the dollar limitations , or the requirements as to the time of payment , set forth in such section ; (2) any
illega l bribe, illegal kickback , or other illegal payment ; (3) certain lobbying and political expenditures; (4) any fine
or similar penal ty paid to a government for the violation of any law; (5) two-thirds of treble damage payments under
the antitrust laws; (6) certain foreign advertising expenses ; (7) certain amounts paid or incurred by a corporation in
connection with the reacquisition of its stock or of the stock of any related person ; or (8) certain app licable
employee remuneration.
384

Sec. 581. See also Treas. Reg. sec. l.581-l (a).

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 bank for this purpose generally includes domestic building and loan associations , mutual stock or
savings banks , and certain cooperative banks that are commonly referred to as thrifts. 385
S corporation banks
A bank is generally eligible to elect S corporation status under section 1362, provided it
meets the other requirements for making this election and it does not use the reserve method of
accounting for bad debts as described in section 585. 386
Special bad debt loss rules for small banks
Section 166 provides a deduction for any debt that becomes worthless (wholly or
partially) within a taxable year. The reserve method of accounting for bad debts, repealed in
1986387 for most taxpayers , is allowed under section 585 for any bank (as defined in section 581)
other than a large bank. For this purpose , a bank is a large bank if, for the taxable year (or for
any preceding taxable year after 1986), the average adjusted basis of all its assets ( or the assets of
the controlled group of which it is a member) exceeds $500 million. Deductions for reserves are
taken in lieu of a worthless debt deduction under section 166. Accordingly, a small bank is able
to take deductions for additions to a bad debt reserve. Additions to the reserve are determined
under an experience method that generally looks to the ratio of (1) the total bad debts sustained
during the taxable year and the five preceding taxable years to (2) the sum of the loans
outstanding at the close of such taxable years. 388
Credit unions
Credit unions are exempt from Federal income taxation. 389 The exemption is based on
their status as not-for-profit mutual or cooperative organizations (without capital stock) operated
for the benefit of their members, who generally must share a common bond. The definition of
common bond has been expanded to permit greater use of credit unions. 390 While significant

385
While the general principles for detennining the taxable income of a corporation are applicable to a
mutual savings bank , a building and loan association, and a cooperative bank , there are certain exceptions and
special rules for such institutions. Treas. Reg. sec. l .58 l-2(a).
386

Sec. 1361(b)(2)(A).

387

Tax Reform Act of 1986, Pub. L. No . 99-514 .

388

Sec. 585(b)(2) .

389

Sec. 50 I(c)(14)(A). For a discussion of the history of and reasons for Federal tax exemption, see
United States Department of the Treasury , Comparin g Credit Unions with Other Depository Instit utions, Report
3070, January 15, 2001, available at bttps://www.treasu ry.gov/press-center/pressreleases/Documents /report30702.doc.
390

The Credit Union Membership Access Act , Pub. L. No. 105-219, allows multiple common bond credit
unions. The legislation in part responds to National Credit Union Administration v. First National Bank & Trust
Co., 522 U.S. 479 (1998) , which interpreted the pennissible membership of tax-exempt credit unions narrowly.

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 differences between the rules under which credit unions and banks operate have existed in the
past , most of those differences have disappeared over time. 391

FDIC premiums
The Federal Deposit Insurance Corporation ("FDIC") provides deposit insurance for
banks and savings institutions . To maintain its status as an insured depository institution , a bank
must pay semiannual assessments into the deposit insurance fund. Assessments for deposit
insurance are treated as ordinary and necessary business expenses. These assessments , also
known as premiums , are deductible once the all events test for the premium is satisfied. 392

Description of Proposal
No deduction is allowed for the applicable percentage of any FDIC premium paid or
incurred by the taxpayer. For taxpayers with total consolidated assets of $50 billion or more, the
applicable percenta ge is 100 percent. Otherwise , the applicable percentage is the ratio of the
excess of total consolidated assets over $ 10 billion to $40 billion. For example, for a taxpayer
with total consolidated assets of $20 billion , no deduction is allowed for 25 percent of FDIC
premiums. The proposal does not apply to taxpayers with total consolidated assets (as of the
close of the taxable year) that do not exceed $10 billion.
FDIC premium means any assessment imposed under section 7(b) of the Federal Deposit
Insurance Act. 393 The term total consolidated assets has the meaning given such term under
section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 394
For purposes of determining a taxpayer 's total consolidated assets, members of an
expanded affiliated group are treated as a single taxpa ye r. An expanded affiliated group means
an affiliated group as defined in section 1504(a), determined by substituting "more than
50 percent " for "a t least 80 percent " each place it appears and without regard to the exceptions
from the definition of includible corporation for insurance companies and foreign corporations.
A partnership or any other entity other than a corporation is treated as a member of an expanded
affiliated group if such entity is controlled by members of such group.

39 1

The Treasury Department has concluded that any remain ing regulatory differences do not raise
competitive equity concerns between credit unions and banks. United States Department oftbe Treasury,
Comparing Credit Unions with Other Depository Institutions, Report 3070, January 15, 2001 , p. 2, available at
https://www.treasury .gov/press-center /press-releases /Documents /report30702.doc.
392

Technical Advice Memorandum 199924060, March 5, 1999, and Rev. Rul. 80-230, 1980-2 C.B. 169,

393

12U.S.C.sec .1 817(b).

394

Pub. L. No. 111-203.

1980.

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 Effective Date
The provision applies to taxable years beginning after December 31, 2017.

2. Repeal of advance refunding bonds
Present Law
Section 103 generally provides that gross income does not include interest received on
State or local bonds. State and local bonds are classified generally as either governmental bonds
or private activity bonds. Governmental bonds are bonds the proceeds of which are primarily
used to finance governmenta l facilities or the debt is repaid with governmenta l funds. Private
activity bonds are bonds in which the State or local government serves as a conduit providing
financing to nongovernmental persons (e.g., private businesses or individuals). 395 Bonds issued
to finance the activities of charitable organizations described in section 501 (c)(3) ("qualified
501(c)(3) bonds") are one type of private activ ity bond. The exclus ion from income for interest
on State and local bonds only applies if certain Code requirements are met.
The exclusion for income for interest on State and local bonds applies to refunding bonds
but there are limits on advance refunding bonds. A refunding bond is defined as any bond used
to pay principal , interest, or rede mption price on a prior bond issue (the refunded bond).
Different rules apply to current as opposed to advance refunding bonds. A current refunding
occurs when the refunded bond is redeemed within 90 days of issuance of the refunding bonds.
Conversely , a bond is classified as an advance refunding if it is issued more than 90 days before
the redemption of the refunded bond. 396 Proceeds of advance refunding bonds are genera lly
invested in an escrow account and held until a future date when the refunded bond may be
redeemed.
Although there is no statutory limitation on the number of times that tax-exempt bonds
may be currently refunded, the Code limits advance refundings. Generally, governmenta l bonds
and qualified 501(c)(3) bonds may be advance refunded one time. 397 Private activity bonds,
other than qualified 501(c)(3) bonds, may not be advance refunded at all.398 Furthermore , in the
case of an advance refunding bond that results in interest savings (e.g., a high interest rate to low
interest rate refunding) , the refunded bond must be redeemed on the first call date 90 days after
the issuance of the refunding bond that results in debt service savings. 399

395

Sec. 14 l.

396

Sec. 149(d)(5).

397
Sec. 149(d)(3). Bonds issued before 1986 and pursuant to certain transition rules contained in the Tax
Refonn Act of 1986 may be advance refunded more than one time in certain cases.
398

Sec. 149(d)(2).

399

Sec. 149(d)(3)(A)(iii) and (B) ; Treas. Reg. sec. 1.149(d)-1(()(3). A "call" provision provides the issuer
of a bond with the right to redeem the bond prior to the stated maturity.

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 Description of Proposal
The proposal repeals the exclusion from gross income for interest on a bond issued to
advance refund another bond.

Effective Date
The proposal applies to advance refundin g bonds issued after December 31, 2017.

3. Cost basis of specified securities determined without regard to identification
Present Law
In general
Gain or loss generally is recognized for Federal income tax purposes on realization of
that gain or loss (for example , as the result of sale of property). The taxpayer ' s gain or loss on a
disposition of property is the difference between the amount realized on the sale and the
taxpayer's adjusted basis in the property disposed of. 400
To compute adju sted basis , a taxpayer must first determine the property ' s unadjusted or
original basis and then make adjustments prescribed by the Code. 401 The original basis of
property is its cost , except as otherwise prescribed by the Code (for example , in the case of
property acquired by gift or bequest or in a tax-free exchange). Once determined , the taxpayer 's
original basis generally is adjusted downward to take account of depreciation or amortization ,
and generally is adjusted upward to reflect income and gain inclusions or capital improvements
with respect to the property.

Basis computation rules
If a taxpayer has acquired stock in a corporation on different dates or at different prices
and sells or transfers some of the shares of that stock , and the lot from which the stock is sold or
transferred is not adequately identified , the shares sold are deemed to be drawn from the earliest
acquired shares (the "first-in-first-out rule").402 However , if a taxpayer makes an adequate
identification ("specific identification") of shares of stock that it sells, the shares of stock treated
as sold are the shares that have been identified. 403 A taxpayer who owns shares in a regulated
investment company ("RIC ") generally is permitted to elect , in lieu of the specific identification

400

Sec. l 001.

401

Sec. 10 16.

402

Treas. Reg. sec. 1.1012-l(c)(l ).

403

Treas. Reg. sec. l.l 0l 2-l (c)(2).

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 or first-in-first-out methods , to determine the basis of RIC shares sold under one of two averagecost-basis methods described in Treasury regulations (together , the "average basis method ").404
In the case of the sale, exchange , or other disposition of a specified security ( defined
below) to which the basis reporting requirement described below applies , the first-in-first-out
rule, specific identification , and average basis method conventions are applied on an account by
account basis. 405 To facilitate the determination of the cost of RIC stock under the average basis
method , RIC stock acquired before January 1, 2012, generally is treated as a separate account
from RIC stock acquired on or after that date unless the RIC ( or a broker holding the stock as a
nominee) elects otherwise with respect to one or more of its stockholders , in which case all the
RIC stock with respect to which the election is made is treated as a single account and the basis
reporting requirement described below applies to all that stock. 406
The basis of stock acquired after December 31, 2010, in connection with a dividend
reinvestment plan ("DRP") is determined under the average bas is method for as long as the stock
is held as part of that plan. 407
Basis reporting
A broker is required to report to the IRS a customer ' s adjusted basis in a covered security
that the customer has sold and whether any gain or loss from the sale is long-term or shortterm.408
A covered security is, in general , any specified security acquired after an applicable date
specified in the basis reporting rules. A specified security is any share of stock of a corporation
(including stock of a RIC) ; any note, bond , debenture , or other evidence of indebtedness ; any
commodity , or contract or derivative with respect to such commodity , if the Treasury Secretary
determines that adjusted basis reporting is appropriate ; and any other financial instrument with
respect to which the Treasury Secretary determines that adjusted basis reporting is appropriate.
For purposes of satisfyin g the basis reporting requirements , a broker must determine a
customer ' s adjusted basis in accordance with rules intended to ensure that the broker's reported
adjusted basis numbers are the same numbers that customers must use in filing their tax
returns. 409

404

Treas. Reg. sec. 1.1012-l (e).

405

Sec. l0l 2(c)(l ).

406

Sec. 10 12(c)(2).

407

Sec. 1012(d)( l). Other special rules apply to DRP stock. See sec. 1012(d)(2) and (3).

408

Sec. 6045(g); Treas. Reg. sec. l. 6045-1 (d).

4 9
o

See sec. 6045(g)(2).

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 Description of Proposal
The proposal requires that the cost of any specified security sold , exchanged , or
otherwise disposed of on or after January 1, 20 18, be determined on a first-in first-o ut basis
except to the extent the average basis method is otherwise allowed (as in the case of stock of a
RIC).
The proposal includes several conforming amendments , including a rule restricting a
broker ' s basis reporting method to the first-in first-out method in the case of the sale of any stock
for whic h the average basis method is not permitted.

Effective Date
The proposal applies to sales , exchanges , and other dispositions after December 31, 20 17.

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 H. Compensation
1. Nonqualified deferred compensation

Present Law
In general

Compensation may be received currently or may be deferred to a later time. The tax
treatment of deferred compensation depends on whether it is qualified (that is, eligible for taxfavored treatment) 410 or nonqualified and, if nonqualified , whether it is funded or unfunded. In
the case of a funded nonqua lified deferred compensation arrangement , funded amounts are
included in income when the right to the compensation vests, that is, when it is no longer subject
to a substant ial risk of forfeiture. 41 1 Earnings after vesting may be taxed annually or when paid.
Under genera l tax principles , unfunded nonq ualified deferred compensa tion generally is
not included in income unti l actually or constructively received. 412 However , under statutory
rules generally applicable to nonqualified deferred compensation arrangements , income inclusion
is delayed until receipt only if specific requirements are met. Otherwise, deferred amounts are
included in income at vesting, with certa in additional incom e taxes. In addition , in the case of
certain arrangements , statutory rules require nonqualified deferred compensation to be included
in income at vesting, and depending on the arrangement , earnings after vesting may be taxed
annually or when paid.
General rules for nongualified deferred compensation

In general
Various requirements apply to a nonqu alified deferred compensation plan in order to
avoid income inclusion at vesting. 413 Absent a specific exception , these requirements apply in
addition to any special rules for particular types of nonqualified deferred compensa tion plans.

°

41
For a discuss ion of present law relating to tax-favored retirement plans , see Joint Committee on
Taxation, Report to the House Committee on Ways and Means on Present Law and Suggestions for Reform
Submitted to the Tax Reform Working Groups (JCS- 3-13), May 6, 2013 , Part II.I.
411

Depending on tbe funding veh icle, the tax treatment of funded nonqualified deferred compensation may
be governed by section 83, 402(b), or 403(c). Similar treatment app lies under a common law doctrine of econom ic
benefit , as app lied, for examp le, in Sproull v. Commissioner, 16 T.C. 244 ( 1951), ajf'd per curiam , 194 F.2d 54 1
(6th Cir. l 952) , and Rev. Ru!. 60-3 l , Situation 4, 1960- l C.B. 174. Under section 404(a)(5) , (b), and (d),
nonqualified deferred compensat ion is genera lly deductible by the service recipient for the taxab le year in which the
amount is includible in the service prov ider's income , subject to any applicable linuts on deductibility.
412

Treas. Reg. secs. l.451-l(a) and l.451- 2; Rev. Rul. 60-31 , 1960-l C.B. 174.

4 13
Section 409 A, generally effective for amounts deferred in taxab le years beginning after Decemb er 31,
2004. For further discussion of the tax treatment of nonqualified deferred compensation before 2005 and concerns

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 A nonqualified deferred compensation plan must provide that compensation for services
performed during a taxable year generally may be deferred at the service provider 's election only
if the election to defer is made no later than the close of the preceding taxable year ( or at such
other time as provided in Trea sury regulat ions). In the case of any performance-based
compensation for services perform ed over a period of at least 12 month s, the election may be
made no later than six months before the end of the service period. The time and form of
distributions from the plan must be specified at the time of initial deferral. However, subj ect to
certain requirem ents, a plan may allow later changes in the time and form of distribution s.
Distribution s from a nonqua lified deferred compensat ion plan may be allowed only upon
separatio n from service (as determined by the Secretary of the Treasury) , death , a spec ified time
(or pursuant to a fixed sched ule), change in control of a corporation (to the extent provided by
the Secretary of the Treasury) , occurrence of an unforeseeable emergency , or if the service
provider beco mes disabled. 4 14 A nonqualified deferred compensation plan may not allow
distributions other than upon the permissible distribution events and, exce pt as provided in
regulations by the Secretary of the Treasury, may not permit acce leration of a distribution.
If these requirements are not met, all amounts deferred by a serv ice provider under the
plan are currently includible in income to the extent such amounts are not subject to a substantial
risk of forfeiture and not previou sly included in gross income .415 For this purpose , a person 's
rights to compensation are subject to a substantial risk of forfeiture if the rights are con ditioned
on the future performance of substantial services by any person or the occurrence of a con dition
related to a purpose of the compen sation, provided that the possibility of forfeiture is substantial.
A con dition impo sed on the right to compensation may constitute a substantial risk of forfeiture

that led to the enactment of section 409A, see Joint Committee on Taxa tion, Genera l Explanation of Tax Legislation
Enacted in the 108th Congress (JCS-5 -05), May 2005.
414
Under a spec ial rule, when a "specified employee" separates from service , distributions may not be
made ear lier than six months after the date of the separation from service or, if earlier, the date of the employee 's
death. Specified employees are key employees (as defined in section 4 I6(i)) of pub licly-traded corporations and
genera lly include officers (limited to 50 employees) having annual compensation greater than $ 175,000 (for 2017),
five-percen t owners, and one-percent owners having annua l compensation from the employer greater than $150,000.
415

In the case ofan employee , under section 3401(a) , the amount included in income constitutes wages
subject to income tax withholding. In addition to current income inclusion, an interest factor tax at the rate
applicable to underpayme nts of tax plus one percenta ge point is imposed on the w1derpayments that would have
occurred had the compensation been includible in income when first deferred , or, if later, when not subject to a
substantia l risk of forfeiture. The amount required to be included in income is also subject to a 20-percent addit ional
tax. Under section 409A(b) , current income inclusion, interest , and a 20-percent additional tax may also result from
certain arrangements involving offshore assets set aside to fund nonqualified deferred compensation (regardless of
whether the assets are available to satisfy claims of the general creditors of the service recipient) , the restriction of
assets to provide nonqualified deferred compensation in connection with a change in the employer's financial health ,
or assets set aside to prov ide nonqualified deferred compensation during a period when the employer (or controlled
group member) maintains an underfunded defined benefit plan.

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 even if the imposition of the condition was intended in who le or in part to defer taxation of the
compensation to the service provider. 416
Definition of nongualified deferred compensation plan
A nonqualified deferred compensation plan subject to these rules generally includes any
plan, agreement or arrangement (including an agreement or arrangement that includes one
person) that provides for the deferral of compensation (including actua l or notional income on
deferred compensation) , other than a qualified employer plan , or any bona fide vacation leave,
sick leave, compensatory time, disability pay, or death benefit plan. 4I7 A qualified employer
plan for this purpose means a qualified retirement plan, a tax-deferred annuity plan, a simplified
employee pension plan, a simple retirement account plan, an eligible deferred compensation plan
of a tax-exempt or State or local government employer , a plan established before June 25, 1959,
and funded only by employee contributions , or a qualified governmenta l excess benefit
arrangement. 41 8
Under Treasury regulations , certain other types of arrangements are not considered a
deferral of compensation and thus are not subject to these rules. 4I9 For examp le, an exception
applies to amounts that are not deferred beyond a short period of time after the amount is no
longer subject to a substantial risk of forfeiture (referred to as a "short-term deferral"). 420 Under
this exception , a deferral of compensation generally does not occur if the service provider
actually or constructively receives the amount on or before the last day of the applicable two and
one-half month period. The applicab le two and one-ha lf month per iod is the period ending on
the later of the 15th day of the third month following the end of: (1) the service provider's first
taxable year in which the right to the payment is no longer subject to a substantia l risk of
forfeiture; or (2) the service recipient 's first taxable year in which the right to the payment is no
longer subject to a substantial risk of forfeiture.

In addition, Treasury regulations provide an exception for certain separation pay
(severance) arrangements. This exception applies to separation pay pursuant to a window
program , or separation pay provided upon an involuntary separation from service (as defined)
that meets certain requirement s as to amount and timing of payment. The amount cannot exceed
twice the service provider's annua lized compensation in the preceding taxable year (or if less,
twice the section 401 (a)( 17) limit in effect for the year in which the separation from service
occurs); and the plan must require this amount to be paid no later than the end of the second
416

Sec. 409A(d)(4) and Treas. Reg. sec . l.409A-l(d). The Secretary of the Treasury is authorized to
prescribe such regulations as may be necessary or appropriate to carry out the purposes of section 409A.
417

Sec. 409A(d)(l).

418

Secs. 40l(a) , 403(a) and (b), 408(k) and (p), 457(b), 50l(c)(l 8), and 415(m ).

419

For a discussion of intended exceptions for certain arrangements , see Conference Report to accompany
H.R. 4520, the American Jobs Creation Act of 2004 , R.R. Rep. No. 108-755, October 7, 2004, p. 735.
420

Treas. Reg. sec. l.409A-l(b)(4).

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TREAS-17-0313-I-000528

 taxable year following the end of the serv ice provider's taxable year in which the separat ion
from service occurred. 42 1
Treasury regulations also provide exceptions for certain stock options and stock
appreciation rights ("SARs") with respect to serv ice recipient stock, referred to collectively as
"stock rights. " 422 In genera l, under the regulations , a stock option or SAR does not provide for
the deferral of compensation if the exercise price of the stock option or SAR cannot be less than
the fair market value, on the date the option or SAR is granted, of the stock subject to the option
or SAR and the stock right does not otherwise include a deferral feature. Similar exceptions
apply to arrangements involving mutual company units and partnership inte rests. Except ion s
apply also for incentive stock options and options und er an employee stock purchase plan
("statutory options"). 423
Additional rules
Under Treasury regulations , the term "se rvice provider" include s an individual or any of
specified entities for any taxable year for which the indiv idual or entity accounts for income
from the performance of services under the cash receipts and disbursements method of
accounting. 424 The relevant entities are a corporation , an S cor poration , a partnership , a personal
service corporation , a noncorporate entity that would be a personal serv ice corporation if it were
a corporation, a qualified personal service corporation, and a noncorporate entity that wou ld be a
qualified personal service corporation if it were a corporation. However , an exception applies
for a serv ice provider engaged in the trade or business of providing serv ices (other than as an
employee or director of a corporation or in a similar position in the case of an entity that is not a
corporation) if the service provider provides significant serv ices to at least two service recipients
that are not related to eac h other or the service provider. This exception does not apply to the
extent the serv ice provider provides management services, that is, services invo lving the actual
or de facto direction or contro l of the financial or operational aspects of a trade or business of the
service recipient , or investment management or advisory services provided to a serv ice recipient
whose primary trade or business includes the investment of financial assets (includin g real estate
investments), suc h as a hed ge fund or real estate investment trust.

421

Treas. Reg. sec. l.409A-l(b)(9 )(iii).

422

Treas. Reg. sec. l.409A-l(b)(5). A SAR is a right to compensation based on the appreciation in value
of a specified number of shares of stock occurring between the date of grant and the date of exercise of the right. In
the case of a SAR, the exercise price is the amount subtracted from the fair market value of the stock on the date the
SAR is exercised to determine the appreciation in va lue since the date of gran t.
423

Secs. 421-424.

424

Treas. Reg. sec. l.40 9A-l (f) .

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 Nongualified deferred compensation of State or local government or tax-exempt employers

Special rules apply to "eligible 425 " and "ineligible" deferred compensation plans of State
and local government and tax-exempt employers. 426
Amounts deferred under an eligible deferred compensation plan generally are not
included in income until received. In order for a plan to be an eligible plan, the plan must limit
deferrals to a dollar amount ($ 18,000 for 2017 , plus an additiona l "catch-up" amount for older
participants) or, if less, the participant's includible compensation. The plan must also meet
various other requirements.

In the case of an ineligible deferred compensation plan (that is, a plan that does not meet
the requirements to be an eligible plan), deferred amounts are treated as nonqualified deferred
compensation and includible in income for the first taxable year in which there is no substantial
risk of forfeiture of the rights to such compensation , even though the plan is unfunded. For this
purpose , a person ' s rights to compensation are subject to a substantia l risk of forfeiture if the
rights are conditioned on the future performance of substantial services by any individual. 427
Earnings post vesting are generally taxed when paid.
Certain plans are excluded from being treated as deferred compensation , including bona
fide vacation leave, sick leave, compensatory time, severance pay , disability pay, and death
benefits. 428
Nongualified deferred compensation from certain tax indiffer ent parties

In general
Under special rules, any compensat ion deferred under a nonqualified deferred
compensation plan of a nonqualified entity is generally includible in income by the service
provider when there is no substantial risk of forfeiture of the service provider ' s rights to such
compensation , regardless of the method of account ing used by the service provider. 429 For this
purpose , a service provider 's rights to compensation are subject to a substantial risk of forfeiture
425

Some aspects of the mies for elig ible deferred compen sation plans are quite different for plans of State
or local government employers and plans of tax-exempt employers. In particular , an eligible de ferred compensa tion
plan of a State or local government is a tax-favored, funded arrangement, similar to a qualified defined contr ibution
plan, whereas an eligible deferr ed compen sation plan of a tax-exempt emplo yer must be unfunded . These rules in
effect limit the amoun t of unfunded nonqualified deferred compens ation that can be provided on a tax-deferr ed basis
by a tax-exempt employer.
426

Sec . 457, which also contains exceptions for various arrangements.

427

Sec . 45 7(f)(3)(B).

428

Sec . 457(e)(l l )(A).

429
Section 457A, generally effective for deferred amoun ts attributable to services performed after
December 3 1, 2008.

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 only if the rights are conditioned on the future performance of substantial services by any
individual. 430 A condition related to a purpose of the compensation (other than future
performance of substantial services) does not result in a substantial risk of forfeiture.
If the amount of any deferred compensation is not determinable at the time the
compensation is otherwise includible in income , the compensation is includible when the amount
becomes determinable. In that case, the income tax attributable to the compensation includible
in income is increased by the sum of ( 1) an interest charge , and (2) an amount equal to
20 percent of the includible compensation. The interest charge is equal to the interest at the rate
applicable to underpayments of tax plus one percentage point 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.
Nonqualified entity
The term "nonqualified entity" includes certain foreign corporations and certain
partnerships ( either domestic or foreign). A foreign corporation is a nonqualified entity unless
substantially all of its income is effectively connected with the conduct of a U.S. trade or
business or is subject to a comprehensive foreign income tax. A partnership is a nonqualified
entity unless substantially all of its income is allocated to persons other than foreign persons with
respect to whom such income is not subject to a comprehensive foreign income tax and
organizations exempt from U.S. income tax.
The term comprehensive foreign income tax means with respect to a foreign person , the
income tax of a foreign country if (I) the person is eligible for the benefits of a comprehensive
income tax treaty between the foreign country and the United States , or (2) the person
demonstrates to the satisfaction of the Secretary of the Treasury that the foreign country has a
comprehensive income tax.
Nonqualified deferred compensation
For purposes of these special rules , the term "nonqualified deferred compensation plan"
is generally defined in the same manner as under the general rules for nonqualified deferred
compensation (and includes any agreement or arrangement , as well as actual or notional income
on deferred compensation) with certain modifications.
Nonqualified deferred compensation includes any plan that provides a right to
compensation based on the appreciation in value of a specified number of equity units of the

430

Under section 457A(d)(l )(B), to the extent provided in regu lations, if compensation is determined
solely by reference to the amount of gain recognized on the disposition of an investment asset , the compensa tion is
treated as subject to a substantial risk of forfeiture until the date of such disposition. No regulations or other
guidance applying this mle has been issued.

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 service recipient. 431 However , IRS guidance provides some exceptions. 432 In general , under the
guidance , a stock option is not treated as nonqualified deferred compensation for this purpose if
the exercise price of the stock option cannot be less than the fair market value, on the date the
option is granted, of the stock subject to the option and the option does not otherwise include a
deferral feature. A similar exception applies to arrangements involving the right to purc hase an
equity interest in a noncorporate entity. Exceptions apply also for statutory options. Finally , an
exception applies for a SAR if the exercise price of the SAR cannot be less than the fair market
value, on the date the SAR is granted, of the stock subject to the SAR and the SAR does not
otherwise include a deferral feature, but only if the SAR by its terms at all times must be settled
in service recipient stock and is settled in service recipient stock.
A special "short-term deferral " exception applies , under which compensation is not
treated as deferred if the service provider receives payment of the compensation not later than
I2 months after the end of the taxab le year of the service recipient during which the right to the
payment of such compensation is no longer subject to a substantial risk of forfeiture (within the
meaning of the special rules).
Description of Proposal

In general
Under the proposal, any compensation deferred under a nonqualified deferred
compensation plan is includible in the gross income of the service provider when there is no
substantial risk of forfeiture of the service provider 's rights to such compensation. For this
purpose , the rights of a service provider to compensat ion are treated as subj ect to a substantia l
risk of forfeiture only if the rights are conditioned on the future performance of substantial
services by any individual. Under the proposal , a condition related to a purpose of the
compensation other than the future performance of substantia l services (such as a condition
based on achieving a specified performance goal or a condit ion intended in whole or in part to
defer taxation) does not create a substantial risk of forfeiture, regardless of whether the
possibility of forfeiture is substantia l. In addition, a covenant not to compete does not create a
substantial risk of forfeiture.
The proposal applies without regard to the method of account ing of the service prov ider.
Because of the definition of substantial risk of forfeiture under the proposal , a taxpayer using
either the cash method of accounting or the accrual method of accounting may be required to
include deferred compensation in income earlier than the method of accounting would otherwise
reqmre.

431
Sec. 457A(d)(3)(A). The Secretary of the Treasury is authori zed to prescribe such regulations as may
be necessary or appropriate to carry out the purposes of section 457 A.

432

Notice 2009-8 , 2009-1 C.B. 347, A-2(b). For a discussion of intended exceptions for certain
arrangements, see Committee on Ways and Means Report to accompany H.R. 6049, the Renewable Energy and Job
Creation Act of 2008, H.R. Rep. No. 110-658, May 20, 2008, pp . 195-196.

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 Nothing under the proposal is to be construed to prevent the inclusion of amounts in
income under any other income tax provision or any other rule of law earlier than the time
provided in the proposal. Any amount included in income under the proposal is not required to
be included in income under any other income tax provision or any other rule of law later than
the time provided under the proposal.

Nongualified deferred compensation
For purposes of the proposal , the term "nonqualified deferred compensation plan" means
any plan that provides for the deferral of compensation , other than a qualified employer plan , a
bona fide vacation leave , sick leave , compensatory time , disability pay or death benefit plan , and
any other plan or arrangement designated by the Secretary of the Treasury consistent with the
purposes of the proposal. The Secretary shall not provide an exception for severance plans , bona
fide or otherwise , in regulations or other guidance. A qualified employer plan for this purpose
means a qualified retirement plan , a tax-deferred annuity plan , a simplified employee pension
plan, a simple retirement account plan , an eligible deferred compensation plan of a State or local
government employer , or a plan established before June 25, 1959, and funded only by employee
contributions.
In addition , a nonqualified deferred compensation plan for purposes of the proposal
specifically includes any plan that provides a right to compensation based on the value of, or the
appreciation in value of, a specified number of equity units of the service recipient. Such a
compensation right does not fail to provide for the deferral of compensation merely because the
compensation is to be paid in cash or by the transfer of equity. The proposal applies to all stock
options and SARs (and similar arrangements involving noncorporate entities) , regardless of how
the exercise price compares to the value of the related stock on the date the option or SAR is
granted. It is intended that no exceptions are to be provided in regulations or other administrative
guidance. However , it is intended that statutory options are not considered nonqualified deferred
compensation for purposes of the proposal. An exception is provided for that portion of a plan
consisting of a transfer of property described in section 83 (other than nonstatutory stock
options) , or a trust to which section 402(b) applies , or relating to statutory options under section
422 or 423 for which there is no disqualifying disposition.
For purposes of the proposal , a plan includes any agreement or arrangement , including an
agreement or arrangement that includes one person. In addition , references to deferred
compensation are treated as including references to income (whether actual or notional)
attributable to deferred compensation or income. However , compensation is not treated as
deferred for purposes of the proposal if the service provider receives payment of the
compensation not later than two and one-half months after the end of the service recipient ' s or
service provider ' s taxable year , whichever is later , during which the right to the payment of such
compensation is no longer subject to a substantial risk of forfeiture (within the meaning of the
proposal).

Additional rules
The Secretary of Treasury is directed to prescribe such regulations as may be necessary
or appropriate to carry out the purposes of the proposal , including regulations disregarding a

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TREAS-17-0313-I-000533

 substantial risk of forfeiture in cases where necessary to carry out the purposes of the proposal.
Except as provided by the Secretary of the Treasury , for purposes of the proposal , rules similar to
the controlled group rules for qualified retirement plans apply. 433
Under the proposal , the present-law general rules for nonqualified deferred compensation
and the present-law rules for nonqualified deferred compensation from certain tax indifferent
parties are repealed. In addition , the present-law rules for eligible and ineligible deferred
compensation plans of tax-exempt employers and for ineligible deferred compensation plans of
State and local governments do not apply with respect to deferred amounts attributable to
services performed after December 31, 2017.
In addition , the proposal applies income tax reporting and withholding , as applicable , to
amounts required to be included in gross income of employees and other service providers,
includin g nonresident aliens subject to U.S. taxation.

Effective Date
The proposal generally applies to amounts attributable to services performed after
December 31 , 2017. In the case of any deferred compensation amount to which the proposal
does not otherwise apply solely by reason of the fact that the amount is attributable to services
performed before January 1, 2018 , to the extent such amount is not includible in gross income in
a taxable year beginning before 2027 , such amount is includible in income in the later of ( 1) the
last taxable year before 2027 , or (2) the taxable year in which there is no substantial risk of
forfeiture of the rights to such compensation (determined in the same manner as determined
under the proposal). Earnings on deferred amounts attributable to services performed before
January 1, 2018 , are subject to the proposal only to the extent that the amounts to which the
earnings are attributable are subject to the proposal.
The Secretary of the Treasury is directed to issue guidance , no later than 120 days after
enactment of the proposal , providing a limited period of time during which a nonqualified
deferred compensation arrangement attributable to services performed on or before
December 31 , 2017 , may , without violating the general rules for nonqualified deferred
compensation , be amended to conform the date of distribution to the service provider to the date
amounts are required to be included in income under the proposal. If the service providertaxpayer is also a service recipient and maintains one or more nonqualified deferred
compensation arrangements for its service providers under which any amount is attributable to
services performed on or before December 31, 2017 , the guidance is to permit any such
arrangement to be amended to conform the dates of distribution under that arrangement to the
date amounts are required to be included in the income of the taxpayer. An amendment to a
nonqualified deferred compensation arrangement made pursuant to the guidance is not to be
treated as a material modification of the arrangement for purposes of the genera l rules for
nonqualified deferred compensation.

433

Sec. 414(b) and (c).

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 2. Modification of limitation on excessive employee remuneration
Present Law
In general
An employer generally may deduct reasonab le compen sation for per sonal services as an
ordinary and nece ssary bu siness expense. Sectio n I 62(m) provides an explicit limitation on the
deductibility of compen sation expe nses in the case of publi cly trade d corporate emp loyers. The
otherwise allowable deduction for compe nsation paid or accrued wi th respect to a covered
employee of a publicly held corporati on434 is limited to no more than $1 million per year. 435 The
deduction limitation applies when the deduction would otherwise be taken .

Covered employees
Section l 62(m) defines a covered employee as ( 1) the chief exec utive officer of the
corporation (or an individual acting in such capac ity) as of the close oftbe taxable year and
(2) the four most highly compensated officers 436 for the taxable year (other than the chief
exec utive officer). Treasury regulations under section 162(m) provide that whether an employee
is the chief executive officer or among the four most highly compensated officers should be
determined pursuant to the exec utive compen sation disclosure ru les prom ulgated under the
Securities Exc hange Act of 1934 ("Exchange Act").

In 2006, the Securities and Exchange Commission amended certain ru les relating to
execu tive compensa tion , including which officers' com pensation mu st be disclosed under the
Exc hange Act. Under the new ru les, such officers are (1) the principal execu tive officer (or an
individual acting in such capac ity), (2) the principal financial officer (or an individual acting in
such capacity), and (3) the three most highly compensated officers, 437 other than the principal
exec utive officer or principal financial officer.
In response to the Securities and Exchange Commi ssion 's new disclosure ru les, the
Internal Revenue Serv ice issued updated guidance on identifying which employees are covered
by section 162(m). 438 The new guidance provides that "cove red emp loyee" means any employee
who is (1) the principal exec utive officer (or an individual acting in such capaci ty) defined in
434
A corporat ion is treated as publicly held if it has a class of common equity securities that is required to
be registered under section 12 of the Securities Exchange Act of 1934.
435

Sec. l62(m). This deduction limitation applies for purposes of the regular income tax and the
alternative minimum tax.
436

Such officers must also be employees whose total compensation is required to be reported to
shareholders under the Securities Exchange Act of 1934.
437

Such officers must also be employees whose total compensation is required to be reported to
shareholders under the Securities Exchange Act of 1934.
438

Notice 2007 -49, 2007-25 I.R.B. 1429.

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TREAS-17-0313-I-000535

 reference to the Exchange Act, or (2) among the three most highly compensated officers 439 for
the taxable year (other than the principal executive officer) , again defined by reference to the
Exchange Act. Thus, under current guidance , only four employees are covered under
section 162(m) for any taxable year. Under Treasury regulations , the requi rement that the
individual meet the criter ia as of the last day of the taxable year appl ies to both the principal
executive officer and the three highest compensate d officers. 440
Definition of publicly held corporation
For purposes of the deduction disallowance of section 162(m), a publicly held
corporat ion means any corporat ion issuing any class of common equity securities required to be
registered under section 12 of the Securities Exchange Act of 1934. All U.S. publicly traded
compan ies are subject to this registration requirement , including their foreign affiliates (to the
extent subject to U. S. tax). A foreign company publicly traded throug h Amer ican depository
receipts ("AD Rs") is also subj ect to this registration requirement if more than 50 percent of the
issuer ' s outstanding voting securities are held, directly or indirectly , by residents of United States
and either (i) the majori ty of the executive officers or directors are United States citizens or
residents , (ii) more than 50 percent of the assets of the issuer are located in the United States, or
(iii) the business of the issuer is administered principally in the United States. Other foreign
companies are not subject to the registration requirement.
Remuneration subject to the deduction limitation

In genera l
Unless spec ifically excluded , the deduction limitation applies to all remuneration for
services , including cash and the cash value of all rem uneration (including benefits) paid in a
medium other than cash. If an individual is a covered emp loyee for a taxable year, the deduction
limitat ion applies to all compensat ion not explicitly excluded from the deduction limitati on,
regardless of whet her the compe nsation is for services as a covered employee and regardless of
when the compensation was earned. The $ 1 million cap is red uced by excess parachute
payments (as defined in section 280G) that are not deductible by the corporation.
Certain types of compensat ion are not subject to the deduction limit and are not taken
into account in determining whet her other compensation exceeds $ 1 million. The following
types of compensation are not taken into account: ( 1) remuneration payable on a commission
basis ; (2) remuneration payable solely on account of the attainment of one or more performance
goals if certain outside director and shareho lder approval requirements are met
("performa nce-based compensat ion"); (3) payments to a tax-favored retirement plan (includin g
salary reduct ion contributions) ; (4) amounts that are excludable from the executive's gross

439

Such officers must also be emplo yees whose total compen sation is required to be reported to
shareholders under the Securities Exchange Act of 1934.
440

Treas. Reg. sec. l.1 62-27(c)(2).

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 income (such as employer-provided health benefits and miscellaneous fringe benefits 441 ) ; and
(5) any remuneration payable under a written binding contract which was in effect on
Februa ry 17, 1993. In addition , remuneration does not include compensation for whic h a
deduction is allowable after a covered employee ceases to be a covered employee. Thus , the
deduction limitation often does not apply to deferred compensatio n that is otherwise subject to
the deduction limitation (e.g., is not performance-based compensation) because the payment of
compensation is deferred until after termination of employment.
Performance-based compensation
Compen sation qualifies for the exception for performance-based compensation only if
( 1) it is paid solely on account of the attainme nt of one or more performance goals, (2) the
performance goals are establ ished by a compensation comm ittee consisting solely of two or more
outside directors ,442 (3) the material terms under which the compensation is to be paid , includin g
the performance goa ls, are disclosed to and approve d by the shareholders in a separate majori tyapproved vote prior to payment, and (4) prior to payment, the compensation committee cert ifies
that the performance goals and any other material terms were in fact satisfied.
Compen sation (other than stock options or other stock appreciation rights ("SA Rs")) is
not treated as paid solely on account of the attainment of one or more performa nce goa ls unless
the compensatio n is paid to the particular executive pursuant to a pre-established objective
performance formu la or standard that precludes discretion. A stock option or SAR with an
exercise price not less than the fair market value, on the date the option or SAR is granted, of the
stock subject to the option or SAR, generally is treated as meeting the except ion for
performance-based compensa tion , pro vided that the requirements for outside director and
shareholder approva l are met (without the need for certification that the performance standards
have been met). This is the case because the amount of compen sation attributabl e to the options
or SARs received by the executive would be based solely on an increase in the corpora tion's
stock price. Stock-base d compensation is not treated as performance-based if it depends on
factors other than corpora te performance.
Description of Proposal
Definition of covered employee
The proposal revises the definition of covere d employee to include both the principal
executive officer and the principal financia l officer. Further , an individual is a covered emp loyee
if the individual holds one of these positions at any time durin g the taxab le year. The proposal
also defines as a covered employee the three (rather than four) most highly co mpensated officers
for the taxab le year (other than the principal executive officer or prin cipal financial officer) who
441

Secs. 105, 106 , and 132.

442
A director is considered an outside director if he or she is not a current employee of the corporation (or
related entities), is not a former employee of the corporation (or related entities) who is receiving compensation for
prior services (other than benefits under a qua lified retirement plan), was not an officer of the corporation (or related
entities) at any time, and is not currently receiving compensation for personal services in any capacity (e.g ., for
services as a consu ltant) other than as a director.

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 are required to be reported on the company's proxy statement for the taxable year (or who would
be required to be reported on such a statement for a company not required to make such a report
to shareholder s).

In addition , if an individual is a covered employee with respect to a corporation for a
taxable yea r beginning after December 31, 2016, the individual remains a covered employee for
all future years. Thus , an individual remains a covered employee with respect to compensation
otherwise deductible in subsequent years, including years during which the individual is no
longer employed by the corporation (including years after the individual has died).
Compensation does not fail to be compensation with respect to a covered employee and thus
subject to the deduction limit for a taxable year merely because the compensation is includible in
the income of, or paid to, another individual , such as compensat ion paid to a beneficiary after the
employee's death, or to a former spouse pursuant to a domestic relations order.
Definition of publicly held corporation
The proposal extends the applicability of section 162(m) to include all domestic publicly
traded corporat ions and all foreign companies publicly traded through ADRs. The proposed
definition may include certa in additional corporat ions that are not publicly traded , such as large
private C or S corporat ions.
Performance-based compensation and commissions exceptions
The proposal eliminates the exceptions for comm issions and performance-based
compensation from the definiti on of compensation subject to the deduction limit. Thus, such
compensation is taken into account in determining the amount of compensatio n with respect to a
covered employee for a taxable year that exceeds $1 million and is thus not deductible under
section 162.
Effective Date
The proposal applies to taxable years beginn ing after December 31, 2017.
3. Excise tax on excess tax-exempt organization executive compensation
Present Law
Taxable employers and other service rec ipients are genera lly allowed a deduction for
reasonable compensation expenses. 443 Howeve r, in some cases, compensation in excess of
specific levels is not deductible.
In the case of a publicly held corporatio n, subject to certain exceptions, the deduction for
a taxable year for compensation of the corporation ' s principal executive officer or for any of the

443

Sec. l 62(a)( l ).

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 corporation ' s three most highly compensated officers other than the principal executive officer is
limited to $1 million ("$ 1 million limit on deductible compensation ").444
A "parachute payment" (generally a payment of compensation that is contingent on a
change in corporate ownership or control) made to an officer , shareholder or highly compensated
individual is generally not deductible if the aggregate present value of all such payments to an
individual equals or exceeds three times the individual's base amount (an "excess parachute
payment"). 445 An individual ' s base amount is the average annual compensation includible in the
individual ' s gross income for the five taxable years ending before the date the change in
ownership or control occurs. Certain amounts are not considered parachute payments , including
payments under a qualified retirement plan , a simplified employee pension plan , or a simple
retirement account. 446
These deduction limits generally do not affect a tax-exempt organization.
Description of Proposal

Under the proposal , an employer is liable for an excise tax equal to 20 percent of the sum
of the (1) remuneration (other than an excess parachute payment) in excess of $1 million paid to
a covered employee by an applicable tax-exempt organization for a taxable year , and (2) any
excess parachute payment (under a new definition for this purpose that relates solely to
separation pay) paid by the applicable tax-exempt organization to a covered employee.
Accordingly , the excise tax applies as a result of an excess parachute payment , even if the
covered employee ' s remuneration does not exceed $1 million.
For purposes of the proposal , a covered employee is an employee (including any former
employee) of an applicable tax-exempt organization if the employee is one of the five highest
compensated employees of the organization for the taxable year or was a covered employee of
the organization (or a predecessor) for any preceding taxable year beginning after December 31,
2016. An "applicable tax-exempt organization " is an organization exempt from tax under
section 50l(a) , an exempt farmers' cooperative ,447 a Federal , State or local governmental entity
with excludable income,448 or a political organization. 449

444

Sec . 162(m)(l ). Under section 162(m)(6), limits apply to deductions for compens ation of individuals
performin g services for certain health insurance providers.
445

Sec . 280G.

446

Secs . 40 l(a ), 403(a), 408(k), and 408(p).

447

Sec. 52 1(b ).

448

Sec. 115(1).

449

Sec . 527(e)(l) .

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 Remuneration means wages as defined for incom e tax withholdin g purposes ,450 but does
not include any designated Roth contrib ution. 451 Remun era tion of a covered employee includes
any remun eration paid with respect to employm ent of the covere d em ployee by any person or
gove rnmental entity related to the applicable tax-exempt organization. A person or
gove rnmental entity is treated as relat ed to an applicable tax-exempt organization if the person or
gover nmental entity (1) contro ls, or is con trolled by, the organization , (2) is controlled by one or
more persons that control the organization , (3) is a support ed organization 4 52 during the taxable
year with respect to the organization , (4) is a supportin g organization 453 durin g the taxab le yea r
with respec t to the organization , or (5) in the case of a vo luntary employees' beneficiary
association ("VEBA"), 454 establ ishes, maintains , or makes contributions to the VEBA. However ,
remuneration of a covered employee that is not deductible by reason of the $ 1 million limit on
deductible compensation is not taken into accou nt for purposes of the propo sal.
Under the proposal , an excess parachute payment is the amount by which any parachute
payment exceeds the portion of the base amount allocated to the payment. A parachute payment
is a payment in the nature of compe nsatio n to (or for the benefit of a covered employee) if the
payment is contingent on the employee's separati on from employment and the aggregate pr esent
value of all such payments is three times or more the base amount. The base amount is the
average annual compensation includibl e in the covered em ployee's gross income for the five
taxable years ending before the date of the em ploy ee's separation from emp loyment. Parachute
payments do not include payment s under a qualified retirement plan , a simplifi ed employee
pension plan , a simple retirement account , a tax-deferred annuity ,455 or an eligible deferred
compensation plan of a State or local governme nt emp loyer. 456
The emp loyer of a covered emp loyee is liable for the excise tax. If remuneration of a
cove red employee from more than one employer is taken into account in determining the exc ise
tax , each employer is liable for the tax in an amount that bears the same ratio to the total tax as
the remuneration paid by that emplo yer bears to the remuneration paid by all employers to the
covered em ployee.

450

Sec. 340l(a).

45 1

Under section 402A(c) , a designated Roth contribution is an elective deferral (that is, a contribution to a
tax-favored employer-sponsored retirement plan made at the election of an employee) that the employee designates
as not bein g excludable from income.
452

Sec. 509(f)(3).

453

Sec. 509(a)(3).

454

Sec. 501(c)(9).

455

Sec. 403(b ).

456

Sec. 457(b).

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 Effective Date
The proposal applies to taxable years beginning after December 31, 2017.

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 I. Insurance
1. Net operating losses of life insuran ce companies

Present Law
A net operat ing loss ("NOL") generall y means the amount by which a taxpayer's
business deductions exceed its gross income. In genera l, an NOL may be carr ied back two years
and carried over 20 years to offset taxable income in such years. NOLs offset taxable income in
the order of the taxable years to which the NOL may be carried. 457
For purposes of computing the alternative minimum tax ("AMT"), a taxpayer ' s NOL
deduction cannot reduce the taxpayer ' s alternative minimum taxable income ("AMTI ") by more
than 90 percent of the AMT!. 458

In the case of a life insurance company , a deduction is allowed in the taxable year for
operat ions loss carryovers and carrybacks , in lieu of the deduct ion for net operation losses
allowed to other corporat ion s.459 A life insurance company is permitted to treat a loss from
operation s (as defined under section 8 10(c)) for any taxable year as an operations loss carryback
to each of the three taxable years preceding the loss year and an operat ions loss carryover to each
of the I 5 taxable years following the loss year. 460
Description of Proposal
The proposal repeals the operations loss deduction for life insurance companies and
allows the NOL deduction under section 172. This provides the same treatment for losses of life
insurance companies as for losses of property and casualty insurance compan ies and of other
corporat ions. The proposal thus limits the compan ies' NOL deduction to 90 percent of taxable
income (determined without regard to the deduction) , provides that carryovers to other years are
adjusted to take account of this limitation and may be carried forward indefinitely. The NOL
deduction of a life insurance company is determined by treating the NOL for any taxable year
genera lly as the excess of the life insurance deductions for such taxable year over the life
insurance gross income for such taxable year.

Effective Date
The proposal applies to losses arising in taxable years beginning after December 31,
2017.

457

Sec. l 72(b )(2).

458

Sec . 56(d).

459

Secs. 8 10, 805(a )( 5).

460

Sec. 8 1O(b)( 1) .

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 2. Repeal of small life insurance company deduction
Present Law
The small life insurance company deduction for any taxable year is 60 percent of so
much of the tentative life insurance company taxable income ("LI CTI") for such taxable year as
does not exceed $3 million , reduced by 15 percent of the excess of tentative LICTI over
$3 million. The maximum deduction that can be claimed by a small company is $1.8 million ,
and a company with a tentative LI CTI of $15 million or more is not entitled to any small
company deduction. A small life insurance company for this purpose is one with less than
$500 million of assets.

Description of Proposal
The proposal repeals the small life insurance company deduction.

Effective Date
The proposal applies to taxable years beginning after December 31, 2017.

3. Adjustment for change in computing reserves
Present Law
Change in method of accounting

In general , a taxpayer may change its method of accounting under section 446 with the
consent of the Secretary (or may be required to change its method of accounting by the
Secretary). In such instances , a taxpayer generally is required to make an adjustment (a
"section 48 l(a) adjustment ") to prevent amounts from being duplicated in, or omitted from, the
calculat ion of the taxpayer's income. Pursuant to IRS procedures , negative section 481(a)
adjustments generally are deducted from income in the year of the change whereas positive
section 481(a) adjustments generally are required to be included in income ratably over four
taxable years. 461
However , section 807(f) explicitly provides that changes in the basis for determining life
insurance company reserves are to be taken into account ratably over 10 years.

10-year spread for change in comput ing life insura nce company reserves
For Federa l income tax purposes , a life insurance company includes in gross income any
net decrease in reserves , and deducts a net increase in reserves. 462 Methods for determining

461

See, e.g., Rev. Proc. 20 15-13, 2015-5 I.R.B. 419, and Rev. Proc. 2017- 30, 2017-18 I.R.B. l 13 l.

462

Sec . 807.

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 reserves for tax purposes genera lly are based on reserves prescribed by the Nationa l Associat ion
of Insurance Commissioners for purposes of financia l reporting under State regulatory rules.
Income or loss resulting from a change in the method of comp uting reserves is taken into
accou nt ratably over a 10-yea r period. 463 The rule for a change in basis in computing reserves
app lies only if there is a change in basis in com putin g the Federally prescribed reserve (as
distinguished from the net surrender value). Although life ins uranc e tax reserves require the use
of a Federally prescribed method , interest rate, and mortality or morbidity table , changes in other
assumptions for comput ing statutory reserves (e.g. , when premiums are collected and claims are
paid) may cause increases or decreases in a compa ny' s life insurance reserves that must be
spread over a 10-year period. Changes in the net surr ender value of a contract are not subject to
the 10-year spread because , apart from its use as a minimum in determining the amount of life
insurance tax reserves , the net surre nder value is not a reserve but a current liabi lity.
If for any taxa ble year the taxpayer is not a life insurance com pany, the balance of any
adjustments to reserves is tak en into account for the preceding taxable year.

Description of Proposal
Income or loss resulting from a change in method of computin g life insurance company
reserves is taken into account consistent with IRS pro cedures , genera lly ratably over a four-year
period , instead of over a 10-year period.

Effective Date
The proposal applies to taxab le years beginn ing after Dece mber 31, 2017.

4. Repeal of special rule for distributions to shareholders from pre-1984 policyholders
surplus account
Present and Prior Law
Under the law in effect from 1959 throug h 1983, a life insurance com pany was subject to
a three-phase taxable income comp utati on under Federa l tax law. Under the three-phase syste m,
a compa ny was taxed on the lesser of its gain from operatio ns or its taxable investment income
(Phase I) and , if its gain from operations exceeded its taxable investmen t income , 50 percent of
suc h excess (Phase II). Federa l income tax on the other 50 percent of the ga in from operations
was deferred , and was accounted for as part of a po licyholder's surplus account and , subj ect to
certain limitations , taxed only when distrib uted to stockholders or upon corpora te dissolution
(Phase III). To determine wh ether amount s had been distri buted , a company maintained a
sha rehold ers surp lus account , wh ich genera lly includ ed the company's previously taxed income
that wou ld be ava ilable for distribution to shareho lders. Distribution s to shareho lders were

463

Sec. 807(f).

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 treated as being first out of the shareholders surplus account , then out of the policyho lders
surplus account , and finally out of other accounts.
The Deficit Reduction Act of 1984464 included provisions that, for 1984 and later years ,
eliminated further deferral of tax on amounts (described above) that previously would have been
deferred under the three-phase system. Although for taxable years after 1983, life insurance
companies may not enlarge their policyholders surplus account , the companies are not taxed on
previously deferred amounts unless the amounts are treated as distributed to shareholders or
subtracted from the policyholders surplus account. 465
Any direct or indirect distribution to shareholders from an existing policyholders surplus
account of a stock life insurance company is subject to tax at the corporate rate in the taxable
year of the distribution. Present law (like prior law) provides that any distribution to
shareho lders is treated as made (1) first out of the shareholders surplus account , to the extent
thereof , (2) then out of the policyholders surplus account , to the extent thereof , and (3) finally,
out of other accounts.
For taxable years beginning after December 31, 2004 , and before January 1, 2007 , the
application of the rules imposing income tax on distributions to shareholders from the
policyholders surplus account of a life insurance company were suspended. Distributions in
those years were treated as first made out of the policyholders surplus account , to the extent
thereof, and then out of the shareholders surplus account, and lastly out of other accounts.
Description of Proposal
The proposal repeals section 815, the rules imposing income tax on distributions to
shareholders from the policyholders surplus account of a stock life insurance company.
In the case of any stock life insurance company with an existing policyholders surplus
account (as defined in section 815 before its repeal) , tax is imposed on the balance of the account
as of December 31, 2017. A life insurance company is required to pay tax on the balance of the
account ratably over the first eight taxable years beginning after December 31, 2017.
Specifically , the tax imposed on a life insurance company is the tax on the sum of life insurance
company taxable income for the taxable year (but not less than zero) plus 1/8 of the balance of
the existing policyho lders surplus account as of December 31, 2017. Thus , life insurance
company losses are not allowed to offset the amount of the policyholders surplus account
balance subject to tax.
Effective Date
The proposal applies to taxable years beginning after December 31, 2017.

464

Pub. L. No. 98-369.

465

Sec . 815.

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 5. Modification of proration rules for property and casualty insurance companies
Present Law
The taxable income of a property and casualty insurance company is determined as the
sum of its gross income from underwriting income and investment income (as well as gains and
other income items) , reduced by allowable deductions.
A proration rule applies to property and casualty insurance companies. In calculating the
deductible amount of its reserve for losses incurred , a property and casualty insurance company
must reduce the amount of losses incurred by 15 percent of (1) the insurer's tax-exempt interest ,
(2) the deductible portion of dividends received (with special rules for dividends from affiliates) ,
and (3) the increase for the taxable year in the cash value of life insurance , endowment , or
annuity contracts the company owns. 466 This proration rule reflects the fact that reserves are
generally funded in part from tax-exempt interest , from deductible dividends , and from other
untaxed amounts.

Description of Proposal
The proposal replaces the 15-percent reduction under present law with a reduction equal
to 5.25 percent divided by the top corporate tax rate. For 2018 , the top corporate tax rate is 35
percent, and the percentage reduction is 15 percent. For 2019 and thereafter , the corporate tax
rate is 20 percent , and the percentage reduction is 26.25 percent under the proration rule for
property and casualty insurance companies . The proration percentage will be automatically
adjusted in the future if the top corporate tax rate is changed , so that the product of the proration
percentage and the top corporate tax rate always equals 5.25 percent.

Effective Date
The proposal applies to taxable years beginning after December 31, 2017.

6. Repeal of special estimated tax payments
Present Law
Allowance of additional deduction and establishment of special loss discount account
Present law allows an insurance company required to discount its reserves an additional
deduction that is not to exceed the excess of ( 1) the amount of the undiscounted unpaid losses
over (2) the amount of the related discounted unpaid losses , to the extent the amount was not
deducted in a preceding taxable year. 467 The provision imposes the requirement that a special
loss discount account be established and maintained , and that special estimated tax payments be
made. Unused amounts of special estimated tax payments are treated as a section 6655 estimated

466

Sec. 832(b)(5).

467

Sec. 847.

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 tax payment for the 16th year after the year for whic h the spec ial estima ted tax payment was
made.
The total payments by a taxpa yer, including section 6655 estimated tax payments and
other tax payment s, together with special est imated tax payments made under this prov ision, are
generally the same as the total tax payments that the taxpayer would make if the taxpayer did not
elect to have this provision apply , except to the extent amounts can be refunded under the
pro vision in the 16th year.

Calculation of special estimated tax payments based on tax benefit attributable to
deduction
More spec ifica lly, present law imposes a req uirement that the taxpayer make special
estimated tax payments in an amount eq ual to the tax benefit attributab le to the additional
deduction allowed under the provis ion. If amounts are includ ed in gross income as a result of a
reduction in the taxpaye r's special loss discount account or the liquidation or termination of the
taxpayer 's insurance business , and an additiona l tax is due for any year as a result of the
inclusion , then an amount of the specia l estimated tax payment s equal to such additional tax is
applied against suc h additional tax. If there is an adjust ment reducing the amount of additional
tax against which the spec ial estimat ed tax payment was applied , then in lieu of any credit or
refund for the reduction , a special estimated tax payment is treated as made in an amount equal
to the amo unt that would otherwise be allowable as a credit or refund.
The amount of the tax benefit attributa ble to the deduction is to be determined (under
Treasury regulations (wh ich have not been promulgated)) by taking into account tax benefits that
would arise from the carryback of any net opera ting loss for the year as we ll as current year
benefits. In addition , tax benefits for the current and carryback years are to take into account the
benefit of filing a consolidated return with another insura nce company without regard to the
conso lidati on limitations imposed by sect ion 1503( c).
The taxpayer 's estimated tax payments under section 6655 are to be determined without
regard to the additional deduction allowed un der this provision and the specia l estimated tax
payments. Leg islative history 468 indicates that it is intended that the taxpaye r may apply the
amount of an overpayment of any section 6655 est imated tax payments for the taxable yea r
against the amount of the special estim ated tax payment required under th is provision. The
specia l estimated tax payments under this provision are not treated as estimated tax payments for
purpo ses of sect ion 6655 (e.g., for purposes of calculat ing pena lties or interest on underpayment s
of estimated tax) when such spec ial est imated tax payments are made.

Refundable amount
To the extent that a special estimated tax payment is not used to offset addi tional tax due
for any of the first 15 taxable years beginning after the year for which the payment was made ,
such special estimat ed tax payment is treated as an estimated tax payment made under
468

See H.R. Rep. No. 100-1104, Conference Report to accompany H.R. 4333, the Technical and
Miscellaneous Revenue Act of 1988, October 21, 1988, p. 174.

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 section 6655 for the 16th year after the year for which the special estimated tax payment was
made. If the amount of such deemed section 6655 payment , together with the taxpayer ' s other
payments credited against tax liability for such 16th year , exceeds the tax liability for such year,
then the excess (up to the amount of the deemed section 6655 payment) may be refunded to the
taxpayer to the same extent provided under present law with respect to overpayments of tax.
Regulatory authority

In addition to the regulatory authority to adjust the amount of special estimated tax
payments in the event of a change in the corporate tax rate, authority is provided to Treasury to
prescribe regulations necessary or appropriate to carry out the purposes of the provision.
Such regulations include those providing for the separate application of the provision
with respect to each accident year. Separate application of the provision with respect to each
accident year (i.e., applying a vintaging methodology) may be appropriate under regulations to
determine the amount of tax liability for any taxable year against which special estimated tax
payments are applied , and to determine the amount (if any) of special estimated tax payments
remaining after the 15th year which may be available to be refunded to the taxpayer.
Regulatory authority is also provided to make such adjustments in the application of the
prov ision as may be necessary to take into account the corporate alternative minimum tax.
Under this regulatory authority , rules similar to those applicable in the case of a change in the
corporate tax rate are intended to apply to determine the amount of special estimated tax
payments that may be applied against tax calculated at the corporate alternative minimum tax
rate. The special estimated tax payments are not treated as payments of regular tax for purposes
of determining the taxpayer's alternative minimum tax liability.
Regulations have not been promulgated under section 847.
Description of Proposal

The proposal repeals section 847. Thus, the election to apply section 847, the additional
deduction , special loss discount account , special estimated tax payment , and refundable amount
rules of present law are eliminated.
The entire balance of an existing account is included in income of the taxpayer for the
first taxable year beginning after 2017, and the entire amount of existing special estimated tax
payments are applied against the amount of additional tax attributable to this inclusion. Any
special estimated tax payments in excess of this amount are treated as estimated tax payments
under section 6655.
Effective Date

The proposal applies to taxable years beginning after December 31, 2017 .

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 7. Capitalization of certain policy acquisition expenses

Present Law
In the case of an insurance company , specified policy acquisition expenses for any
taxable year are required to be capitalized , and generally are amortized over the 120-month
period beginning with the first month in the second half of the taxable year. 469
A special rule provides for 60-month amortization of the first $5 million of specified
policy acquisition expenses with a phase-out. The phase-out reduces the amount amortized over
60 months by the excess of the insurance company ' s specified policy acquisition expenses for
the taxable year over $IO million.
Specified policy acquisition expenses are determined as that portion of the insurance
company ' s general deductions for the taxable year that does not exceed a specific percentage of
the net premiums for the taxable year on each of three categories of insurance contracts. For
annuity contracts , the percentage is 1.75; for group life insurance contracts , the percentage is
2.05 ; and for all other specified insurance contracts , the percentage is 7.7.
With certain exceptions , a specified insurance contract is any life insurance , annuity , or
noncancellable accident and health insurance contract or combination thereof. A group life
insurance contract is any life insurance contract that covers a group of individuals defined by
reference to employment relationship , membership in an organization , or similar factor, the
premiums for which are determined on a group basis , and the proceeds of which are payable to
(or for the benefit of) persons other than the employer of the insured , an organization to which
the insured belongs , or other similar person.
Description of Proposal
The proposal extends the amortization period for specified policy acquisition expenses
from a 120-month period to the 600-month period beginning with the first month in the second
ha!f of the taxable year. The proposal does not change the special rule providing for 60-month
amortization of the first $5 million of specified policy acquisition expenses (with phaseout). The
proposal provides that for annuity contracts , the percentage is 3.17 ; for group life insurance
contracts , the percentage is 3.72; and for all other specified insurance contracts , the percentage is
13.97.
Effective Date
The proposal applies to taxable years beginning after December 31, 2017.

469

Sec. 848.

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 8. Tax reporting for life settlement transactions, clarification of tax basis of life insurance
contracts, and exception to transfer for valuable consideration rules
Present Law
An exclusion from Federal income tax is provided for amounts recei ved under a life
insurance contract paid by reason of the death of the insured. 470
Under rules known as the transfer for value rules , if a life insurance contract is sold or
otherwise transferred for valuable consideration, the amount paid by reason of the death of the
insured that is excludab le generally is limited .471 Under the limitation , the excludable amount
may not exceed the sum of (1) the actual value of the consideration, and (2) the premiums or
other amounts subsequently paid by the transferee of the contract. Thus, for example, if a person
buys a life insurance contract, and the consideration he pays combined with his subsequent
premium payments on the contract are less than the amount of the death benefit he later receives
under the contract, then the difference is includable in the buyer's income.
Exceptions are provided to the limitation on the excludable amount. The limitation on
the excludable amount does not apply if ( 1) the transferee's basis in the contract is determined in
who le or in part by reference to the transferor 's basis in the contract, 472 or (2) the transfer is to
the insured , to a partner of the insured, to a partnership in which the insured is a partner, or to a
corporation in which the insur ed is a shareholder or officer. 473
IRS guidance sets forth more details of the tax treatment of a life insurance policyholder
who sells or surrenders the life insurance contract and the tax treatment of other se llers and of

470
Sec. IOl(a)(l). In the case of certain accelerated death benefits and viatica l settlements , special rules
treat certain amounts as amounts paid by reason of the death of an insured (that is, generally, excludable from
income). Sec. l Ol (g). The rules relating to accelerated death benefits provide that amounts treated as paid by
reason of the death of the insured include any amount received under a life insurance contract on the life of an
insured who is a terminally ill indi vidual, or who is a chronically ill individual (provided certain requirements are
met). For this purpose, a term inally ill individual is one who has been certified by a physician as having an illness
or physical condition which can reasonably be expected to result in death in 24 months or less after the date of the
certification. A chronically ill individual is one who bas been certified by a licensed health care practitioner with in
the precedin g 12-month period as meeting certain ability-related requirements. In the case of a viatical settlement , if
any portion of the death benefit under a life insurance contract on the life of an insured who is tenninally ill or
chronically ill is sold to a v iatical settlement provider, the amount paid for the sale or assignment of that portion is
treated as an amount paid under the life insurance contract by reason of the death oftbe insured (that is, genera lly,
excludable from income). For this purpose , a viatical settlement provider is a person regularly engaged in the trade
or business of purchasing , or taking assignments of, Iife insurance contracts on the lives of terminally ill or
chronically ill individuals (provided certain requ irements are met).
471

Sec. l0l(a)(2).

472

Sec. l Ol (a)(2)(A).

473

Sec. 10l(a)(2)(B).

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 buyers of life insurance contracts. The gu idan ce relates to the character of taxable amounts
(ordinary or capital) and to the taxpayer ' s basis in the life insurance contract.
In Revenue Ruling 2009-13 ,474 the IRS ruled that income recognized under section 72(e)
on surrender to the life insurance comp any of a life insurance contract with cash va lue is
ordi nary income. In the case of sale of a cash va lue life insurance contract , the IRS ruled that the
insured ' s (seller ' s) basis is reduced by the cost of insurance , and the gain on sale of the contract
is ordinary income to the extent of the amount that would be recognized as ordinary income if
the contract were surre ndered (the " inside buildup") , and any excess is long-ter m cap ital gain.
Gain on the sa le of a term life insurance contract (wit hou t cash surrender va lue) is long-term
capital gain under the ruling.
In Revenue Ruling 2009-14 ,475 the IRS ruled that under the transfer for value rules , a
portion of the death benefit received by a buyer of a life insurance contract on the death of the
insured is includable as ordinary income . The portion is the excess of the death benefit over the
consideration and other amounts (e.g., premiums) paid for the contract. Upon sale of the
contract by the purchaser of the contract , the gain is long-term capi tal gain , and in determining
the gain, the basis of the contrac t is not reduced by the cost of insurance.

Description of Proposal

In general
The provision imposes reporting requirements in the case of the purchase of an existing
life insurance co ntract in a reportable policy sale and imp oses reporting requirements on the
payor in the case of the payment of reportable death benefits. The provision sets fort h rules for
determining the basis of a life ins urance or annui ty contract. Lastly , the provision modifies the
transfer for value rules in a tran sfer of an interest in a life insurance contract in a reportable
policy sale.

Reporting requirements for acquisitions of life insurance contracts
Reporting up on acquisition of life insurance contract
The reporting requirement applies to every person who acqu ires a life insurance contract ,
or any interest in a life insura nce contract , in a reportable poli cy sale during the taxa ble year. A
reportable po licy sale means the acquisition of an interest in a life insurance contract , directly or
ind irectly , if the acq uirer has no substantial family , business , or financia l relationship wit h the
insured (apart from the acq uirer ' s interest in the life insurance contract) . An indirect acquisition
includ es the acquisition of an interest in a partnership , trust , or other entity that holds an interest
in the life insura nce contract.
Under the reporting req uirement , the buyer reports information about the purchase to the
IRS , to the insurance company that issued the contract , and to the seller. The information
474

2009-2 1 I.R.B. 1029.

475

2009-2 l I.R.B . l 03 l.

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 reported by the buyer about the purchase is (1) the buyer ' s name, address , and taxpayer
identification number ("TIN"), (2) the name , address , and TIN of each recipient of payment in
the reportable policy sale, (3) the date of the sale, and (4) the amount of each payment. The
stateme nt the buyer provides to any issuer of a life insurance contract is not required to include
the amount of the payment or payments for the purchase of the contract.
Reporting of seller's basis in the life insurance contract
On receipt of a report described above, or on any notice of the transfer of a life insurance
contract to a foreign person , the issuer is required to report to the IRS and to the seller ( 1) the
basis of the contract (i.e., the investment in the contract within the meaning of section 72(e)(6)) ,
(2) the name , address , and TIN of the seller or the transferor to a foreign person , and (3) the
policy number of the contract. Notice of the transfer of a life insurance contract to a foreign
person is intended to include any sort of notice, including information provided for nontax
purposes such as change of address notices for purposes of sending statements or for other
purposes, or information relating to loans, premiums , or death benefits with respect to the
contract.
Reporting with respect to reportable death benefits
When a reportab le death benefit is paid under a life insurance contract , the payor
insurance company is required to report information about the payment to the IRS and to the
payee. Under this reporting requirement , the payor reports (1) the gross amount of the payment;
(2) the taxpayer identificat ion number of the payee ; and (3) the payor's estimate of the buyer ' s
basis in the contract. A reportable death benefit means an amount paid by reason of the death of
the insured under a life insurance contract that has been transferred in a reportable policy sale.
For purposes of these reporting requirements , a payment means the amount of cash and
the fair market value of any consideration transferred in a reportable policy sale.
Determination of basis
The provision provides that in determining the basis of a life insurance or annuity
contract , no adjustment is made for mortality , expense , or other reasonable charges incurred
under the contract (known as "cost of insurance"). This reverses the pos ition of the IRS in
Revenue Ruling 2009-13 that on sale of a cash value life insurance contract , the insured' s
(seller ' s) basis is reduced by the cost of insurance.
Scope of transfer for value rules
The provision provides that the exceptions to the transfer for value rules do not apply in
the case of a transfer of a life insurance contract , or any interest in a life insurance contract , in a
reportable policy sale. Thus , some portion of the death benefit ultimately payable under such a
contract may be includable in income.

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 Effective Date

Under the provision , the reporting requirement is effective for reportable policy sales
occurring after December 31, 2017 , and reportable death benefits paid after December 31, 2017.
The clarification of the basis rules for life insurance and annuity contracts is effect ive for
transactions entered into after August 25, 2009. The modification of exception to the transfer for
value rules is effective for transfers occurring after December 3 1, 2017.

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TREAS-17-0313-I-000553

 J. Partnerships
1. Tax gain on the sale of a partnership interest on look-through basis

Present Law
In general
A partnership generally is not treated as a taxable entity , but rather , income of the
partnership is taken into account on the tax returns of the partners. The character (as capital or
ordinary) of partnership items passes through to the partners as if the items were realized directly
by the partners. 476 A partner holding a partnership interest includes in income its distributi ve
share (whether or not actually distributed) of partnership items of income and gain, including
capital gain eligible for the lower tax rates , and deducts its distributive share of partnership items
of deduction and loss. A partner 's basis in the partnership interest is increased by any amount of
gain and decreased by ay amount of losses thus included. These basis adjustments prevent
double taxation of partnership income to the partner. Money distributed to the partner by the
partnership is taxed to the extent the amount exceeds the partner's basis in the partnership
interest.
Gain or loss from the sale or exchange of a partnership interest generally is treated as
gain or loss from the sale or exchange of a cap ital asset. 477 However , the amount of money and
the fair market value of property received in the exchange that represent the partner 's share of
certain ordinary income-producing assets of the partnership give rise to ordinary income rather
than capital gain. 478 In genera l, a partnership does not adjust the basis of partnership property
following the transfer of a partnership interest unless either the partnership has made a one-time
election to do so,4 79 or the partnership has a substantia l built-in loss immediately after the
transfer. 480 If an election is in effect or the partnership has a substantial built-in loss immediately
after the transfer , adjustments are made with respect to the transferee partner. These adjustments
are to account for the difference between the transferee partner 's proportionate share of the
adjusted basis of the partnership property and the transferee partner ' s basis in its partnership
interest. 48 1 The effect of the adjustments on the basis of partnership property is to approximate
the result of a direct purchase of the property by the transferee partner.

476

Sec. 702.

477

Sec . 741; Pollack v. Commissioner, 69 T.C . 142 ( 1977) .

478
Sec. 75l(a). These ordinary income-producing assets are unrealize d receivables of the partnersh ip or
inven tory items of the partnership ("7 51 assets ").

479

Sec. 754.

480

Sec. 743(a).

481

Sec. 743(b).

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TREAS-17-0313-I-000554

 Source of gain or loss on transfer of a partnership interest
A foreign person that is engaged in a trade or business in the United States is taxed on
income that is "effec tively connected" with the conduct of that trade or busines s ("effec tively
connected ga in or loss"). 482 Partners in a partnership are treated as engaged in the conduct of a
trade or business within the United States if the partnership is so engaged. 483 Any gross income
derived by the foreign person that is not effectively connected with the person ' s U.S. business is
not taken into account in determin ing the rates of U.S. tax applicable to the person 's income
from the business. 484
Among the factors taken into account in determining whether income , gain , or loss is
effectively connected gain or loss are the extent to which the income, gain, or loss is derived
from assets used in or held for use in the conduct of the U.S. trade or business and whether the
activities of the trade or business were a material factor in the realization of the income , gain, or
loss (the "asset use" and "business activities" tests) .485 In determinin g whether the asset use or
busine ss activities tests are met , due regard is given to whether such assets or such income , gain,
or loss were accounted for through such trade or busine ss. Thus , notwithstanding the general
rule that source of ga in or loss from the sale or exchange of personal property is generally
determined by the residence of the seller, 486 a foreign partner may have effectively connected
income by reason of the asset use or busine ss activities of the partnership in which he is an
investor.
Special rules apply to treat gain or loss from dispos ition of U.S. real property interests as
effectively connected with the conduct of a U.S. trade or business. 487 To the extent that
consideration received by the nonresident alien or foreign corporation for all or part of its interest
in a partnership is attributable to a U.S. real property interest, that consideration is considered to
be received from the sale or exchange in the United States of such propert y.4 88 In certain

482

Secs. 87l(b) , 864(c) , 882.

483

Sec. 875.

484

Secs. 87 l(b)(2) , and 882(a)(2). Non -business income received by foreign persons from U.S. sources is
generally subject to tax on a gross basis at a rate of 30 percent , and is collec ted by withholding at the source of the
payment. The income of non-resident aliens or foreign corporations that is subject to tax at a rate of30-percent is
fixed, determinable , annual or periodical income that is not effectively connected with the conduct of a U.S. trade or
business.
485

Sec. 864(c)(2).

486

Sec . 865(a).

487

Sec. 897(a), (g).

488

Sec. 897(g) .

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TREAS-17-0313-I-000555

 circumstances , gain attributable to sales of U.S. real property interests may be subject to
withholding tax of ten percent of the amount realized on the transfer. 489
Under a 1991 revenue ruling , in determining the source of gain or loss from the sale or
exchange of an interest in a foreign partnership , the IRS applied the asset-use test and business
activities test at the partnership level to determine the extent to which income derived from the
sale or exchange is effectively connected with that U.S. business. 490 Under the ruling , if there is
unrealized gain or loss in partnership assets that wou ld be treated as effectively connected with
the conduct of a U.S. trade or business if those assets were sold by the partnership , some or all of
the foreign person 's gain or loss from the sale or exchange of a partnership interest may be
treated as effectively connected with the conduct of a U.S. trade or business . However , a 2017
Tax Court case rejects the logic of the ruling and instead holds that , generally , gain or loss on
sale or exchange by a foreign person of an interest in a partnership that is engaged in a U.S. trade
or business is foreign-source. 49 1

Description of Proposal
Under the proposal , gain or loss from the sale or exchange of a partnership interest is
effect ively connected with a U.S. trade or business to the extent that the transferor wou ld have
had effective ly connected gain or loss had the partnership sold all of its assets at fair market
value as of the date of the sale or exchange. The proposa l requires that any gain or loss from the
hypothetical asset sale by the partnership be allocated to interests in the partnership in the same
manner as nonseparately stated income and loss.
The proposal also requires the transferee of a partnership interest to withho ld IO percent
of the amount realized on the sale or exchange of a partnership interest unless the transferor
certifies that the transferor is not a nonresident alien individual or foreign corporation. If the
transferee fails to withhold the correct amount , the partnership is required to deduct and wit hhold
from distributions to the transferee partner an amount equal to the amount the transferee failed to
withhold.
The proposal provides the Secretary of the Treasury with specific regulatory authority to
address coord ination with the nonrecognition provisions of the Code.

Effective Date
The proposal is effective for sales and exchanges after December 31, 2017.

489

Sec. l445(e)(5). Temp. Treas. Reg. sec. l.1445-l lT(b) ,(d).

490

Rev. Rul. 91-32 , 1991-1 C.B. 107.

491

See Grecian Magnesite Mining v. Commissioner, 149 T.C. No . 3 (July 13, 20 17).

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TREAS-17-0313-I-000556

 2. Modification of the definition of substantial built-in loss in the case of transfer of
partnership interest
Present Law

In general, a partnership does not adjust the basis of partnership property following the
transfer of a partnership interest unless either the partnership has made a one-time election under
section 754 to make basis adjustments , or the partnership has a substantial built-in loss
immediately after the transfer. 492
If an election is in effect , or if the partnership bas a substantial built-in loss immediatel y
after the transfer , adjustments are made with respect to the transferee partner. These adjustments
are to account for the difference between the transferee partner 's proportionate share of the
adjusted basis of the partnership property and the transferee 's basis in its partnership interest. 493
The adjustments are intended to adjust the basis of partnership property to approximate the result
of a direct purchase of the property by the transferee partner.
Under the provision , a substantial built-in loss exists if the partnership's adjusted basis in
its property exceeds by more than $250 ,000 the fair market value of the partne rship property. 494
Certain securitization partnerships and electing investme nt partnerships are not treated as having
a substantial built-in loss in certain instances , and thus are not required to make basis
adjustments to partnership prop erty. 495 For electing investment partnerships, in lieu of the
partnership basis adjustments, a partner-level loss limitation rule applies. 496

Description of Proposal
The proposal modifies the definition of a substantial built-in loss for purposes of section
743( d), affecting transfer s of partnership interests. Under the proposal , in addition to the
present-law definition , a substantial built -in loss also exists if the transferee would be allocated a
net loss in excess of $250,000 upon a hypothetical disposition by the partnership of all
partnership's assets in a fully taxable transaction for cash equal to the assets' fair market value ,
immediately after the transfer of the partnership interest.
For example, a partnership of three taxable partners (partners A, B, and C) has not made
an election pursuant to section 754. The partner ship has two assets , one of which , Asset X, has a
built-in gain of $1 million , whi le the other asset , Asset Y, has a built-in loss of $900, 000 .
492

Sec. 743(a).

493

Sec. 743(b).

494

Sec. 743(d).

495

See sec. 743(e) (alternative rules for electing investment partnerships) and sec. 743(t) (exception for
securitizat ion partnerships).
496

Unlike in the case of an electing investment partnership, the partner-level loss limitation rule does not
apply for a secur itization part11ership.

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TREAS-17-0313-I-000557

 Pursuant to the partnership agreement , any gai n on sale or exchange of Asset X is spec ially
allocated to partner A. The three partners share equally in all other partnership items , including
in the built-in loss in Asset Y. In this case , each of partner B and partner C has a net built-in loss
of $300 ,000 (one third of the loss attributable to asset Y) allocable to his partnership interest.
Nevert hele ss, the partnership does not have an overall built-in loss, but a net built-in gain of
$ 100,000 ($1 million minus $900 ,000). Partner C sells his partnership interest to another person,
D, for $33 ,333. Under the proposal , the test for a substantia l built-in loss applies both at the
partnership level and at the transferee partner level. If the partnership were to sell all its assets
for cash at their fair market va lue immediatel y after the transfer to D, D would be allocated a loss
of $300 ,000 ( one third of the built-in loss of $900 ,000 in Asset Y). The partnership does not
have a substantial built-in loss , but a sub stantial built-in loss exists under the partner-level test ,
and the partnership adjusts the basis of its assets accordingly with respect to D.

Effective Date
The proposal applies to transfers of partnership interests after December 31, 2017.

3. Charitable contributions and foreign taxes taken into account in determining limitation
on allowance of partner's share of loss
Present Law
A partner's distributive share of partnership loss (including capital loss) is a llowed only
to the extent of the adj usted basis (before reduction by current year's losses) of the partner ' s
intere st in the partnership at the end of the partnership taxable year in which the loss occurred.
Any disallowed loss is allowable as a deduction at the end of the first succeed ing partnership
taxable year , and sub seq uent taxable years , to the extent that the partner ' s adjusted basis for its
partnership interest at the end of any such year exceeds zero (before reduction by the loss for the
year) .497
A partner's basis in its partnership interest is increased by its distributive share of income
(including tax exempt income) and is decreased (but not below zero) by distributions by the
partnership and its distributive share of partnership losses and expenditures of the partnership not
deductible in computing partnership taxable income and not properly chargeable to capital
account. 498 In the case of a charitab le contribution , a partner's basis is reduced by the partner ' s
distributive share of the adjusted basis of the contributed property. 499
A partnership computes its taxable income in the same manner as an individual with
certain except ions. The exceptions provide , in part , that the deductions for foreign taxes and

497

Sec. 704(d) and Treas. Reg. sec. 1.704-l(d)(I) .

498

Sec. 705(a).

499

Rev. Rul. 96-l l , 1996-l C. B. 140.

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TREAS-17-0313-I-000558

 charitable contributions are not allowed to the partnership. 500 Instead , a partner takes into
account its distributive share of the foreign taxes paid by the partnership and the charitable
contributions made by the partnership for the taxable year. 501
In applying the basis limitation on partner losses, Treasury regulations do not take into
account the partner's share of partnership charitable contributions and foreign taxes paid or
accrued. 502 The IRS has taken the position in a private letter ruling that the basis limitation on
partner losses does not apply to limit the partner 's deduction for its share of the partnership 's
charitable contributions. 503 While the regulations relating to the loss limitation do not mention
the foreign tax credit, a taxpayer may choose the foreign tax credit in lieu of deductin g foreign
taxes. 504
By contrast, under S corporation rules limiting the losses and deductions which may be
taken into account by a shareholder of an S corporation to the shareholder's basis in stock and
debt of the corporation, the shareholder's pro rata share of charitable contributions and foreign
taxes are taken into account. 505
Description of Proposal
The proposal modifie s the basis limitation on partner losses to provide that a partner 's
distributive share of items that are not deductible in computing the partnership's taxable income ,
and not properly chargeable to capital account, are allowed only to the extent of the partner 's
500

Sec. 703(a)(2)(B) and (C). In add ition , section 703(a)(2) provides that other deductions are not allowed
to the partnership , notwithstanding that the partnership's taxable income is computed in the same manner as an
individual' s taxable incom e, specifically: personal exemptions , net operating loss deductions, certain itemi zed
deductions for individuals, or depletion.
501

Sec. 702 .

502
The regulation provides that "[i]f the partner's distributive share of the aggregate of items of loss
specified in section 702(a)(l) , (2), (3) , (8) [now (7)], and (9) [now (8)) exceeds the basis of the partner's interest
computed l.ll1derthe preceding sentence , the limitation on losses l.ll1dersection 704(d) must be allocated to his
distributive share of each such loss." The regulation does not refer to sect ion 702(a)(4) (char itable contributions)
and 702(a)(6) (foreign taxes paid or accrued). Treas. Reg. sec. 1.704-1 (d)(2).
503

Ptiv. Ltr. Ru!. 8405084. And see William S. McKee , William F. Ne lson and Rob ert L. Whitrnire ,
Federal Taxation of Partnerships and Partners, WG&L , 4u, Edition (20 11), paragraph 11.0S[l)[b) , pp. 11-214
(noting that the "failure to include charitable contributions in the § 704(d) limitation is an apparent technical flaw in
the statute. Because of it, a zero-basis partner may reap the benefits of a partnership charitable contribution without
an offsetting decrease in the basis of his interest , whereas a fellow partner who happens to have a positive basis may
do so only at the cost ofa basis decrease.").
504

Sec. 90 l.

505
Sec. 1366(d) and sec. 1366(a)(l). In connection with the application of the section 1366(d) limitation
to charitable contributions , section 1366(d)(4) provides a special rule prorating the amount of appreciation not
subject to the limitation in the case of charitable contributions of appreciated property by the S corporation. Under a
related rule, the share holder's basis in bis interest is decreased by the basis (rather than tbe fair market value) of
appreciated property by reason ofa charitable contribution of the property by the S corporation (temporarily through
2013) (sec. 1367(a)(2)).

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TREAS-17-0313-I-000559

 adjusted basis in its partnership interest at the end of the partnership taxable year in which the
expenditure occurs. Thus , the basis limitation on partner losses applies to a partner ' s distributive
share of charitable contributions and foreign taxes.
Effective Date

The proposal applies to partnership taxable years beginning after December 31, 2017.

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TREAS-17-0313-I-000560

 K. Determination of Worker Classification and Information Reporting Requirements
Present Law
Worker classification

In general
The classification of a worker as an employee or not as an employee (that is, a selfemployed individual in most cases) is relevant for many tax purposes. These purposes include
employment tax requirements , exclusions from gross income for certain types of compensation,
and expense deductions. Some purposes favor employee status, while others favor selfemployed status. For example, an employee may exclude employer-provided health benefits
from gross income. On the other hand, a self-employed individual may deduct work-related
expenses in determining adjusted gross income.
Common-law test and section 530 of the Revenue Act of 1978
The largest body of tax law relating to worker classification has developed in connection
with employment taxes.506 Employment tax responsibility generally rests with the person who is
the employer of an employee under a common-law test that has been incorporated into Treasury
regulations. 507 Under the regulations, an employer-employee relationship generally exists if the
person for whom services are performed has the right to control and direct the individual who
performs the services, not only as to the result to be accomplished by the work, but also as to the
details and means by which that result is accomplished. That is, an employee is subject to the
will and control of the employer, not only as to what is to be done , but also as to how it is to be
done. It is not necessary that the employer actually control the manner in which the services are
performed , rather it is sufficient that the employer have a right to control. Whether the requisite
control exists is determined on the basis of all the relevant facts and circumstances.
Various cases and administrative guidance have identified various facts or factors that are
relevant in determining whether an employer-employee relationship exists. Based on an
examination of cases and rulings , the Internal Revenue Service ("IRS") developed a list of 20
factors that may be examined in determining whether an employer-employee relationship
exists. 508 The degree of importance of each factor varies depending on the occupation and the
factual context in which the services are performed.

506

Employment taxes consist of taxes under the Federal Insurance Contributions Act ("FICA "),
secs. 3101 -3128 , the Railroad Retirement Tax Act ("RRTA ''), secs. 320 1-3233, and the Federa l Unemployment Tax
Act ("FUTA "), secs. 3301-3311, and required income tax withh olding, secs. 3401-3404.
507

Treas . Reg. secs. 3l.3l2l( d)-l(c)( l ), 3l.3306 (i)-l (a), and 3l.340l(c)- l.

sos Rev. Ru!. 87-41 , 1987-1 C.B. 296. The 20 factors identified by the IRS are: (l) instructions ,
(2) training , (3) integration of the worker's services into business operations , (4) services to be rendered personally,
(5) hiring, supervision , and paying assistants , (6) continuing relationship , (7) set hours of work, (8) full-time services
required, (9) work on service recipient 's premises , (10) required order or sequence of work , (l l) oral or written

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TREAS-17-0313-I-000561

 More recently , the IRS has identified three categories of evidence that may be relevant in
determining whether the requisite control exists under the common-law test and has grouped
illustrative factors under these three categories: ( 1) behavioral control; (2) financial control; and
(3) relationship of the parties. 509 The IRS emphasizes that factors in addition to the 20 identified
factors may be relevant , that the weight of the factors may vary based on the circumstances, that
relevant factors may change over time , and that all facts must be examined.
Generally , individuals who follow an independent trade , business , or profession in which
they offer services to the public are not employees. Courts have recognized that a highly
educated or skilled worker does not require close supervision; therefore , the degree of day-to-day
control over the worker's performance of services is not particularly helpful in determining the
worker's status. Courts have considered other factors in these cases , tending to focus on the
individual 's ability to realize a profit or suffer a loss as evidenced by business investments and
expenses.
Under section 530 of the Revenue Act of 1978510 ("sec tion 530"), if certain requirements
are met, a taxpayer may generally treat a worker as not being an employee for employment tax
purposes , regardless of the worker's actual status under the common-law test, unless the taxpayer
has no reasonable basis for such treatment. For this purpose , a reasonable basis exists if the
taxpayer reasonably relied on (1) past IRS audit practice with respect to the taxpayer ,
(2) published rulings or judicial precedent , (3) long-standing recognized practice in the industry
of which the taxpayer is a member , or (4) any other reasonable basis. Relief under section 530
also requires that the taxpayer not have treated the worker as an employee for any period, and ,
for periods after 1978, all Federal tax returns, including information returns , must have been
filed on a basis consistent with treating the worker as not being an employee. Further, the
taxpayer (or a predecessor) must not have treated any worker holding a substantially similar
position as an employee for purposes of employment taxes for any period beginning after 1977.
Section 530 also generally prohibits Treasury and the IRS from publishing regulations
and revenue rulings with respect to the employment status of any individual for employment tax
purpo ses. However, a service provider or service recipient may generally obtain a written

reports required, (12) payment by the hour, wee k, or month , (13) payment of business or travel expenses ,
( 14) furnishing of tools and materials by service recipient, ( 15) significant investment by the worker , (16) ability to
realize a profit or loss by tbe worker, (17) working for more than one firm at a time, (18) services available to the
general public , ( 19) service recipient has right to discharge , and (20) worker has right to tem1inate relationship.

so9 Department of the Treasury , Internal Revenue Service , Independent Contractor or Employee? Training
Material s, Training 3320-102 (10-96) TPDS 842381, pp. 2-7. This document is publicly available through the IRS
website.
510

Pub. L. No. 95-600. The relief provided under section 530 was initiall y temporary to give Con gress
time to resolve the many complex issues regarding worker classification. However , after being extended more than
once , it was made permanent and has been amended several times over the years.

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TREAS-17-0313-I-000562

 determination from the IRS regarding the status of a particular worker as an employee or
independent contractor for purposes of Federal employment taxes and income tax withholding.

511

Statutory employee or nonemployee status
The Code conta ins various provisions that prescribe treatment of a specific category or
type of worker as an employee or as not being an emp loyee. Some of these provisions apply for
Federal tax purposes generally; for example , certain real estate agents and direct sellers are
treated for all tax purposes as not being employees. 512 Others apply only for specific purposes ;
for example , full-time life insurance sa lesmen are treated as employees for social secur ity and
Med icare tax and employee benefit purposes ,513 and certa in other salesmen are treated as
employees for social security and Medicare tax purposes. 514

Reporting requirements
Returns relating to payments made of fixed or determinable income or compensat ion
and relating to payments for serv ices
Present law imposes a variety of information reporting requirements on participants in
certain transactions. 515 These requirements are intended to assist taxpayers in prepar ing their
incom e tax return s and to help the Internal Revenue Serv ice ("IRS") determine whether such
returns are correct and complete.
The primary provision governing information reporting by payors requires an information
return by every person engaged in a trade or business who makes payments aggregating $600 or
more in any taxable year to a single payee in the course of the payor's trade or business. 516
Payments to corporations generally are excepted from this requirement. Payments subject to
reporting include fixed or determinable income or compensation , but do not include payments
for goods or certain enumerated types of payments that are subje ct to other specific reporting
511

IRS Form SS-8 (Rev. 11-2006). A written detennin ation with regard to prior emp loyment status may
be issued by the IRS. The IRS will not issue a written determination with respect to prospective employment status .
Section 3.01( 104) of Rev. Proc. 2017-3 , 20 17- 1 I.R.B. 130, 136. Under section 7436 , iftb e IRS detem1ines that a
worker is an employee for employmen t tax purposes of the person for whom services are performed , or that the
person is not entitled to relief under section 530, the person may petition the Tax Court for a determination of
whether tbe IRS determina tion is correct and tbe proper amount of employment tax.
512

Sec. 3508.

513

Secs. 312l(d)(3)(B) and 770l(a)(20 ).

514

Sec. 312l(d)(3)(D).

515

Secs. 6031 through 6060.

516

The information return generally is submitted electronically as a Form 1099 or Form 1096, although
certain payments to beneficia ries or employees may require use of form 1041 or Forms W-2 and W-3, respectively.
Treas. Reg. sec. l.6041-l(a) (2).

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TREAS-17-0313-I-000563

 requirements .517 Detailed rules are provided for the reporting of various types of inves tment
income , including interest , dividends , and gross proceeds from broker ed transactions (such as a
sale of stock) paid to U.S. persons .5 18
Specia l informat ion reportin g requirements exist for emplo yers required to deduct and
withhold tax from employees' income. 519 In addition , any serv ice recip ient engage d in a trade or
business and paying for services is required to make a return according to regulations when the
aggregate of payments is $600 or more .520
The payor of amounts described above is required to provide the recipient of the payment
with an annual statement showing the aggregate payment s made and contact information for the
payor. 521 The statement must be supplied to taxpayers by the payors by January 31 of the
following calendar year. Payor s generally must file the information return with the IRS on or
522
before January 31 of the year following the calendar year to which suc h returns relate .
Returns relating to payment s made in sett lement of third party network transact ions
Any payment settlement entity making payment to a participatin g payee in settlement of
reportable payment transaction s must report annua lly to the IRS and to the participatin g payee
the gross amount of such reportable payment transactions , as we ll as the name , address , and TIN
of the participating payees. A " reportable pa yment transa ction " mean s any payment card
tran saction and any third party network tran saction.
A "payment settlement entity" means , in the case of a payment card transaction , a
merchant acquiring entity and , in the case of a third part y network tran saction, a third party
settlement organization. A "participating payee" mean s, in the case of a third part y network
tran saction , any person who accepts payment from a third party settlement organization in
settlement of suc h transaction.
For purposes of the reportin g requirement , the term "third party network tran saction "
means any transaction which is settl ed through a third party payment network. A "third party
payment network" is defined as any agree ment or arrang ement ( 1) which invol ves the
estab lishment of account s with a centra l organization by a sub stantial number of persons (i.e.,
517

Sec. 604l (a) requires reporting as to fixed or determinable gains, profits , and income (other than
payments to which secs. 6042(a)(l) , 6044(a)(l), 6047(c), 6049(a) , or 6050N(a) applies and other than payments
with respect to whic h a statement is required under author ity of section 6042(a) , 6044(a)(2) or 6045). These
payments excepted from section 604l(a) include most interest , royalties , and dividends.
518

Secs. 6042 (dividends) , 6045 (broker reporting) and 6049 (interest) and the Treasury regulations

thereunder.
519

Sec. 6051(a).

520

Sec. 6041 A.

521

Secs. 6041(d) , 6041A(e).

522

Sec. 6071(c).

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TREAS-17-0313-I-000564

 more than 50) who are unrelated to such organization , provide goods or services , and have
agreed to settle transactions for the provision of such goods or services pursuant to such
agreement or arrangement; (2) which provides for standards and mechanisms for settling such
transactions ; and (3) which guarantees persons providing goods or services pursuant to such
agreement or arrangement that such persons will be paid for providing such goods or services.
In the case of a third party network transaction , the payment settlement entity is the third party
settlement organization, which is defined as the central organization which has the contractual
obligation to make payment to participating payees of third party network transactions. Thus , an
organization generally is required to report if it provides a network enabling buyers to transfer
funds to sellers who have established accounts with the organization and have a contractual
obligation to accept payment through the network. However , an organization operating a
network which merely processes electronic payments (such as wire transfers, electronic checks,
and direct deposit payments) between buyers and sellers, but does not have contractual
agreements with sellers to use such network , is not required to report under the provision.
Similarly , an agreement to transfer funds between two demand deposit accounts will not , by
itself, constitute a third party network transaction.
A third party payment network does not include any agreement or arrangement which
provides for the issuance of payment cards. In addition , a third party settlement organization is
not required to report unless the aggregate value of third party network transactions for the year
exceeds $20,000 and the aggregate number of such transactions exceeds 200. 523 If a payment of
funds is made to a third party settlement organization by means of a payment card (e.g., as part
of a transaction that is a payment card transaction) , the $20,000 and 200 transaction de minimis
rule continues to apply to any reporting obligation with respect to payment of such funds to a
participating payee by the third party settlement organization made as part of a third party
network transaction.

Description of Proposal
Worker classification safe harbor

In general
The proposal provides a safe harbor under which, for all Code purposes (and
notwithstanding any Code provision to the contrary) , if certain requirements are met with respect
to service performed by a service provider , with respect to such service: ( 1) the service provider
is not treated as an employee, (2) the service recipient is not treated as an employer , (3) a payor
is not treated as an employer, and (4) the compensation paid or received for the service is not
treated as paid or received with respect to employment. 524

523

Sec. 6050W(e).

524

The proposal also amends the direct seller rules und er section 3508 to include a person engaged in the
trade or business of sel ling, or soliciting the sale of, promotional products from other than a pem1anent retail
establishment. For this purpose, a promotional product is a tangible item with permanently marked promotional
words , symbols, or art of the purchas er.

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TREAS-17-0313-I-000565

 For purposes of the proposal , a service provider is any qualified person who performs
service for another person , and a qualified person is any natural person or any entity if any of the
services performed for another person are performed by one or more natural persons who
directly own interests in such entity. The service recipient is the person for whom the service
provider performs service. A payor is a person (including the service recipient) that pays the
service provider for performing the service, or any marketplace platform which is any person
who operates a digital website or mobile application that facilitates the provision of goods or
services by providers to recipients , who enters into an agreement with each provider that such
provider will not be treated as an employee with respect to such goods and services , who
provides standards and mechanisms for settling such transactions , and guarantees each service
provider of payment for transactions. 525
The proposal does not apply with respect to any service provided by a service provider to
a service recipient or pay or if the service provider owns any interest in the service recipient or
payor, with the exception of a service recipient or payor , the stock of which is regularly traded
on an established securities market.
Under the proposal , notwithstanding section 530 of the Revenue Act of 1979, the
Secretary of the Treasury is directed to issue such regulations as the Secretary determines are
necessary to carry out the purposes of the proposal. Nothing in the proposal is to be construed as
limiting the ability or right of a service provider , service recipient , or payor to apply any other
Code provision , section 530 , or any common law rules for determining whether an individual is
an employee , or as establishing a prerequisite for the application of any of those areas of law.
Service provider requirements
In order for this treatment to apply to service , in connection with performing the service ,
the service provider generally must (1) incur expenses which are deductible as trade or business
expenses and a significant portion of which are reimbursed ; (2) agree to perform the service for a
particular amount of time , to achieve a specific result , or to complete a specific task ; (3) have a
significant investment in assets or training applicable to the service performed , not be required to
perform services exclusively for the service recipient , have not performed substantially the same
services for the service recipient or payor as an employee during the one-year period ending with
the date of commencement of services under a contract meeting the requirements described
below , or not be compensated on a basis which is tied primarily to the number of hours actually
worked. Alternatively , in the case of a service provider engaged in the trade or business of
selling (or soliciting the sale of) goods or services , the service provider must be compensated
primarily on a commission basis , and substantially all the compensation for the service must be
directly related to sales of goods or services rather than to the number of hours worked. In
addition , any service provider must have a principal place of business , must not primarily
provide the service in the service recipient's place of business , must pay a fair market rent for
use of the service recipient's place of business , or must provide the service primarily using
equipment supplied by the service provider.
525

The proposal amends section 7436 to allow a petition to be filed by a service recipient , a payor , or a
servic e provider whom tbe IRS has determined should have been treated as an employee .

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 Contract and reporting requirements
The service performed by the service provider must be pursuant to a written contract
between the service provider and the service recipient (or the pay or, if applicable) that meets
certain requirements. First, the contract must include the service provider's name , taxpayer
identification number , and address ; a statement that the service provider will not be treated as an
employee for purposes of the Code with respect to the service provided pursuant to the contract ;
a statement that the service recipient (or the payor) will, consistent with Code requirements ,
withhold on and report to the IRS the compensation payable pursuant to the contract; a statement
that the service provider is responsible for the payment of Federal, State, and local taxes ,
including self-employment taxes , on compensation payable pursuant to the contract; and a
statement that the contract is intended to be a contract meeting the applicable requirements. The
contract does not fail to meet these requirements merely because the service provider's name ,
taxpayer identification number , and address are collected at the time of payment for the services
and not in advance, or because the contract provides for an agent of the service recipient or payor
to fulfill the responsibilities of the service recipient or payor. Second, the term of the contract
generally must not exceed two years; however , a contract can be renewed in writing one or more
times if the term of each renewal does not exceed two years and if the required information in the
contract is updated in connection with the renewal. Third , the contract or renewal must be
signed, including electronically , by both the service recipient or payor and the service provider
no later than the date on which aggregate payments made by the service recipient to the service
provider exceed $1000.
If, for a taxable year, the service recipient or payor fails to meet the reporting
requirements applicable with respect to any service provider ("applicable" reporting
requirements) ,526 the safe harbor does not apply for purposes of making any determination with
respect to the tax liability of the service recipient or payor with respect to such service provider
for the year (unless the failure is due to reasonable cause and not willful neglect).

Prospective application of reclassification

In the case of a determination by the IRS that a service recipient or a payor should have
treated a service provider as an employee, if certain requirements are met, the determination will
not be effective earlier than the "notice date. " In order for this rule to apply , the service recipient
or payor must have entered into a written contract with the service provider that meets the
requirements described above , for all relevant taxable years the service recipient or the payor
must have satisfied the applicable withholding and reporting requirements with respect to the
526

The applicable reporting requirements relate to, under section 604 l (a), a person engaged in a trade or
business that makes payments of $600 or more ($1,000 or more under the proposal , as discussed below) to another
person , under section 604lA (a), a service recipient engaged in a trade or business that pays $600 or more ($1,000 or
more under the proposal , as discussed below ) in remuneration to another person for services , or under section
6050W(a) , a marketplace platform settling payments above the minimum threshold with a provider of goods or
services engaging in third party network transactions. Under the proposal , reporting by a service recipient or payor
required under section 6041 or 6041 A with respect to compensation paid under the proposal must include the
aggregate amount of such compensation paid to each person whose name is required to be included on the report,
the aggregate amount of income tax withheld from the compensation (as discussed below) , and an indication of
whether a copy of the contract required under the proposa l is on file with the service recipient or payor.

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TREAS-17-0313-I-000567

 service provider (unless the failure to satisfy the requirements is due to reasonable cause and not
willful neglect) , the service recipient or payor must have collected and paid over all applicable
employment taxes for all relevant taxable years with respect to the service provider (unless the
failure to satisfy the requirements is due to reasonable cause and not willful neglect) , and the
service recipient or the payor must demonstrate a reasonable basis for determining that the
service provider is not an employee under the safe harbor and that the determination was made in
good faith.
Similarly, with respect to the service provider , a determination that the service provider
should have been treated as an employee will not be effective earlier than the notice date if the
service provider entered into a written contract with the service recipient or payor that meets the
requirements described above, for all relevant taxable years the service provider satisfied
applicable income tax and self-employment tax return requirements 527 with respect to the service
recipient or payor (unless the failure to satisfy the requirements is due to reasonable cause and
not willful neglect) , and the service provider demonstrates a reasonable basis for determining
that the service provider is not an employee under the safe harbor and that the determination was
made in good faith.
For this purpose , the "notice date" is the 30th day after the earlier of (1) the date on
which the first letter of proposed deficiency that allows the service provider , service recipient , or
payor an opportunity for administrative review in the IRS Office of Appeals is sent, (2) the date
on which a deficiency notice is sent, or (3) the date on which a notice of determination that a
service provider is an employee is sent.
Withholding requirements
The proposal imposes an income tax withholding requirement with respect to
compensation paid pursuant to a contract between a service provider and a service recipient ( or
payer) that meets the requirements described above. For this purpose, a payment of such
compensation is treated as a payment of wages by an employer to an employee. However , the
amount required to be withheld is five percent of the compensation and only on compensation up
to $20,000 paid pursuant to the contract. 528
Reporting requirements
Returns relating to payments made of fixed or determinable income a compensation
and relating to payments for services
This proposal increases the reporting threshold for two categories of reportable payments
from aggregate payments of $600 or more to $1000 or more. The first category is payments of
fixed or determinable income or compensation not including payments for goods or certain
527

Secs. 60 I2(a) and 6017.

528

The proposal also amends the voluntary withholdin g rules under section 3402(p) to provide that a
voluntary withholding agreement is not taken into account in determinin g whether any party to the agreement is an
emp loyee or an employer for Code purposes.

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TREAS-17-0313-I-000568

 enumerated types of payments subject to other reporting requirements. The second category is
payments for services received from any service recipient engaged in a trade or business paying
for such services.
Returns relating to payments made in sett lement of third party network transactions
This proposal defines a marketplace platform as a person which is a central organization
and who operates a website , mobile application , or similar system through which users may
transact for the provision of goods or services to recipients and through which the organization
settles such transactions and guarantees payments to providers. In the agreement with each
prov ider, the central organizat ion classified as a marketplace platform must state that the
provider will not be treated as an employee with respect to their provision of goods or services.
This proposa l also changes the de minimis rule for aggregate third party network
transactions to a part icipating payee below wh ich a third party settlement organization is not
required to report. A third party settlement organ ization is generally required to report third party
network transactions with any participating payee that exceed a minimum threshold of $ 1,000 in
aggregate payments , regardless of the aggregate number of such transactions.
Certain third party settlement organizat ions may instead elect to report once third party
network transactions with a partic ipating payee either exceed $5,000 or exceed 50 in number ,
whichever occurs first. Third party sett lement organizations that are marketplace platforms may
opt to report using the higher threshold if substantially all of the participating payees to which it
makes reportable payme nts are primari ly engaged in the sale of goods on such platform. Third
party settlement organizations that are not marketplace p latforms may opt to report using the
higher threshold third party network transactions with participating payees who are primarily
engaged in the sale of goods in these transactions.
Effective Date
Worker classification

The proposal is generally effective for services performed after December 31, 2017, and
amounts paid for such services after such date. However , a contract, and a service recipient or
payor, will not be treated as failing to meet the requirements under the proposal with respect to
compensat ion paid to a service provider before 180 days after the date of enactment of the
proposal.
Reporting requirements

The proposal applies to payments made after December 31, 2018.

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TREAS-17-0313-I-000569

 L. Tax-Exempt Organizations
1. Excise tax based on investment income of private colleges and universiti es

Present Law
Public charities and private foundations
An orga nization qua lifying for tax-exempt status under section 50l (c)(3) is further
classified as either a public charity or a private foundation. An organization may qualify as a
public charity in several ways. 529 Certain organizations are classified as public charities per se,
regardless of their sources of support. These include churches, certa in schoo ls, hospita ls and
other medical organi zations , certain organ izations providing assistance to colleges and
universities , and governmental unit s.530 Other organizations qualify as public charities because
they are broadly publicly supported. First, a charity may qualify as publicly supported if at least
one-th ird of its total support is from gifts, grants or other contr ibutions from governme ntal units
or the general public.531 Alternatively, it may qualify as pub licly supported if it receives more
than one-third of its total support from a combina tion of gifts, grants , and contrib utions from
governmen tal units and the public plus revenue arising from activities related to its exempt
purposes (e.g., fee for serv ice income). In add ition, this category of public char ity must not rely
excess ively on endow ment income as a source of support .532 A supportin g organ ization, i.e., an
organization that provid es supp ort to another section 501 (c)(3) entity that is not a private
foundation and meets the requirements of the Code, also is classified as a public charity. 533

529 The Code does not express ly define the term "pub lic charity ," but rather provides exceptions to those
entities that are treated as private foundations.
530 Sec. 509(a)(I) (referring to sections l 70(b )( I)(A)( i) through (iv) for a description of these
organizations).
531

Treas. Reg . sec. 1. l 70A-9(()(2) . Failing this mechanical test, the organization may qua lify as a public
charity if it passes a "facts and circumstances " test. Treas. Reg. sec. l. l ?0A -9(()(3).
532

To meet this requirement , the organization must nonnally receive more than one-third of its support
from a combination of(!) gifts, grants, contributions , or membership fees and (2) certain gross receipts from
adm issions, sales of merchandise , performance of services, and furnishing of facilities in connection with activities
that are related to the organization 's exempt purposes. Sec. 509(a)(2)(A). In addition, the organization must not
normally receive more than one-third of its public support in each taxable year from the sUin of(l) gross investment
income and (2) the excess of unrelated business taxable income as determined under section 512 over the amount of
unrelated business income tax imposed by section 511. Sec. 509(a)(2)(B).
533

Sec. 509(a)(3). Supporting organizations are further classified as Type 1, II, or lll depending on the
relationship they have with the organizations they support. Supporting organizations must support public charities
listed in one of the other categories (i.e., per se public charities , broadly supported public charities , or revenue
generating public charities) , and they are not permitted to support other supportin g organizations or testing for
public safety organizations.

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 A section 501 (c)(3) organization that does not fit within any of the above categories is a
private foundation. In general, private foundations receive funding from a limited number of
sources (e.g., an individual , a family, or a corporation).
The deduction for charitable contributions to private foundations is in some instances less
generous than the deduction for charitable contributions to public charities. In addition, private
foundations are subject to a number of operational rules and restrictions that do not apply to
public charities. 534

Excise tax on investment income of private foundations
Under section 4940(a), private foundations that are recognized as exempt from Federal
income tax under section 50l(a) (other than exempt operating foundations) 535 are subject to a
two-percent excise tax on their net investment income. Net investment income generally
includes interest , dividends , rents, royalties (and income from similar sources), and capital gain
net income , and is reduced by expenses incurred to earn this income. The two-percent rate of tax
is reduced to one-percent in any year in which a foundation exceeds the average historical level
of its charitable distributions. Specifically, the excise tax rate is reduced if the foundation's
qualifying distributions (generally, amounts paid to accomplish exempt purposes) 536 equal or
exceed the sum of (1) the amount of the foundation's assets for the taxable yea r multiplied by the
average percentage of the foundation's qualifying distributions over the five taxable years
immediately preceding the taxable year in question , and (2) one percent of the net investment
income of the foundation for the taxable year. 537 In addition, the foundation cannot have been

Organi zations organized and operated exclusive ly for testing for public safety also are classified as public
charities. Sec. 509(a)(4). Such organizations , however , are not eligible to receive deductible charitable
contributions under section 170.
534 Unlike public charities , private foundations are subject to tax on their net investment income at a rate of
two percent (one percent in some cases). Sec. 4940. Private foundations also are subject to more restrictions on
their activities than are public charities. For example , private foundations are prohibited from engaging in selfdealing transactions (sec. 4941) , are required to make a minimum amount of charitable distributions each year, (sec.
4942) , are limited in the extent to which they may control a business (sec. 4943) , may not make speculative
investments (sec. 4944) , and may not make certain expenditures (sec. 4945). Violations of these rules result in
excise taxes on the foundation and , in some cases, may result in excise taxes on tbe managers of the foundation.
535
Exempt operating foundations are exempt from the section 4940 tax. Sec. 4940(d)(l). Exempt
operating foundations generally include organizations such as museums or libraries that devote their assets to
operating charitable programs but have difficulty meeting the "public support" tests necessary not to be classified as
a private foundation. To be an exempt operating foundation , an organization must: (I) be an operating foundation
(as defmed in section 4942(i)(3)); (2) be publicly supported for at least 10 taxable years; (3) have a governing body
no more than 25 percent of whom are disqualified persons and that is broadly representative of the general public;
and (4) have no officers who are disqualified persons. Sec. 4940(d)(2).

536

Sec. 4942(g).

537

Sec. 4940(e).

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 subject to tax in any of the five preceding years for failure to meet minimum quali fying
distribution requirements in section 4942.
Private foundations that are not exempt from tax under section 50l(a), such as certain
charitable trusts, are subject to an excise tax under section 4940(b ). The tax is equal to the
excess of the sum of the exc ise tax that would have been imposed under section 4940(a) if the
foundation were tax exempt and the amount of the tax on unrelated business income that would
have been imposed if the foundation were tax exempt, over the income tax imposed on the
foundation under subtitle A of the Code.
Private foundations are required to make a minimum amount of qualifying distributions
each year to avoid tax under section 4942. The minimum amount of qualifying distributions a
foundation has to make to avoid tax under section 4942 is reduced by the amount of section 4940
excise taxe s paid.538
Private colleges and universities

Private colleges and universities generally are treated as public charities rather than
private foundations 539 and thus are not subject to the private foundation excise tax on net
investment income.
Description of Proposal

The propo sal imposes an excise tax on an applicable educational institution for each
taxable year equal to 1.4 percent of the net investment income of the institution for the taxable
year. Net investment income is determined using rules similar to the rules of section 4940( c)
(relating to the net investment income of a private foundation).
For purpo ses of the proposal , an applic able educational institution is an institution: (1)
that has at least 500 tuition-pa ying students dur ing the preced ing taxable year; (2) that is an
eligible education institution as described in section 25A of the Code 540 ; (3) that is not described
in the first section of section 51 l (a)(2)(B) of the Code (genera lly describing State colleges and
universities); and (4) the aggregate fair market value of the assets of which at the end of the
preceding taxable year ( other than those assets which are used directly in carrying out the
institution ' s exempt purpo se 541 ) is at least $250,000 per student. For the se purpo ses, the number
538

Sec. 4942(d)(2).

539

Secs. 509(a)( I) and l 70(b)( I )(A)(ii).

540

Section 25A defines an eligible educational institution as an institution (1) which is described in section
481 of the Higher Education Act of 1965 (20 U.S.C. sec. 1088), as in effect on August 5, 1977, and (2) which is
eligible to participate in a program under title IV of such Act.
541

Assets used directly in carryin g out the institution 's exempt purpose include , for example , classroom
buildings and physical facilities used for educat ional activities and office equipment or other admin istrative assets
used by employees of the institution in carrying out exempt activities , among other assets.

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 of students of an institution is based on the daily average number of full-time stud ents attend ing
the institution, with part-time students being taken into acco unt on a fu ll-tim e stud ent eq uivalent
basis.
For purposes of dete rminin g whether an institution meets the asset-pe r-student threshold
and determining net investme nt income, assets and net investment income includ e amoun ts with
respect to an organization that is related to the institution. An organization is treated as related to
the institu tion for this purpose if the organization: ( 1) contro ls, or is controlled by, the
institut ion ; (2) is controll ed by one or more persons that contro l the institution; or (3) is a
support ed organization 542 or a supp orting organization 543 during the taxable year with respect to
the institution.

Effective Date
The proposal is effect ive for taxab le years beginning after D ecember 31 , 2017.

2. Name and logo royalties treated as unrelated business taxable income
Present Law
Tax exemption for certain organizations
Section 501(a) exempts ce rtain organizations from Federa l income tax. Suc h
orga nizatio ns include: (1) tax-exemp t organizations descr ibed in section 501 (c) (includin g
among others section 50l(c)(3) charitable organizations and section 50l(c)(4) socia l welfare
organizations); (2) re ligious and apos to lic organizations described in section 50 l (d) ; and (3)
trusts forming part of a pension, profit-sharing , or stock bonus plan of an employe r described in
sectio n 401(a).

Unrelated business income tax, in general
An exemp t organization genera lly may have revenue from four sources: contri butions,
gifts, and grants; trade or business income that is related to exempt activities (e.g., program
serv ice revenue) ; invest ment income; and trade or business income that is no t related to exe mpt
activi ties. The Federal income tax exemptio n generally extends to the first three categories , and
does not extend to an organization ' s unre lated trade or business income. In some cases ,
however , the investment income of an organization is taxed as if it were unrelated trade or
business incom e. 544

542

Secs. 509(f)(3).

543

Secs. 509(a)(3).

544
This is the case for social clubs (sec. 50l(c)(7)) , voluntary employees ' beneficiary associations (sec.
50l(c )(9)), and organizations and trusts described in sections 50l(c)(l 7) and 50l(c)(20). Sec. 5l 2(a)(3).

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 The unrelated business income tax ("UBIT") genera lly applies to income derived from a
trade or business regu larly carried on by the organization that is not substant ially related to the
performance of the organization 's tax-exempt functions. 545 An organization that is subject to
UBIT and that has $1,000 or more of gross unrelated business taxable income must report that
income on Form 990-T (Exempt Organization Business Incom e Tax Return).
Mos t exempt organiza tion s may operate an unrelated trade or business so long as the
organization remains primari ly engaged in activities that further its exem pt purpo ses. Therefore ,
an organization may engage in a substan tial amount of unrelated business activity wit hout
j eopardiz ing exempt status. A section 501 (c)(3) (charitabl e) organi zation, however, may not
operate an unrelated trade or business as a substantial part of its activities. 546 Therefore , the
unrelated trade or business activity of a section 501 (c)(3) organization must be insubstantial.

Organizations subject to tax on unrelated business income
Mos t exe mpt organizations are subject to the tax on unrelated business income.
Specifically, organizations subject to the unrelated business income tax generally include: ( 1)
organ izations exemp t from tax und er section 501(a) , including organ izations described in section
501(c) (exce pt for U.S . instrume ntalities and certain char itable trusts); 547 (2) qualified pension ,
profit-sharing , and stock bonus plan s described in sect ion 401 (a); 548 and (3) certa in State colleges
and uni versities. 549

Exclusions from unrelated business taxable income
Certa in types of income are specifically exempt from unrelated business taxable income,
such as dividends , interest, royalties , and certa in rents ,550 unless derived from debt-financed
property or from certain SO-percent controlled subsidiaries. 551 Other exemp tions from UBIT are
provided for activities in which substan tially all the work is performed by volunt eers, for income
from the sale of donated goods, and for certain activities carried on for the convenience of
members, students, patients , officers, or emp loyees of a charitable organization. In addition ,
specia l UBIT provisions exem pt from tax activities of trade shows and State fairs, income from
bingo games, and income from the distribution of low-cost items incidental to the solici tation of
charitabl e contribution s. Organizations liab le for tax on unrelated business taxable income may

545

Secs. 511-514.

546

Treas . Reg. sec. l.50l(c)(3)-l(e).

547

Sec. 511(a)(2)(A).

548

Sec. 511(a)(2)(A).

549

Sec. 511(a)(2)(B).

550

Secs.511-514.

55 1

Sec. 512(b)(13).

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 be liable for alternative minimum tax determined after taking into account adjustments and tax
preference items.
Description of Proposal

The proposal modifies the UBIT treatment of the licensing of an organization ' s name or
logo generally to subject royalty income derived from such a license to UBIT. Specifically, the
proposal amends section 513 ( regarding unrelated trades or businesses) to provide that any sale
or licensing by an organization of any name or logo of the organization (including any trademark
or copyright related to a name or logo) is treated as an unrelated trade or business that is
regularly carr ied on by the organization. In addition , the proposal amends section 5 12 (regarding
unrelated business taxable income) to provide that income derived from any such licensing of a
name or logo of the organization is incl uded in the organization ' s gross unrelated business
taxable income, notwithstanding the provisions of section 512 that otherwise exclude certain
types of passive income (including royalties) from unrelated business taxable income. 552
Effective Date

The proposal is effective for taxable years beginning after December 31, 2017.
3. Unrelated business taxable income separately computed for each trade or business
Present Law
Tax exemption for certain organizations

Section 50l(a) exempts certain organizations from Federal income tax. Such
organizations include: (1) tax-exempt organizatio ns described in section 50 l (c) (including
among others section 50l (c)(3) charitable organizations and section 50l(c)(4) social welfare
organizations) ; (2) religious and apostolic organizations described in section 50 1( d); and (3)
trusts forming part of a pension , profit-sharing , or stock bonus plan of an employer described in
section 40l(a).
Unrelated busine ss income tax, in general
An exempt organiza tion generally may have revenue from four sources: contri butions,
gifts, and grants ; trade or business income that is related to exemp t activities (e.g ., program
service revenue) ; investment income ; and trade or business income that is not related to exempt
activities. The Federa l income tax exempt ion generally extends to the first three categories , and
does not extend to an organization ' s unrelated trade or business income. In some cases,

552

Specifically, the proposal references sections 512(b)( l ), (2), (3) and (5).

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 however , the investment income of an organ ization is taxed as if it were unrelated trade or
business income. 553
The unrelated business income tax ("UB IT") generally applies to income derived from a
trade or business regularly carried on by the organization that is not substantiall y related to the
performance of the organization's tax-exempt functions. 554 An organization that is subject to
UBIT and that has $1,000 or more of gross unrelated business taxable income must report that
income on Form 990-T (Exem pt Organization Business Income Tax Return).
Most exe mpt organizations may operate an unrelated trade or business so long as the
organization remains primarily engaged in activities that further its exempt purposes. Therefore ,
an organization may engage in a substantial amount of unrelated business activity without
jeopardizing exempt statu s. A section 50l(c)(3) (charitable) organization, however , may not
operate an unrelated trade or business as a substantial part of its activities. 555 Therefore , the
unrelated trade or bus iness activity of a section 50 I (c)(3) organization must be insubstantial.
Organizations subject to tax on unrelated business income

Most exempt organizations are subject to the tax on unrelated business income.
Specifically, organizations subject to the unrelated bus iness income tax generally include: ( 1)
organizations exempt from tax under section 501(a), including organizations described in section
50l(c) (except for U.S. instrumentalities and certain charitable trusts) ;556 (2) qualified pension,
profit-sharing , and stock bonus plans described in sect ion 40l(a) ;557 and (3) certain State colleges
and universities. 558
Exclusions from unrelated busin ess taxable income

Certain types of income are specifically exempt from unrelated business taxable income,
such as dividends , interest, royalties , and certain rents ,559 unless derive d from debt-financed
property or from certain 50-percent controlled subsidiaries. 560 Other exemptions from UBIT are
provided for activities in wh ich substa ntially all the work is performed by volunteers, for income
553

This is the case for socia l clubs (sec. 50l(c)(7)), vo luntary emp loyees ' beneficiary associations (sec.
50 l(c)(9)), and organizat ions and trusts described in sections 50 l(c)(l 7) and 501 (c)(20). Sec. 5 l 2(a)(3).
554

Secs. 511-514.

555

Treas. Reg. sec. l.50l(c)(3)-l(e).

556

Sec. 51 l (a)(2)(A).

557

Sec. 51 l (a)(2)(A).

558

Sec. 511(a)(2)(B) .

559

Secs. 511-514.

560

Sec. 5 l 2(b )( 13).

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 from the sale of donated goods, and for certain activities carried on for the convenience of
members , students, patients , officers , or employees of a charitable organization. In addition ,
special UBIT provisions exe mpt from tax activities of trade shows and State fairs, income from
bingo games, and income from the distribution of low-cost items incidental to the solicitation of
charitable contributions. Organizations liable for tax on unrelat ed business taxable income may
be liable for alternative minimum tax determined after taking into acco unt adjustments and tax
preference items.
Specific deduction against unrelated business taxable income

In computing unrelated business taxable income, an exempt organ ization may take a
specific deduction of $1,000. This specific deduction may not be used to create a net operating
loss that will be carried back or forward to another year. 56 1
In the case of a diocese , province or religious order , or a convention or association of
churches, a specific deduction is allowed w ith respect to each pari sh, individual church , district ,
or other local unit. The specific deduction is equal to the lower of $1,000 or the gross income
derived from any unrelated trade or business regularly carr ied on by the loca l unit. 562
Operation of multiple unrelated trades or businesses

An organization determines its unrelated business taxable income by subtracting from its
gross unrelated business income deductions directly connected with the unrelated trade or
business. 563 Under regulations , in determining unrelated business taxable income , an
organization that operates multiple unrelated trades or businesses aggregates income from all
such activities and subtracts from the aggregate gross income the aggregate of deductions. 564 As
a result, an organiza tion may use a deduction from one unrelated trade or business to offset
income from another, thereby reducing total unrelated business taxable income.
Description of Proposal

For an organization with more than one unrelat ed trade or business , the propo sal requires
that unrelated business taxable income first be computed separately with respect to each trade or
business and without regard to the specific deduction generally allowed under section
512(b)(12). The organization' s unrelated business taxab le income for a taxab le year is the sum
of the amounts (not less than zero) computed for each separate unrelated trade or business , less
the specific deduction allowed under section 5 12(b)(l2). A net operating loss deduction is
allowed only with respect to a trade or business from which the loss arose.

561

Sec. 512(b)(l 2).

562

Ibid .

563

Sec . 512(a).

564

Treas. Reg. sec. 1.512(a)-1 (a).

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 The result of the proposa l is that a deduction from one trade or business for a taxable year
may not be used to offset income from a different unrelated trade or business for the same
taxable year. The proposal genera lly does not, however , prevent an organization from using a
deduction from one taxable year to offse t income from the same unrelated trade or business
activity in another taxable yea r, where appropriate.
Effective Date
The proposal is effective for taxable years beginning after December 31, 2017.
4. Repeal of tax-exempt status for professional sports leagues
Present Law
Tax exemption for section 50l(c)(6) organizations
Section 501 (c)( 6) provides tax exem pt status for business leagues and certain other
organizations not organized for profit, no part of the net earnings of which inures to the benefit
of any private shareho lder or individual. A business league is an association of persons having
some common business interest , the purpose of which is to promote such common interest and
not to engage in a regular business of a kind ordinarily carried on for profit. 565 Such an
organization may not have as its primary activity performing "particular services" for
members.566 Contributions to these types of organ izat ions are not deductible as charitable
contributions; however, they may be deductible as trade or business expenses if ordinary and
necessary in the conduct of the taxpayer 's business. Many organizations known as "trade
assoc iations" may qualify for exempt status under this provision.
Professional sports leagues
Since 1966, section 50l(c)(6) has included language exempting from tax "professiona l
football leagues (whether or not administering a pension fund for football players). " The
Internal Revenue Service has interpreted this language as applying not only to profess ional
football leagues, but to all profess ional sports leagues. 567

565

Treas. Reg. sec. l.50l(c)(6)-l.

566

Tre as. Reg. sec. I.50l(c)(6)-l.

567

See General Counsel Memorandum 38179, Nove mber 29 , 1979 ("We continue to belie ve that
professional sports leagues , including football leagues, do not qualify for exemption if the ordinary standards of
section 50l(c)(6) are applied. However , wh ile the answer is far from clear , we have concluded upon reflection that
the specific exemption of football leagues in 1966 can be viewed as providing support for recognition of exemption
of all professional sports leagues as a unique category of organizations under section 50 l ( c)( 6). Since other
professional sports leagues are indistinguishable in any meaningful way from football leagues, we th ink it is fair to
conclude that by formally blessing the exempt ion it knew football leagues had historically enjoyed, Congress
implici tly recogn ized a unique histo rical category of exemption und er sect ion 501 (c)(6). The specific enumerat ion
of football leagues can be viewed as merely exemplary of the category thus recogni zed, and as necessitated only by
the problem of insur ing that football's pension and merger arrangement wou ld not endanger its exemption").

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 Description of Proposal
The proposal strikes from section 501 (c )( 6) the phrase "professiona l football leagues
(whether or not administering a pension fund for football players)." In addition , the proposal
amends section 501 (c )( 6) to provide that sect ion 501 (c )( 6) "s hall not apply to any professional
sports league (whet her or not administering a pension fund for players). "

Effective Date
The proposal is effective for taxable years beginning after December 31, 2017.

5. Modification of taxes on excess benefit transactions (intermediate sanctions)
Present Law
Excess benefit transactions
The Code imposes excise taxes on excess benefit transactions between disqualified
persons and char itable organizations (other than private foundations) or social we lfare
organizations (as described in sect ion 50l(c)(4)). 568 The excess benefit transaction tax
commonly is referred to as " intermediate sanctions." 569 An excess benefit transaction generally
is a transaction in which an economic benefit is provided , directly or indirectly, by a charitab le or
socia l we lfare organization to or for the use of a disqualified person if the va lue of the economic
benefit provided exceeds the va lue of the consideratio n (includin g the performance of serv ices)
received for providing such benefit. The excise tax is imposed on any such excess.

Disqualified persons
Disqualified persons generall y includ e: (1) persons who were, at any time during the
five-year period end ing on the date of the transaction , in a position to exercise substant ial
influence over the affairs of the organization (incl udin g officers and directors) ; (2) a member of
the family of such a person ; and (3) certain 35-percent or more controlled entities. 570
Special rules apply with respect to charities that are sponsoring organizations of donor
advised funds. For such organizations , the term "disqualified person" also includ es: (I) donors
and certain other persons appointed by a donor to provide advice with respect to the fund (donor
advisors) ; (2) investment advisors ; and (3) members of the family and certain 35-pe rcent or more
568

Sec. 4958.

569

The excess benefit transaction rules were enacted in l 996 to pro vide a sanction short of revocation of
tax exemption , an "intermediate " sanction , for abusive self-dealing transactions (i.e. , private inurement ) between an
organizati on insider and the organization. Prior to enactment of the excess benefit transaction rules , there was no
sanction in the Code on organization insiders or disqualified persons for engaging in self-dealing transactions with
respect to a public charity.
570

Sec. 495 8(f)(l) .

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 controlled entities of a person described in (1) or (2). 571 An investment advisor is a person (other
than an employee of the sponsoring organization) compensated by the organization for managing
the investment of , or providing investment advice with respect to , assets maintained in donor
advised funds owned by the organization. 572

Rebuttable presumption of reasonableness
Under the intermediate sanctions regulations , in certain cases an exempt organization
may avail itself of a rebuttable presumption with respect to compensation arrangements and
property transfers. Payments under a compensation arrangement are pre sumed to be reasonable ,
and a transfer of property , or the right to use propert y, is presumed to be at fair market value , if:
( 1) the arrangement or terms of transfer are approved in advance by an authorized body of the
organization (as defined below) composed entirely of individuals who do not have a conflict of
interest with respect to the arrangement or transfer ; (2) the authorized body obtained and relied
upon appropriate data as to comparability prior to making its determination ; and (3) the
authorized body adequately documented the basis for its determination concurrently with making
that determination. 573 If these requirements are satisfied , the IRS may overcome the presumption
of reasonableness if it develops sufficient contrary evidence to rebut the probative value of the
comparability data relied upon by the authorized body .574
An authorized body is defined as: (1) the governing body of the organization ; (2) a
committee of the governing body , which may be composed of any individuals permitted under
State law to serve on such a committee , to the extent that the committee is permitted by State law
to act on behalf of the governing body ; or (3) to the extent permitted by State law , other parties
authorized by the governing body of the organization to act on its behalf by following procedures
specified by the governing body in approving compensation arrangements or property
transfers .575

In general , an authorized body has appropriate data as to comparability if, given the
knowledge and expertise of its members , it has information sufficient to determine whether the
arrangement is reasonable in its entirety or the transfer is at fair market value .576 In the case of
compensation , rele vant information includes , but is not limited to, compensation levels paid by
similarly situated organizations , both taxable and tax-exempt , for functionally comparable
positions ; the availability of similar services in the geographic area of the applicable tax-ex empt
organization ; current compensation surveys compiled by independent firms ; and actual written
571

Secs. 4958(f)(l) (E) and (F).

572

Sec. 4958(f)(8) .

573

Tre as. Reg. sec . 53.4958-6(a). See also H. Rep. No. 506, 10411, Congress, 2d Sess. 1996, pp . 53, 56-7.

574

Treas . Reg. sec. 53.49 58-6(b).

575

Treas. Reg. sec. 53.4958-6(c)(l) (i).

576

Treas. Reg. sec. 53.4958-6(c)(2)(i).

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TREAS-17-0313-I-000580

 offers from similar institutions competin g for the services of the disqualified per son. In the case
of property , relevant information includes , but is not limited to, current independent appra isals of
the value of all propert y to be transferred , and offers rece ived as part of an open and compe titive
bidding pro cess. For organizations with annual gross rece ipts (includin g contributions) of less
than $ 1 million , the authorized body is considered to have appropriate data as to co mparabili ty if
it has data on compensation paid by three comparable organizations in the same or simi lar
comm unities for simi lar services. There is no inference with respect to whe ther circumstances
falling outside this safe harbor will meet the requ irement with respect to the collectio n of
appropriate data. 577
In gene ral, for a decision to be documented adequate ly, the writte n or elec troni c records
of the authorized body must note : ( 1) the terms of the transaction that was approved and the date
it was approved ; (2) the memb ers of the authoriz ed body who were present during debate on the
transaction that was approved and those who voted on it; (3) the comparab ility data obtained and
relied upon by the authorized body and how the data was obtained ; and (4) any actions taken
with respect to consideration of the transaction by anyone who is otherwise a member of the
aut horized body but w ho bad a conflict of interest with respec t to the transaction. 578

Amount of the excise tax
The excess benefi t tax is imposed on the disqualified person and , in certain cases , on the
organization ' s managers , but is not imposed on the exem pt organiza tion.
An initial tax of25 percent of the excess benefit amount is impo sed on the disqualified
person that receives the excess benefit. An additional tax on the disqualified per son of 200
percent of the excess benefit applies if the violation is not corrected. A tax of 10 percent of the
excess benefit (no t to exceed $20 ,000 with respect to any excess benefit transac tion) is imposed
on an organization manager who knowingly participated in the excess benefit transaction , if the
mana ger's parti cipation was willfu l and not due to reasonab le cause , and if the initia l tax was
imposed on the disqualified person. 579 If more than one person is liab le for the tax on
disqualified persons or on management , all such persons are join tly and severally liabl e for the
tax_5so

Standard for knowing violations
A manager participa tes in a tran sact ion knowing ly only if the manager: ( 1) has actua l
knowledge of sufficien t facts indicating that, based solely upon those facts, such transaction
wou ld be an excess benefit transaction ; (2) is aware that such a transaction under these
577

Treas. Reg. sec . 53.4958-6(c)(2)(ii).

578

Treas . Reg. sec. 53.4958-6(c)(3).

579

Sec. 4958(d)(2). Taxes imposed may be abated if certain conditions are met. Secs. 496 1 and 4962.

580

Sec. 495 8(d)( l).

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TREAS-17-0313-I-000581

 circumstances may violate the provisions of Federal tax law governing excess benefit
transactions ; and (3) negligently fails to make reasonable attempts to ascertain whether the
transaction is an excess benefit transaction, or the manager is in fact aware that it is such a
transaction. 58 1 The burden of proof in a Tax Court proceeding as to whether an organization
manager (or foundation manager) acted knowingly is on the Secretary. 582
Knowing does not mean having a reason to know. 583 However , evidence tending to show
that an organization manager has reason to know of a particular fact or particular rule is relevant
in determining whether the manager had actual knowledge of such a fact or rule. Thus , for
examp le, evidence tending to show that a manager has reason to know of sufficient facts
indicating that, based solely upon such facts, a transaction wou ld be an excess benefit transaction
is relevant in determining whether the manager has actual knowledge of such facts.584
Participation by an organizatio n manager is wi llful if it is voluntary , consc ious, and
intentio nal. No motive to avoid the restrictions of the law or the incurrence of any tax is
necessary to make the participation willful. Participation by an organization manager is not
willful if the manager does not know that the transaction in which the manager is participating is
an excess benefit transaction. 585 An organization manager ' s participation is due to reasonab le
cause if the manager has exercised responsibility on behalf of the organization with ordinary
business care and prudence. 586
Special rules

An organization manager ' s reliance on professional advice genera lly means that the
manager has not knowingly participated in an excess benefit transact ion. Under Treasury
regulations , an organization manager ' s participation in a transaction ordinarily is not considered
knowing, even though the transaction subsequently is held to be an excess benefit transaction , to
the extent that, after full disclosure of the factua l situation to an appropriate professiona l, the
organization manager relies on a reasoned written opinion of that professional with respect to
elements of the transaction within the professional ' s expertise. A written opinion is considered
as reasoned even though it reaches a conclusion that is subsequently determined to be incorrect
so long as the opinion addresses itself to the facts and the applicable standards. A written
opinion is not considered to be reasoned if it does nothing more than recite the facts and express
a conclusion. The absence of a written opinion of an appropriate professional with respect to a

581

Treas. Reg. sec. 53.4958-l (d)(4)(i).

582

Sec. 7454(b).

583

Treas. Reg. sec. 53.4958-l (d)(4)(ii).

584

Ibid.

585

Treas. Reg. sec. 53.4958-l (d)(S).

586

Treas. Reg. sec. 53.4958-l (d)(6).

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TREAS-17-0313-I-000582

 transaction does not , by itself , give rise to any inference that an organization manager
participated in the transaction knowingly.
Appropriate professionals on whose written opinion an organization manager may rely ,
are: (I) legal counsel , including in-house counsel; (2) certified public accountants or accounting
firms with expertise regarding the relevant tax law matters ; and (3) independent valuation
experts who hold themselves out to the public as appraisers or compensation consultants ,
perform the relevant valuations on a regular basis , are qualified to make valuations of the type of
property or services involved , and include in the written opinion a certification that the three
preceding requirements are met. 587

An organization manager's participation in a transaction ordinarily is not considered
knowing even though the transaction subsequently is held to be an excess benefit transaction , if
an appropriate authorized body that approved the transaction meets the requirements of the
rebuttable presumption of reasonableness with respect to the transaction. 588

Description of Proposal
Entity-level tax in the event of an excess benefit transaction
Under the proposal , if an initial tax is imposed on a disqualified person under the
intermediate sanctions rules , 589 the organization is subject to an excise tax equal to 10 percent of
the excess benefit , unless the participation of the organization in the transaction is not willful and
is due to reasonable cause. No tax on the organization is imposed if the organization: (1)
establishes that the minimum standards of due diligence ( described below) were met with respect
to the transaction ; or (2) establishes to the satisfaction of the Secretary that other reasonable
procedures were used to ensure that no excess benefit was provided.

Eliminate rebuttable presumption and establish due diligence procedures
The proposal eliminates the rebuttable presumption of reasonableness contained in the
intermediate sanctions regulations. Under the proposal , the procedures that presently provide an
organization with a presumption of reasonableness (i.e., advance approval by an authorized
body , reliance upon data as to comparability , and adequate and concurrent documentation)
generally will establish instead that an organization has performed the minimum standards of due
diligence with respect to an arrangement or transfer involving a disqualified person. Satisfaction
of these minimum standards will not result in a presumption of reasonableness with respect to
the transaction.

587

Treas. Reg. sec. 53.4958-l (d)(4)(iii).

588

Treas. Reg. sec. 53.4958-l(d )(4)(iv).

589

Sec. 4958 (a)(l ).

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 Eliminate certain special rules for knowing behavior by organization managers

The proposal eliminates the special rule that provides that an organization manager's
participation ordinarily is not "knowing " for purpo ses of the intermediate sanctions excise taxes
if the manager relied on profess ional advice. Although the proposal eliminates the special rule,
whether an organization manager relies on professional advice is a relevant consideration in
determining the manager knowing ly participated in an excess benefit transaction.
The proposal also eliminates the specia l regulatory rule that provides that an organiza tion
manager ordinarily does not act knowingly for purposes of the excess benefi t transaction exc ise
tax if the organization has met the requirements of the rebuttable presu mption procedure .
Treat investment advisors and athletic coaches as disqualified persons

The proposal modifies the definition of a disqualified person for purposes of the
intermediate sanctio ns rules. First , a person who performs services as an athletic coach for an
organization that is an eligible educational institution (within the meaning of section 25A of the
Code 590 ) is treated as a disqualified person with respect to the organization. Second, the proposal
( 1) expands to all organizations that are subject to the intermediate sanctions rules the presentlaw rule that treats investment advisors to donor advised funds as disqualified persons , and (2)
modifies the definition of investment advisor for this purpose. For all applicable tax-exempt
organizations (including sponsoring organizations of donor advised funds), the term investment
advisor means, with respect to an organization , any person compensated by the organ ization, and
who is primarily responsib le, for managing the investment of, or providing investment advice
with respect to, assets of the organ ization.591 For a sponsoring organization of a donor advised
fund , the term investment advisor also includes any person who is an investment advisor with
respect to a sponsoring organization under present law, i.e., a person (other than an employee of
the organ ization) compensated by such organization for managing the investment of, or
prov iding investment advice with respect to, assets maintained in donor advised funds owned by
the sponsoring organiza tion.
Application of intermediate sanctions rules to section 501(c)(5) and section 501(c)(6)
organizations

The proposa l extends application of the section 4958 intermediate sanctions rules to taxexempt organizations described in sections 501 (c)( 5) (labor and certain other organizat ions) and
50l(c)(6) (business leagues and certain other organizations).

590

Section 25A defines an eligible educational institution as an institution (1) which is described in section
481 of the Higher Education Act of 1965 (20 U.S.C . sec . 1088), as in effect on August 5, 1977, and (2) which is
eligible to participate in a program wider title IV of such Act.
591

Under the proposal , the existing rules that treat as disqualified persons certain family members and 35percent controlled ent ities of investment advisors to sponsoring organizations of donor advised funds will apply
more broadly to investment advisors that are disqualified persons with respect to any organi zation subject to the
intermed iate sanctions rules.

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 Effective Date
The proposal is effective for taxable years beginning after December 31, 2017.

6. Denial of deduction for amounts paid in exchange for college athletic seating rights
Present Law

In general
The Internal Revenue Code allows taxpayers to reduce their income tax liability by
taking deductions for contributions to certain organizations , including charities , Federa l, State ,
local and Indian tribal governments , and certain other organizations.
To be deductible , a char itable contribut ion generally must meet severa l threshold
requirements. First , the recipient of the transfer must be eligible to receive charitable
contributions (i.e., an organization or entity described in section l 70(c)). Second, the transfer
must be made with gratuitous intent and without the expectation of a benefit of substantia l
econom ic value in return. Third , the transfer must be complete and generally must be a transfer
of a donor 's entire interest in the contributed property (i.e., not a contingent or partial interest
contribution) . To qualify for a current year charitable deduction , payment of the contribution
must be made with in the taxable year. 592 Fourth, the transfer must be of money or propertycontr ibutions of services are not deductible. 593 Finally , the transfer must be substantiated and in
the proper form.
Special rules limit a taxpayer's charitable contributions in a given year to a percentage of
income, and those rules, in part, tum on whether the organization receiving the contributions is a
public charity or a private foundat ion. Other special rules determine the deductible value of
contributed property for each type of property.

College athletic seating rights
In general, where a taxpayer receives or expects to receive a substantial return benefit for
a payment to charity, the payment is not deductible as a charitab le contribution. However ,
specia l rules apply to certain payments to institutions of higher education in exchange for which
the payor receives the right to purchase tickets or seating at an athletic event. Specifically , the
payor may treat 80 percent of a payment as a charitab le contribution where: (1) the amount is
paid to or for the benefit of an institution of higher education (as defined in sect ion 3304(f))
described in section (b )( 1)(A)(ii) (generally, a school with a regular faculty and curricu lum and
meeting certain other requirements) , and (2) such amount would be allowab le as a charitable
deduction but for the fact that the taxpayer receives (d irectly or indirectly) as a result of the
592

Sec. l 70(a)(l ).

593

For example , the value of time spent volunteer ing for a charitable organization is not deductible.
Incidental expenses such as mileage , supplies , or other expenses incurred while volunteering for a charitable
organization, however , may be deductible.

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 payment the right to purchase tickets for seating at an athletic event in an athletic stad ium of
such institution.594
Description of Proposal
The proposal amends section 170(1) to provide that no charitable deduction shall be
allowed for any amount described in paragraph 170(1)(2), generally , a payment to an institution
of higher education in exchange for whic h the payor receives the right to purchase tickets or
seating at an athletic event , as described in greater detai l above.
Effective Date
The proposal is effect ive for contributions made in taxable years beginning after
December 31, 2017.

594

Sec. 170(1).

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 M. Retirement Savings
1. Conformity of contribution limits for employer-sponsored retirem ent plans

Present Law

Account-based tax-favored employer-sponsored retirement plans include a qualified
defined contribution plan, a tax-sheltered annuity plan (referred to as a "section 403(b) plan"),
and an eligible deferred compensation plan of a State or local governmen t (referre d to as a
"governmen tal section 457(b) plan"). 595 A qualified defined contri bution plan may include a
qualified cash or deferred arrangement (referred to as a "section 401(k) plan"), under which an
employee elects to have contributions made to the plan (referred to as "elective deferrals ") rather
than receiving the same amount as cash compensation. 596 Elective deferra ls are generally made
on a pretax basis unless designated by the employee as Roth contrib utions, which are made on an
after-tax basis. A defined contribution plan may also provide for after-tax employee
contributions and for employer nonelective contributions and matching contributions. A
section 403(b) plan may also provide for these different types of contribu tions. Altho ugh a
governmental section 457(b) plan may provide for employer contributions, these plans genera lly
provide only for elective deferrals.

In the case of a section 40 I (k) plan or a section 403(b) plan, specific annual limits apply
to elective deferrals by an employee and additional annual limits apply to aggregate
contribution s for the employee . For 2017 , elective deferrals are generally limited to the lesser of
(1) $18,000 plus an additional $6,000 catch-up contribution limit for employees at least age 50
and (2) the employee's compensation. 597 If an employee participates in both a sectio n 401 (k)
plan and a section 403(b) plan of the same employer ,598 a single limit applies to elective deferrals
under both plans. However , under a specia l rule, in the case of employees who have completed
15 years of service, additional elective deferrals are permitted under a section 403(b) plan
maintained by an educatio nal organization , hospital, home health service agency, health and
welfare service agency , church, or conven tion or association of churches. 599 In this case, the
annua l limit is increased by the least of (I) $3,000, (2) $ 15,000 reduced by the employee's
additional elective deferrals for previous years, and (3) $5,000 multiplied by the employee's
years of service and reduced by the employee's elective deferrals for previous years.
For 2017 , the limit on aggrega te contributions to a qualified defined contribution plan
(including a section 40l(k) plan) or a section 403(b) plan is the lesser of (I) $54,000 and (2) the
595

Secs. 40 l (a), 403(a), 403(b ), 457(b ).

596

Sec. 40 l (k).

597

Secs. 402( g) and 4l4( v) .

598

For this purpos e members of a controlled group or affiliated service group are treated as a single

employer.
599

Sec. 402 (g)(7).

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 employee's compensation. 600 Because employees generally do not receive compensation for
years after they have terminated employment , contributions generally cannot be made for former
employees. However, under a special rule, employer contributions to a section 403(b) plan can
be made for up to five years after termination of employment. 60 1
The limit described above on aggregate contributions to a qualified defined contribution
plan applies to contributions for an employee to any defined contribution plans maintained by the
same employer, defined generally to include any members of a controlled group (using an
ownership standard of more than 50 percent , rather than at least 80 percent) or affiliated service
group. Similarly , the limit on aggregate contributions to a section 403(b) plan applies to
contributions for an employee to any section 403(b) plan maintained by the same employer ,
including any members of a controlled group or affiliated service group. However , contributions
to a qualified defined contribution plan and to a section 403(b) plan maintained by the same
employer are subject to separate limits unless the employee in the section 403(b) plan is in
control of the employer maintaining the qualified defined contribution plan. This could occur ,
for example , if the employee in the section 403(b) plan owns a separate business that maintains a
qualified defined contribution plan. In that case , a single limit applies to the contributions for the
employee to the section 403(b ) plan and the defined contribution plan. However , deferrals under
a governmental section 457(b) plan are not taken into account in applying this limit.
In the case of a governmental section 457(b) plan , all contributions are subject to a single
limit, generally for 2017 , the lesser of ( 1) $18,000 plus an additional $6,000 catch-up
contribution limit for employees at least age 50 and (2) the employee's compensation. 602 This
limit is separate from the limit on elective deferrals to section 401 (k) and section 403(b) plans.
Thus , for example , if an employee participates in both a section 403(b) plan and a governmental
section 457(b) plan of the same employer , the employee may contribute up to $18 ,000 (plus
$6,000 catch-up contributions if at least age 50) to the section 403(b) plan and up to $18 ,000
(plus $6,000 catch-up contributions if at least age 50) to the section 457(b) plan. In addition ,
under a special rule , catch-up contributions may be made by an employee to a governmental
section 457(b) for the last three years before attainment of normal retirement age. Additional
contributions may be made up to the lesser of (1) two times the otherwise applicable dollar limit
for the year (two times $ 18,000 for 2017 , or $36 ,000) and (2) the employee's otherwise
applicable limit for the year plus the amount by which the limit applicable to the employee for
previous years exceeded the employee ' s deferrals for the previous years. 603 If a higher limit
applies to an employee for a year under this special rule than under the general catch-up rule
($6 ,000 for 2017) , the general catch-up rule does not apply for the year.

600

Sec. 415(c). Employee contributions to qualified defmed benefit plans are also taken into account in
applying this limit.
601
Sec. 40 3(b)( 3), permitting compensation received up to five years previousl y as compensation for the
current year. In addition , under a special rule in section 4 l 5(c)(7), certain contribution amoun ts are permitted for
church employees and foreign missionaries.
602

Secs. 414(v) and 457(b)(2) and (e)(l5).

603

Sec. 457(b)( 3) .

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 Description of Proposal

The proposal applies a single aggregate limit to contributions for an employee in a
governmental section 457(b) plan and elective deferrals for the same employee under a section
401(k) plan or a 403(b) plan of the same employer. Thus , the limit for govern menta l section
457(b) plans is coordinated w ith the limit for section 40l(k) and 403(b) plans in the same manner
as the limits are coordinated under present law for elective deferrals to section 40 1(k) and
section 403(b) plans.
The proposal repeals the special rules allowing additional elective deferrals and catch-up
contributions under section 403(b) plans and governmenta l section 457(b) plans. Thus, the same
limits apply to elective deferrals and catch-up contributions under section 401 (k) plans, section
403(b) plans and governmental section 457(b) plans.
The proposal repeals the special rule allowing employer contribut ions to section 403(b)
plans for up to five years after termination of employment. 604
The proposal also revises application of the limit on aggregate contributions to a qualified
defined contribu tion plan or a section 403(b) plan (that is, the lesser of (1) $54,000 (for 2017)
and (2) the employee 's compensat ion). As revised, a single aggregate limit applies to
contribut ions for an employee to any defined contribution plans , any section 403(b) plans, and
any governmental section 457(b) plans maintained by the same employer, including any
members of a controlled group or affiliated service group.605
Effective Date

The proposal is effect ive for plan years and taxable years beginning after
December 31, 2017.
2. Application of 10-percent early withdrawal tax to governmental section 457(b) p'lan_s
Present Law

Tax-favored employer-sponsored retirement plans includ e a qualified retirement plan , a
tax-sheltered annuity plan (referred to as a "section 403(b) plan"), and an eligible deferred
compensation plan of a State or local government (referred to as a "governmental section 457(b)
plan"). 606 A simplified employee pension ("SEP") plan and SIMPLE IRA plan are also

604

The proposal does not repeal the special rule in section 4lS(c )(7) , under which certain contribution
amounts are permitted for church employees and foreign missionaries.
605

As under present law , employee contributions to qualified defined benefit plans are also taken into
account in applying this limit.
606

Secs. 40l(a) , 403(a), 403(b ), and 457(b).

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 tax-favored employer-sponsored retirement plan s under which the employer mak es contributions
to an individual retirement arrangement ("IRA ") established for each of its employees. 607
In general, similar tax treatment applies to contributions to and distributions from these
plans. Distribution s are generall y includible in income except to the extent attributable to
after-tax contribution s or qualified distributions from Roth accounts. In addition , unless an
exception applies , a distr ibution from a qualified retirement plan , section 403(b) plan , or IRA
(including a SEP or SIMPLE IRA) before age 59½ is subject to an additional tax (the "early
withdrawa l tax"). 608 The ear ly w ithdrawa l tax is equal to 10 percent of the amount of the
distribution that is includible in income (25 percent in the case of certain SIMPLE IRA
distributions). The early withdrawal tax does not apply to distributions from governmental
section 457(b) plans.

Description of Proposal
Under the proposal , unless an exception applies , the early withdrawal tax applies to a
distribution from a governmental section 457(b) plan before age 59 ½ to the extent the
distribution is includible in income.

Effective Date
The proposal is effec tive for taxable years beginnin g after December 31, 2017.

3. Elimination of catch-up contributions for high-wage employees
Present Law
Account-based tax-favored employer-sponsored retirement plans include a qualified
defined contribution plan , a tax-sheltered annuity plan (referred to as a section 403(b) plan) , and
an eligible deferred compensation plan of a State or local governmen t (referred to as a
governmental section 457(b) plan). 609 A simp lified employee pension ("SEP ") plan and
SIMPLE IRA plan are also tax-favored employer-sponsored retirement plans under which the
employer makes contributions to an individual retirement arrangement ("IRA " ) established for
each of its employ ees .61 For purposes of these plans , a self-employed individual is treated as an
emp loyee. 611

°

607

Sec. 408(k) and (p).

608

Sec. 72(t).

609

Secs. 40l(a) , 403(a) , 403(b) , and 457(b).

610

Sec. 408(k) and (p).

611

Sec. 40l (c)(l).

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 As discussed above, contributions to these plans for an employee are subject to an annual
limit of the lesser of a specified dollar amount and the employee's compensation. 612 In the case
of an employee age 50 or older, the specified dollar amount is increased by a certain amount
(generally $6,000 for 20 I 7), allowing the employee to make additional "catch-up" contributions
for the year. 613
Description of Proposal

Under the proposal , an employee may not make catch-up contributions for a year if the
employee received wages of $500,000 or more for the preceding year. 614
Effective Date

The proposal is effective for plan years and taxable years beginning after
December 31, 2017.

612
For this purposes, a self-employed individual's compensation is earned income , as defmed in
section 40 l (c)(2).
613

Sec. 414(v). As discussed above , under present law, additional catch-up contributions may be
pennitte d under a section 403(b) plan or governmenta l section 457(b) plan.
614

Catch-up contributions for a year are not pennit ted by a self-employed individual with earned income
of more than $500,000 for the preceding year.

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 TAXATIO N OF FOREIG N INC OME AND FOR EIGN PERSO NS
PRE SENT LAW

The following discussion of present 1aw prov ides an overview of genera l princi1)les of
taxation of cross-border activity as well as a detailed explanation of prov isions in present law
that are relevant to the proposals in Title IV of the bill.
A. General Overview of International Principl es of Taxation

l.nternationa l law generally recog nizes the right of each sovereign nation to prescr ibe
ru les to regu1ate conduct w ith a suffic ient nexus to the sovere ign nation. The nexus may be
based on nationa lity of the actor, i.e., a nexus between said conduct and a person (whether
natura l or jur idical) with a connection to the sovereign nation, or it may be ten-itorial, i.e., a
nex us betwee n the conduct to be regulated and the territory where the conduct occms.615 For
example, most lega l systems respect lim its on the exte nt to which their measures may be given
extraterritor ial effect. The broad acceptance of such norms extends to authority to regulate crossborder trade and economic dealings , incl uding taxation.
The exerc ise of sovereign jurisdict ion is usually based on either nationality of the perso n
whose conduct is regulated or the terr itory in which the conduct or activity occurs. These
concepts have been refined and, in varying combinations, adapted to form the principles for
determining whether sufficient nexus with a ju risdiction exists to concl ude that the jurisdiction
may enforce its right to impose a tax. The elements of nexus and the nomenclature of the
principles may differ based on the type of tax in question. Taxes are categorized as either direct
tax.es or indirect tax.es. The former category genera lly refers to those tax.es that are imposed
directly on a person ("capitation tax"), property , or income from property and that cannot be
shifted to another person by the taxpayer. Tncontrast, indirect taxes are taxes on consumption or
produc tion of goods or serv ices, for which a taxpayer may shift respons ibility to another person.
Such taxes include sales or use taxes, value-added taxes, or customs duties.6 16
Although governments have imposed direct taxes on property and indirect taxes and
duties on specific transactio ns since ancient times, the hjstory of direct taxes in the fonn of an
income tax is relatively recent. 6 17 When determining bow to allocate the right to tax a particular
6 15

AmericanLaw lnstilute, Resta tement (17,ird) o.f Foreign Relations law of the Unit ed States. secs. 402

and 403 , (1987).
616

Maria S. Cox. Fritz Neumark , el al., ''Taxation" Encyclopedia Britannica,
bttps ://www .brilannica.com/lopic / Laxarion/Classes-of-taxes. accessed May 16. 2017. Wllelher a tax is considered a
dfrecl tax or indirec t tax has varied over time , and no s ingle delioit ion is used. For a rev iew of the significance of
these terms in Federal tax history. see Alan 0. Dixler, "Direct Taxes Under the Constitut ion~ A Review of the
Precedents ," Tax JJ;story Project , Tax Analys ts, available at
http://www .Laxh istory.org/t bp/readi ngs.usf/ ArtWeb/28 34C7FBDA4 l D9DA85257308000670 l 7?OpeuDocumenr.
accessed May 17, 2017.
617
The earliest western income ta.xsystem is traceable lo the British Tax Act of 1798, enacted in 1799 to
raise funds needed to prosecute the Napoleonic Wars, and rescinded in l 816. See, A.M. Bardopoulos , eC0111
111
erc e

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 item of income , most jurisdictions consider p1inciples based on either source (te1Titoryor situs of
the income) or residence (nationality of the taxpayer). 618 By contrast , when the authority to
collect indirect taxes in the form of sales taxes or value added taxes is under considerat ion,
jurisdictions analyze the taxing rights in terms of the origin principle or destination principle.
The balance of this Part I.A descrjbes the prjnciples in more detail and bow jur isdict ions resolve
claims of ove rlapping juri sdiction.
1. Origin and destination principles

Indirect taxes that are imposed based on the place where production of goods or services
occm , irrespective of the location of the persons who own the means of production , and where
the goods and services go after being produced , are examples of origin-based taxes . If, instead ,
authority to tax a transaction or service is dependent on the location of use or consumption of the
goods or serv ices, the tax system is an examp le of a destination-based tax . The most common
form of a destination-ba sed tax is the destination-based value-added tax ("VAT"). Over 160
countries have adopted a VAT, 619 which is generally a tax imposed and collected on the "value
added " at every stage in the production and distribution of a good or service. Although there are
severa l ways to compute the taxable base for a VAT , the amount of value added can genera lly be
thought of as the difference between the value of sales (output s) and pmchases (inputs) of a
business .620 The United States does not have a VAT , nor is there a Federal sales or use tax.
and /he E_'/.fecls
o.fTechnologyo11 Taxation, L~w, Governance and Technolo gy Series 22, DOI 10.1007/978-3-3 19l 5449- 7_2. (Springer 2015), at Sect ion 2.2 . ''Hist ory of Tax ," pp. 23-24. See also,
http://www.parliarnent.uk/about/li ving-heritage /transformingsociety Lpriva te-lives/taxation /overview /incometax /.
61g

Reuven Avi-Youab , ''.International Tax as Int ernat ional Law," 57 Tax Law Review 483 (2003 -2004).

619

Alan Schenk, Victor Thurony i, and W ei Cui, Value Added Tax: A Compm·aliv eAp proac/1 , Cambtidge
Univers ity Pres s, 20 15. Consistent with (he OECD Jn1erna1ional VATIGST Guide lines, supra, t.he tenn VAT is used
to refer to all broad-based final consumption taxes, regardless of the acronym used to identify. Thus, many
countTies tha t denominate their nation al consumption tax as a GST (genera l sales tax) are included i.n ll1eestimate of
the munber of countTies witl1 a VAT.
620
Nearly all co untries use the credit-invoice method of ca lcu lating value added to determine VAT
liability . Un der the credit-invoice method , a tax is impose d on the seller for all of its sales. Th e tax is calc ulated by
applying the tax rate to the sales pric e of the good or serv ice, and the amount of tax is genera lly disclosed on the
sales invoice. A business credi t is provid ed for all VAT levied on purcha ses of taxable goods and services (i.e.,
''in puts") used in the seller 's business . Th e ultimate consumer (i.e. , a non-business purch aser), howe ver, does not
receive a credit with respect to his or her purchases. The VAT credit for inputs prevents the imposition of multiple
layers of tax with respec t to tl1e total final pur chase price (i.e., a ''cascading " of the VAT). As a result , llic net tax
paid at a particular stage of production or distribu tion is based on the value added by that taxpayer at tlmt stage of
production or distribution . ln theory , the total amount of tax paid with respect to a good or serv ice from all levels of
production and distribut ion should equal the sales price of the goo d or serv ice to the ultinrnte coustuner multiplied
by the VAT rate.

ln order to receive 011input credit w ith respect to any pmchase , a business purchaser is generally required
lo possess an invoice from a seller that coutaius the name of the purch aser and indicates the amount o[tax collected
by the seller on the sale of the input to the purchaser. At the end of a reportin g period, a taxpayer may calculate its
tax liability by subtracting the cumulative amount of tax stated 011 its purchase invoices from the cumulative amount
of tax stated on its sales invoices.

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 However , the majority of the States have enacted sales or use taxes, including both origin-based
taxes and destination-based taxes. 621
With respect to cross-border transactions , the OECD has recommended that the
destination prjnciple be adopted for all indirect taxes , in part to conform, to the treatment of such
transactions for purposes of customs duties. The OECD defines the destination principle as ''the
principle whereby , for consumption tax purposes , internationally traded services and intangibles
should be taxed according to the rules of the jurisdiction of consumption. "622 A jurisdiction may
detennine the place of use or consumption by adopting the convention that the place of business
or residence of a customer is tbe place of consumption. Use of such proxies are needed to
detem1ine the location of businesses that are juridical entities, which are more able than natural
persons to move the location of use of goods , services or intangibles in response to imposition of
tax.

2. Source and residence principles
Exercise of taxing authority based on a person ' s residence may be based on status as a
national , resident , or domiciliary of a juri sdiction and may reach worldwide activities of such
persons. As such, it is the broadest assertion of taxing authority. For individual s, the test for
residence may depend upon nationality , or a physical presence test , or some combination of the
two. For all other person s, detem1ining residency may require more complex consideration of
the level of activities within a jurisdiction, management , control or place of incorporation. Such
rules generally reflect a policy decision about the requisite level of activity within, or contact
with, a jmisdiction by a person that is sufficient to watTant asse11ionof taxingjmisdiction .
Source-based exerc ise of taxing authority taxes income from activities that occw·, or
property that is located , within the territory of the taxingjurisdiction. If a person conducts
business or owns property in a jurisdiction , or if a transaction occurs in who le or in part in a
jurisdiction , the resulting taxation may require allocation and apportionme nt of expenses
attributable to the activity in order to ensure that only the portion of profits that have the required
nexus with the territory are subject to tax. Most juri sdictions , including the United States, have
rules for detennining the source of items of income and expense in a broad range of categories
such as compensation for services, dividends , interest, royalties and gains.
Regardless ofwhichoftbese two bases of tax.ing authority is chosen by ajurisdiction , a
jurisdiction's determination of whether a transaction, activity or person is subject to tax require s
that the jurisdict ion establish the limits on its assertion of authority to tax.

62 1
EY, Worldwide VA1; GS1'and Sales Tax Guide 2015, p. 1021, available at
http ://www.ey.com/PublicaLioa/vwLUAssets/WorJdwide-V AT-GST-aud-sa les-tax-guide2015/$F1LE/Worldwide %20 VAT,%20GST %20a nd%20Sales %20 Tax %20Guidc%202015.pdf .

m See, OECD , "Recommendation oftl1c Co uncil on IJ1capp licat ion of value added tax/ goods and serv ices
tax lo tbe internationa l trade in services and intangibles as approved on September 27, 2016 ," [C(20 16) 120],
appe ndix , page 3, reproduced in the append ix, OECD. lnternalional VAT/GST G11ideliJ1es
1 OECD Publishing , 2017.

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 3. Resolving overlappi ng or conflicti ng jurisdiction to tax

Countries have developed norm s about what constirutes a rea sonable regulatory action by
a sovereign state that will be respe cted by other sovereign states. Consensus on what constitut es
a reasonable limit on the extent of one state's juri sdiction helps to minimize the risk of conflicts
arising as a result of extratenitoria l action by a state or overlapping exercise of authority by
states. Mechanisms to eliminate double taxation have developed to address those situations in
which tbe source and residency determination s of the respecti ve juri sdictions result in duplicati ve
assertion of taxing authority . For example , asymmetry between different standard s adopted in
two countries for detenn ining residency of per sons, source of income , or other basis for taxation
may result in income that is subject to taxation in both juri sdiction s.
When the rules of two or more countries overlap , potential double taxation is usually
mitigated by operation of bilateral tax treatie s or by legislative measures permitting credit for
taxes paid to another juri sdiction. The United States is a partner in numerou s bilatera l
agreements that have as their objective the avoidance of international double taxation and the
prevention of tax avoidance and evasion. Another related objective of U.S. tax treatie s is the
remova l of the barriers to trade , capital flows, and commerc ial travel that may be caused by
overlapping tax jmi sdictions and by the burden s of comp lying with the tax laws of a juri sdiction
when a person 's contacts with, and income derived from, that juri sdiction are minimal. The
United States Model Income Tax Convention ("U.S. Model Treaty of 2016") with an
accompanying Preamble by the Department of Treasury , reflect s the most recent comprehensive
statement of U.S. negotiating position with respect to tax treaties. 623 Bilateral agreement s are
also used to permit limited mutual administrative assistance betweenjuri sdictions.624
In addit ion to entering into bilateral treatie s, countries have worked in multilateral
organizations to develop comm on principles to alleviate double ta xation. Those principles are
generally reflected in the provis ions of the Model Tax Convention on Income and on Capital of
the Organization for Eco nomic Cooperation and Development (the "OECD Model treaty "), 625 a
623

Tbe c1uTentU.S. Mo del treaty was published February 17, 2016 , and is availab le at
https://,vww ,treasury.gov /resource-center /tax-poLicy/treaties/Docurnents/Treaty-US %20Model-2016.pdJ ; the
Preamb le is available at bttps://www .treasury.gov /resource-center /tax-policy/treaties/Documents /PreambleUS%20Mode l-2016.pd( Tbe U.S. Model treaty is updated periodically to reflect deve lopments in the negotiating
pos ition of the United States. Such changes include provi sions that were success fully included in bilateral treat ies
concluded by the United States. as well as new proposed measures not ye t included in a bilateral agreement.
624

Althougb U.S. courts extend c01nity to foreign judgmen ts in some instances, tl1eyarc not requfred to
recognize or assist in enforceme nt of foreign judgments for co llect ion of taxes, cons istent with U1ecommon law
''revenue rule" in Holman v. Jo!mson, 1 Cowp. 341, 98 Eng. Rep. 1120 (K B.1775). AmericaJ1Law lnstitllte ,
Restatement (Third) o.fForeig11Relatio11sLaw of the U1JitedStates. sec. 483. (1987). The rule retains vitality in U.S.
case law. Pasq11antino 11. United States, 544 U.S. 349; 125 S. Ct 1766; I (il L. Ed. 2d 619 (2005) (a conviction for
criminal wire fraud arising from an inten t to defraud Canadian tax autbo1ities was found not to conflict "w ith any
well -established revenue rule princip lel,j" and thus was not ruderogation of the revenue mle) . To the extent it is
abrogated. it is done so in bilateral treat ies, to eru;ure reciprocity. At present, the Un ited States bas such agreements
in force with five j urisdictions: Cauada; Denmark; France ; Nether lands; and Sweden.
625 OECD (2014), Model Tax Convention on Income and on Cap ital: Condensed Version 2014 , OECD
Publishing, 2014, availab le at http://dx.doi.org/ 10. 1787//mtc cond-2014 -en . Tbe multinational organ ization was

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TREAS-17-0313-I-000595

 precursor of which was first developed by a predecessor organization in 1958, w hich in tum has
antecedents from work by the League of Nat ions in the 1920s.626 As a consensus document , the
OECD Model treaty is intended to serve as a model for countrie s to use in negotiating a bilateral
treaty that would settle issues of double taxation as we ll as to avoid inappropriate double
nontaxation. The provisions have developed over time as practice with actual bilateral treaties
leads to unexpected results and new issues are raised by parti es to the treatie s.627
4. International principles as applied in the U.S. system

Present law combines taxation of all U.S. persons on their worldwide income, whether
derived in the United States or abroad, with limited deferral of taxation of income earned by
foreign sub sidiaries of U.S. compani es and source-based taxation of the U.S.-so urce income of
nonresident aliens and foreign entities. Under this system (sometime s described as the U.S.
hybrid system), the application of the Code differs depending on whether income arises from
outbound investment or inbound investment. Outbound investment refers to the foreign
activities of U.S . person s, while inbound investment is investment by foreign persons in U.S.
assets or activities , although certain rules are common to b oth inbound and outbound activities.
B. Principles Common to Inbound and Outbound Taxation

Although the U.S. tax mie s differ depending on whether the activity in questio n is
inbound or outbound , there are certain concepts that apply to both inbound and outbound
investment. Such areas include the transfer pricing rules, entity classification , the rules for
detennination of source, and whether a corporat ion is foreign or domestic.
1. Residence

U.S. persons are subject to tax on their worldwide income. The Code defines U.S. person
to include all U.S. citizens and residents as well as domestic entities such as partnerships,
corporat ions, estates and certain trusts.628 The tenn "resident " is defined only wjth respect to
natural persons. Nonc itizens who are lawfully admitted as permanent residents of the Un ited
States in accordance with immigration laws (colloquialJy referred to as green card holders) are

first established in 1961 by the United States, Canada and 18 European countries, dedicated to global development ,
aud has since expanded to 35 members.
6'2G "Rep01i by ll1efaq,crts on Dot1ble Taxation,' ' League of Nat ion Document E.F.S. 73\Fl 9 (I 923), a
repon conm1issioned by the Lea gue at its second asse mbly. See also, Lara F riedlander and Scott Wilkie, ''Policy
Fon un: the History of Tax Treaty Prov isions--Aod Why It Is Impor tant to Know About It,' ' 54 Canadia11 Tax
Journal No. 4 (2006)_
627
For example , the OECD initiated a multi-year s tudy on base-erosion and profit shifting in response to
concerns of multiple members. For an overv iew of that project , see Joint Committee on Taxat ion , Background ,
Summary, and lmpli cafions of/he OECDIG20 Base Erosion and Profit Shifting Project (JCX-139-15 ), November
30, 2015. This docrnnent can also be found on the Joint Committee on Taxation website at www .jct.gov .

618

Sec. 770l(a)(30) .

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 treated as residents for tax purposes. In addition , noncitizens who meet a substantial presence
test and are not otherwise exempt from U.S. taxation are also taxable as U.S. residents. 629
For legal entities , the Code determines whether an entity is subject to U.S. taxation on its
worldwide income on the basis of its place of organization. For purposes of U.S. tax law, a
corporation or partnership is treated as domestic if it is organized or created under the laws of the
United States or of any State, unless , in the case of a partnership, the Secretary prescribes
otherwise by regulation. 630 All other partnerships and corporations (that is, those organized
under the laws of foreign countries) are treated as foreign. 63 1 In contrast , place of organization is
not determinative of residence under taxing jurisdictions that use factors such as situs,
management and control to determine residence. As a result , legal entities may have more than
one tax residence , or, in some case , no residence. 632 Only domestic corporations are subject to
U.S. tax on a worldwide basis. Foreign corporations are taxed only on income that has a
sufficient connection with the United States.
Tax benefits otherwise available to a domestic corporation that migrates its tax home
from the United States to foreign jurisdiction may be denied to such corporation, in which case it
continues to be treated as a domestic corporation for ten years following such migration. 633
These sanctions generally apply to a transaction in which, pursuant to a plan or a series of related
transactions: (1) a domestic corporation becomes a subsidiary of a foreign-incorporated entity or
otherwise transfers substantially all of its properties to such an entity in a transaction completed
after March 4, 2003; (2) the former shareholders of the domestic corporation hold (by reason of
the stock they had held in the domestic corporation) at least 60 percent but less than 80 percent
(by vote or value) of the stock of the foreign-incorporated entity after the transaction (this stock
often being referred to as "stock held by reason of '); and (3) the foreign-incorporated entity ,
considered together with all companies connected to it by a chain of greater than 50 percent
ownership (that is, the "expanded affiliated group"), does not have substantial business activities
in the entity's country of incorporation, compared to the total worldwide business activities of
the expanded affiliated group. 634

629

Sec. 7701(b).

630

Sec. 770 I (a)(4).

631
Secs. 770l(a)(5) and 770 l (a)(9). Entities organized in a possession or territory of the United States are
not considered to have been organized under the laws of the United States.
632

"The notion of corporate residence is an important touchstone of taxation , however, in many foreign
income tax systems[,]" with the result that the bilateral treaties are often relied upon to resolve conflicting claims of
taxing jur isdiction. Joseph Isenber gh, Vol. I U.S. Taxation of Foreign Persons and Foreign Income , Para. 7. 1
(Fourth Ed . 2016).
633

Sec. 7874.

634
Section 7874(a). In addition , an excise tax may be impos ed on certain stock compensation of
executives of companies that undertake inversion transact ions . Sec. 4985.

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 The Treasury Department and the IRS have promulgated detailed guidance, through both
regulations and several notices , addressing these requirements under section 7874 since the
section was enacted in 2004, 635 and have sought to expand the reach of the section or reduce the
tax benefits of inversion transactions. For example, No tice 2014-52 announced Treasury's and
the IRS's intention to issue regulations and took a two-pronged approached. First, it addressed
the treatment of cross-border combination transactions themselves. Second, it addressed posttransaction steps that taxpayers may undertake with respect to US-owned foreign subsidiaries
making it more difficult to access foreign earnings without incurring added U.S. tax. On
Nove mber 19, 2015, Treasury and the IRS issued Notice 20 15-79, wh ich announced their intent
to issue further regulations to limit cross-border merger transactions , expanding on the guidance
issued in Notice 2014-52. In 2016, Treasury and the IRS issued proposed and temporary
regulations that incorporate the rules previously annou nced in Not ice 2014-52 and Not ice 201579 and a new multiple domestic entity acquisition rule.636
In early 2017, Treasury issued final and temporary regulations 637 that adopt, with few
changes, the 20 16 temporary and proposed regulations .

2. Entity classification
Certain entities are eligible to elect their classification for Federal tax purposes under the
"check- the-box" regulations adopted in 1997.638 Those regulations simplified the entity
classification process for both taxpa yers and the IRS by making the entity classification of
unincorporated entities explicitly elective in most instances. 639 The eligibility to elect and the

635
Notice 2015 -79, 2015 I.RB. LEXIS 583 (Nov. 19, 20 15), which announced their inten t to issue further
regulations to limit cross- border merger transactions, expanding on the guidance issued in Notice 2014-52. On
April 4 , 20 16, Treasury and the IRS issued proposed and temporary regulations (T.D. 9761) that incorporate the
rules previous ly announced in Notice 20 l 4-52 and Not ice 2015 -79 and a new multiple domestic entity acquisition
rule. On January 13, 2017 , Treas ury and the IRS issued final and temporary regu lations under section 7874 (T.D.
9812), wh ich adopt, with few changes , prior temporary and proposed regulations , which identify certain stock of an
acqui ring foreign corporation that is disregarded in calculating the ownership of the foreign corporation for purposes
of section 7874.

636

T.D. 9761 , Apri l 4, 2016. But see, Chamber of Commerce v Internal Revenue Service, Cause No 1: 16CV-944-L Y (W. D. Tex. Sept. 29, 20 17), granting summary judgment to plaintiff in challenge to temporary
regu lations based on lack of compliance with Admjnjstrative Procedure Requirements.
637

T.D . 9812 , January 13, 2017.

638

Treas. Reg. sec. 30l.770l-l,

et seq .

639

The check-the-box regulations replaced Treas. Reg. sec. 301.770 l-2 , as in effect prior to I 997, under
which the classification of unincorporated entities for Federal tax purposes was determined on the basis of a four
characteristics indicat ive of status as a corporation: continuity of life, centralization of management , limjted
liability , and free transferability of interests. An entity that possessed three or more of these characteristics was
treated as a corporation ; if it possessed two or fewer , then it was treated as a partnership. Thus, to achieve
characterization as a partnership under this system , taxpayers needed to arrange the governing instruments of an
entity in such a way as to eliminate two of these corporate characteristics. The advent and proliferation of limited
liability companies ("LLCs") under State laws allowed business owners to create customi zed entities that possessed

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TREAS-17-0313-I-000598

 breadth of an entity 's choices depend upon whether it is a "per se corporation" and its number of
beneficial owners. Foreign as well as dome stic entities may make the election. As a result , it is
possible for an entity that operates across countries to be treated as a hybrid entity. A hybrid
entity is one which is treated as a flow-through or disregarded entity for U.S. tax purposes but as
a corporation for foreign tax purposes . For "reverse hybrid entities ," the opposite is true. The
election can affect the determination of the source of the income , availability of tax credits, and
other tax attributes .

3. Source of income rules
The rules for determining the source of certain types of income are specified in the Code
and described briefly below . Various factors determine the source of income for U.S. tax
purposes , including the status or nationality of the payor, the status or nationality of the recipient ,
the location of the recipient's activities that generate the income , and the location of the assets
that generate the income . To the extent that the source of income is not specified by statute , the
Treasury Secretary may promulgate regulations that explain the appropriate treatment. However ,
many items of income are not explicitly addressed by either the Code or Treasury regulations ,
sometimes resulting in non taxation of the income . On several occasions , courts have determined
the source of such items by applying the rule for the type of income to which the disputed
income is most closely analogous , based on all facts and circumstances. 640
Interest
Interest is derived from U.S. sources if it is paid by the United States or any agency or
instrumentality thereof , a State or any political subdivision thereof , or the District of Columbia.
Interest is also from U.S. sources if it is paid by a resident or a domestic corporation on a bond ,
note, or other interest-bearing obligation. 641 Special rules apply to treat as foreign-source certain
amounts paid on deposits with foreign commercial bankin g branches of U.S. corporations or
partnerships and certain other amounts paid by foreign branches of domestic financial
institutions .642 Interest paid by the U.S. branch of a foreign corporation is also treated as U.S.source income. 643

a critical common feature-limited liability for investors-as well as other corporate characteristics the owners
found desirable. As a consequence , classification was effectively elective for well-advised taxpayers.
640

See, e.g., Hunt v. Commissioner, 90 T.C. 1289 (1988).

641

Sec. 86l(a)(l); Treas. Reg. sec. l.861-2(a)(l).

642

Secs. 86l(a)(l) and 862(a)(l). For purposes of certain reporting and withholding obligations the source
mle in section 86l(a)(l)(B) does not apply to interes t paid by the foreign branch of a domestic financial institution .
This results in the payment being treated as a withho ldable payment. Sec. 1473(l)(C).
643

Sec. 884(f)( l ).

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TREAS-17-0313-I-000599

 Dividends
Dividend income is generally sourced by reference to thep.ay or's.place of
incorporation. 644 Thus , dividends paid by a domestic corporation are genera lly treated as entirely
U.S.-source income. Similarly, dividends paid by a fore ign corporat ion are genera lly treated as
entirely foreign-source income. Under a special rule, dividends from certain foreign
corporations that cond uct U.S. businesses are treated in part as U.S.-source income. 645
Rents and royalties
Rental income is sourced by reference to the location or place of use of the leased
property. 646 The nationality or the country of residence of the lessor or lessee does not affect the
source of rental income. Rental income from property located or used in the United States ( or
from any interest in such property) is U.S. -source income , regardless of whether the property is
real or personal , intangible or tangible.
Royalties are sourced in the place of use of (or the place of privilege to use) the property
for which the royalties are paid. 647 This source rule applies to royalties for the use of either
tangible or intangible property , including patents , copyrights, secret processes , formulas ,
goodwill , trademarks , trade names , and franch ises.
Income from sales of personal property
Subject to significant exceptions , income from the sale of personal property is sourced on
the basis of the residence of the seller. 648 For this purpose , special definitions of the terms "U.S.
resident" and "nonresident " are provided. A nonres ident is defined as any person who is not a
U.S. resident, 649 whi le the term "U.S. resident" comprises any juridical entity which is a U.S.
person , all U.S. citizens, as well as any individual who is a U.S. resident without a tax home in a
foreign country or a nonresident alien with a tax home in the United States. 650 As a result,
nonresident includes any foreign corporation. 651

644

Secs. 86l(a)(2), 862(a)(2).

645

Sec. 861(a)(2)(B).

646

Sec. 861 (a)( 4).

641

Ibid.

648

Sec. 865(a).

649

Sec. 865(g)( I)(B).

650

Sec. 865(g)(l)(A).

65

Sec. 865(g).

'

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 Several special rules apply . For example , income from the sale of inventory property is
generally sourced to the place of sale , which is determined by where title to the property
passes .652 However , if the sale is by a nonresident and is attributable to an office or other fixed
place of busine ss in the United States , the sale is treated as income from U.S. sources without
regard to the place of sale , unless it is sold for use, disposition , or consumption outside the
United States and a forei gn office materially participates in the sale.653 Income from the sale of
inventory prop erty that a taxpayer produces (in whole or in part) in the United State s and sells
outside the United States, or that a taxpayer produces (in whole or in part) outside the United
States and sells in the United States, is treated as partl y U.S.-so urce and partl y foreign-source. 654
In determining the source of gain or loss from the sale or exchange of an intere st in a
foreign partner ship, the IRS has taken the position that to the extent that there is unrealized gain
attributable to partner ship assets that are effectively connected with the U.S. bu siness, the foreign
person 's gain or loss from the sale or exchange of a partnership interest is effectively connected
gain or loss to the extent of the partner 's distributive share of such unrealized gain or loss, and
not capital gain or loss. Similarly , to the extent that the partner 's distributive share of unrealized
gain is attributable to a permanent establishment of the partner ship under an applicable treaty
provision, it may be subject to U.S. tax under a treaty. 655
Gain on the sale of depreciable property is divided between U.S.-source and foreignsource in the same ratio that the depreciation was previously deductible for U.S . tax purposes. 656
Payment s received on sale s of intangible property are sourced in the same manner as roya lties to
the extent the payments are contingent on the productivit y, use , or disposition of the intangible
propert y_657

652

Secs. 865(b) , 86 l(a)(6) , 862(a)(6); Treas. Reg. sec. 1.86l-7(c).

653

Sec. 865(e)(2).

654
Sec. 863(b ). A taxpayer may elect one of three methods for allocating and apportioning income as
U.S.- or foreign-source: (1) the 50-50 method under which 50 percent of the income from the sa le of inventory
property in such a situation is attributab le to the production activities and 50 percent to the sales activities , with the
income sourced based on the location of those activities; (2) independent factory pr ice ("IFP") method under which ,
in certain circumstances, an IFP may be estab lished by the taxpayer to detennin e income from production activities;
(3) the books and records method under which , with advance penn ission, the taxpayer may use books of account to
detail the allocation of rece ipts and expenditures between pro duction and sales activities. Treas. Reg. sec. l.8633(b), (c). If production activ ity occurs only within the United States , or only within fore ign countries , then a ll
income is sourc ed to where the production activity occurs ; when production activities occur in both the United
States and one or more foreign countries , the income attributab le to production activities must be sp lit between U.S.
and foreign sources. Treas. Reg. sec. l. 863-3(c)(l). The sales activity is generally sourced based on where title to
the property passes. Treas. Reg. secs. l.863 -3(c)(2) , l.861 -7(c).
655

Rev. Rul. 91-32, 1991- 1 C.B. 107. But see, Grecian Magnesite Mining, Industria l & Shipping Co. SA v
Commissio ner, 149 T.C. No. 3 (2017).
656

Sec. 865(c).

657

Sec. 865(d) .

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TREAS-17-0313-I-000601

 Personal serv ices income
Compensation for labor or personal services is generally sourced to the place-ofperformance. Thus , compensation for labor or personal services performed in the United States
generally is treated as U.S.-source income, subject to an except ion for amount s that meet certain
de minimis criteria. 658 Compensation for serv ices performed both withi n and w ithout the Un ited
States is allocated between U.S.-and foreign-so urce .659
Insurance income
Unde rwrit ing income from issuing insurance or annuity contracts genera lly is treated as
U.S.-source income if the contract involves prop erty in, liability arising out of an activity in, or
the lives or hea lth of residents of, the United States. 660
Transportation income
Sources rules generally provide that income from furnishing tran sportation that both
begins and ends in the Un ited States is U.S.-source income ,66 1 and SO-percent of income
attributable to transportation that either begins or the ends in the United States is treated as
U.S .-source income. However, to the extent that the operator of a shipping or cruise line is
fore ign, its ownership structure and the maritime law 662 applicable for determinin g what
constitutes international shipp ing as well as spec ific income tax provisions comb ine to create an
industry-specific departure from the rules generally applicable. 663

658

Sec. 861(a)(3). Gross income of a nonresident alien individual, who is present in the Un ited States as a
member of the regular crew ofa foreign vesse l, from tbe perfonnance of persona l serv ices in connection with the
internationa l opera tion of a ship is genera lly treated as foreign-source income.
659

Treas. Reg. sec. l.861-4(b ).

660

Sec. 861 (a)(7).

661

Sec. 863(c).

662

U.S. law on navigation is codified in U.S. Code at title 33, and is consisten t with the body of
internationa l maritime law. The normative principles of international maritime law for determining the maritime
zones and territorial sovereignty over seas are embodied in the Un ited Nations Convention on the Law of the Sea,
first opened for signature in 1982. Since 1983, the Executiv e Branch bas agreed that the treaty is genera lly
consistent with existing international nonns of the law of the sea and that the United States would act in conforn1ity
to the principles of the treaty other than those portions regarding deep seabed exploitation, even in the absence of
ratification of the treaty.
663

Due to the regulatory framework for aviation , an intern ational flight must either originate or conclude in
the country of residence of the airline's owner , where income tax for the international flight is assessed. In contrast
to international shipp ing, international aviation cannot be carried out using flags-of-convenience. Thus , although tax
law treats shipping and aviation similarly, the differences between the two industries and the applicable regulatory
regimes produce different tax outcomes. Full territorial sovereignty applies within 12 nautical miles of one ' s coast;
the contiguous waters beyond 12 nautical miles but up to 24 nautical miles are subject to some regulation. Within
200 nautical miles , a country may assert an economic zone for exploitation of living marine resources and some

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TREAS-17-0313-I-000602

 Income from space or ocean activities or international communications
In the case of a foreign person , generally no income from a space or ocean activity or
from international communications is treated as U.S.-source income. 664 With respect to the latter ,
an exception is provided if the foreign person maintains an office or other fixed place of bu siness
in the United States, in which case the international communications income attributable to such
fixed place of bu siness is treated as U.S.-source income. 665 For U.S. persons , all income from
space or ocean activities and 50 percent of income from international communications is treated
as U.S.-source income.
Amounts received with respect to guarantees of indebtedness
Amounts received , directly or indirectly, from a noncorporate resident or from a domestic
corporation for the provision of a guara ntee of indebtedness of such person are income from U.S.
sources. 666 This includes payments that are made indirectly for the provision of a guarantee. For
example , U.S.-sou rce income under this rule includes a guara ntee fee paid by a foreign bank to a
foreign corporation for the foreign corporation's guarantee of indebtedness owed to the bank by
the foreign corporat ion 's domestic subsidiary , where the cost of the guarantee fee is passed on to
the domestic subsidiary through , for instance , additional intere st charged on the indebtedness. In
this situat ion, the dome stic subsi diary has paid the guara ntee fee as an economic matter through
higher intere st costs , and the additional interest payments made by the subsidiar y are treated as
indirect payments of the guarantee fee and, therefore , as income from U.S. source s.
Such U.S.-source income also includes amounts received from a foreign person , whether
directly or indirectly , for the provision of a guara ntee of indebtedne ss of that foreign person if
the payments received are connected with income of such person that is effectively connecte d
with the conduct of a U.S. trade or business. Amounts received from a foreign person , whether
directly or indirectl y, for the provision of a guara ntee of that per son's debt , are treated as foreignsource income if they are not from sources within the Un ited States under sect ion 86l(a)(9).

minerals. Beyond 200 nautical miles are tbe "hig h seas" in which no sovereign state may assert exclusive
jurisdiction.
664

Sec. 863(d).

665

Sec. 863(e).

666

Sec. 861 (a)(9). This provision effects a legislative override of tbe opinion in Container Corp. v.
Commissioner, 134 T.C . 122 (Febmary l 7, 2010) , aff'd 201 l WLl664358 , 107 A.F.T.R.2d 2011-1831 (Stb Cir.
May 2, 20 l l ), in which tbe Tax Court held tbat fees paid by a domestic corporation to its foreign parent with respect
to guarantees issued by tbe parent for the debts of the domestic corporation were more closely analogous to
compensation for services tban to interest , and determined that tbe source of the fees should be determined by
reference to the residence of the foreign parent- guarantor. As a result, the income was treated as income from
foreign sources.

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TREAS-17-0313-I-000603

 4. Intercompany transfers

Transfer pricing
A basic U.S. tax principle applicable in dividing profits from transactions between related
taxpayers is that the amount of profit allocated to each related taxpayer must be measured by
reference to the amount of profit that a similarly situated taxpayer wou ld realize in similar
transactions with umelated parties. The transfer pricing rules of section 482 and the
accompanying Treasury regulations are intended to preserve the U.S. tax base by ensuring that
taxpayers do not shift income properly attributable to the United States to a related foreign
company through pricing that does not reflect an arm 's- length result. 667 Similarly , the domestic
laws of most U.S. trading partners include rules to limit income shifting through transfer pricing.
The arm's-length standard is difficult to administer in situations in which no umelated party
market prices exist for transactions between related parties. When a foreign person with U.S.
activities has transactions with related U.S. taxpayers , the amount of income attributable to U.S.
activities is determined in part by the same transfer pricing rules of section 482 that apply when
U.S. persons with foreign activities transact with related foreign taxpayers.
Section 482 authorizes the Secretary of the Treasury to allocate income , deductions ,
credits, or allowances among related business entities 668 when necessary to clearly reflect income
or otherwise prevent tax avoidance, and comprehensive Treasury regulations under that section
adopt the arm's-length standard as the method for determining whether allocations are
appropriate. 669 The regulations generally attempt to identify the respective amounts of taxable
income of the related parties that would have resulted if the parties bad been unrelated parties
dealing at arm's length. For income from intangible property , section 482 provides "in the case
of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)),
the income with respect to such transfer or license shall be commensurate with the income
attributable to the intangible. " By requiring inclusion in income of amounts commensurate with
the income attributable to the intangible , Congress was responding to concerns regarding the
effectiveness of the arm's-length standard with respect to intangible property-including , in
particular , high-profit-potential intangib les. 670

667

For a detailed description of the U.S. transfer pricing rules, see Joint Coll1ll1itteeon Taxati on, Present
Law and Background Related to Possib le Income Shifli ng and Transfer Pricing (JCX-37-10) , July 20, 2010, pp. I 850.
668

The tenn "related" as used herein refers to relationships described in section 482 , which refers to "t wo
or more organizations, trades or businesses (whether or not incorporated, whether or not organized in the United
States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests ."
669

Section 1059A buttresses section 482 by limiting the extent to which costs used to determine custom
valuation can also be used to determine basis in proper ty imported from a related party. A taxpayer that imports
property from a related party may not assign a value to the property for cost purposes that exceeds its customs value .
670

H.R. Rep. No. 99-426, p. 423.

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 Gain recognition on outbound transfers
If a transfer of intangible property to a foreign affiliate occurs in connection with certain
corporate tran sactions, nomecognition rules that may otherwise apply are suspended. The
transferor of intangible property must recognize gain from the transfer as thou gh he had sold the
intangible (regardless of the stage of development of the intangible property) in exchange for
payments contingent on the use , productivity or disposition of the transferred property in
amounts that would have been received either annually over the useful life of the property or
upon disposition of the property after the transfer. 671 The appropriate amounts of those imputed
payments are determined using transfer-pricing principles. Fina l regulations issued in 2016
eliminate an exception under temporary regulation s that permitted nomeco gnition of gain from
outbound tran sfers of foreign goodwill and going concern value. However , the Secretary
announced that reinstatement of an exception for active trade or business is under consideration
for cases with little potential for abuse and administrative difficulties. 672
C. U.S. Tax Rules Applicable to Nonresident Aliens
and Foreign Corporations (Inbound)

Nonresident aliens and foreign corporations are generally subject to U.S. tax only on their
U.S.-source income. Thus , the source and type of income received by a foreign person generall y
determines whether there is any U.S. income tax liability and the mechanism by which it is
taxed. The U.S. tax rules for U.S. activities of foreign taxpayers apply differently to two broad
types of income: U.S.-source income that is "fixed or determinable annual or periodical gains,
profits , and income" ("FDAP income ") or income that is "effectively connected with the conduct
of a trade or business within the United States" ("ECI"). FDAP income generally is subject to a
30-percent gross-basis tax withheld at its source, while ECI is generally subject to the same U.S.
tax rules that apply to business income derived by U.S. persons. That is, deductions are
permitted in determining taxable ECI, which is then taxed at the same rates applicable to U.S.
person s. Much FDAP income and similar income is, however , exempt from tax or is subject to a
reduced rate of tax under the Code 673 or a bilateral income tax treaty .674

67 1

Sec. 367(d).

672

See, T.D. 9803, 81 F.R. 91012 (December 17, 2016). Treas. Reg. sec. l.367(d)-l(b) now provides that
the rules of section 367(d) apply to transfers of intangible property as defined under Treas. Sec. l.367(a)- l (d)(5)
after September 14, 2015 , and to any transfers occurring before that date resulting from entity classification
elections filed on or after September 15, 2015. Noting that commenters on the regulations had cited legislative
history that contemplated active business exceptions , Treasury announced the reconsideration of the rule. U.S.
Treasury Department , Seco nd Report to the President on Identifying and Reducing Tax Regula tory Burdens ,
Executive Order 13789 October 2, 2017 , TNT Doc 2017 -72131. The relevan t legislative history is found at in H.R.
Rep. No. 98-432 , 98th Cong., 2d Sess. 1318-1320 (March 5, 1984) and Conference Report , H.R. Rep. No. 98-861 ,
93t1,Cong. 2d Sess. 951-957 (June 23, 1984).
673

E.g., the portfolio interest exception in section 871 (h)( discussed below).

674

Because each treaty reflects considerations unique to the relationship between the two treaty countries,
treaty withholding tax rates on each category of income are not uniform across treaties.

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 1. Gross-basis taxation of U.S.-source income

Non-business income received by foreign persons from U.S. sources is generally subject
to tax on a gross basis at a rate of 30 percent , which is collected by withholding at the source of
the payment. As explained below , the categories of income subject to the 30-percent tax and the
categories for which withholding is required are generally coextensive, with the result that
determining the withholding tax liability determines the substantive liability.
The income of non-resident aliens or foreign corporations that is subject to tax at a rate of
30-percent includes FDAP income that is not effectively connected with the conduct of a U.S.
trade or business. 675 The items enumerated in defining FDAP income are illustrative ; the
common characteristic of types ofFDAP income is that taxes with respect to the income may be
readily computed and collected at the source, in contrast to the administrative difficulty involved
in determinin g the seller's basis and resulting gain from sales of property .676 The words "a nnual
or periodical" are "merely generally descripti ve" of the payments that could be within the
purview of the statute and do not preclude application of the withholding tax to one-time, lump
sum payments to nonresident aliens. 677
With respect to income from shipping, the gross basis tax potentially applicable is four
percent ,678 unless the income is effectively connected with a U.S. trade or busine ss, and thus
subject to the graduated rates, as determined under rules specific to U.S.-source gross
transportation income rather than the more broadly applicable rules defining effectively
connected income in section 864(c). Even if the income is within the purview of those special
rules , it may nevertheles s be exempt if the income is derived from the international operation of
a ship or aircraft by a foreign entity organized in a jurisdiction which provides a reciprocal
exemption to U.S. entities. 679
Types ofFDAP income
FDAP income encompasses a broad range of types of gross income , but has limited
application to gains on sales of property, including market discount on bonds and option
675

Secs. 87l(a), 881. If the FDAP income is also ECI, it is taxed on a net basis , at graduated rates.

676

Commissioner v. Wodehouse, 337 U.S. 369, 388 -89 (1949) . After reviewing legislative history of the
Revenue Act of l 936, the Supreme Court noted that Congress expressly intended to limit taxes on nonresident aliens
to taxes that could be readily collectible , i.e., subject to withhold ing, in response to "a theoretical system imprac tical
of administrat ion in a great number of cases. H.R. Rep. No. 2475, 74th Cong ., 2d Sess. 9-10 ( 1936) ." In doing so ,
the Court rejected P.G. Wodehouse's arguments that an advance royalty payment was not within the purview of the
statutory defmition ofFDAP income.
677

Commissioner v. Wodehouse, 337 U.S. 369, 393 (1949).

678

Sec. 887.

679

Sec. 883(a)(l). In addition , to the extent provided in regulations , income from shipping and aviat ion is
not subject to the four-percent gross basis tax if the income is of a type that is not subject to the reciprocal
exemption for net basis taxation. See sec. 887(b)(l). Comparable rules under section 872(b)(l) app ly to income of
nonresident alien individuals from shipping operations.

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TREAS-17-0313-I-000606

 °

premiums. 68 Capital gains received by nonres ident aliens present in the United States for fewer
than 183 days are genera lly treated as foreign source and are thus not subject to U.S. tax, unless
the gains are effec tively connected with a U.S. trade or business; capital gains received by
nonresident aliens present in the United States for 183 days or more681 that are treated as income
from U .S. sources are subject to gross-bas is taxation .682 In contrast, U .S-source gains from the
sale or exchange of intangibles are subject to tax and withholding if they are contingent upon the
productivity of the property sold and are not effectively connec ted with a U.S. trade or
busines s.683
Interest on bank deposit s may qualify for exemption on two grounds , depending on where
the und erlying pdn cipal is held on deposit. Interest paid with respect to deposits with domestic
banks and savings and loan associations, and certain amounts held by insurance compani es, are
U.S.-source income but are not subject to the U.S. tax when paid to a foreign person, unless the
interest is effectively connected with a U.S. trade or business of the recipient. 684 Interest on
deposit s with foreign branches of domestic banks and domestic savings and loan associations is
not treated as U.S.-so urce income and is thus exempt from U.S. tax (regardless of whether the
recipient is engaged in a U.S. trade or business). 685 Similarly, interest and original issue discount
on certain short-term obligations is also exempt from U.S. tax when paid to a foreign perso n.686
Additionally, there is genera lly no information reporting required with respect to payments of
such amounts .687
AJthough FDAP income includes U.S.-source portfolio interest, such interest is
specifically exe mpt from the 30-percent gross-basis tax . Portfolio interest is any interest
680

Although technically insurance premiums pa id to a foreign insurer or reinsurer are FDAP income, they
are exempt from withholding under Tre as. Reg. sec. l .144 l- 2(a)(7) if the insurance contract is subjec t to t:heexcise
tax under section 43 71. Treas. Reg. secs. l.l 441-2(b )(l) (i) and l.l 44 l -2(b)(2).
681

For purposes of this rul e. whether a person is considered a resident in the United States is determin ed
by application ofti1e rules under section 7701(b).
682
·

Sec. 871(a)(2) . [n add ition, certain cap ital gains from sales of U.S. teal property interests are subject to
tax as effectively connected income (or in some instances as djvidend income) under the Foreign Investment ,in Real
Properly Tax Act of 1980 ('"PIRPTA '').
5R3

Secs. 871(a)(l)( D), 88 l(a )(4).

68 1
'

Secs. 87l(i)(2)(A) , 88l( d); Treas. Reg. sec. l.144l-l(b)(4 )(n).

685

Sec. 86l(a)(l)( B); Treas. Reg. sec. l.l44l-1(b)(4)(j ii).

6 6
K

Secs. 87 1(g)( l)(B), 881(a)(3); Treas. Reg. sec. l.1441-l(b)(.4)( iv).

687

Treas. Reg. sec. 1.1461-1 (c)(2)( ii)(A), (B). Reg11lationsrequire a bank to report interest if U1erecip ient
is a nonresident alien who resides in a country with wllicb the U11ited States has a satisfactmy ex.change of
information program under a bilateral agreement and the deposit is maintained at au office in the United States.
Treas. Reg. secs. l. 6049-4(b)(5) and l.6049-8. The lRS publ ishes lists oftl.te countries whose res idents are subject
to the reporting requirements , and those coU11triesw ith respec t to which the reported iufonnalion wiU be
automatically excbauged. Rev. Proc. 20 I7-31 , available at ht1ps://www .irs .gov/pub/irs-drop/ rp-l 7-J Lpdf ,
supplementin g Rev. Proc. 20 14-64.

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TREAS-17-0313-I-000607

 (including original issue discount) that is paid on an obligation that is in registered form and for
which the beneficial owner has provided to the U.S. withholding agent a statement certifying that
the beneficial owner is not a U.S. person. 688 For obligations issued before March 19, 2012 ,
portfolio interest also includes interest paid on an obligation that is not in registered form,
provided that the ob ligation is shown to be targeted to foreign investors under the conditions
sufficient to estab lish deductibility of the payment of such interest. 689 Portfolio interest ,
however, does not incl ude interest received by a 10-percent shareholder ,690 certain contingent
interest ,69 1 interest received by a contro lled foreign corporation from a related person ,692 or
interest received by a bank on an extens ion of cred it made pursuant to a loan agreement entered
into in the ordinary course of its trade or business. 693
Imposition of gross-basis tax and reporting by U.S. withho lding agents
The 30-percent tax on FDAP income is generally collected by means of withholding. 694
Withholding on FDAP payments to foreign payees is required unless the withhold ing agent ,695
i.e., the person making the payment to the foreign person receiving the income , can establish that
the beneficial owner of the amount is eligible for an exemption from withho lding or a reduced
rate of w ithholdin g under an income tax treaty. 696 The principal statutory exemptions from the
30-percent tax apply to interest on bank deposits , and portfolio interest , described above. 697

In many instances , the income subject to withho lding is the only income of the foreign
recipient that is subject to any U.S. tax. No U.S. Federal income tax return from the foreign

688

Sec. 87 l(h)(2).

689

Sec. 163(f) (2)(B). The exception to the registration requirements for foreign targeted securities was
repealed in 2010 , effective for obl igations issued two years after enac tment , thus narrowin g the portfolio interest
exemption for obli gations issued after March 18, 2012. See Hiring Incentives to Restore Emp loyment Law of 2010 ,
Pub. L. No. 111-147 , sec. 502(b).
690

Sec. 871 (h)( 3).

691

Sec. 871(h)(4).

692

Sec. 881 (c)(3)(C).

693

Sec. 88l(c)(3)(A).

694

Secs. 1441, 1442.

695

Withhold ing agent is defined broad ly to include any U.S. or foreign person that has the control , receipt,
custody , disposal , or payment of an item of incom e of a foreign person subj ect to withholdin g. Treas. Reg. sec.
1.1441-7(a) .
696

Secs. 871 , 881 , 1441, 1442; Treas. Reg. sec. 1.1441-l(b ).

697

A reduced rate of withholdin g of 14 percent applies to certain scholarships and fellowships paid to
individuals temporarily present in the United States . Sec. 1441(b ). In addit ion to statutory exemptions , the 30percent tax with respect to interest , div idends and royalties may be reduced or eliminated by a tax treat y between the
United States and the country in which the recipient of income otherwise subject to tax is resident.

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TREAS-17-0313-I-000608

 recipient is genera lly FHRA required with respect to the income from w hich tax was withheld , if
the recipient has no ECI income and the withholding is sufficient to satisfy the recipient's
liability. Accordingly , although the 30-percent gross-basis tax is a withholding tax, it is also
generall y the final tax liabilit y of the foreig n recipient (un less the foreign recipients files for a
refund).
A withholding agent that makes payments of U.S.-source amounts to a foreign person is
required to report and pay over any amounts of U.S. tax withheld. The reports are due to be filed
with the IRS by March 15 of the calendar year following the year in wh ich the payment is made.
Two types of reports are required: (I) a summary of the total U.S.-source income paid and
withholding tax withheld on foreign persons for the year and (2) a report to both the IRS and the
foreign person of that person's U.S .-source income that is subj ect to reporting. 698 The
nonresident with holdin g rules apply broadly to any financial inst itution or other payor , includin g
fore ign financial institutions. 699
To the extent that the withholding agent deducts and withholds an amount , the withheld
tax is credited to the recipient of the income. 700 If the agent withholds more than is required , and
results in an overpayment of tax, the excess may be refunded to the recipient of the income upon
filing of a timely claim for refund.
Excise tax on foreign reinsurance premiums
An excise tax applies to premiums paid to foreign insurers and reinsurers covering U.S.
The excise tax is imp osed on a gross basis at the rate of one percent on reinsurance and
risks .
life insurance premiums , and at the rate of four percent on property and casualty insurance
premiums. The excise tax does not apply to premiums that are effective ly connected with the
conduct of a U.S. trade or business or that are exempted from the excise tax under an applicab le
incom e tax treaty. The exc ise tax paid by one party canno t be cred ited if, for example , the risk is
reinsured with a second party in a transaction that is also subject to the excise tax.
70 1

Many U.S. tax treaties pro vide an exemption from the excise tax, incl uding the treaties
with Germany , Japan , Switzerland , and the United Kingdom. 702 To prevent persons from
inappropriate ly obtaining the benefits of exempt ion from the excise tax, the treaties generally
includ e an anti-condu it rule. The most com mon anti-conduit rule prov ides that the treaty
exemp tion applies to the excise tax only to the exten t that the risks covered by the premiums are

698

Treas. Reg. sec. 1.l 461-1 (b), (c) .

699

See Treas. Reg . sec . 1.144 l-7 (a) (definition of withholdin g age nt includ es foreign persons).

100

Sec. 1462.

701

Secs . 4371-4 374.

702

Generally , when a foreign person qualifies for benefits under such a treaty, the United States is not
permitted to collec t the insurance premiums excise tax from that person .

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TREAS-17-0313-I-000609

 not reinsured with a person not entitled to the benefits of the treaty (or any other treaty that
provides exemption from the excise tax). 703

2. Net-basis taxation of U.S.-source income
The United States taxes on a net basis the income of foreign persons that is "effect ively
connected" w ith the conduct of a trade or business in the United States. 704 Any gross income
derived by the foreign person that is not effectively connected with the person's U.S. business is
not taken into account in determining the rates of U.S. tax applicable to the person 's income
from the business. 705
U.S. trad e or business
A foreign person is subject to U.S. tax on a net basis if the person is engaged in a U.S.
trade or business. Partners in a partnership and beneficiaries of an estate or trust are treated as
engaged in the conduct of a trade or business within the United States if the partnership, estate,
or trust is so engaged. 706
The question whether a foreign person is engaged in a U.S. trade or business is factual
and has generated much case law. Basic issues include whether the activity constitutes business
rather than investing, whether sufficient activities in connect ion with the business are conducted
in the United States, and whether the relationship between the foreign person and persons
performi ng functions in the United States in respect of the business is sufficient to attrib ute those
functions to the foreign person.
The trade or business rules differ from one activity to another. The term "trade or
business within the Un ited States" expressly includes the performance of personal services
within the United States. 707 If , however , a nonresident alien individ ual performs personal
services for a foreign employer, and the individual 's total compensation for the services and
period in the United States are minimal ($3,000 or less in total compensation and 90 days or
fewer of physical presence in a year), the individual is not considered to be engaged in a U.S.
703
In Rev. Rul. 2008-15 , 2008-1 C.B. 633, the IRS provided guidance to the effect that the excise tax is
imposed separately on each reinsurance policy covering a U.S. risk. Thus , if a U.S. insurer or reinsurer reinsures a
U.S. risk with a foreign reinsurer , and that foreign reinsurer in turn reinsures the risk with a second foreign reinsurer ,
the excise tax applies to both the premium to the first foreign reinsurer and the premium to the second foreign
reinsurer. In addition , if the first foreign reinsurer is resident in a jurisdiction with a tax treaty containing an excise
tax exemption , the revenue ruling provides that the excise tax still applies to both payments to the extent that the
transaction violates an anti -conduit rule in the applicable tax treaty. Even if no violation of an anti-conduit rule
occurs , under the revenue mlin g, the excise tax still applies to the premiums paid to the second foreign reinsurer,
unless the second foreign reinsurer is itself entitled to an excise tax exemption.
704

Secs. 871(b), 882.

705

Secs. 871(b)(2), 882(a)(2).

706

Sec . 875.

707

Sec. 864(b ).

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TREAS-17-0313-I-000610

 trade or business. 708 Detailed rules govern whether trading in stocks or securities or
commodities constitutes the conduct of a U.S. trade or business. 709 A foreign person who trades
in stock or securities or commodities in the United States through an independent agent generally
is not treated as engaged in a U. S. trade or business if the foreign person does not have an office
or other fixed place of business in the United States through which trades are carried out. A
foreign person who trades stock or securities or commodities for the person 's own account also
generally is not considered to be engaged in a U.S. business so long as the foreign person is not a
dealer in stock or securities or commodities.
For eligible foreign persons , U.S. bilateral income tax treaties restrict the application of
net-basis U.S. taxation. Under each treaty , the United States is permitted to tax business profits
only to the extent those profits are attributable to a U.S. permanent establishment of the foreign
person. The threshold level of activities that constitute a permanent establishment is generally
higher than the threshold level of activities that constitute a U.S. trade or business. For example ,
a permanent establishment typically requires the maintenance of a fixed place of business over a
significant period of time.
Effectively connected income
A foreign person that is engaged in the conduct of a trade or business within the United
States is subject to U.S. net-basis taxation on the income that is "effectively connected " with the
business. Specific statutory rules govern whether income is ECI. 710
In the case ofU.S.-source capital gain and U .S.-source income of a type that would be
subject to gross basis U. S. taxation , the factors taken into account in determining whether the
income is ECI include whether the income is derived from assets used in or held for use in the
conduct of the U.S. trade or business and whether the activities of the trade or business were a
material factor in the realization of the amount (the "asset use " and "business activities " tests). 7 11
Under the asset use and business activities tests, due regard is given to whether the income, gain,
or asset was accounted for through the U.S. trade or business. All other U.S.-source income is
treated as ECI. 7 12

708

Sec. 864(b)(l ).

709

Sec. 864(b)(2).

710

Sec. 864(c).

7 11

Sec. 864(c)(2) .

712

Sec. 864(c)(3).

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TREAS-17-0313-I-000611

 A foreign person who is engaged in a U.S. trade or business may have limited categories
of foreign-source income that are considered to be ECI. 7 13 Foreign-source income not included
in one of these categories (described next) generally is exempt from U.S. tax.
A foreign person ' s income from foreign sources generally is considered to be ECI only if
the person has an office or other fixed place of business within the United States to which the
income is attributable and the income is in one of the following categories: (1) rents or royalties
for the use of patents , copyrights , secret processes or formulas , good will , trade-marks , trade
brands , franchises , or other like intangible properties derived in the active conduct of the trade or
busine ss; (2) interest or dividends derived in the active conduct of a bankin g, financing , or
similar business within the United States or received by a corporation the principal business of
which is trading in stocks or securities for its own account ; or (3) income deri ved from the sale
or exchange (outside the United States) , through the U.S. office or fixed place of business , of
inventory or property held by the foreign person primarily for sale to customers in the ordinary
course of the trade or business , unless the sale or exchange is for use , consumption , or
disposition outside the United States and an office or other fixed place of business of the foreign
person in a foreign country participated materially in the sale or exchan ge.714 Foreign-source
dividends , interest , and royalties are not treated as ECI if the items are paid by a foreign
corporation more than 50 percent (by vote) of which is owned directly , indirectly , or
constructively by the recipient of the income. 7 15

In determining whether a foreign person has a U.S. office or other fixed place of
business , the office or other fixed place of business of an agent generally is disregarded. The
place of business of an agent other than an independent agent acting in the ordinary course of
business is not disregarded , however , if the agent either has the autho rity (regularly exercised) to
negotiate and conclude contracts in the name of the foreign person or has a stock of merchandise
from which he regularly fills orders on behalf of the foreign person. 716 If a foreign person has a
U.S. office or fixed place of business , income , gain , deduction , or loss is not considered
attributable to the office unless the office was a material factor in the production of the income ,
gain , deduction , or loss and the office regularly carries on activities of the type from which the
income , gain , deduction , or loss was derived. 717

713

This income is subject to net-basis U.S. taxation after allowance ofa credit for any foreign incom e tax
imposed on the income . Sec. 906.
7 14

Sec . 864(c)(4)(B).

715

Sec . 864(c)(4)(D)(i).

716

Sec . 864(c)(5)(A) .

7 17

Sec . 864(c)(5)(B).

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TREAS-17-0313-I-000612

 Special rules apply in determining the ECI of an insurance company. The foreign-source
income of a foreign corporation that is subject to tax under the insurance company provisions of
the Code is treated as ECI if the income is attributable to its United States business. 7 18
Income , gain, deduction , or loss for a particular year generally is not treated as ECI if the
foreign person is not engaged in a U.S. trade or business in that year. 7 19 If , however , income or
gain taken into account for a taxable year is attributable to the sale or exchange of property , the
performance of services , or any other transaction that occurred in a prior taxable year , the
determination whether the income or gain is taxable on a net basis is made as if the income were
taken into account in the earlier year and without regard to the requirement that the taxpayer be
engaged in a trade or business within the United States during the later taxable year. 720 If any
property ceases to be used or held for use in connection with the conduct of a U.S . trade or
business and the property is disposed of within 10 years after the cessation , the determination
whether any income or gain attributable to the disposition of the property is taxable on a net
basis is made as if the disposition occurred immediately before the property ceased to be used or
held for use in connection with the conduct of a U.S. trade or business and without regard to the
requirement that the taxpayer be engaged in a U.S. business during the taxable year for which the
income or gain is taken into account. 72 1
Transportation income from U.S. sources is treated as effectively connected with a
foreign person's conduct of a U.S. trade or business only if the foreign person has a fixed place
of business in the United States that is involved in the earning of such income and substantially
all of such income of the foreign person is attributable to regularly scheduled transportation. 722
If the transportation income is effectively connected with conduct of a U.S. trade or business , the
transportation income , along with transportation income that is from U.S. sources because the
transportation both begins and ends in the United States, may be subject to net-basis taxation.
Income from the international operation of a ship or aircraft may be eligible for an exemption
under section 883, provided that the foreign jurisdiction has extended reciprocity for U.S.

718

Sec. 864(c)(4)(C) .

719

Sec. 864(c)(l)(B).

720

Sec. 864(c)(6).

721

Sec. 864(c)(7).

722

Sec. 887(b)(4) .

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TREAS-17-0313-I-000613

 businesses ;723 whether the party claiming an exemption is eligible for the tax relief;724 and the
activities that give rise to the income qualify under relevant regulations.
Allowance of deductions
Taxable ECI is computed by taking into account deductions assoc iated with gross ECI.
For this purpose , the apportionment and allocation of deductions is addressed in detailed
regulations. The regulations applicab le to deductions other than interest expense set forth
general guidelin es for allocating deductions among classes of income and apportioning
deductions between ECI and non-ECI. In some circumstances, deductions may be allocated on
the basis of units sold, gross sales or receipts , costs of goods sold, profits contribut ed, expenses
incurred , assets used , salaries paid, space used, time spent, or gross income received. More
specific guidelines are provided for the allocation and apportionment of research and
experimenta l expend itures, legal and accounting fees, income taxes , losses on dispositions of
property , and net operating losses. Detailed regulations under section 861 address the allocation
and apportionment of interest deductions. In general, interest is allocated and apportioned based
on assets rather than income.

3. Special rules
FIRPTA
A foreign person 's gain or loss from the disposition of a U.S. real property interest
("USRPI") is treated as ECI and, therefore , as taxable at the income tax rates applicable to U.S.
persons , including the rates for net capital gain. A foreign person subject to tax on this income is
required to file a U.S. tax return under the normal rules relating to receipt of ECI. 725 In the case
of a foreign corporation, the gain from the disposition of a USRPI may also be subject to the
branch profits tax at a 30-percent rate ( or lower treaty rate).
The payor of income that FIRPTA treats as ECI ("FIRPT A income") is generally
required to withhold U.S. tax from the payment. 726 The foreign person can request a refund with
its U.S. tax return, if appropriate , based on that person 's total ECI and deductions (if any) for the
taxable year.

723
The most recent compi lation of countries that the United States recogni zes as providing exemptions
lists countries in three gro ups: Twenty-seven countries are eligible for exemption on the basis of a review of the
legislation in the foreign jurisdiction; 39 nations exchanged diplomatic notes with the United States that grant
exemption to some extent; and more than 50 nations are parties with the United States to bilateral income tax treaties
that include a sh ipping article. Rev. Ru!. 2008-17 , 2008-1 C.B. 626, modified by Ann. 2008-57, 2008-C.B. 1192,
2008.
724

Sec. 883(c) and regu lations thereunder.

725

Sec . 897(a).

726

Sec . 1445 and Treasury regulations thereunder.

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 Branch profits taxes

A domestic corporation owned by foreign persons is subject to U.S. income tax on its net
income. The earnings of the domestic corporation are subject to a second tax, this time at the
shareholder level, when dividends are paid. As described previously , when the shareholders are
foreign, the second-level tax is imposed at a flat rate and collected by withholding. Unless the
portfolio interest exemption or another exemption applies , interest payments made by a domestic
corporation to foreign creditors are likewise subject to U.S. tax. To approximate these secondlevel withholding taxes imposed on payments made by domestic subsidiaries to their foreign
parent corporations, the United States taxes a foreign corporation that is engaged in a U.S. trade
or business through a U.S. branch on amounts of U.S. earnings and profits that are shifted out of,
or amounts of interest that are deducted by , the U.S. branch of the foreign corporation. These
branch taxes may be reduced or eliminated under an applicable income tax treaty. 727
Under the branch profits tax, the United States imposes a tax of 30 percent on a foreign
corporation's " dividend equivalent amount." 728 The dividend equivalent amount generally is the
earnings and profits of a U.S. branch of a foreign corporation attributable to its ECI. 729 Limited
categories of earnings and profits attributable to a foreign corporation's ECI are excluded in
calculating the dividend equivalent amount. 730
In arriving at the dividend equivalent amount , a branch 's effectively connected earnings
and profits are adjusted to reflect changes in a branch 's U.S. net equity (that is, the excess of the
branch's assets over its liabilities , taking into account only amounts treated as connected with its
U.S. trade or business). 731 The first adjustment reduces the dividend equivalent amount to the
extent the branch 's earnings are reinvested in trade or business assets in the United States (or
reduce U.S. trade or business liabilities). The second adjustment increases the dividend
equivalent amount to the extent prior rein vested earnings are considered remitted to the home
office of the foreign corporation.
Interest paid by a U.S. trade or business of a foreign corporation generally is treated as if
paid by a domestic corporation and therefore is subject to U.S. 30-percent withholding tax (if the
interest is paid to a foreign person and a Code or treaty exemption or reduction would not be
available if the interest were actually paid by a domestic corporation). 732 Certain "exc ess
interest " of a U.S. trade or business of a foreign corporation is treated as if paid by a U.S.
727

See Treas. Reg. sec. 1.884-l( g), -5.

728

Sec. 884(a).

729

Sec. 884(b ).

730

See sec. 884 (d)(2) (excluding , for example , earnings and profits attributable to gain from the sale of
domestic corporation stock that constitutes a U.S. real property interest described in section 897.
731

Sec. 884(b) .

732

Sec. 884(f)(l)(A).

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TREAS-17-0313-I-000615

 corporation to a foreign parent and, therefore , is subject to U.S. 30-percent withholding tax. 733
For this purpose , excess interest is the excess of the interest expense of the foreign corporation
apportioned to the U.S. trade or business over the amount of interest paid by the trade or
business.
Earnings stripping
Taxpayers are limited in their ability to reduce the U.S. tax on the income derived from
their U.S. operations through certain earnings stripping transactions that involve interest
payments. If the payer ' s debt-to-equity ratio exceeds 1.5 to 1 (a debt-to-equity ratio of 1.5 to 1
or less is considered a "safe harbor "), a deduction for disqualified interest paid or accrued by the
pay or in a taxable year is generally disallowed to the extent of the payor ' s excess interest
expense. 734 Disqualified interest includes interest paid or accrued to related parties when no
Federal income tax is imposed with respect to such interest ;735 to unrelated parties in certain
instances in which a related party guarantees the debt ("guaranteed debt"); or to a REIT by a
taxable REIT subsidiary of that REIT. Excess interest expense is the amount by which the
payor ' s net interest expense (that is, the excess of interest paid or accrued over interest income)
exceeds 50 percent of its adjusted taxable income (generally taxable income computed without
regard to deductions for net interest expense , net operating losses, domestic production activities
under section 199, depreciation , amortization , and depletion). Interest amounts disallowed under
these rules can be carried forward indefinitely and are allowed as a deduction to the extent of
excess limitation in a subsequent tax year. In addition , any excess limitation (that is, the excess,
if any, of 50 percent of the adjusted taxable income of the payor over the payer ' s net interest
expense) can be carried forward three years.

733

Sec . 884(f) ( l)(B).

734

Sec. I 63(j).

735

If a tax treaty reduc es the ra te o f tax on inte rest paid or accru ed by tbe taxpayer , the interest is treated as
interest on w hich no Federal incom e tax is imposed to the extent of the same proportion o f such interest as the rate
of tax impos ed withou t regard to the treaty, reduc ed by the rate o f tax imposed und er the treaty, bears to the rate o f
tax impo sed without regard to the treaty. Sec. 163(j) (S)(B).

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 D. U.S. Tax Rules Applicable to Foreign Activities of U.S. Persons (Outbound)
1. In general

In general, income earned directly by a U.S. person from the conduct of a foreign
business is taxed on a current basis,736 but income earned indirectly from a separate legal entity
operating the foreign business is not. Instead, active foreign business income earned by a U.S.
person indirectly through an interest in a foreign corporation generally is not subject to U.S. tax
until the income is distributed as a dividend to the U.S. person. Certain anti-deferral regimes
may cause the U.S. owner to be taxed on a current basis in the United States on certain categories
of passive or highly mobile income earned by the foreign corporation regardless of whether the
income has been distributed as a dividend to the U.S. owner. The main anti-deferral regimes that
provide such exceptions are the controlled foreign corporation ("CFC") rules of subpart F737 and
the passive foreign investment company ("PFIC") rules. 738 A foreign tax credit genera lly is
available to offset , in whole or in part, the U.S. tax owed on foreign-source income, whether the
income is earned directly by the domestic corporation , repatriated as an actual dividend , or
included in the domestic parent corporation 's income under one of the anti-deferral regimes. 739

2. Anti-deferral regimes
Subpart F
Subpart F,740 applicable to CFCs and their shareholders , is the main anti-deferral regime
of relevance to a U.S.-based multinational corporate group. A CFC generally is defined as any
foreign corporation if U.S. persons own (directly , indirectly, or constructi vely) more than 50
percent of the corporat ion's stock (measured by vote or value) , taking into account only those
U.S. persons that are within the meaning of the term "United States shareholder," which refers
only to those U.S. persons who own at least 10 percent of the stock (measured by vote only). 741
Subpart F income
Under the subpart F rules , the United States genera lly taxes the IO-percent U.S.
shareho lders of a CFC on their pro rata shares of certain income of the CFC (referred to as
736
A U.S. citizen or resident living abroad may be eligible to exclude from U.S. taxable income certain
foreign earned income and foreign housing costs under section 91 l. For a description of this exclusion , see Present
Law and Issues in U.S. Taxation of Cross-Bord er Incom e (JCX-42-l l), September 6,201 l , p. 52.
737

Secs. 951-964.

738

Secs. 129 1-1298.

739

Secs. 901,902,960,

740

Secs. 951-964.

l293(f).

741
Secs. 95l(b) , 957,958. The term "United States shareholder" is used interchangeably herein with "U .S.
shareholder."

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 "subpart F income"), without regard to whether the income is distributed to the shareholders. 742
In effect, the United States treats the 10-percent U.S. shareholders of a CFC as having received a
current distribution of the corporation's subpart F income. With exceptions described below,
subpart F income generally includes passive income and other income that is readily movable
from one taxing jurisdiction to another. Subpart F income consists of foreign base company
income,743 insurance income ,744 and certain income relating to international boycotts and other
violations of public policy. 745
Foreign base company income consists of foreign personal holding company income,
which includes passive income such as dividends, interest, rents, and royalties, and a number of
categories of income from business operations , including foreign base company sales income ,
foreign base company services income, and foreign base company oil-related income. 746
Insurance income subject to current inclusion under the subpart F rules includes any
income of a CFC attributable to the issuing or reinsuring of any insurance or annuity contract in
connection with risks located in a country other than the CFC's country of organization.
Subpart F insurance income also includes income attributable to an insurance contract in
connection with risks located within the CFC's country of organization as the result of an
arrangement under which another corporation receives a substantially equal amount of
consideration for insurance of other country risks. Finally , special rules apply under subpart F
with respect to related person insurance income 747 in order to address captive insurance
companies. 748 Under these rules, the threshold for determining control is reduced to 25 percent ,
and any level of stock ownership by a U.S. person in such corporation is sufficient for the person
to be treated as a U.S. shareholder.
Investments in U.S. property
The 10-percent U.S. shareholders of a CFC also are required to include currently in
income for U.S. tax purposes their pro rata shares of the corporation's untaxed earnings invested

742

Sec. 95 l(a).

743

Sec. 954.

744

Sec. 953.

745

Sec. 952(a)(3) -(5) .

746

Sec . 954.

747

Sec . 953(c). Related person insuranc e income is defined for this purpose to mean any insurance income
attributable to a policy of insurance or reinsurance with respect to which the primary insured is either a U.S.
shareholder (within tbe meaning of the provision) in the foreign corporation receivin g the income or a person related
to such a shareho lder.
748

Joint Committee on Taxation , GeneralExplanation of the Tax Reform Act of 1986 (JCS-10-87) , May 4,
1987, p. 968.

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TREAS-17-0313-I-000618

 in certain items of U.S. property. 749 This U.S. property generally includes tangible property
located in the United States, stock of a U.S. corporation , an obligation of a U.S. person , and
certain intangible assets, such as patents and copyrights, acquired or developed by the CFC for
use in the United States. 750 There are specific exceptions to the general definition of U.S.
property , including for bank deposits , certain export property , and certain trade or business
obligations. 751 The inclusion rule for investment of earnings in U.S. property is intended to
prevent taxpayers from avoiding U.S. tax on dividend repatriations by repatriating CFC earnings
through non-dividend payments , such as loans to U.S. persons.
Subpart F exceptions
Several exceptions to the broad definition of subpart F income permit continued deferral
for income from certain transactions , dividends , interest and certain rents and royalties received
by a CFC from a related corporation organized and operating in the same foreign country in
which the CFC is organized. 752 The same-country exception is not available to the extent that
the payments reduce the subpart F income of the payor. A second exception from foreign base
company income and insurance income is available for any item of income received by a CFC if
the taxpayer establishes that the income was subject to an effective foreign income tax rate
greater than 90 percent of the maximum U.S. corporate income tax rate (that is, more than 90
percent of 35 percent , or 31.5 percent). 753
A provision colloquially referred to as the "CFC look-through " rule excludes from
foreign personal holding company income dividends, interest, rents, and royalties received or
accrued by one CFC from a related CFC (with relation based on control) to the extent
attributable or properly allocable to non-subpart -F income of the payor. 754 The look-through rule
applies to taxable years of foreign corporations beginning before January 1, 2020, and to taxable
years of U.S. shareholders with or within which such taxable years of foreign corporations
end_1ss

749

Secs. 951 (a)( 1)(B) , 956.

750

Sec. 956(c)(l ).

751

Sec. 956(c)(2).

752

Sec. 954(c)(3).

753

Sec. 954(b)(4).

754

Sec. 954(c)(6).

755

See section 144 of the Protecting Americans from Tax Hikes Act of2015 (Division Q of Pub. L. No.
114-113) , H.R. 2029 ["the PATH Act of2015"] , which extended section 954(c)(6) for five years. Congress has
previousl y extended the application of section 954(c)(6) several times, most recently in the Tax Increase Prevention
Act of 2014 , Pub. L. No. I 13-295; Pub. L. No. 107-147, sec. 614, 2002 ; Pub. L. No. 106-170, sec. 503, 1999; Pub.
L. No . 105-277 , 1998.

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TREAS-17-0313-I-000619

 There is also an exclusion from subpart F income for certain income of a CFC that is
derived in the active conduct of banking or financing business ("active financing income") ,
which applies to all taxable years of the foreign corporation beginning after December 31, 2014,
and for taxable years of the shareholders that end during or within such taxable years of the
corporation. 756 With respect to income derived in the active conduct of a banking , financing , or
similar business , a CFC is required to be predominantly engaged in such business and to conduct
substantial activity with respect to such business in order to qualify for the active financing
exceptions. In addition, certain nexus requirements apply , which provide that income derived by
a CFC or a qualified business unit ("QBU") of a CFC from transactions with customers is
eligible for the exceptions if, among other things , substantially all of the activities in connection
with such transactions are conducted directly by the CFC or QBU in its home country, and such
income is treated as earned by the CFC or QBU in its home country for purposes of such
country's tax laws. Moreover, the exceptions apply to income derived from certain cross border
transactions , provided that certain requirements are met.
In the case of a securities dealer , an exception from foreign personal holding company
income applies to any interest or dividend (or certain equivalent amounts) from any transaction ,
including a hedging transaction or a transaction consisting of a deposit of collateral or margin ,
entered into in the ordinary course of the dealer's trade or business as a dealer in securities
within the meaning of section 4 7 5.757 In the case of a QBU of the dealer , the income is required
to be attributable to activities of the QBU in the country of incorporation , or to a QBU in the
country in which the QBU both maintains its principal office and conducts substantial business
activity. A coordination rule provides that , for securities dealers , this exception generally takes
precedence over the exception for active financing income.
Income is treated as active financing income only if, among other requirements , it is
derived by a CFC or by a QBU of that CFC. Certain activities conducted by persons related to
the CFC or its QBU are treat ed as conducted directly by the CFC or QBU. 758 An activity
qualifies under this rule if the activity is performed by employees of the related person and if the
related person is an eligible CFC, the home country of which is the same as the home country of
the related CFC or QBU; the activity is performed in the home country of the related person ; and
the related person receives arm's-length compensation that is treated as earned in the home
country. Income from an activity qualifying under this rule is excluded from subpart F income
so long as the other active financing requirements are satisfied.
Certain income of a qualifying branch of a qualifying insurance company with respect to
risks located within the home country of the branch or within the CFC's country of creation or
organization are also excepted from foreign personal holding company income, provided that
certain requirements are met. Further , additional exceptions from insurance income and from
756

Sec. 954(h). See section 128 of the PATH Act of 2015, which made the active financing exception

permanent.
757

Sec. 954(c)(2)(C).

758

Sec. 954(h)(3)(E).

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TREAS-17-0313-I-000620

 foreign personal holding company income apply for certain income of certain CFCs or branches
with respect to risks located in a country other than the United States, provided that the
requirements for these exceptions, including reserve requirements , are met. 759
Exclusion of previously taxed earnings and profits
A 10-percent U.S. shareholder of a CFC may exclude from its income actual distributions
of earnings and profits from the CFC that were previously included in the 10-percent U.S.
shareholder's income under subpart F. 760 Any income inclusion (under section 956) resulting
from inves tments in U.S. property may also be excluded from the IO-percent U.S. shareholder's
income whe n such earnings are ultimately distributed. 761 Ordering rules provide that
distributions from a CFC are treated as coming first out of earnings and profits of the CFC that
have been previously taxed under subp art F, then out of other earnings and profits. 762
Basis adjustments

In genera l, a 10-percent U.S. shareholder of a CFC receives a basis increase with respect
to its stock in the CFC equal to the amount of the CFC's earnings that are included in the
IO-percent U.S. shareholder's income under subpart F.763 Similarly , a IO-percent U.S.
shareholder of a CFC generally reduces its basis in the CFC's stock in an amount equal to any
distributions that the I 0-percent U.S. shareholder receives from the CFC that are excluded from
its income as previously taxed und er subp art F.764
Passive foreign investment companies

The Tax Reform Act of 1986765 established the PFIC anti-deferral regime. A PFIC is
generally defined as any foreign corporatio n if75 percent or more of its gross income for the
taxable year consis ts of passive income, or 50 percent or more of its assets consists of assets that

759

Subject to approva l by the IRS, a taxpayer may establish that the reserve of a life insurance company
for life insurance and annu ity contracts is the amount taken into account in determining the foreign statement reserve
for the contract (reduced by catastrophe , equa lization, or deficiency reserve or any similar reserve). IRS approva l is
to be based on whether the method , the interest rate, the mortality and morbidity assumptions , and any other factors
taken into account in determining foreign statement reserves (taken together or separately) provide an appropriate
means of measuring income for Federal income tax purposes.
760

Sec. 959(a)( 1).

761

Sec. 959(a)(2).

762

Sec. 959(c).

763

Sec. 961 (a).

764

Sec. 961 (b ).

765

Pub. L. No. 99-514.

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TREAS-17-0313-I-000621

 produce , or are held for the production of, passive income. 766 Alternative sets of income
inclusion rules apply to U.S. persons that are shareholders in a PFIC, regardless of their
percentage ownership in the company. One set of rules applies to PFICs that are qualified
electing funds, under which electing U.S. shareholders currently include in gross income their
respective shares of the company's earnings , with a separate election to defer payment of tax,
subject to an interest charge, on income not currently received. 767 A second set of rules applies
to PFICs that are not qualified electing funds, under which U.S. shareholders pay tax on certain
income or gain realized through the company , plus an interest charge that is attributable to the
value of deferral. 768 A third set of rules applies to PFIC stock that is marketable , under which
electing U.S. shareholders currently take into account as income (or loss) the difference between
the fair market value of the stock as of the close of the taxable year and their adjusted basis in
such stock (subject to certain limitations) , often referred to as "marking to market." 769
Under the PFIC regime, passive income is any income which is of a kind that would be
foreign personal holding company income , including dividends , interest, royalties , rents, and
certain gains on the sale or exchange of property, commodities , or foreign currency. However ,
among other exceptions , passive income does not include any income derived in the active
conduct of an insurance business by a corporation that is predominantly engaged in an insurance
business and that would be subject to tax under subchapter L if it were a domestic corporation. 770
In applying the insurance exception , the IRS analyzes whether risks assumed under contracts
issued by a foreign company organized as an insurer are truly insurance risks, whether the risks
are limited under the terms of the contracts , and the status of the company as an insurance
company. 771
Other anti-deferral rules

The subpart F and PFIC rules are not the only anti-deferral regimes. Other rules that
impose current U.S. taxation on income earned through corporations include the accumulated
earnings tax rules 772 and the personal holding company rules.
Rules for coordination among the anti-deferral regimes are provided to prevent U.S.
persons from being subject to U.S. tax on the same item of income under multiple regimes. For
766

Sec. 1297.

767

Secs. 1293-1295.

768

Sec. 1291.

769

Sec. 1296.

770

Sec. l297(b)(2)(B).

771

Notice 2003-34, 2003-C .B. l 990, June 9, 2003. See also, Prop . Treas. Reg. sec. l .1297-4, 26 CFR Part
l , REG-108214-15 , April 24, 2015.
772

Secs. 531-537.

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TREAS-17-0313-I-000622

 example , a corporation generally is not treated as a PFIC with respect to a particular shareholder
if the corporation is also a CFC and the shareholder is a 10-percent U.S. shareholder. Thus ,
subpart F is allowed to trump the PFIC rules.

3. Foreign tax credit
Subject to certain limitations , U.S. citizens , resident individuals, and domestic
corporations are allowed to claim credit for foreign income taxes they pay. A domestic
corporation that owns at least 10 percent of the voting stock of a foreign corporation is allowed a
"deemed-paid " credit for foreign income taxes paid by the foreign corporation that the domestic
corporation is deemed to have paid when the related income is distributed as a dividend or is
included in the domestic corporation ' s income under the anti-deferral rules. 773
The foreign tax credit generally is limited to a taxpayer ' s U.S. tax liability on its foreignsource taxable income (as determined under U.S. tax accounting principles). This limit is
intended to ensure that the credit serves its purpose of mitigating double taxation of foreignsource income without offsetting U.S. tax on U.S.-source income. 774 The limit is computed by
multiplying a taxpayer ' s total U.S. tax liability for the year by the ratio of the taxpayer ' s foreignsource taxable income for the year to the taxpayer ' s total taxable income for the year. If the total
amount of foreign income taxes paid and deemed paid for the year exceeds the taxpayer's
foreign tax credit limitation for the year , the taxpayer may carry back the excess foreign taxes to
the previous year or carry forward the excess taxes to one of the succeeding 10 years. 775
The computation of the foreign tax credit limitation requires a taxpayer to determine the
amount of its taxable income from foreign sources in each limitation category (described below)
by allocating and apportioning deductions between U.S.-source gross income , on the one hand ,
and foreign-source gross income in each limitation category , on the other. In general , deductions
are allocated and apportioned to the gross income to which the deductions factually relate. 776
However , subject to certain exceptions , deductions for interest expense and research and
experimental expenses are apportioned based on taxpayer ratios. 777 In the case of interest
expense , this ratio is the ratio of the corporation ' s foreign or domestic (as applicable) assets to its
worldwide assets. In the case of research and experimental expenses , the apportionment ratio is
based on either sales or gross income. All members of an affiliated group of corporations

773

Secs. 901, 902, 960, l2 9l( g).

774

Secs. 90 l , 904.

775

Sec. 904(c).

776

Treas. Reg. sec. l. 86 l- 8(b), Temp. Treas. Reg. sec. l. 86 l- 8T(c).

777

Temp. Treas. Reg. sec. l. 86 l-9T , Treas. Reg. sec. l. 861-17.

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 generally are treated as a single corporation for purposes of determining the apportionment
ratios. 778
The term "affiliated group" is determined generally by reference to the rules for
determining whether corporations are eligible to file consolidated returns. 779 These rules exclude
foreign corporations from an affiliated group. 780 Interest expense allocation rules permitting a
U.S. affiliated group to apportion the interest expense of the members of the U.S. affiliated group
on a worldwide-group basis were modified in 2004, and initially effective for taxable years
beginning after December 31, 2008. 78 1 The effective date of the modified rule s has been dela yed
to January 1, 2021. 782 A result of this rule is that interest expense of foreign members of a U.S.
affiliated group is taken into account in determinin g whether a portion of the interest expense of
the domestic members of the group must be allocated to foreign-source income . An allocation to
foreign-source income generall y is required only if, in broad terms , the domestic members of the
group are more highly levera ged than is the entire worldwide group. The new rules are genera lly
expected to reduce the amount of the U.S. gro up 's interest expense that is allocated to foreignsource mcome.
The foreign tax credit limitation is applied separately to passive category income and to
general category income. 783 Passive category income includes passi ve income , such as portfolio
intere st and dividend income , and certain specified types of income. All other income is in the
general category. Passive income is treated as gene ral category income if it is earned by a
qualifying financial services entity. Passi ve income is also treated as general category income if
it is high ly taxed (that is, if the foreign tax rate is determined to exceed the highest rate of tax
specified in Code section 1 or 11, as applicable). Dividend s (and subpart F inclusions), interest,
rents, and royalties received by a IO-percent U.S. shareholder from a CFC are assigned to a
separate limitation category by reference to the category of income out of which the dividends or
778

Sec. 864(e)(l) , (6); Temp . Treas. Reg. sec. l.861-14T(e)(2).

779

Secs. 864(e)(5) , 1504.

780

Sec. I 504(b )(3).

781

782

Sec. 864(f) ; "American Jobs Creation Act of2004 " ("AJCA"), Pub. L. 108-357, sec. 401(a).
Hiring Incentives to Restore Emp loyment Act, Pub. L. No. 111-147, sec. 551 (a).

783

Sec . 904(d). AJCA generally reduced the number of income categories from nine to two, effective for
tax years beginning in 2006. Before AJCA , tbe foreign tax credit limitation was applied separate ly to tbe following
categories of income : (l) passive income, (2) high withholding tax interest , (3) financial services income, (4)
shipping income , (5) certain dividends received from noncontrolled section 902 foreign corporations (also known as
" 10/50 companies "), (6) certain dividends from a domestic international sales corporation or former domestic
international sales corporation , (7) taxable income attributable to certain foreign trade income, (8) certain
distributions from a foreign sales corporation or former foreign sales corporation , and (9) any other income not
described in items (l) through (8) (so-called "general basket" income). A number of other provisions of the Code ,
including several enacted in 20 l 0 as part of Pub. L. No. l l l-226 , create additional separate categories in specific
circumstances or limit the availability of the foreign tax credit in other ways. See, e.g., secs. 865(h) , 90l(j) ,
904(d)(6), 904(h)(l 0).

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 other payments were made.784 Dividends received by a 10-percent corporate shareholder of a
foreign corpo ration that is not a CFC are also categorized on a look-through basis. 785
Special rules apply to the allocation of income and losses from foreign and U. S. sources
within each category of income.786 Foreign losses from one category will first be used to offset
income from foreign sources of other categories. If there remains an overall foreign loss, it will
be deducted against income from U.S. sources. The same princ iple applies to losses from U.S .
sources. In subsequent years, the losses that were deducted against another category or source of
income will be recaptu red. That is, an equal amount of income from the same category or source
that generated a loss in the prior year will be recharacterized as income from the other category
or source against which the loss was deducted. Up to 50 percent of income from one source in
any subsequent year will be recharacterized as income from the other source, whereas foreignsource income in a part icular category can be fully recharacterized as income in another category
until the losses from prior yea rs are fully recaptured. 787
In addition to the foreign tax credit limitation just described, a taxpayer ' s ability to claim
a foreign tax credit may be further limited by a matching rule that prevents the separat ion of
creditable foreign taxes from the associated foreign income. Under this rule, a foreign tax
generally is not taken into account for U.S. tax purpo ses, and thus no foreign tax credit is
available with respect to that foreign tax, until the taxable year in which the related income is
taken into account for U.S. tax purposes .788

4. Special rules
Dual consolidated loss rules
Under the rules applicable to corporatio ns filing consolidated returns , a dual conso lidated
loss ("DCL") is any net operating loss of a domestic corporation if the corporati on is subjec t to
an income tax of a foreign country without regard to whether such income is from sources in or
outside of such foreign country, or if the corporation is subject to such a tax on a residence basis
(a "d ual resident corporation "). 789 A DCL genera lly cannot be used to reduce the taxable income
of any member of the corporation's affiliated group. Losses of a separate unit of a domestic
corporat ion (a foreign branch or an interest in a hybrid entity owned by the corporat ion) are
subject to this limitation in the same manner as if the unit were a wholly owned subsidiary of
784

Sec . 904(d)(3) . The subpar t F rules applicabl e to CFCs and their I 0-percent U.S. shareholders are
descri bed be low.
785

Sec. 904(d)(4).

786

Secs. 904({), (g) .

787

Secs. 904( f)( I), (g)( I).

788

Sec. 909.

789

Sec . l50 3(d).

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TREAS-17-0313-I-000625

 such corporation. An exemption is available under Treasury regulations in the case of DCLs for
which a domestic use election (that is, an election to use the loss only for domestic , and not
foreign , tax purposes) has been made. 790 Recapture is required , however , upon the occurrence of
certain triggering events, including the conversion of a separate unit to a foreign corporation and
the transfer of 50 percent or more of the assets of a separate unit within a twelve-month
period. 79 1
Temporary dividends-received deduction for repatriated foreign earnings
AJCA section 421 added to the Code section 965, a temporary provision intended to
encourage U.S. multinational companies to repatriate foreign earnings. Under section 965, for
one taxable year certain dividends received by a U.S. corporation from its CFCs were eligible for
an 85-percent dividends-received deduction. At the taxpayer's election , this deduction was
available for dividends received either during the taxpayer's first taxable year beginning on or
after October 22, 2004 , or during the taxpayer's last taxable year beginning before such date.
The temporary deduction was subject to a number of general limitations. First , it applied
only to cash repatriations generally in excess of the taxpayer ' s average repatriation level
calculated for a three-year base period preceding the year of the deduction. Second , the amount
of dividends eligible for the deduction was generally limited to the amount of earnings shown as
permanently invested outside the United States on the taxpayer ' s recent audited financial
statements. Third, to qualify for the deduction , dividends were required to be invested in the
United States according to a domestic reinvestment plan approved by the taxpayer ' s senior
management and board of directors. 792
No foreign tax credit (or deduction) was allowed for foreign taxes attributable to the
deductible portion of any dividend. 793 For this purpose , the taxpayer was permitted to
specifically identify which dividends were treated as carrying the deduction and which dividends
were not. In other words , the taxpayer was allowed to choose which of its dividends were
treated as meeting the base-period repatriation level (and thus carry foreign tax credits , to the
extent otherwise allowable) , and which of its dividends were treated as part of the excess eligible
for the deduction (and thus subject to proportional disallowance of any associated foreign tax

790

Treas. Reg. sec. l.l503(d)-6(d).

791

See Treas. Reg. sec. 1.l 503(d)-6 (e)(I ) .

792

Section 965(b)(4). Tbe plan was require d to provid e for the reinvestment of the repatr iated dividends in
the United States, including as a source for the funding of worker hiring and training, infrastructur e, research and
development, capital investments, and the financial stabili zation of the corpora tion for the purpos es of j ob retention
or creation.
793

Sec. 965(d)(l) .

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 credits). 794 Deductions were disallowed for expenses that were directly allocable to the
deductible portion of any dividend. 795
Domestic international sales corporations
A domestic international sales corporations ("DISC") is a domestic corporation that
satisfies the following conditions: 95 percent of its gross receipts must be qualified export
receipts; 95 percent of the sum of the adjusted bases of all its assets must be attributable to the
sum of the adjusted bases of qualified export assets; the corporation must have no more than one
class of stock; the par or stated value of the outstanding stock must be at least $2,500 on each
day of the taxable year; and an election must be in effect to be taxed as a DISC. 796 In general , a
DISC is not subject to corporate-level tax and offers limited deferral of tax liability to its
shareholders. 797 DISC income attributable to a maximum of $ 10 million annually of qualified
export receipts is generally exempt from income tax at both the corporate and shareholder level.
Shareholders must pay interest to account for the benefit of deferring the tax liability on
undistributed DISC income related to this $10 million maximum annual amount. 798 Such entities
are also referred to as interest charge DISCs , or IC-DISCs. Shareholders of a DISC are deemed
to receive a dividend out of current earnings and profits from qualified export receipts in excess
of $10 million. 799 Gain on the sale of DISC stock is treated as a dividend to the extent of
accumulated DISC income. 800 The shareholders of a corporation which is not a DISC , but was a
DISC in a previous taxable year, and which has previously taxed income or accumulated DISC
income, are also required to pay interest on the deferral benefit , and gain on the sale or exchange
of stock in such corporation is treated as a dividend.

794

Accordingly , taxpayers generally were expected to pay regular dividends out of high-taxed CFC
earnings (thereby generatin g deemed-paid credits availab le to offset foreign-source income) and section 965
dividends out oflow-taxed CFC earnings (thereby availing themselves of the 85-percent deduction).
795

Sec. 965(d)(2).

796
Secs. 992(a) and (b). lfa corporation fails to satisfy either or both of the 95-percent tests, it is deemed
to satisfy such tests if it makes a pro rata distribution of its gross receipts which are not qualified export receipts and
the fair market value of its assets which are not qualified export assets. Sec. 992(c).
797
Sec. 991. Prior to the 1984 Revenue Act (Pub. L. 98-369), DISCs were eligible for more generous tax
benefits that were eliminated in favor of the since-repealed foreign sales corporation regime ("FSC") . An overview
of the history of the DIS Cs and FSCs regimes is provided in Joseph Isenber gh, Vol. 3 U.S. Taxationof Foreign
Persons and Foreign Income, Para. 81. (Fourth Ed. 2016).
798
The rate is the average of one-year constant maturity Treasury yields. The deferral benefit is the excess
of the amount of tax for which the shareho lder would be liable if deferred DISC income were included as ordinary
income over the actual tax liability of such shareho lder. Sec. 995(f).
799

The amount of the deemed distribution is the sum of several items, including qualified export receipts
in excess of $ 10 million . See sec. 955(b ) .

soo Sec . 995(c) .

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 IV. INTERNATIONA L TAX REFORM
A. Establishment of Participation Exemption System for Taxation of Foreign Income
1. Deduction for foreign-source portion of dividends received by domestic corporations

from specified to-percent owned foreign corporations
Description of Proposal
In general

The proposal provides for an exemption for certain fore ign income. This exemption is
prov ided for by means of a 100-percent deduction for the foreign-source portion of dividends
received from specified 10-percent owned foreign corporations by domestic corporatio ns that are
United States shareholders of those foreign corporations within the meaning of section 95 1(b) 801
(referred to here as "DRD").
A specified 10-percent owned foreign corporat ion is any foreign corporation (other than a
PFIC that is not also a CFC) with respect to which any domestic corporat ion is a U.S.
shareholder. 802

Foreign-source portion of a dividend
The DRD is available only for the foreign-source portion of dividends received by a
domestic corpo ration from specified IO-percent owned foreign corporat ions. The foreign-source
portion of any dividend is the amount that bears the same ratio to the dividend as the
undistributed foreign earnings bears to the total undistributed earnings. Undistributed earnings
are the amount of the earnings and profits of a specified 10-percent owned foreign corporat ion 803
as of the close of the taxable year of the specified IO-percent ow ned foreign corpora tion in which
the dividend is distributed and not reduced by dividends 804 distributed during that taxable year.
Undistrib uted foreign earnings are the portion of the undistributed earnings attributable to neither
income described in section 245(a)(5)(A) nor section 245(a)(5)(B) , without regard to section
245(a)(l2).

801

Under section 95 l(b) , a domestic corporation is a United States shareholder of a foreign corporation if
it owns, within the meaning of section 958(a), or is considered as owning by applying the rules of section 958(b ), l 0
percent or more of the voting stock of the foreign corporation.
802

Secs. 1297, 1298.

803

Computed in accordance with secs. 964(a) and 986.

804

Pursuan t to section 959(d), a distribution of previously taxed income does not constitute a dividend
even if it reduces earn ings and profits.

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 Hybrid dividends
The DRD is not available for any dividend received by a U.S. shareholder from a
controlled foreign corporation if the dividend is a hybrid dividend. A hybrid dividend is an
amount received from a controlled foreign corporation for which a deduction would be allowed
under this proposal and for which the specified IO-percent owned foreign corporation received a
deduction (or other tax benefit) from taxes imposed by a foreign country.
If a controlled foreign corporation with respect to which a domestic corporation is a U.S.
shareholder receives a hybrid dividend from any other controlled foreign corporation with
respect to which the domestic corporation is also a U.S. shareholder , then the hybrid dividend is
treated for purposes of section 951 (a)(l )(A) as subpart F income of the recipient controlled
foreign corporation for the taxable year of the controlled foreign corporation in which the
dividends was received and the U.S. shareholder includes in gross income an amount equal to the
shareholder's pro rata share of the subpart F income , determined in the same manner as section
95 l(a)(2).

Foreign tax credit disallowance
No foreign tax credit or deduction is allowed for any taxes paid or accrued with respect to
a dividend that qualifies for the DRD.
For purposes of computing the section 904(a) foreign tax credit limitation , a domestic
corporation that is a U.S. shareholder of a specified 10-percent owned foreign corporation must
compute its foreign-source taxable income (and entire taxable income) by disregarding the
foreign-source portion of any dividend received from that foreign corporation for which the
DRD is taken , as well as and any deductions properly allocable or apportioned to that foreignsource portion or the stock with respect to which it is paid.

Holding period requirement
A domestic corporation is not permitted a DRD in respect of any dividend on any share
of stock that is held by the domestic corporation for 365 days or less during the 731-day period
beginning on the date that is 365 days before the date on which the share becomes ex-dividend
with respect to the dividend. For this purpose , the holding period requirement is treated as met
only if the specified 10-percent owned foreign corporation is a specified 10-percent owned
foreign corporation at all times during the period and the taxpayer is a U.S. shareholder with
respect to such specified 10-percent owned foreign corporation at all times during the period.

Effective Date
The proposal is effective for taxable years of foreign corporations beginning after
December 31 , 2017 and for taxable years of U.S. shareholders in which or with which such
taxable years of foreign corporations end.

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 2. Special rules relating to sales or transfers involving specified IO-percent owned foreign
corporations
Description of Proposal
Sales by United States persons of stock

In the case of the sale or exchange by a domestic corporation of stock in a foreign
corporation held for one year or more , the proposal provides that any amount received by the
domestic corporation which is treated as a dividend for purposes of section 1248, is treated as a
dividend for purposes of applying the proposal.
Reduction in basis of certain foreign stock
Solely for the purpose of determining a loss, a domestic corporate shareholder's adjusted
basis in the stock of a specified 10-percent owned foreign corporation (as defined in this
proposa l) is reduced by an amount equal to the portion of any dividend received with respect to
such stock from such foreign corporation that was not taxed by reason of a dividends received
deduction allowable under section 245A in any taxable year of such domestic corporation. This
rule applies in coordination with section 1059, such that any reduction in basis required pursuant
to this proposal will be disregarded , to the extent the basis in the specified 10-percent owned
foreign corporation's stock has already been reduced pursuant to section 1059.
Sale by a CFC of a lower-tier CFC
If for any taxable year of a CFC beginning after December 31, 2017 , an amount is treated as
a dividend under section 964( e)( 1) because of a sale or exchange by the CFC of stock in another
foreign corporation held for a year or more, then: (i) the foreign-source portion of the dividend is
treated as subpart F income of the selling CFC for purposes of section 95l(a)(l)(A) , (ii) a United
States shareholder with respect to the selling CFC includes in gross income for the taxab le year
of the shareholder with or within the taxable year of the CFC ends, an amount equal to the
shareho lder's pro rata share ( determined in the same manner as under section 95 1(a)(2)) of the
amount treated as subpart F income under (i), and (iii) the deduction under section 245A(a) is
allowable to the United States shareholder with respect to the subpart F income included in gross
income under (ii) in the same manner as if the subpart F income were a dividend received by the
shareho lder from the selling CFC.
In the case of a sale or exchange by a CFC of stock in another corporation in a taxable
year of the selling CFC beginning after December 31, 2017, to which this proposal applies if
gain were recognized , the earnings and profits of the selling controlled foreign corporation is not
reduced by any loss from the sale or exchange.
Inclusion of transferred loss amount in certain assets transfers
Under the proposal , if a domestic corporation transfers substantially all of the assets of a
foreign branch (within the meaning of section 367(a)(3)(C)) to a specified 10-percent owned
foreign corporation with respect to which it is a U.S. shareholder after the transfer , the domestic

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 corporation includes in gross income an amount equal to the transferred loss amount , subject to
certain limitations.
The transferred loss amount is the excess (if any) of: ( 1) losses incurred by the foreign
branch after December 31, 2017, and before the transfer , for which a deduction was allowed to
the domestic corporation , over (2) the sum of certain taxable income earned by the foreign
branch and gain recognized by reason of an overall foreign loss recapture arising out of
disposition of assets on account of the underlying transfer. For the purposes of (2), only taxable
income of the foreign branch in taxable years after the loss is incurred through the close of the
taxable year of the transfer , is included. The transferred loss amount is reduced by the amount of
gain recognized by the taxpayer (other than gain recognized by reason of an overall foreign loss
recapture) on account of the transfer.
The amount of loss included in the gross income of the taxpayer under the proposed rule
above for any taxable year cannot exceed the amount allowed as a deduction under new section
245A for the taxable year (taking into account dividends received from all specified IO-percent
owned foreign corporations with respect to which the taxpayer is a U.S. shareholder). Any
amount not included in gross income for a taxable year because of this proposed rule is included
in gross income in the succeeding taxable year.
Amounts included in gross income by reason of the proposal are treated as derived from
sources within the United States. Consistent with regulations or guidance that the Secretary of
the Treasury may prescribe , proper adjustments are made in the adjusted basis of the taxpayer's
stock in the specified 10-percent owned foreign corporation to which the transfer is made, and in
the transferee ' s adjusted basis in the property transferred , to reflect amounts included in gross
income under this proposal.
Effective Date

The proposal relating to reduction of basis in certain foreign stock for the purposes of
determining a loss is effective for dividends received in taxable years beginning after December
31, 2017.
The proposal relating to transfer of loss amounts from foreign branches to certain foreign
corporations is effective for transfers after December 31, 2017.
3. Treatment of deferred foreign income upon transition to participation exemption system
of taxation
Description of Proposal

In general
The proposal generally requires that , for the last taxable year beginning before January 1,
2018 , any U.S. shareholder of a specified foreign corporation must include in income its pro rata
share of the undistributed , non-previously-taxed post-1986 foreign earnings of the corporation
("mandatory inclusion "). For purposes of this proposal , a specified foreign corporation is any
foreign corporation that has at least one U.S. shareholder. It does not include PFICs that are not

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 also CFCs. A portion of that pro rata share of foreign earnings is deductible ; the amount of the
deductible portion depends upon whether the deferred earnings are held in cash or other assets.
The deduction results in a reduced rate of tax with respect to income from the required inclusion
of pre-effective date earnings. A corresponding portion of the credit for foreign taxes is
disallowed , thus limiting the credit to the taxable portion of the included income. The separate
foreign tax credit limitation rules of present law section 904 apply , with coordinating rules. The
increased tax liability generally may be paid over an eight-year period.
Subpart F

The mechanism for the mandatory inclusion of pre-effective-date foreign earnings is
subpart F. The proposal provides that in the last taxable year of a specified foreign corporation
that begins before January 1, 2018 , which is that foreign corporation ' s last taxable year before
the transition to the new corporate tax regime elsewhere in the bill goes into effect, the subpart F
income of the foreign corporation is increased by no less than the accumulated deferred foreign
income of the corporation , determined as of November 9, 2017 , or other applicable measurement
date as appropriate ("measurement date"). The transition rule applies to all U.S. shareholders 805
of a specified foreign corporation , which includes any foreign corporation in which a U.S. person
owns 10 percent of the voting stock. Consistent with the general operation of subpart F, each
U.S. shareholder of a specified foreign corporation must include in income the shareholder ' s pro
rata share of the foreign corporation's subpart F income attributable to its mandatory
inclusion. 806
Accumulated def erred foreign income

A specified foreign corporation ' s accumulated deferred foreign income on the
measurement date is based on all post-1986 foreign earnings and profits that are not previously
taxed and not (1) attributable to income that is effectively connected with the conduct of a trade
or business in the United States and subject to U.S. income tax or (2) subpart F income
(determined without regard to the mandatory inclusion) of a CFC that is included in the gross
income of a U.S . shareholder of the CFC. The potential pool of includible earnings includes all
undistributed foreign earnings accumulated in taxable years beginning after 1986, computed in
accordance with sections 964(a) and 986, taking into account only periods when the foreign
corporation was a specified corporation. The pool of post-1986 foreign earnings and profits is
not reduced by distributions during the taxable year to which section 965 applies.
The pool of post-1986 earnings and profits taken into consideration in computing the
mandatory inclusion required of a U.S. shareholder under this transition rule generally may be
reduced by foreign earnings and profits deficits that are properly allocated to that person by

805

Sec . 95 l(b) , which defines United States shareho lder as any U.S. person that owns 10 percent or more
of the voting classes of stock of a foreign corpora tion.
806
For purposes of taking into accoun t its subpart F income under this rule, a noncon trolled 10/ 50
corporation is treated as a CFC.

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 reason of that person's interest in one or more specified foreign corporations with a deficit in
post-1986 foreign earnings and profits as of the measurement date.
The aggregate foreign E & P deficit is generally allocable to a specified foreign
corporation in the same ratio as the U.S. shareholder's pro rata share of post-1986 deferred
income in that corporation bears to the U.S. shareholder's pro rata share of accumulated post1986 deferred foreign income from all specified foreign corporations with respect to which the
shareholder is a U.S. shareholder.

Deduction from mandatory inclusion
U.S. shareholders with accumulated deferred foreign income may deduct a portion of the
mandatory inclusion in an amount that depends upon the proportion of aggregate earnings and
profits attributable to cash assets rather than noncash assets. A U.S. shareholder may deduct so
much of the aggregate earnings and profits attributable to cash assets as is necessary to result in a
tax rate of 10 percent for such inclusion. With respect to the remainder of the deferred income in
the mandatory inclusion , the U.S. shareholder may deduct an amount sufficient to result in a tax
rate of 5 percent with respect to such income.
The aggregate earnings and profits attributable to cash assets for a U.S. shareholder is the
greater of the pro rata share of the cash position of all specified foreign corporations as of the last
day of the taxable year of the mandatory inclusion, or the average of the cash position
determined on the last day of each of the two taxable years ending immediately before the
measurement date. Rules are provided to avoid double counting of cash assets.

Foreign tax credit
The portion of foreign income tax that is deemed paid or accrued with respect to the
taxable portion of the mandatory inclusion is not creditable or deductible against the Federal
income tax attributable to the inclusion. The disallowed portion of foreign tax credits is 71.4
percent of foreign taxes paid attributable to the portion of the section 965 inclusion attributable
to the aggregate cash position plus , 85.7 percent of foreign taxes paid attributable to the
remaining portion of the section 965 inclusion .807 The proposal coordinates the disallowance of
foreign tax credits with the requirement 808 that a domestic corporate shareholder is deemed to
receive a dividend in an amount equal to foreign taxes it is deemed to have paid and for which it
claimed a credit.

807

Other foreign tax credits used by a taxpayer against tax liability resu lting from the deemed inclusion
app ly in full.
808

Sec . 78 .

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 Limitatio ns on assessment extended

The proposal also provides an exception to the otherwise applicable limitations period for
assessment of tax to ensure that the period for assessment of underpayments in tax related to the
determination treatment of the mandatory inclusion (includ ing related deductions and credits)
does not expire prior to six years from the date on wh ich the tax return initially reflecting the
mandatory inclusion was filed.
Installment payments

A U.S. shareholder may elect to pay the net tax liability resulting from the mandatory
inclusion of pre-effective-date undistributed CFC earnings in eight installments. If installment
payment is elected , the payments for each of the first five years equals 8 percent of the net tax
liability. The amount of the sixth installment is 15 percent of the net tax liability, increasing to
20 percent for the seventh installment and the remain ing balance of 25 percent in the eighth year.
The net tax liability that may be paid in installments is the excess of the U.S.
shareho lder' s net income tax for the taxable year in which the pre-effective-date undistributed
CFC earnings are included in income over the taxpayer 's net income tax for that year determined
without regard to the inclusion. Net income tax means net income tax as defined for purposes of
the genera l business credit, but reduced by the amount of that credit.
An election to pay tax in installments must be made by the due date for the tax return for
the taxable year in which the pre-effective-date undistributed CFC earnings are included in
income. The Treasury Secretary has authority to prescribe the manner of making the election.
The first installment must be paid on the due date (determined w ithout regard to extensions) for
the tax return for the taxable year of the income inclusion. Succeeding installments must be paid
annua lly no later than the due dates (without extensions) for the income tax return of each
succeed ing year. If a deficienc y is later determined w ith respect to the net tax liability, the
additiona l tax due may be prorated among all installment payments in most circumstances. The
portions of the deficiency prorated to an installment that was due before the deficiency was
assessed must be paid upon notice and demand. The portion prorated to any remaining
installment is payable with the timely payment of that installment payment , unless the deficiency
is attributable to negligence , intentional disregard of rules or regulations , or fraud with intent to
evade tax , in which case the entire deficiency is payab le upon notice and demand.

The timely paymen t of an installment does not incur interest. If a deficiency is
determined that is attributable to an understateme nt of the net tax liability due under this
proposal , the deficiency is payab le with underpayment interest for the period beginning on the
date on which the net tax liability would have been due, without regard to an election to pay in
installments, and ending with the payment of the deficiency. Furthermore , any amount of
deficiency prorated to a remaining installment also bears interest on the deficiency , but not on
the original installment amount.
The proposal also includes an acceleration rule. If ( 1) there is a failure to pay timely any
required installment , (2) there is a liquidation or sale of substantially all of the U.S. shareholder ' s
assets (includ ing in a bankruptcy case), (3) the U.S. shareholder ceases business , or (4) another

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 similar circumstance arises , the unpaid portion of all remaining installments is due on the date of
the event (or, in a bankruptcy proceeding or similar case, the day before the petition is filed).
Special rule for S corporations

A special rule permits deferral of the transition net tax liability for shareholders of a U.S.
shareho lder that is an S corporation. 809 The S corporation is required to report on its income tax
return the amount includible in gross income by reason of this provision , as well as the amount
of deduction that would be allowable, and provide a copy of such information to its shareholders.
Any shareholder of the S corporation may elect to defer the net tax liability until the
shareho lder's taxable year in which a triggering event occurs. The election to defer the tax is due
not later than the due date for the return of the S corporation for its last taxable year that begins
before January 1, 2018.
Three types of events may trigger an end to deferral of the net tax liability. The first type
of triggering event is a change in the status of the corporation as an S corporat ion. The second
category includes liquidation , sale of substantially all corporate assets , termination of the
company or end of business , or similar event , including reorganization in bankruptcy. The third
type of triggering event is a transfer of shares of stock in the S corporation by the elect ing
taxpayer , whether by sale, death or otherwise, unless the transferee of the stock agrees with the
Secretary to be liable for net tax liability in the same manner as the transferor. Partial transfers
trigger the end of deferral only with respect to the portion of tax properly allocable to the portion
of stock sold.
If a shareholder of an S corporation has elected deferral under the special rule for S
corporation shareholders and a triggering event occurs, the S corporation and the electing
shareholder are jointly and severally liable for any net tax liability and related interest or
penalties. The period w ithin which the IRS may collect such liability does not beg in before the
date of an event that triggers the end of the deferral. If an election to defer payment of the net
tax liability is in effect for a shareholder, that shareholder must report the amount of the deferred
net tax liability on each income tax return due during the period that the election is in effect.
Failure to include that information with each income tax return will result in a penalty equal to
five-percent of the amount that should have been reported.
After a triggering event occurs, a shareholder in the S corporation may elect to pay the
net tax liability in eight installments , subject to rules similar to those generally applicable absent
deferral. Whether or not a shareholder may elect to pay in installment s depends upon the type of
event that triggered the end of deferral. If the triggering event is liquidation , sale of substantia lly
all corporate assets, termination of the company or end of business , or similar event, the
installment payment election is not available. Instead, the entire net tax liability is due upon
notice and demand . The installment election is due with the timely return for the year in which

809

Section 1361 defines an S corporation as a domestic small business corporation that has an election in
effect for status as an S corporation , with fewer than 100 shareholders , none of whom are nonresident aliens , and all
of whom are individuals, estates , trusts or certain exempt organizations.

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 the triggering event occurs. The first installment payment is required by the due date of the same
return , determined without regard to extensions of time to file.

Recapture from expatriated entities
The proposal denies any deduction claimed with respect to the mandatory subpart F
inclusion and imposes a tax rate of 35-percent on the entire inclusion if a U.S. shareholder
becomes an expatriated entity within the meaning of section 7874(a)(2) at any point within the
ten-year period following enactment of this proposal. An entity that becomes a surrogate foreign
corporation that is treated as a domestic corporation under section 7874(b) is not within the
scope of this recapture proposal. Although the amount due is computed by reference to the year
in which the deemed subpart F income was originally reported , the additional tax arises and is
assessed for the taxable year in which the U.S. shareholder becomes an expatriated entity. No
foreign tax credits are permitted with respect to the additional tax due as a result of the recapture
rule. The Secretary is authorized to prescribe rules necessary to carry out the proposal.

Effective Date
The proposal is effective for the last taxable year of foreign corporations beginning
before January 1, 2018 , and all subsequent taxable years of a foreign corporation and for the
taxable years of a U.S. shareholder with or within which such taxable years end.

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 B. Rules Related to Passive and Mobile Income
1. Current year inclusion of global intangib le low-taxed income by United States
shareho lders

Description of Proposal
Under the proposal , a U.S. shareholder of any CFC must include in gross income for a
taxable year its global intangible low-taxed income ("GIL TI") in a manner generally similar to
inclusions of subpart F income. GIL TI means , with respect to any U.S. shareholder for the
shareho lder ' s taxable year , the excess (if any) of the shareholder ' s net CFC tested income over
the shareholder's net deemed tangib le income return. The shareholder ' s net deemed tangible
income return is an amount equal to 10 percent of the aggregate of the shareholder 's pro rata
share of the qualified business asset investment ("QBAI") of each CFC with respect to which it
is a U.S. shareholder.

Net CFC tested income
Net CFC tested income means , with respect to any U.S. shareholder , the excess of the
aggregate of its pro rata share of the tested income of each CFC with respect to which it is a U.S.
shareho lder over the aggregate of its pro rata share of the tested loss of each CFC with respect to
which it is a U. S. shareholder. Pro rata shares are determined under the rules of section
95 l(a)(2).
The tested income of a CFC means the excess (if any) of the gross income of the
corporation detenuined without regard to certain exceptions to tested income: (1) the
corporation ' s ECI under section 952(b) ; (2) any gross income taken into account in determining
the corporation's subpart F income ; (3) any gross income excluded from foreign base company
income or insurance income by reason of the high -tax exception under section 954(b)(4) ; (4) any
dividend received from a related person (as defined in section 954( d)(3)) ; and (5) any foreign oi l
and gas extract ion income and foreign oil related income , over deductions (including taxes)
properly allocable to such gross income under rules similar to the rules of section 954(b )(5).
The tested loss of a CFC means the excess (if any) of deductions (including taxes)
properly allocab le to the corporation's gross income determined without regard to the tested
income exceptions over the amount of such gross income .

Qualified business asset investment
QBAI means , with respect to any CFC for a taxable year , the average of the aggregate of
its adjusted bases , determined as of the close of each quarter of the taxable year , in specified
tang ible property used in its trade or business and of a type w ith respect to wh ich a deduction is
generally allowable under section 167. The adjusted basis in any property must be determined
using the alternative depreciation system under current section 168(g) , notwithstanding any
provision of law (or any other section of this bill) which is enacted after the date of enactment of
this proposal.

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 Specified tangible property means any property used in the production of tested income
or tested loss. If such property was used in the production of tested income and income that is
not tested income , the property is treated as specified tangible property in the same proportion
that the tested income produced with respect to the property bears to the total amount of gross
income produced with respect to the property less deductions , including taxes, properly allocable
to such gross income.
For purposes of determining QBAI , the Secretary is authorized to issue anti-avoidance
regulations or other guidance as the Secretary determines appropriate , including regulations or
other guidance that provide for the treatment of property if the property is transferred or held
temporarily , or if avoidance was a factor in the transfer or holding of the property.
Coordination with subpart F
In general , GIL TI amount included in gross income is treated in the same manner as an
amount included under section 951(a)(l)(A) for purposes of applying sections 168(h)(2)(B),
535(b)(10) , 904(h)(l) , 959, 961, 962, 993(a)(l)(E) , 996(f)(l) , 1248(b)(l) , 1248(d)(l) ,
650l(e)(l)(C) , 6654(d)(2)(D) , and 6655(e)(4) . However , the Secretary may provide rules for
coordinating the GILTI inclusion with provisions of law in which the determination of subpart F
income is required to be made at the CFC level.
The proposal requires that the amount of GIL TI included by a U.S. shareholder be
allocated across each CFC with respect to which it is a U.S. shareholder. The portion of GIL TI
treated as being with respect to a CFC equals zero for a CFC with no tested income and, for a
CFC with tested income, the portion of GIL TI which bears the same ratio to the total amount of
GIL TI as the U.S. shareholder's pro rata amount of tested income of the CFC bears to the
aggregate amount of the U.S. shareholder's pro rata share of the tested income of each CFC with
respect to which it is a U.S. shareholder.
For purposes of the GIL TI inclusion , a person is treated as a U.S. shareholder of a CFC
for any taxable year only if such person owns (within the meaning of section 958(a)) stock in the
corporation on the last day, in such year, on which the corporation is a controlled foreign
corporation. A corporation is generally treated as a CFC for any taxable year if the corporation
is a CFC at any time during the taxable year.
Deemed-paid credit for taxes properly attributable to tested income
For any amount of GIL TI included in the gross income of a domestic corporation, the
corporation is deemed to have paid foreign income taxes equal to 80 percent of the product of the
corporation's inclusion percentage multiplied by the aggregate tested foreign income taxes paid
or accrued , with respect to tested income , by each CFC with respect to which the domestic
corporation is a U.S. shareholder.
The inclusion percentage means, with respect to any domestic corporation , the ratio
(expressed as a percentage) of such corporation's GIL TI amount divided by the aggregate
amount of its pro rata share of the tested income of each CFC with respect to which it is a U.S.
shareholder.

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 Tested fore ign income taxes means , with respect to any domestic corporatio n that is a
U.S. shareho lder of a CFC , the foreign income taxes paid or accrued by the CFC that are
properly attributable to the CFC's tested income.
The proposal creates a separate foreign tax credit basket for GIL TI, with no carryforward
or carryback available for excess credits. For purposes of determining the foreign tax credit
limitation , GILTI is not general category income , and income that is both GILTI and passive
category income is consi dered passive category income. The taxes deemed to have been paid are
treated as an increase in GIL TI for purposes of sect ion 78, determined by taking into account 100
percent of the aggregate tested foreign income taxes.
Effective Date
The proposal is effective for taxab le years of foreign corporations beginning after
December 3 1, 2017 , and for taxable years of U.S. shareholders in which or with which such
taxable years of foreign corporat ions end.
2. Deduction for foreign-derived intangibl e income
Description of Proposal

In the case of a domestic corporation for its taxable year, the proposal allows a deduction
equal to 37.5 percent of the lesser of (1) the sum of its fore ign-der ived intangible income plus the
amount of GIL TI that is included in its gross income , or (2) its taxable income , determined
without regard to this proposal.8 10 The foreign-derived intangible income of any domestic
corpora tion is the amount whic h bears the same ratio to the corporation ' s deemed intangib le
income as its fore ign-derived deduction eligible income bears to its deduction eligible income.
The Secretary is authorized to prescribe regulations or other guidance as may be necessary or
appropriat e to carry out this proposal.
Deduction eligible income
Deduction eligible income means, with respect to any domestic corporat ion, the gross
income of the corporation determined without regard to: (1) the subpart F income of the
corporatio n under section 95 1; (2) the GIL TI of the corporation ; (3) any dividend received from
a CFC w ith respect to which the corpo ration is a U.S. shareholder; and (4) any domestic oil and
gas income of the corpora tion ; and (5) any foreign branch income (as defin ed in section
904(d)(2)(J)) of the corporatio n, over the deduction s (including taxes) properly allocab le to such
gross mcome .
Deemed intangible income
The domestic corporation ' s deemed intangible income means the excess (if any) of its
deduction eligible income over its deemed tangible income return. The deemed tangib le income

810

Global intangible low-income taxed income is de fined in new sec. 951 A.

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 return means, with respect to any corporat ion, an amount equal to 10 percent of the corporat ion ' s
qualified business asset investment ("QBAI").
For purposes of computing its foreign-derived intangible income , a domestic
corporat ion' s QBAI is the average of the aggregate of its adjusted bases, determined as of the
close of each quarter of the taxable year , in specified tangible property used in its trade or
business and of a type with respect to which a deduction is allowab le under section 167. The
adjusted basis in any property must be determined using the alternative depreciation system
under sect ion I 68(g), notwithstanding any provision of law (or any other section of this bill)
which is enacted after the date of enactment of this proposal.
Specified tangible property means any tangible property used in the production of
deduction eligible income. If such property was used in the production of deduction eligible
income and income that is not deduction eligible income, the property is treated as specified
tangible property in the same proportion that the deduction eligible income produced with
respect to the propert y, bears to the total amount gross income produced with respect to the
property less deductions (includ ing taxes) properly allocable to such gross income.
Foreign-derived deduction eligible income
Fore ign-derived deduction eligible income means, with respect to a taxpayer for its
taxable year , any deduction eligible income of the taxpayer that is derived in connection with ( 1)
property that is sold by the taxpayer to any person who is not a United States person and that the
taxpayer establishes to the satisfaction of the Secretary is for a foreign use or (2) services
provided by the taxpayer that the taxpayer estab lishes to the satisfact ion of the Secretary are
provided to any person , or with respect to property , not located within the United States. Foreign
use means any use, consumption , or disposition that is not within the United States. Specia l
rules for determining foreign use apply to transactions that involve property or services provided
to domestic intermed iaries or related parties.
For purposes of the proposal , the terms "sold ," "sells", and "sale " include any lease,
exchange , or other disposition.
Property or services provided to domestic intermediaries
If a taxpayer sells property to another person (other than a related party) for further
manufacture or modification within the United States, the property is not treated as sold for a
foreign use even if such other person subsequently uses such property for foreign use. Income
derived in connection w ith services prov ided to another person (other than a related party)
located within the United States is not treated as foreign-derived deduction eligible income.

Special rules with respect to related party transactions
If property is sold to a related foreign party, the sale is not treated as for a foreign use
unless the property is sold by the related foreign party to another person who is unrelated and is
not a U.S. person and the taxpayer establishes to the satisfaction of the Secretary that such
property is for a foreign use . Income derived in connection with services provided to a related
party who is not located in the United States is not treated as foreign-derived deduction eligible

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 income unless the taxpayer establi shes to the satisfaction of the Secretary that such service is not
substantially similar to services provided by the related party to persons located within the
United States.
For purposes of applying these rules, a related party means any member of an affiliated
group as defined in section 1504( a) determined by substituting "more than 50 percent " for "at
least 80 percent " each place it appears and without regard to sections l 504(b )(2) and l 504(b )(3).
Any person (other than a corporation) is treated as a member of the affil iated group if the person
is controlled by members of the group (includ ing any entity treated as a member of the group by
reason of this sentence) or contro ls any member , w ith control being determined under the rules
of section 954( d)(3).
Effective Date
The proposal is effect ive for taxable years beginning after December 31, 2017.
3. Special rules for transfers of intangible property from controlled foreign corporations to
United States shareholders
Description of Proposal
For certa in distributions of intangible property held by a CFC on the date of enactment of
this proposal , the fair market value of the property on the date of the distribution is treated as not
exceeding the adjusted basis of the property immediately before the distribution. If the
distribution is not a dividend , a U.S. shareholder ' s adjusted basis in the stock of the CFC with
respect to which the distribution is made is increased by the amount (if any) of the distribution
that wou ld, but for this propo sal, be includibl e in gross income. The adju sted basis of the
property in the hands of the U.S. shareholder immediately after the distribution is the adjusted
basis immediately before the distribution , red uced by the amount of the increase (if any)
described previously.
For purposes of the proposal , intangible property means intangible property as described
in section 936(h)(3)(B) and computer software as described in section 197( e)(3)(B).
The proposal app lies to distributions that are (1) received by a domes tic corporation from
a CFC w ith respect to which it is a U. S. shareho lder and (2) made by the CFC before the last day
of the third taxable year of the CFC beginning after December 31, 2017.
Effective Date
The propo sal is effective for taxab le years of foreign corporations beginning after
December 31, 2017 , and for taxable years of U.S. shareholde rs in which or with which such
taxable years of foreign corporat ions end.

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 C. Other Modifications of Subpart F Provisions
1. Elimination of inclusion of foreign base company oil related income

Description of Proposal

The proposal eliminates foreign base company oil related income as a category of foreign
base company income.
Effective Date

The proposal is effective for taxable years of foreign corporations beginning after
December 31, 2017 , and for taxable years of U.S. shareholders in which or with which such
taxable years of foreign corporations end.
2. Inflation adjustment of tie minimis exception for foreign base company income
Description of Proposal

In the case of any taxable year beginning after 2017 , the proposal indexes for inflation the
$1,000,000 de minimis amount for foreign base company income, with all increases rounded to
the nearest multiple of $50,000.
Effective Date

The proposal is effective for taxable years of foreign corporations beginning after
December 31, 2017 , and for taxable years of U.S. shareholders in which or with which such
taxable years of foreign corporations end.
3. Repeal of inclusion based on withdrawal of previously excluded subpart F income from
qualified investment
Description of Proposal

The proposal repeals section 955. As a result , a U.S. shareholder in a CFC that invested
its previously excluded subpart F income in qualified foreign base company shipping operations
is no longer required to include in income a pro rata share of the previously excluded subpart F
income when the CFC decreases such investments.
Effective Date

The proposal is effective for taxable years of foreign corporations beginning after
December 31, 2017 , and to taxable years of U.S. shareholders within which or with which such
taxable years of foreign corporations end.

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 4. Modification of stock attribution rules for determining status as a contro lled foreign
corporation
Description of Proposal

The proposal amends the ownership attribution rules of section 958(b) so that certain
stock of a foreign corporation owned by a foreign person is attributed to a related U.S. person for
purposes of determining whether the related U.S. person is a U.S. shareholder of the foreign
corporation and, therefore , whether the foreign corporation is a CFC. In other words , the
proposa l provides "downward attribution" from a foreign person to a related U.S. person in
circumstances in which present law does not so provide. The pro rata share of a CFC's subpart F
income that a United States shareholder is required to include in gross income, however,
continues to be determined based on direct or indirect ownership of the CFC, without application
of the new downward attribution rule.
Effective Date

The proposal is effective for the last taxable year of foreign corporations beginning
before January 1, 2018 and all subsequent taxable years of a foreign corporation and for the
taxable years of a U.S. shareholder w ith or with which such taxable years end.
5. Modification of definition of United States shareholder
Description of Proposal

This proposal expands the definition of U.S. shareholder under subpart F to include any
U.S. person who owns 10 percent or more of the total value of shares of all classes of stock of a
foreign corporation.
Effective Date

The proposal is effective for the last taxable year of foreign corporations beginning
before January 1, 2018, and for taxable years of U.S. shareholders with or within which such
taxable years of foreign corporations end.
6. Elimina tion of requirement that corporation must be controlled for 30 days before
subpart F inclusions apply
Description of Proposal

The proposal eliminates the requirement that a corporation must be controlled for an
uninterrupted period of 30 days before subpart F inclusions apply.
Effec tive Date

The proposal is effective for taxab le years of foreign corporations beginning after
December 31, 2017 , and for taxable years of U.S. shareholders with or within which such taxable
years of foreign corporations end.

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TREAS-17-0313-I-000643

 7. Look-thru rule for related controlled foreign corporations made permanent
Description of Proposal
The propo sal makes permanent the exclusion from foreign personal holding company
income for certain dividends , interest (including factorin g income that is treated as equivalent to
interest under sect ion 954(c)(l)(E)) , rents, and royalties received or accrued by one CFC from a
related CFC.

Effective Date
The proposal is effec tive for taxable years of foreign corporation s beginning after
December 3 1, 2019 , and for taxab le years of U.S. shareholders in which or with which such
taxable years of foreign corpora tions end.

8. Corporations eligible for deductions for dividends exempted from subpart F inclusions
for increased investments in United States property
Description of Proposal
The requirement in subpart F that U.S. shareholders recognize income when earnings are
repatriated in the form of increases in investment by a CFC in U.S. property is amended to
provide an exception for domestic corpo rations that are U.S. shareho lders in the CFC either
directly or through a domestic partnership.

Effective Date
The proposal is effec tive for taxable years of controlled foreign corporations beginning
after December 31, 2017, and for taxable years of U.S. shareholders in which or with whic h such
taxable years of the foreign corporat ions end.

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 D. Prevention of Base Erosion
1. Denial of deduction for interest expense of United States shareholders which are

members of worldwide affiliated groups with excess domestic indebtedness
Description of Proposal
The proposal addresses base erosion that results from excessive and disproportionate
borrowing in the United States by limiting the deductibility of interest paid or accrued by U.S.
corporations that are members of a worldwide affiliated group. For any domestic corporation
that is a member of a worldwide affiliated group , the proposal reduces the deduction for interest
paid or accrued by the corporat ion by the product of the net interest expense of the domestic
corporation multiplied by the debt-to-equity differential percentage of the worldwide affiliated
group. Net interest expense means the excess (if any) of: (1) interest paid or accrued by the
taxpayer during the taxable year , over (2) the amount of interest includible in the gross income of
the taxpayer for the taxable year. 8 11
A worldwide affiliated group is one or more chains of corporations , connected through
stock ownership with a common parent that would qualify as an affiliated group under section
1504, with two differences. First , the ownership thresho ld of section 1504( a)(2) is applied using
50 percent rather than 80 percent. Second , the restriction on inclusion of a fore ign corporation
under section l 504(b )(3) is disregarded for purposes of identifying the worldwide affiliated
group.
The debt-to-equity differential percentage means , with respect to any wor ldwide
affiliated group , the excess domest ic indebtedness of the group divided by the total indebtedness
of the domestic corporations that are members of the group. All U.S. members of the worldwide
affiliated group are treated as one member when determining whether the group has excess
domest ic indebtedness as a resu lt of a debt-to-equity differential. Excess domestic indebtedness
is the amount by which the total indebtedness of the U.S. members exceeds 110 percent of the
total indebtedness those members wou ld hold if their total indebtedness to total equity ratio were
proportionate to the ratio of total indebtedness to total equity in the worldwide group. Total
equity means , with respect to one or more corporations , the excess (if any) of: (1) the money and
all other assets of such corporations , over (2) the total indebtedness of such corporations.
Intragroup debt and equity interests are disregarded for purposes of this computation .
The amount of any interest not allowed as a deduction for any taxable year by reason of
this proposal or new section 163(j) (depending on whichever imposes the lower limitat ion with
respect to such taxab le year) can be carried forward indefinitely.
The Secretary is provided regulatory authority to provide rules for: ( 1) the prevention of
the avoidance of this proposal , (2) the coordination of this proposal with section 884 , (3) the

811

The Secretary is pro vided is regu latory authority to provide for adjustments in determinin g the amount
of net interest expense .

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TREAS-17-0313-I-000645

 treatment of partnership indebtedness, allocation of partnership debt, interest, or distributive
shares , and (4) the coordination of this proposal with section 163(j).
Effective Date

The proposal is effec tive for taxable years beginning after December 31, 2017 .
2. Limitations on income shifting through intangible property transfers
Description of Proposal

The proposal addresses recurring definitional and methodological issues that have arisen
in controversies 8 12 in transfers of intangible property for purposes of sections 367( d) and 482,
both of which use the statutory definition of intangible proper ty in section 936(h)(3)(B). The
proposal revises that definition and confirms the authority to require certain valuation methods.
It does not modify the basic approach of the existing transfer pricing rules with regard to income
from intangible property.
Under the proposal , workforce in place , goodwi ll (both foreign and domestic) , and going
concern value are intangible property within the meaning of section 936(h)(3)(B) , as is the
residual category of "any similar item" the value of which is not attributable to tangible property
or the services of an individual. The flush language at the end of that subparagraph is removed ,
to make clear that the source or amount of value is not relevant to whether property that is one of
the specified types of intangible property is within the scope of the definition.
The propo sal also clarifies the authority of the Commissioner to specify the method to be
used to determine the value of intangible property , both with respect to outbound restructurings
of U.S. operations and to intercompany pricing allocations. 813 First, in the case of transfers of
multiple intangible properties in one or more related transactions , valuation of such intangible
property on an aggregate basis is explicitly permitted if the Commiss ioner determines that an
aggregate basis achieves a more reliable result than an asset-by-asset approach. The proposa l is
consistent with the position that the additional value that results from the interrelation of
intangible assets can be properly attributed to the underlying intangible assets in the aggrega te,
where doing so yields a more reliable result. This approach is also consis tent with Tax Court
decisions in cases outside of the section 482 context , where collections of multiple , related

812

Veritas v. Commissioner, 133 T.C. No. 14 (December 10, 2009), non-acq. , IRB 20 10-49 (Decemb er 6,

813

Secs . 367(d) and 482.

2010).

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TREAS-17-0313-I-000646

 intangible assets were viewed by the Tax Court in the aggregate. 8 14 Finally, it is also consistent
with the cost-s haring regulations. 8 15
The proposal also codifies the realistic alternative principle with respect to intangible
property. The realistic alternative principle is predicated on the notion that a taxpayer wi ll only
enter into a particular transaction if none of its realistic alternatives is economically preferable to
the transaction under consideration. As a result, the existing regulations provide the IRS with the
ability to determine an arm' s-length price by reference to a transaction (such as the owner of
intangible property using it to make a product itself) that is different from the transaction that
was actually completed (such as the owne r of that same intangible property licensing the
manufacturing rights and then buying the product from the licensee).
Effective Date
The proposal applies to transfers in taxable years beginnin g after December 31, 2017. No
inference is intended with respect to application of section 936(h)(3)(B) or the authority of the
Secretary to provide by regulation for such application on or before the date of enactment.
3. Certain related party amounts paid or accrued in hybrid transactions or with hybrid
entities
Description of Proposal
The proposal denies a deduction for any disqualified related party amount paid or accrued
pursuant to a hybrid transaction or by, or to, a hybrid entity. A disqualified related party amount
is any interest or royalty paid or accrued to a related party to the extent that: (1) there is no
correspo nding inclusion to the related party under the tax law of the country of wh ich such
related party is a resident for tax purposes , or (2) such related party is allowed a deduction with
respect to such amount under the tax law of such country. A disqualified related party amount
does not include any payment to the extent such payment is included in the gross income of a
U.S. shareholder under section 95 l(a). A related party for these purposes is determined under
the rules of section 954( d)(3), except that such section applies with respect to the payor as
opposed to the CFC on otherwise referred to in such section.

814

See, e.g., Kraft Foods Co. v. Commissioner, 21 T.C. 513 (1954) (thirty-one related patents must be
valued as a group and the useful life for depreciation should be based on the average of the patents' useful lives);
Standard Conveyor Co. v. Commissioner, 25 B.T .A. 28 1, p. 283 (] 932) ("[I]t is evident that it is impos sible to value
these seven patents separat ely. Their value, as in the case of many groups of patents representing improvements on
the prior art, appears largely to consist of their combination. "); Massey-Ferguson, Inc. v. Commissioner, 59 T.C. 220
( 1972) (taxpayer who abandoned a distribution network of contracts with separate distributorships was entitled to an
abandonment loss for the entire network in the taxable year during which the last o f tl1e contracts was terminated
because that was the year in which the entire intangible value was lost).
815

See Treas. Reg. sec. l.4 82-7(g)(2)(iv) (if multiple transactions in connection witl1 a cost-sharin g
arrangement involve platform , operating and other contribut ions of resources , capabilities or rights that are
reasonabl y anticipated to be interrelated , then determination of the arm 's-len gtl1charge for platform contribution
transactions and other transactions on an aggregate basis may provide the most reliable measure of an arm ' s-lengtl1
result).

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 A hybrid transaction is any transaction , series of transactions , agreement , or instrument
one or more payments with respect to which are treated as interest or royalties for Federal
income tax purposes and which are not so treated for purposes of the tax law of the foreign
country of which the recipient of such payment is resident for tax purposes or is subject to tax.
A hybrid entity is any entity which is either: (1) treated as fiscally transparent for Federa l income
tax purposes but not so treated for purposes of the tax law of the foreign country of which the
entity is resident for tax purposes or is subject to tax, or (2) treated as fiscally transparent for
purposes of the tax law of the foreign country of which the ent ity is resident for tax purposes or
is subject to tax but not so treated for Federa l income tax purposes.
The proposal grants the Secretary authority to issue regulations or other guidance as may
be necessary or appropriate to carry out the purposes of the proposal , including regulations or
other guidance providing rules for: ( I) denying deductions for conduit arrangements that invo lve
a hybrid transaction or a hybrid entity , (2) the application of this proposal to foreign branches ,
(3) applying this proposal to certain structured transactions , (4) denying all or a portion of a
deduction claimed for an interest or a royalty payment that , as a result of the hybrid transaction
or entity , is includ ed in the recipient's income under a preferential tax regime of the country of
residence of the recipient and has the effect of reducing the country's generally applicab le
statutory tax rate by at least 25 percent , ( 5) denying all of a deduction claimed for an interest or a
royalty payment if such amount is subject to a participation exemption system or other system
which provides for the exclus ion of a substantial portion of such amount , (6) rules for
determining the tax residence of a fore ign entity , and (7) exceptions to the genera l rule set forth
in the proposal.

Effective Date
The proposal is effective for taxable years beginning after December 31 , 2017.

4. Termination of special rules for domestic international sales corporations
Description of Proposal
The proposal repeals the specia l Code rules for DISCs and IC-DISCs.

In particular , the proposal terminates any corporate electio n to be treated as a DISC that
is in effect for the corporation ' s last taxable year beginning in 2018. The terminat ion is effective
for the corporation ' s immediately succeeding taxable year (and all years thereafter). The
proposal also prohibits any new corporate election to be treated as a DISC for any taxable year
beginning after December 31 , 2018.
As a result of the proposal's termination of existing corporate DISC elections and its
prohibition of new DISC elections , the special rules that apply to DISCs , IC-DISCs and their
shareho lders will no longer have effect. In particular , corporations will no longer be permitted
the exemption from corporate leve l tax allowed under the DISC rules , and individua l
shareho lders of corporations for which DISC elections are terminated w ill be subject to
shareho lder-level taxation in respect of the earnings of the corporations in which they are
shareholders under all the normal rules for shareholder -leve l taxation of corporate earnings.

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 The proposal includes a transition rule for share holders of corporat ions the DISC
elections of which are terminated. Under this transition rule , a shareholder of a corporation
whose DISC election is terminated is deemed to have received , in the first taxable year for which
the termination is effective , a distribution to which the section 995(b )(2) deemed distribution
rules apply. The proposal prov ides that this deemed distribution - and any actual distribution
after termination of the DISC election to the extent paid out of the corporatio n' s accumu lated
DISC income - is not a qualifying dividend under section l(h)(l l) (B). Conseq uently , an
individual DISC shareholder is not eligible for the prefere ntial tax rate allowed under section
l (h)(l l) with respect to such distributions.
Effective Date

The proposal is effective for taxable years beginning after December 31, 2018.
5. Surrogate foreign corporations not eligible for reduced rate on dividends
Description of Proposal

Any individual shareho lder who receives a dividend from a corporation which is a
surrogate foreign corporation as defined in section 7874(a)(2)(B) , other than a foreign
corporat ion which is treated as a domestic corporation under section 7874(b ), is not entitled to
the lower rates on qualified dividends provided for in section l(h).
Effective Date

The proposal is effective for dividends paid in taxable years beginning after December
31, 2017.

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 E. Modifications Related to Foreign Tax Credit System
1. Repeal of section 902 indirect foreign tax credits; determination of section 960 credit on
current year basis

Description of Proposal
The proposal repeals the deemed-paid credit with respect to dividends received by a
domestic corporation which owns 10 percent or more of the voting stock of a foreign
corporation.
A deemed-paid credit is provided with respect to any income inclusion under subpart F.
The deemed-paid credit is limited to the amount of foreign income taxes properly attributable to
the subpart F inclusion. Foreign income taxes under the proposal include income, war profits , or
excess profits taxes paid or accrued by the CFC to any foreign country or possession of the
United States. The proposal eliminates the need for computing and tracking cumulative tax
pools.
Additionally , the proposal provides rules applicable to foreign taxes attributable to
distributions from previously taxed earnings and profits , including distributions made through
tiered-CFCs .
The Secretary is granted authority under the proposal to provide regulations and other
guidance as may be necessary and appropriate to carry out the purposes of this proposal. It is
anticipated that the Secretary would provide regulations with rules for allocating taxes similar to
rules in place for purposes of determining the allocation of taxes to specific foreign tax credit
baskets. 8 16 Under such rules, taxes are not attributable to an item of subpart F income if the base
upon which the tax was imposed does not include the item of subpart F income. For example , if
foreign law exempts a certain type of income from its tax base, no deemed-paid credit results
from the inclusion of such income as subpart F. Tax imposed on income that is not included in
subpart F income, is not considered attributable to subpart F income.
In addition to the rules described in this section , the proposal makes several conforming
amendments to various other sections of the Code reflecting the repeal of section 902 and the
modification of section 960. These conforming amendments include amending the section 78
gross-up provision to apply solely to taxes deemed paid under the amended section 960.

Effective Date
The proposal is effective for taxable years of foreign corporation beginning after
December 31, 2017 , and for taxable years of U.S. shareholders in which or with which such
taxable years of foreign corporations end.

816

See Treas. Reg. sec. 1.904-6(a).

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 2. Separate foreign tax credit limitation basket for foreign branch income
Description of Proposal
The proposal requires foreign branch income to be allocated to a specific foreign tax
credit basket. Foreign branch income is the business profit s of a U.S. per son which are
attributable to one or more QBUs in one or more foreign countries.
Under this proposal , business profits of a QBU shall be determined under rules
established by the Secretary. Business profits of a QBU shall not, however , include any income
which is passive category income.

Effective Date
The proposal is effec tive for taxable years beginning after December 31, 2017.

3. Acceleration of election to allocate interest , etc., on a worldwide basis
Description of Proposal
This proposal accelerates the effective date of the wor ldwide intere st allocation rules to
apply to taxabl e years beginning after December 31, 2017 , rather than to taxable years beginning
after December 31, 2020.

Effective Date
The proposal is effect ive for taxab le years beginning after December 31, 2017.

4. Source of income from sales of inventory determined solely on basis of production
activities
Description of Proposal
Under this proposal , gains, profits , and income from the sale or exchange of inventory
property produced partly in, and partly outside , the United State s is allocated and apportioned on
the basis of the location of production with respect to the propert y. For examp le, income derived
from the sale of inventory property to a foreign jurisdiction is sourced who lly within the United
States if the property was produced entirely in the United States , even if title passage occurred
elsewhere. Likewise , income derived from inventory property sold in the United States , but
produced entirely in another country , is sourced in that country even if title passage occurs in the
United States. If the inventory property is produced partly in, and partly outside , the United
States, however , the income derived from its sale is sourced partly in the United States.

Effective Date
The proposal is effec tive for taxable years beginning after December 31, 2017.

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TREAS-17-0313-I-000651

 F. Inbound Provisions
1. Base erosion and anti-abuse tax

Description of Proposal
Tax on base erosion payments
Under the proposal , an applicable taxpayer is required to pay a tax equal to the base
erosion minimum tax amount for the taxable year. The base erosion minimum tax amount
means , with respect to an applicable taxpayer for any taxable year , the excess of 10-percent of
the modified taxable income of the taxpayer for the taxable year over an amount equal to the
regular tax liability (defined in section 26(b )) of the taxpayer for the taxable year reduced (but
not below zero) by the excess (if any) of credits allowed under Chapter 1 over the credit allowed
under section 38 (general business credits) for the taxable year allocable to the research credit
under section 4 I (a).
Modified taxable income means the taxable income of the taxpayer computed under
Chapter 1 for the taxable year, determined without regard to any base erosion tax benefit with
respect to any base erosion payment , or the base erosion percentage of any net operating loss
deduction allowed under section 172 for the taxable year.
A base erosion payment generally means any amount paid or accrued by a taxpayer to a
foreign person that is a related party of the taxpayer and with respect to which a deduction is
allowable , including any amount paid or accrued by the taxpayer to the re lated party in
connection w ith the acquisition by the taxpayer from the related party of property of a character
subject to the allowance of depreciation (or amortization in lieu of depreciation). A base erosion
payment also includes any amount that constitutes reductions in gross receipts of the taxpayer
that is paid to or accrued by the taxpayer with respect to: (1) a surrogate foreign corporation
which is a related party of the taxpayer , and (2) a foreign person that is a member of the same
expanded affiliated group as the surrogate foreign corporation. A surrogate foreign corporation
has the meaning given in section 7874(a)(2) , but does not include a foreign corporation treated as
a domestic corporation under section 7874(b).
A base erosion tax benefit means any deduction allowed with respect to a base erosion
payment for the taxable year.
Any base erosion tax benefit attributable to any base erosion payment on which tax is
imposed by sections 871 or 881 and with respect to which tax has been deducted and withheld
under sections 1441 or 1442, is not taken into account in computing modified taxable income as
defined above. If the rate of tax required to be deducted and withheld under sections 1441 or
1442 with respect to any base erosion payment is reduced , the above exclusion only applies in
proportion to such reduction.
The base erosion percentage means for any taxable year , the percentage determined by
dividing the aggregate amount of base erosion tax benefits of the taxpayer for the taxable year by
the aggregate amount of the deductions allowable to the taxpayer under Chapter 1 for the taxable
year, taking into account base erosion tax benefit for which a deduction is allowed under Chapter

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 I and by not taking into account any deduction allowed under sections 172, 245A or 250 for the
taxable year.
An applicable taxpayer means , with respect to any taxable year , a taxpayer: (A) which is
a corporation other than a regulated investment company , a real estate investment trust , or an S
corporation ; (B) which bas average annual gross receipts of at least $500 million for the threetaxable-year period ending with the preceding taxable year ; and (C) which has a base erosion
percentage of four percent or higher for the taxable year.
In the case of a foreign person the gross receipts of which are taken into account for
purposes of this proposal , only gross receipts which are taken into account in determining
income effectively connected with the conduct of a trade or business within the United States is
taken into account for these purposes. If a foreign person ' s gross receipts are aggregated with a
U.S. person ' s gross receipts for reasons described below (on aggregation rules) , the preceding
sentence does not apply to the gross receipts of any U.S. person which are aggregated with the
taxpayer's gross receipts.
All persons treated as a single employer under section 52(a) are treated as one person for
purposes of this proposal , except that in applying section 1563 for purposes of section 52, the
exception for foreign corporations under section l 563(b )(2)(C) is disregarded.
For purposes of this proposal , foreign person has the meaning given in section
6038A(c)(3).
Related party means: (i) any 25-percent owner of the taxpayer , (ii) any person who is
related to the taxpayer or any 25-percent owner of the taxpayer , within the meaning of sections
267(b) or 707(b)(l) , and (iii) any other person related to the taxpayer within the meaning of
section 482. For these purposes , section 318 regarding constructive ownership of stock applies
to these related party rules except that that " 10 percent" is substituted for " 50 percent " in section
318(a)(2)(C) , and for these purposes sections 3 I 8(a)(3)(A) , (B) and (C) do not cause a U.S.
person to own stock owned by a person who is not a U.S. person .
The proposal introduces additional reporting requirements under section 6038A. The
Secretary of the Treasury may prescribe regulations with regard to information relating to : (A)
the name , principal place of business , and country or countries in which each person is organized
or resident which: (i) is a related party to the reporting corporation , and (ii) had a transaction
with the reporting corporation during its taxable year , (B) the manner ofrelation between the
reporting corporation and the person referred to in (A) , and (C) transactions between the
reporting corporation and each related foreign person.
In addition , for purposes of information reporting under sections 6038A and 6038C , if the
reporting corporation or the foreign corporation to which section 6038C applies is an applicable
taxpayer under this proposal , the information that may be required includes: (A) base erosion
payments paid or accrued during the taxable year by the taxpayer to a foreign person which is a
related party of the taxpayer , (B) such information as the Secretary of the Treasury finds
necessary to determine the base erosion minimum tax amount of the taxpayer for the taxable
year , and (C) such other information as the Secretary of the Treasury determines is necessary.

/\MERICAi\

UST 001632

pVERSIGHT

243

TREAS-17-0313-I-000653

 The penalties provided for under sections 6038A(D)(l) and (2) are both increased to
$25,000.
Effective Date

The proposal applies to base erosion payments paid or accrued in taxable years beginning
after December 31, 2017.

/\MERICAi\

UST 001633

pVERSIGHT

244
TREAS-17-0313-I-000654

 G. Other Provisions
1. Taxation of passenger cruise gross income of foreign corporations and nonresident alien
individuals

Description of Proposal
The proposal creates a category of income defined as passenger cruise gross income ,
provides specific rules for determining the extent to which such income is effectively connected
with the conduct of a trade or business in the United States , and removes such income from
eligibility for the reciprocal exemptions of sect ions 873 and 883. As a result , effectively
connected passenger cruise income is subject to net basis taxation. A conform ing ame ndm ent to
the definition of effectively connected income for purposes of the gross basis tax on international
shipping income is made.
Passenger cruise gross income is all income from the operation of a commercial vesse l on
a covered voyage. A covered voyage is genera lly defined in as a voyage that wou ld be subject to
the passenger tax. An antiabuse provision is included such that if passengers embark a ship in
the Uni ted States and more than 10 percent of the passengers disembark in the United States , the
operation of the ship at all times between such events is treated as a covered voyage. A cruise in
wh ich all persons who embark in the United States later disembark in a foreign port , with no
intervening stops , is a covered voyage.
In determining whether income is from the operation of a passenger cruise , one includes
all income from actions inciden tal to the operation , as we ll as any amounts received with respect
to any on- or off-board activities , services or sales with respect to passengers , whether or not the
activities , sales or services are provided onboard the vessel. This includes any income from any
agreement with any person with respect to the provision of the activities , services , or sales.
To determine what portion of passenger cruise gross income is effectively connected , the
proposal requires a computation of the length (mea sured in calendar days) of the covered voyage
and the portion of the voyage that occurs in U.S. territorial waters , defined as 12 nautical miles
from low tide on the U.S . coastline or within the international boundary between the United
States and a contiguous country. The time that the vessel is considered to be in U.S. territorial
waters is compared to the total time of the voyage to arrive at the U.S. territorial waters
percentage of the gross income. For purposes of this comp utati on , any vessel in a U.S. port or
within U.S. waters for any portion of a calendar day is considered to be in U.S. waters for an
entire calendar day. Days during wh ich a ship is out of serv ice in a U.S. port for major repairs
are not counted. In addition , under no circumstances is a single calendar day to be counted
twice. Thus , a ship that leaves one U.S. port , exits U.S. waters and later the same calendar day
again enters U.S. waters is in U.S. waters only one day.
The proposal explicitly requires that any income considered to be effectively connected
under genera l rules without regard to the U.S. territorial percentage continues to be treated as
such , even if the U.S. territorial percentage of passenger gross income is a lesser amount.

/\MERICAi\

UST 001634

pVERSIGHT

245

TREAS-17-0313-I-000655

 Effective Date
The proposal is effective for taxable years beginning after December 31, 2017.

2. Modification of insurance exception to the passive foreign investment company rules
Description of Proposal
The proposal modifies the requirements for a corporation the income of which is not
included in passive income for purposes of the PFIC rules. The proposal replaces the test based
on whether a corporation is predominantly engaged in an insurance business with a test based on
the corporat ion's insurance liabilities. The requirement that the foreign corporation would be
subject to tax under subchapter L if it were a domestic corporation is retained.
Under the proposal , passive income for purposes of the PFIC rules does not include
income derived in the active conduct of an insurance business by a corporation ( 1) that would be
subject to tax under subchapter L if it were a domestic corporation ; and (2) the applicable
insurance liabilities of which constitute more than 25 percent of its total assets as reported on the
company ' s applicable financial statement for the last year ending with or within the taxable year.
For the purpose of the proposal's exception from passive income , applicable insurance
liabilities means , with respect to any property and casualty or life insurance business (I) loss and
loss adjustment expenses , (2) reserves (other than deficiency , contingency , or unearned premium
reserves) for life and health insurance risks and life and health insurance claims with respect to
contracts providing coverage for mortality or morbidity risks. This includes loss reserves for
property and casualty , life, and health insurance contracts and annuity contracts. Unearned
premium reserves with respect to any type of risk are not treated as applicable insurance
liabilities for purposes of the proposal. For purposes of the proposal , the amount of any
applicable insurance liability may not exceed the lesser of such amount ( 1) as reported to the
applicable insurance regulatory body in the applicable financial statement ( or, if less , the amount
required by applicable law or regulation) , or (2) as determined under regulations prescribed by
the Secretary.
An applicable financia l statement is a statement for financial reporting purposes that ( 1)
is made on the basis of generally accepted accounting principles , (2) is made on the basis of
international financ ial report ing standard s, but only if there is no statement made on the basis of
generally accepted accounting principles , or (3) except as otherwise provided by the Secretary in
regulations , is the annual statement required to be filed with the applicable insurance regulatory
body , but only if there is no statement made on either of the foregoing bases. Un less otherwise
provided in regulations , it is intended that genera lly accepted accounti ng principles means U.S.
GAAP.
The applicab le insurance regulatory body means , with respect to any insurance business ,
the entity establis hed by law to license, author ize, or regulate such insurance business and to
which the applicable financ ia l statement is provided. For examp le, in the United States , the
applicable insurance regulatory body is the State insurance regulator to which the corporation
provides its ann ual statement.

/\MERICAi\

UST 001635

pVERSIGHT

246
TREAS-17-0313-I-000656

 If a corporation fails to qualify solely because its applicable insurance liabilities
constitute 25 percent or less of its total assets , a United States person who owns stock of the
corporation may elect in such manner as the Secretary prescribes to treat the stock as stock of a
qualifying insurance corporation if (1) the corporation's applicable insurance liabilities
constitute at least IO percent of its total assets , and (2) based on the applicable facts and
circumstances , the corporation is predominantly engaged in an insurance business , and its failure
to qualify under the 25 percent threshold is due solely to specified circumstances involving such
insurance business. Specified circumstances include , for example , the fact that the company is in
runoff , that is, it is not taking on new insurance business (and consequently has little or no
premium income), and is using its remaining assets to pay off claims with respect to pre-existing
insurance risks on its books.

Effective Date
The proposal applies to taxable years beginning after December 31, 2017.

3. Repeal of fair market value of interest expense apportionment
Description of Proposal
The proposal prohibits members of a U.S. affiliated group from allocating interest
expense on the basis of the fair market value of assets for purposes of section 864( e). Instead ,
the members must allocate interest expense based on the adjusted tax basis of assets.

Effective Date
The proposal is effective for taxable years beginning after December 31, 2017.

/\MERICAi\

UST 001636

pVERSIGHT

247

TREAS-17-0313-I-000657

 ESTIMATED REVENUE EFFECTS OF THE CHAIRMAN' S MARK OF
THE "TAX CUTS AND JOB S ACT,"
SCHEDUL ED FOR MARKUP BY THE COMMITTEE ON FINANCE ON NOVEMBER 13, 2017
Fiscal Yea1·s2018 - 2027
[Billions of Dollars}
Prnvision

TREAS-17-0313-I-000658

JOINT COMMITTEE ON TAXATION
November 9, 2017
JCX-52- 17

Effective

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2018-22

2018-27

tyba 12/31/17

-8 1.0

-117.8

-122.7

-127.4

-132.3

-137 .5

-142.8

- 148.6

-154 .9

-161.0

-581.1

-I ,325.9

tyba 12/31/ 17
tyba 12/31/ 17
tyba 12/31/17

-58.3
96.4
0.9

-84.1
141.8
2.3

-86.6
146.4
5.7

-89.7
151.4
8.5

-92 .6
157.2
10.7

-95 .1
163.2
13.2

-98 .1
169.2
17. I

-IO 1.6
175.3
20.6

- 105.3
181.7
23.7

-108.4
188.2
28.3

-411.2
693.2
28.3

-919.8
1,570.9
131.2

tyba 12/31/17

-25.5

-43.1

-45 .3

-46.5

-47 .2

-46 .2

-47. 1

-50.1

-53.1

-56 .0

-207.3

-459.7

tyba 12/31/ 17

10.2

16.5

16.6

17.2

17.8

18.2

18.8

19.5

20.0

20.6

78.4

175.6

I. Tax Reform for Individuals

J-

UST 001637

A. Simplification and Refo nn of Rates, Standard Deductions ,
and Exemptions
I. I0%, 12%, 22.5 %, 25%, 32.5, 35%, and 38.5% income
tax rate brackets [1][2]..........................................................
2. Modify standard deduction ($12,000 for sing les,
$24,000 for married filing jointly , $18,000 for HoH) [2] .....
3. Repea l of deduction for personal exemp tions [2] ................ .
4. Alternative inflation measure (2) .................................... ......
B. Treatment of Business Income of Individuals
I. Allow 17.4% deduction to certain domestic non-service
passthro ugh income witJ1exception for service passthro ugh
income to taxpayer s with taxable income below $150,000
for join t filers, $75,000 for all others, phased out over next
$50,000 for joint filers, $25,000 for all others, indexed
with $50 round-down rnle; includes restriction based on
allocated wages (3) ...............................................................
2. Disa llow active pass-through losses in excess of
$500 ,000 for joi nt filers , $250 ,000 for all others ........... .......
C. Refonn oftJ1e Child Tax Credit
I. Modificat ion of child tax credit ($1,650 not indexed ;
refundable up to $ I ,000 indexed up to nearest $ I 00
base year 2017; $2,500 refundability threshold not
indexed ; $500 other dependents not indexed ;
phaseouts $500,000/$ 1 Millio n not indexed ; increase
eligibi lity to less than 18 years old) [2] ................................ .
2. Require valid Social Security number of each child to
claim refundable portion of chil d credit (2)...................... ....

:::c:
C,

tyba I 2/3 1/17
tyba 12/31/ 17

-26.4

-55.5

-57.0

-58.2

-59 .4

-62 .2

-63.5

-64 .7

-66.1

-68.8

-256 .4

2.9

2.8

2.7

2.6

2.7

2.6

2.5

2.6

2.7

I I.I

-

-5$1.,

i

~Q

 Page2

2018

2019

D. Simp lification and Refonn of Deductions and Exc lusions
I. Repea l of itemized deductions for taxes not paid or
accrued in a trade or business , interest on home
equ ity debt , non-disaster casua lty losses , tax
preparation expenses, and ce11ain miscellaneous
expenses (2) .................................. ........... .............................
tyba 12/31/17
60.5
108.0
2. Increase percentage limit for charitable contributions
of cas h to public charit ies ......................................................
cmi tyba 12/31/ l 7 - - - - - - - - - - - - - - - 3. Repea l of overa ll limitation on itemized deduct ions .............
tyba 12/31/ 17
---------------4. Modify exclusion of gain from sale of a principal
[4]
0.1
residence ................................................................................
saea 12/31/17
5. Repea l exclusion for employer-provided bicycle commu ter
fringe benefit. ................... ................. ....................... .............
tyba 12/31/ 17
[4]
[4]
6. Repea l exclusion for employer-provided qualified moving
expense reimbu rseme nts (5)(6) ........................ .....................
0.4
0.6
tyba 12/31/17
7. Repea l of deduction for moving expenses (other than
member s of the Armed Forces) .............................................
tyba 12/31/ 17
0.6
0.8
8. Modification to wagering losses ...... .............. ...... .......... .......
tyba 12/31/17
(4]
(4]
- 1.2
-8.1
E. Doub le Estate, Gift and GST Tax Exemp tion Amount.. ....... dda & gma 12/31/17
F. Repea l of A lternative Minimum Tax on Indi vidua ls ............
tyba 12/31/ 17
-6. 1
-74.3

Tota l of Tax Refonn fo1· Individual s ... .. ........ .. ... .. ... .. ................................

-29.5

-109.9

2020

2021

2022

2023

2024

2025

2026

2027

201 8-22

2018 -27

112.3

I 19.0

125.5

132.6

140.2

147.9

155.8

164.2

525.4

1,266.0

TREAS-17-0313-I-000659

Effective

- - - - - - - - - - - - - - - - Estimate Included in Item I.D. I. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Estimate Included in Item I.D.I. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 0.1

0.1

0. 1

0.1

0. 1

0. 1

0.1

0.2

0.4

1.1

[4]

(4]

(4]

[4]

[4]

(4]

(4]

(4]

[4]

[4]

0.6

0.6

0.6

0.6

0.6

0.7

0.7

0.7

2.7

6.1

0.9
[4]
-8.8
-65.2

0.9
(4]
-9.1
-68.7

1.0
(4]
-9.6
-72.5

1.0
[4]
-10.1
-75.9

I. I
[4]
-10.7
-79.7

I. I
(4]
-1 1.4
-83.9

1.2
(4]
-12.l
-88.0

1.2
[4]
-12.8
-92.3

4.2
0.1
-36.8
-286.9

9.7
0.1
-93.8
-706.7

-100.2

-99.2

-98. 1

-95.4

-92.2

-92 .6

-93 .7

-93.2

-435.9

-902.9

II . Business Tax Reform
A. Tax Rates
I . 20% corporate tax rate in 20 I9 and thereafter ......................
tyba 12/31/ 18
-15.2
-99.0
- 138.6
-141.9
-143 .2
-147.7
- 152.5
- 157.0
- 163.1
-171.0
-53 7.9
2. Reduction of dividends received deduction percentages .......
tyba 12/31/ 18
0.4
0.5
0.5
0.6
0.6
0.6
0.6
0.6
0.7
2.0
-4.7
-1.3
-1.3
-1.3
-1.3
-1.2
-1.1
-34.0
B. Repea l of Alternative Minimum Tax on Corporations [2]. ...
tyba 12/31/17
-153
-8.3
-4.5
C. Small Business Refonn s
I. Increa se section 179 expensing to $ I million with a
phaseout range beginning at $2.5 million and expand
definition of qualified property .............................................
ppisi tyba 12/31/17
-3.5
-6.3
-4.3
-2.6
-2.0
-1.5
-I.I
-0.9
-0.9
-0. 8
-18.8
2. Simplified accounting for small business ..............................
[7]
-8.7
-6.9
-2.6
-1.6
-1.3
-1.2
-1.2
- 1.3
-1.4
-1.4
-21.1
D. Cost Recovery , etc.
I. Limit net intere st deductions to 30% of adjus ted
24.6
39.2
30.6
30.4
29.2
28.7
28.4
30.4
32.8
34.2
taxable income , carryforward of denied deduction ...............
tyba 12/31/17
154.0
2 . Provide 100% bonus dep reciation for five
pp isa &
sppoga 9/27/ 17
-36.2
-40.4
-23.3
- 13.4
- I 1.0
14.9
6.4
-124.3
years (8) ................................................................................
8.8
22.3
10.6
3. Modifications to depreciation limita tions on luxury
automobi les and personal use property .................................
ppisa 12/31/ 17 · - • • • - • • • - • - • • • - • • • - • - • • • - - - - - - -Estimate Included in Item 11.D.2. - - - - - •• - • - ••.•••••••••.••
4. Modificat ions oft1·eatment of certa in fann property .............
ppisa 12/31/ 17
[9]
[9]
[9]
-0.1
-0.2
-0.3
-0.2
-0.1
[9]
[9]
-0.4
5 . Modification of net operating loss deduction .............. .......... lai tyba 12/31/ 17
14.8
14.4
11.3
15.6
23.9
30 .7
28.8
19.4
9. 1
2.5
79.8
0.6
3.7
4.5
6.7
6. Repea l like-kind exchanges excep t for real property ............ generally eca 12/31/17
1.0
1.3
1.8
2.3
2.9
5.6
7.0

-1,329.2
5.1
-40.3

-24.0
-27.6

J-

UST 001638

Prnvision

3~

-55
i«_

_;__

w

~~)

e

 Page 3

Effective

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2018-22

2018-27

TREAS-17-0313-I-000660

Prnvision

-2.7
-5.7
7. App licable recovery period for real property [ l 0]. ...............
ppisa 12/31/17
-0.3
-0.6
-0.6
-0.6
-0 .6
-0 .6
-0.6
-0.6
-0.6
-0.6
E. Business-Related Deduc tions
I. Repea l of deduction for income attributable lo domestic
production activities ................ .......... .............................. ......
tyba 12/31/ 18
-0 .3
3.4
7.9
8.7
9.1
9.5
10.0
10.3
10.5
11.5
28.8
80.7
2. Limitation on deduction by employers of expenses for
fringe benefits:
a. Meals and entertainment expenses [ 11]. ..........................
apoia 12/3 1/ 17
1.6
2.0
2.1
2.1
2.2
2.3
2.4
2.5
2.6
2.6
10.0
22.4
b. Qualified transpo1tation fringes [12). ..............................
apoia 12/3 1/ 17
1.7
1.7
1.3
1.5
1.8
1.8
1.8
1.9
1.9
2.0
7.9
17.4
F. Accounting Methods
I. Certa in special rules for taxable year of inclusion (in
genera l) ............... ........................ ................ .................... .......
tyba 12/3 l /17
1.9
2.0
1.6
1.6
0.6
0.2
0.2
0.2
0.2
0.2
7.8
8.9
2. Certa in special rules for taxable year of inclusion
(related to origina l issue discount) ........................................
tyba l 2/31/17
1.3
2.1
1.5
1.5
0.9
0.2
0.2
0.3
0.3
0.3
7.4
8.7
G. Business Credits
I. Modification of credit for clinica l testing expenses for
1.4
1.8
2.2
2.6
3.1
3.7
4.2
4.8
certain drngs for rare diseases or conditions......................... apoii tyba 12/31/ 17
0.5
5.3
8.6
29.7
[13)
[4]
0.2
0.4
0.5
0.5
0.5
0.6
0.6
0.6
0.6
2. Modification of rehabilitation credit... ..................................
1.5
4.3
3. Repea l of deduction for certain unused business credits .......
tyba l 2/31/17
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Negligible Revenue Effect - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - H. Banks and Financ ial Instrnments
I. Limitation on deduct ion for FDIC premiums ........................
tyba 12/31/ 17
0.8
1.8
1.4
1.4
1.4
1.5
1.5
1.5
1.6
1.6
6.8
14.5
2. Repea l of advance refunding bonds ......................................
ar bia 12/31/17
0.4
1.1
1.4
1.7
1.9
2.0
2.0
2.1
2.1
2.1
6.5
16.8
3. Cost basis of specified securities detennined without
regard to identification .......................................................... seaoda 12/31117
0.3
0.4
0.4
0.2
0.2
0.2
0.2
0.2
0.3
0.3
1.5
2.7
I. Compensation
I. Nonqualified deferred compensation ....................................
[14)
0.3
1.0
1.6
1.5
1.3
1.1
0.8
0.6
4.0
1.3
5.8
13.4
2. Modification of limitation on excessive employee
remuneration .........................................................................
tyba 12/31/ 17
0.3
2.0
1.2
I. I
I.I
1.0
1.0
1.0
0.9
0.8
5.7
10.4
3. 20% excise tax on excess tax-exempt organizat ion
executive compensation ........................................................
tyba 12/31/17
0.3
0.4
0.4
0.4
0.4
0.4
0.4
0.4
0.4
0.3
1.7
3.6
J. Insurance
I . Net operating losses of life insurance compan ies ..................
tyba 12/31/ 17
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Estimate Includ ed in Item II.D. 5 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - •
2. Repea l of small life insurance company deduct ion ............ ...
tyba 12/31/ 17
[4]
[4]
[4]
(4)
(4)
[4]
[4]
(4)
(4)
[4]
0.1
0.2
3. Adjustment for change in computing reserves ......................
tyba 12/31/17
0.2
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0. 1
0.1
0.6
4. Repeal of special rule for distributions to shareholde rs
from pre-1984 policyholders surplus account... ....................
tyba 12/31/ 17
(4)
(4]
[4]
(4)
(4)
(4]
(4]
(4)
(4)
(4]
(4]
5. Modificat ion of prorat ion rules for property and
casua lty insurance companies ......................................... ......
tyba 12/31/17
0.2
0.3
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
1.1
6. Repea l of specia l estimat ed tax payme nts .............................
tyba 12/31/17
(4)
(4]
[4]
(4]
(4]
[4]
[4]
(4]
(4]
[4]
[4]
7. Capita lization of certa in policy acquisition expenses ...........
tyba 12/31/ 17
0.4
2.1
2.4
2.5
2.7
3. 1
3.2
8.6
1.5
2.2
2.9
8. Tax reporting for life se ttlement transactions ........................ generally tyba 12/31/ 17
(9)
(9]
[4]
[4]
(4)
(4)
(4]
[4]
0.1
0. 1
[4]
~
9. Clarification of tax basis of life insurance contracts ............. generally teia 8/25/09- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Estimate Included in Item IJ.J.8. - - - - - - - - - - - - - - - - - - - - - - - - - - ~ 10. Excep tion to transfer for va luable consideration rules..........
ta 12/31/17
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Est imate Included in Item IJ.J.8. - - - - - - - - - - - - - - - - - - - - - - - - - -

UST 001639

J!.l

~

I

~-°'
->,

 Page4

Effective

201 8

2019

2020

2021

2022

2023

2024

2025

2026

2027

2018-22

K. Partnerships
I. Tax gain on the sale of a partnership interest on look-thru

2018-27

TREAS-17-0313-I-000661

Prnvision

saea 12/31/ 17
[4]
0.2
0.3
0.3
0.4
0.5
0.5
0.5
0.5
0.6
1.2
3.8
2. Expand the definition of substa ntial built-in loss for
purposes of partnership loss transfers ...................................
topia 12/31/17
[4]
[4]
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.2
0.5
3. Charitab le contribu tions and foreign taxes taken into
account in detenn ining limitation on allowance of
pat1ner's share of loss .......... .......... ................ .............. ...... ...
tyba 12/31/ 17
[4]
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.2
0.2
0.5
1.2
L. Detennination of Worker Classification and Infom1ation
Reporting Requirements
I. Worker classification safe harbo r and withholding [I SJ.......
[ 16]
-0. 1
-0.3
-0.3
-0.3
-0 .3
-0.4
-0.4
-0.4
-0.S
-0.S
-1.3
-3.4
2. Change in infonnation reporting threshold s [2] [ 17)............
pma 12/31/ 18
0.2
0.3
0.4
0.4
0.4
0.4
0.5
0.5
0.5
1.3
3.6
M. Tax-Exempt Organizations
I. Excise tax based on investment income of private
colleges and universities ........................................................
tyba 12/31/ 17
0.2
0.2
0.2
0.2
0.3
0.3
0.3
0.3
0.3
0.3
1.2
2.5
2. Name and logo royalties treated as unre lated business
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.3
taxable income ......................................................................
tyba 12/31/17
0.8
2.0
3. Unrelated business taxable income separately computed
generally
for each trade or business activity .........................................
tyba 12/31/ 17
0.3
0.3
0.3
0.3
0.3
0.3
0.3
0.3
0.3
0.4
1.6
3.2
4. Repea l tax-exempt status for profess iona l sports leagues .....
tyba 12/31/ 17
[4]
[4]
[4]
[4]
[4]
[4]
[4]
[4]
[4]
[4]
[4]
0.1
5. Modification of taxes on excess benefit transac tions
(intennediate sanctions) ........................................................
tyba 12/31/17
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Negligible Revenue Effect - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 6. Charitab le deduc tion not allowed for amounts paid in
exchange for co llege athletic event seating rights ....... ...... .... cmi tyba 12/31/ 17
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.9
1.9
N. Retirement Savings
I. Confonnity of contribution limits for employer-sponsored
pyba&
tyba 12/31/17
0. 1
0.1
0.1
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.7
1.7
2. Applicat ion of I0% early withdrawa l tax to governmental
457 plans ............. ............................... ......... ..........................
tyba 12/31/17
[9]
-0.1
-0.1
-0.1
[9]
[9]
[9]
[9]
[9]
[9]
0.2
-0.3
3. Eliminate catc h-up contributions for high-wage
pyba &
emp loyees ............................................................................. .
tyba 12/31/ 17
[4]
[4]
[4]
[4]
[4]
0.1
0.1
0.1
0. 1
0. 1
0.2
0.5

To tal of Business Tax Refo rm .................................................................

-29.0

-84.2

-103.0

-88.0

-75. 1

-52.2

-43.3

-60.4

-72. 8

-89.5

-378.5

UST 001640

t-

:::c:
C,

III. Internati onal Tax Reform
A. Estab lishment of Pa11icipation Exemption System for
Taxat ion of Foreign Income
I. Deduction for dividends received by domestic
corporations from certain foreign corporations ................... ..
2. Specia l mies relat ing to sa les or transfers invo lving
ce1tain foreign corporations ............................. .............. .......

-697. 2

[18]
dri tyba &
Ta 12/31/ 17

-17.7

-26.4

-18. 3

-20.1

-20.5

-20.4

-21.7

-22.7

-23.4

-24 .S

-103.0

0.2

0.2

0.5

0.8

1.2

1.4

1.6

1.5

1.7

2.2

2.9

--en
-2 ff:

tt ~

~~

 Page 5

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2018-22

2018-27

( 19)

45.8

22.7

6.9

7.3

8.1

16.3

30.1

41.6

I 9.1

-8.0

90.9

190.0

(18)

19.6

24.5

9.6

9.3

8.9

8.5

8.8

8.9

8.9

8.4

72.0

115.5

tyba 12/31/17

-1.3

3.7

6.8

6.4

0.3

-11.4

-15.8

-19.9

-24.6

-30.6

15.9

-86.4

(20)

-3.9

-7.3

-8.9

- 12.1

-8.3

-0.9

1.7

1.8

1.9

1.9

-40.6

-34.1

(18)

-0.1

-0.3

-0.3

-0.3

-0.4

-0.4

-0.4

-0.5

-0.5

-0.6

-1.4

-4.0

(18)

(9)

[9]

[9]

(9)

(9)

[9]

[9]

(9)

(9)

[9]

-0.2

-0.4

[ 18)

[9]

[9]

[9]

(9)

(9)

[9]

[9]

(9)

(9)

[9]

[9]

[9]

TREAS-17-0313-I-000662

Effective

3. Treatment of deferred foreign income upon transition
to par ticipation exemption system of taxation and
mandatoty inclusion at two-tier rate (5-pe rcen t rate
for illiquid assets , I 0-percent rate for liquid assets) ....... .... ...
B. Rules Rela ted to Passive and Mobile Income
I. Current year inc lusion of globa l intangible low-taxed
income , with deduction , by United States shareho lders ........
2. Deduction for foreign-derived intangible income derived
from trade or business within the United Sta tes ............. .......
3. Special rules for transfers of intangible property from
contrn lled foreign corporations to United States
shareho lders ............... ........................ ...................................
C. Other Modifications of Subpar t F Provisions
I. Elimination of inc lusion of foreign base company
o il related income ..... ............... ....... ......... ......... ............... ......
2. Inflat ion adjus tmen t of de minimis excep tion for
foreign base company income .............................................. .
3. Repea l of inclusion based on withdrawal of previously
excluded subpa rt F income from qualified investment... ......
4. Modificat ion of stock attribution m ies for detenn ining
status as a con trolled foreign corpora tion ..............................
5. Modification of definition of United Sta tes shareho lder .......
6. Eliminat ion of requirement that corporation must be
contrnlled for 30 days before subpa rt F inclusions

(19)
(18)

(18)
7. Look-tllnl rule for con trolled foreign corpora tions
made permanen t. ........ ........ ................ ........ ........ ........ ...........
8. Corporations eligible for deduc tion for divide nds from
controlled foreign corporations exempt from subpart F to
investments in United States property .................. .................
D . Prevent ion of Base Erosion
I. Denia l of deduction for intere st expense of Uni ted States
shareho lders which are members of worldwide affiliated
groups with excess domes tic indebtedness ................ ............
2. L imitation on income shifting through intangible
property transfers .......... ................................ .......... ..............
3. Certain related party amounts paid or accrued in
hybrid transactions or with hybrid entities ............................
4 . Tenn ination of spec ia l rules for domestic internat iona l
sa les corpora tion ..................................................................
.
5. Surrogate foreign corporations not eligib le for
reduced rate on dividends ............................. .......... ....... ........

· - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Estimate Included in Item Ill.A. I. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 0.2
0.2
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.8
1.4

(4)

0.1

[2 1)

[4]

(4]

(4)

[4]

[4]

[4]

[4]

[4]

0.2

0.4

-0.8

-1.2

-1.3

-1.4

-1.5

-1.7

-1.8

-2.0

-3.3

- 11.8

[l 8)

-0.1

-0.2

-0.2

-0.2

-0.2

-0.2

-0.2

-0.2

-0.2

-0.2

- 1.0

-2.0

tyba 12/31/17

0.5

0.8

0.7

0.8

0.7

0.9

1.0

0.9

1.2

1.3

3.5

~

Ta tyba 12/31/ 17

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.5

tyba 12/31/17

~

- (n
a:

· - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Estimate Includ ed in Item Ill.A. 1. - - - - - - - - - - - - - - - - - - - - - - - - - -~

tyba 12/31/ 18
dpa 12/31/ 17

UST 001641

Prnvision

0.1

0.3

0.5

0.6

0.6

0.6

0.6

0.7

0.7

0.7

2.0

0.1

0. 1

0.1

0.1

0.1

0. 1

0.1

0.1

0. 1

0.3

~

:::?-

~

 Page6

Effective

201 ~

2019

2020

2021

2022

2023

2024

2025

2026

2027

2018-22

-2.0
0.1

0.3

0.5

15.4

16.6

49.3

123 .5

0.1

0.1

0. 1

0.4

0.7

0. 1

0.2

0.2

0.2

0.5

I.I

(4)

[4)

[4)

(4]

(4)

0.2

0.2

2.3

7.0

19.0

25.9

-0.8

-34.0

88.2

104.4

- 170.9

-140.6

-116.5

- 127.1

- 167.3

-216.7

-726.2

-1,495.7

E. Modifications Related to Foreign Tax Credit System
I. Repea l of section 902 indirect foreign tax credits;
detennination of section 960 cred it on cuJTent year
2. Separate foreign tax credi t limitation baske t for
foreign branch income ......................................................... . .
3. Accelerat ion of election to allocate interest, etc. , on a
wor ldwide
4. Source of income from sales of inventory detennined
so lely on basis of production activi ties ............................... ..
F. Inbound Provisions
I . Base erosion and anti-ab use
G. Other Provisions
I. Taxation of passenger cruise gross income of foreign
corporations and nonres ident alien individuals ............. ........
2. Restr iction on insurance business exception to pass ive
foreign investment company rules ..................................... ... .
3. Repea l of fair marke t va lue method of interes t
expense appo rtionment. .......................... ...... .......... .............. .

( 18)

· - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Estimate Included in Item Ill.A.I. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

tyba 12/31/17

• - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Estimate Included in Item 111.B.1. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

tyba 12/31/ 17

-0.3

-0.6

-0.7

-0.4

tyba I 2/31/17

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

apoaa 12/3 1/I i

3.9

9.3

11.5

12.1

12.6

13.4

14.2

14.7

tyba 12/31/ 17

0.1

0.1

0.1

0.1

0.1

0.1

0.1

tyba 12/31/17

0. 1

0. 1

0. 1

0.1

0.1

0. 1

tyba 12/31/ 17

(4)

0.1

[4]

(4)

47.3

27.5

7.9

3.6

-11.2

- 166.6

-195.3

- 183.6

Tota l of International Tax Refo nn . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .... . .. .
NET TOTAL

2018 -27

TREAS-17-0313-I-000663

Prnvision

0.1

-2.0

Joint Committee on Taxa tion
NOTE: Details may not add to totals due to rounding. The date of enactment is generally assumed to be December I , 2017.

eca = exchanges comp leted after
gma = gifts made after
lai = losses accrned in
pma = payments made after
ppisa = property placed in service after
ppisi = property placed in service in
pyba = plan years beginning after
saea = sales and exchanges after
seaoda = sales , exchange s, and other
dispositions after

spa = services performed after
sppoga = specified plants plan ted or
grafted after
ta = transactions after
Ta = transfers after
topia = transfers of partnership interest:J:
after
tyba = taxable years beginning after

J--

UST 001642

Legend for "Effective" co lumn:
apoia = amounts paid or incurred after
ar = advance refunding
apoaa = amounts paid or accrned after
apoi i = amounts paid or incuJTed in
bia = bonds issued after
cmi = contributions made in
DOE = date of enactment
dda = decedents dying after
dpa = dividends paid after
dri = dividends received in

(!:'

<en
ua:
(L W
LL >

[Footnotes for JCX-52-17 appear on the following pages]

~~

 TREAS-17-0313-I-000664

Page 7

Footnotes for JCX-52- 17:

u

UST 001643

[I] The parameter s for the end of the 22.5 % and 32 .5% rate brack ets, the begin ning of the 38.5% rate bracket , and the standard deduct ion amount use 2018 as the base year. Other indexed param eters are
adjusted for inflation from their 2017 values using the chain ed CPI- U as the inflation measure to determin e 2018 values.
[2] Estimate includ es the following outlay effects:
2018
2019
2020
202 1
2022
2023
2024
2025
2026
2027
2018-22
20 18-27
I.I
1.2
1.2
1.2
1.2
1.2
1.0
1.3
1.3
4.4
10.6
10%, 12%, 22.5% , 25% , 32.5 , 35%, and 38.5% tax brackets ...................................
Modify standard deduction ............................................. ..........................................
9.4
9.7
10.2
10.4
10.5
10.6
10.7
10.9
I I.I
39.7
93.6
Repea l per sonal exemption s ................... ............ ............................ ............ ..............
-10. 8
-15.9
-16.4
-16.6
-16.9
-I 7.2
-I 7.4
-I 7.7
-17 .9
-I 8. 1
-76.6
-164 .9
Al ternat ive inflati on methods .................... .............. ............................ ............ ..........
-0. 3
-0.6
-1.3
-1.6
-2 .1
-2.5
-3.1
-3.6
-4.0
-3.9
-19.2
14.1
14.3
14 .2
14.2
15.7
15.7
15.6
15.6
16.9
56.7
136 .2
Modification of child tax credit .................. ........... ........................................ ............
C han ge in infonnation repo rting threshold s .............................................................
[22)
[22)
[22)
[22)
[22)
[22)
0.1
0 .2
[22 )
[22)
R equire valid Soc ial Security numb er of eac h ch ild to claim
-I I.I
-24.1
refundable portion of child credit. ....................................................................... ...
-2.9
-2.8
-2 .7
-2.6
-2.7
-2.6
-2.5
-2.6
-2.7
Repea l of itemized deduction s for taxes not paid or accrued in a trade or
business , interest on home equity debt , non-disaste r casua lty losses and
certai n misce llaneous expenses .................. ........... ......................... ............... .........
-0.4
-0. 3
-0.4
-0 .4
-0.4
-0.4
-0.4
-0.4
-0.5
-1.5
-3.7
Repea l of alterna tive min imum tax on corporations ............. ................ .. ..................
10.8
3.8
-0.4
-0.3
13.9
13.9
[3] Es timate includ es the following budget effects:
2018
2019
2020
202 1
2022
2023
2024
2025
2026
2027
2018-22
20 18-27
-6.8
2.1
Total Reven ue Effec t (SECA interaction ) ...... ................................... .......... .......... ....
-1.3
-1.8
-1.6
-1.3
-0 .9
1.7
2.7
1.9
1.4
I. I
On-budget effects ...................................................................................................
-0.2
-0.4
-0 .3
-0 .3
-0.2
0.3
0.6
0.4
0.3
0.2
-1.4
0.4
Off-budg et effec ts ..................................................................................................
-1.0
-1.4
-1.2
-1. 0
-0 .7
1.4
2.2
1.5
I.I
0.9
-5.4
1.6
[4) Ga in of less than $50 million .
[5) Estim ate includ es the following budget effec ts:
2018
2019
2020
202 1
2022
2023
2024
2025
2026
2027
2018-22
20 18-27
Total Reven ue Effec t. .......... ............. ....... .......... ........................................ ................
0.4
0.6
0.6
0.6
0.6
0.6
0.6
0.7
0.7
0.7
2.7
6. 1
On-budg et effec ts ........................ ............ ............................ ...................................
0.3
0.4
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.6
2.2
4.8
Off-budg et effec ts ................................................................................................ ..
0.1
0.1
0.1
0. 1
0.1
0.1
0.1
0.1
0. 1
0.1
0.6
1.3
[6] Estim ate includ es policy that retain s exclusio n under sec tion 2 l 7(g) (related to membe rs of the Armed Forc es).
[7] The expan sion of the thresho ld allowing the use of the cash method , the creation of an exempt ion from the requir ement to use inventories , and the expan sion of the exception from the un ifonn cap italizatio11
rules are effective for taxable years beginn ing after Decemb er 31, 20 17. The expansion of the excep tion from the requir ement to use the percentag e of completion method is effect ive for con tracts entered
into after Decemb er 3 1, 2017 , in taxable years ending after such date. The threshold applicabl e to each provision is ind exed for inflation for taxable years beginning after December 3 1, 2018.
[8] Estim ate con tains interaction wi th the sec tion 179 expa nsion in ll.C. I.
[9] Loss of less than $50 million .
[ I OJ Estimate includes the following provisions: for nonresidentia l real prop erty, reduc e the app licable recovery period to 25 years from 39 years; for reside ntial renta l property , reduc e the applicabl e recovery
period to 25 years from 27 .5 years; for qualified impro vemen t prope rty, reduce the applicable recovery period to IO years from 15 years.
[ 11] Estim ate includ es the followi ng budget effec ts:
2018
2019
2020
202 1
2022
202 3
2024
2025
202 6
2027
20 1!M=72018-22
2.3
2.4
2.5
2.6
1.6
2 .0
2.1
2. 1
2 .2
2.c
10.0
On-budg e!
1.9
2.0
2. 1
2. 1
I. ~
1.6
1.7
1.8
2.2
8.2
Off-budg et effec ts ..................................................................................................
0 .4
0.4
0.4
0.4
o.~
0.4
0.4
0.4
OA
0.4

m

u

~

en

v CC
(L W
[Foo/no/es for Table JCX-52-1 7 conlinu e on /he following page]

LL >

~~

 Footnotes for JCX-52- 17 continued:

TREAS-17-0313-I-000665

Page 8

[ 12) Estimate includes the following budget effects:
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2018-22
2018-27
1.5
1.7
Total Revenue Effect. .................................... ...........................................................
1.9
2.0
7.9
17.4
1.3
1.7
1.8
1.8
1.8
1.9
On-budget effects .................................................... ...............................................
1.0
1.2
1.3
1.3
1.4
1.4
1.5
1.5
1.5
1.6
6.4
13.9
Off-budge t effects ..................................................................................................
0.3
0.3
0.3
0.3
0.4
0.4
0.4
0.4
0.4
0.4
1.6
3.5
[ 13) Generally effective for amounts paid or incurred after December 31, 2017, with a transition rule providing that for buildings owned or leased al all times after December 31, 2017, the 24-mo nth
period for makin g qualified rehabilitati on expenditures begins no later than 180 days after the date of enactment, and the repeal is effective for suc h expend itures paid or incurred after the
end of the taxable year in which such 24-month period ends.
[14) Generally effective for amounts attributable to services performed after December 31, 2017. Amounts attributable to services perfonned before January 1, 2018 , are included in income at the
later of vesting (as defined under the proposal) or 2026.
[ I SJ Estimate includes the following budget effects:
2018
2019
2020
202 1
2022
2023
2024
2025
2026
2027
2018-22
2018-27
Total Revenue Effect. ................................................ ........................................ ........
-0. 1
-0.3
-0.3
-0.3
-0.3
-0.4
-0.4
-0.4
-0.S
-0.S
-1.3
-3.4
[9]
-0.1
-0.1
-0.1
-0.1
-0.1
-0.1
-0.1
-0.1
-0.1
-0.3
On-budget effects .................................................................................................. .
-0.7
Off-budget
-0.2
-0.2
-0.3
-0.3
-0.3
-0.3
-0.3
-0.4
-0.4
-1.0
-2.7
[9]
[ 16) Genera lly effec tive for services perfonned after December 31, 2017, though section 7706( d)( I)(C) requirements are not to be enforced for compensation paid prior to 180 days after the date of enactment.
[l 7) Estimate includes the following budget effects:
2018
2019
2020
202 1
2022
2023
2024
2025
2026
2027
2018-2"
20 18-27
I.~
Total Revenue Effect.......... ................ .................... ........................................... ........
0.2
0.3
0.4
0.4
0.4
0.4
0.5
0.5
0.5
3.6
On-budget effects ...................................................................................................
0.1
0.2
0.2
0.2
0.2
0.2
0.2
0.3
O.~
0.7
1.9
0.3
O.f
Off-budget
0.1
0.2
0.2
0.2
0.2
0.2
0.2
0.2
1.7
[ 18) Effective for taxable years of foreign corpora tions beginning after December 31, 2017, and to taxable years of United States shareho lders with or with in which such taxable years of foreign corporations end
[ 19) Effect ive for the last taxable year of foreign corporations beginning before Janua1y I , 20 18, and all subsequent taxable years of foreign corpora tions and for the taxable years of a United States shareholder
with or within which such taxable years end.
[20) Effective for distributions made in taxable years of foreign corporations beginning after December 31, 201 7, and for taxable years of United States shareho lders with or within which such taxable years of
foreign corpora tions end.
[21] Effective for taxable years of foreign corporations beginning after December 31, 2019, and to taxable years of United States shareholders with or within which such taxable years of foreign corpora tions end
[22) Increase in outlays of less than $50 million.

UST 001644

J-

:::c:
C,

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< 00

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(L W
LL >

~~

 RE: SFC Chairman's Mark and Revenue Table
From :

"Lawless, Julia (Finance)" <julia_lawless@finance.se nate.gov>

To:

"Dunn, Brendan (McConnell)" <brendan_dunn@mcconnell.senate.gov>, "Prater, Mark
(Finance " <mark rater finance .senate.gov>, "Knight, Shahira E. EOP/WHO"
<
, "Muzinich, Justin" <justin.muzinich@trea sury.gov>

Cc:

"Khosla, Jay (Finance)" <jay_khosla@finance.senate.gov>, "Hickman, Bryan (Finance)"
<bryan_hickman@finance .senate.gov>, "Niederee, Katie (Finance)"
<katie_niederee@finance.senate .gov>

Date :
Attachments:

Thu, 09 Nov 2017 20:46 :46 -0500
11.9.17 Charge and Response.pdf (130.78 kB) ; 11.9.17 Real World Examples.pdf (128
kB); 11.9.17 Policy Highlights.pdf (130.35 kB); 11.9.17 Committee History.pdf (467.15 kB)

Attached, please find additional documents :
Charge & Response
Real World Examples
Policy Highlights
SFCCommittee History in Tax Space
Let us know if yo u need anything else.
Julia Lawless
Communications Director
U.S. Senate Finance Committee
Chairman Orrin Hatch (R-Utah)
From: Dunn, Brendan (McConne ll)
Sent: Thursday, November 9, 2017 8:27 PM
To: Prater Mark Finance <Mark _Prater@finance.senate.gov>; Knight, Shahira E. EOP/WHO
; Justin. Muzinich@ t reasury .gov
Cc: Khosla, Jay (Finance) <Jay_Khosla@finance. senate.go v>; Hickman, Bryan (Finance)
<Bryan_Hickman@finance .senate.gov>; Niederee, Katie (Finance)
<Kati e_Niederee@finan ce.senate .gov>; Lawless, Julia (Finance) <Julia_Lawless@finance.senate .gov>
Subject: RE:SFCChairman's Mark and Revenue Tab le

Sounds good

Brendan M. Dunn
Policy Adv isor and Couns el
Offic e of the Senate Majority Leader
From : Prater, Mark (Finance)
Sent : Thu rsday, November 09, 2017 8:27 PM
To: Dunn,B
EOP/WHO
; Justin .Muzinich@treasury.gov
Cc: Khosla, Jay (Finance) <Jay Khosla@fin ance.senate.gov >; Hickman, Bryan (Finance)
<Bryan Hickman@finance.senate.gov >; Niederee, Katie (Finance)
<Katie Niederee@finance .senate .gov>; Lawless, Julia (Finance) <Julia Lawless@finance .senate.gov >
Subject: RE:SFCChairman's Mark and Revenue Table

Have to have the notice approved before it goes out . I'l l give you the high sign after that occurs .
Thanks.

TREAS-17-0313-I-000666

 From : Dunn, Brendan (M cConnell)

Sent : Thu rsday, November 09, 2017 8:25 PM
finance .senate. ov >; Knight, Shahi ra E. EOP/WHO
<
; Justin.Muzinich@treasury .gov
Cc: Khosla, Jay (Finance) <Jay Khosla@finance .senate.gov >; Hickman, Bryan (Finance)
<Bryan Hickman@finance .senate.gov >; Niederee, Katie (Finance)
<Katie Niederee@finance .senate.gov >; Lawless, Julia (Finance) <Julia Lawless@finance .senate .gov>
Subject: RE: SFCChairman's Mark and Revenue Table

To: Prater Ma rk Finance <Mark Prater

So OK to flip at 8:50?
Lawless, can you fl ip the other 2 documents?
M aybe give people a taste on t he Charge/ Response and 2 pager (that everyone has)?

Brendan M. Dunn
Policy Advisor and Counsel
Offic e of the Senat e Majority Leader
From : Prater, Mark (Finance)
Sent : Thursday, November 09, 2017 8:20 PM
To: Dunn, Brendan McConnell <Brendan Dunn mcconnell.senate. ov>; Knight, Shahira E.
EOP/WHO
; Justin .Muz inich@treasury .gov
Cc: Khosla, Jay (Finance) <Jay Khosla@finance .senate .gov>; Hickman, Bryan (Finance)
<Bryan Hickman@finance .senate .gov>; Niederee, Katie (Finance)
<Katie Niederee@finance .senate .gov>; Lawless, Julia (Finance) <Julia Lawless@finance .senate .gov>
Subject: SFCChairman's Mark and Revenue Table

FYI..
Please hold tight for 30 minutes. We want to send to SFC member offices first per committee
pro t ocol. Thanks.

AM

pvERJ
S

11
~ ,

r

TREAS-17-0313-I-000667

 •♦TAX
-♦

REFORM

Charge
and
Response
The SenateFinanceCommittee's tax proposalis a crit ical step toward achieving pro-American,
fiscally responsible tax
reform.This proposalis t he culmination of yearsof work at the Finance Committee,including more t han 70 hearings,
multiple working groups, option papersandreport s. This comprehensive
planwas also craftedbasedon a unified tax
reformframework, put forth in Septemberwith t he administration andother congressiona
l leaders.
The chairman'smarkwill cont inuethroughregularorder, includinga robustvetting andmarkupprocessin the Finance
Committee- all cruciallyimportant steps as Republicans
advancetheir sharedgoalof delivering strong,pro-growthtax
reformto the American people.
The following chargeandresponse is designed to highlight current attacks and suggestedresponsesto help set t he record
straight and put an endto t he false narratives on tax reform.

CHARGES:
More
Tax
CutsfortheRich
&Corpo
rateAmerica
•
•
•
•

TaxCutsfor the Wealthy
TaxBreaksfor CorporateAmerica
SmallBusinessLoophole to Benefitthe Rich
DeathTax ChangesBenefit the Wealthy

CHARGE: The Finance Committee bill is just a tax cut for the wealthy.
RESPONSE
· False. The Finance Committee mark cuts tax rates acrossthe board. The mark alsorepealsa number
of tax credits and benefits, includingmany t hat predominantly benefit wealthy taxpayers, so t he lowerrate will apply to a
largerincomebase.
The bill also:
• Nearlydoubles t he standarddeduction from $6,350 to $12,000 for individuals,from $12,700to $24,000for married
couples,from $9,300 t o $18,000 for single parents.
• Expandsthe childtax credit from $1,000 to $1,650 andallows manymore parents to claimt he credit by substantially
lifting existing caps
Combined, these reformsmean lowertaxes andbiggerpaychecksfor tens of millions of middle-classAmericanfamilies.
In addition,the mark doesnot shift tax burdenfrom higher-incomeearnersto those in lowerbracket s, maintaining t he
progressivityof the current tax code.

BOTTOM
LINE~TheFinanceCommittee's primary focus is to provide much-neededtax relief to middle· and lower·
incomefamiliesandindividuals, NOTto cut taxes for the wealthiestAmericans.

UST 001647

TREAS-17-0313-I-000668

 CHARGE:
The FinanceCommitteemarl<is just another tax breakfor major
corporations.
Overthe last two decades,the vast majorityof America'sforeign competitors haveaggressively
RESPONSE:
reducedtheir corporatetax rates whilethe UnitedStates has steadily maintaineda 35 percentrate, the highest
corporatetax rate in the industrializedworld.
TheFinanceCommitteemarklowersthe corporatetax rate to 20 percent,which is roughlyon parwith America's
trading partners.And,the markpaysfor muchof the rate reduction with a combinationof increasedeconomic
growthand corporatetax offsets. Themarkwill also movethe United States from a worldwide tax systemto a more
territorial system,allowingAmerican companiesto bringforeign earningsbackto the United States to invest in our
economywithout facingunfairand uncompetitivetax consequences.

8 OTTO
M LINE. Thecommittee's corporatetax reformswill increasewagesfor middle-class workers, create
moreU.S.jobs, and preventmorejobs and capitalfrom beingshippedoverseas. In fact, the Councilfor Economic
Advisorsestimatedthese reforms could raise householdincomesby $4,000 peryearor more.

CHARGE:
The bill creates a massiveloopholeto allow wealthy peopleto pay
taxes as businessentities.
RESPONSE
: False.TheFinanceCommitteemarkwill allowsmall businessownersto deducta portionof their
"pass-through
" businessincomeon their individualtax returns.Thedeductionwill not apply to normalcompensation
paidto businessownersandwill be subjectto strict requirementsto preventhigh-incomeearnersfrom recharacterizingpersonalincomeas businessincomein orderto usethe deduction.

BOTTOMLINE Small businessesemploy nearlyhalf of all U.S.workersandcreatethe majorityof newAmerican
jobs.TheFinanceCommitteeproposalprovidesmuch-needed
tax relief for small businesses,allowingthem to expand,
invest,hire moreworkersandincreasewages,while also preventingpeoplefrom gamingthe system.
CHARGE:
The marl<repeats the mistakes of l(ansas' ..pass-through"tax
system
RESPONSE:
False. Comparingthe Kansastax planto the FinanceCommitteeproposalis an applesandoranges
comparison.Whileit appearedthat somepeople in Kansaswere able to gamethe systemin orderto take advantage
of a zeropercentpass-throughrate,the FinanceCommitteeproposaldoesnot exemptpass-throughincomefrom
taxation. Instead, it allows small businessownerswith pass-throughincometo deducta portionof that incomeon
their individualreturns.The mark includessafeguardsto preventpeoplefrom re-characterizingpersonal incomeas
businessincomein ord.er to usethe deduction.
BOTTOMLINE: TheFinanceCommitteeproposalincludesa simpleand safe meansof providingmuch-needed
tax relief for small businesses- the enginesof Americanjob creation,while also preventingpeoplefrom gamingthe
system.
CHARGE:Changesto the death tax will simplybenefit the rich.

LJ.s.
Senate Committtee on Finance

UST 001648
pVERSIGHT

TREAS-17-0313-I-000669

2

 RESPONSE:
Thedeathtax, an unfairdoubletax, negativelyimpactsfamily-ownedbusinessesandfarms
throughoutthe country, burdeningthose who haveworkedtheir entire livesto buildsuccessful companiesand create
jobs.Thesefamilies shouldnot haveto fear doubletaxationfrom Washingtonwhenthey passdowntheir life's workto
the next generation.
WhilemanyDemocrats- includingSens.RonWyden,Bill Nelson,Joe Manchin
, DianneFeinsteinand Patty Murrayhaveacknowledged
this reality andvotedto repealthe deathtax, the FinanceCommittee markwould simplyincrease
the deathtax exemption to reduceuncertaintyfor family-ownedfarms andbusinessesby making it less likelythat
Washingtonwill imposean unnecessaryand unfairlayerof tax on Americanswho want to pass on their life's workto
the next generation.

BOTTOMLINE· Thedeathtax punishesAmericansfor building up farms and businessesandpassingthem on
to future generations.TheFinanceCommitteemark mitigatesmuchof the deathtax's adverseimpact.

CHARGES:
More
Tax
Cuts
fortheRich
&Corporate
America
•
•
•
•
•

BracketChangesRaiseTaxeson Low-IncomeAmericans
EliminatingItemizedDeductionsHurts MiddleClass
Changesto SALT Harmfulto Middle Class
Changesaffecting MortgageInterest DeductionsHurt Middle-ClassHomeValues
Can't Guaranteea Middle-C
lass TaxCut

CHARGE:
The FinanceCommittee plan raises taxes on the poor.

RESPONSE:
Thecommittee'schief focus is loweringtaxes for the poorand middle class. Bynearly doublingthe
standarddeduction,the markreducesthe tax burdenfor tens of millionsof lower-and middle-income
families and
greatlyexpandsthe zeropercenttax bracket.In addition,the mark lowersthe current 15 percentbracketto 12 percent and maintains the 10 percentbracketto coverthose who rely on itemizeddeductionsinsteadof the standard
deductionto qualifyfor the bottom rate.
Thecommitteeproposalalso significantlyincreasesthe ChildTaxCreditfrom $1,000 per child to $1,650 perchild,
andmaintainsother provisionsthat are importantto low-and middle-incomefamilies.

BOTTOMLINE: Low-incomeAmericans will be someof the biggestbeneficiariesof the FinanceCommitteetax
reformmark.

CHARGE:This proposalhurts the middleclass by eliminatingitemized
deductions.

RESPONSE:
False. TheFinanceCommitteemark providesacross-the-board
tax relief, with a particularfocus on
hardworking
, middle-class Americans
.

U:-S.SenateCommitttee on Finance

UST 001649
pVERSIGHT

3
TREAS-17-0313-I-000670

 Theeliminationof most itemizeddeductionswill haveNOimpact on the nearly three-quartersof Americanfamilies
who currently itemize.Forthe less than 30 percentof taxpayerswho itemiie today,the benefitof lowertax rates, a
largerstandarddeductionand enhancedchild tax creditswill largelyoutweighthe loss of itemizedded.uctions.
Importantly, the markretains the deductionsfor homemortgageinterest andcharitablecontributions, two of the
most popularand importantdeductionsfor the middleclass.

BOTTOMLINE~Everymajorprovisionwithin the tax codehas an importantconstituencyandconsequence.The
FinanceCommitteemarkstrikes an appropriatebalancebetweenimportantdeductionsthat shouldbe maintained
andthose that shouldbe repealedin orderto reducethe overall tax burdenon middleclass Americans.
CHARGE:Eliminatingthe state and localtax (SALT)deduction,one of the biggest of itemized deductions,will hurt the middleclass.

RESPONSE:
The FinanceCommittee'schieffocus is on providingrelieffor low-and middleincomeAmericans.
TheSALTdeductiondisproportionate
ly benefitsthose who makemorethan $500,000 peryearas well as those who
livein high-taxcities and states. In fact, one-thirdof the deduction's benefits goto the top one percentof earners,
while practicallyno benefitgoesto those in the bottom half.
Nearly three-quartersof Americanfamilies alreadyclaimthe standarddeduction,meaningthat repealingthe SALTde·
ductionwill haveabsolutelyno impact on them. Thevast majorityof middle-classfamilieswho currently itemizetheir
deductionsshould fare better with other changes,includinga lowertax rate, largerstandarddeductionandenhanced
Child Tax Creditthan with the SALTdeduction.

BOTTOMLINE: Repealingthe SALTdeduction,which has a veryhefty pricetag in terms of revenue,will help
reducethe tax burdenon the middle classwhile mostly impactinghigh-incometaxpayersin states andcities with
disproportionately
hightax rates.
CHARGE:Changesto the mortgageinterest deductionwill hurt the value of
middle-classhomesand the broaderreal estate market.

RESPONSE:
The homemortgageinterest deductionis explicitlyretainedin the FinanceCommitteemark.
Whilefewer people will claimthe mortgageinterest deductionunderthe FinanceCommitteeproposaldueto the
expandedstandarddeduction,most middle-classfamilies will see a significantdecreasein their tax liability,in most
casesexceedingthe itemizeddeductionsthey claimtoday,ultimately loweringtheir tax bill.
Historically, growth in the housingmarketcorrelates verycloselywith growth in the economyand not with tax rates.
And, largerafter-tax paychecksfor middle-classworkersanda strongereconomywill strengthen,not weaken, housing markets.

BOTTOMLINE: Themarkwill maintainthe core of the homemortgagewithout harminghomevalues or the
housingmarket.

/\ U.S.SenateComm itttee on Flnance
UST 001650

pVERSIGHT

TREAS-17-0313-I-000671

4

 CHARGE:The Finance Committee tax plan does not cut taxes for the middle
class.
This is simply false. Underthis proposal, a typical familyof four earningthe medianfamily income
RESPONSE~
(around$73,000) will see its taxes cut by nearly $1,500.Thebill will also reducethe tax burdenon small businesses
and put Americancompanieson a level playingfield with their foreign competitors in orderto growthe economyand
create morejobs hereat home.

CHARGES:
AFiscal
Fiasco,
Lacks
Permanence
&IsPartisan
•
•
•
•
•

TaxReformWill AddTrillionsto the Debt
TaxCuts Payfor Themselves
LacksPermanence6: Resultsin Uncertainty
PartisanExercise
Written in the Darkof Night

CHARGE:This proposal is fiscally irresponsible,adding trillions to the debt.
RESPONSE
: The proposalwill makeconcrete reformst o the brokenU.S.tax codeand put the Americaneconomy
backon a growth t rack.Theplan is mostly paidfor with a combinationof economicgrowthand reformst hat broaden
the tax baseby eliminat ing special interest tax breaks.
Thistax plan is an investmentin the middle class - onethat will producemorejobs, higherwagesanda strongerand
morecompetitiveAmericaneconomy.

CHARGE:Since tax reform is being done through reconciliation, the bill will
lacl<permanence and sunset in 10 years.
RESPONSE
: Whenwe crafted this mark,one of our goals was to provideAmericanswith as muchcertainty and
tax permanenceas possible. Giventhat this is a once-in-a-generationopportunity to makemuch-neededchangesto
the tax code,getting pro-growthand pro-middle-classtax reformpolicies in the bookswith as muchpermanenceas
possible is the best way forward.
CHARGE:Republicansare excluding Democrats by doingtax reform through
reconciliation.
RESPONSE
: Reconciliationis simplya proceduraltool that removesthe 60-votethreshold for certain types of
legislation in the Senate.If youlookbackto majort ax bills in recentdecades,you'll seethat most of them were done
throughreconciliationandthat they ultimatelyhadbipartisansupport. Republicanshaveinvited andwelcomedthe
support of Democrats.
ManyDemocratsare on the recordin supportof manyof the veryreformscontainedin the FinanceCommittee mark,
including middle classtax relief, reducedcorporatetax rates, and movementto a territorial tax system.This suggests
their complaintsaboutthe markare moreabout politics than policy.

BOTTOMLINE~Nothing aboutthe reconciliation processprecludesDemocratsfrom engagingin tax reform.
Thedecisionto not participatein this endeavoris theirs alone. Theclaimthat reconcilia
t ion somehowpreventsthem
from participatingis a transparentexcusefor putting politics aheadof reform.

/\ LJ.S. Senat e Committtee on Finance
UST 001651

pVERSIGHT

TREAS-17-0313-I-000672

5

 CHARGE:Senatorsdon't even l<nowwhat's in the proposal.
RESPONSE:
Membersof the SenateFinanceCommittee,alongwith membersoff the committee, havebeen
meetingfor months to addressgoals and concerns.Themark was drafted with the direct input of FinanceCommittee
members.
Therewill be a full committee markupand a fair and robustfloor debate. Everymemberof the Senatewill haveample
opportunityto readthe bill, opineabout its contents, and offer changes.

BOTTOM
LINE: Thereare no legitimatecomplaintsto be madeabout process.Thisentire endeavorhas been
transparentandyears in the making.

For more informat ion, visit t he Senate Finance Commrttee 's website at finance .se nate .gov/tax refo rm.

/\r U.S.SenateCommitttee on Finance
UST 001652
pVERSIGHT

6
TREAS-17-0313-I-000673

 ·•TAX
· CUTS&
JOBS
ACT

Real
World
Impact
How the Senate proposalwill help Americans

Fam
ilyoffour
earning
$73
,000
► A family of four with incomeof around$73,000 (medianfamily income)

will see a tax cut of nearly$1,500.
► Theirtax bill will fall from what they paytoday, around$3,683,to paying

$2,199 next year-a reduction of $1,484.
►

This representsa reductionin their tax bill of morethan 40 percent.

Sin
gleparen
t with
income
of$41,000
► A singleparentwith an incomeof $41,000 will see a tax cut

of morethan $1,000 .
► Theirtax bill will fall from what they are payingtoday, around$1,865,

to paying$838 next year-a reduction of $1,027.
►

This representsa reductionin their tax bill of 55 percent , meaningthat their
tax bill next yearwill be less than half of what it is today.

Married
small
business
owners
with
income
ofS100,000
► A coupleearning$100,000 , with $60,000from wages $25,000in

compensationfrom their non-corporatebusiness,and $15,000 of business
income, will see a tax cut of morethan $2,850.
► Theirtax bill will fall from what they paytoday, around$11,280, to

payingaround$8,425next year-a reduction of $2,855.
►
A

This representsa reductionin their tax bill of morethan 25 percent.

PVEfl~G~UST 001653 ttee on Finance

TREAS-17-0313-I-000674

 . ..TAXCUTS&
JOBS
ACT

Policy
Highlights
TheTax Cuts andJobsAct providesfiscally responsible middle-class tax relief by cutting tax rates acrossthe board,
reducingthe tax burdenon Americanjob creatorsc1ndmodernizingour tax system.Underthis proposal, a typical familyof
four earningthe medianfamilyincome(around$73,000)will see its taxes cut by nearly $1,500.Thebill will also reduce
the tax burdenon small businessesand put Americancompanieson a level playingfield with their foreigncompetitorsin
mderto growthe economyandcreate morejobs hereat home.
Combined,all of this will meanbiggerpaychecksfor middle-class workersandfamilies, moreAmericanjobs and a stronger
U.S. economy.

RELIEF
FOR
AMERICAN
WORKERS
AND
FAMILIES
The TaxCuts and JobsAct.
►

Lowersindividualtax rates for low· and middle-incomeAmericansby effectivelyexpandingthe zerotax bracketand
maintaininga 10 percentbracket,allowinghardworkingtaxpayersto keepmoreof their hard-earnedmoney, makeends
meet, and savefor retirement.Thebill includesa reformedrate structure that targets t ax reliefto the middle class
while maintaining the existingtax distribution,anda 38.5 percentbracketfor high-incomeearners.

►

Nearlydoubles the standarddeductionto reduceor eliminatethe federalincometax burdenfor tens of millionsof
Americanfamilies. The standarddeductionwill increasefrom $6,350to $12,000for individualsandfrom $12,700to
$24,000for marriedcouples.For single parents, the standarddeductionwill increasefrom $9,300 to $18,000.

►

Recognizes the uniquechallengesfaced by parentswith youngchildrenby:
• Expandingthe child tax credit from $1,000 to $1,650 and allowingmanymoreparentsto claimthe credit by
substantially lifting existing caps;
• Preservingthe child anddependentcaretax credit to helpworkingparentscarefor their childrenandolder
dependents- such as an aginggrandparent- who needsupport;
• Preservingthe adoptiontax credit to helpfamilies with the high costs of adoptingchildren;and
• Allowingparents to moreeffectivelysavefor the educationcosts of unbornchildren.

►

Preservesthe deductionfor charitable contributions,continuinga longrecognition of the importanceof private
philanthropyfor the churchesandcommunityorganizationsthat dailyprovideaid and assistanceto those in need.

►

Protectsthe homemortgageinterest deductionfor existingmortgagesand maintainsthe deductionfor newly
purchasedhomesup to $1 million.Thisincentivefor homeownership
providestax reliefto current andaspiring
homeowners
.

►

Continuespopular retirementsavingsprogramssuch as 401(k)s and IndividualRetirementAccounts,to help
Americans build their retirementnest eggsand preparefor the future.

UST 001654 eeon Finance
J.9V~S~if

TREAS-17-0313-I-000675

 RELIEF
FOR
AMERICAN
WORKERS
ANO
FAMILIES
(continued)
►

Preservesthe earnedincometax credit to providetax reliefto low-incomeAmericansworking to buildbetter lives
for themselves.

►

Preservesadditional importantelementsof the existing individualtax system, including:
• Deductionfor medicalexpenses
• Enhancedstandarddeductionfor the blindand elderly
• Educationrelieffor graduatestudents

►

Repealsthe alternativeminimumtax (AMT)to simplifythe tax codeandeliminateuncertaintyfor millionsof
Americanswho arerequiredto calculate their taxes twice eachyear.

►

Providesrelieffrom the death tax by doubling the current exemption.Thiswill reduceuncertaintyand costs for
family-ownedfarms and businessesby makingit less likelythat Washingtonwill imposean unnecessary1·ayerof
taxation on Americanswho want to passon their life's workto the next generation.

RELIEF
FOR
JOB
CREATORS
OfALL
SIZES
►

Permanent
ly lowersthe corporatetax rate to 20 percentso Americancompaniesno longerhaveto face the
highesttax rate in the industrializedworld, which will allowthem to better competein the globalmarketplace.
,
create morejobs and increasewages.

►

Substantially lowersthe tax burdenon MainStreet job creatorsthrough:
• A simpleand easy-to-administerdeductionfor pass-throughbusinessesof all sizes,allowingmoresmall
businessesto grow, invest,hire new workersand increasewageswhile also preventingabuseof the
reformedsystem;
• EnhancedSection179 expensingto promotebusinessinvestmentandgrowth; and
• Enhancedcash accounting,allowingmorebusinessesto usethe simplecash-basisaccountingmethod.

►

Full andimmediateexpensingof new equipmen
t , which encouragesgrowth and increasesinvestment,
productivityandwages.

►

Protectsthe ability of smallbusinessesto deduct interest on loansthat allows MainStreet employersto expand,
invest, andhire new workers.

►

Preservesimportantelementsof the existingbusinesstax system,including:
• Low-incomehousingcredit to continueencouragingbusinessesto invest in affordablehousingandprovide
individualsandfamilies with expandedopportunities.
• Researchanddevelopmenttax credit, which enhancesinvestmentsin Americanproducts,technologyand
innovations.

.► Permanently modernizesour outdatedinternationaltax system byeliminatingthe antiquated,!worldwide"system,
in orderto eliminatedouble taxation, enhancethe competitivenessof Americancompanies,and bringbusiness
and investmentbackto the UnitedStates.
►

Eliminatesthe ''lock-outeffect" by makingit simplerandless onerousfor Americanmultinationalsto bringforeign
earningsbackto Americafor investmentandgrowth hereat home.

►

Makesthe UnitedStates a better placeto do businessby eliminatingincentivesfor companiesto shift jobs,
profits andintellectual propertyoverseas,and by creatingincentivesfor companiesto both locatein Americaand
bringeconomicactivity backto America.

,b~rOO"r ttee
on Finance
UST 001655

TREAS-17-0313-I-000676

2

 . ..TAXCUTS&
JOBS
ACT

Senate
Finance
Committee
Takes
onTax
Reform
Yearsof Analysis,Papers,Hearingsand LegislatingLaythe Groundworkfor a
Once-In-a GenerationTax Overhaul
The Senate FinanceCommittee,which has the largest committee jurisdiction in either chamber of Congress,
overseesmorethan 50 percent of the federal budget and has jurisdiction overtax, trade and healthcarepolicy.
SinceU.S. SenatorOrrinHatch(R-Utah)becamethe top Republicanon the committee, he's fought to enact a strong,
pro-growtheconomicagendato strengthenthe Americaneconomy.At the top of that list is remakingthe nation's
tax codeto better serveAmericanjob creators and hardworking,middle-classfamilies acrossthe country.

Here's
alook
atthecommittee's
work
bythenumbers:
21 pages

In 2011, then RankingMemberHatch led Senate FinanceCommitteeRepublicansto submit 21
pages of recommendationsto the Joint Select Committeeon Deficit Reductionto help lay the
groundworkfor comprehensive
tax reform.

10 papers

Hatch and then-ChairmanMax Baucus( □-Mont.) released10 option papersas part of the "the
blankslate" approachthat was launchedin 2013 to scrubthe tax codeandproduceconcretepolicy
solutionsto bringthe codeinto the 21st century.

7 principles

In December2014, Hatch releasedan extensive report tit led, "Comprehens
ive Tax Reformfor
2015 and Beyond
." Thereport is not a tax reform plan, but a discussionof ideas and principles
that outlines in detail sevenkey principles comprehensivetax reform should embrace,including
economicgrowth, fairness,simplicity, and savingsand investment,amongothers.

5 working
groups

Duringthe 114th Congress,as chairman, Hatch launchedfive bipartisanFinanceCommittee tax
workinggroupsto helpjumpstart congressiona
l t ax reformefforts. Thegroupsproducedbipartisan
papers, whichservedas the foundationfor additionalhearingsand helpedto set the tablefor a real
overhaulof the nation's tax code.

2 committees UnderChairmanHatch's leadership, the Senate FinanceCommittee markedup tax extenders
legislation in July 2015. This action servedas the foundationfor the PATHAct, December2015
legislation signedinto law, which included a numberof bipartisan legislative policies that were
advancedby the two tax writing committeesthroughopenprocessanddebate.

/\

p ~~QmUST 001656 tteeonFinance

TREAS-17-0313-I-000677

 6 years,
70 hearings

Overthe last six years, the SenateFinanceCommitteehas held 70 hearingson howthe tax code
canbe improvedand streamlinedto work better for all Americans.

6 principals

A recent joint statement by the six tax principalsin the Senate,Houseand administration
highlightedthat there is unity amongthe legislativeand executivebranchesand that the taxwriting committeeswould take the leadin draftinglegislation.

The time to reform the brokentax code is now. A pro-growthtax plan will movethe U.S.economyforward,
helpingto producejobs andbiggerpaychecksfor the Americanpeople, and allowingthem to keepmoreof their
hard-earnedincomes.

Six years, 70 hearings
Senate FinanceCommitteework on tax reform underOrrinHatch

21pc11Je-::;
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groups

For moreinformation,visit the SenateFinanceCommittee's website at finance.senate.gov/taxreform
.

###

/\r lJ.S. Senate Committee on Finance
UST 001657

pVERSIGHT

TREAS-17-0313-I-000678

2

 To:

"Angus, Barbara" <barbara.angus@mail.house.gov>
"Kowalski, Daniel" <daniel.kowalski@treasury.gov>

Date:

Fri, 10 Nov 2017 10:46:16 -0500

From :

Thank you so much, Dan. It has been a privilege to be part of this effort. Lots more to come but it is
exciting to have gotten through this first step!
Barb ara M. Angus
Cb ief T ax Counsel
Committee on Way s and Mean s
202.225.5522
11

11

From: Daniel.Kowalski@treasury .gov <Daniel.Kowalskj@treasury .gov>

Date: Friday, November 10, 2017 at 10:43 AM
To: "A ngus, Barbara" <Barba ra.Angus@mail.house.gov >

Subject: Congratulations
Barbara, I just wanted to congratulate you on getting the tax reform measure out of committee. It
was a huge project, and vitally important for our efforts to get a tax bill to the President's desk. I
haven't been particularly involved lately, but I'm still paying attention, and deeply appreciative of the
personal effort I am sure you had to devote to the task.
Thank you.
Dan

/\Mlf

ll Al\

UST 001658
pVERSIGHT

TREAS-17-0313-I-000679

 Re: Con ratulations
From :

"Callas, George" <geo rge.callas@mail.house.gov>

To :

"Kowa lski, Daniel" <danie l.koWalski@treasury.gov>

Date :

Fri, 10 Nov 2017 11:19: 10 -0500

Thanks, Dan !

From: 11Daniel.Kowalski@t reasur y.gov " <Dan ieLKowa lski@treasur y.gov>
Date : Friday, Novem ber 10, 2017 at 10:46 AM
To: "Callas, George" <George.Callas@ma il.h o use.gov>
Subject: Congrat ulati ons
George, I j ust wanted to congratulate you on getting the tax reform bill out of committee . Good luck
on the floor next week.
Dan

/\Mlf

ll Al\

UST 001659
pVERSIGHT

TREAS-17-0313-I-000680

 Bonds + Advanced Refundin s
From:
To :

"Hulse, Bill" <bill.hulse@mail.house.gov>
"Bailey, Bradley" <bradley.bailey@treasury.gov>

Date:

Fri, 10 Nov 2017 14:34:05 -0500

Brad - I wanted to quickly follow-up on the meeting we had with Treasury a month or two ago. As
you no doubt saw, the House bill would eliminate private activity bonds and advanced refunding
bonds . We were surprised by this. It also seems inconsistent with President Trump's call for
infrastructure investment in the United States .
We were very pleased to see the Senate bill mainta ins PAB, but we would still like to see them
address advanced refundings .
We are planning to keep t alking to our House colleagues about this, but please let us know if there
are any opportunity to work with Treasury/ the Administration to address our concerns.
You might also be interested in the below Op-Ed that ran in the Washington Examiner this morning.
http://www.washingtonexaminer
.com/protect-infrastructure-finance-in-tax-reform/article/2640182
Thanks,
Bill

Protect infrastructure finance in tax reform
by Rep. Randy Hultgren (R-IL) and Rep.Dutch Ruppersberger (D-M D)

Americans on both sides of the aisle agree : Our current tax code is complex, costly and
time consuming . It hurts the ability of American businesses to grow and create new
middle -classjobs, and for individuals to cover basic household costs. We believe it's
time for real reforms that simpli fy the tax code, lower taxes on all Americans and their
families and stimulate job growth.
We are encouraged by a number of the reforms proposed in the Tax Cuts and Jobs Act
working its way through the House.
However , as Co-Chairs of the Municipal Finance Caucus, we are concerned by the
serious threat posed to the tax-exempt status of private activity bonds. These tools are
used regularly by states and local governments to fund important pub lic goods such as
healthcare facilities, affordable housing, schools and universities, airports, water and
sewer facilities, commuting centers, and other important infrastructure .
This year, 162 members of Congress joined together in demonstrating the importance
of municipal finance, including PABs,to fund the vast majority of infrastructure projects
in their communities. In fact, President Trump has called for increasing infrastructure
investment in the United States, and has under scored the idea of pub lic and private
institut ions partner ing to improve infrastructure. There are a number of proposals
before Congress to expand upon the success of PABs.
The current tax-exempt status of PABs made it possible for Presence Health, the largest

/\Mlf

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UST 001660
pVERSIGHT

TREAS-17-0313-I-000681

 Catholic health system in Illinois, to refinance its debt, ensuring its continued services
would be made available to hundreds of thousands of the neediest individuals and
families across the state. Constituents in Illin ois' 14th District depend on Presence to
access their Medicaid benefits . The University of Chicago has used these bonds for every
building at their medical center, including specialized care for children and cancer
patients.
In Maryland, construction crews broke ground earlier this year on a long -awaited light
rail line. Conceived more than three decades ago, the line was made possible only with a
private activity bond - leveraging federal, state, and private sector dollars. Not only is it
expected to relieve traffic across three counties - in the state with the nation 's secondlongest commutes - but the new line will create 52,000 new jobs .
We strongly encourage our colleagues in Congress to seriously reconsider what losing
the tax-exempt status of PABswill mean for their districts before agreeing to advance
this misguided and misunderstood change to the tax code that will stunt Job growth for
years to come.
Randy Hultgren , a Republican, represents Illinois ' 14th Congressional District and is a
member of the House Financial Services Committee. Dutch Ruppersberger, a Democrat,
represents Maryland 's 2nd Congressional District and is a member of the House
Appropriations Committee .

Bill Hulse I Legislative Assistant
U.S. Rep rese ntative Randy Hultgren (IL-14)
2455 Rayburn I Washington , DC 20515
Office: (202) 225-2976
Web site I Facebook I Twitter

/\Mlf

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UST 001661
pVERSIGHT

TREAS-17-0313-I-000682

 Re: JCT score of HR1
From:

"Maloney, Drew' ' <"/o=ustreasury/ou=exchange administrative group
(fyd ibohf2 3spdlt)/cn=recipients/cn=0aa00d7c98de4 3f9aec8 f68a919f6fe3 -ma loney, drew">

To:

"Knight , Shahira E. EOP/WHO " <
<brendan _dunn@mcconnell .senate.gov>

Cc:
Date:

"Muzinich , Justin' ' <justin .muzinich@treasury.g ov>

, "Dunn, Brendan (McConnell)"

Fri , 10 Nov 2017 16:28:34 -0500

We will reach out again. Not sure we can score, but can offer some help .
Drew Maloney
Assistant Secretary of the Treasury
legislative Affairs
United States Department of the Treasury
1500 Pennsylvania Avenue, NW Suite 3134
Washl ngton, DC 20220
Offi ce: 202-622 -1900
Cell: --drew ~
a sury.gov

From: Knight, Shahira E. EOP/WHO <Shahira.E.Knight@who.eop.gov>
Date: November 10, 2017 at 1:57:05 PM EST
To : Dunn, Brendan (McConnell) <Brendan_Dunn@mcconnell. senate.gov>
Cc: Muzinich, Justin <Justin.Muzinich@ tr easury.gov>, Maloney, Drew <Drew.Maloney@treasury .gov>
Subject : Re: JCT score of HR1

Copying Drew as I believe he told Sen. Johnson he would connect him w ith Treasury folks. Thanks.
On Nov 10, 2017, at 1:34 PM , Dunn , Brendan (McConnell) <Brendan Dunn@mcconnell.senate .gov >
wro te:

b(5)

From: Sean Riley <Sean Rlley@ronjohnson .senate .gov>
Date: Friday , Novembe r 10 , 2017 at 1:31 PM
To: Brenda n Dunn <Brendan Dunn@mcconneH. senate .gov>
Subject: Re: JCTscore of HRl
Brendan-Senator

Johnson needs the following info to move forward !

Can you help?

From: Sean Riley <Sean Riley@ronjohnson.senate .gov>

TREAS-17-0313-I-000683

 Date : Tuesday, Novembe r 7, 2017 at 11:20 PM
To : " Dun n, Brenda n (McConnell)" <Brendan Dunn@mcconnelLsenate.gov >
Subject : Re: JCT score of HR1
Thank you
Sent from my iPhone
On Nov 7, 2017, at 10:48 PM, Dunn , Brendan (McConnell) <Brendan Dunn@mcconnell.senate.gov >
wrote:
■

II

•

b(5)

Usinga commonreformtemplate(including
reduced
individual
incometaxratesat 12, 25, and35percent
, an
expanded
standard
deduction,
repealof certainitemized
deductions
, repealof theestateandgeneration
skipping
transfertaxes,repealof thecorporate
andindividual
AMT, a 20percentcorporate
taxrate, repealof
section199(domestic
manufacturing
deduction)
, 50percentbonusdeprecation
for sevenyears,reduced
interestexpense
deduction,
andlimiting
thededuction
for netoperating
lossesto 90percent
of income),
the
JointCommittee
onTaxation(Jen estimates
thata 25-percent
maximumrate ontheactivebusiness
income
of pass-through
entities(similar
to fheprovision
inthe HouseWays& Meanstaxreformbill)generally
costsin
billionrangeover10yea~.
the$400-$430
At therequest
of GOPFinance
Committee
members
, JCT modmed
thereformtemplateaboveto allowS
corporations
to electto usea "reasonable
compensation
" standard
to determine
theportionof theirincomethat
istreatedaslaborincome(withtheremainder
qualifying
forthebeneficial
taxrate).In genera
l, JCT would
expectthatmany S corporations
wouldmakethiselection
, asthereasonable
compensation
standard
as
interpreted
bythecourtsdoesnotmeasure
marketratesof pay, butrathergenerously
permitsreasonable
compensation
to understate
thevaluetheindividual
couldachieve
in themarket.Inaddition
, the Internal
's abilityto challenge
reasonable
compensation
assertions
ona diminished
budgetshould
RevenueService
encourage
aggressive
application
of thelaxstandard
. Further,partnerships
, soleproprietorships
, andfarms
to convertto S corpo
rationformto avoidtreatingincome fromtheactivityaslabor
wouldhaveincentives
income
. Giventhat, JCThasestimatedthat,usingthecommonreformtemplatedescribed
abovebutallowing
forS corporations
to electto usea 'reason
ablecompensation
" approach
, wouldincrease
thecostof the25
percent
maximumrateontheactivebusinessincomeof pass-through
entitiesto over$850billionover10
years.

/\Mlf

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UST 001663
pVERSIGHT

TREAS-17-0313-I-000684

 From :

"Plack , Brendon (Thune)" <brendon_ plack@thune .senate.gov>

To:

Amy Swonger <. •
<drew.maloney treasury .gov>

Date :

Sat, 11 Nov 2017 12:06:56 -0500

Attachments:

Thune Results 11-9.xlsx (21.31 kB)

, "Maloney, Drew"

Sent from my Verizo n, Samsung Galaxy smartphons

TREAS-17-0313-I-000685

 RE: Year Delro!
From: "Maloney, Drew'' <"/o= ustreasury/o u=exc hange administrative gro up
(fydibohf23s pdlt)/cn =recipients/cn =0aa00d 7c98de43f9aec8 f68a919f6fe3-maloney, drew">

To:
Date :

Sat , 11 Nov 20 17 12:33:11 -0500

Thanks Brendon
From : Plack, Brendon (Thune) [mailto:Brendon_Plack@thune.senate.gov]

Se nt : Saturday 1 November 11 2017 12:07 PM
To: Amy Swonger . '
Subject: Year Delay

-

; Maloney, Drew <Drew.Maloney@treasury.gov>

Si.:11tti·om my Verizon Sam::,uug.G,1laxy:sma1l[lltom.

AM

PVER-'S1~ -6-6Ff

TREAS-17-0313-I-000686

 Estimated distributional anal sis of the Chairman's mark
From :

"Prater, Mark (Finance)" <mark_p rater@fina nce .senate.gov>

To:

"Knight, Shahira E. EOP/WHO" < Shahira Knight, EOP
<just in .muzinich@treasury.gov>

Date :

Sat, 11 Nov 2017 17:46:33-0500

Atta chments:

D-17-48 .pdf (107.44 kB)

· , "Muzinich, Justin"

Hey gu ys,
Embargoed until 6:10 p.m.

b(5)

TREAS-17-0313-I-000687

 #0 -17-48

DISTRIBUTION EFFECTS OF T HE CHA IRMAN 'S MARK OF
T HE "TAX CUTS AND JOBS ACT,"
SC HEDULED FOR MARKUP BY TH E COMM ITTEE ON FINANCE ON NOVEMBER 13, 2017 (1)

Calendar Year 2019

INCOME
CATEGORY (2)
Less than $10,000 .........
$10,000 to $20,000 ........
$20,000 to $30,000 ........
$30,000 to $40,000 ........
$40,000 to $50,000 ........
$50,000 to $75,000 ........
$75,000 to $ 100,000 ......
$100,000 to $200,000 .....
$200,000 to $500,000 .....
$500,000 to $1,000,000 ..
$1,000,000 and over. ......
Total , All Taxpaye rs ......

CHANGE IN
FEDERAL
TAXES (3)
Millions
Percent
-$405
-5.7%
-$ 1,509
(5)
-$2 ,308
- 10.4%
-$3 ,79 1
-8.1%
-$5 ,245
-7.8%
-$ 18,845
-7.1%
-$16,702
-6.0%
-$47 ,287
-5.0%
-$37,755
-5.2%
-$19, 138
-7.5%
-$33,2 17
-5 .3%
-$186,203
-5.8%

FEDERAL TAXES (3)
UNDER
PRESENT LAW
Billions
Percent
$7 .0
0 .2%
-$2.4
-0. 1%
$22 .1
0 .7%
$47.0
1.5%
$67 .3
2 .1%
$265 .3
8 .2%
$279 .5
8 .7%
$939 .8
29. 1%
$724 .3
22.4%
$254 .7
7 .9%
$624 .1
19.3%
$3,228 .7
100.0%

FEDERAL TAXES (3)
UNDER
PROPOSAL
Billions
Percent
$6.6
0.2%
-$3.9
-0 .1%
$19.8
0.7%
$43.2
1.4%
$62.0
2 .0%
$246.5
8.1%
$262.8
8.6%
$892.5
29 .3%
$686.5
22.6%
$235.6
7.7%
$590.9
19.4%
$3,042.5
100.0%

Average Tax Rate (4)
Present
Law
Proposal
Percent
Percent
9.1%
8.6%
-0.7%
-1.2%
3.9%
3.5%
7.9%
7.3%
10.9%
10.1%
14.8%
13.7%
17.0%
15.9%
20 .9%
19.9%
26.4%
25 .0%
30.9%
28.5%
32.5%
30.4%
20 .7%
19.4%

TREAS-17-0313-I-000688

November 11, 20 17

So ur ce : Jo int Co mmittee o n Tax atio n
Detail may not add to total due to rounding .

J-

UST 001667

(1) This table is a distributiona l analysis of the proposal in revenue table JCX-52- 17, excluding the fo llowing sections: I. Tax Reform for
Individuals : D.4.-D.6. , and E.
(2) The income concept used to place tax returns into income catego ries is adjusted gross income (AGI) plus: (1) tax-exempt interest ,
[2) emp loyer contributions for health plans and life insurance , [3) emp loyer share of FICA tax, (4) worker 's compe nsation ,
[5) nontaxab le Social Security benefits, (6) insurance value of Med icare benefits , (7) alternative minimum tax preference items ,
(8) indiv idual share of business taxes , and (9) excluded income of U.S. citizens living abroad . Categories are measured at 20 17 levels .
(3) Federal taxes are equa l to indiv idual income tax (including the outlay portion of refundable credits ), employment tax (attributed to employees)
excise taxes (attribu ted to consumers) , and corporate income taxes. The est imates of Federa l taxes are preliminary and subject to change.
Individuals who are dependents of other taxpaye rs and taxpayers with negative income are excluded from the analys is.
Does not include indirect effects.
(4) The average tax rate is equal to Federal taxes desc ribed in footnote (3) div ided by income desc ribed in footnote (2) .
(5) For returns in the $10,000 to $20 ,000 income category , Federal taxes wou ld decrease from -$2 .4 12 billion to -$3.912 billion.

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 #0 -17-48

DISTRIBUTION EFFECTS OF T HE CHA IRMAN 'S MARK OF
T HE "TAX CUTS AND JOBS ACT,"
SC HEDULED FOR MARKUP BY TH E COMM ITTEE ON FINANCE ON NOVEMBER 13, 2017 (1)

Calendar Year 2021

INCOME
CATEGORY (2)
Less than $10,000 .........
$10,000 to $20,000 ........
$20,000 to $30,000 ........
$30,000 to $40,000 ........
$40,000 to $50,000 ........
$50,000 to $75,000 ........
$75,000 to $ 100,000 ......
$100,000 to $200,000 .....
$200,000 to $500,000 .....
$500,000 to $1,000,000 ..
$1,000,000 and over. ......
Tota l, All Taxpaye rs ......

CHANGE IN
FEDERAL
TAXES (3)
Millions
Percent
-$251
-3.6%
-$ 1,082
(5)
-$2 ,098
-9 .3%
-$3 ,52 1
-7.4%
-$5 ,224
-7.1%
-$ 18,317
-6.5%
-$15,875
-5.3%
-$43 ,558
-4.3%
-$33,423
-4.2%
-$16,974
-6.1%
-$24,993
-3 .7%
-$165,316
-4.7%

FEDERAL TAXES (3)
UNDER
PRESENT LAW
Billions
Percent
$6 .9
0 .2%
-$4.9
-0. 1%
$22 .5
0 .6%
$47 .7
1.4%
$73 .7
2 .1%
$283 .4
8 .1%
$300.3
8 .6%
$1 ,0 17.6
29. 1%
$799 .8
22.9%
$279 .4
8 .0%
$67 1.8
19.2%
$3,498 .3
100.0%

FEDERAL TAXES (3)
UNDER
PROPOSAL
Billions
Percent
$6.7
0.2%
-$6.0
-0.2%
$20.5
0.6%
$44.2
1.3%
$68.4
2 .1%
$265.1
8.0%
$284.5
8.5%
$974.0
29 .2%
$766.4
23.0%
$262.5
7.9%
$646.8
19.4%
$3,333.0
100.0%

Average Tax Rate (4)
Present
Proposal
Law
Percent
Percent
7.9%
8.2%
-1.7%
- 1.4%
3.3%
3.7%
7.0%
7.6%
10.1%
10.9%
13.7%
14.7%
15.9%
16.8%
20.0%
20 .9%
25 .3%
26 .5%
29.0%
31.0%
3 1.0%
32.4%
19.6%
20 .7%

TREAS-17-0313-I-000689

November 11, 20 17

So ur ce : Jo int Co mmittee o n Tax atio n
Detail may not add to total due to rounding .

J-

UST 001668

(1) This table is a distributiona l analysis of the proposal in revenue table JCX-52- 17, excluding the fo llowing sections: I. Tax Reform for
Individuals : D.4.-D.6. , and E.
(2) The income concept used to place tax returns into income catego ries is adjusted gross income (AGI) plus: (1) tax-exempt interest ,
[2) emp loyer contributions for health plans and life insurance , [3) emp loyer share of FICA tax, (4) worker 's compe nsation ,
[5) nontaxab le Social Security benefits, (6) insurance value of Med icare benefits , (7) alternative minimum tax preference items ,
(8) indiv idual share of business taxes , and (9) excluded income of U.S. citizens living abroad . Categories are measured at 20 17 levels .
(3) Federal taxes are equa l to indiv idual income tax (including the outlay portion of refundable credits ), employment tax (attributed to employees)
excise taxes (attribu ted to consumers) , and corporate income taxes. The est imates of Federa l taxes are preliminary and subject to change.
Individuals who are dependents of other taxpaye rs and taxpayers with negative income are excluded from the analys is.
Does not include indirect effects.
(4) The average tax rate is equal to Federal taxes desc ribed in footnote (3) div ided by income desc ribed in footnote (2) .
(5) For returns in the $10,000 to $20 ,000 income category , Federal taxes wou ld decrease from -$4 .888 billion to -$5.970 billion.

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 #0 -17-48

DISTRIBUTION EFFECTS OF T HE CHA IRMAN 'S MARK OF
T HE "TAX CUTS AND JOBS ACT,"
SC HEDULED FOR MARKUP BY TH E COMM ITTEE ON FINANCE ON NOVEMBER 13, 2017 (1)

Calendar Year 2023

INCOME
CATEGORY (2)
Less than $10,000 .........
$10,000 to $20,000 ........
$20,000 to $30,000 ........
$30,000 to $40,000 ........
$40,000 to $50,000 ........
$50,000 to $75,000 ........
$75,000 to $ 100,000 ......
$100,000 to $200,000 .....
$200,000 to $500,000 .....
$500,000 to $1,000,000 ..
$1,000,000 and over. ......
Total , All Taxpaye rs ......

CHANGE IN
FEDERAL
TAXES (3)
Millions
Percent
-$35
-0.5%
-$538
(5)
-$ 1,733
-7 .0%
-$2,865
-5.6%
-$4 ,480
-5.5%
-$ 15,359
-5.0%
-$12,226
-3.8%
-$28,909
-2.6%
-$17,787
-2.1%
-$9 ,103
-3.1%
-$ 1,873
-0.3%
-$94,873
-2.5%

FEDERAL TAXES (3)
UNDER
PRESENT LAW
Billions
Percent
$6.4
0 .2%
-$5.0
-0. 1%
$24 .7
0 .7%
$5 1.0
1.4%
$80 .9
2 .1%
$305 .2
8 .1%
$325.9
8 .6%
$1 ,103.4
29.3%
$863 .6
22.9%
$297 .6
7 .9%
$7 17.5
19.0%
$3,771 .1
100.0%

FEDERAL TAXES (3)
UNDER
PROPOSAL
Billions
Percent
$6.4
0.2%
-$5.6
-0.2%
$22.9
0.6%
$48.2
1.3%
$76.4
2 .1%
$289.8
7.9%
$3 13.7
8.5%
$1,074.5
29 .2%
$845.8
23.0%
$288.5
7.8%
$7 15.7
19.5%
$3,676.2
100.0%

Average Tax Rate (4)
Present
Law
Proposal
Percent
Percent
7.0%
7.0%
- 1.3%
-1.5%
3.7%
3.5%
7.6%
7.2%
10.8%
10.2%
14.6%
13.8%
16.6%
16.0%
20 .8%
20.2%
26 .5%
25 .9%
30.8%
29.8%
32.2%
32 .0%
20 .5%
20 .0%

TREAS-17-0313-I-000690

November 11, 20 17

So ur ce : Jo int Co mmittee o n Tax atio n
Detail may not add to total due to rounding .

J-

UST 001669

(1) This table is a distributiona l analysis of the proposal in revenue table JCX-52- 17, excluding the fo llowing sections: I. Tax Reform for
Individuals : D.4.-D.6. , and E.
(2) The income concept used to place tax returns into income catego ries is adjusted gross income (AGI) plus: (1) tax-exempt interest ,
[2) emp loyer contributions for health plans and life insurance , [3) emp loyer share of FICA tax, (4) worker 's compe nsation ,
[5) nontaxab le Social Security benefits, (6) insurance value of Med icare benefits , (7) alternative minimum tax preference items ,
(8) indiv idual share of business taxes , and (9) excluded income of U.S. citizens living abroad . Categories are measured at 20 17 levels .
(3) Federal taxes are equa l to indiv idual income tax (including the outlay portion of refundable credits ), employment tax (attributed to employees)
excise taxes (attribu ted to consumers) , and corporate income taxes. The est imates of Federa l taxes are preliminary and subject to change.
Individuals who are dependents of other taxpaye rs and taxpayers with negative income are excluded from the analys is.
Does not include indirect effects.
(4) The average tax rate is equal to Federal taxes desc ribed in footnote (3) div ided by income desc ribed in footnote (2) .
(5) For returns in the $10,000 to $20 ,000 income category , Federal taxes wou ld decrease from -$5 .044 billion to -$5.582 billion.

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Page 3

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 #0 -17-48

DISTRIBUTION EFFECTS OF T HE CHA IRMAN 'S MARK OF
T HE "TAX CUTS AND JOBS ACT,"
SC HEDULED FOR MARKUP BY TH E COMM ITTEE ON FINANCE ON NOVEMBER 13, 2017 (1)

Calendar Year 2025

INCOME
CATEGORY (2)
Less than $10,000 .........
$10,000 to $20,000 ........
$20,000 to $30,000 ........
$30,000 to $40,000 ........
$40,000 to $50,000 ........
$50,000 to $75,000 ........
$75,000 to $ 100,000 ......
$100,000 to $200,000 .....
$200,000 to $500,000 .....
$500,000 to $1,000,000 ..
$1,000,000 and over. ......
Tota l, All Taxpaye rs ......

CHANGE IN
FEDERAL
TAXES (3)
Millions
Percent
-$60
-1.0%
-$685
(5)
-$ 1,857
-6 .8%
-$2,986
-5.6%
-$4 ,830
-5.5%
-$ 16,3 04
-5.0%
-$13,075
-3.7%
-$31,298
-2.6%
-$2 1,229
-2.3%
-$10,493
-3.3%
-$5 ,47 1
-0.7%
-$108,248
-2.6%

FEDERAL TAXES (3)
UNDER
PRESENT LAW
Billions
Percent
$5 .9
0 .1%
-$4.7
-0. 1%
$27 .2
0 .7%
$53 .7
1.3%
$88 .0
2 .2%
$328 .1
8 .0%
$350.6
8 .6%
$1 ,197.4
29.3%
$943 .3
23. 1%
$321 .5
7 .9%
$780 .2
19. 1%
$4,091 .1
100.0%

FEDERAL TAXES (3)
UNDER
PROPOSAL
Billions
Percent
$5.8
0.1%
-$5.3
-0 .1%
$25.3
0.6%
$50.7
1.3%
$83.2
2 .1%
$311.8
7.8%
$337.5
8.5%
$1,166. 1
29 .3%
$922.0
23.2%
$311.0
7.8%
$774.7
19.5%
$3,982.8
100.0%

Average Tax Rate (4)
Present
Law
Proposal
Percent
Percent
5.8%
5.8%
- 1.1%
-1.3%
3.8%
3.6%
7.5%
7.1%
10.9%
10.3%
14.5%
13.8%
16.5%
15.8%
20 .7%
20.2%
26 .5%
25 .9%
30.8%
29.7%
32.1%
3 1.7%
20 .5%
19.9%

TREAS-17-0313-I-000691

November 11, 20 17

So ur ce : Jo int Co mmittee o n Tax atio n
Detail may not add to total due to rounding .

J-

UST 001670

(1) This table is a distributiona l analysis of the proposal in revenue table JCX-52- 17, excluding the fo llowing sections: I. Tax Reform for
Individuals : D.4.-D.6. , and E.
(2) The income concept used to place tax returns into income catego ries is adjusted gross income (AGI) plus: (1) tax-exempt interest ,
[2) emp loyer contributions for health plans and life insurance , [3) emp loyer share of FICA tax, (4) worker 's compe nsation ,
[5) nontaxab le Social Security benefits, (6) insurance value of Med icare benefits , (7) alternative minimum tax preference items ,
(8) indiv idual share of business taxes , and (9) excluded income of U.S. citizens living abroad . Categories are measured at 20 17 levels .
(3) Federal taxes are equa l to indiv idual income tax (including the outlay portion of refundable credits ), employment tax (attributed to employees)
excise taxes (attribu ted to consumers) , and corporate income taxes. The est imates of Federa l taxes are preliminary and subject to change.
Individuals who are dependents of other taxpaye rs and taxpayers with negative income are excluded from the analys is.
Does not include indirect effects.
(4) The average tax rate is equal to Federal taxes desc ribed in footnote (3) div ided by income desc ribed in footnote (2) .
(5) For returns in the $10,000 to $20 ,000 income category , Federal taxes wou ld decrease from -$4 .664 billion to -$5.349 billion.

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Page4

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 #0 -17-48

DISTRIBUTION EFFECTS OF T HE CHA IRMAN 'S MARK OF
T HE "TAX CUTS AND JOBS ACT,"
SC HEDULED FOR MARKUP BY TH E COMM ITTEE ON FINANCE ON NOVEMBER 13, 2017 (1)

Calendar Year 2027

INCOME
CATEGORY (2)
Less than $10,000 .........
$10,000 to $20,000 ........
$20,000 to $30,000 ........
$30,000 to $40,000 ........
$40,000 to $50,000 ........
$50,000 to $75,000 ........
$75,000 to $ 100,000 ......
$100,000 to $200,000 .....
$200,000 to $500,000 .....
$500,000 to $1,000,000 ..
$1,000,000 and over. ......
Total , All Taxpaye rs ......

CHANGE IN
FEDERAL
TAXES (3)
Millions
Percent
-$444
-8.5%
-$ 1,835
(5)
-$3 ,238
- 10.3%
-$4 ,336
-7.3%
-$6,922
-7.1%
-$2 1,575
-6.1%
-$19,082
-5.0%
-$51,396
-3.9%
-$40,557
-4.0%
-$17,755
-5.1%
-$23,439
-2 .8%
-$190,553
-4.3%

FEDERAL TAXES (3)
UNDER
PRESENT LAW
Billions
Percent
$5 .2
0 .1%
-$3.4
-0. 1%
$3 1.4
0 .7%
$59.4
1.3%
$98 .0
2 .2%
$352 .2
7 .9%
$380.3
8 .6%
$1 ,302.4
29.3%
$1 ,026.5
23. 1%
$345 .7
7 .8%
$848 .7
19. 1%
$4,446 .4
100.0%

FEDERAL TAXES (3)
UNDER
PROPOSAL
Billions
Percent
$4.8
0.1%
-$5.2
-0 .1%
$28. 1
0.7%
$55. 1
1.3%
$91.1
2 .1%
$330.6
7.8%
$361.2
8.5%
$1,25 1.0
29.4%
$985.9
23.2%
$327.9
7.7%
$825.2
19.4%
$4,255.8
100.0%

Average Tax Rate (4)
Present
Law
Proposal
Percent
Percent
4.7%
4.3%
-0.8%
-1.2%
4 .1%
3.6%
7.6%
7.1%
11.0%
10.3%
14.5%
13.6%
16.3%
15.5%
20 .7%
19.8%
26 .6%
25 .5%
30.8%
29.1%
32.1%
3 1.1%
20 .5%
19.6%

TREAS-17-0313-I-000692

November 11, 20 17

So ur ce : Jo int Co mmittee o n Tax ation
Detail may not add to total due to rounding .

J-

UST 001671

(1) This table is a distributiona l analysis of the proposal in revenue table JCX-52- 17, excluding the fo llowing sections: I. Tax Reform for
Individuals : D.4.-D.6. , and E.
(2) The income concept used to place tax returns into income catego ries is adjusted gross income (AGI) plus: (1) tax-exempt interest ,
[2) emp loyer contributions for health plans and life insurance , [3) emp loyer share of FICA tax, (4) worker 's compe nsation ,
[5) nontaxab le Social Security benefits, (6) insurance value of Med icare benefits , (7) alternative minimum tax preference items ,
(8) indiv idual share of business taxes , and (9) excluded income of U.S. citizens living abroad . Categories are measured at 20 17 levels .
(3) Federal taxes are equa l to indiv idual income tax (including the outlay portion of refundable credits ), employment tax (attributed to employees)
excise taxes (attribu ted to consumers) , and corporate income taxes. The est imates of Federa l taxes are preliminary and subject to change.
Individuals who are dependents of other taxpaye rs and taxpayers with negative income are excluded from the analys is.
Does not include indirect effects.
(4) The average tax rate is equal to Federal taxes desc ribed in footnote (3) div ided by income desc ribed in footnote (2) .
(5) For returns in the $10,000 to $20 ,000 income category , Federal taxes wou ld decrease from -$3 .4 15 billion to -$5.250 billion.

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 Novemb er 11, 2017

DISTRIBUTION AL EFFECTS OF THE CHAIRMAN 'S MARK OF
THE "TAX CUTS AND JOBS ACT,"
SCHEDULED FOR MARKUP BY THE COMMITTEE ON FINANCE ON NOVEMBER 13, 2017

Summaryof DistributionTable
Distribution of Individual Income Tax Side of Table JCX-52-17

CHANGE IN FEDERAL TAXES($ millions)
INCO ME CATEGO RY

2019

Less than $10 ,000 .............

2021

-$124

-$69

2023

2027

2025

-$75

-$37

-$144
-$1,047

$10 ,000 to $20,000 ............

-$917

-$775

-$758

-$662

$20 ,000 to $30,000 ............

-$ 1,587

-$1 ,546

-$1 ,712

-$1 ,586

-$1 ,860

$30 ,000 to $40,000 ..........

-$2 ,814

-$2 ,746

-$2 ,736

-$2 ,584

-$2,589

$40 ,000 to $50,000 ............

-$3,981

-$4,140

-$4,223

-$4 ,236

-$4 ,538

$50 ,000 to $75,000 ............

-$14,493

-$14 ,566

-$14,295

-$14, 196

-$13,784

$75 ,000 to $100 ,000 .........

-$1 1,300

-$1 1,345

-$10,933

-$10 ,660

-$10 ,355

$ 100,000 to $200,000 .........

-$27,457

-$26,837

-$24 ,096

-$22 ,543

-$20 ,375

$200 ,000 to $500,000 .........

-$17 ,857

-$17,469

-$14,309

-$14, 100

-$14,035

$500 ,000 to $ 1,000 ,000 ......

-$10 ,178

-$10 ,290

-$8,364

-$8, 198

-$8,063

$ 1,000 ,000 and over. ..........

-$8,411

-$8,465

-$1 ,910

-$1,447

-$1,599

Total , All Taxpayers ..........

-$99,120

-$98,248

-$83,377

-$80,209

-$78,362

Distribut ion of Business Tax Side
INCO ME CATEG ORY
Less than $10 ,000 .............
$10 ,000 to $20,000 ------· ·•·•
$20 ,000 to $30,000 ............
$30 ,000 to $40,000 ............
$40 ,000 to $50,000 ............
$50 ,000 to $75,000 ............
$75 ,000 to $100 ,000 ..........
$ 100,000 to $200,000 .......
$200 ,000 to $500,000 ..

CHANGE IN FEDERAL TAXES($ millions)
2019
2021
2023
2025
2027
-281
- 182
41
-23
-300
-592
-307
220
-23
-789
-721
-552
-21
-270
-1,379
-977
-775
- 129
-401
-1,746
- 1,264
- 1,084
-256
-594
-2,385
-4 ,352
-3,752
- 1,064
-2, 108
-7,792
-5,402
-4 ,530
- 1,293
-2,415
-8,727
-19 ,829
-16 ,721
-4 ,813
-8,755
-31 ,021
-19 ,898
-15 ,954
-3 ,478
-7, 129
-26,522
-739

$500 ,000 to $1 ,000 ,000 ......

-8,961

-6,684

-2,296

-9,692

$ 1,000 ,000 and over. ..........

-24,806

- 16,528

37

-4 ,024

-21,840

Total, All Taxpayers ..........

-87,083

-67,067

-11,495

-28,038

-112 ,191

TOTAL DISTRIBUTION

CHANGE IN FEDERAL TAXES($ millions)
INCOM E CATEGO RY

2019

2021

2023

2025

2027

Less than $10 ,000 .............

-405

-251

-35

-60

-444

$10 ,000 to $20,000 ............

- 1,509

-1 ,082

-538

-685

-1,835

$20 ,000 to $30,000 ............

-2,308

-2,098

- 1,733

- 1,857

-3,238

$30 ,000 to $40,000 ............

-3,791

-3,521

-2,865

-2,986

-4,336

$40 ,000 to $50,000

--·---· ·· ·•

-5 ,245

-5 ,224

-4 ,480

-4,830

-6,922

$50 ,000 to $75,000

---·-·· ·• ·•

-18 ,845

-18 ,317

-15,359

-16 ,304

-21 ,575

$75 ,000 to $100 ,000 ..........

- 16,702

- 15,875

- 12,226

- 13,075

- 19,082

$ 100,000 to $200,000 .........

-47 ,287

-43 ,558

-28,909

-31,298

-51,396

$200 ,000 to $500,000 .......

-37,755

-33,423

-17 ,787

-21 ,229

-40 ,557

$500 ,000 to $ 1,000 ,000 ......

-19 ,138

-16 ,974

-9 , 103

-10,493

-17 ,755

$1 ,000 ,000 and over ...........

-33 ,217

-24,993

-1 ,873

-5,471

-23,439

Total , All Taxpayers ..........

-186,203

-165 ,316

-94,873

-108,248

-190 ,553

Source: Joint Committee on Taxation

/\MERICAi\

UST 001672
pVERSIGHT

TREAS-17-0313-I-000693

 NUMBER OF RETURNS BY INCOME CLASS
NUMBER OF TAXPAYER UNITS (thousands) (1)
INCOME CATEGORY (2)

2019

2021

2023

2025

2027

Less than $10,000 .............................

19,260

19,286

19,053

19,034

18,985

$10,000 to $20,000 ...........................

20,566

20,755

20,726

20,681

20,378

$20,000 to $30,000 ...........................

21,510

21,700

21,965

22,183

22,499

$30,000 to $40,000 ...........................

16,011

15,920

15,903

15,951

16,263

$40,000 to $50,000 .......... .................

12,841

13,239

13,707

14,004

14,365

$50,000 to $75,000 ...........................

27 ,393

27,575

27,986

28,396

28,651

$75,000 to $100,000 .........................

17,835

18,190

18,670

19,033

19,489

$100,000 to $200,000 ........................

30,667

31,169

31,869

32,622

33,332

$200,000 to $500,000 ........................

9,152

9,431

9,542

9,765

9,923

$500,000 to $1,000,000 .....................

1,147

1,180

1,186

1,206

1,215

$1,000,000 and over. .........................

572

584

594

611

629

Tot al, All Taxpayers .........................

176,955

179,029

181,201

183,485

185,726

TREAS-17-0313-I-000694

November 11, 2017

Source: Joint Committee on Taxation

(1) Includes nonfilers , excludes dependent filers and returns with negative income.
(2) The income concept used to place tax returns into income categor ies is adjusted gross income (AGI) plus: [1] tax-exempt interest,
[2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, (4] worker's compensation,
(5] nontaxable Social Security benefits , (6] insurance value of Medicare benefits, [7] alternative minimum tax preference items,
[8] individual share of business taxes, and [9] excluded income of U.S. citizens living abroad. Categories are measured at 2017 levels

UST 001673

J-

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~~

 RE: Data
From:

"Bailey, Bradley" <"/o=ustreasury/ou=exchange administrative group
(fydibohf23spdlt)/cn=recipients/cn= 7eb678b02d9b41 c0af365038a082c58e-bailey, brad I">

To:

"Reiser, Martin" <martin.reiser@mail.house .gov>

Date:

Sun, 12 Nov 2017 10:31 :10-0500

Can you give me a quick calfr -

From: Reiser, Martin <Martin.Reiser'@ma il.h ouse.gov>
Date: November 12, 2017 at 10:29 :07 AM EST
To: Bailey, Bradley <Bradley.Bailey@treasury.gov>
Subject: RE: Data

Ok. b(5)

From: Bradley.Bailey@treasury.gov [mailto:Bradley.Bailey@treasury.gov]
Sent : Sunday, Novem ber 12, 2017 10:27 AM
To : Reiser, Martin <Martin.Reiser@mail.house .gov>
Subject: Re: Data

b(5)
i
'

From: Reiser, Martin <Martin.Reiser@mail.house.gov
Date: November 11, 2017 at 8:33:19 AM EST
To : Bailey, Bradley <Bradley.Bailey@treasury.gov >
Subject : Re: Data

>

b(5)

Sent from my iPhone
On Nov 11, 2017, at 8:18 AM , " Bradley .Bailey@treasury.gov " <Bradley.Bailey@treasury.gov > wrote:

b(5)

From: Reiser, Martin <Martin.Reiser@mail.house.gov

>

Date: November 11, 2017 at 8:16:16 AM EST
To: Bailey, Bradley <Bradley.Bailey@treasury .gov>
Subject: Re: Data
b(5)
b(S)

/\Mlf

ll Al\

UST 001674
pVERSIGHT

TREAS-17-0313-I-000695

 Sent from my iPhone
On Nov 11, 2017, at 8:09 AM, " Bradley.Bailey@treasury.gov " <Bradley.Bailey@treasu ry.gov>
wrote:

b(5)

From : Reiser, Martin <Martin.Reiser@mail.house.gov

>

Date: November 11, 2017 at 7:04:32 AM EST
To: Bailey, Bradley <Bradley.Bailey@treasury.gov >
Subject : Data

b(5)
b(5)

Sent from my iPhone

/\Mlf

ll Al\

UST 001675
pVERSIGHT

TREAS-17-0313-I-000696

 FW : Sim
From :

"Bailey, Bradley'' <"/o= ustreas ury/ou=exchange admin istrative group
(fyd ibohf23s pdlt)/cn =rec ipients/cn= 7eb678b02d9b41c0af365038a 082c58e-bailey , bradl">

To:

"Reiser, Martin " <martin .reiser@mail.house. gov>

Date :

Sun, 12 Nov 2017 10:57:56 -0500

Atta chments :

CL and HWM Exa mple Ca lculator 110720 17 FINAL.XLSX (45. 97 kB)

Here's the calculator
From: Bailey, Bradley
Sent : Wednesday, November 08, 2017 10:14 AM
To : 'Specht, Brittan ' <Brittan .Specht@mail.house.gov> ; 'donald .schneider@mail.house .gov'
<donald.schneider@mail.house .gov>
Cc: 'Dunham , Will' <Will.Dunham@mail.house .gov>; Maloney , Drew <Drew.Maloney@treasury .gov>;
@treasury.gov> ;
@treasury .gov>; • •
Muzinich, Justin <Justin .Muzinich@treasury .gov>
Subject : Simple calculator for comparing CL and HWM

Brittan/

Donald :

In advance of our 1pm meeting, wanted t o share the attached calculator that OTA has been working
on. It allows the user to enter income, dependents, and deductions for each filing status (e.g., single ,
mfj) and from that information automatically computes tax liability. The income and deduction items
can be customized for a state or congressional district using the taxpayer advocate or IRSdata .
Brad

Brad Bailey
Deputy Assistant Secretary for Tax and Budget
Office of Legislative Affairs
U.S. Department of the Treasury
Br~
reasury.gov
C: • •
0: (202) 622-2878

/\Mlf

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UST 001676
pVERSIGHT

TREAS-17-0313-I-000697

 SFC Winners and Losers Table
From :

"Monie, Alex (Finance)" <alex_monie@finance.senate.gov>

To:

Shahira Knight , EOP

Cc:
Date :
Attachments:

"Prater, Mark (Finance)" <mark_prater@finance.senate.gov>

"Muzinich, Justin" <justin.rnuzinich@treasury.gov>

Mon, 13 Nov 2017 08:07:00 -0500
O-17-49.pdf (58.99 kB)

Shahira and Justin, Mark wanted you both to have a copy of the winners and losers tables. Let me
know if you have any questions.
Best,
Alex

TREAS-17-0313-I-000698

 A DISTRIBU TION OF RETURNS BY THE SIZE OF THE TAX CHANGE FOR
THE CHAIRMAN 'S MARK OF THE "TAX CUTS AND JOBS ACT,"
SCHEDULED FOR MARKUP BY THE COMMITTEE ON FINANCE ON NOVEMBER 13, 2017

Calend ar Year 2019

INCOME
CATEGORY (2)
Less than $10,000 ...............
$10,000 to $20,000 ............
$20,000 to $30 ,000 ............
$30,000 to $40,000 ............
$40,000 to $50,000 ............
$50,000 to $75,000 ............
$75,000 to $100,000 ..........
$100,000 to $200,000 .........
$200,000 to $500,000 .........
$500,000 to $1,000,000 ......
$1,000,000 and over ...........
Total, All Taxpayers ..........

Tax Decrease
Greater
Than $500
$100-$500
0.4%
3.3%
1.3%
35.9%
5.9%
39.8%
22.6%
37.7%
45.6%
26.1%
63.3%
16.2%
10.7%
70.2%
73.2%
5.0%
72.2%
3.1%
87.9%
0.5%
81.6%
0.2%
40.4%
19.3%

Percentage of Return s
Tax Change
Tax Increase
Less than
Greater
$100
$100-$500
Than $500
96.1%
0.1%
0.1%
61.1%
0.5%
1.2%
51.0%
1.0%
2.3%
35.0%
1.8%
2.9%
21.6%
2.9%
3.9%
11.0%
3.6%
5.9%
4.7%
4.0%
10.4%
2.3%
3.9%
15.6%
1.4%
2.9%
20.4%
0.3%
0.5%
10.7%
0.2%
0.3%
17.7%
31.1%
2.3%
6.8%

TREAS-17-0313-I-000699

#D-17-49
November 11, 2017

Sou rce : Jo int Commi ttee on Taxatio n
Detail may not add to total due to rounding.
(1) This table is a distr ibutional analysis of the proposa l in revenue table JCX-52-17 , exclud ing the following sections: I. Tax Reform for
Individua ls: D.4.-D.6. , and E.
(2) The income concept used to place tax returns into income categor ies is adjusted gross income (AGI) plus: (1] tax-exempt interest ,
[2] employer contributions for health plans and life insurance , [3] employer share of FICA tax, [4] worker's compensation ,
[5] nontaxable Social Security benefits , [6] insurance value of Medicare benefits , [7] alternative minimum tax preference items ,
[8] individual share of business taxes , and [9] excluded income of U.S. cit izens living abroad . Categories are measured at 2017 levels.
(3) The categor ies reflect ing the size of tax change are indexed for inflation.

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 A DISTRIBU TION OF RETURNS BY THE SIZE OF THE TAX CHANGE FOR
THE CHAIRMAN 'S MARK OF THE "TAX CUTS AND JOBS ACT,"
SCHEDULED FOR MARKUP BY THE COMMITTEE ON FINANCE ON NOVEMBER 13, 2017

Calend ar Year 2021

INCOME
CATEGORY (2)
Less than $10,000 ...............
$10,000 to $20,000 ............
$20,000 to $30 ,000 ............
$30,000 to $40,000 ............
$40,000 to $50,000 ............
$50,000 to $75,000 ............
$75,000 to $100,000 ..........
$100,000 to $200,000 .........
$200,000 to $500,000 .........
$500,000 to $1,000,000 ......
$1,000,000 and over ...........
Total, All Taxpayers ..........

Tax Decrease
Greater
Than $500
$100-$500
0.3%
2.1%
1.1%
28.3%
4.7%
37.9%
20.6%
35.5%
43.9%
25.0%
60.7%
16.5%
11.5%
67.5%
70.7%
5.2%
68.3%
3.5%
85.1%
0.8%
79.1%
0.3%
38.7%
17.9%

Percentage of Return s
Tax Change
Tax Increase
Less than
Greater
$100
$100-$500
Than $500
97.3%
0.1%
0.1%
68.7%
0.6%
1.3%
53.9%
1.1%
2.4%
39.1%
2.0%
2.9%
23.7%
3.2%
4.2%
12.2%
4.0%
6.6%
4.8%
4.5%
11.7%
2.2%
4.3%
17.7%
1.6%
2.9%
23.8%
0.3%
0.8%
13.0%
0.0%
0.2%
20.4%
33.1%
2.6%
7.7%

TREAS-17-0313-I-000700

#D-17-49
November 11, 2017

Sou rce : Jo int Commi ttee on Taxatio n
Detail may not add to total due to rounding.
(1) This table is a distr ibutional analysis of the proposa l in revenue table JCX-52-17 , exclud ing the following sections: I. Tax Reform for
Individua ls: D.4.-D.6. , and E.
(2) The income concept used to place tax returns into income categor ies is adjusted gross income (AGI) plus: (1] tax-exempt interest ,
[2] employer contributions for health plans and life insurance , [3] employer share of FICA tax, [4] worker's compensation ,
[5] nontaxable Social Security benefits , [6] insurance value of Medicare benefits , [7] alternative minimum tax preference items ,
[8] individual share of business taxes , and [9] excluded income of U.S. cit izens living abroad . Categories are measured at 2017 levels.
(3) The categor ies reflect ing the size of tax change are indexed for inflation.

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 A DISTRIBU TION OF RETURNS BY THE SIZE OF THE TAX CHANGE FOR
THE CHAIRMAN 'S MARK OF THE "TAX CUTS AND JOBS ACT,"
SCHEDULED FOR MARKUP BY THE COMMITTEE ON FINANCE ON NOVEMBER 13, 2017

Calend ar Year 2023

INCOME
CATEGORY (2)
Less than $10,000 ...............
$10,000 to $20,000 ............
$20,000 to $30 ,000 ............
$30,000 to $40,000 ............
$40,000 to $50,000 ............
$50,000 to $75,000 ............
$75,000 to $100,000 ..........
$100,000 to $200,000 .........
$200,000 to $500,000 .........
$500,000 to $1,000,000 ......
$1,000,000 and over ...........
Total, All Taxpayers ..........

Tax Decrease
Greater
Than $500
$100-$500
0.0%
2.0%
0.5%
32.9%
2.5%
39.0%
13.7%
38.7%
37.0%
27.5%
54.0%
18.5%
13.4%
60.8%
64.2%
5.6%
59.2%
4.0%
78.2%
0.8%
72.7%
0.3%
34.1%
19.6%

Percentage of Return s
Tax Change
Tax Increase
Less than
Greater
$100
$100-$500
Than $500
97.3%
0.4%
0.2%
61.1%
4.0%
1.4%
53.7%
2.5%
2.4%
41.1%
3.3%
3.2%
26.4%
4.2%
4.9%
14.3%
5.0%
8.2%
6.1%
5.0%
14.7%
2.7%
4.7%
22.7%
1.8%
3.7%
31.3%
0.6%
1.0%
19.4%
0.3%
0.3%
26.3%
32.8%
3.7%
9.8%

TREAS-17-0313-I-000701

#D-17-49
November 11, 2017

Sou rce : Jo int Commi ttee on Taxatio n
Detail may not add to total due to rounding.
(1) This table is a distr ibutional analysis of the proposa l in revenue table JCX-52-17 , exclud ing the following sections: I. Tax Reform for
Individua ls: D.4.-D.6 .• and E.
(2) The income concept used to place tax returns into income categor ies is adjusted gross income (AGI) plus: (1] tax-exempt interest ,
[2] employer contributions for health plans and life insurance , [3] employer share of FICA tax, [4] worker's compensation ,
[5] nontaxable Social Security benefits , [6] insurance value of Medicare benefits . [7] alternative minimum tax preference items ,
[8] individual share of business taxes , and [9] excluded income of U.S. cit izens living abroad . Categories are measured at 2017 levels.
(3) The categor ies reflect ing the size of tax change are indexed for inflation.

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 A DISTRIBU TION OF RETURNS BY THE SIZE OF THE TAX CHANGE FOR
THE CHAIRMAN 'S MARK OF THE "TAX CUTS AND JOBS ACT,"
SCHEDULED FOR MARKUP BY THE COMMITTEE ON FINANCE ON NOVEMBER 13, 2017

Calend ar Year 2025

INCOME
CATEGORY (2)
Less than $10,000 ...............
$10,000 to $20,000 ............
$20,000 to $30 ,000 ............
$30,000 to $40,000 ............
$40,000 to $50,000 ............
$50,000 to $75,000 ............
$75,000 to $100,000 ..........
$100,000 to $200,000 .........
$200,000 to $500,000 .........
$500,000 to $1,000,000 ......
$1,000,000 and over ...........
Total, All Taxpayers ..........

Tax Decrease
Greater
Than $500
$100-$500
0.1%
3.3%
0.6%
33.6%
2.0%
39.8%
13.0%
38.5%
36.0%
28.4%
53.2%
19.2%
13.3%
60.9%
63.8%
5.7%
60.2%
3.5%
78.2%
1.0%
73.3%
0.3%
34.0%
20.0%

Percentage of Return s
Tax Change
Tax Increase
Less than
Greater
$100
$100-$500
Than $500
96.1%
0.4%
0.2%
60.9%
3.5%
1.4%
52.7%
3.0%
2.5%
41.8%
3.4%
3.2%
26.5%
4.1%
5.1%
14.1%
5.1%
8.4%
5.6%
5.1%
15.1%
2.6%
4.7%
23.2%
1.8%
3.7%
30.7%
0.7%
0.8%
19.3%
0.2%
0.3%
25.9%
32.2%
3.8%
10.0%

TREAS-17-0313-I-000702

#D-17-49
November 11, 2017

Sou rce : Jo int Commi ttee on Taxatio n
Detail may not add to total due to rounding.
(1) This table is a distr ibutional analysis of the proposa l in revenue table JCX-52-17 , exclud ing the following sections: I. Tax Reform for
Individua ls: D.4.-D.6. , and E.
(2) The income concept used to place tax returns into income categor ies is adjusted gross income (AGI) plus: (1] tax-exempt interest ,
[2] employer contributions for health plans and life insurance , [3] employer share of FICA tax, [4] worker's compensation ,
[5] nontaxable Social Security benefits , [6] insurance value of Medicare benefits , [7] alternative minimum tax preference items ,
[8] individual share of business taxes , and [9] excluded income of U.S. cit izens living abroad . Categories are measured at 2017 levels.
(3) The categor ies reflect ing the size of tax change are indexed for inflation.

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 A DISTRIBU TION OF RETURNS BY THE SIZE OF THE TAX CHANGE FOR
THE CHAIRMAN 'S MARK OF THE "TAX CUTS AND JOBS ACT,"
SCHEDULED FOR MARKUP BY THE COMMITTEE ON FINANCE ON NOVEMBER 13, 2017
Calend ar Year 2027

INCO ME
CATEGORY (2)

Less than $10,000 ...............
$10,000 to $20,000 ............
$20,000 to $30 ,000 ............
$30,000 to $40,000 ............
$40,000 to $50,000 ............
$50,000 to $75,000 ............
$75,000 to $100,000 ..........
$100,000 to $200,000 .........
$200,000 to $500,000 .........
$500,000 to $1,000,000 ......
$1,000,000 and over ...........
To tal, All Taxpayers ..........

Tax Dec rease
Greater
Th an $500
$ 100-$500
0.4%
6.3%
1.4%
43.4%
4.5%
41.9%
21.3%
33.8%
41.4%
26.2%
57.2%
18.4%
65.6%
11.6%
68.4%
5.2%
68.0%
3.5%
83.3%
0.6%
77.9%
0.2%
38.2%
20.6%

Percent age of Return s
Tax Change
T ax Increase
Less t han
Greater
$100
$100-$500
Than $500
92.8%
0.3%
0.2%
50.7%
3.1%
1.5%
48.8%
2.4%
2.4%
38.7%
3.3%
2.9%
23.8%
4.1%
4.6%
11.9%
4.7%
7.7%
4.6%
4.9%
13.3%
2.4%
4.3%
19.6%
1.6%
2.7%
24.3%
0.4%
0.7%
15.0%
0.2%
0.3%
21.5%
29.0%
3.4%
8.7%

TREAS-17-0313-I-000703

#D-17-49
November 11, 2017

Sou rce : Jo int Commi ttee on Taxatio n
Detail may not add to total due to rounding.
(1) This table is a distr ibutional analysis of the proposa l in revenue table JCX-52-17 , exclud ing the following sections: I. Tax Reform for
Individua ls: D.4.-D.6. , and E.
(2) The income concept used to place tax returns into income categor ies is adjusted gross income (AGI) plus: (1] tax-exempt interest ,
[2] employer contributions for health plans and life insurance , [3] employer share of FICA tax, [4] worker's compensation ,
[5] nontaxable Social Security benefits , [6] insurance value of Medicare benefits , [7] alternative minimum tax preference items ,
[8] individual share of business taxes , and [9] excluded income of U.S. cit izens living abroad . Categories are measured at 2017 levels.
(3) The categor ies reflect ing the size of tax change are indexed for inflation.

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 From:

b(6)

To:

"Plack, Brendon (Thune)" <brendon_plack@thune.senate.gov>

Cc:

"Bailey, Bradley" <bradley.bailey@treasury.gov>,
<drew .maloney@treasury.gov>

Date:
Attachments:

Mon, 13 Nov 2017 10:37:30 -0500

i>

treasury .gov>
"Maloney, Drew"

Pass Through counts and totals in HR1 tax brackets.xlsx (20.82 kB)

• • : • b(5)
b(5)

•

•

From: Plack, Brendon (Thune) [mailto:Brendon_Plack@thune
Sent: Sunda November 12 2017 9:12 PM
To: • •
treasury.gov>
Subject: Fwd: S-Corp Concerns with Senate Tax Reform Bill

.senate.gov]

Hey l:IJllllllll
let's discuss this tomorrow morning if you have time.

b(5)

I think I mentioned this to Drew as well last week.

SenLfrom my Verizon, Samsung Galaxy smru·tphone

-------- Original message -------From: Jade West - NA W <jwest@naw.org>
Date: 11/ 12/ 17 11:54 AM (GMT-05:00)
To: "Plack, Brendon (Thune)" <Brendon_Plack @thune.senate.gov >, "McBride , Stacy (Blunt)"
< Stacy _ McBride @blunt. se nate.gov>, "Popp, Monica (Comyn)"
<Monica _ Popp @comyn. senate. gov>
Cc: Arie Newhouse <ANewhous e@namor g>, "Suares , Erica (McConnell)"
<Erica_ Suares @mcconnell. se nate .gov>
Subject: FW: S-Corp Concerns with Senate Tax Refo1m Bill
Just FYI- and following up on our conversation Thursday morning , this S Corp bulletin explains why
the pass-through community has problems with the Senate bill (as well as with the probably-worse
House bill) . The inequity of treatment between the C Corps and pass-th roughs is pretty stark .
Erica, you weren't able to make the Thursday meeting and I assume you 've seen this S corp bull etin ,
but am copyi ng you just in case. I know you/SFC are still wo rking on this, but th is bulletin pretty
clearly expla ins the pass-thru problem .....

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TREAS-17-0313-I-000704

 Jade C. West
Sr. Vice President - Government Relations
National Association of Wholesaler-Distributors
1325 G Street, NW, Suite 1000
Washington, DC 20005
Tel: 202-872-0885 Fax: 202-296-5940
www.naw.org
From: S Corporation Association [mai lto :breardon@s -corp.org]
Sent : Saturday , November 11, 2017 6:08 PM
To : Jade West - NAW <jwe st@naw.org>
Subject : S-Corp Concerns with Senate Tax Reform Bil l

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pVERSIGHT

TREAS-17-0313-I-000705

 In ThisIssue
Join Us
S-Corp Concerns with
Senate Tax Reform BIii

AreYouA Merrilerof
S-Corp
? WlyNot?
S-CORP is the only trade
association exclusively
focused on representing S
corporations before the
Congress and the Executive
Branch .

Our mission is to act as the
"eyes, ears , and voice" of
Amer ica's S corporations in
Washington , D .C . Advocacy is
all we do.

JOIN TODAY!

LJLJ

S-Corp Concerns with Senate
Tax Reform Bill
Top Line
The Framework and rhetoric leading up to its release indicated that
Senate Leadership and the Finance Committee were committed to
treating the millions of companies organized as pass-throug h
businesse s fairly in relation to C corporations. The Framework
explicitly ca lled for a rate differential of five percentage points, while
previous Finance Committee work focused on leveling the playing
field between C corporations and pass-through busfoesses by
eliminating the double corporate tax and moving the entire business
community toward s a single, reasonable leve l of tax on all
businesse s.
Unlike much of the business community, S-Corp fully supported both
efforts and expresse d that suppmi publicly.
The tax bill release d Thursday night falls well short of these promises
and policies. It abandons any notion of equity for pass-through
businesses. Under the plan, no success ful pass-through business will
receive the promised 25 perc ent rate or anything close to it, while the
new, larger tax rate gap betwee n pass-through businesses and C
corporations will result in a migration of business activity out of the
c01Tect, single layer tax approach and into the hannful , doubl e
corporate tax. The economy will suffer as a result - there will be
fewer job s and less inves tment than if pass-through bu sinesses cou ld
continue as a viable alternative for family businesses.
The new disparity of rates between individuals and C corporations
will turn the C corporation into the tax avoidance vehicle of choice
for wealthy taxpayers , returning the Tax Code to the pre-19 86 Tax
Refo1m Act days when C corporation rates were sharply lower than
individual rate s and tax gaming within the corporate structur e was
rampant.
Below are spec ific concerns and questions we have regarding the
Senate bill. lt was releas ed late Thursday evening, so this is not a
comprehensive list or review. S-Corp will continue to work with the
Committee and members of the Senate to seek improvements and
restore some semblance of parity between the tax treatment of C

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UST 001685
pVERSIGHT

TREAS-17-0313-I-000706

 corporations and S corporations.

Specific Concerns
Rate Differential: The bill reduces the top rate on C corporations to
20 percent. The bill reduces the top rate on S corporations to 38.5
percent, 18.5 points higher and 13.5 points above the promised rate in
the Framework. The bill does include a deduction for pass-through
businesses, if they have sufficient employees and payroll costs, of up
to 17.4 percent, bringing the effective rate on qualifying pass-through
businesses down to 32 percent, or 12 points above the C corporation
rate. That is not the rate most S corporations will pay, however:
• SALT: The bill repeals the State and Local Tax Deduction for
individuals and pass-through businesses. C corporations will
continue to deduct SALT. Depending on which state(s) an S
corporation resides in, the repeal of this business expense will
increase the marginal rate of S corporations by as much as 5
percentage points. S corporations operating in California,
therefore, will pay a marginal rate of 37 percent. The average
S corporation will pay a marginal rate of around 34 percent, or
14 points above the C corporation rate.
• NIIT: Republican leadership promised to repeal the Net
Investment Income Tax (NilT) following the election of
President Trump. This tax applies to income from S
corporat ions earned by inactive shareholders. The failure of
health care reform, coupled with the decision by leadership to
not repeal the NilT in tax reform, means marginal rates on S
corporation income for inactive shareholders will be even 3.8
percentage points higher, resulting in a top marginal rate for S
corporations of 40 percent or more.
• Revenues: The reason the pass-through rate is so much higher
than the C corporation rate is the Committee chose to devote
relatively more revenues to reducing the corporate rate. The
JCT reports that the 20 percent corporate rate reduces revenues
by $1,326 billion, whereas the pass-through deduction reduces
revenues by just $460 billion, or 26 percent of the total revenue
pool devoted to business rate relief By way of comparison,
pass-through businesses employ the majority of workers and
earn the majority of business income. They represent
approximately one-third of the American economy, not onefourth.

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TREAS-17-0313-I-000707

 • Fix: The Committee should devote a proportional amount of
revenue to reducing the pass-through rate as it does to reducing
the C corporation rate. At the very least , it should set as a goal
maintaining the current maximum rate differential of
approximately 9 percentage points between the two entity
types.
Base Broadening: The Senate bill includes extensive base
broadening, much of it affecting both C corporations and S
corporations. But many of these base broadening provisions apply to
pass-through businesses only, while a11the base broadening wi11hurt
S corporations more, since their marginal rate is so much higher than
the C corporation rate. The loss of a $1 deduction will cost C
corporations just 20 cents, whereas it will cost an S corporation up to
40 cents or more. Here are some of the significant base broadening
provisions that will affect S corporations:
• Loss Limitation Rules: The Senate bill includes a who11ynew
limitation on "excess business losses of a taxpayer other than a
C corporation ... " There is little explanation as to why this
provision is needed, necessary or even good policy. It would
apply to active pass-through business income (not passive
income) and it raises $176 billion over ten years. By way of
background, the JCT references an existing limitation on losses
by farmers who receive federal crop subsidies, yet this
provision appears to have nothing to do with farms or
subsidies. When you net this extra tax against the cost of the
17.4 percent deduction, the rate relief targeted at pass-through
businesses drops to $284 billion, or just one-fifth the cost of the
20 percent corporate rate.
• SALT: The bill would repeal the State and Local Tax (SALT)
deduction for individuals and pass-through businesses but not
for C corporations. As noted above, this has the effect of
raising marginal rates of pass-through businesses by up to 5
percentage points, exacerbating the rate differential between S
and C corporations.
• Section 199: The bi11would repeal the Section 199 deduction
for production income, utilized by manufacturers and other
producers. Four out of five manufacturers are organized as
pass-through businesses. The deduction is up to 9 percent of
production income, so it has the potential to reduce effective
marginal tax rates by more than 3 percentage points. While the
199 repeal applies to both C corporations and pass-through
businesses, the rate disparity between C corporations and pass-

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pVERSIGHT

TREAS-17-0313-I-000708

 through businesses means it will hit S corporations up to twice
as hard.
• Repeal of Miscellaneous Deductions: These are a series of
deductions that are only limited for individuals and passthrough businesses, including indirect and miscellaneous
deductions from a pass-through business and deductible
investment expenses from a pass-through entity. Preventing a
partnership from deducting investment expenses can result in
the partners paying taxes exceeding the returns on the
investment. Need less to say, C corporations may continue to
deduct their investment expenses.
• AMT: The Senate bill would repeal the individual Alternative
Minimum Tax (AMT). This is a large benefit to pass-through
businesses, since much of their income is taxed under the AMT
rather than the regular code. The effect is muted if not fully
offset, however, by the fact that the bill repeals many of the
deductions restored by the AMT repeal. For example, passthrough businesses lose the SALT when their shareholders pay
the AMT. Repealing the AMT restores their ability to deduct
the SALT. The bill then repeals the SALT, but only for
individuals and pass-through businesses, not C corporations.
Combined, the base broadening in the Senate bill has the effect
of turning the regular Tax Code into a new AMT, only at higher
marginal rates.
• Fix: Strike the new limitation on active pass-through business
income and allow pass-through businesses to deduct SALT.
International: The bill moves the tax code from a world-wide system
to a modified territorial system (subject to the new GILTI regime).
This new territorial system is reserved for C corporations only. S
corporations and other pass-through entities are not included. This
exclusion puts S corporations with overseas operations at a distinct
disadvantage.
• Example: Under the bill, a C corporation with a CFC operating
in the UK would pay the 20 percent UK corporate tax.
Assuming no further inclusions under the GILTI regime, it
would be able to pay the remainder back to the US with no
additional tax. When the C corporation pays that income as a
dividend to its shareholders, they would be taxed at 23.8
percent, but only those shareholders who pay taxes. Seventyfive percent of C corporation shareholders are tax advantaged charities, endowments, qualified plans, foreigners, etc.

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UST 001688
pVERSIGHT

TREAS-17-0313-I-000709

 • S Corporations with branch operations in the UK would pay the
20 percent tax to the UK and then the US tax of 32-41 percent
immediately (see section above) at the new pass-through tax
rates. They would be allowed a Foreign Tax Credit for the
taxes paid in the UK against their personal income, but this
would be subject to limitations. There would be no opportunity
to defer paying the US tax.
• Alternatively , an S corporation with a CFC would pay the 20
percent UK tax and its shareholders would be taxed at 23.8
percent on 100 percent of the dividend income when that is
repatriated, regardless of whether the dividend was distributed
to the shareholders. In other words, an S corporation with a
CFC is treated worse than a C corporation CFC under the new
territorial system
• IC-DISC: The bill repeals the IC-DISC. This repeal has little
effect on C corporations , as income qualifying for the new
territorial system is taxed almost exactly as the IC-DISC
system does now. The foreign earnings would be subject to
foreign tax, and then a single additional layer of tax at the
dividend rate when dividends are paid to the shareholder. The
only difference would be that the dividends can be paid directly
to the shareholder, rather than through the DISC. Since S
corporations are excluded from the new territorial system, they
will be harmed by this repeal. They lose the benefit of the
DISC, but also are precluded from the benefits of territorial.
• Fix: The Senate bill should allow S corporations with CFCs to
participate in territorial. The result would be IC-DISC-like
treatment for all types of business operating overseas, with all
of them having equal treatment. An alternative fix would be to
preserve the IC-DISC for pass-through businesses.
Bottom Line

If enacted as introduced , the Senate bill would result in a large
migration of business activity from the pass-through tax and into the
double corporate tax. This migration would not result in better
economic performance - the transition costs, the double tax imposed
on a broader base of business income, and the change in behavior it
would require on the part of converted family businesses will hurt
economic growth, not help it.
Pass-through businesses employ the majority of workers, they earn
the majority of business income, and they pay higher effective tax

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 rates than C corporations, yet they are literally being treated as an
after-thought in this legis lation.
The fix is for the Senate (and the House) to pursue tax refonn that
balance s the importance of the pass-through community with the
legitimate need to reduce the C co rporation rate. S-Corp and its
allies are willing and eager to work with the Committee and the full
Senate to affect these changes.

Why Join S-Corp? Here's what our members say!
"S-Corp's strength is its ability to work with other business groups to support issues important
to S corporations. They really are a leader and resource for other bu siness groups in DC.''
- Tom J'vf
cMahon, Vice Presid ent of Operati ons. Barker Company

S-Corporation Association of Ame rica, 134 1 G St. NWr Suite 600, Washignto n, DC 20005
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TREAS-17-0313-I-000711

 Calculator / PT Data
From:

"Bailey, Bradley" <bradley.bailey@treasury.gov>

To:

"Prater , Mark (Finance)" <mark _prater@finance .senate.gov>, "Wrase , Jeff (Finance)"
<jeff _wrase@finance.senate.gov>

Cc:

"Maloney , Drew" <drew.maloney@treasury .gov>

Date:
Attachments:

Mon, 13 Nov 2017 11 :35:00 -0500
Pass Through counts and totals in HR1 tax brackets .xlsx (20.82 kB) ; CL and HWM
Example Calculator 11072017 FINAL.XLSX (45.97 kB)

Brad Bailey
Deputy Assistant Secretary for Tax and Budget
Office of Legislative Affairs
U.S. Departm ent of the Treasury
Bradle .baile
treasur . ov

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TREAS-17-0313-I-000712

 From:

"Bailey, Bradley" <"/o=ustreasury/ou=exchang e administrative group
(fydibohf23spdlt)/cn=recipients/cn= 7eb678b02d9b41 c0af365038a082c58e-bailey, brad I">

To:

"~n

(Thune)" <brendon_plack@thune .senate.gov>, b(6)

tlVllllllllllll@treasury.go v>
Cc:

"Maloney , Drew" <drew .maloney@tre asury.gov>

Date:

Mon, 13 Nov 2017 12:00:14 -0500

Thank you very much. Will report back if there's anything of note
From: Plack, Brendon (Thune) [mailto:Brendon_Plack@thune.senate.gov]
Sent: Monday, November 13, 2017 11:57 AM
To: Bailey, Bradley <Bradley.Bailey@treasury .gov>; • •
Cc: Maloney, Drew <Drew.Maloney@treasury.gov>
Subject : RE: S-Corp Concerns with Senate Tax Reform Bill

treasury .gov>

From: Bradley.Bailey@treasury
.gov [mailto:Bradley.Bailey@treasury.gov
]
Sen ·
vember 13, 2017 10:50 AM
To:
treas . v; Plack, Brendon (Thune)
Cc: Drew.Maloney@treasury.gov

Subject: RE: 5-Corp Concerns with SenateTax Reform Bill
b(5)

From: b(6)
Sent : Monday , November 13, 2017 10:38 AM
To: 'Plack, Brendon (Thune) ' <Brendon Plack@thune .senate.gov >
Cc: Bailey, Bradley <Bra.dley.Bailey@treasury.gov >; Maloney, Drew <Drew.Maloney@treasury
Subject : RE: $-Corp Concerns with Senate Tax Reform Bill

.gov>

Hey BP. b(5)

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TREAS-17-0313-I-000713

 From: Plack, Brendon (Thune) (mailto:Brendon Plack@thune.senate.gov ]
Sent: Sunda November 12 2017 9:12 PM
To :
treasu r . ov>
Subject: Fwd: S-Corp Concerns with Senate Tax Reform Bill

I think I mentioned this to Drew as we I last week.

Sent from my Verizon, Samsung Galaxy smrutphone

-------- Original message -------From: Jade West - NA W <jwest@naw.org>
Date: 11/ 12/ 17 11:54 AM (GMT-05:00)
To: "Plack, Brendon (Thune)" <Brendon Plack@thune.senate.gov >, "McBride , Stacy (Blunt)"
<Stacy McBride@blunt.senate.gov >, "Popp, Monica (Comyn)"
<Monica Popp@comyn.senate.gov >
Cc: Arie Newhouse <ANewhouse@nam.org> , "Suares , Erica (McConnell)"
<Erica Suares@mcconnell. senate. gov>
Subject: FW: S-Corp Concerns with Senate Tax Reform Bill
Just FYI- and fol lowing up on our conversatio n Thursday morning, this S Corp bul letin exp lains why
the pass-t hrough commun ity has problems with the Senate bill (as well as with the pro bably-worse
House bill) . The inequit y of t reatme nt between the C Corps an d pass-th roughs is pretty star k.
Erica, you weren't able to make the Thursda y meeting and I assume you' ve seen this S co rp bulletin,
but am copying you just in case. I know yo u/SFC are still working on this, but this bu lletin pretty
clearl y exp lains the pass-thru proble m .....

Jade C. West
Sr. Vice President - Government Relations
National Association of Wholesaler-Distributors
1325 G Street, NW, Suite 1000
Washington, DC 20005
Tel: 202-872-0885 Fax: 202-296-5940
www.naw.org
From: S Corporation Association [mailto:breardon@s-corp.org
Sent: Saturday, November 11, 2017 6:08 PM
To: Jade West - NAW <jwest@naw.org >
Subject : $-Corp Concerns with Senate Tax Reform Bill

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]

TREAS-17-0313-I-000714

 InThisIssue
Jo1□ Us

S-Corp Concerns with
Senate Tax Reform Bill

AreYouA Meni>er
of
5-Corp
? WlyNot?
S-CORP is the only trade
association exclusively
focused on representingS
corporations before ttie
Congress and the Executive

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S-Corp Concerns with Senate
Tax Reform Bill
Top Line
The Framework and rhetoric leading up to its relea se indicated that
Senate Leadership and the Finance Conunittee were committed to
treating the millions of companies organized as pass-through
bus inesses fairJy in re lation to C corporat ions. The Framework
exl)licitly called for a rate differential of five percentage points, while

TREAS-17-0313-I-000715

 Branch
Our mission ls to act as the
''eyes, ears, and voice" of
Amerfca's S corporationsIn
Washington, D .C. Advocacy is
all wedo .

JOINTODAY!

LJLJ

previous Finance Committee work focused on leveling the playing
field between C corporations and pass-through businesses by
eliminating the double corporate tax and moving the entire business
community towards a single, reasonable leve l of tax on all
businesses.
Unlike much of the business community, S-Corp fully supported both
efforts and expressed that support publicly .
The tax bill released Thursday night falls well shmi of these promi ses
and policie s. It abandons any notion of equity for pass-through
businesse s. Under the plan, no successfu l pa ss -through busines s will
receive the promised 25 percent rate or anything close to it, whi le the
new, larger tax rate gap between pas s-through businesses and C
corporations will resu lt in a migration of business activity out of the
c01Tect, single layer tax approach and into the hannful , double
corporate tax. The eco nomy will suffer as a result - there will be
fewer jobs and less investme nt than if pass-througl1 businesse s cou ld
continue as a viabl e alternative for family businesses.
The new disparity of rates between individuals and C corpo rations
will turn the C corporation into the tax avo idance vehicle of choice
for wea lthy taxpayers, returning the Tax Code to the pre-1986 Tax
Reform Act days when C corporation rates were sharp ly lower than
individual rates and tax gaming within the corporate structure was
rampant.
Below are spec ific concerns and questions we have regarding the
Senate bill. It was released lat e Thursday evening, so this is not a
comprehe nsive list or review. S-Corp will co ntinue to work with the
Committee and members of the Senate to seek improvements and
restore some se mblance of parity betwee n the tax treatm ent of C
corporations and S corporations.

Specific Concerns
Rate Differential: The bill reduces the top rate on C corporations to
20 percent. The bill reduces the top rate on S corporati ons to 38.5
percent , 18.5 point s higher and 13.5 point s above the promised rate in
the Framework . The bill doe s include a deduction for pass -through
businesses , if they have sufficient emp loyees and payroll costs, of up
to 17.4 perc ent, bringing the effective rate on qualifying pass-tl1rough

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 businesses down to 32 percent, or 12 points above the C corporation
rate. That is not the rate most S corporations will pay, however:
• SALT: The bill repeals the State and Local Tax Deduction for
individuals and pass-through businesses. C corporations will
continue to deduct SALT. Depending on which state(s) an S
corporation resides in, the repeal of this business expense will
increase the marginal rate of S corporations by as much as 5
percentage points. S corporations operating in California,
therefore, will pay a marginal rate of 37 percent. The average
S corporation will pay a marginal rate of around 34 percent, or
14 points above the C corporation rate.
• NIIT: Republican leadership promised to repeal the Net
Investment Income Tax (NilT) following the election of
President Trump. This tax applies to income from S
corporations earned by inactive shareholders. The failure of
health care reform, coupled with the decision by leadership to
not repeal the NIIT in tax reform, means marginal rates on S
corporation income for inactive shareholders will be even 3.8
percentage points higher, resulting in a top marginal rate for S
corporations of 40 percent or more.
• Revenues : The reason the pass-through rate is so much higher
than the C corporation rate is the Committee chose to devote
relatively more revenues to reducing the corporate rate. The
JCT reports that the 20 percent corporate rate reduces revenues
by $ 1,326 billion, whereas the pass-through deduction reduces
revenues by just $460 billion, or 26 percent of the total revenue
pool devoted to business rate relief. By way of comparison,
pass-through businesses employ the majority of workers and
earn the majority of business income. They represent
approximately one-third of the American economy, not onefourth.
• Fix: The Committee should devote a proportional amount of
revenue to reducing the pass-through rate as it does to reducing
the C corporation rate. At the very least, it should set as a goal
maintaining the current maximum rate differential of
approximately 9 percentage points between the two entity
types.
Base Broadening: The Senate bill includes extensive base
broadening, much of it affecting both C corporations and S
corporations. But many of these base broadening provisions apply to
pass-through businesses only, while all the base broadening will hurt
S corporations more, since their marginal rate is so much higher than

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 the C corporation rate. The loss of a $1 deduction will cost C
corporations just 20 cents, whereas it will cost an S corporation up to
40 cents or more. Here are some of the significant base broadening
provisions that will affect S corporations:
• Loss Limitation Rules: The Senate bill includes a wholly new
limitation on "excess business losses of a taxpayer other than a
C corporation ... " There is little explanation as to why this
provision is needed, necessary or even good policy. It would
apply to active pass-through business income (not passive
income) and it raises $176 billion over ten years. By way of
background, the JCT references an existing limitation on losses
by farmers who receive federal crop subsidies, yet this
provision appears to have nothing to do with farms or
subsidies. When you net this extra tax against the cost of the
17.4 percent deduction, the rate relief targeted at pass-through
businesses drops to $284 billion, or just one-fifth the cost of the
20 percent corporate rate.
• SALT: The bill would repeal the State and Local Tax (SALT)
deduction for individuals and pass-through businesses but not
for C corporations. As noted above, this has the effect of
raising marginal rates of pass-through businesses by up to 5
percentage points, exacerbating the rate differential between S
and C corporations.
• Section 199: The bill would repeal the Section 199 deduction
for production income, utilized by manufacturers and other
producers. Four out of five manufacturers are organized as
pass-through businesses. The deduction is up to 9 percent of
production income, so it has the potential to reduce effective
marginal tax rates by more than 3 percentage points. While the
199 repeal applies to both C corporations and pass-through
businesses, the rate disparity between C corporations and passthrough businesses means it will hit S corporations up to twice
as hard.
• Repeal of Miscellaneous Deductions: These are a series of
deductions that are only limited for individuals and passthrough businesses, including indirect and miscellaneous
deductions from a pass-through business and deductible
investment expenses from a pass-through entity. Preventing a
partnership from deducting investment expenses can result in
the partners paying taxes exceeding the returns on the
investment. Needless to say, C corporations may continue to

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 deduct their investment expenses.
• AMT: The Senate bill would repeal the individual Alternative
Minimum Tax (AMT). This is a large benefit to pass-through
businesses, since much of their income is taxed under the AMT
rather than the regular code. The effect is muted if not fully
offset, however, by the fact that the bill repeals many of the
deductions restored by the AMT repeal. For example, passthrough businesses lose the SALT when their shareholders pay
the AMT. Repealing the AMT restores their ability to deduct
the SALT. The bill then repeals the SALT, but only for
individuals and pass-through businesses, not C corporations.
Combined, the base broadening in the Senate bill has the effect
of turning the regular Tax Code into a new AMT, only at higher
marginal rates.
• Fix: Strike the new limitation on active pass-through business
income and allow pass-through businesses to deduct SALT.
International: The bill moves the tax code from a world-wide system
to a modified territorial system (subject to the new GILTI regime).
This new territorial system is reserved for C corporations only. S
corporations and other pass-through entities are not included. This
exclusion puts S corporations with overseas operations at a distinct
disadvantage.
• Example: Under the bill, a C corporation with a CFC operating
in the UK would pay the 20 percent UK corporate tax.
Assuming no further inclusions under the GILTI regime, it
would be able to pay the remainder back to the US with no
additional tax. When the C corporation pays that income as a
dividend to its shareholders, they would be taxed at 23.8
percent, but only those shareholders who pay taxes. Seventyfive percent of C corporation shareholders are tax advantaged charities, endowments, qualified plans, foreigners, etc.
• S Corporations with branch operations in the UK would pay the
20 percent tax to the UK and then the US tax of 32-41 percent
immediately (see sect ion above) at the new pass-through tax
rates. They would be allowed a Foreign Tax Credit for the
taxes paid in the UK against their personal income, but this
would be subject to limitations. There would be no opportunity
to defer paying the US tax.
• Alternative ly, an S corporation with a CFC would pay the 20
percent UK tax and its shareholders would be taxed at 23.8
percent on 100 percent of the dividend income when that is

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 repatriated, regardless of whether the dividend was distributed
to the shareholders. In other words, an S corporation with a
CFC is treated worse than a C corporation CFC under the new
territorial system.
• IC-DISC: The bill repeals the IC-DISC. This repeal has little
effect on C corporations, as income qualifying for the new
territorial system is taxed almost exactly as the IC-DISC
system does now. The foreign earnings would be subject to
foreign tax, and then a single additional layer of tax at the
dividend rate when dividends are paid to the shareholder. The
only difference would be that the dividends can be paid directly
to the shareholder, rather than through the DISC. Since S
corporations are excluded from the new territorial system, they
will be harmed by this repeal. They lose the benefit of the
DISC, but also are precluded from the benefits of territorial.
• Fix: The Senate bill should allow S corporations with CFCs to
participate in territorial. The result would be IC-DISC-like
treatment for all types of business operating overseas, with all
of them having equal treatment. An alternative fix would be to
preserve the IC-DISC for pass-through businesses.
Bottom Line

If enacted as introduced, the Senate bill would result in a large
migration of business activity from the pass-through tax and into the
double corporate tax. This migration would not result in better
economic performance - the transition costs , the double tax imposed
on a broader base of business income, and the change in behavior it
would require on the part of converted family businesses will hurt
economic growth, not help it.
Pass-through businesses employ the majority of workers , they earn
the majority of business income, and they pay higher effective tax
rates than C corporations, yet they are literally being treated as an
after-thought in this legislation.
The fix is for the Senate (and the House) to pursue tax reform that
balances the importance of the pass-through community with the
legitimate need to reduce the C corporation rate. S-Corp and its
allies are willing and eager to work with the Committee and the full
Senate to affect these changes.

Why Join S-Corp? Here's what our members say!

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TREAS-17-0313-I-000720

 "S-Corp's strength is its ability to work with other business groups to supp01t issues important
to S corporations. They really are a leader and resource for other business groups in DC."

S-Corporation

Association of America, 1341 G St. NW, Suite 600, Washignton, DC 20005
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UST 001700
pVERSIGHT

TREAS-17-0313-I-000721

 RE: RE:
From:

"Reiser, Martin" <martin.reiser@mail.house.gov>

To:

"Maloney, Drew" <drew.maloney@treasury.gov>

Date:

Mon, 13 Nov 2017 14:29:28 -0500

Attachments:

Collins, formatted.docx (1.07 MB)

b(5)
I

From: Drew.Maloney@treasury .gov [mailto:Drew.Maloney@treasury
.gov]
Sent: Monday , November 13, 2017 2:25 PM
To: Reiser, Martin <M art in.Reiser@mail.house .gov>; Specht , Brittan <Brittan.Specht@mail.house.gov>
Subject: RE: RE:

Got it, is it something that is easily prov i ded over ernail
From: Reiser, Martin [mailto:Martin.Reiser@mail.house.gov
]
Sent: Monday , November 13, 2017 2:17 PM
To: Maloney, Drew <Drew .Maloney@treasury.gov >; Specht, Brittan <Brittan.Specht@rnail.house.gov
Subject: RE:

>

b(5)

From: Drew.Maloney@treasury.gov (mailto:Drew.Maloney@treasury
.gov]
Sent: Monday , November 13, 2017 2:02 PM
To: Specht, Brittan <Brittan .Specht@mail.house.gov >; Reiser, Ma rtin <Martin .Reiser@mail.house.gov >
Subject:
b(S)

Thanks
Drew

Drew Maloney
Assistant Secretary of the Treasury
Legislative Affairs
United States Department of the Treasury
1500 Pennsylvania Avenue, NW Suite 3134
Washington, DC 20220
Office: 202-622-1900
Cell: b(6)
drew.maloney@treasury.gov

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TREAS-17-0313-I-000722

 Re: RE: RE:
From :

"Reiser, Martin" <mart in.reiser@mai l.house. gov >

To:

"Maloney , Drew" <drew .maloney@treas ury.gov>

Date :

Mon, 13 Nov 2017 15:08:04 -0500

b(5)
I
'

Sent from my iPho ne
On Nov 13, 2017 , at 2:56 PM, "Drew.Maloney@treasury.gov " <Drew.Malainey@treasury.gov > wrote:

■

b(5)
From: Reiser, Martin (mai lto :Martin .Reiser@mail.house.gov ]

Sent: Monday, November 13, 2017 2:29 PM
>
To : Ma loney, Drew <Drew ,Maloney@treasu rv..£QY

Subject: RE: RE:

b(5)

From: Drew.Maloney@treasury

.gov (mailto :Drew.Maloney@treasu

ry.gQY]

Sent: Monday, November 13, 2017 2:25 PM
To : Reiser, Martin <Martin ,Reiser@mail ,house ,goy >; Specht, Brittan <Elrittan .Specht @maiLhouse,go)L >

Subject: RE: RE:
Got It, is it something that is easily provided over em al I
From: Reiser, Martin (mailto:Martin.Reiser@mail.house.gov

]

Sent : Monday , November 13, 2017 2:17 PM
To : Ma loney, Drew <Drew .Ma loney@treasury.gov >; Specht , Brittan <B1rittan.Specht@mail .house.gov >
Subject : RE:
b(5)
i

From: Drew .Maloney@treasury .gov [mallto:Drew.Maloney@treasury.gQY]

Sent: Monday, November 13, 2017 2:02 PM
To : Specht , Brittan <Brittan.Specht@mail.house.gov

>; Reiser, Martin <.Martin .Reiser@maiLhouse.gov >

Subject :
b(5)

Thanks
Drew

Drew Maloney

Assistant Secretary of the Treasury

AME- CAN

UST 001702
PVERSIGHT

TREAS-17-0313-J-000001

 Legislative Affairs
United States Department of the Treasury
1500 Pennsy/van ta Avenue , NW Suite 3134
Washington, DC 20220
Office: 202-622-1900
Cell: [l(;j
drew.maloney@treasury.gov

AME- CAN

UST 001703
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TREAS-17-0313-J-000002

 Isakson 8 Tax markup amendments
From:

"McGuire , Monica (Isakson)" <monica _mcguire@isakson.senate.gov>

To:

"Bailey, Bradley" <bradley.bailey@treasury .gov>

Date:

Tue, 14 Nov 2017 00:39:13 -0500

Attachments:

Tax Reform Markup Amendments.docx (15.78 kB)

Brad, mtg tonight of SFC Rep tax LAs lasted till 11 :00 pm! Modified mark to have delayed release around
4 pm. Thus not votes on amdts til Wed .
Sorry to not get our votes to you earlier. The last 2 amdts are placeholders.
Arndt #4 regrading locum tenets would be subject to the Byrd rule.
M3
Sent from my iPhone

AMf HICAN

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TREAS-17-0313-J-000003

 Isakson Amen dment #1 to the Tax Cuts and Jobs Act
Cosponsors: Scott, Crapo

Short Title: Nuclear Prod uction Tax Credits

Description of Amendment: The amendment would modify the credit for production from
advanced nuclear power facilit ies and remove the current expiration date of place in service
before January 1, 2021, and create a new credit transfer provision regarding certain pub lic
entities . Specifically , the change would provide that certain pub lic entities would be eligible to
transfer NPTCs to specific project participants. The amendment would be effective for tax years
beginning after date of enactment.

JCT Sco re: $400 million over 10 years (JCX-47-17)

Offset: To be provided .

[NOTE - Amendment sponsor reserves the right to modify the amendment for technical, revenue
neutrality, or other purposes.]

AMERICAN

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TREAS-17-0313-J-000004

 Isakson Amendment #2 to the Tax Cuts and Jobs Act

Short Title: Transition Relief for Existing Foreign Branches

Description of Amendment: The Chairman's Mark genera lly exempts from tax dividends
received by U.S. corporations from controlled foreign corporations. However , U.S. corporations
operating as branches in foreign countries wou ld continue to pay U.S . tax on the foreign branch ' s
income . The amendment would allow an existing foreign branch operating an active business
overseas to make a one-time , irrevocable election to treat such fore ign branch as if it were a
controlled foreign corporation under a territorial tax system. It also makes adjustments to the
Code section 367 gain that would otherw ise be recognized including a carve-out of locallydeveloped intangibles , and includes tax rates and installment payment periods used under
deemed repatriation for tax due on such adjusted section 367 gain.

JCT Score: To be provided.

Offset: To be provided.

[NOTE - Amendment sponsor reserves the right to modify the amendment for technical, revenue
neutrality, or other purposes.]

AMERICAN

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TREAS-17-0313-J-000005

 Isakson Amendment #3 to the Tax Cuts and Jobs Act

Short Title: Expand Eligibility for 100% Expensing

Description of Amendment: The Chairman 's Mark extends the bonus depreciation provisions
of Section l 68(k) of the Internal Revenue Code through 2022 and increases the first-year
deduction from 50 percent to 100 percent. Under curren t law, film, TV, and theatrical
pro ductions do not qualify for bonus depreciation , but a separate section (Section l 81) provides
special expensing rules for these productions. The amen dment wou ld allow film, TV, and
theatr ical productions to qualify for the temporary 100% expensing by changing the definition of
qualified property eligible for bonus depreciation.
JCT Score: To be provided.

Offset: To be provided.

[NOTE - Amendment sponsor reserves the right to modify the amendment for technical, revenue
neutrality, or other purposes.]

AMERICAN

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TREAS-17-0313-J-000006

 Isakson Amendment #4 to the Tax Cuts and Jobs Act

Short Title: Clarification of Treatment of Locum Tenens Physicians

Description of Amendment: The Chairman 's Mark creates a safe harbor for treatme nt of
independent contractors. The amendment clarifies the treatment of locum tenens physicians as
independent contractors to help alleviate physician shortages in underserved areas.

JCT Score: To be provided.

Offset: To be provided, if needed.

[NOTE - Amendment sponsor reserves the right to modify the amendment for technical, revenue
neutrality, or other purpo ses.]

AMERICAN

UST 001708
pVERSIGHT

TREAS-17-0313-J-000007

 Isakson Amendment #5 to the Tax Cuts and Jobs Act

Short Title: Repeal Exclusion Applicable to Certain Passenge r Aircraft Operated by a Foreign
Corporation

Description of Amendment: Section IV(G)(l) of the Chairman ' s Mark removes passenger
cruise gross income from the reciprocal exemption under Section 883 of the Internal Revenue
Code. The amendment would similarly remove certain passenger aircraft operated by a foreign
corporation from Section 883. The restriction would apply to a foreign corporatio n
headquartered in a foreign country that does not have an income tax treaty with the United States
and that has fewer than two arrivals and departures from passenger airline carriers headquartered
in the U.S.

JCT Score: To be provided , but the amendment is expected to raise revenue.

[NOTE - Amendment sponsor reserves the right to modify the amendment for technical , revenue
neutrality, or other purposes.]

AMERICAN

UST 001709
pVERSIGHT

TREAS-17-0313-J-000008

 Isakson Amendment #6 to the Tax Cuts and Jobs Act

Short Title: Clarify Definition of Aggregate Foreign Cash Position for Business Acquisitions

Description of Amendment: The Chairman 's Mark imposes a tax on deferred foreign income
upon transition to the participation exempt ion system. The tax is imposed at a rate of 10 percent
for aggregate earnings and profits attributable to cash assets, and 5 percent for those attributable
to noncash assets. Aggregate earnings and profits attributab le to cash assets are calculated as the
greater of the cash position of the foreign corporation as of the end of 2017, or the average of the
cash position as of the end of2015 and 20 16. The amendment would modify this calculation to
reduce the 2015-20 16 average by the amount of cash that a foreign corporation used to purchase
substantia lly all of the assets of a trade or business from an unrelated person between the end of
20 15 and November 9, 20 17. The amendment would include a recapture provision that would
impose a tax if the foreign corporatio n were to sell the acquired business for cash before the end
of a specified holding period.

JCT Score: To be provided.

Offset: To be provided if needed.

[NOTE - Amend ment sponsor reserves the right to modify the amendment for technical, revenue
neutrality, or other purposes.]

AMERICAN

UST 001710
pVERSIGHT

TREAS-17-0313-J-000009

 Isakson Amendment #7 to the Tax Cuts and Jobs Act

Short Title: To improve the bill.

Description of Amendment: Section IV(D)(2) of the Mark addresses limitations on income
shifting through intangible property transfers. The amendment wou ld modify this section.

JCT Score: To be provided.

Offset: To be provided if needed.

[NOTE-Amend ment sponsor reserves the right to modify the amendment for technical, revenue
neutrality , or other purposes.]

AMERICAN

UST 001711
pVERSIGHT

TREAS-17-0313-J-000010

 Isakson Amendment #8 to the Tax Cuts and Jobs Act

Short Title: To improve the bill.

Description of Amendment: Table 2 in Section I(A)( l ) of the Chairman's Mark describes a
new rate structure for individual income tax rates for 2018. In the last line of the section titled
"Estates and Trusts, " the amendment would strike "$3,077.50 " and insert "$3,078."

JCT Score: To be provided.

Offset: To be provided if needed.

[NOTE - Amendment sponsor reserves the right to modify the amendment for technical, revenue
neutrality, or other purpo ses.]

AMERICAN

UST 001712
pVERSIGHT

TREAS-17-0313-J-000011

 RE: tax reform
From :

"Alber, Alexis (Ron Johnson)" <alexis_albe r@ronjohnson .senate.gov>

To:

"Riley, Sean (Ron Johnson)" <sean_riley@ronjo hnson.se1nate.g0v>,"Maloney, Drew"
<drew.maloney@treasury.gov>

Cc:

treasury.gov>, "O'Neil, Jennifer (Ron Johnson)"
<Jenn er_o ne1@ronJo nson.senate.gov>, "Maloney , Drew"
<drew .maloney@treasury.gov>, "Mcllheran, Pa.trick (Roni Johnson)"
<patrick_mcilheran@ronjohnson .senate.gov>

Date:

Tue , 14 Nov 2017 09 :59:46 -0500

Attachments:

Sen. Johnson Business Tax Reform Summary.pdf (271.8, kB)

Hi Drew,
I look forward to work ing with you. b(5)

b(5)
I

b(5)

. At tached is the

summary.
Please feel free to contact me with any questions.
Tha nks,
Alexis J. Alber
Legislative Counsel
Senator Ron Johnson (WI)
328 Hart Senate Office Build ing
Wash ington , DC 20510
From: Riley, Sean (Ron Johnson)
Sent: Tuesday , November 14, 2017 9 :11 AM
To:~@treasury
.gov
Cc: lililalllllllll
@treasury.gov; O'Neil, Jennifer (Ron Johnson)
<Jennifer_O'Neil@ronjohnson.senate .gov>; Drew.Maloney@treasury.gov ; Alber, Alexis (Ron Johnson)
<Alexis_Alber@ronjohnson .senate.gov>; Mcllheran, Patrick (Ron Johns;on)
<Patrick_Mcllheran@ron j ohnson .senate.gov>
Subject: RE: tax reform

Hi, Drew-Adding

Alex 1s Alber, ou r tax counsel.

Sean Riley
Legislative Director
Office of Senator Ron Johnson (WI)

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 (202) 224-5323
From: Drew.Ma loney@t reasury .gov

[maiIto :Drew .Ma loney@trea sury.g~

Sent: Tuesday, November 14, 2017 8:32 AM
To: Rile Sean Ron Johnso n) <Sean Riley@ron lohnson.senate .gov>
Cc:
treasur . ov; O'Neil, Jennifer (Ron Johnson)
<Jennifer_ O'Nei l@ron johnson .senate.gov>
Subject: RE:tax reform

Sean,
b(5)

Thanks
Drew
From: Riley, Sean (Ron Johnson) (mailto:Sean Riley@ronjohnson.senate.gov ]

Sent: Monday, November 13, 2017 2:41 PM
To :~
<Drew.Malone
r
r . ov>
Cc: ~
<
treasur . ov>; O'Neil, Jennifer (Ron Johnson)
<Jennifer_ O'Nei l@ronjohnson.sena t e.gov>
Subject: RE:tax reform

Thanks, Drew. Adding our Director of Operations .
Sean Riley
Legislative Director
Office of Senator Ron Johnson (WI)
(202) 224-5323
From: Drew.Maloney@treasury.gov

[mailto:Drew.Maloney@treasury

.gQ.V]

Sent: Monday, November 13, 2017 2:08 PM
To : Rile
Cc:

Sean Ron Johnson) <Sean Riley@ron lohnson.senate.gov >
treasur . ov
Subject: tax reform

Sean,
Would like to schedule a meeting between our tax team and the Senator for this week. It wou ld be
our Assistant Secretary of Tax Policy, one of our counselors and myself.
Thanks
Drew

Drew Maloney
Assistant Secretary of the Treasury
Legislative Affairs
United States Department of the Treasury
1500 Pennsylvania A venue, NW Suite 3134
Washington, DC 20220
Office: 202-622-1900
Cell: -

drew.malo ney@t reasu ry,gov

AM

CAN

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TREAS-17-0313-J-000013

 UST 001715 

How to make America's corporate tax system the most competitive in the world
Many economists have shown that the burden of the corporate tax is borne by employees and consumers
in the form of lower wages and higher prices. Instead of making employees and consumers pay the
corporate tax, why not shift the burden to the owners?
Eighty-one percent of American bu sinesses are Subchapter Sor limited liability corporations - they
operate as ''pass through" entities for tax purposes. Their business income is attributed directly to th e
owners, and it is taxed on their individual tax returns. We shou ld tax domestic income of C corporations at
the ownership level as well. There would be a number of issues to resolve , but wit h modern accounting
techniques and computing power, it is certainly possible to attribute C corp income to shareholders.
Once income (which I suggest should be defined as operational cash flow) is attributed , busi nesses
would make a backu p withholding payment equal to 25% for owner taxes - simi lar to what they
curre ntly do for payroll taxes. That would cover the vast major ity of taxes owed by share holders . To the
extent that an individual's tax rates differ from the withheld rate, those individua l taxpa yers would
claim a refund or pay the remaining tax due .
The required business tax withholding payment is, in effect, a forced dividend that elimi nates the
economically harmful doub le taxation of dividends and disincentives to repatriating overseas income .
Because corporate income already will have been fully attributed to owners, ad ditional dividend
payments to shareholders cou ld be distributed withou t incurring additiona l tax. This wmtld
dramatically increase the incentive for corporations to stop hoarding cash, to pay more dividends, and
thereby to promote more efficient allocation of capital and greater economic growth .
There are ma ny details .to be developed , but here are the basic elen1ents of the plan:
The defin ition of all domestic bus iness taxable income (whether from a C corp. an S corp or an LLC)
remains the same, with all common business deductions allowed (including interest deductio n).
Worldwide cash flow would be included in taxab le income. Companies would continue to claim a foreign
tax credit for taxes remitted to foreig n governments. This credit wou ld be passed thr ough to
shareho lders proportionally.
Corporations wou ld establis h a method to attribute taxab le income to share holders. 1would suggest
using a shareho lders' days metric - the number of shares owned divided by portion of the year they
are owned.
Taxable income would be attributed to each owner holding shares.
C corps wou ld make a backup withholding tax payment on beha lf of the owners to the IRS equa l to
25% of taxable income on a quarterly basis.
C corp owners would rece ive a n annua l form , similar to a K-1, showing attributab le income and the 25%
backup withholding tax payment made on their behalf.
C corp owners would include attributable income in their individual taxable income - and would be
able to claim the full backup withholding as a credit against their tax liability .
Tax-exempt share holde rs, pension plans and foreign shareholders would not be allowed to claim
backup wit hholding as a tax credit.
Because taxab le income wou ld be fully attributed and taxes would be paid by ow ners , no
additional tax would be due on dividends paid to shareholders.
Dividend payments made would not be deducted from taxable income.

Rl)N

JOHNSON
1 \

AMERICAN

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pVERSIGHT

TREAS-17-0313-J-000015

HNAlr

 RE: RJ
From :

"Dunn, Brendan (McConnell)" <brendan_dunn@mcconnell.sena1e.gov>

To:

"Muzinich, Justin" <ju stin.muzinich@treasury.gov>

Date :

Wed, 15 Nov 2017 22:28:42 -0500

b(5)

Bre ndan M. Dun n
Policy Advisor and Co unsel

Office of the Senate Majolity Leader
From: Justin.Muzinich@treasury.gov [mailto:Justin.Muzinich@treasury•.gov)
Sent: Wednesday, November 15, 2017 4:47 PM
To : Dunn, Brendan (McConnell) <Brendan_Dunn@mcconnell.senate.gov>;
Drew.Maloney@treasury .gov
Subject : RE: RJ
b(S)
From: Dunn, Brendan (McConnell) [mailto:Brendan Dunn@mcconnell ,.senate.gov ]
Sent: Wednesday, November 15, 2017 3:47 PM
To : Maloney, Drew <Drew.Maloney@treasury.gov >
Cc: Muzinich, Justin <Justin.Muzinich@treasury .gov>
Subject : RJ
b(S)

RepublicanSen. Ron Johnson Opposes GOP Senate Tax Pack:age
Wisconsin Republican says plan unfairly benefits corporations ovex other businesses, says be
finds bill's process 'offensive '
By Siobhan Hughes
Nov. 15, 20 17 3:21 p.m ET
The Wall Street Journal
https ://www. wsj .conva11icIes/rcpublican-sen-ron-jolmson-opposes-1~op
~scnate-tax-package15l07 77290

WASHINGTON- Sen. Ron Johnson (R , Wis.) said he opposes the Senate Republican tax
package, saying it unfairly benefits corporations more than other types of businesses.
''Jf they can pass it without me, let them," Mr. Johnson said in an interview. "I'm not going to
vote for this tax package."

Mr. Johnson's posit ion could undennine the Senate's efforts to pas:s a tax plan by early
December or get the bill to President Donald Trump's desk by Christmas. Republicans are
counting on near universal support from within the patty to pass a bill on party line votes. With
52 seats in the Senate, Republicans can lose no more than two votes unless they can somehow
find a way to win votes from Democrats.
Other Senate Republicans have expressed concerns. Jeff Flake of Arizona, for example, has
wonied about deficits and Susan Collins of Maine has wonied about Republican plans to repeal
the insurance coverage mandate in the Affordable Care Act as part of a tax overbauL

UST 001717

TREAS-17-0313-J-000016

 Until now, no Senate Republican has come out definitively against the GOP tax plan. The risk for
Senate Republican leaders is that other Republicans get behind Mr. Johnson's opposition. In
addition to his concern about the details of the Republican proposal, he also complai ned about a
process that he said has been closed to his input and also misleads the public about the nature of
the tax overhaul.
"I don't like that process," Mr. Johnson said. "I find it pretty offensive, personally."

Mr. Johnson said Republican plans prioritize corporations over "pass-thro ugh" entities- so le
proprietorships, partnerships, limited liability companies and S Corporations - whose owners pay
taxes through individual returns and at individual income-tax rates, rather than corporate rates.
The Senate plan, like the House plan, proposes to cut the corporate rate from 35% to 20%.
Top rates for pass-through filers would remain over 30% in the Senate version of the bill and the
House bill substantially constrains how much pass-through income could be taxed at a new 25%
rate.
The Senate bill would provide $1. 3 trillion in gross tax rate cuts to corporations, according to the
Joint Committee on Taxation. That compares to $362 billion in gross tax cuts for pass-through
entities. Both types of businesses also would lose some tax breaks. More companies are
organized as pass-through businesses than as corporations. Many pass-through filers are small
businesses. Overa ll U.S. business income is split roughly evenly between the pass-through
businesses and corporate income.
"I have no problems in making all American businesses competitive globally," Mr. Johnson said.
''This isn't anti-big corporation at all. When you're going to do a tax reform, you have to treat
them equitabl y so they can maintain their competitive position here at home as we're making
them competitive globally."
Brendan M. Dunn
Policy Advisor and Counsel
Office of the Senate Majority Leader

AMlf ICAN

UST 001718
pVERSIGHT

TREAS-17-0313-J-000017

 b(5)

RE:
From :

"Alber , Alexis (Ron Johnson)" <alexis_arber@ronjohnson .senate.gov>

To :

"Prater , Mark (Finance)" <mark_prater@finance .senate.gov>, "Kowalski , Daniel"
<daniel.kowatski@treasury .gov>, "Khosla , Jay (Finance)" <jay_Jd1osla@finance.senate .gov> ,
"Dunn, Brendan (McConnell)" <brendan_dunn@mcconnell.senate.gov>

Cc:

'Wrase, Jeff (Finance)" <jeff_wrase@finance.senate .gov>, ----Monica (Cornyn)" <moniccLpopp@comyn.senate .gov>, "Socl"ersii~"
<sharon_soderstrom@mcconnell .senate .gov> , "Acuna , Jennifer (Finance)"
<jennifer_acuna@finance .senate .gov> , "Blando , Tony (Ron Johnson )"
<tony_blando@ronjohnson.senate.gov>, "Riley , Sean (Ron Johnson)"
<sean_riley@ronjohnson.senate.gov;> , "Mcllheran, Patrick (Ron Jlohnson)"
<patrick_mcilheran@ronjohnson.senate .gov;>, "Oman, Eric (Finance)"
<eric_oman@finance .senate.gov>

Date:

Sat, 18 Nov 2017 20 :02:30 -0500

• "Popp,

Dan,
Per Mark's recommendation,
Treasury

0

below are my notes regarding data Sen. Jlohnson has requested from

b(5)

0

4.

b(5)

5.

I

10. b(5)

ME- C N

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PVERSIGHT

TREAS-17-0313-J-000018

 b(5)

Fro m: Prater, Mark (Finance)
Sent : Saturday, November 18, 2017 7:22 PM
To : Daniel.Kowalski@treasury.gov; Khosla, Jay {Finance) <Jay_ Khosla@finance.senate.gov>; Dunn,
Brendan (M cConnell) <Brendan _Dunn@mcconnell.senate.gov>
Cc: Alber, Alexis (Ron Johnson) <Alexis_Albe r@ronjohnson.senate.gov>; Wrase, Jeff (Finance)
<Jeff_Wrase@f inance.senate.gov>;
Popp, Monica {Cornyn)
<Monica_Popp@cornyn.senate.gov>; Soderstrom, Sharon McConnell)
<Sharon_Soderstrom@mcconnell.senate.gov>; Acuna, Jenni f er {Finance)
<Jennifer_Acuna@finance.senate.gov>; Blando, Tony (Ron Johnson)
<Tony_Blando@ronjohnson.se nate.gov>; Riley, Sean (Ron Johnson)
<Sean_ Riley@ron j ohnson.senate.gov>; Mcl lheran, Patrick (Ron Johnson)
<Patrick _Mc ll heran@ro njohnson .senate.gov> ; Oman, Eric (Finance) <Eric_ Oman@finance.senate.gov>
Subject : RE:b(5)

I transmitted Sen. Johnson's requests to JCT, on behalf of SFCstaff, late yesterday afternoon. I
discussed it with Tom Bartho ld this morning. There is some data available that profiles business
entities in the pamphlet JCT published for our hearing. Here's the link:
https ://www .ict .gov/publication s.html?func=startdown&id =5021

I don't know if all of the 11 JCT requests have been shared with Treasury, but I'd be glad to do so if
your office agrees.
From: Danie l.Kowalski@t reasury.gov [mailto :Daniel.Kowalski@treasur)/.:gQYJ
Sent: Saturday, November 18, 2017 5:45 PM
To: Khosla, Jay (Fina nce) <Jay Khosla@finance .senate.g ov>; Dunn, Breindan (McConne ll )
<Brendan Dunn@mcconnell.senate .gov>
Cc: Alber, Alexis (Ron Johnson) <Alexis Alb er@ronjohnson .senate .gov >; Wrase, Jeff (Finance)
<Jeff Wrase@finance.senate .gov>
Popp, Monica (Cornyn)
<Monica Popp@cornyn .senate.gov >; Soderstrom, Sharon (McConnell)
<Sharon Soderstrom@mcconnell.senate .gov>; Prater, Mark (Finance)
<M ark Prater@fjnanc e.senate.gov >; Acuna, Jennifer (Finance) <Jen nifer Acuna@finance .senate .gov>;
Blando, Tony (Ron Johnson) <Tony Blando@ronjohnson .senate .gov>; Ril ey, Sean (Ron Johnson)
<Sean Riley@ro njohnson .senate .gov>; Mcllh era n, Patrick (Ron Johnson)
<Patrick Mc llheran@ronjohnson.senate .gov>; Oman, Eric {Finance) <Eric Oman@finance .senate .gov>
Subject : RE: •

b(5)

From: Khosla, Jay {Finance) [mailto :Jay Khosla@finance .senate .gov]
Sent: Saturday, November 18, 2017 11 :35 AM
To: Dunn, Brendan (McConnell) <Brendan Dunn@mcconnell.senate.gov >
Cc: A lber, Alexis (Ron Johnson) <Alexis Alber@ronjohnson.senate .gov >; Wrase, Jeff (Finance)
<Jeff Wra se@finance.sena t e.gov >; Shahira E. EOP/WHO Knight --->;
Kowalski, Daniel <Daniel.Kowalsk i@treasury.gov >; Popp, Monic a'{co'm~
<Monica Popp@cornyn .senate .gov>; Soderstrom, Sharon (McConnell)
<Sharon Soderstrom@mcconnell.senate .gov>; Prater, Mark (Finance)
<Mark Prate r@fjnance .senate.gov >; Acuna, Jennifer (Finance) <Jennifor Acuna@fjnance.senate ,gov>;
Blando, Tony (Ron Johnson) <Tony Blando@roniohnson .senat e.gov>; Riley, Sean (Ron Johnson)
<Sean Riley@ronjohnson .senate .gov>; M cllheran, Patrick (Ron Johnson)

AME- CAN

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TREAS-17-0313-J-000019

 ron 'ohnson .senate. ov>; Oman, Eric (Finance) <Eric Oman@finance .senate .gov>

+ Eric Oman.
On Nov 18, 2017, at 11:00 AM , Dunn, Brendan (McConnell) <Brendan Dunn@mcconnell.senate .gov>
wrote:
Adding Finance

From: Alexis Alber <Alexis Alber@ron johnson.senate.gov >
Date: Saturday, November 18, 2017 at 10:30 AM
To: Brendan Dunn <Brendan Dunn@mcconne ll.senate.gov >, Jeffrey Wrase

<Jeff Wrase@finance.senate.gov >, Shahira Knight
Daniel Kowalski <Daniel.Kowalski@treasury .gov>, Monica Popp
<Monica Popp@cornyn.senate.gov >, Sharon Soderstrom

<Sharon Soderstrom@mcconnell.senate
.gov>
Cc:Tony Blando <Tony Blando@ronjohnson.senate.gov >, Seain Riley
<Sean Riley@ronjohnson.senate .gov>, Patrick Mcllheran
<Patrick -----Mcllheran ran ·ohnson.senate. ov>
Subject: b(5)

Good morning,
b(5)
I

I

Thanks,
Alexis
Sent from my iPhone

AME- CAN

UST 001721
PVERSIGHT

TREAS-17-0313-J-000020

 Re: b(5)
From :

"Muzinich, Justin" <"/o=us treasury/ou=exchange administrat ive group
(fydibohf23 spdlt)/cn=recipie nts/c n=3d2afce60d7e464fbd30ff8dbe ,defecb-muzinich, jus''>

To:

"Alber, Alexis (Ron Johnson)" <alexis_alber@ronjohnson.senate .gov> , "Kowa lski, Daniel "
<danlel.kowalski@treasury .gov>

Cc :

"Kautte r, David" <david.kautter@treasury.gov> , "Popp , Monica (Gornyn)"
<rnonica_popp@comyn.senate.gov>, "Riley, Sean (Ron Johnso n)"
<sean_riley@ronjohnson.sena te.gov>, "Wrase , Jeff (Fina nce)" <jeff_wrase@finance.senate.gov>,
"Mcllheran , Patrick (Ron Johnson)" <patrick_mcilhera n@ronjoh nso n.senate.gov>, "Acuna ,
Jennifer (Finance )" <jennifer_ac una@finance .senate.gov> , "Blan,do, Tony (Ron Johnson)"
<tony _blando@ronjohn son.se nate.gov>, "Soderstrom, Sharon (McConnell)"
<sharon_sode rstrom@mcconnell.senate .gov>, "Prater, Mark (Fina nce)"
<mark_prater@finance .senate .gov>, "Khosla , Jay (Finance )" <jay_khosla@finance .senate.gov> ,
"Dunn, Brendan (McConnell)" <brendan_dunn@mcconnell .senatB .gov>,
shahira.e. .knight@w~rnan
, Eric (Finance)" <eric _oman@finance .senate.gov> ,
''Mackie, James Ill" <---@treasury
.gov>

Date :

Sun, 19 Nov 2017 07:38:50-0500

was

Tha nks Dan and Alexis. The team is working on answers to your questions , inclucffng the list from yesterday that
also sent to JCT. Some is a bit of a lift , so we will do our best to send you what we have by end of day Monday, and
the rest will follow afte r that.

From: Alber, Alexis (Ron Johnson) <Alexis_Alber@ronjohnson. senat e.gov >
Date: Nov em ber 18, 2017 at 10:26:44 PM EST
To: Kowa lski, Daniel <OanieLKowalski@treasury .gov>
Cc: Blando, Tony (Ron Johnson) <Tony_Blando@r o njo hnson.senate .gov>, Dunn, !Brendan (McConnell)
<Brendan_Dunn@mcconnell.s enate.gov>, Riley, Sean (Ron Johnson)!NSean Rile i ronjohnson.senate.gov> ,
@treasury.goV>, Kautter, David
Muzinich , Justin <Justin.Muzin ich@treasury .gov>, Mack ie, James Ill •
<David.Kautter@treasury.gov>, Prater, Mark (Finance) <Mark _Prater@ inance.se:nate.goV>, Soderstrom , Sharon
(McConnell) <Sharon_Soderstrom@mcconnell.senate.gov>, Khosla, Jay {Finance) <Jay_Khosla@finance .senate.gov>,
Oman,Eric (Finance) <Eric_Oman@f inance.senate.gov>, W rase, Jeff (Finance) <k!ff _Wtase@finance .senate .gov >,
Po , Monica (Cornyn) <Mon ica_Popp@cornyn.senate .gov>,
>, Mcl lheran, Pat rick (Ron fohnson) <Patrick _Mc:l lher an@ronjohnson .senate .gov>,
Acuna, Jenni er Finance <Jenni er_ Acuna@flnance .senate.gov>
Subject: Re: •

Than ks Dan, apprec iate the help.
Sent from rny iPhone
On Nov 18, 2017, at 10:19 PM, "Daniel.Kowalski@t reasury .gov" <Dan iel ~Cowalsld@treasury .gov > wrote:

I have included other Treasury personnel regarding the detailed data vou are requesting.
From: Alber, Alexis (Ron Johnson) [mailto;A le.xis Albe r@ron johnson.s, ~nate ,gov ]

ME- C N

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TREAS-17-0313-J-000021

 Sent: Saturday, November 18, 2017 9:25 PM
To : Kowalski, Daniel <Daniel.Kowalski@treasury.gov >; Khosla, Jay {Finance)
<Jay Khosla@finance.senate.gov >; Dunn, Brendan (McConnell)
<Brendan Dunn@mcconnell.senate.gov >
Cc: Wrase, Jeff (Finance) <Jeff Wrase@finance.senate.gov >; ---; Popp,
Monica (Cornyn) <Monica Popp@cornyn .senate .gov>; Soderstrom, Sh:~
<Sharon Soderstrom@mcconnell.senate .gov>; Prater , Mark (Finance)
<Mark Prater@finance.senate.gov >; Acuna, Jennifer (Finance) <Jennifer Acuna@finance.senate.gov >;
Blando, Tony {Ron Johnson) <Tony Blando@ronjohnson.senate.gov >; Riley, Sean (Ron Johnson)
<Sean Riley@ronjohnson.senate.gov >; Mcllheran, Patrick (Ron Johnson)
<Patrick Mc llheran ron ·ohnson.senate. ov>; Oman, Eric {Finance) <Eric Oman@finance .senate .gov>
Subject : RE:•

Thank you Dan. As a follow up, the senator has additional questions.

From: Daniel.Kowalski@treasury.gov (mai lto:Dan iel.Kowa lski@treasur\1.,,goy
J
Sent: Saturday, November 18, 2017 5:45 PM
To : Khosla, Jay (Finance) <Jay Khosla@finance .senate.gov >; Dunn, Breindan (McConnell)
<Brendan Dunn@mcconnell.senate.gov >
Cc: Alber, Alexis (Ron Johnson ) <Alexis Alber@ronjohnson .senate.gov >; Wr ase, Jeff (Finance)
<Jeff Wrase@fioance.senate .gov>;
; Popp, Monica (Cornyn)
<Monica Popp@cornyn.senate.gov >; Soderstrom, Sharon McConnel l)
<Sharon Soderstrom@mcconnell.senate.gov >; Prater, Mark (Finance)
<Mark

Prale r@finance.senale.gov

>; Acuna, Jennifer (Finance) <Jennifer

Acu11a@finance.senale.gov

>;

Blando, Tony {Ron Johnson) <Tony Blando@ronjohnson.senate.gov >; Riley, Sean (Ron Johnson)
<Sean Riley@ronjohnson .senate.gov >; Mcllheran, Patrick (Ron Johnson)
<Patrick Mc llheran ron ·ohnson.senate. ov>; Oman, Eric (Finance) <Eric Oman@finance.senate .gov>
Subject : RE:•
b(5)

From: Khosla, Jay {Finance) [mailto:Jay Khosla@finance.senate.gov

l

Sent: Saturday, November 18, 2017 11:35 AM
To : Dunn, Brendan {McConnell) <Brendan Dunn@mcconnell.sena t e.gov>
Cc: Alber, Alexis (Ron Johnson) <Alexis Alber@ronjohnson .senate .gov>; Wrase, Jeff (Finance)
<Jeff Wrase@finance.sena t e.gov>; Shahira E. EOP/WHO Knight
Kowalski, Daniel <Daniel.Kowalsk i@treasury .gov>; Popp, Monica (Cornyn)
<Monica Popp@cornyn .senate .gov>; Soderstrom, Sharon (McConnell)
<Sharon Soderstrom@mcconnell.senate .gov>; Prater, Mark (Finance)
<Mark Prater@finance.senate.gov >; Acuna, Jennifer (Finance) <Jennife r Acuna@finance.senate.gov >;
Blando, Tony {Ron Johnson) <Tony Blando@ronjohnson.senate.gov >; Riley, Sean (Ron Johnson)

<111111

AME- CAN

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 <Sean Riley@ronjohnson.senate.gov >; Mc llhera n, Patrick (Ron Johnson)
<Patrick Mc llheran ron 'ohnson.senate . ov>; Oman, Eric(Finance) <Eric Oman@finance .senate .gov>
Subject : Re:•

+ Eric Oman .
On Nov 18, 2017, at 11:00 AM , Dunn , Brendan (McConnell) <Brendan Dunn@mcconneH.senate .gov>
wrote:
Adding Finance

From: Alex is Alber <Alexis Alber@ron j ohnson.senate.gov >
Date: Saturday, November 18, 2017 at 10:30 AM
To: Brendan Dunn <Brendan Dunn@mcconnel l.senate .gov>, J~
<Jeff Wrase@fi nance.senate.gov >, Shahir a Knight ---Daniel Kowalski <Daniel.Kowalskj@t reasury.gov >, Monica PoplP
<Monica Popp@cornyn.senate.gov >, Sharon Soderstrom
<Sharon Soderstrom@mcconnell.senate.gov >
Cc:Tony Blando <Tony Blando@ronjohnson.senate.gov >, Sean Riley
<Sean Riley@ronjohnson.senate .gov>, Patrick Mcllheran
<Patrick M cllheran@ron johnson.senate.gov >
Subject: •

>,

Good morning,
b(5)

Thanks,
Alexis
Sent from my iPhone

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 RE:

b(5)

From :

"Kowalski, Daniel" <"/o=ustreasury/ou=exchange administrative ~Iroup
(fydibohf23spdlt)/cn=rec ipients/cn=cf6b4ee3710f422fbceecb0020766838-kowalski, dan">

To :

"Popp, Monica (Comyn)" <monica_popp@cornyn.senate.gov>

Cc:

"Dunn, Brendan (McConnell)" <brendan_dunn@mcconnell.senati~.gov>

Date :

Mon, 20 Nov 2017 11:23:41 -0500

Not at all, as long as you include the same caveats

From: Popp, Monica (Cornyn) [mailto:Monica_Popp@cornyn .senat e.gov]
Sent: Monday , November 20, 2017 11:20 AM
To: Kowalski, Daniel <Daniel.Kowa lski@treasury.gov>
Cc: Dunn, Brendan (McConnell} <Brendan_Dunn@mcconnell.senate.ge,v>
Subject: Re:

Dan - Wou ld you mind if we shared th is estimate with Daines' office as well?

From: "Daniel.Kowalski@treasury.gov " <Daniel.Kowalski@treasury.gov >
Dat e: Saturday, November 18, 2017 at 10:19 PM
To: "Alber, Alexis (Ron Johnson) " <Alexis Alber@ronjohnson.senate .gov>, Jay Khosla

<Jay Khosla@finance.senate.gov >, "Dunn, Brendan (McConnell)"
<Brendan Dunn@mcconnell.senate.gov >
Cc: "W rase, Jeff (Fin ance)" <Jeff Wrase@finance .senate .gov>,
I

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b(5)

I have included other Treasury personnel regarding the detailed data vou are requesting.
From: Alber, Alexis (Ron Johnson) [mailto:Alexis Alber@ronjohnson .sc~nate.gov)
Sent: Saturday, November 18, 2017 9:25 PM
To : Kowalski, Daniel <Daniel.Kowalski@treasury.gov >; Khosla, Jay {Finan ce)
<Jay Khosla@finance.senate.gov >; Dunn, Brendan (McConnel l}

ME- CAN

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 <Brendan Dunn@mcconnell.senate .gov>
Cc: Wrase, Jeff (Finance) <Jeff Wrase@finance.senate.gov >; ; Popp,
Monica (Cornyn) <Monica Popp@cornyn.senate.gov >; Soderstrom, Sh,aron (McConnell)
<Sharon Soderstrom@mcconnell.senate,gov >; Prater , Mark (Finance)
<Mark Prater@fi na nee.sen ate.gov >; Acuna, Jennifer (Finan ce) <Jenn ifrr Acuna@fi nan ce,sen ate .gov>;
Blando, Tony (Ron Johnson) <Tony Blando@ronjohnson.senate .gov>; Riley, Sean (Ron Johnson)
<Sean Riley@ronjohnson .senate.gov >; Mcl lhera n, Patrick (Ron Johnson)
<Patrick Mc llheran@ronjohnson.senate.gov >; Oman, Eric (Finance) <Eric Oman@finance.senate .gov>
Subject : RE:b(5)

Thank you Dan. As a follow up, the senator has additional questions.

From: Daniel .Kowalski@treasury.gov (mai lto :Daniel .Kowalski@treasurv.gov ]
Sent: Saturday , November 18, 2017 5:45 PM
To: Khosla, Jay (Finance) <Jay Khosla@finance.senate.gov >; Dunn, Breindan (McConnel l)
<Brendan Dunn@mcconnell.senate.gov >
Cc: Alber, Alexis (Ron Johnson) <Alexis Alber@ronjohnson.senate .gov >; Wrase, Jeff (Finance)
<Jeff Wrase@finance.senate.gov >
Popp, Monica (Cornyn)
<Monica Popp@cornyn.senate.gov >; Soderstrom, Sharon (McConnell)
<Sharon Soderstrom@mcconnell.senate ,gov>; Prater, Mark (Finance)
<Mark Prater@fjnance ,senate .gov>; Acuna, Jennifer (Finance) <Jennifer Acuna@finance .senate .gov>;
Blando, Tony (Ron Johnson) <Tony Blando@ronjohnson.senate .gov>; Riley, Sean (Ron Johnson)
<Sean Riley@ronjohnson .senate.gov >; Mcl lh eran, Patrick (Ron Johnson)
<Patrick Mcllheran@ronjohnson.senale.gov

>; Oman, Eric (Finance) < Eric Ornan@finance.senale.gov

>

Subject: RE: b(5)

b(5)

From: Khosla, Jay (Finance) fmailto :Jay Khosla@finance.sen ate .gov]
Sent: Saturday, November 18, 2017 11:35 AM
To: Dunn, Brendan (McConnell) <Brendan Dunn@mcconnell.senate.gov >
Cc: Alber, Alexis (Ron Johnson) <Alexis Alber@ronjohnson .senate .gov >; Wrase, Jeff (Finance)
<Jeff Wrase@finance.senate.gov >; Shahira E. EOP/WHO Knight ---->;
Kowalski, Daniel <Daniel.Kowalsk i@treasury.gov >; Popp, Monica[corii' vnr--<Monica Popp@cornyn.senate .gov>; Soderstrom, Sharon (McConnell)
<Sharon Soderstrom@mcconnell.senate .gov>; Prater, Mark (Finance)
<Mark Prater@finance.senate.gov >; Acuna, Jennifer (Finance) <Jennifer Acuna@fioance .senate.gov >;
Blando, Tony (Ron Johnson) <Tony Blando@ronjohnson.senate .gov>; Riley, Sean (Ron Johnson)
<Sean Riley@ronjohnson .senate.gov >; Mcllheran, Patrick (Ron Johnson}
<Patrick Mcllheran@ronjohnson.senate .gov>; Oman, Eric (Finance) <Eric Oman@ffnance.senate .gov>
Subject : Re: C Corp SALTscore

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TREAS-17-0313-J-000025

 + Eric Oman.
On Nov 18, 2017, at 11:00 AM, Dunn, Brendan (McConnell) <Brendan Dunn@mcconnell.senate .gov>
wrote:
Adding Finance

From: Alexis Alber <Alexis Alber@ronjohnson .senate .gov>
Date : Sat urd ay, Novem ber 18, 2017 at 10:30 AM
To: Brendan Dunn <Brendan Dunn@mcconnell.senate .gov>, Jeffr ey Wrase

<Jeff Wrase@finance .senate.gov >, Shahir a Knight ~
Daniel Kowalski <Daniel.Kowalski@treasury .gov>, Mon ica Popp
<Monica Popp@cornyn.senate .gov>, Sharon Soderst ro m
<Sharon Soderstrom@mcconnell.senate.gov >
Cc: Tony Blando <Tony Blando@ronjohnson .senate .gov>, Seain Riley
<Sean Riley@ronjohnson .senate.gov >, Patr ick M cllh era n

<Patrick ------Mcllheran

ron ·ohns n.senate . ov>

Subject: b(5)

Good morning,
b(S)

Thanks,
Alexis
Sent from my iPho ne

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