TECHNICAL EXPLANATION OF THE PROTECTING AMERICANS FROM TAX HIKES ACT OF 2015, HOUSE AMENDMENT #2 TO THE SENATE AMENDMENT TO H.R. 2029 (RULES COMMITTEE PRINT 114-40) Prepared by the Staff of the JOINT COMMITTEE ON TAXATION December 17, 2015 JCX-144-15 CONTENTS Page INTRODUCTION .......................................................................................................................... 1 TITLE I − EXTENDERS ............................................................................................................... 2 A. Permanent Extensions ......................................................................................................... 2 1. Reduced earnings threshold for additional child tax credit made permanent (sec. 101 of the bill and sec. 24 of the Code) ................................................................ 2 2. American opportunity tax credit made permanent (sec. 102 of the bill and sec. 25A of the Code).................................................................................................... 3 3. Modification of the earned income tax credit made permanent (sec. 103 of the bill and sec. 32 of the Code) ......................................................................................... 6 4. Extension and modification of deduction for certain expenses of elementary and secondary school teachers (sec. 104 of the bill and sec. 62(a)(2)(D) of the Code) ............................................................................................................................. 8 5. Extension of parity for exclusion from income for employer-provided mass transit and parking benefits (sec. 105 of the bill and 132(f) of the Code) .................... 9 6. Deduction for State and local sales taxes (sec. 106 of the bill and sec. 164 of the Code)................................................................................................................. 11 7. Special rule for qualified conservation contributions made permanent (sec. 111 of the bill and sec. 170(b) of the Code) ...................................................................... 12 8. Tax-free distributions from individual retirement plans for charitable purposes (sec. 112 of the bill and sec. 408(d)(8) of the Code) .................................................. 16 9. Extension and expansion of charitable deduction for contributions of food inventory (sec. 113 of the bill and sec. 170 of the Code) ........................................... 20 10. Extension of modification of tax treatment of certain payments to controlling exempt organizations (sec. 114 of the bill and sec. 512 of the Code) ........................ 23 11. Extension of basis adjustment to stock of S corporations making charitable contributions of property (sec. 115 of the bill and sec. 1367 of the Code) ................. 24 12. Extension and modification of research credit (sec. 121 of the bill and secs. 38 and 41 and new sec. 3111(f) of the Code) .................................................................. 25 13. Extension and modification of employer wage credit for employees who are active duty members of the uniformed services (sec. 122 of the bill and sec. 45P of the Code)................................................................................................................. 32 14. Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (sec. 123 of the bill and sec. 168 of the Code)........................... 34 15. Extension and modification of increased expensing limitations and treatment of certain real property as section 179 property (sec. 124 of the bill and sec. 179 of the Code)................................................................................................................. 37 16. Extension of treatment of certain dividends of regulated investment companies (sec. 125 of the bill and sec. 871(k) of the Code) ..................................... 39 17. Extension of exclusion of 100 percent of gain on certain small business stock (sec. 126 of the bill and sec. 1202 of the Code) .......................................................... 40 i 18. Extension of reduction in S corporation recognition period for built-in gains tax (sec. 127 of the bill and sec. 1374 of the Code) .................................................... 41 19. Extension of subpart F exception for active financing income (sec. 128 of the bill and secs. 953 and 954 of the Code) ...................................................................... 44 20. Extension of temporary minimum low-income housing tax credit rate for non-Federally subsidized buildings (sec. 131 of the bill and sec. 42 of the Code) .... 46 21. Extension of military housing allowance exclusion for determining whether a tenant in certain counties is low-income (sec. 132 of the bill and sec. 42 of the Code) ........................................................................................................................... 47 22. Extension of RIC qualified investment entity treatment under FIRPTA (sec. 133 of the bill and secs. 897 and 1445 of the Code) .......................................... 49 B. Extensions Through 2019 ................................................................................................. 51 1. Extension of new markets tax credit (sec. 141 of the bill and sec. 45D of the Code) ........................................................................................................................... 51 2. Extension and modification of work opportunity tax credit (sec. 142 of the bill and secs. 51 and 52 of the Code) ................................................................................ 53 3. Extension and modification of bonus depreciation (sec. 143 of the bill and sec. 168(k) of the Code) .............................................................................................. 60 4. Extension of look-through treatment of payments between related controlled foreign corporations under foreign personal holding company rules (sec. 144 of the bill and sec. 954(c)(6) of the Code) .................................................................. 67 C. Extensions Through 2016 ................................................................................................. 69 1. Extension and modification of exclusion from gross income of discharges of acquisition indebtedness on principal residences (sec. 151 of the bill and sec. 108 of the Code)................................................................................................................. 69 2. Extension of mortgage insurance premiums treated as qualified residence interest (sec. 152 of the bill and sec. 163 of the Code) ............................................... 71 3. Extension of above-the-line deduction for qualified tuition and related expenses (sec. 153 of the bill and sec. 222 of the Code) ............................................................ 72 4. Extension of Indian employment tax credit (sec. 161 of the bill and sec. 45A of the Code)................................................................................................................. 73 5. Extension and modification of railroad track maintenance credit (sec. 162 of the bill and sec. 45G of the Code) .................................................................................... 74 6. Extension of mine rescue team training credit (sec. 163 of the bill and sec. 45N of the Code)................................................................................................................. 76 7. Extension of qualified zone academy bonds (sec. 164 of the bill and sec. 54E of the Code)................................................................................................................. 77 8. Extension of classification of certain race horses as three-year property (sec. 165 of the bill and sec. 168 of the Code) ............................................................ 79 9. Extension of seven-year recovery period for motorsports entertainment complexes (sec. 166 of the bill and sec. 168 of the Code).......................................... 80 10. Extension and modification of accelerated depreciation for business property on an Indian reservation (sec. 167 of the bill and sec. 168(j) of the Code) ................ 81 11. Extension of election to expense mine safety equipment (sec. 168 of the bill and sec. 179E of the Code) ................................................................................... 83 ii 12. Extension of special expensing rules for certain film and television productions; special expensing for live theatrical productions (sec. 169 of the bill and sec. 181 of the Code) ........................................................................... 84 13. Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico (sec. 170 of the bill and sec. 199 of the Code)................................................................................................................. 86 14. Extension and modification of empowerment zone tax incentives (sec. 171 of the bill and secs. 1391 and 1394 of the Code) ........................................................ 87 15. Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands (sec. 172 of the bill and sec. 7652(f) of the Code)................................................................................................................. 94 16. Extension of American Samoa economic development credit (sec. 173 of the bill and sec. 119 of Pub. L. No. 109-432) ................................................................... 95 17. Suspension of medical device excise tax (sec. 174 of the bill and sec. 4191 of the Code)................................................................................................................. 97 18. Extension and modification of credit for nonbusiness energy property (sec. 181 of the bill and sec. 25C of the Code) ........................................................... 99 19. Extension of credit for alternative fuel vehicle refueling property (sec. 182 of the bill and section 30C of the Code) ................................................................... 101 20. Extension of Credit for Electric Motorcycles (sec. 183 of the bill and sec. 30D of the Code)............................................................................................................... 102 21. Extension of second generation biofuel producer credit (sec. 184 of the bill and sec. 40(b)(6) of the Code) .................................................................................. 102 22. Extension of biodiesel and renewable diesel incentives (sec. 185 of the bill and sec. 40A of the Code) ......................................................................................... 104 23. Extension of credit for the production of Indian coal facilities (sec. 186 of the bill and sec. 45 of the Code) ..................................................................................... 106 24. Extension of credits with respect to facilities producing energy from certain renewable resources (sec. 187 of the bill and secs. 45 and 48 of the Code) ............. 107 25. Extension of credit for energy-efficient new homes (sec. 188 of the bill and sec. 45L of the Code) ................................................................................................ 109 26. Extension of special allowance for second generation biofuel plant property (sec. 189 of the bill and sec. 168(l) of the Code) ...................................................... 110 27. Extension of energy efficient commercial buildings deduction (sec. 190 of the bill and sec. 179D of the Code) ...................................................................... 112 28. Extension of special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities (sec. 191 of the bill and sec. 451(i) of the Code) ..................................................................... 114 29. Extension of excise tax credits and payment provisions relating to alternative fuel (sec. 192 of the bill and secs. 6426 and 6427 of the Code) ............................... 116 30. Extension of credit for fuel cell vehicles (sec. 193 of the bill and sec. 30B of the Code)............................................................................................................... 117 TITLE II − PROGRAM INTEGRITY ....................................................................................... 118 1. Modification of filing dates of returns and statements relating to employee wage information and nonemployee compensation to improve compliance (sec. 201 of the bill and secs. 6071 and 6402 of the Code) ...................................... 118 iii 2. Safe harbor for de minimis errors on information returns, payee statements and withholding (sec. 202 of the bill and secs. 6721 and 6722 of the Code) ........... 122 3. Requirements for the issuance of ITINs (sec. 203 of the bill and sec. 6109 of the Code)............................................................................................................... 124 4. Prevention of retroactive claims of earned income credit, child tax credit, and American Opportunity Tax Credit (secs. 204, 205, and 206 of the bill and secs. 24, 25A and 32 of the Code) ............................................................................ 127 5. Procedures to reduce improper claims (sec. 207 of the bill and secs. 24, 25A, 32, and 6695) .................................................................................................................. 130 6. Restrictions on taxpayers who improperly claimed credits in prior year (sec. 208 of the bill and secs. 24, 25A and 6213 of the Code) ................................. 134 7. Treatment of credits for purposes of certain penalties (sec. 209 of the bill and secs. 6664 and 6676 of the Code) ............................................................................. 138 8. Increase the penalty applicable to paid tax preparers who engage in willful or reckless conduct (sec. 210 of the bill and sec. 6694 of the Code) ........................ 140 9. Employer identification number required for American opportunity tax credit (sec. 211 of the bill and secs. 25A and 6050S of the Code) ..................................... 141 10. Higher education information reporting only to include qualified tuition and related expenses actually paid (sec. 212 of the bill and sec. 6050S of the Code) ......................................................................................................................... 142 TITLE III − MISCELLANEOUS PROVISIONS ...................................................................... 144 A. Family Tax Relief ........................................................................................................... 144 1. Exclusion for amounts received under the work colleges program (sec. 301 of the bill and sec. 117 of the Code) ......................................................................... 144 2. Modification of rules relating to section 529 programs (sec. 302 of the bill and sec. 529 of the Code) .......................................................................................... 144 3. Modification to qualified ABLE programs (secs. 303 of the bill and secs. 529 and 529A of the Code) .............................................................................................. 148 4. Exclusion from gross income of certain amounts received by wrongly incarcerated individuals (sec. 304 of the bill and new sec. 139F of the Code) ........ 152 5. Clarification of special rule for certain governmental plans (sec. 305 of the bill and sec. 105(j) of the Code) ...................................................................................... 153 6. Rollovers permitted from other retirement plans into SIMPLE retirement accounts (sec. 306 of the bill and sec. 408(p)(1)(B) of the Code) ............................ 154 7. Technical amendment relating to rollover of certain airline payment amounts (sec. 307 of the bill and sec. 1106 of the FAA Modernization and Reform Act of 2012) ..................................................................................................................... 156 8. Treatment of early retirement distributions for nuclear materials couriers, United States Capitol Police, Supreme Court Police, and diplomatic security special agents (sec. 308 of the bill and sec. 72(t) of the Code) ................................. 159 9. Prevention of extension of tax collection period for members of the Armed Forces who are hospitalized as a result of combat zone injuries (sec. 309 of the bill and secs. 6502 and 7508(e) of the Code)............................................................ 161 B. Real Estate Investment Trusts ......................................................................................... 162 1. Restriction on tax-free spinoffs involving REITs (sec. 311 of the bill and sec. 355 of the Code) ................................................................................................ 168 iv 2. Reduction in percentage limitation on assets of REIT which may be taxable REIT subsidiaries (sec. 312 of the bill and sec. 856 of the Code) ............................ 171 3. Prohibited transaction safe harbors (sec. 313 of the bill and sec. 857 of the Code) ......................................................................................................................... 171 4. Repeal of preferential dividend rule for publicly offered REITS; authority for alternative remedies to address certain REIT distribution failures (secs. 314 and 315 of the bill and sec. 562 of the Code) ........................................................... 173 5. Limitations on designation of dividends by REITs (sec. 316 of the bill and sec. 857 of the Code) ................................................................................................ 174 6. Debt instruments of publicly offered REITs and mortgages treated as real estate assets (sec. 317 of the bill and sec. 856 of the Code) ..................................... 175 7. Asset and income test clarification regarding ancillary personal property (sec. 318 of the bill and sec. 856 of the Code) .......................................................... 176 8. Hedging provisions (sec. 319 of the bill and sec. 857 of the Code) ......................... 178 9. Modification of REIT earnings and profits calculation to avoid duplicate taxation (sec. 320 of the bill and secs. 562 and 857 of the Code) ............................ 179 10. Treatment of certain services provided by taxable REIT subsidiaries (sec. 321 of the bill and sec. 857 of the Code) .......................................................... 181 11. Exception from FIRPTA for certain stock of REITs; exception for interests held by foreign retirement and pension funds (secs. 322 and 323 of the bill and secs. 897 and 1445 of the Code) ........................................................................ 184 12. Increase in rate of withholding of tax on dispositions of United States real property interests (sec. 324 of the bill and sec. 1445 of the Code) ........................... 191 13. Interests in RICs and REITs not excluded from definition of United States real property interests (sec. 325 of the bill and sec. 897 of the Code) ...................... 192 14. Dividends derived from RICs and REITs ineligible for deduction for United States source portion of dividends from certain foreign corporations (sec. 326 of the bill and sec. 245 of the Code) .......................................................... 193 C. Additional Provisions...................................................................................................... 195 1. Provide special rules concerning charitable contributions to, and public charity status of, agricultural research organizations (sec. 331 of the bill and secs. 170(b) and 501(h) of the Code) ............................................................................................ 195 2. Remove bonding requirements for certain taxpayers subject to Federal excise taxes on distilled spirits, wine, and beer (sec. 332 of the bill and secs. 5061(d), 5173(a), 5351, 5401 and 5551 of the Code) ............................................................. 198 3. Modification to alternative tax for certain small insurance companies (sec. 333 of the bill and sec. 831(b) of the Code) .................................................................... 200 4. Treatment of timber gains (sec. 334 of the bill and sec. 1201 of the Code) ............. 202 5. Modification of definition of hard cider (sec. 335 of the bill and sec. 5041 of the Code)............................................................................................................... 203 6. Church plan clarification (sec. 336 of the bill and sec. 414 of the Code) ................. 205 D. Revenue Provisions ......................................................................................................... 216 1. Updated ASHRAE standards for energy efficient commercial buildings deduction (sec. 341 of the bill and sec. 179D of the Code) ...................................... 216 2. Excise tax equivalency for liquefied petroleum gas and liquefied natural gas (sec. 342 of the bill and sec. 6426 of the Code) ........................................................ 218 v 3. Exclusion from gross income of certain clean coal power grants (sec. 343 of the bill) .................................................................................................................. 219 4. Clarification of valuation rule for early termination of certain charitable remainder unitrusts (sec. 344 of the bill and sec. 664(e) of the Code) ..................... 220 5. Prevention of transfer of certain losses from tax indifferent parties (sec. 345 of the bill and sec. 267 of the Code) ......................................................................... 222 6. Treatment of certain persons as employers with respect to motion picture projects (sec. 346 of the bill and new sec. 3512 of the Code) .................................. 224 TITLE IV − TAX ADMINISTRATION .................................................................................... 227 A. Internal Revenue Service Reforms ................................................................................. 227 1. Duty to ensure that Internal Revenue Service employees are familiar with and act in accordance with certain taxpayer rights (sec. 401 of bill and sec. 7803 of the Code)............................................................................................................... 227 2. Prohibition of use of personal e-mail for official government business (sec. 402 of the bill) .................................................................................................. 228 3. Release of information regarding the status of certain investigations (sec. 403 of the bill and sec. 6103 of the Code) ....................................................................... 229 4. Require the Secretary of the Treasury to describe administrative appeals procedures relating to adverse determinations of tax-exempt status of certain organizations (sec. 404 of the bill and sec. 7123 of the Code) ................................. 231 5. Require section 501(c)(4) organizations to provide notice of formation (sec. 405 of the bill, secs. 6033 and 6652 of the Code, and new sec. 506 of the Code) ......................................................................................................................... 237 6. Declaratory judgments for section 501(c)(4) and other exempt organizations (sec. 406 of the bill and sec. 7428 of the Code) ........................................................ 241 7. Termination of employment of Internal Revenue Service employees for taking official actions for political purposes (sec. 407 of the bill and sec. 1203(b) of the Code) ......................................................................................................................... 243 8. Gift tax not to apply to gifts made to certain exempt organizations (sec. 408 of the bill and sec. 2501(a) of the Code) ................................................................... 244 9. Extend the Internal Revenue Service authority to require a truncated Social Security Number (“SSN”) on Form W-2 (sec. 409 of the bill and sec. 6051 of the Code)............................................................................................................... 247 10. Clarification of enrolled agent credentials (sec. 410 of the bill) ............................... 248 11. Partnership audit rules (sec. 411 of the bill and secs. 6225, 6226, 6234, 6235, and 6031 of the Code) ..................................................................................... 248 B. United States Tax Court .................................................................................................. 253 1. Filing period for interest abatement cases (sec. 421 of the bill and sec. 6404 of the Code)............................................................................................................... 253 2. Small tax case election for interest abatement cases (sec. 422 of the bill and secs. 6404 and 7463 of the Code) ............................................................................. 253 3. Venue for appeal of spousal relief and collection cases (sec. 423 of the bill and sec. 7482 of the Code) ........................................................................................ 254 4. Suspension of running of period for filing petition of spousal relief and collection cases (sec. 424 of the bill and secs. 6015 and 6330 of the Code) ............ 255 vi 5. Application of federal rules of evidence (sec. 425 of the bill and sec. 7453 of the Code)............................................................................................................... 256 6. Judicial conduct and disability procedures (sec. 431 of the bill and new sec. 7466 of the Code) .............................................................................................. 257 7. Administration, judicial conference, and fees (sec. 432 of the bill Code sec. 7473; and new secs. 7470 and 7470A of the Code) ........................................... 258 8. Clarification relating to the United States Tax Court (sec. 441 of the bill and sec. 7441 of the Code) ........................................................................................ 259 vii INTRODUCTION This document,1 prepared by the staff of the Joint Committee on Taxation, provides a technical explanation of the revenue provisions of the “Protecting Americans from Tax Hikes Act of 2015,” House amendment #2 to the Senate amendment to H.R. 2029 (Rules Committee Print 114-40), as introduced in the House on December 15, 2015, and posted on the Rules Committee website at http://docs.house.gov/billsthisweek/20151214/121515.250_xml.pdf. 1 This document may be cited as follows: Joint Committee on Taxation, Technical Explanation of the Revenue Provisions of the Protecting Americans from Tax Hikes Act of 2015, House Amendment #2 to the Senate Amendment to H.R. 2029 (Rules Committee Print 114-40), (JCX-144-15), December 17, 2015. This document can also be found on the Joint Committee on Taxation website at www.jct.gov. 1 TITLE I − EXTENDERS A. Permanent Extensions Part 1 − Tax Relief for Families and Individuals 1. Reduced earnings threshold for additional child tax credit made permanent (sec. 101 of the bill and sec. 24 of the Code) 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. 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 aggregate child tax credit 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 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 tax 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 (the “earned income” formula). This threshold dollar amount is $10,000 indexed for inflation from 2001. The American Recovery and Reinvestment Act, as subsequently extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 20102 and the American Taxpayer Relief Act of 2012,3 set the threshold at $3,000 for taxable years 2009 to 2017. Families with three or more qualifying 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 tax credit (“EITC”). Earned income is defined as the sum of wages, salaries, tips, and other taxable employee compensation plus net self-employment earnings. Unlike the EITC, 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 2 Pub. L. No. 111-312. 3 Pub. L. No. 112-240. 2