Order Code RL32193
CRS Report for Congress
Received through the CRS Web
Anti-Tax-Shelter
and Other Revenue-Raising
Tax Proposals
January 12, 2004
Jane G. Gravelle
Senior Specialist in Economic Policy
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

Anti-Tax-Shelter and Other Revenue-Raising Tax
Proposals
Summary
Several bills introduced in the 108th Congress have included revenue-raising
provisions, particularly those aimed at tax shelters that are generally used by
corporations.
Anti-sheltering provisions were included in bills introduced by
Representative Lloyd Doggett (whose current bill is H.R. 1555), in the Senate version
of the 2003 tax cut (H.R. 2), in the Senate version of the Care Act (S. 476), and most
recently in both the House (H.R. 2896) and Senate (S. 1637) reported versions of
bills which eliminate the extraterritorial income provision (ETI)–which has been
found to contravene World Trade Organization (WTO) restrictions on export
subsidies–and provide other tax cuts and have been reported from their respective
committees. The number and size of the revenue-raising provisions are much greater
in S. 1637 ($56 billion over a 10-year period) than in the H.R. 2896 ($26 billion).
The Senate bill is revenue neutral overall, while the House bill loses revenue over the
period FY2004-FY2013.
Several types of revenue increases in S. 1637 and H.R. 2896 include (1) generic
anti-shelter provisions (including increased penalties and, in the case of the Senate
bill, changes in the economic substance doctrine), (2) provisions related to corporate
inversions and expatriations, and the associated earnings stripping, (3) other
provisions targeted at specific tax abuses, (4) provisions that involve explicit changes
in tax policy, and (5) fees. Fees (basically customs fees), are actually the single
largest revenue producers and account for about 30% of the gain in the Senate bill
and 60% of the gain in the House bill.
The Senate bill’s largest revenue raiser outside of customs fees is a codification
and strengthening of the economic substance doctrine which is used to determine
when an activity’s tax benefits are denied because they are aimed solely at tax
sheltering.
This provision is one that has attracted relative controversy, with
proponents arguing that is a crucial tool in the battle against corporate tax shelters
and opponents suggesting it will not be effective and will adversely affect ordinary
transactions.
Inversions occur when U.S. firms move the parent corporation abroad to reduce
taxes, often accomplished by earnings stripping methods where domestic income is
shifted abroad. The Senate bill has more stringent provisions directed to U.S.
inverted firms; the House bill has generic earnings stripping provisions that apply to
all U.S. subsidiaries of foreign parents.
A number of specific anti-shelter provisions are included in the bills, some of
them arising from the investigation of the Enron failure or from other issues raised
by failed firms. There are also some explicit tax policy changes which relate
primarily to deferred compensation in the House bill, but touch on a variety of other
areas in the Senate bill.

Contents
General Anti-Shelter Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Penalties for Non-Disclosure and Other Purposes . . . . . . . . . . . . . . . . . . . . . 6
Economic Substance Doctrine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Corporate Inversions, Earnings Stripping, and Expatriation . . . . . . . . . . . . . . . . 10
Specific Provisions Aimed at Shelters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Built in Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Property and Casualty Insurance Companies . . . . . . . . . . . . . . . . . . . . . . . . 12
Disallowance of Interest on Convertible debt . . . . . . . . . . . . . . . . . . . . . . . 13
Lease term to Include Service Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Disallowance of Partnership Loss Transfers . . . . . . . . . . . . . . . . . . . . . . . . 13
Lessors to Tax Exempt Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Mismatching of Items with Related Corporations . . . . . . . . . . . . . . . . . . . . 13
Basis Reduction for Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Straddle Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Installment Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Non-Recognition of Gain in Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Like Kind Exchanges for Residences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Clarification of Banking Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Estimated Tax on Deemed Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Expanded Authority to Disallow Benefits under Section 269 . . . . . . . . . . . 15
Modification of the CFC-PFIC Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Limit on Transfer of Losses in REMICs . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Tax Policy Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
House Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Overpayments and Underpayments of Tax . . . . . . . . . . . . . . . . . . . . . 17
Senate Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Charitable Contributions of Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Increase in Age Limit for section 1(g ) (“Kiddie Tax”) . . . . . . . . . . . . 18
Repeal Rehabilitation Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Private Debt Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Utility Grading Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Corporate Governance Provisions: Denial of Deductions . . . . . . . . . . 19
Extensions of Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
List of Tables
Table 1: Revenue Raisers in H.R. 2896 Raising $100 million
or more FY2004-FY2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 2: Revenue Raisers in S. 1637 Raising $100 million
or more FY2004-FY2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Anti-Tax-Shelter and Other Revenue-
Raising Tax Proposals
Several bills introduced in the 108th Congress have included revenue-raising
provisions, particularly those aimed at tax shelters that are generally used by
corporations.
Anti-sheltering provisions were included in bills introduced by
Representative Lloyd Doggett (whose current bill is H.R. 1555), in the Senate version
of the 2003 tax cut (H.R. 2), in the Senate version of the Care Act (S. 476), and most
recently in both the House (H.R. 2896) and Senate (S. 1637) reported versions of
bills which eliminate the extraterritorial income provision (ETI)–which has been
found to contravene World Trade Organization (WTO) restrictions on export
subsidies–and provide other tax cuts and have been reported from their respective
committees. The number and size of the revenue-raising provisions are much greater
in S. 1637 ($56 billion over a 10-year period) than in the H.R. 2896 ($26 billion).
The Senate bill is revenue neutral overall, while the House bill loses revenue over the
period FY2004-FY2013.
This report is an overview of the revenue raising provisions in H.R. 2896 and
S. 1637. It includes a brief discussion of some of the larger revenue raising
provisions, although the reader is directed to the Committee reports (108-393 for the
House bill and 108-292 for the Senate) for more detailed descriptions.
The bills have numerous (and complex) provisions, many of which have minor
consequences. To provide an overview, only provisions raising $100 million or
more of revenue over 10 years will be discussed.
Tables 1 and 2 list these
provisions in order of descending revenue gain. Table 1, containing the House
provisions, lists 17 measures while Table 2, containing the Senate provisions, lists
over twice as many measures.
To begin the discussion, it is helpful to organize the provisions into basic
categories. The five categories (in the order in which they will be discussed) are (1)
generic anti-shelter provisions, (2) provisions related to corporate inversions and
expatriations, and the associated earnings stripping, (3) other provisions targeted at
specific tax abuses, (4) provisions that involve explicit changes in tax policy, and (5)
fees. Fees (basically customs fees) are actually the single largest revenue producers
and account for about 30% of the gain in the Senate bill and 60% of the gain in the
House bill.

CRS-2
Table 1: Revenue Raisers in H.R. 2896 Raising $100 million or
more FY2004-FY2013, in Millions of Dollars
Provision
Revenue Gain
1. Extension of customs fees
16,916
2. Earnings Stripping
2,726
3. Tax Shelters: Penalties for Non-Reporting
1,559
4. Small property and casualty companies
1,179
5. Non-qualified deferred compensation
800
6. Corporate inversions
450
7. Mismatching of items with related corporations
444
8. Basis reduction for partnerships
364
9. Extension of IRS user fees
345
10. Individual expatriations
327
11. Extension of provision allowing DB plan transfers
298
12. Like-kind exchange for residences
171
13. Clarification of banking business
154
14. Estimated taxes on deemed asset sales
123
15. Exclusion of interest on overpayments
115
16. Prepayment of interest on underpayments
101
17, Limit on transfer of losses on REMIC residuals
100
Source: Joint Committee on Taxation, JCX-95-03, October 24, 2003.

CRS-3
Table 2: Revenue Raisers in S. 1637 Raising $100 million or
more FY2004-FY2013 (In Millions of Dollars)
Provision
Revenue Gain
1. Extension of customs fees
17,139
2. Economic substance doctrine
13,322
3. Charitable contributions of patents
3,851
4. Intangibles, broader application of rules
3,291
5. Corporate inversions
2,747
6. Built in losses
1,800
7. Tax shelters: penalties for non-reporting
1,559
8. Qualification rules (tax exempt and casualty insurance)
1,273
9. Increase age limit for section 1(g)
1,180
10. Repeal rehabilitation credit, non-historic buildings
1,013
11. Private debt collection
973
12. Disallowance of interest on convertible debt
891
13. Lease term to include service contracts
864
14. Disallowance of partnership loss transfers
705
15. Establish specific class lives for utility grading costs
701
16. Individual expatriation (mark to market)
700
17. Lessors to tax exempt entities
519
18. Mismatching of items with related corporations
444
19. Extend IRS user fees
386
20. Basis reduction for partnership
368
21. Denial of deduction for punitive damages
333
22. Earnings stripping applied to Subchapter S and individuals
244
23. Straddle rules
230
24. Installment sale treatment
215
25. Denial of deduction for fines
191
25. Non-recognition of gain in liquidation
189
27. Like-kind sales of residences
171
28. Clarification of banking business
166
29. Estimated tax on deemed assets sales
123
30. Expanded authority to disallow benefits under Section 269
108
31. Modification of CFC/PFIC rules
106
32. Deposits to stop interest running on underpayments
101
Source: Report of the Committee on Finance, To Accompany S. 1637, Report 108-292.

CRS-4
General Anti-Shelter Provisions
The term “tax shelter” is not easily defined and the usage of the term varies.
Sometimes it refers to any method of shielding income from tax including provisions
that were explicitly adopted by Congress as incentives. Sometimes it refers to
practices that meet the letter of the law (often by combining provisions in different
parts of the tax code) but are unintended by the law. In some cases, they are activities
that do not clearly meet the letter of the law. The provisions in the tax bills are
largely aimed at what might be called “abusive” tax shelters – activities set up to take
advantage of the strict letter of the law but whose purpose is to avoid taxes rather
than engage in any meaningful economic activity, and whose benefits were not
intended by Congress.
Tax shelters today are different from those that attracted attention in the 1970s,
and the legislation enacted to address those shelters does not address today’s
shelters.1 Most of the earlier tax shelters were in real estate or some other type of
physical investment (oil and gas, farming) and involved limited partnership interests
in highly leveraged assets which benefitted from both interest deductions and
deductions for accelerated depreciation (or other deductions for costs). Before
generic anti-shelter provisions directed at this type of shelter were enacted, a high
income taxpayer could take deductions many times his actual investment as his claim
to deductions (or his basis) included not only the amount financed by his cash
investment but also any associated debt (for which he would not be personally at
risk). These shelters were largely sold to high tax rate individuals. A series of law
changes (slowing depreciation, lowering tax rates, and enacting limits on deductions
through at-risk rules and passive loss restrictions) and economic changes (a decline
in inflation and in interest rates) have made those shelters obsolete.
Today’s tax shelters do not follow a consistent pattern and they are highly
varied.2 They are largely corporate shelters. Often, they do not involve investments
in real assets but rather in financial instruments that are highly liquid, held for a short
period of time, and structured to avoid risk. One paper discussing a court case
referred to the underlying stock asset held by the company “which, under a charitable
view of the facts, it owned for an hour.”3 This case was a dividend stripping case
where a tax exempt entity owned stock in a foreign firm and could not use foreign
tax credits; the entity arranged to sell a block of stock to a taxable firm just before
the dividend was paid; the taxable firm then sold the stock at a loss (because it was
worth the original price less the dividend) which wiped out the taxable income but
left the firm with a foreign tax credit attached to the dividend.
1 For a discussion of old and new style tax shelters and their interaction with “at risk” rules,
see James Whitmire and Bruce Lemons, “Putting Tax Shelters at Risk – Discussion and
Proposal for Change,” Tax Notes, Jan. 27, 2003, pp. 585-596.
2 See Gerald R. Miller, “Corporate Tax Shelters and Economic Substance: An Analysis of
the Problem and Its Common Law Solution,” Texas Tech Law Review, vol. 34, 2003, pp.
1015-1069 for a discussion of some of the common features of tax shelters.
3 Daniel Shaviro, “Economic Substance, Corporate Tax Shelters, and the COMPAQ Case,”
Tax Notes, July 10, 2000, p. 222.

CRS-5
The general objective of most tax shelters is to generate tax deductions, often
by contriving to increase the basis of the taxpayer in assets, or to shift losses or
deductions from tax indifferent parties (those not subject to U.S. tax such as foreign
corporations or tax exempt organizations) to taxable parties. Tax shelters may take
advantage of the flexibility allowed to partnerships in allocating income and assets,
may take advantage of related parties that are incorporated abroad and not subject to
current U.S. tax, may involve leasing arrangements to tax exempt organizations, and
have even involved firms’ buying life insurance on its rank and file employees ( so-
called “janitors” insurance).4 Some of the shelters are put together by promoters who
then sell them to firms, including prestigious accounting firms and financial
institutions. (Some accounting firms have indicated that they have closed these
operations.)5
Measuring the amount of revenue lost from tax shelters is difficult, although
some data suggest that the loss is substantial. The role of tax shelters is especially
difficult to monitor since these shelters may lead to mismeasurement of pre-tax
profits and make their magnitude difficult to detect. Several studies comparing book
and tax income have noted the widening gap between the two that cannot be
explained by the traditional measures of depreciation, stock options, and foreign
source income retained abroad. A study by Desai found $155 billion of unexplained
discrepancies in 1998,6 implying lost taxes that could be up to $54 billion (at a 35%
tax rate). This amount could be lower because some firms are operating at a tax loss,
some firms do not pay the top marginal tax rate, and some firms have unused credits.
But the amount is significant.
Some of this gap between book and taxable income was due to intended tax
benefits, and examining tax expenditures–which measure the revenue cost of explicit
special tax deductions, exclusions, and credits not considered to be part of a normal
income tax–may help to adjust for that effect. Our calculations suggest that about
$23 billion of such a gap would be attributable to tax expenditures.7 While there are
4
See CRS Report RS21498, Corporate-Owned Life Insurance: Tax Issues, by Don
Richards, for a discussion.
5 See Sheryl Stratton, “KPMG Skewered at Senate Shelter Hearing,” Tax Notes, Nov. 24,
2003, pp. 942-946.
6Mehir Desai, “The Corporate Profit Base, Tax Sheltering Activity and the Changing Nature
of Employee Compensation,” National Bureau of Economic Research Working Paper 8866,
April 2002.
7 In the same year that Desai estimated the $155 billion gap, the projected tax expenditures
for corporations were about $72 billion according to the Joint Committee on Taxation.
Almost half of this amount ($33.5 billion) was due to accelerated depreciation, largely for
equipment (and including expensing of research and development, or R&D, costs), which
Desai accounted for. Another $1.2 billion was retained earnings of controlled foreign
corporations, which he also accounted for. (These earnings are profits of subsidiaries of
U.S. firms incorporated under the laws of foreign countries and not paid as dividends to the
U.S. parent company). If one also eliminates $2.5 billion for tax deductions for charitable
contributions which were probably deducted as a book expense, $4.2 billion lost because
of graduated tax rates, and $7.6 billion of credits, the remaining tax expenditures account
(continued...)

CRS-6
many possible errors in calculating these effects, there nevertheless appears to be
significant potential for a relatively large size of unintended corporate tax base
reductions given the potential size of the book tax difference discovered by Desai.
Of course, not all of these differences represent illegal, or even abusive, tax shelters.
For example, there are certain types of preferred securities that are treated as debt for
tax purposes but as equity for book purposes, whose treatment for tax purposes has
been tested in court.
The general scope of this potential loss (i.e. a discrepancy of up to $54 billion
reduced by $23 billion leaving a potential of $31 billion unaccounted for)
accommodates estimates made by a Internal Revenue Service (IRS) contractor and
reported in a GAO study that suggested a loss from abusive tax shelters of $13.6 to
$17.3 billion for that same year.8 This study also reports an IRS database covering
the period 1989-2003 with a cumulative estimate of $85 billion. Additionally, the
study explains the efforts that IRS has been making to address these abusive tax
shelters, including listing specific transactions it found to be illegal and requiring
disclosure.
Setting aside the explicit provisions adopted by Congress, tax sheltering
activities raise two types of challenges for tax administration–and anti-shelter
legislation addresses one or both of these issues. First, in order for the IRS to collect
taxes avoided illegally, it is necessary to detect the tax shelters. Because of the
complexity of these operations, the elements of the tax shelter may be buried in other
deductions. IRS has engaged in an aggressive enforcement program against tax
shelter operations, including requiring disclosure of shelters. The penalties for non-
disclosure, included in both bills, are designed to provide more incentives to comply
with disclosure rules. Secondly, when a tax activity technically meets the statute, it
may nevertheless be disallowed in the courts under certain doctrines of common law.
These doctrines include examining the activity to determine if it is a sham
transaction, if it has no economic substance, and/or if it has no business purpose. A
provision clarifying and codifying the economic substance doctrine is included in the
Senate bill and is the largest revenue raiser after customs fees in that bill (although
there is some uncertainty about the amount of revenue that might be raised).
Penalties for Non-Disclosure and Other Purposes
New initiatives and Treasury regulations require taxpayers to report information
about certain categories of “reportable transactions” which include those that are
similar to tax transactions already disallowed, those offered under conditions of
confidentiality, those contingent on tax treatment, those generating losses of a certain
size, those where tax treatment differs from book treatment, and those resulting in a
significant tax credit while being held a short period of time. There are no specific
penalties for not reporting these transactions, and both H.R. 2896 and S. 1637 impose
7(...continued)
for about $23 billion.
8
Internal Revenue Service: Challenges Remain in Combating Abusive Tax Shelters,
Statement of Michael Brostek, General Accounting Office, before the Senate Finance
Committee, Tuesday, October 21, 2003.

CRS-7
a penalty on failure to provide required information on reportable transactions (items
3 in Table 1 and 7 in Table 2 respectively); this provision accounts for the bulk of
the $1.6 billion in revenue gain from penalties, although there are some changes in
other penalties.
Some critics have objected to certain aspects of the penalty
provisions, including the flat rate shelter disclosure penalty that applies regardless of
whether the taxpayer’s position is upheld and a new higher penalty on understatement
that applies to transactions lacking economic substance in the Senate bill (because
of uncertainty regarding the definition of economic substance).9
Economic Substance Doctrine
The provision in the Senate bill codifying the economic substance doctrine is
the largest revenue raiser in the Senate bill after customs fees, accounting for $13.3
billion over 10 years.
As noted above, even when transactions meet the letter of the tax law, tax
benefits may be disallowed by the courts if the activity is found to be a type of sham
transaction; in the particular case of tax shelters the related issues of economic
substance and/or business purpose are often used. 10 That is, if an activity does not
have economic substance and/or there is no business purpose, the tax benefits are
disallowed. The Senate bill recognizes these doctrines in the tax law itself and
provides a number of specific guidelines. For example, if the court finds the
economic substance doctrine to be relevant, the bill provides that the taxpayer must
meet both the objective test of economic substance and the subjective test of having
a non-tax business purpose to keep the tax benefit. Requiring both is referred to as
a conjunctive rule, while requiring either is referred to as a disjunctive rule. The
objective is to strengthen the rule and to bring more uniformity to court decisions.
Some court cases have required both aspects to be met and others only one. The bill
also sets out specific rules for determining when the taxpayer meets the economic
substance test through demonstrating profit potential, by requiring that the return
outside the tax benefits exceed the riskless rate of return; it also provides that the
transactions must be a reasonable means of achieving the business purpose.
The purpose of the provision regarding economic substance (according to the
Committee report) is:11
9
See letter written to Chairman William F. Thomas by Andrew Berg, Tax Section, New
York State Bar Association, September 24, 2003, reprinted in Tax Notes, October 20, 2003,
pp. 401-403. See also the letter to Chairman Thomas and Grassley on the economic
substance doctrine dated August 5, 2003 posted on the Tax Executive’s Institute web site,
http://www.tei.org/codify03.html (visited December 16, 2003).
10 For a general background on the economic substance doctrine see Joseph Bankman, “The
Economic Substance Doctrine,” Southern California Law Review, vol. 74, Nov. 2000, pp.
5-30; Miller, “Corporate Tax Shelters and Economic Substance,” op. cit, and Martin J.
McMahon, Jr. “Economic Substance, Purposive Activity, and Corporate Tax Shelters,” Tax
Notes,
Feb. 25, 2002, pp. 1017-1026.
11 Senate Report 108-192, to accompany S. 1637, p. 85.

CRS-8
The Committee is concerned that many taxpayers are engaging in tax
avoidance transactions that rely on the interaction of highly technical
tax law provisions.
And the report goes on to add in a footnote:
These transactions usually produce surprising results that were
not contemplated by Congress. Whether these transactions are
respected usually hinges on whether the transaction had sufficient
economic substance. The Committee is concerned that in addressing
these transactions the courts, in some cases, are reaching conclusions
inconsistent with Congressional intent. In addition, the Committee is
concerned that in determining whether a transaction has economic
substance, taxpayers are subject to different legal standards based on
the circuit in which the taxpayer is located. Thus, the Committee
believes it is appropriate to clarify for the courts the appropriate
standards to use in determining whether a transaction has economic
substance.
There has been a great deal of controversy about the economic substance
doctrine legislation. While the proposal is in the Senate bill, it is not in the House
bill. It is opposed by Treasury officials in the current Bush administration. Many
firms, practicing tax attorneys, and tax executives in businesses have objected to the
provision, both individually and formally through organizations such as the Tax
Executives Institute, the Tax Section of the American Bar Association and the Tax
Section of the New York State Bar Association.12
At the same time, there is much support for the codification of the economic
substance doctrine, in addition to the position taken by the Finance Committee. The
Clinton administration supported the bill, and Chairman Thomas’s 2002 bill in the
107th Congress (H.R. 5095) included an economic substance provision. There are a
number of attorneys and law professors who have taken the view that codification of
the economic substance doctrine, as in the Senate provision or with some
modification is advisable and even necessary to stem the tide of tax shelters.13
12
Pamela Olson (at her nomination hearings for Assistant Secretary of Treasury for Tax
Policy) commented on economic substance in answer to a question at a hearing; these
comments are reported in Samuel C. Thompson Jr. and Robert Allen Clary 11, “Coming in
from the Cold: The Case for ESD Codification” Tax Notes, May 26, 2003, pp. 1270-1274.
See also, as noted above, the letter on the economic substance doctrine posted on the Tax
Executive’s Institute web site, http://www.tei.org/codify03.html (visited December 16) and
the April 24 letter to Chairman Grassley and Ranking Member Baucus posted on the
American Bar Association’s Web site http://www.abanet.org/tax/home.html (visited
December 16, 2003). See also New York State Bar Association Tax Section, “Economic
Substance Codification,” Tax Notes, June 23, 2003; Peter L. Faber, letter to the Chairman
Thomas, reprinted as “Practitioner to Congress: Don’t Try to Codify Economic Substance,
Tax Notes, Oct. 21, 2002, pp. 423-424; James M. Peaslee, letter to the Finance Committee,
reprinted as “More Thoughts on Proposed Economic Substance Clarification,” Tax Notes,
May 5, 2003, pp. 747-750, May 5, 2003.
13 Lawrence M. Stone, Letter to Chairman Thomas, reprinted as “Congress Should Codify
(continued...)

CRS-9
In general, the arguments for codification in these discussions and commentary
include the need to take more aggressive action to stem the tide of tax shelter cases,
since a stricter rule would change the cost-benefit calculus faced in this area and
strengthen the position of the tax authorities. The argument is also made that in the
face of aggressive tax sheltering, even compliant taxpayers will be pressured into
these activities unless Congress (or the Supreme Court) takes action to clarify
economic substance. Moreover, in addition to creating more conformity in court
decisions, putting the doctrine into the code would allow the Treasury to write more
detailed regulations.
The criticisms of the proposal include both criticisms of any codification of the
economic substance doctrine, as well as the particular ones used in the provision.
Pam Olson, answering a question at her nomination hearing as Assistant Secretary
of Treasury for Tax Policy,14 made the case against codification roughly as follows:
such an approach is too wooden and rigid (not flexible enough), it will be both too
broad (presumably covering unintended transactions) and too narrow (presumably
leaving ways for individuals to get around the rules), and that it will increase
complexity for the IRS and slow audits. In general, in the discussion by many of the
critics several themes emerge.
One is that the courts are the proper place to
adjudicate complex technical issues. Another is that the legislation as written would
also be applicable to perfectly common transactions that have long been occurring
and whose benefits are intended by the Congress–even ordinary actions like electing
Subchapter S (a small corporation electing to be taxed as a partnership) or
incorporating a foreign branch operation (which allows deferral of U.S. tax on active
income).
Critics also argue that the new language will still have significant
ambiguities that would require adjudication and that designers of shelters will simply
devise new ways to get around the rules.
Supporters have written rejoinders, for example suggesting that too much
flexibility is the underlying problem with tax shelters and that more rigid rules are
needed, and that clearer rules would simplify IRS administration and enforcement.
The rejoinders also argue that the claims about interference with ordinary accepted
transactions are greatly exaggerated: the Committee report makes it clear that the
intent is not to deny deliberate benefits bestowed by Congress, and that the legislation
applies only to cases where the court decides economic substance is an issue. They
also point out that the tax authorities would not press cases of this nature in any
event.
13(...continued)
Economic Substance,” in Tax Notes, November 18, 2002; Samuel C. Thompson Jr. and
Robert Allen Clary 11, “Coming in from the Cold: The Case for ESD Codification” Tax
Notes
, May 26, 2003, pp. 1270-1274; Terrill A. Hyde and Glen Arlen Kohl, “The Shelter
Problem is Too Serious Not to Change the Law,” Tax Notes, July 7, 2003, Pp. 119-122;
Lawrence Stone, “Economic Substance Codification: Naysayers Can Help Make it Work,”
Tax Notes, Aug. 4, 2003, pp. 730-731. A paper supporting the general notion is Martin J.
McMahon, “Economic Substance, Purposive Activity, and Corporate Tax Shelters,” op cit.
14 Reported in Thompson and Clary, “Coming in from the Cold,” op. cit.

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Corporate Inversions, Earnings Stripping, and
Expatriation
Anti-tax sheltering provisions include provisions that are directly related to an
activity called corporate inversion and also provisions dealing with individual
expatriates (individuals who change residence or renounce citizenship to avoid U.S.
tax). The provisions discussed in this section are items 2, 6 and 10 in Table 1 and
items 5, 16 and 22 in Table 2.15
Corporate inversion occurs when a U.S. company sets up a foreign incorporated
firm to become the parent corporation (and the current U.S. firm now becomes the
subsidiary corporation). This inversion confers two related tax advantages: avoiding
tax on foreign earnings and earnings stripping which allows a reduction of tax on
domestic earnings.
First, any income earned abroad would be beyond the ambit of the U.S. tax
system. Foreign subsidiaries of U.S. parent companies are subject to tax on certain
types of passive income even if not paid back to the U.S. parent (this income is called
Subpart F income), and the U.S. is stricter than many other countries in taxing this
income. However, income of foreign subsidiaries of a foreign parent company (and
the parent company’s income) is not subject to this tax (even if the shareholders are
U.S. citizens). Thus an inversion would permit a company to avoid the tax on
passive earnings of foreign operations. (The tax on active earnings does not apply
in any case until the income is repatriated as a dividend. Note also that the tax
avoidance matters in countries that have no taxes or low taxes where foreign tax
credits cannot be used to offset the additional U.S. tax).
The second advantage is that setting up the firm with a foreign parent allows
more scope for reducing tax on U.S. source income by allowing the U.S. subsidiary
to rely heavily on debt held by a foreign related company. Interest is deductible and
while interest paid to a related foreign corporation is subject to a withholding tax, tax
treaties often eliminate or greatly reduce that withholding tax. Some inversion
operations are set up with three related firms: the U.S. firm, the new foreign parent
firm in a country without a treaty, and another subsidiary in a country with a treaty
to receive and transmit the interest payments. Reducing U.S. tax with debt or other
deductible payments to related firms is referred to as “earnings stripping” and it is an
issue not just with inverted firms, but with U.S. subsidiaries of foreign parent firms
in general. Because of the potential for abuse, the current tax code has a restriction
on deductibility of interest for thinly capitalized U.S. firms (with more than 60% of
assets held in debt and with more than 50% of earnings paid in interest).
The tax benefits of inversions are limited by the possibility that stockholders
will pay individual capital gains tax on the appreciation that occurred from the time
they purchased the stock to the time of the inversion. However, increasingly large
15
See also CRS Report RL31444, Firms That Incorporate Abroad for Tax Purposes:
Corporate “Inversions” and “Expatriation,” by David Brumbaugh for further discussion.

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shares of stock are held in tax exempt form (e.g. pensions, IRAs) and the capital
gains tax rate is relatively low (currently only 15%).
Individuals can also act to limit their tax liability by changing their citizenship
to a low tax country.
The responses to these issues vary across bills. Under H.R. 2896 the general
earnings stripping rules would be tightened (item 2 in Table 1) by dropping the asset
share test (i.e. disallowing interest based only on the interest as a share of income)
and lowering the interest share (to 25% for ordinary debt and 50% for guaranteed, or
30% overall).
This provision, which has a broader scope than on firms with
inversions, would raise much of the $3.5 billion revenue gain for 2004-2013 in this
area – $2.726 billion. H.R. 2896 has some provisions focused directly on inversions
as well (item 6) which would prevent use of foreign tax credits or net operating
losses from offsetting taxes on inversion transactions (this and other items are
grouped in item 5). It would also impose a 15% excise tax on stock options related
to inversions. The limits on credits and loss offsets raise about $340 million and the
stock option tax $78 million. There are also small gains from a provision to require
reporting of mergers and acquisitions and to allocate items for reinsurance contracts.
The other significant revenue raiser in this group is a $327 million provision
imposing taxes on expatriate individuals (item 10 in Table 1). U.S. citizens or
residents are taxed on worldwide income (but are allowed a foreign tax credit for
taxes paid on foreign source income); nonresidents who are not citizens are subject
to a 30% withholding tax that may be lowered or eliminated through a tax treaty.
Individuals who renounce citizenship or residency for the purpose of avoiding tax
must pay tax on U.S. source income at ordinary tax rates, if they exceed certain
thresholds with respect to tax liability in the past and assets. H.R. 2896 replaces this
subjective determination of intent with an objective test based on prior taxes paid and
assets.
S. 1637 focuses on inverted firms and does not alter the general earnings
stripping rules. The inverted firms provisions (item 5 in Table 2) would tax inverted
firms as if they were domestic firms if 80% of the new foreign parent is owned by
former shareholders of the U.S. firm (for inversions occurring after March 20, 2002
and where the company had no existing substantial interest in the foreign country).
For other inversions, a “toll” tax equal to the top corporate (or individual, in the case
of a partnership) rate would be imposed (and could not be offset by foreign tax
credits or carryover of net operating losses). For earnings stripping, S. 1637 has
provisions that eliminate the asset test and reduce the interest share test to 25% but
the bill applies these stricter rules only to inverted corporations. These provisions
together account for $2.6 billion over FY2004-FY2013. In additional revenue
provisions added to the bill, there is a 20% excise tax on stock options linked to the
inversion and an extension of earnings stripping rules to Subchapter S corporations
(corporations taxed as partnerships) and partnerships and strengthens them for
inverted corporations. Individual expatriates would be taxed immediately under a
mark to market rule (i.e. the individual must pay tax as if he or she had sold the
asset).

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Overall, the House bill focuses much more heavily on general revenues from
tightening the earnings stripping rules for all corporations, and is less targeted to
inverted companies, while the Senate bill has much stricter tax provisions for
inversions and does not contain a general provision for earnings stripping. The
Senate bill’s provision for individual expatriates requires an immediate tax on
accumulated gain from assets through a mark to market provision.
Specific Provisions Aimed at Shelters
This section discusses specific provisions that are aimed at practices that appear
to require a legislative remedy but may still be thought of as tax shelters. They vary
in the fundamentals, but as one can see from the following discussion, many of them
involve transactions, sometimes between related parties, where one party is exempt
from the U.S. tax and the other is not. Arrangements involve ways of reducing
taxable income by increasing debt (since interest is deductible) as in the case of
earnings stripping, increasing basis (the part of an asset’s price that is exempt when
the asset is sold), increasing other deductions, or excluding or reducing income. The
following discussions are brief explanations; the reader is directed to the committee
reports for more detailed information. They are arrayed from highest to lowest
revenue gain.
The Senate bill also singled out certain provisions as relating to Enron – a report
by the Joint Committee on Taxation investigating Enron uncovered some of the
methods used to avoid taxes. When provisions fall into these categories, they will
be noted.
Built in Losses
This largest of the provisions in this section in projected revenue gains ($1.8
billion) arose from the Enron investigation, and is only in the Senate bill. It
addresses the situation when firms or other parties exchange assets for stock and
control the corporation after the exchange; under current law this is a tax free
transaction, that is, no gain or loss is recognized. If one party to the exchange is an
exempt foreign entity and the asset has a loss (i.e. basis, that is, the amount deducted
on sale, is above market value), and the U.S. corporation takes the foreign party’s
basis, the domestic taxable firm can benefit from this transaction (because when the
asset is sold, a loss will be recognized). The proposal would require basis to be fair
market value in these cases.
Property and Casualty Insurance Companies
This item is included in both bills (item 4 in Table 1 and 8 in Table 2) and
raises about $1.2 billion. It basically addresses a provision that has been in the tax
law for a long time that allows tax exemptions for very small property and casualty
companies. These firms are entirely tax exempt if they receive less than $350,000
in premiums. They are taxable only on investment income if premiums are less than
$1 million. This provision had been used to exempt large amounts of investment

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income by setting up a firm with nominal premiums but huge investment reserves.16
The new provision requires more than 50% of gross receipts from premiums to be
eligible for these tax benefits; the House bill also raises the exemption level for firms
that do qualify.
Disallowance of Interest on Convertible debt
This provision is also an Enron-related one, and is only in the Senate bill; it
raises about $900 million. Under present law interest including original issue
discount (the difference between issue cost and face value of a security on maturity,
which is equivalent to interest paid at the end), cannot be deducted if it is contingent
on the value of securities of the issuer or a related party (involving ownership of 50%
or more). This provision applies the restrictions without regard to the 50% rule.
Lease term to Include Service Contracts
This provision, raising almost $800 million, is contained only in the Senate bill.
To prevent tax exempt entities from transferring accelerated depreciation to taxable
entities via leases, the useful life of property that is leased to tax exempt entities is
a life that is the longest of the specified tax life or 125% of the lease term. Some
attempts have been made to bypass this rule by using service contracts; this provision
requires that the length of service contracts be included in determining lease term.
Disallowance of Partnership Loss Transfers
This $700 million provision is highly technical and contained only in the Senate
bill. Many tax shelters are associated with partnerships, which have a lot of
flexibility. This flexibility includes assigning basis to individual partners. Currently
when property is distributed or a partnership interest transferred, the partnership is
not required to make an adjustment to basis, and when property is distributed to other
partners later, the basis adjustments may be made in a way that permits double
recognition of losses or transfers of losses. This provision disallows that outcome.
Lessors to Tax Exempt Entities
This $500 million provision is only in the Senate bill. Leasing to tax exempt
entities by taxable firms (who receive accelerated depreciation deductions) has
figured heavily in a number of tax shelter arrangements. This provision limits
deductions to income received from the lease, imposing a treatment much like the
passive loss restrictions that apply to passive individual investors.
Mismatching of Items with Related Corporations
This provision, raising about $450 million, is included in both bills (item 7 in
Table 1 and Item 18 in Table 2). It corrects a circumstance where U.S. companies
16
This activity was described in David Cay Johnston, “From Tiny Insurers Big Tax
Breaks,” New York Times, April 1, 2003, Sect. C, p. 1

CRS-14
who are creditors do not include original issue discount on behalf of their foreign
subsidiaries even though the deductions themselves are reflected in current income.
Basis Reduction for Partnerships
This $400 million provision came out of the Enron investigation and is included
in both bills (item 8 in Table 1 and item 20 in Table 2). It also arises from the
flexibility allowed partnerships. When partners contribute assets to a partnership or
the partnership distributes assets to a partner, there is no gain or loss realized.
However, it may be necessary to adjust the basis of the asset (which determines how
much of an asset is return on capital and exempt from taxes when the taxpayer does
sell the property). For example, if a partner contributed a building for which he had
paid $100,000 to the partnership, his basis in the partnership is $100,000, but if the
partnership returns the building to him in a distribution and also pays him $20,000,
then he has to reduce his basis to $80,000 so that when he sells the property, he will
pay tax on the $20,000. The partnership may elect to adjust the basis of its assets in
a corresponding manner and is required to group assets of a similar type in allocating
basis. The grouping rules have permitted partnerships in such situations to reduce
the basis of stock and increase the basis of physical assets, which is advantageous for
corporate partners who do not include cash from the sale of stock in income but do
include such gains on real assets.
Straddle Rules
This $230 million provision is only in the Senate bill. Straddles occur when
individuals hold (generally two) assets that move in opposite directions (such as an
option to buy, or call, along with an option to sell, or put, at a fixed price). If one of
the assets is sold for a loss, current law allows the loss only in excess of the gain of
the other asset, with unused loss carried over. Some stock positions are exempt from
this treatment and there is some confusion regarding circumstances when the parts
of the straddle are not identified.
The proposal makes a number of detailed changes in the straddle rule including
repeal of the stock exemptions, providing that taxpayers identify the components of
straddles, and changing the rule from a deferral of loss to a change in basis.
Installment Sales
This $215 million provision is only in the Senate bill. Under present law,
individuals who sell property with payments to be received as installments only
recognize gain when the payments are actually made. If the taxpayer also receives
a readily tradable debt instrument from a corporation or government, this instrument
is considered the payment and gain is taxed immediately. This provision extends this
rule to debt issued by partnerships and individuals.
Non-Recognition of Gain in Liquidation
This provision is only in the Senate bill, and raises slightly under $200 million.
U.S. subsidiaries of foreign parents pay U.S. corporate tax on their earnings and

CRS-15
when they transfer profits to the foreign parent pay a withholding tax of 30% unless
there is a tax treaty; there is a similar tax on the shifting of branch earnings abroad.
However, if a subsidiary or branch is closing down (a liquidation) assets may be
transferred tax free (if certain restrictions are met). There is a concern that firms may
create U.S. holding companies to obtain the earnings of the domestic operation and
then transfer them tax-free. This provision denies tax free treatment to a U.S.
holding company that has been in existence less than five years.
Like Kind Exchanges for Residences
This provision raises $170 million and is in both bills (item 12 in Table 1 and
item 27 in Table 2). Under current law married couples can exclude $500,000 of
gain ($250,000 for singles) when they sell their residence as long as they have lived
in it for two of the past five years. This provision denies this exclusion if they
acquired the house in a like kind exchange with no recognition of gain. For example,
this provision would tax gain that arose from rental properties converted into
residences.
Clarification of Banking Business
This provision is in both bills (item 12 in Table 1 and item 28 in Table 2); it
raises about $170 million. Under current law, income from foreign incorporated
subsidiaries (other than earnings of certain types of passive assets) is not taxed until
paid to the U.S. shareholder. However, investments of the foreign subsidiary in the
United States are subject to tax (as they can be equivalent to a distribution). There
are a series of exceptions to this rule, and one of them is for bank deposits. In a
recent court case, payments to a shareholder for purposes of carrying on a department
store credit card business were found to be banking by the courts; this provision
bases the definition of banking on the taxpayer’s being subject to banking
regulations.
Estimated Tax on Deemed Asset Sales
This $120 million provision is in both bills (item 14 in Table 1 and item 29 in
Table 2). In some circumstances a company acquiring another company may elect
to treat the transactions as a sale of assets by the acquired company rather than stock.
Apparently some taxpayers have interpreted a related provision about estimated taxes
to require no estimated tax payments; this provision provides that effects of an asset
sale must be reflected in estimated tax payments.
Expanded Authority to Disallow Benefits under Section 269
This $100 million provision relates to the Enron investigation and is only in the
Senate bill. Present law (Section 269) provides that a taxpayer who acquires control
of another corporation cannot use the acquired firm’s tax benefits if the acquisition
was for the purposes of avoiding tax. This provision expands the scope of present
law by not requiring that the acquisition of assets establishes control.

CRS-16
Modification of the CFC-PFIC Rules
This provision is related to the Enron investigation and raises about $100 million;
it is only in the Senate bill. Under current law shareholders in controlled foreign
corporations, or CFCs, are taxed currently on certain tax haven income (Subpart F
income). There are also rules requiring current taxation of income of passive foreign
investment companies (PFICs) that have most of their assets in a passive form. To
prevent overlap, a CFC cannot also be treated as a PFIC and shareholders are not
subject to the rules even if they are expected to pay no tax on Subpart F income. This
provision would apply the PFIC rules in those cases.
Limit on Transfer of Losses in REMICs
This $100 million provision is only in the House bill and relates to the Enron
investigation. Because of rules recognizing no gain or loss in a transfer of property
for stock, Enron was able to use REMICs (real estate mortgage investment conduits,
which are used to convert mortgages to securities) to duplicate losses. This provision
limits the basis of certain interests in REMICs (residual interests, which are the
remainder after subtracting regular interests that involve fixed payments) that are
transferred to corporations to the fair market value in cases where the basis of a
REMIC residual is greater than fair market value.
Tax Policy Changes
Many of the provisions listed thus for are in both the House and Senate bills;
however, in the area of actual tax policy changes – items that change provisions of
the income tax without seeming to be directed at a tax shelter abuse, the focus is
quite different. The larger revenue raisers in the House bill are focused on deferred
compensation, and, to a lesser degree, underpayments and overpayments of tax. The
Senate bill, while including the underpayment provision, has several significant
changes in tax provisions that are different from those in the House bill.
Accordingly, in this section, we discuss first the House bill provisions and then the
Senate bill provisions. In some cases these provisions actually provide benefits, and
the revenue gain only reflects timing.
House Bill
The House Bill contains about $1.3 billion of tax increases resulting from tax
policy changes, $800 million of which is due to the deferred compensation provision
discussed immediately below.
Deferred Compensation.
The House bill contains two revisions to the treatment of deferred compensation
(compensation that accrues to individuals but is not paid out to them)–items 5 and
11 in Table 1, respectively raising $800 million and $300 million. Non-qualified
deferred compensation is taxable to an individual on a facts and circumstances basis
designed to determine whether an individual has really obtained a right to the

CRS-17
compensation. Firms had set up “rabbi trusts” (so called because the first case that
came to the attention of the IRS was set up for a rabbi) where deferred compensation
in the trust could be used to satisfy creditors if the firm became insolvent and this
feature was used to justify not taxing the compensation currently. The bill eliminates
this use of exposure of trust fund assets to creditors in the case of insolvency as a
justification for not taxing deferred compensation.
This provision clearly involves a tax increase; the gain from this provision
represents in part, therefore, a speeding up of tax payments, since at some point in
the future, the taxes which would otherwise occur on deferred compensation will not
materialize.
The second provision extends a current provision that allows firms to avoid plan
disqualification (if made prior to termination) or penalties (if made on plan
termination) when taking excess assets out of defined benefit pension plans, by
transferring them to a retiree health benefits plan. The excise tax is 20% or 50%,
depending on whether a replacement plan or certain benefit increases occur. The
excise tax applies in addition to regular income tax on the withdrawal. When
transfers are made, no deduction can be taken for the transfers or the expenditures
they fund. If all the funds are not used currently, they revert and are subject to the
20% excise tax. This change involves providing a tax benefit, not a penalty. The
provision is projected to raise revenue, however, presumably because of the increased
transfers from the funds will pay for costs while not permitting a deduction and
because a penalty is applied to unused funds. This provision would eventually lose
revenue, however, by reducing the size of plans (and the eventual individual tax on
pension recipients) or by reducing the amount of future contributions that must be
made to fund benefits.
Overpayments and Underpayments of Tax.
The House bill includes two other policy changes that relate to tax
administration and which raise revenue during the budget horizon – items 15 and 16
in Table 1 (raising about $100 million each). The first is the elimination of taxes on
interest accrued on overpayments of tax. This provision also establishes a benefit,
and presumably results in a revenue gain because it increases the likelihood of
overpayments, although it should lead to a long term loss. The other provision also
provides a benefit and a speedup in collections by allowing more flexibility for
taxpayers to prepay amounts to stop interest payments on tax underpayments; this
gain would also be transitory.
Senate Bill
The Senate bill also contains the provision on underpayments (item 32, Table
2), but there are five other provisions that are permanent increases in most cases;
altogether these provisions account for $11.6 billion in revenue, almost ten times the
size of the provisions in the House bill. All references are to Table 2.

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Charitable Contributions of Patents.
The largest revenue raiser ($3.9 billion) involves limiting deductions for
charitable contributions of patents (item 3). Under certain circumstances, donors of
property to charitable organizations are able to deduct the entire fair market value of
an asset even though they have not been taxed on the gain. For certain other types of
contributions, such as contributions to foundations or contributions of certain created
property, they can only deduct the basis–what they paid for it or spent creating it. The
Senate bill’s provision, reflecting concerns that the fair market value of patents is not
easily determined and may be inflated, limits the contribution to the basis. However,
it also allows an exception to the general rule disallowing benefits for contributions
of partial interests, by permitting the donor to receive a share of the royalties.
Intangibles.
The second provision involves the treatment of intangibles (item 4), raising $3.3
billion. Under current law acquired intangibles are deducted over a 15 year period –a
compromise to prevent disputes and allocational issues across intangibles including
some (such as good will) which were previously not deductible at all, and others (such
as patient lists) that taxpayers had successfully made a case in court for deducting over
shorter periods of time. In the Senate bill, two intangibles provisions would add
organizational and certain start up costs (currently deductible over five years) and
sports franchises (which had a variety of rules, including special rules for player
contracts) to the 15 year category.
The bill also permits the first $5,000 for
organization and start-up costs to be deducted immediately.
Increase in Age Limit for section 1(g ) (“Kiddie Tax”).
A third provision (item 9), raising $1.2 billion, expands coverage of the “kiddie
tax” that requires unearned income to be taxed at the parent’s rate. The bill increases
coverage from those under age 14 to those under age 18.
Repeal Rehabilitation Credit.
A fourth change (item 10) repeals the 10% credit for rehabilitation expenditures
on buildings constructed before 1936, gaining $1 billion. No change is made in the
20% rehabilitation credit for historic buildings.
Private Debt Collection.
This provision (item 11) raising almost $1 billion authorizes the IRS to use
private debt collection services.
Utility Grading Costs.
Utility assets (such as transmission or distribution lines) are placed in classes that
allow them to be depreciated over 15 or 20 years.
However, because certain
regulations were never adopted, grading and preparing property for these lines is not
assigned a class and by default is depreciated over seven years. This provision places

CRS-19
the grading and land preparation costs for transmission and distribution lines into the
same class as the assets themselves, raising about $700 million.
Corporate Governance Provisions: Denial of Deductions.
The Senate bill included several provisions on corporate governance that
reflected concerns arising from the collapse of Enron and other firms. Two of the
provisions raise revenues of about $330 million (item 21) and $190 million (item 25)
respectively.
The first would disallow firms’ deductions for punitive damages
(normally all settlements are considered a cost of doing business and are deductible).
The second relates to deductions for fines. Taxpayers are not allowed to deduct the
costs of fines. This provision clarifies that payments made to the government or at the
direction of the government pursuant to an investigation, including those made to
avoid further investigation, are not deductible unless they are determined to provide
restitution.
Extensions of Fees
In both bills, the largest revenue raiser is the extension of customs fees
(merchandising, passenger and conveyance processing fees), accounting for about $17
billion, accounting for about 60% of the revenue gain in the House bill and about 30%
of the gain in the Senate bill. A fee extension with a smaller gain is the IRS user fee
(item 9 in the House bill and item 19 in the Senate bill), which accounts for about
$400 million.