By the Tax Management Editorial Staff
Washington, D.C.

On December 16, 2005, the House and Senate approved by unanimous consent a long-negotiated package (H.R. 4440) of business and individual tax breaks meant to help the Gulf Coast recover from the fall's spate of hurricanes. The Senate, which approved the package as an amendment to the House bill, generally acceded to the House position on excluding the gaming industry and other businesses like liquor stores from the business tax breaks included in the measure, which provides a bonus depreciation deduction for property in the affected region as well as a carryback of net operating losses (NOLs). President Bush signed the Act into law December 21.

The following is a discussion of the tax-related sections of the Act pertaining to hurricane relief.

TITLE I--ESTABLISHMENT OF GULF OPPORTUNITY ZONE

Tax Benefits for Gulf Opportunity Zone
[Act §101; Code §§1400M (new), 1400N (new)]
Definitions [Code §1400M]

The Act provides that the terms "Gulf Opportunity Zone" and "GO Zone" mean that portion of the Hurricane Katrina disaster area determined by the President to warrant individual or individual and public assistance from the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of Hurricane Katrina. The Act also provides that the term "Hurricane Katrina disaster area" means an area with respect to which a major disaster has been declared by the President before September 14, 2005.

The Act provides that the term "Rita GO Zone" means that portion of the Hurricane Rita disaster area determined by the President to warrant individual or individual and public assistance from the federal government. The term "Hurricane Rita disaster area" means an area with respect to which a major disaster has been declared by the President before October 6, 2005.

The Act provides that the term "Wilma GO Zone" means that portion of the Hurricane Wilma disaster area determined by the President to warrant individual or individual and public assistance from the federal government. The term "Wilma disaster area" means an area with respect to which a major disaster has been declared by the President before November 14, 2005.

Tax-exempt bond financing [Code §1400N(a)]

The Act authorizes the issuance of qualified private activity bonds to finance the construction and rehabilitation of residential and nonresidential property located in the Gulf Opportunity Zone, which includes Alabama, Louisiana, Mississippi, or any political subdivision thereof.

Gulf Opportunity Zone Bonds are bonds for which 95% or more of the proceeds are used for qualified project costs in the GO Zone (exempt facility bonds) or that meet the requirements of a qualified mortgage issue in the Zone (qualified mortgage bonds).

For exempt facility bonds, qualified project costs include those for the acquisition, construction, reconstruction, and renovation of nonresidential real property and public utility property located in the GO Zone, and the cost of qualified residential rental projects located in the GO Zone. A project is a qualified residential rental project if 20% or more of the residential units in such project are occupied by individuals whose income is 60% or less of area median gross income, or if 40% or more of the residential units in such project are occupied by individuals whose income is 70% or less of area median gross income.

For qualified mortgage bonds, residences located in the GO Zone are treated as targeted area residences. Therefore, the first-time homebuyer rule is waived and purchase and income rules for targeted area residences apply to residences financed with bonds issued under the provision. One hundred percent of the mortgages must be made to mortgagors whose family income is 140% or less of the applicable median family income. In addition, the amount of a qualified home-improvement loan that may be financed with bond proceeds is $150,000.

GO Zone Bonds may only be issued for projects approved by the Governor or the bond commission of the State in which the financed project shall be located. Bond proceeds may not be used to provide for country clubs, casinos, hot tub facilities, suntan facilities, liquor stores, massage parlors, golf courses, and race tracks. Bond proceeds also may not be used to finance movable fixtures and equipment to ensure that property financed with the bonds will remain in the GO Zone. The face amount of the bonds cannot exceed $2,500 multiplied by the portion of the population that falls within the GO Zone.

GO Zone Bonds must be issued after the date of enactment and before January 1, 2011.

Advance refunding of certain tax-exempt bonds [Code §1400N(b)]

The Act permits one additional advance refunding of bonds issued by Alabama, Louisiana, or Mississippi, or any political subdivision thereof, that were outstanding on August 28, 2005 and could not be advance refunded under Code restrictions in effect on or after that date. The Act also permits one advance refunding of certain exempt facility bonds for airports, docks, or wharves issued by Alabama, Louisiana, or Mississippi, or any political subdivision thereof, notwithstanding the general prohibition on the advance refunding of such bonds.

To be eligible for the additional advance refunding, the advance refunding bond must be the only other outstanding bond with respect to the refunded bond. Thus, at no time after the advance refunding authorized under the provision occurs may there be more than two sets of bonds outstanding.

The Governor of the respective state must designate eligible advance refunding bonds. The maximum amount of advance refunding bonds that may be issued pursuant to this provision is $4.5 billion in the case of Louisiana, $2.25 billion in the case of Mississippi, and $1.125 billion in the case of Alabama. Advance refunding bonds issued under the provision must satisfy present-law arbitrage restrictions and all requirements otherwise applicable to advance refunding issues (e.g., redemption requirements and prohibition on abusive transactions). In addition, bonds may not be advance refunded if any portion of the proceeds of such bonds was used to provide for country clubs, casinos, hot tub facilities, suntan facilities, liquor stores, massage parlors, golf courses, or race tracks.

Effective for advance refundings of bonds after the date of enactment and before January 1, 2011.

Low-income housing credit [Code §1400N(c)]

The Act provides an increase in the housing credit dollar amount for low-income housing purposes in the GO Zone. For low-income housing credit purposes, in the case of calendar years 2006, 2007, and 2008, the State housing credit ceiling of each state located in the GO Zone is increased by the lesser of: (1) the aggregate housing credit dollar amount allocated by the state housing credit agency of that state to buildings located in the GO Zone for that calendar year, or (2) the Gulf Opportunity housing amount for that State for the calendar year. The Act defines the Gulf Opportunity housing amount for the calendar year as an amount equal to the product of $18.00 multiplied by the portion of the State population which is in the GO Zone (as determined by the most recent census estimate of resident population released by the Bureau of Census before August 28, 2005).

The Act provides that for calendar year 2006, the State housing credit ceilings of Texas and Florida are each increased by $3,500,000. Also, the Act states that in the case of property placed in service during 2006, 2007, and 2008, the GO Zone, the Rita GO Zone, and the Wilma GO Zone are treated as difficult development areas for purposes of applying difficult development area rules of the low-income credit. The Act also provides that such property is not taken into account for purposes of the metropolitan statistical area limitation. The Act provides that these difficult development area rules apply only to housing credit dollar amounts allocated during the period beginning on January 1, 2006, and ending on December 31, 2008, and to certain buildings placed in service during such period financed by tax-exempt bonds issued after December 31, 2005.

Finally, the Act provides that "national metropolitan median gross income determined under the rules of §142(d)(2)(B)" is substituted for "area median gross income" for purposes of applying the income test of §42(g)(1). This rule applies to property placed in service during 2006, 2007, or 2008, in the GO Zone, and in a nonmetropolitan area (reference to §42(d)(5)(C)(iv)).

Special allowance for certain property acquired on or after August 28, 2005 [Code §1400N(d)]

The Act allows a 50% bonus depreciation allowance for GO Zone business property that is placed in service before 2008 (before 2009, for nonresidential real and residential rental property) and exempts such depreciation allowances from the alternative minimum tax. Qualified GO Zone property is property that meets four requirements. First, it must be one of the following six types of property: (i) property to which the general MACRS rules apply and that has a recovery period of 20 years or less, (ii) computer software not covered by §197 to which the general MACRS rules apply, (iii) water utility property to which the general MACRS rules apply, (iv) qualified leasehold improvement property to which the general MACRS rules apply, (v) nonresidential real property, or (vi) residential rental property. Second, substantially all of the use of the property must be in the GO Zone and must be in the active conduct of a trade or business by the taxpayer in such Zone. Third, the original use of the property in the GO Zone must begin with the taxpayer on or after August 28, 2005. Fourth, the property is acquired by the taxpayer by purchase (within the meaning of §179(d)) on or after August 28, 2005, but only if no written binding contract for the acquisition was in effect before August 28, 2005. (However, property is not precluded from qualifying for the additional first-year depreciation merely because a binding written contract to acquire a component of the property is in effect before August 28, 2005.) Qualified GO Zone property does not include property that is depreciated under the alternative depreciation system, tax-exempt bond-financed property, or qualified revitalization buildings.

Recapture rules apply if the property ceases to qualify as GO Zone property.

Increase in expensing under §179 [Code §1400N(e)]

First, the Act increases the maximum amount deductible under §179 (the "overall limitation") by the lesser of $100,000 or the cost of qualified §179 GO Zone property placed in service during the taxable year. Thus, in addition to the $100,000 maximum cost of any §179 property (including property that also meets the definition of qualified §179 GO Zone property) that may be deducted under present law, a taxpayer may elect to deduct a maximum $100,000 additional amount of the taxpayer's cost of qualified §179 GO Zone property, resulting in a maximum deductible amount of $200,000 of qualified §179 GO Zone property. (The $100,000 present-law portion is indexed for inflation for taxable years beginning in 2004 through 2007, so the total may be higher than $200,000 after taking indexation of that portion into account.) The $100,000 additional amount is not inflation-indexed.

Second, the Act increases the maximum amount of eligible property costs (currently $400,000 plus inflation adjustment) that may be taken into account without triggering a reduction in the $200,000 overall limitation, by the lesser of $600,000 or the cost of qualified §179 GO Zone property placed in service during the taxable year. Thus, the $200,000 maximum deduction for the cost of qualified §179 GO Zone property is reduced (but not below zero) by the amount by which the cost of qualified §179 GO Zone property placed in service during the taxable year exceeds a dollar cap of up to $1 million. (The $400,000 present-law portion of this amount is indexed for taxable years beginning after in 2004 through 2007, so the actual dollar cap may be higher than $1 million after taking indexation of that portion into account.) The $600,000 additional amount is not inflation-indexed.

Qualified §179 GO Zone property is §179 property that is qualified GO Zone property (as defined above for purposes of the special 50% bonus depreciation allowance provided by new §1400N(d)).

The Act includes rules coordinating the increased §179 amounts that it provides with present-law expensing rules for enterprise zone businesses in empowerment zones and with respect to renewal communities. For purposes of those rules, qualified §179 GO Zone property is not treated as qualified zone property or qualified renewal property, unless the taxpayer elects not to take such qualified §179 GO Zone property into account for purposes of this provision. Thus, a taxpayer acquiring property that could qualify as either qualified §179 GO Zone property, or qualified zone property or qualified renewal property, may elect the additional expensing provided either under this provision, or under the empowerment zone or renewal community rules, but not both, with respect to the property.

Recapture rules apply if either recapture applies under §179(d)(10) or the property ceases to qualify as §179 GO Zone property.

Expensing for certain demolition and clean-up costs [Code §1400N(f)]

The Act allows a taxpayer to elect to treat 50% of any qualified GO Zone clean-up costs as an expense deductible for the taxable year in which it is paid or incurred. For this purpose, the Act defines qualified GO Zone clean-up costs as any amount paid or incurred during the period beginning on August 28, 2005, and ending on December 31, 2007, for debris removal from, or demolition of structures on, real property located in the GO Zone. In addition, the property must be held by the taxpayer for trade or business use or for the production of income, or must be §1221(a)(1) property in the hands of the taxpayer. The Act specifies that the amounts paid or incurred are taken into account only to the extent that such amount would otherwise by chargeable to capital account.

Extension of expensing for environmental remediation costs [Code §1400N(g)]

The Act allows taxpayers to expense qualified environmental remediation expenditures paid or incurred on or after August 28, 2005, but before 2008, in connection with qualified contaminated sites in the GO Zone, including GO Zone sites at which petroleum products have been released or disposed of. Thus, the Act changes present law by extending the expensing provision for two years for qualified contaminated sites located in the GO Zone and by treating petroleum products as hazardous substances for purposes of applying the expensing provision in the GO Zone. Petroleum products include crude oil, crude oil condensates, and natural gas. The exceptions for sites on the national priorities list under CERCLA, and for substances with respect to which a removal or remediation is forbidden under §104(a)(3) of CERCLA, continue to apply to all hazardous substances, including petroleum products.

Increase in rehabilitation credit [Code §1400N(h)]

The Act provides an increase in the rehabilitation credit for expenditures incurred in the GO Zone. The Act states that in the case of qualified rehabilitation expenditures (as defined in §47(c)) paid or incurred during the period beginning on August 28, 2005, and ending on December 31, 2008, with respect to any qualified rehabilitated building or certified historic structure located in the GO Zone, the 10% rehabilitation credit is 13% and the 20% rehabilitation credit is 26%.

Special rules for small timber producers [Code §1400N(i)]

The Act doubles expensing allowances for timber producers that hold 500 or fewer acres of qualified timber property throughout the taxable year, for reforestation costs: (i) incurred on or August 28, 2005, but before 2008, with respect to qualified timber property any portion of which is located in the GO Zone, (ii) incurred on or after September 23, 2005, but before 2008, with respect to qualified timber property any portion of which is located in the Rita GO Zone and no portion of which is located in the GO Zone, and (iii) period incurred on or after October 23, 2005, but before 2008, with respect to qualified timber property any portion of which is located in the Wilma GO Zone. However, the amount by which the expensing limit is increased is limited to the amount of reforestation expenditures paid or incurred during the relevant portion of the taxable year.

The Act also extends to five years the carryback period for net operating losses incurred by certain businesses and small timber producers in the GO Zone, effective for taxable years ending on or after August 28, 2005, with respect to income and loss which is allocable to that portion of the taxpayer's taxable year that is on or after August 28, 2005, but before 2007 (for qualified timber property any portion of which is located in the GO Zone); on or after September 23, 2005, but before 2007 (for qualified timber property any portion of which is located in the Rita GO Zone and no portion of which is located in the GO Zone); or on or after October 23, 2005, but before 2007 (for qualified timber property any portion of which is located in the Wilma GO Zone).

These provisions do not apply to taxpayers that are publicly-traded corporations or REITs.

Special rules for gulf opportunity zone public utility casualty losses [Code §1400N(j)]

The Act allows taxpayers to elect to treat GO Zone public utility casualty losses as specified liability losses to which the 10-year carryback period applies. "Gulf Opportunity Zone public utility casualty losses" are casualty losses of public utility property located in the GO Zone by reason of Hurricane Katrina that are deductible under §165 for the taxable year. However, the Act reduces the amount of Gulf Opportunity Zone public utility casualty losses that would otherwise be taken into account by the amount of gain recognized by the taxpayer from involuntary conversions of public utility property located in the GO Zone by reason of Hurricane Katrina.

The Act limits the total amount of specified liability loss, including any amount of public utility casualty loss treated as such, to the amount of the taxpayer's overall NOL for the taxable year, as under present law. Taxpayers who elect this treatment with respect to any loss are not eligible to also treat the loss as having occurred in any prior taxable year, nor to include the casualty loss as part of the five-year NOL carryback provided under new §1400N(i). For purposes of the provision, public utility property generally means property used predominantly in a rate-regulated trade or business of the furnishing or sale of electrical energy, water, or sewage disposal services; gas or steam through a local distribution system; telephone services or certain other communication services; or transportation of gas or steam by pipeline.

Treatment of net operating losses attributable to gulf opportunity zone losses [Code §1400N(k)]

The Act provides a special five-year carryback period for net operating losses (NOLs) to the extent of certain specified amounts related to the GO Zone. The amount of the NOL which is eligible for the five-year carryback ("eligible NOL") is limited to the sum of the following deductions: (1) qualified GO Zone casualty losses; (2) certain moving expenses; (3) certain temporary housing expenses; (4) depreciation deductions with respect to qualified GO Zone property for the taxable year the property is placed in service; and (5) deductions for certain repair expenses resulting from Hurricane Katrina.

Qualified GO Zone casualty losses are losses on certain property located in the GO Zone and attributable to Hurricane Katrina. The loss property must be (1) property used in a trade or business, and (2) a capital assets held for more than one year in connection with either a trade or business or a transaction entered into for profit. The amount of any casualty loss does not include any amount compensated for by insurance or otherwise. The total amount of the casualty loss which may be included in the eligible NOL is reduced by the amount of any gain recognized by the taxpayer from involuntary conversions of property located in the GO Zone caused by Hurricane Katrina.

Certain employee moving expenses of an employer may be included in the eligible NOL. In order to qualify, an amount must be paid or incurred after August 27, 2005, and before January 1, 2008 with respect to an employee who (1) whose principal place of abode was located in the GO Zone before August 28, 2005, (2) was unable to remain in the abode as a result of Hurricane Katrina, and (3) is employed in the GO Zone by the taxpayer after the expense is paid or incurred. Moving expenses are defined to include only the reasonable expenses of moving household goods and personal effects from the former residence to the new residence, and of traveling (including lodging) from the former residence to the new place of residence. The former residence and the new residence may be the same residence if the employee initially vacated the residence as a result of Hurricane Katrina. The individual with respect to whom the moving expenses are incurred need not have been an employee of the taxpayer at the time the expenses were incurred.

Deductions for an employer's expenses paid or incurred after August 27, 2005, and before January 1, 2008, to temporarily house employees who are employed in the GO Zone may be included in the eligible NOL. The temporary housing need not be located in the GO Zone in order for such expenses to be included in the eligible NOL. However, the employee's principal place of employment with the taxpayer must be in the GO Zone.

Depreciation or amortization deductions with respect to qualified GO Zone property placed in service during the year may be included in the eligible NOL. The special carryback period applies to the entire allowable depreciation deduction for such property for the year in which it is placed in service, including both the regular depreciation deduction and the additional first-year depreciation deduction, if any. An election out of the additional first-year depreciation deduction for GO Zone property does not preclude eligibility for the five-year carryback.

Deductions for repair expenses (including the cost of removal of debris) with respect to damage caused by Hurricane Katrina may in included in the eligible NOL. In order to qualify, the amount must be paid or incurred after August 27, 2005 and before January 1, 2008, and the property must be located in the GO Zone.

The amount of the NOL to which the five-year carryback period applies is limited to the amount of the taxpayer's overall NOL for the taxable year. Any remaining portion of the taxpayer's NOL is subject to the general two-year carryback period. Ordering rules similar to those for specified liability losses apply to losses carried back under the provision. The general rule which limits a taxpayer's NOL deduction to 90% of AMTI will not apply to any NOL to which the five-year carryback period applies under the provision. Thus, a taxpayer may apply such NOL carrybacks to offset up to 100% of AMTI.

A taxpayer may make an irrevocable election not to apply the five-year carryback under the provision with respect to any taxable year.

Credit to holders of gulf tax credit bonds [Code §1400N(l)]

The Act provides a credit to Gulf tax credit bondholders who hold such bonds on one or more credit allowance dates (March 15, June 15, September 15, December 15, and the last day on which the bond is outstanding) during the taxable year. The credit amount is 25% of the annual credit determined with respect to such bond. The annual credit is the credit rate determined by Secretary multiplied by the outstanding face amount of the bond. The credit amount is prorated for bonds issued during the three-month period ending on a credit allowance date. The credit allowed to Gulf tax credit bondholders is limited to the excess of the sum of the regular tax and the alternative minimum tax over the sum of the other credits allowable (excluding refundable credits).

The Act defines a "Gulf tax credit bond" as any bond issued as part of an issue: (1) by the States of Alabama, Louisiana, or Mississippi; (2) for which 95% of the proceeds are used to pay principal, interest, or premiums on qualified bonds issued by such state or any political subdivision thereof, or to make a loan to any political subdivision of the state to pay principal, interest, or premiums on qualified bonds; (3) designated by the Governor of such state as a Gulf tax credit bond: (4) which is a general obligation of the state and is in registered form (as defined in §149(a)); (4) for which the maturity does not exceed two years; (5) issued after December 31, 2005, and before January 1, 2007. Also there is a state matching requirement in order for the bond to qualify under this provision.

There is an aggregate limit on bond designations: $200 million for Louisiana, $100 million for Mississippi, and $50 million for Alabama. Special rules apply regarding arbitrage, pass-thru entities, and bonds held by regulated investment companies. Finally, the credit allowed is treated as a nonrefundable bondholder credit and is included in gross income as interest income.

Application of new markets tax credit to investments in community development entities serving gulf opportunity zone [Code §1400N(m)]

The Act provides $1 billion from 2005 through 2007 in New Markets Tax Credit Authority to investments in community development entities with recovery and redevelopment of the GO Zone as a significant mission. The amount for 2005 and for 2006 is $300 million and the 2007 amount is $400 million. The §45D carryover of unused limitation is to be applied separately with respect to this additional amount.

Treatment of representations regarding income eligibility for purposes of qualified residential rental project requirements [Code §1400N(n)]

The Act provides that the operator of a residential rental project may rely on the representations of an individual applying for tenancy in such project that such individual's income will not exceed the applicable income limits for qualified residential rental projects when the individual's tenancy begins, provided the individual's tenancy begins during the six-month period after s/he was displaced by Hurricane Katrina and, thus, the project is in compliance with the 20-50 test or the 40-60 test.

Treatment of public utility property disaster losses [Code §1400N(o)]

The Act provides an election for taxpayers who incurred casualty losses attributable to Hurricane Katrina for eligible public utility property located in the GO Zone. Under the election, such casualty losses may be taken into account in the fifth taxable year, rather than in the first taxable year, immediately preceding the taxable year in which the loss occurred. If the application of this provision results in the creation or increase of a net operating loss for the year in which the casualty loss is taken into account, the net operating loss may be carried back or carried over as under present law applicable to net operating losses for such year. Eligible public utility property is property used predominantly in the trade or business of the furnishing or sale of electrical energy, water, or sewage disposal services; gas or steam through a local distribution system; telephone services, or other communication services if furnished or sold by the Communications Satellite Corporation for purposes authorized by the Communications Satellite Act of 1962; or transportation of gas or steam by pipeline. Such property is eligible even if the taxpayer's rates are established or approved by a regulatory body. A taxpayer making the election under the provision is eligible to file an application for a tentative carryback adjustment of the tax for any prior taxable year affected by the election. The statute of limitations with respect to such a refund or credit claim cannot expire earlier than one year after the date of enactment. A taxpayer making the election with respect to a loss is not entitled to interest with respect to any overpayment attributable to the loss.

Tax benefits not available with respect to certain property [Code §1400N(p)]

The Act provides that the provisions relating to additional first-year depreciation, increased expensing under §179, and the five-year carryback of net operating losses (NOLs) attributable to GO Zone casualty losses, depreciation, or amortization otherwise provided under new Code §1400N do not apply with respect to certain property. Specifically, the provisions do not apply to property used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises. The provisions also do not apply to property used in connection with any gambling or animal racing property.

For this purpose, gambling or animal racing property includes certain personal property and certain real property. Personal property treated as gambling or animal racing property includes any equipment, furniture, software, or other property used directly in connection with gambling, the racing of animals, or the on-site (i.e., at the racetrack) viewing of such racing. Real property treated as gambling or animal racing property is the portion of any real property (determined by square footage) that is dedicated to gambling, the racing of animals, or the on-site viewing of such racing, unless the portion so dedicated is less than 100 square feet. No apportionment calculation is required with respect to real property which meets the 100-square-foot de minimis exception.

Effective date

The provisions are effective for taxable years ending on or after August 28, 2005. However, §§1400N(i)(2), (j), and (k), dealing with losses, applies to losses arising in such taxable years.

Expansion of Hope Scholarship and Lifetime Learning Credit for Students in the Gulf Opportunity Zone
[Act §102; Code §1400O (new), related to §25A]

The Act temporarily expands the Hope and Lifetime Learning credits for students attending (i.e., enrolled and paying tuition at) an eligible education institution located in the Gulf Opportunity Zone. The Act provides that the Hope credit is increased to 100% of the first $2,000 in qualified tuition and related expenses and 50% of the next $2,000 of qualified tuition and related expenses. The Act specifically doubles the dollar amount in effect for the particular year. These amounts are adjusted for inflation. For example, in 2006, the $2,000 amount is $2,200. The Lifetime Learning credit rate is increased from 20% to 40%. The provision expands the definition of qualified expenses to mean qualified higher education expenses as defined under the rules relating to qualified tuition programs, including certain room and board expenses for at least half-time students. The Act applies to taxable years beginning in 2005 or 2006.

Housing Relief for Individuals Affected by Hurricane Katrina
[Act §103; Code §1400P (new)]

The Act provides a temporary income exclusion for the value of in-kind lodging provided for a month to a qualified employee (and the employee's spouse or dependents) by or on behalf of a qualified employer. The amount of the exclusion for any month for which lodging is furnished cannot exceed $600. The exclusion does not apply for purposes of Social Security and Medicare taxes or unemployment tax.

The Act also provides a temporary credit, under the general business credit regime, to a qualified employer of 30% of the value of lodging excluded from the income of a qualified employee under the provision. The amount taken as a credit is not deductible by the employer.

The Act provides that a qualified employee means, with respect to a month, an individual who: (1) on August 28, 2005, had a principal residence in the Gulf Opportunity (GO) Zone; and (2) performs substantially all of his or her employment services in the GO Zone for the qualified employer furnishing the lodging. A qualified employer means any employer with a trade or business located in the GO Zone.

Effective for lodging provided during the period beginning on the first day of the first month beginning after the date of enactment and ending on the date that is six months after such first day.

Extension of Special Rules for Mortgage Revenue Bonds
[Act §104; Related to Code §143]

The Act extends the waiver of the first-time homebuyer requirement provided by Katrina Tax Relief Act to financing provided through December 31, 2010.

Special Extension of Bonus Depreciation Placed in Service Date for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma
[Act §105; Related to Code §168]

The Act provides the Secretary of the Treasury with authority to further extend the placed-in-service date (beyond December 31, 2005), on a case-by-case basis, for certain property eligible for the December 31, 2005 placed-in-service date under present law. The authority extends only to property placed in service or manufactured in the Gulf Opportunity Zone, the Rita GO Zone, or the Wilma GO Zone. In addition, the authority extends only to circumstances in which the taxpayer was unable to meet the December 31, 2005 deadline as a result of Hurricanes Katrina, Rita, and/or Wilma. Any extension would be only for such additional time as is required as a result of the hurricane(s) and in no case would the deadline be extended beyond December 31, 2006.

Applicable to property placed in service on or after August 28, 2005, in taxable years ending on or after such date.

TITLE II--TAX BENEFITS RELATED TO HURRICANES RITA AND WILMA

Extension of Certain Emergency Tax Relief for Hurricane Katrina to Hurricanes Rita and Wilma
[Act §201; Code §§1400Q (new), 1400R (new), 1400S (new), 1400T (new)]
Special Rules for Retirement Funds [Code §1400Q (new)]

The Act codifies and expands the relief provided under the Katrina Emergency Tax Relief Act of 2005 (Katrina Tax Relief Act), P.L. 109-73, providing an exception to the §72(t) 10% early withdrawal tax in the case of qualified Hurricane Katrina distributions, to any "qualified hurricane distribution," which is defined to include distributions relating to Hurricanes Rita and Wilma. Under the Act, a qualified hurricane distribution includes distributions that meet the definition of a qualified Hurricane Katrina distribution under the Katrina Tax Relief Act, as well as any other distribution from an eligible retirement plan made on or after September 23, 2005, and before January 1, 2007, to an individual whose principal place of abode on September 23, 2005, is located in the Hurricane Rita disaster area and who has sustained an economic loss by reason of Hurricane Rita. Also under the Act, a qualified hurricane distribution also includes a distribution from an eligible retirement plan made on or after October 23, 2005, and before January 1, 2007, to an individual whose principal place of abode on October 23, 2005, is located in the Hurricane Wilma disaster area and who has sustained an economic loss by reason of Hurricane Wilma. Under the Act, the total amount of qualified hurricane distributions that an individual can receive from all plans, annuities or IRAs is $100,000.

The Act also codifies and expands the provision under the Katrina Tax Relief Act allowing recontribution of certain distributions from a §401(k) plan, §403(b) annuity, or IRA to qualified Hurricane Rita distributions and to qualified Hurricane Wilma distributions. Under the Act, a qualified Hurricane Rita distribution is a hardship distribution from a §401(k) plan or §403(b) annuity, or a qualified first-time homebuyer distribution from an IRA: (1) that is received after February 28, 2005, and before September 24, 2005; and (2) that was to be used to purchase or construct a principal residence in the Hurricane Rita disaster area, but the residence is not purchased or constructed on account of Hurricane Rita. The Act provides that any portion of a qualified Hurricane Rita distribution may, during the period beginning on September 23, 2005, and ending on February 28, 2006, be recontributed to a plan, annuity or IRA to which a rollover is permitted. The Act also provides that a qualified Hurricane Wilma distribution is a hardship distribution from a §401(k) plan or §403(b) annuity, or a qualified first-time homebuyer distribution from an IRA: (1) that is received after February 28, 2005, and before October 24, 2005; and (2) that was to be used to purchase or construct a principal residence in the Hurricane Wilma disaster area, but the residence is not purchased or constructed on account of Hurricane Wilma. Under the Act, any portion of a qualified Hurricane Wilma distribution may, during the period beginning on October 23, 2005, and ending on February 28, 2006, be recontributed to a plan, annuity or IRA to which a rollover is permitted.

In addition, the Act codifies and expands the special rules for loans from a qualified employer plan provided under the Katrina Tax Relief Act, increasing the dollar amount limit on loans not treated as distributions and delaying repayment of such loans under §72(p), to loans from a qualified employer plan to a qualified Hurricane Rita or Hurricane Wilma individual made on or after the date of enactment and before January 1, 2007. Under the Act, a qualified Hurricane Rita individual includes an individual whose principal place of abode on September 23, 2005, is located in a Hurricane Rita disaster area and who has sustained an economic loss by reason of Hurricane Rita. Also under the Act, in the case of a qualified Hurricane Rita individual with an outstanding loan on or after September 23, 2005, from a qualified employer plan, if the due date for any repayment with respect to such loan occurs during the period beginning on September 23, 2005, and ending on December 31, 2006, such due date is delayed for one year. The Act provides that a qualified Hurricane Wilma individual includes an individual whose principal place of abode on October 23, 2005, is located in a Hurricane Wilma disaster area and who has sustained an economic loss by reason of Hurricane Wilma. Under the Act, in the case of a qualified Hurricane Wilma individual with an outstanding loan on or after October 23, 2005, from a qualified employer plan, if the due date for any repayment with respect to such loan occurs during the period beginning on October 23, 2005, and ending on December 31, 2006, such due date is delayed for one year. The Act also provides that an individual cannot be a qualified individual with respect to more than one hurricane.

The Katrina Tax Relief Act permitted certain plan amendments made pursuant to the changes made by the provisions of Title I of that Act, or regulations issued thereunder, to be retroactively effective. The Act codifies and expands the ability to make retroactive plan amendments under the Katrina Tax Relief Act to apply to changes made pursuant to new Code §1400Q or regulations issued thereunder.

Effective on the date of enactment.

Employment Relief [Code §1400R (new)]

The Act codifies, with some modification, the employee retention credit provisions that were enacted in Katrina Tax Relief Act §202, which allows an eligible employer a credit of an amount equal to 40% of the qualified wages paid or incurred in 2005 for each eligible employee, not to exceed $6,000 for each individual for the taxable year. The Act eliminates the restriction that prevented employers of more than 200 employees from taking the credit. The Act defines eligible employers and employees with reference to a GO Zone (as defined in new Code §1400M), instead of a core disaster area, and extends the retention credit to employers affected by Hurricanes Rita and Wilma and located in the corresponding GO Zone. The Act lists the reference dates for defining eligibility and qualified wages for employers affected by Hurricanes Katrina, Rita and Wilma as August 28, 2005, September 23, 2005, and October 23, 2005, respectively.

Codification of the credit takes effect on the date of enactment. Repeal of the employer size limitation is effective as if included in the Katrina Relief Act. The retention credit is effective for wages paid after September 23, 2005, in the case of Hurricane Rita and after October 23, 2005, in the case of Hurricane Wilma.

Additional Tax Relief Provisions [Code §1400S (new)]

Charitable Contributions. The Act codifies without change the charitable contribution relief that was granted to individuals in §301 of the Katrina Tax Relief Act. Under this provision, any cash charitable contribution made by an individual between August 28, 2005, and December 31, 2005, to a public charity that is neither a §509(a)(3) supporting organization nor a donor-directed fund is not subject to the percentage limitations of §170(b) or the itemized deduction reduction of §68. The Act expands the relief granted in the Katrina Tax Relief Act to corporations by providing that cash contributions made by corporations between the above dates may be deducted to the extent of taxable income, provided that the contributions are made for relief efforts related to Hurricane Rita or Hurricane Wilma, in addition to Hurricane Katrina. [Code §1400S(a)]

Personal Casualty Losses. The Act codifies the rule in the Katrina Tax Relief Act eliminating limitations on personal casualty or theft losses for losses arising in the Hurricane Katrina disaster area, and expands it to include losses arising in the Hurricane Rita and Hurricane Wilma disaster areas that are attributable to those hurricanes, respectively.

Under present law (§165), a taxpayer may claim a deduction for any loss sustained during the taxable year and not compensated by insurance otherwise. Personal casualty or theft losses generally are deductible (i) only if they exceed $100 per casualty or theft (§165(h)(1)) and (ii) only to the extent they exceed 10% of an individual taxpayer's adjusted gross income (§165(h)(2)(A)). The Katrina Tax Relief Act provides that these two limitations do not apply to the extent the casualty or theft losses arise in the Hurricane Katrina disaster area on or after August 25, 2005, and are attributable to Hurricane Katrina, and provides that, for purposes of the 10% threshold, such losses attributable to Hurricane Katrina are disregarded. The Act codifies the Hurricane Katrina rule and expands it to Hurricane Rita and Hurricane Wilma losses.

The codification is effective on the date of enactment, and the expansion of the provision applies to losses related to Hurricane Rita arising on or after September 23, 2005, and to losses related to Hurricane Wilma arising on or after October 23, 2005. [Code §1400S(b)]

Section 7508A Authority. The Bill provides that in the case of any taxpayer determined by the IRS to be affected by the Presidentially declared disasters relating to Hurricanes Katrina, Rita, or Wilma, relief under §7508A (authority to postpone deadlines by reasons of a Presidentially declared disaster) is provided for a period ending not earlier than February 28, 2006. [Code §1400S(c)]

Special Rules for Determining Earned Income. The Act codifies the rule permitting certain individuals affected by Hurricane Katrina to elect to calculate their earned income and refundable child credits using earned income from the prior taxable year (the "Katrina election"), and expands the rule to permit certain individuals affected by Hurricanes Rita and Wilma to make similar elections (the "Rita election" and the "Wilma election," respectively). Under §32, the amount of an eligible taxpayer's earned income credit depends on the taxpayer's earned income and whether the taxpayer has qualifying children. Under §24, taxpayers with incomes below certain threshold amounts are eligible for a $1,000 credit for each qualifying child, and the credit is refundable to the extent of 15% of the taxpayer's earned income in excess of $10,000 (indexed for inflation); families with three or more children are allowed a refundable credit for the amount by which the taxpayer's social security taxes exceed the earned income credit (if that amount is greater than the refundable credit). A "qualified" individual with earned income for the taxable year that includes August 25, 2005, that is less than earned income for the preceding taxable year, and who is affected by Hurricane Katrina, can make a Katrina election. To qualify for the Katrina election, an individual must (i) have had his or her principal place of abode in the Hurricane Katrina core disaster area on August 25, 2005, or (ii) have lived in the Hurricane Katrina disaster area on August 25, 2005, and have been displaced from his or her principal place of abode.

In addition to codifying the Katrina election, the Act expands the rule to provide for a "Rita election" An individual is qualified for the Rita Election if the individual (i) had his or her principal place of abode in the Rita GO Zone on September 23, 2005, or (ii) had his or her principal place of abode in the Hurricane Rita disaster area but outside the Rita GO Zone on that date and was displaced from the principal place of abode.

The Act also expands the rule to provide for a "Wilma election" for an individual (i) who, on October 23, 2005, had his or her principal place of abode in the Wilma GO Zone or (ii) had his or her principal place of abode on that date outside the Wilma GO Zone but in the Hurricane Wilma disaster area and was displaced from the principal place of abode. A qualified individual may make a Rita or Wilma election only if the individual's earned income for the taxable year that includes September 23, 2005, or October 23, 2005, as the case may be, is less than earned income for the preceding taxable year. The rules governing Rita and Wilma elections are the same as those governing Katrina elections in all other respects.

The codification is effective on the date of enactment, and the expansion of the provision applies to taxable years that include September 23, 2005, and October 23, 2005, respectively. [Code §1400S(d)]

Authority to Make Adjustments Regarding Taxpayer and Dependency Status. The Act provides that, with respect to taxable years beginning in 2005 or 2006, the Secretary may make adjustments in the application of the Code as may be necessary to ensure that taxpayers do not lose any deduction or credit or experience a change of filing status by reason of temporary relocations by reason of Hurricane Katrina, Hurricane Rita, or Hurricane Wilma. The Act provides that any adjustments made under this rule ensure that an individual is not taken into account by more than one taxpayer with respect to the same tax benefit. [Code §1400S(e)]

Special Rules for Mortgage Revenue Bonds [Code §1400T]

The Act provides that, in the case of financing provided with respect to owner-occupied residences in the GO Zone, the Rita GO Zone, or the Wilma GO Zone, §143 is applied: (1) by treating any such residence in the Rita GO Zone or the Wilma GO Zone as a targeted area residence, (2) by applying §143(f)(3) without regard to §143(f)(3)(A) (special income rules), and (3) by substituting "$150,000" for "$15,000" in §143(k)(4) (qualified home improvement loan rules). The Act provides that these special rules will not apply to financing provided after December 31, 2010.

TITLE III--OTHER PROVISIONS

Gulf Coast Recovery Bonds
[Act §301; Related to 31 U.S.C. §3105]

The Act provides the Secretary of the Treasury, or the Secretary's delegate, the power to designate one or more series of bonds or certificates (or any portion thereof) issued under 31 U.S.C. §3105 as "Gulf Coast Recovery Bonds" in response to Hurricanes Katrina, Rita, and Wilma.

Election to Include Combat Pay as Earned Income for Purposes of Earned Income Credit
[Act §302; Code §32]

A taxpayer may elect to include combat pay (as defined under §112) as earned income for purposes of the earned income credit. The Act extends the ability to elect this treatment until January 1, 2007.

Modification of Effective Date of Exception from Suspension Rules for Certain Listed and Reportable Transactions
[Act §303; Code §6404, related to P.L. 108-357, §903]

The effective date of §6404(g)(2)(E), as added by §903(d)(2) of the American Jobs Creation Act of 2004) (AJCA), provides that the suspension of interest under the general rule of §6404(g) does not apply to interest accruing after October 3, 2004, with respect to underpayments resulting from listed transactions or undisclosed reportable transactions. The Act modifies the AJCA effective date to provide that the exception for such transactions also applies to interest accruing on or before October 3, 2004. However, taxpayers remain eligible for the suspension of interest if the year in which the underpayment occurred is barred by the statute of limitations (or a closing agreement) as of December 14, 2005.

The Act also provides a special rule under which taxpayers remain eligible for the suspension of interest if participating in the IRS's tax shelter settlement initiative under Announcement 2005-80. The special rule applies on a transaction-by-transaction basis, and eligibility for the special rule is revoked if the taxpayer ceases to participate in the settlement initiative or the IRS determines that a settlement agreement will not be reached within a reasonable period of time.

The Act also amends §6404(g)(1) to eliminate interest suspension on amended returns.

Effective as if it were originally included as part of the AJCA, except that the rule relating to the restart of the 18-month period is effective for documents provided on or after the date of enactment.

Authority for Undercover Operations
[Act §304; Code §7608]

The Act extends the applicability of §7608(c), which requires the certification of the IRS Commissioner for the expenditure of funds used for undercover operations involving the investigation of internal revenue-related crimes and outlines procedures involving the use of those funds, from before January 1, 2006, to January 1, 2007.

Disclosure of Certain Tax Return Information
[Act §305; Code §6103]

For disclosures or requests made after December 31, 2005, the Act extends the termination date of the provisions in §6103, which allow the disclosure of return information to carry out student loans under the Department of Education's Income Contingent Repayment program, the disclosure of returns and return information to state tax officials and to state and local law enforcement agencies to facilitate combined employment tax reporting, and the disclosure return information, either (i) to apprise appropriate officials of criminal or terrorist activities or (ii) upon request by a federal law enforcement agency relating to terrorist activities, from December 31, 2005, to December 31, 2006.