ACTION
FROM THE COMMITTEE ON WAYS AND MEANS

Thomas Announces Committee Action on H.R. 2896, the “American Jobs Creation Act of 2003,” and H.R. 2571, the “Rail Infrastructure Development and Expansion Act for the 21st Century”

Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways and Means, today announced that on Tuesday, October 28, 2003, the Committee ordered favorably reported, H.R. 2896, the "American Jobs Creation Act of 2003," as amended, by a recorded vote of 24-15; and ordered reported without recommendation, H.R. 2571, the “Rail Infrastructure Development and Expansion Act for the 21^st Century,” as amended, by voice vote.  Legislative text and materials from the Joint Committee on Taxation are available at: http://waysandmeans.house.gov/legis.asp?formmode=item&number;=111.

DESCRIPTION OF H.R. 2896 AS APPROVED:

U.S. manufacturing and production tax rate cut.  The corporate tax rate on U.S. manufacturing and production income would be reduced by 3 percentage points (from 35 percent to 32 percent).  The tax rate cut would apply to property that is manufactured, produced, grown or extracted in the United States, including tangible personal property, agriculture, softwood timber, processed food, construction, architectural and engineering services for construction projects built in the United States, extracted items, software, movies, music, and oil and gas refining and production.  The rate cut schedule would be the following:

• 2004-2006 -- 34 percent, and
• 2007 & after -- 32 percent.

Across-the-board tax rate cut.  In addition to the manufacturing and production rate cut, the bill would provide a new reduced 32 percent top corporate tax rate for all corporations with less than $20 million of taxable income.  The across-the-board rate cut is not limited to manufacturing and production income.  The small business rate schedule would be the following:

• 2004-2006      -- 33 percent (under $1 million of taxable income),
• 2007-2008 -- 32 percent (under $1 million of taxable income),
• 2009-2011      -- 32 percent (under $5 million of taxable income), and
• 2012 & after -- 32 percent (under $20 million of taxable income).

Section 179 expensing.  The expansion of small business expensing that was enacted in the Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27) would be extended for 2 years (through December 31, 2007).

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27) section 179 provision increases the amount of capital purchases that small- and medium-sized businesses can expense (immediately deduct) from $25,000 to $100,000 and increases the size of companies eligible for the provision by doubling the capital expenditure cap from $200,000 to $400,000.  (Both amounts are indexed for inflation.)

Depreciation relief.  The 39-year leasehold and restaurant depreciation lives would be reduced to 15 years.  The provisions would sunset on December 31, 2005.

AMT relief.  The bill contains several provisions that would greatly reduce the corporate alternative minimum tax (AMT).  These provisions follow:

• Would expand the size of companies exempt from AMT from $7.5 million of gross receipts to $20 million of gross receipts. 
• Would eliminate the 90 percent limitation of the use of net operating losses (NOLs) against AMT.
• Would eliminate the 90 percent limitation on the use of foreign tax credits against AMT, and
• Would coordinate farmer income averaging and the AMT.

S corporation reforms.  The bill contains various provisions to simplify the taxation of

S corporations and expands S corporation eligibility.  These provisions follow:

• Would treat three generations of family members as one shareholder.
• Would expand the maximum number of S corporation shareholders from 75 to 100, and
• Includes other provisions that would liberalize and simplify the taxation of S corporations such as treating individual retirement accounts as eligible S corporation shareholders and modifying the treatment of qualifying director shares.

Repeal of the Extraterritorial Income Exclusion Act of 2000 (ETI). The bill would repeal the ETI regime, but would provide the following transition relief, as follows:

• 100 percent of their ETI benefits in 2003,
• 80 percent of their ETI benefits in 2004,
• 80 percent of their ETI benefits in 2005,
• 60 percent of their ETI benefits in 2006, and
• Binding contracts in effect prior to January 14, 2002, would retain FSC and ETI benefits.

Competitive taxation of global earnings.  The bill contains several provisions that would make U.S. companies globally competitive and, thus, enable them to increase their U.S. manufacturing and U.S. exports including, treating the European Union as one county for purposes of the anti-deferral base company sales and services rules, repealing the anti-deferral foreign shipping income rules, providing that active income would continue to be treated as active income, when a controlled foreign corporation sells an interest in a partnership or makes a payment to another controlled foreign corporation, repealing the duplicative foreign personal holding company and foreign investment company rules, modifying the treatment of commodities transactions entered into in the ordinary course of business to manage price or currency fluctuations, treating active oil and gas pipeline transportation income as active income and partially excluding royalty payments paid to the United States on certain domestic made films.

Prevention of double taxation.  The bill contains several provisions that would reduce the double taxation of earnings including, reducing the number of foreign tax credit baskets from 9 to 2, modifying the overall domestic loss rules, modifying the interest allocation rules, fixing the rules that limit the ability of company’s to use foreign tax credits when it owns more than 10 percent, but less than 50 percent of another company, repealing the secondary withholding tax, modifying provisions to facilitate the ability of U.S. mutual funds located in the United States to attract foreign investors, treating the sale and lease of intangibles the same for purposes of the foreign tax credit, providing an election to allow the taxpayer to use actual versus average exchange rate for foreign tax payments, treating stock owned by partnerships as proportionally owned by its partners for purposes of the foreign tax credit, and providing equal treatment for interest paid by foreign partnerships and foreign corporations.

Provisions to prevent erosion of U.S. tax base.  The bill would require inverting (or expatriating) companies to pay the full U.S. tax on the transfer of U.S. assets to a foreign country, would equalize the treatment of shareholders and corporate executives and insiders by imposing a 15 percent excise tax on stock options held by corporate executives and insiders when a company inverts, and would tighten current law to prevent companies from improperly eroding the U.S. tax base through excessive interest payments to foreign related parties. 

Individual expatriation.  The provision would provide an objective test (rather than current law’s subjective test) to determine if a taxpayer is subject to the U.S. expatriation rules.

Tax shelters.  The bill would adopt the Bush Administration’s tax shelter recommendations that require increased disclosure of abusive transactions and increased penalties on those that promote and engage in abusive tax shelters. 

Protecting employee benefits.  The bill would do the following:

• Would create rules to govern the tax treatment of nonqualified deferred compensation to ensure that tax is deferred only in situations where the compensation is truly at risk, and the employee does not have access or control over the deferred amounts.

• Would clarify that statutory stock options are not subject to payroll tax when the option is exercised.

• Would extend for 5 years the ability to transfer excess defined benefit pension assets to retiree health accounts. 

Reforms and other provisions.

• Reform provisions.  The bill would adopt a number of reform provisions including, preventing partnership losses from being deducted more than once, repealing special Financial Asset Securitization Investment Trusts (FASIT) rules, limiting transfer of built-in losses on Real Estate Mortgage Investment Conduit (REMIC) residuals, modifying treatment of stripped interest in bond and preferred stock funds, requiring a minimum withholding period for foreign tax credit on withholding tax, clarifying what is a banking business for purposes of determining investment of earning in U.S. property, modifying exemption from tax for small property and casualty insurance companies, preventing mismatching of deductions and income inclusions in transactions with related foreign persons, and excluding like-kind exchange property from nonrecognition treatment on the sale or exchange of a principal residence. 

• Internal Revenue Service (IRS) user fees and other IRS provisions.  The bill would extend the IRS users fees through 2013, authorize the IRS to enter into installment agreements that provide for partial payment, modify rules to allow deposits to stop running of interest on potential underpayments, clarify rules for payment of estimated tax for deemed asset sales, deny deduction for interest paid to the IRS on underpayments involving certain tax motivated transactions, and exclude from gross income interest on overpayments of income tax by individuals.

• Farm and Small Business provisions.  The bill would provide special reinvestment rules for livestock sold on account of weather-related conditions, provide for payment of dividends on stock of cooperatives without reducing patronage dividends, add Hepatitis A to list of taxable vaccines, expand human clinical trial expenses qualifying for the orphan drug tax credit, modify rules to provide that distributions from publicly traded partnerships are treated as qualifying income for regulated investment companies, modify and simplify real estate investment trust provisions, modify the excise tax imposed on bows and arrows to prevent foreign bow and arrow manufacturers from avoiding the tax, repeal the excise tax imposed on tackle boxes and sonar fish-finding devices, provide a tax credit for carrying tax paid distilled spirits, provide capital gains treatment to the outright sale of timber, clarify that environmental “settlement funds” meeting certain requirements are beneficially owned by the U.S. government and, therefore, are not subject to Federal income tax, and suspend, until June 30, 2007, the occupational taxes relating to distilled spirits, wine and beer.

Extension of customs user fees.  The bill would extend Customs User Fees until 2013.  These fees will be more closely linked to the critical commercial services that Customs provides to importers such as the processing of merchandise, commercial inspections, and modernization of Customs' computer system.

DESCRIPTION OF H.R. 2571 AS APPROVED: 

The Committee voted to strike the tax provisions of H.R. 2571.  H.R. 2571, as reported by the Committee on Transportation and Infrastructure on June 25, 2003, would authorize States to issue $24 billion of tax-exempt bonds and tax-credit bonds to finance high-speed rail transportation projects.