®
tax notes
The New Rules for Limited Tax
Benefits in Tax Legislation
By Michael W. Evans
Michael W. Evans is a partner in the Washington
office of the law firm of Kirkpatrick & Lockhart
Preston Gates Ellis LLP. He previously worked in the
Senate, including as chief counsel of the Senate Finance Committee and as tax counsel to Sen. Max
Baucus, D-Mont.
as a result, could significantly affect the process by which
Congress considers tax legislation. At the very least, the
new rules establish procedures that require disclosure, to
the congressional tax committees and in some cases to the
public, of information about the beneficiaries of limited
tax benefits. The new rules also may discourage the
enactment of provisions that are likely to be considered
limited tax benefits.1
In this special report, Evans discusses the new rules
that require the disclosure of information regarding
federal legislation that constitutes a limited tax benefit. Evans describes the development of the new
rules, including the debates about tax ‘‘rifle shots,’’ the
implementation of the Line Item Veto Act, and the
debate about congressional earmarks. He then discusses several issues that are likely to arise regarding
the operation of the new rules.
This article is intended to help those involved in the
congressional tax legislative process better understand
the new rules. It begins by describing what led to the
adoption of the new rules, including past controversies
about ‘‘rifle shot’’ transition rules, the implementation of
the Line Item Veto Act, and the recent debate about
congressional earmarks. It then describes the operation of
the new rules and discusses several issues about how
they will apply, including issues regarding the definition
of beneficiaries, the tests that are likely to be used to
determine whether a tax provision applies uniformly,
and the distinction between revenue-losing provisions
and transition rules.
Copyright 2008 Michael W. Evans.
All rights reserved.
II. Background
A. Generally
Table of Contents
I.
II.
III.
IV.
V.
Introduction . . . . . . . . . . . . . . . . . . . . . . .
Background . . . . . . . . . . . . . . . . . . . . . . .
A. Generally . . . . . . . . . . . . . . . . . . . . . .
B. Criticism and Congressional Response . .
C. The Line Item Veto Act . . . . . . . . . . . . .
D. Earmark Reform . . . . . . . . . . . . . . . . .
The 2007 Reforms . . . . . . . . . . . . . . . . . .
Operation of the New Rules . . . . . . . . . . .
A. Overview . . . . . . . . . . . . . . . . . . . . . .
B. Procedure . . . . . . . . . . . . . . . . . . . . . .
C. Scope . . . . . . . . . . . . . . . . . . . . . . . . .
D. Targeted Beneficiary . . . . . . . . . . . . . . .
E. Uniform Application . . . . . . . . . . . . . . .
F. Transition Rules . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . .
597
597
597
599
600
602
603
605
605
605
606
607
608
611
611
I. Introduction
Congress has established new procedural rules that
require the disclosure of detailed information about some
types of legislative provisions that benefit a small number of individuals or entities. Although these rules are
aimed primarily at spending provisions that are targeted
to a particular entity — earmarks — some of the rules
apply to provisions that provide limited tax benefits and,
TAX NOTES, May 12, 2008
For as long as Congress has been raising revenue, it
has been considering provisions that benefit a relatively
small number of people or entities. In 1789 Rep. James
Madison of Virginia began the debate on the first revenue
bill by proposing a general tariff of 5 percent on all
imports, but he also reluctantly acknowledged that it
might be necessary to impose additional tariffs on specific products.2 Rep. William Smith of Maryland quickly
rose to the bait. Just three days into the debate, Smith
presented a petition, signed by 726 ‘‘tradesmen, merchants, and others, of the town of Baltimore,’’ listing a
series of manufactured items produced in Baltimore and
asking that protective tariffs be imposed on competing
1
As was written about the provisions regarding limited tax
benefits in the Line Item Veto Act (which are discussed below):
‘‘Practically speaking . . . the identification of a provision as a
limited tax benefit could hurt the prospects for enactment of the
provision. The public does not favorably view ‘special interest’
tax legislation or ‘rifle shot’ transitional relief, which may deter
Congress from including limited tax benefits in legislation.’’
William P. McClure and Geoffrey B. Lanning, ‘‘The Line Item
Veto Act as It Relates to Limited Tax Benefits,’’ Tax Notes, Feb. 10,
1997, p. 788, Doc 97-3934, 97 TNT 27-73.
2
1 Annals of Cong. 102-103 (T. Lloyd ed., 1789). See generally
Michael Evans, ‘‘The Foundations of the Tax Legislative Process:
The Confederation, Constitutional Convention, and First Revenue Law,’’ Tax Notes, Jan. 21, 1991, p. 283.
597
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SPECIAL REPORT
COMMENTARY / SPECIAL REPORT
3
Id., 1 Annals of Cong., at 115. This appears to be the first
instance of congressional lobbying.
4
Id. at 167.
5
Id. at 167-168. This appears to be the first instance of
congressional logrolling.
6
1 Stat. 24 (1789).
7
Id.
8
Joseph Thorndike, ‘‘Two Cheers for Loopholes,’’ Tax Notes,
Apr. 17, 2006, p. 371, Doc 2006-7065, 2006 TNT 74-32.
9
65 Stat. 504, section 329 (1951). This provision is discussed in
William L. Cary, ‘‘Pressure Groups and the Revenue Code: A
Requiem in Honor of the Departing Uniformity of the Tax
Laws,’’ 68 Harv. L. Rev. 745, 746-749 (1955). See also Stanley S.
Surrey, ‘‘The Congress and the Tax Lobbyist — How Special Tax
Provisions Get Enacted,’’ 70 Harv. L. Rev. 1145, 1147 (1957).
598
taxpayers. For example, the 1969 act itself included a
series of new rules for private foundations. In addition to
a general transition rule, it included a provision exempting from the new definition of a private foundation ‘‘any
trust created under the terms of a will or a codicil to a will
executed on or before March 30, 1924,’’ if particular
conditions had been met.10
During the 1980s, the pace of tax legislation quickened, as Congress passed a series of tax bills containing
hundreds of provisions closing loopholes and otherwise
repealing or reducing tax expenditures, either to raise
revenue (in 1982, 1984, 1986, and 1987) or as part of
comprehensive tax reform (in 1986). As the pace quickened, the use of specific transition rules escalated, as
Congress exempted specific taxpayers from one or another of the changes. For example, one section of the Tax
Reform Act of 1986 provided that, despite reforms that
the bill made regarding installment payments:
gain with respect to installment payments received
pursuant to notes issued in accordance with a note
agreement dated as of August 29, 1980 . . . where
such note agreement was executed pursuant to an
agreement of purchase and sale dated April 25,
1980, more than one-half of the installment payments of the aggregate principal of such notes have
been received by August 29, 1986, and the last
installment payment of the principal of such notes
is due August 29, 1989, shall be taxed at a rate of 28
percent [rather than 34 percent].11
Another section, entitled ‘‘Transitional Rules for Specific Facilities,’’ contained 51 paragraphs exempting more
than 200 specific projects from various aspects of the new
restrictions on tax-exempt bonds.12 All told, the 1986 act
contained about 650 specific transition rules, with a total
revenue cost of $10.6 billion.13
The use of such specific, narrowly targeted transition
rules, which came to be known as rifle shots, had its
defenders. During a time of extraordinary change in the
tax system, it was considered appropriate to provide
some relief to taxpayers who had undertaken transactions based on the old law; as tax reporter Pat Jones
wrote, ‘‘The idea behind transitional relief is not to
penalize taxpayers who were simply playing according
to the old rules.’’14 It was argued that in some cases it
made sense to draft such relief for specific taxpayers or
transactions rather than more generally. One reason was
substantive: If Congress was persuaded that a particular
transaction was worthy of protection by a transition rule,
it may be better to specifically protect that transaction
rather than to provide relief more generally; doing so
10
Tax Reform Act of 1969, section 314(b)(7), 83 Stat. 560
(1969).
11
Tax Reform Act of 1986, section 811(c)(8), 100 Stat. 2085
(1986).
12
Id. at section 1317.
13
132 Cong. Rec. S13,911-S13,916 (daily ed. Sept. 27, 1986) (list
of transition rules); 132 Cong. Rec. S13,911 (daily ed. Sept. 27,
1986) (statement of Sen. Packwood regarding the revenue cost).
14
Pat Jones, ‘‘The Controversy Over Rifle-Shot Transition
Rules,’’ Tax Notes, May 2, 1988, p. 543.
TAX NOTES, May 12, 2008
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imports.3 A few days later, Smith’s Maryland colleague,
Rep. Charles Carroll, proposed a tariff on window and
other glass because ‘‘a manufacture of this article was
begun in Maryland, and attended with considerable
success; if the Legislature were to grant a small encouragement, it would be permanently established.’’4 Rep.
George Clymer of Pennsylvania immediately joined in,
proposing tariffs on paper, walking sticks, hats, iron, and
various other products; Rep. Benjamin Goodhue of Massachusetts proposed a tariff on anchors; Rep. Roger
Sherman of Connecticut proposed deleting the tariffs on
various fruits and nuts; and Rep. Fisher Ames of Massachusetts proposed a tariff on wool cards.5 Each proposal
was adopted. By the time the first Congress had completed its work, the bill established a general tariff of 5
percent, with exemptions for several products and higher
tariffs on 63 products.6 The bill also contained a special
transition rule, with the new tariffs generally becoming
effective on August 1, 1789, except for the tariffs on hemp
and cotton, which became effective on December 1, 1790.7
For the next 150 years, during which Congress raised
revenue primarily from tariffs, this pattern continued. As
Joseph Thorndike wrote, ‘‘tariff arguments were deeply
and profoundly specific. Industries lobbied for preferential treatment, and legislators responded by dispensing
or withholding favors.’’8
When Congress shifted from tariffs to the income tax
as the primary source of federal revenue, it initially
painted with broad strokes. A special exemption would
occasionally appear. For example, the Revenue Act of
1951 contained a provision establishing a favorable tax
rule for a lump sum distribution received by an employee
under very narrow circumstances; the provision was
designed to benefit Louis Mayer, the retiring head of
MGM Studios.9 And bills that raised taxes typically
included transition rules specifying how the new law
would apply to activities that already were under way,
sometimes with refinements that benefited particular
taxpayers. But, by and large, tax bills established general
rules that applied uniformly to all taxpayers.
With the Tax Reform Act of 1969, Congress began a
period of significant reforms that would culminate in the
enactment of the Tax Reform Act of 1986. As it tightened
up the tax rules by closing loopholes and otherwise
reducing tax expenditures, Congress occasionally softened the blow by providing transition relief for specific
COMMENTARY / SPECIAL REPORT
The proliferation of rifle-shot transition rules also had
its harsh critics, who argued that those provisions favored interests that had special access to Congress. In
particular, Sen. Howard Metzenbaum, D-Ohio, began to
object to the consideration of major tax bills until he had
an opportunity to review each bill for inappropriate
transition rules. During the Senate’s consideration of the
Tax Reform Act of 1986, Metzenbaum dug in. Arguing
that it ‘‘is one thing to provide a transition rule which
assists a taxpayer who has acted in reliance on current
law,’’ but ‘‘quite another to provide a taxpayer with a
special provision denied to others similarly situated,’’17
he threatened to filibuster the bill unless Sen. Packwood
provided him with a list of all of the transition rules.
Packwood eventually relented, providing Metzenbaum
with a list of 174 rifle-shot transition rules.18 Metzenbaum
proceeded to offer amendments to delete various transition rules and other provisions he termed ‘‘loopholes,’’
and several of the amendments passed.19
including rifle-shot transition rules in tax legislation.
Entitled ‘‘The Great Tax Giveaway,’’ the seven-part series
described in detail how, in the authors’ view, various
interests used speaking fees (which then could legally be
given to members of Congress, within limits and subject
to disclosure), campaign contributions, and the hiring of
former congressional staff to persuade Congress to enact
those provisions as ‘‘the Seagrams paragraph,’’20 a provision providing ‘‘preferential treatment . . . to 15 large
life insurance companies . . . denied to 1800 other life
insurance companies,’’21 and a provision permitting ‘‘a
millionaire Beverly Hills stockbroker, who boasts the
world’s largest private collection of Rodin sculpture, to
escape payment of taxes that others must pay.’’22 The
articles also criticized the practice of writing transition
rules ‘‘in such a way that they mask the identity of the
real beneficiaries.’’23
The Philadelphia Inquirer series won the Pulitzer Prize
for journalism, and it had an immediate chastening effect.
Constituents wrote to their congressional representatives.
The American Bar Association adopted a resolution urging Congress to require the public disclosure of the
beneficiaries of transition rules.24 Rep. Curt Weldon, with
83 cosponsors, introduced legislation requiring the committee report accompanying tax legislation to identify
any provision that ‘‘is intended to provide special benefits with respect to 5 or fewer taxpayers, transactions,
events, items of property, projects, or issuances of
bonds,’’ including the identity of the known beneficiaries, the congressional sponsor, and the revenue effect;25
Rep. Charles Stenholm introduced a similar resolution,
with 54 cosponsors.26
B. Criticism and Congressional Response
In 1988 The Philadelphia Inquirer published a series of
articles describing and sharply criticizing the practice of
In response to this criticism, the taxwriting committees
modified their practices. In early 1988, the new chair of
the Finance Committee, Sen. Lloyd Bentsen, responded
to the publication of The Philadelphia Inquirer series by
announcing that he would disclose the identity of any
beneficiary of a rifle-shot transition rule and would
generally review the practice of providing rifle-shot
relief.27 When the Finance Committee was developing the
Technical and Miscellaneous Revenue Act of 1988, which
primarily made technical corrections to the Tax Reform
Act of 1986, Bentsen released a staff report listing each
provision in the bill that benefited 10 or fewer beneficiaries.28 Further, he pledged that the bill would not contain
15
Lawrence Zelenak, ‘‘Are Rifle Shot Transition Rules and
Other Ad Hoc Tax Legislation Constitutional?’’ 44 New York U.
Tax L. Rev. 563, 566 (1989). See also Ellin Rosenthal, ‘‘Bentsen
Warns Colleagues: No Rifleshots,’’ Tax Notes, June 19, 1989, p.
1434 (‘‘narrowly targeted tax breaks, or ‘rifleshots’ . . . have
provided a mechanism through which political compromise can
occur, thereby expediting action on legislative initiatives’’).
16
132 Cong. Rec. S13,578 (1986).
17
Id.
18
132 Cong. Rec. S7143 (1986).
19
See, e.g., 132 Cong. Rec. S7457 (1986) (remarks of Sen.
Metzenbaum). See generally Lee A. Sheppard, ‘‘Metzenbaum
Wages War on Finance Bill’s Transition Rules,’’ Tax Notes, June
23, 1986, p. 1155.
20
Donald Barlett and James Steele, ‘‘How Businesses Influence the Tax-Writing Process,’’ The Philadelphia Inquirer, Apr. 12,
1988, at A1.
21
Id.
22
Id.
23
Id.
24
See Rob Bennett, ‘‘Waiting for the Next Transition Rule
Expose,’’ Tax Notes, Sept. 24, 1990, p. 1693.
25
H. Res. 467, 100th Cong. (1988).
26
H. Res. 580, 100th Cong. (1988).
27
See Jones, ‘‘The Latest on the Technical Corrections Bill,’’
Tax Notes, June 13, 1988, p. 1246.
28
See ‘‘Finance Releases Report on Tech Corrections Transition Rules,’’ Tax Notes, July 4, 1988, p. 6.
TAX NOTES, May 12, 2008
599
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minimized both the revenue loss and the risk that a
general transition rule would lead to unintended and
unjustified windfalls. The other reason was political:
When Congress tightened up the tax laws in a way that
was likely to generate significant political opposition,
including rifle-shot transition rules protecting specific
taxpayers or transactions may have been a reasonable
price to pay to attract the necessary political support. As
Prof. Lawrence Zelenak wrote, ‘‘The proponents of tax
reform were able to use rifle shot rules to build support
. . . . Loyal legislators could be rewarded with rifle shot
rules granted at their request, and wavering legislators
could be convinced to support the bill by the promise of
a few transition rules.’’15 The then chair of the Senate
Finance Committee, Sen. Robert Packwood, described
the political perspective during Senate debate on the Tax
Reform Act of 1986. In opposing a Senate floor amendment to delete a provision specifically benefiting the oil
and gas industry, Packwood said that he initially had
opposed the provision in the Finance Committee, but that
‘‘two hours before the bill passed, I was not sure that we
had the votes to pass the bill. Several Senators indicated
that unless they got this . . . exception for oil and gas,
they would not vote for the bill.’’16
COMMENTARY / SPECIAL REPORT
Finance Committee, and, eventually, the House Ways and
Means Committee.33 In 1992, tax reporter Andrew Hoerner wrote that ‘‘recent years have seen a remarkable
decline in the number of so-called ‘rifle shot’ provisions
— tax changes intended to benefit a single taxpayer.’’34
Another factor may have been that, after 1993, Congress
was not considering revenue-raising provisions at the
same pace and of the same scope that it had been earlier.
Whatever the combination of reasons, in 2007, the ranking minority member (and former chair) of the Finance
Committee, Chuck Grassley, R-Iowa, could say that ‘‘for
over 20 years, chairmen of the Finance Committee have
employed a practice of opposing narrow tax provisions,
commonly known as ‘rifleshots.’’’35
The first round of the fight over limited tax benefits
was over. A few years later, the second round of the fight
would begin, as Congress turned its attention to the Line
Item Veto Act and to earmarks.
C. The Line Item Veto Act
For many years, Congress had considered proposals to
give the president authority, similar to the authority
exercised by many governors, to exercise a line-item veto
over specific spending items.36 In the mid-1990s, support
for the line-item veto grew.
29
See Jones, ‘‘Tax Policy Considerations Triumphed in Technical Corrections Bill, Aides Say,’’ Tax Notes, Nov. 14, 1988, p.
686.
30
Baucus explained: ‘‘The House bill does not contain rifle
shots. If we in the Senate now were to adopt rifle shots, then the
House conferees would come to the conference with their
bushel basket full of rifle shots. I guarantee the members of the
Senate that the bill brought back from the conference with the
House to the Senate then would be much more heavily ladened.’’ 153 Cong. Rec. S10,700 (1988).
31
See ‘‘Bentsen Opposes ‘Rifle Shot’ Transition Rules in 1989
Tax Bill,’’ Doc 89-4667, 89 TNT 123-2. See also Robert D. Hershey
Jr., ‘‘Tax-Writing Rules Altered by Bentsen,’’ The New York Times,
p. D-6, June 13, 1989.
32
The Revenue Act of 1992 contained a provision that would
have established a special pension rule for pension plans for
pilots (the bill was vetoed). Revenue Act of 1992, H.R. 11, 103d
Cong., section 11 (1992). In 2000, one version of an omnibus tax
bill contained a provision that would have provided a series of
tax breaks to the MCI Center that was being built in Washington, D.C. (the provision was not enacted). See Ryan J. Donmoyer,
‘‘Abe Pollin Fires Rifle Shot No One Hears,’’ Tax Notes, Aug. 7,
2000, p. 741, Doc 2000-20363, 2000 TNT 147-3. And in 2007, the
House passed an energy bill that contained a provision creating
a new category of tax credit bonds, H.R. 6, 110th Cong., section
1542 (2007), and the provision was criticized on the House floor
as being a rifle shot. 151 Cong. Rec. H14,430 (daily ed. Dec. 6,
2007) (remarks of Rep. Ryan).
33
After Sen. Bentsen publicly stated that he would oppose
the inclusion of rifle-shot transition rules in tax legislation, the
chair of the Ways and Means Committee, Rep. Dan Rostenkowski, declined to make a similar statement. See Bennett, supra
note 25. (‘‘Rostenkowski’s side-stepping of the [rifle shot] question is . . . a skillful demonstration of the evasive maneuvers for
which top politicians are famous.’’) However, as a practical
matter, Rostenkowski eventually seems to have taken the same
position as Bentsen, and, over the next several years, the Ways
and Means Committee did not include rifle-shot transition rules
in the bills that it reported. See Jones, ‘‘House Overwhelmingly
Passes Technical Corrections; Finance Struggles With Committee Amendment,’’ Tax Notes, Aug. 8, 1988, p. 551 (noting that
Rostenkowski had decided that rifle-shot provisions were inappropriate); Jones, ‘‘Tax Policy Considerations Triumphed in
Technical Corrections Bill, Aides Say,’’ Tax Notes, Nov. 14, 1988,
p. 686. In 1995 the new chair of the Ways and Means Committee,
Rep. Bill Archer, adopted a general policy along the lines of that
previously adopted by the Finance Committee, writing, in a
letter to committee members, ‘‘I will not support rifle shot
amendments’’ in an upcoming tax bill. Barbara Kirchheimer,
‘‘Archer Asks Committee Members for Tax Items for Reconciliation,’’ Tax Notes, Apr. 24, 1995, p. 458, 95 TNT 78-1.
34
Andrew Hoerner, ‘‘Legislative Process in Need of Improvement, FBA Panelists Find,’’ Tax Notes, Aug. 31, 1992, p. 1127.
35
153 Cong. Rec. S10,700 (2007). See also Sheppard, ‘‘The Tax
Law Implications of the Supreme Court’s S&L Decision,’’ Tax
Notes, July 15, 1996, p. 270, Doc 96-20011, 96 TNT 137-4 (noting
that ‘‘Congress no longer buys off taxpayers aggrieved by
changes in the tax law with grandfather clauses that protect
them from ever being affected by the change,’’ but also noting
that Congress continues to use other methods to cushion the
impact of new rules).
36
See Gordon T. Butler, ‘‘The Line Item Veto and the Tax
Legislative Process: A Futile Effort at Deficit Reduction, but a
Step Toward Tax Integrity,’’ 49 Hastings L. J. 1, 104 n.289 (1997)
(Footnote continued in next column.)
(Footnote continued on next page.)
600
TAX NOTES, May 12, 2008
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any new transition rules.29 During consideration of the
bill, the Finance Committee followed through on this
pledge. Indeed, when the bill was debated on the Senate
floor, there was a controversy over an amendment offered by Sen. William McClure to extend the period for a
hydroelectric project in Island Park, Idaho, to qualify for
the energy tax credit. Sen. Max Baucus, D-Mont., who
was the floor manager of the bill, opposed the amendment. The amendment presented a sympathetic case,
Baucus said, because the project’s delay was caused by
Congress’s imposition of additional energy project licensing requirements. Nevertheless, he said, ‘‘The Finance
Committee adopted the clear standard on this bill of not
accepting rifle shots or changes to old transition rules.’’30
In 1989, Sen. Bentsen formalized these practices. The
day before the Finance Committee’s first markup session
of the year, he sent a letter to committee members
explaining that he would oppose the inclusion of any
narrowly targeted transition rules in tax legislation. ‘‘I
believe we now must consider . . . arguments in favor of
transition relief to be closed,’’ Bentsen wrote, ‘‘so that we
may move forward effectively in the discharge of the
committee’s business.’’ After explaining that ‘‘there may
be several reasons — revenue loss or policy considerations, for example — why a particular tax amendment
must be opposed,’’ he continued, ‘‘there is one factor that
I think should be controlling as a threshold matter: As
chairman, I have opposed and will continue to oppose
any tax amendments that unfairly benefit certain taxpayers while not benefiting other similarly situated taxpayers.’’ Further, he warned, ‘‘I have been forthcoming with
information available to me about the beneficiaries of tax
legislation, and I plan to continue that practice.’’31
Thereafter, the use of rifle-shot transition rules declined sharply. Although there may have been occasional
exceptions,32 the combination of restraint and disclosure
announced by Bentsen became the general practice of the
COMMENTARY / SPECIAL REPORT
In 1997 the Line Item Veto Act was enacted, permitting
the president to cancel some types of specific provisions
of legislation without vetoing the entire bill.40 The act
was designed, the conference managers said, to give the
president the authority not only to ‘‘eliminate wasteful
federal spending’’ but also to ‘‘cancel special tax
breaks.’’41
(noting that Presidents Grant, Hayes, Arthur, Franklin
Roosevelt, Truman, Eisenhower, Nixon, Reagan, George H.W.
Bush, and Clinton supported the idea of the line-item veto).
37
For example, a bill introduced by then-Rep. Dick Cheney in
1985 would have required that every separate item in an
appropriations bill be enrolled and presented individually to
the president, so that the president could make a specific
decision whether to sign or veto that appropriations item. H.R.
1247, 99th Cong. (1985).
38
141 Cong. Rec. H1348 (1995).
39
141 Cong. Rec. H3459 (1995).
40
Line Item Veto Act, 110. Stat. 1200 (1996).
41
H. Rep. 104-491 15, 104th Cong. (1996). During the consideration of the Line Item Veto Act, there was extensive debate
about the appropriate test for defining a limited tax benefit, and
the test was modified several times. In the House, the initial
version of the bill applied to ‘‘any provision of a revenue act
which . . . would provide a Federal tax benefit to five or fewer
taxpayers.’’ H.R. 2, 104th Cong., section 4(3) (introduced version, 1995). In committee, the threshold was increased to 100 or
fewer beneficiaries. H.R. 2, 104th Cong., section 4(3) (reported
version, 1995). On the House floor, Rep. Louise McIntosh
Slaughter, D-N.Y., offered an amendment to replace this numerical test with a narrative test, so that the bill would apply to a
provision that had the practical effect of providing different
treatment to similarly situated taxpayers, but the amendment
was rejected. 141 Cong. Rec. H3482-H3483 (1995). Thus, the
House-passed version of the bill applied to a provision that
provided a federal tax benefit to 100 or fewer beneficiaries. H.R.
2, 104th Cong., section 4(3) (version passed by House, 1995). The
Senate took a different approach, favoring a narrative standard
over a numerical standard. The Senate version of the bill
applied to any revenue-losing provision that had ‘‘the practical
effect of providing more favorable treatment to a particular
taxpayer or a limited group of taxpayers when compared to
similarly situated taxpayers.’’ S. 4, 104th Cong., section 5(5)
(1995). The conference report adopted the House approach,
defining a limited tax benefit as a revenue-losing provision that
‘‘provides a federal tax deduction, credit, exclusion, or preference to 100 or fewer beneficiaries.’’ S. 4, 104th Cong., section
1029(9)(i) (conference report version, 1995). The conference
report also added a new and separate test for transition rules,
applying to any provision that provides transitional relief to 10
or fewer taxpayers. Id. at section 1029(9)(ii).
TAX NOTES, May 12, 2008
Specifically, regarding tax provisions, the act required
the Joint Committee on Taxation to examine the conference report for any tax legislation to determine whether
the legislation contained any ‘‘limited tax benefits,’’
which were defined as either revenue-losing provisions
providing a tax benefit to 100 or fewer beneficiaries or as
transition rules providing relief to 10 or fewer beneficiaries (unless, in either case, the provision fit into one of
several exceptions42). If the JCT determined that the bill
did indeed contain limited tax benefits, it was to describe
them in a statement to the bill’s conferees, who then had
the discretion to include the description in the conference
report. If the conference report included a description of
limited tax benefits (or failed to include a description and
the president determined that the conference report did
in fact contain limited tax benefits), the president had the
authority to use line-item veto authority to cancel any of
the limited tax benefits. If the president did so, the
canceled provisions would go into effect only if both the
House and Senate passed bills disapproving the president’s cancellation.43
Shortly after the Line Item Veto Act was enacted,
Congress passed the Taxpayer Relief Act of 1997, which
contained about 300 tax provisions, including a series of
revenue-losing changes to the rules for education tax
incentives, savings tax incentives, the child tax credit, the
alternative minimum tax, foreign provisions, and pension rules, as well as a series of miscellaneous changes to
the tax code (the revenue cost of all of these changes was
offset by a further series of changes that raised revenue).44 Applying the provisions of the Line Item Veto
Act, the JCT identified 79 of the provisions as limited tax
benefits subject to presidential cancellation.45 When
President Bill Clinton signed the bill, he exercised his
new line-item veto authority to cancel one of the bill’s
limited tax benefits, along with a spending provision in
another bill.
The president’s cancellations were challenged, and, in
1998, the Supreme Court held that the Line Item Veto Act
was unconstitutional.46 The Constitution’s presentment
clause, the Court said, required that the power to enact
42
The exceptions were for provisions that provided the same
treatment to all persons who are in the same industry, engage in
the same activity, own the same type of property, or issue the
same type of investment instrument; for provisions that affected
beneficiaries differently only because of the size or form of a
business association, because of general demographic conditions of individuals, because of the amount involved, or because
of the exercise of a generally available election; and for provisions that provided relief based on the existence of a binding
contract or similar instrument or provisions that are technical
corrections. Line Item Veto Act, section 1026(9)(A) and (B), 110
Stat. 1209 (1996).
43
Id. See generally McClure and Lanning, supra note 1. For a
critical view of the provisions of the Line Item Veto Act as they
related to tax legislation, see Sheppard, ‘‘Line Item Veto —
Pointless When It Comes to Tax Law,’’ Tax Notes, Jan. 13, 1997, p.
127, Doc 97-1242, 97 TNT 9-10.
44
Taxpayer Relief Act of 1997, 111 Stat. 788.
45
Id. at section 1701.
46
Clinton v. New York, 524 U.S. 417, Doc 98-6115, 98 TNT 30-11
(1998).
601
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Early versions of the line-item veto were aimed primarily at targeted spending provisions.37 However, as
the congressional debate intensified, the focus expanded
to include some types of tax provisions. For example,
during a 1995 House floor debate, Rep. Carolyn B.
Maloney, D-N.Y., asked, ‘‘If we are going to be tough on
spending, should we not likewise be tough on tax
giveaways?’’38 And Rep. James P. Moran, D-Va., declared
that ‘‘the real abuse of the taxpayers’ money is not on the
spending side, it is on the tax side. . . . Hundreds of
billions are lost because we do not scrutinize what is in
the Tax Code.’’39
COMMENTARY / SPECIAL REPORT
Given the Supreme Court’s decision, the process by
which the JCT was to examine revenue legislation to
identify limited tax benefits was discontinued. Nevertheless, the Line Item Veto Act remained relevant, in two
ways. First, soon after the Line Item Veto Act was
enacted, the JCT published a document explaining how it
would review revenue provisions to determine whether
they constituted limited tax benefits under the act,48 and,
as discussed below, that document provided insights into
some of the issues that arise under the new rules. Second,
in developing the Line Item Veto Act, Congress expanded
the scope of its concern to include not only rifle-shot
provisions that benefited a single entity but also a
broader set of tax provisions.
The broader scope can be seen from the JCT analysis in
identifying 79 provisions of the Taxpayer Relief Act as
limited tax benefits. Thirteen were transition rules.49 Of
the remaining 66, some provided rifle-shot tax relief in
the classic sense, such as a provision establishing special
loss carryback rules for the National Railroad Passenger
Corp. (a unique entity).50 But many others were more
general reforms. For example, one provision amended
the rules for tax-exempt organizations formed to provide
health insurance risk pools for high-risk individuals, to
allow the spouse and children of high-risk individuals to
participate.51 Another amended the rules regarding
generation-skipping transfer trusts, to allow a transfer to
a collateral relative whose parent is deceased to qualify
for the predeceased parent exception.52 Another was the
provision that Clinton sought to cancel, which deferred
recognition of gain from the sale of stock in food processing companies to farmer cooperatives.53 Although these
provisions probably were not rifle shots in the narrow
sense of benefiting a single entity, they provided limited
tax benefits as defined in the Line Item Veto Act.
D. Earmark Reform
After the Line Item Veto Act was held to be unconstitutional, the practice of passing earmarks — provisions in
appropriations bills that targeted spending to specific
entities — continued to grow, with the Congressional
Research Service finding that the number of earmarks in
appropriations bills rose from 4,155 in 1994 to 15,887 in
2005.54 Criticism grew in turn. The advocacy group
Citizens Against Government Waste said that ‘‘porkbarrel spending has exploded since the mid-1990s’’ and
identified 76,420 ‘‘examples of egregious pork-barrel
spending,’’ mostly earmarks; and a poll showed that
‘‘among all Americans, a 39 percent plurality say the
single-most important thing for Congress to accomplish
this year is curtailing budgetary ‘earmarks’ benefiting
only certain constituents.’’55
Congress responded to that criticism by developing
further proposals designed to reduce the use of earmarks.
One set of proposals was to revive and revise the
line-item veto.56 Another was to bring more ‘‘sunshine’’
to the legislative process by requiring the disclosure of
information about earmarks. The basic idea was that if
Congress included an earmark in a bill, it would have to
make public specific information about the earmark,
including the name of the member of Congress who
requested the earmark, the specific project that would
benefit, and, to the extent known, the specific individuals
or companies that would benefit. This was expected to
both increase accountability and reduce the number of
earmarks. As a House committee report said, ‘‘There has
been near unanimity among Members in support of more
transparency and accountability in the earmarking process. While the current system for Members to direct
Federal funds to specific legislative priorities is not
perfect, most Members can agree that requiring full
disclosure of all earmarks, including the names of those
Members who requested them, will require Members to
fully explain and defend their legislative priorities to
their colleagues.’’57
As with the Line Item Veto Act, Congress decided to
apply those disclosure rules not only to spending earmarks but also to certain types of tax provisions. As
Assistant Senate Democratic Leader Richard J. Durbin,
D-Ill., said in 2007, ‘‘If we are going to have transparency
in earmark appropriations, I believe . . . that should also
apply to tax favors, changes in the Tax Code to benefit an
individual company or a handful of companies.’’58
In 2006 both the House and Senate considered legislation to require the disclosure of earmarks. The major
proposals applied not only to appropriations bills and
other spending bills but also to certain types of tax
provisions. The House bill required the disclosure of
earmarks in appropriations bills as well as any ‘‘tax
54
H. Rep. No. 109-655, at 5 (2006).
Line-Item Veto: Perspectives on Applications and Effects:
Hearing Before the H. Comm. on the Budget, 109th Cong. (2006)
(statement of Thomas A. Schatz, president of Citizens Against
Government Waste).
56
See, e.g., H.R. 4890, 109th Cong. (2005) (to amend the
Congressional Budget Act to provide for the expedited consideration of some proposed rescissions of budget authority); H.R.
4889, 109th Cong. (2005) (to grant the president power to reduce
specific budget authority); S. J. Res. 26, 109th Cong. (2005)
(proposing a constitutional amendment relative to the line-item
veto).
57
H. Rep. 109-655, 109th Cong. (2005).
58
153 Cong. Rec. S415 (daily ed. Jan. 11, 2007).
55
47
Id. at 421.
JCT, ‘‘Analysis of Provisions Contained in the Line Item
Veto Act (P.L. 104-30) Relating to Limited Tax Benefits,’’ JCS-1-97
(1997) [hereinafter cited as Joint Committee 1997 Guidance].
49
The JCT’s description of limited tax benefits lists items (35)
through (48) as relating to transition rules. H. Rep. 105-220,
105th Cong., at 773-774 (1997) (Conf. Rep.).
50
Taxpayer Relief Act of 1997, section 977, 111 Stat. 251 (1997).
51
Id. at section 101(c).
52
Id. at section 511.
53
Id. at section 968.
48
602
TAX NOTES, May 12, 2008
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
statutes ‘‘may only be exercised in accord with a single,
finely wrought and exhaustively considered, procedure,’’
and the Line Item Veto Act violated this requirement by
authorizing ‘‘the President himself to effect the repeal of
laws, for his own policy reasons, without observing the
procedures set out in Article I.’’47
COMMENTARY / SPECIAL REPORT
III. The 2007 Reforms
During the 110th Congress, the House and Senate
moved quickly to establish new disclosure requirements.
But they took different paths.
The House divided ethics reforms into two categories:
reforms that could be accomplished unilaterally, by sim-
59
H.R. 1000, 109th Cong. section (1)(b) (2006). A tax earmark
was defined as ‘‘any revenue-losing provision that provides a
Federal tax deduction, credit exclusion, or preference to only
one beneficiary (determined with respect to either present law
or any provision of which the provision is a part) under the [tax
code] in any year for which the provision is in effect.’’ Id. at
section (2)(b)(1).
60
S. 2349, 109th Cong., section 103 (2007).
61
H. Res. 1000, 109th Cong., section 2(b)(1) (2006).
62
See 152 Cong. Rec. H6598 (daily ed. Sept. 14, 2006) (remarks
of Rep. Slaughter); id. at H6605, H6609-H6610 (amendment
proposed by Rep. Slaughter). Rep. Slaughter’s amendment was
effectively rejected when her motion to recommit the bill was
defeated. Section 503 of the Slaughter amendment would have
required the JCT to submit a statement identifying the limited
tax benefits in any revenue bill, but did not define a limited tax
benefit.
63
Id. at H6597-H6616. H. Res. 1000 was applied to tax
provisions once. When the Ways and Means Committee reported the Tax Relief and Health Care Act of 2006, the chair of
the Committee, Rep. Bill Thomas, asked the JCT to identify any
tax earmarks in the bill. The JCT did so, identifying two
provisions. 152 Cong. Rec. H9069-H9070 (daily ed. Dec. 8, 2006)
(remarks of Rep. Thomas).
64
See http://www.dccc.org/100hours/. (‘‘We will start by
cleaning up Congress, ending the link between lobbyists and
legislation.’’)
TAX NOTES, May 12, 2008
ply amending the House rules, and reforms that required
bicameral legislation. Reforms that fell into the first
category, including disclosure requirements for earmarks
and limited tax benefits, were adopted on the first day of
the new Congress.65 Other reforms were to be considered
as part of comprehensive ethics legislation.
Thus, on the first day of the 110th Congress, the House
adopted a new rule, clause nine of House Rule XXI,
requiring the disclosure of information regarding any
‘‘limited tax benefit,’’ which was defined as either of the
following:
(1) any revenue-losing provision that —
(A) provides a Federal tax deduction, credit,
exclusion, or preference to 10 or fewer beneficiaries
under the Internal Revenue Code of 1986, and
(B) contains eligibility criteria that are not uniform in application with respect to potential beneficiaries of such provision; or
(2) any Federal tax provision which provides one
beneficiary temporary or permanent transition relief from a change to the Internal Revenue Code of
1986.66
The Senate did not adopt reforms unilaterally. Instead,
it considered all of its reform proposals as part of
comprehensive ethics legislation. As the Senate considered this legislation, it modified the language regarding
limited tax benefits several times. On the first day of
Congress, Senate Majority Leader Harry Reid, D-Nev.,
introduced a bill, S. 1, identical to the bill that the Senate
had passed the previous year. Like the previous bill, it
required the disclosure of any earmark, which was
defined as a provision that ‘‘specifies the identity of a
non-Federal entity to receive assistance,’’ including ‘‘tax
expenditures or other revenue items.’’67
A few days later, this introduced version of S. 1 was
superseded by a new version that was offered as a
substitute amendment by Reid, Minority Leader Mitch
McConnell, R-Ky., and others. Regarding the disclosure
of targeted tax benefits, the Reid-McConnell amendment
took an approach similar to the House rule, dividing
revenue provisions into two categories — revenue-losing
provisions and transition rules — and establishing a
separate test for each. However, for revenue-losing provisions, the Reid-McConnell amendment used a different
test than the House rule. Instead of applying to a
provision that had 10 or fewer beneficiaries (and did not
apply uniformly), the Reid-McConnell amendment applied to a provision that ‘‘has the practical effect of
providing more favorable tax treatment to a particular
taxpayer or limited group of taxpayers when compared
with other similarly situated taxpayers.’’68
During the debate on the Reid-McConnell amendment, Sen. Jim DeMint, R-S.C., argued that the definition
of limited tax benefits was too narrow. He proposed
65
H. Res. 6, 110th Cong., 1st Sess. (2007).
Id. at section 404.
67
S. 1, 110th Cong., section 103 (2007).
68
153 Cong. Rec. S302 (daily ed. Jan. 9, 2007).
66
603
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
earmark.’’59 The principal Senate bill required the disclosure of any ‘‘earmark,’’ which was defined as a provision
that ‘‘specifies the identity of a non-Federal entity to
receive assistance,’’ including ‘‘tax expenditures or other
revenue items.’’60
Both the House and Senate passed ethics reform bills
including the disclosure provisions, but the conference
committee never produced a conference report, so a bill
was not enacted. In September 2006 the House decided to
act unilaterally. It considered a resolution amending the
House rules to require the disclosure of earmarks. The
resolution, H. Res. 1000, required the disclosure not only
of earmarks in appropriations bills but also of any ‘‘tax
earmark,’’ which was defined as a provision providing a
tax benefit to only one entity.61 During the House floor
debate, the ranking Democrat on the House Rules Committee, Rep. Louise McIntosh Slaughter, D-N.Y., opposed
the resolution, arguing that it was too modest. She
proposed an alternative that would expand the resolution’s application to tax provisions.62 The Slaughter
amendment was rejected, and H. Res. 1000 was passed
and remained in effect through the end of the 109th
Congress.63
As the 2006 congressional elections approached,
Democrats raised the political stakes, pledging that if
they took majority control of Congress in the elections,
they would make ethics reform — including greater
transparency regarding earmarks — a top priority.64
COMMENTARY / SPECIAL REPORT
69
S. Amdt. 11, section 103, 153 Cong. Rec. S320 (daily ed. Jan.
9, 2007).
70
Id. at S322.
71
Id. at S416.
72
153 Cong. Rec. 555 (daily ed. Jan. 16, 2007) (remarks of Sen.
DeMint).
73
Id. 121 Stat. 735 (2007). The principal reforms in the act, in
addition to the rules regarding the disclosure of earmarks and
limited tax benefits, include: banning all gifts and travel reimbursements from lobbyists and entities that retain lobbyists
(with some exceptions); expanding the restrictions on postemployment activities of congressional members and staff; and
requiring greater disclosure regarding lobbying and campaign
contributions.
74
Id. at section 521.
604
Code of 1986,’’ and that ‘‘contains eligibility criteria that
are not uniform in application with respect to potential
beneficiaries of such provision.’’
Pulling all of this together, by the end of 2007 the
House and Senate each had adopted rules requiring
congressional disclosure regarding provisions that constitute limited tax benefits.75 The following table compares the final versions of the new House and Senate
rules:
House Rule XXI.9(e)
Senate Rule XLIV.5
The term ‘‘limited tax benefit’’
means —
any revenue losing
provision that —
provides a Federal tax
deduction, credit, exclusion,
or preference to 10 or fewer
beneficiaries under the
[IRC] and
The term ‘‘limited tax benefit’’
means —
any revenue provision that
—
provides a Federal tax
deduction, credit, exclusion,
or preference to a particular
beneficiary or limited
group of beneficiaries
under the [IRC], and
contains eligibility criteria
that are not uniform in
application with respect to
potential beneficiaries of such
provision.
[No separate rule.]
contains eligibility criteria
that are not uniform in
application with respect to
potential beneficiaries of such
provision; and
any federal tax provision
which provides one
beneficiary temporary or
permanent transition relief
from a change to the
[IRC].
Before turning to the detailed operation of the new
rules, it may be useful to note that in the course of
formulating the rules for limited tax benefits, Congress
ended up applying a broader and more complex standard to tax provisions than it did to spending provisions.
Spending provisions are considered earmarks, subject to
disclosure only if they target spending to a single entity
or geographic location.76 These are akin to rifle shots. Tax
75
Congress is considering further restrictions on earmarks,
including a proposed moratorium on the inclusion of earmarks
in appropriations bills.
76
The House and Senate rules apply similar requirements to
spending earmarks, which the House rule defines as
a provision or report language included primarily at the
request of a Member, Delegate, Resident Commissioner,
or Senator providing, authorizing or recommending a
specific amount of discretionary budget authority, credit
authority, or other spending authority for a contract, loan,
loan guarantee, grant, loan authority, or other expenditure with or to an entity, or targeted to a specific State,
locality or Congressional district, other than through a
statutory or administrative formula-driven or competitive award process.
H. Con. Res. 6, 110th Cong., section 404 (2007). The Senate
definition is identical, except it uses the term ‘‘Congressionally
directed spending item’’ rather than ‘‘Congressional earmark,’’
and refers only to a senator rather than also to a member,
delegate, or resident commissioner. Section 521, 121 Stat. 735
(2007).
TAX NOTES, May 12, 2008
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
replacing it with the text of the House rule,69 saying that
‘‘the definition of a targeted tax benefit in the [ReidMcConnell amendment] . . . falls short, as it never explicitly defines what constitutes a limited group of taxpayers.
Speaker [Nancy] Pelosi’s language, however, explicitly
defines a limited tax benefit as one that is targeted to 10
or fewer beneficiaries.’’70 Durbin opposed DeMint’s
amendment. It was, he argued, too weak, because it
would apply only to revenue provisions that had 10 or
fewer beneficiaries. ‘‘The Senate should not be writing a
number such as 10 into this law or into the Senate rules,
creating an incentive for those who want a tax break to
find 11 beneficiaries to escape the DeMint amendment,’’
Durbin said.71
After an attempt to table the DeMint amendment
failed, Durbin and DeMint reached a compromise. Their
compromise provided that a revenue-losing provision
was a limited tax benefit if it ‘‘provides a Federal tax
deduction, credit, exclusion, or preference to a particular
beneficiary or limited group of beneficiaries under the
Internal Revenue Code of 1986,’’ and if it also ‘‘contains
eligibility criteria that are not uniform in application with
respect to potential beneficiaries of such provision.’’ Like
the House rule, the compromise also established a separate test for transition rules, providing that a limited tax
benefit also was a revenue provision that ‘‘provides one
beneficiary temporary or permanent transition relief
from a change to the Internal Revenue Code of 1986.’’72
After the Senate passed its version of the bill, House
and Senate negotiators spent several months working out
compromises regarding such things as changes in the
lobbying rules. In August 2007 the final version passed
the House and Senate and was enacted into law as the
Honest Leadership and Open Government Act, which
made a series of sweeping reforms to ethics and related
rules.73 The act established a new Senate rule, section five
of Senate Rule XLIV, requiring the disclosure of earmarks
and limited tax benefits.74 Regarding the definition of
limited tax benefits, the final version was identical to the
version that passed the Senate, with one significant
change: It deleted the separate test for transition rules.
Thus, the Senate rule requires disclosure regarding any
limited tax benefit, which is defined as any revenue
provision that ‘‘provides a Federal tax deduction, credit,
exclusion, or preference to a particular beneficiary or
limited group of beneficiaries under the Internal Revenue
COMMENTARY / SPECIAL REPORT
IV. Operation of the New Rules
A. Overview
The new House and Senate rules take the same basic
approach: Both require the disclosure of specific information regarding any provision that constitutes a ‘‘limited
tax benefit.’’77
There are, however, differences. Some are procedural,
reflecting differences in the operation of the House and
Senate. Also, there are two substantive differences in the
tests for determining whether a provision is a limited tax
benefit. First, the House rule divides revenue provisions
into two categories, with one test for revenue-losing
provisions and another test for transition rules. In contrast, as explained above, the Senate decided to delete the
separate test for transition rules and instead to use a
single test for all revenue provisions. Second, the House
rule uses bright-line numerical tests, defining a limited
tax benefit as either a revenue-losing provision that
applies to 10 or fewer beneficiaries (and does not apply
uniformly) or a transition rule that applies to only 1
beneficiary. In contrast, the Senate rule uses a general
narrative test, defining a limited tax benefit as a revenue
provision that applies ‘‘to a particular beneficiary or
limited group of beneficiaries’’ (and does not apply
uniformly). Given these differences, there may be cases in
which a provision is considered a limited tax benefit
under the one rule but not under the other.
The remainder of this article discusses specific issues
regarding the application of the new rules. In doing so, it
draws from several sources in addition to the text of the
rules themselves, including a colloquy that occurred
during the 2007 Senate floor debate between the chair
and ranking minority member of the Senate Finance
Committe, Sens. Baucus and Grassley (Baucus-Grassley
Colloquy), the legislative history of the Senate rule, the
JCT’s 1997 document providing guidance regarding the
application of the Line Item Veto Act (Joint Committee
1997 Guidance), and a memorandum that the JCT sent to
the Finance Committee in 2007 regarding the application
of the new Senate rule to a specific provision (Joint
Committee 2007 Memo).
B. Procedure
In both the House and Senate, a member who requests
a limited tax benefit must provide a written statement to
the chair and ranking minority member of the tax committee identifying the individual or entities reasonably
77
Id.
anticipated to benefit (to the extent known to the member), the purpose of the limited tax benefit, and a
certification that neither the member nor his immediate
family has a pecuniary interest in the limited tax benefit.
In the House, a point of order lies against a bill,
amendment, or conference report unless the chair of the
Ways and Means Committee, the proponent of the
amendment, or the House managers of the conference
submit a statement either listing the limited tax benefits
or stating that there are none. This point of order cannot
be waived as part of a general rule, but may be waived
only by a specific vote of the House. Because the House
rule was adopted at the beginning of the first session of
the 110th Congress, the new procedure applied to all
House revenue bills considered during 2007. During the
year, the House considered 17 revenue bills, and for all
but 1, a statement was made that the bill did not contain
any limited tax benefits (the other was a technical corrections bill).78
In the Senate, if the Finance Committee reports a bill
that includes a limited tax benefit, it must ‘‘as soon as
practicable identify on a publicly accessible congressional
website each such item through lists, charts, or other
similar means, including the name of each Senator who
submitted a request to the committee for each item so
identified.’’ On the Senate floor, a point of order lies
against a bill or conference report unless the chair of the
Finance Committee (or the majority leader) certifies that
any limited tax benefit in the bill or conference report has
been identified in the committee report, statement of
managers, or otherwise, including the name of the senator requesting the provision. This information must be
available on a publicly accessible congressional Web site,
in a searchable format, at least 48 hours before there is a
vote on the relevant bill or conference report. The point of
order is debatable for only one hour, and the point of
order may be waived only by 60 votes. In the case of an
amendment offered on the Senate floor, if a senator offers
an amendment that includes a limited tax benefit that has
not previously been identified, that senator must ensure
that a statement is made in the Congressional Record,
describing the limited tax benefit, ‘‘as soon as practicable.’’79
78
H.R. 2, 153 Cong. Rec. H253 (daily ed. Jan. 9, 2007) (remarks
of Rep. Miller); H.R. 6, 153 Cong. Rec. H516 (daily ed. Jan. 12,
2007) (remarks of Rep. Rangel); H.R. 976, H.R. Rep. No. 110-14,
at 28 (2007); H.R. 1562, H.R. Rep. No. 110-66, at 16 (2007); H.R.
1677, H.R. Rep. No. 110-84, at 31 (2007); H.R. 1906, 153 Cong. Rec.
H3562 (daily ed. Apr. 18, 2007) (remarks of Del. Norton, D-D.C.);
H.R. 2776, H.R. Rep. No. 110-214, at 119 (2007); H.R. 3056, H.R.
Rep. No. 110-281, at 46 (2007); H.R. 3162, H.R. Rep. No. 110-284,
at 299 (2007); H.R. 3221, 153 Cong. Rec. H9277 (daily ed. July 31,
2007) (remarks of Rep. Dingell, D-Mich.); H.R. 3540, H.R. Rep.
No. 110-347, at 7 (2007); H.R. 3648, H.R. Rep. No. 110-356, at 19
(2007); H.R. 3963, 153 Cong. Rec. H12,022 (daily ed. Oct. 24, 2007)
(remarks of Rep. Rangel); H.R. 3996, H.R. Rep. No. 110-431, at
177 (2007); H.R. 3997, H.R. Rep. No. 110-426, at 22 (2007); H.R.
4351, 153 Cong. Rec. H15,318 (daily ed. Dec. 11, 2007) (remarks of
Rep. Rangel).
79
This occurred once in 2007. See 154 Cong. Rec. S15,627 (daily
ed. 2007). (Statement of Sen. Lisa Murkowski, R-Alaska: ‘‘Mr.
(Footnote continued on next page.)
TAX NOTES, May 12, 2008
605
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
provisions, however, may be considered limited tax
benefits, subject to disclosure, even if they apply more
broadly than to only a single entity: under the House
rule, if they apply to up to 10 beneficiaries; and, under
the Senate rule, if they apply to ‘‘a limited number of
beneficiaries.’’ Further, as discussed below, the definition
of a limited tax benefit contains a uniformity exception
that makes the new rules’ application to revenue provisions more complex than their application to spending
provisions.
COMMENTARY / SPECIAL REPORT
President, per rule XLIV of the Standing Rules of the Senate, I
certify that I proposed an amendment to H.R. 2419, the farm bill,
that addresses income averaging for amounts received in connection with the Exxon Valdez litigation. This amendment is a
limited tax benefit amendment.’’)
80
U.S. Const., Art. I, section 5, cl. 2.
81
S. 2345, 110th Cong., section 301 (2007).
82
Memorandum from Ed Kleinbard to Bill Dauster, Deputy
Chief of Staff, Senate Finance Committee, Oct. 30, 2007, reprinted
in S. Rep. No. 110-228, at 81 (2007).
83
S. Rep. No. 110-228, at 81 (2007).
84
Id.
606
Rep. Charles Rangel, D-N.Y., stated that the bill did not
contain any limited tax benefits.85 During House floor
debate, Rep. Paul Ryan, R-Wis., questioned Rangel’s
decision to forgo listing the New York Liberty Zone
provision as a limited tax benefit, asking whether he was
‘‘correct that irrespective of the fact that the Joint Committee on Taxation defines this as an earmark, that the
chairman of the Ways and Means Committee has chosen
to supersede that ruling and claim that this is not in his
filing in the bill; is this correct?’’86 Rangel replied that the
JCT’s opinion was advisory only, and that ‘‘the Chair has
shared with you, and you can call the Parliamentarian or
anyone else you want, this is not considered as an
earmark.’’87 Thus, the chair of the Finance Committee,
relying on the JCT’s analysis, concluded that the provision was a limited tax benefit, while the chair of the Ways
and Means Committee concluded that it was not.
Turning from procedure to the substance of the rules,
the next section discusses issues that are likely to arise
under the new rules. It starts with a discussion of issues
that relate primarily to the consideration of revenuelosing provisions. It then discusses additional issues that
arise regarding transition rules.
C. Scope
As a threshold matter, the new rules define a revenuelosing limited tax benefit (as opposed to a transition rule)
as either a ‘‘revenue losing provision’’ (House rule) or a
‘‘revenue provision’’ (Senate rule) that provides ‘‘either a
Federal tax deduction, credit, exclusion, or preference
. . . under the Internal Revenue Code of 1986.’’ In doing
so, the new rules use language similar to that of the Line
Item Veto Act, which applied to ‘‘any revenue losing
provision’’ that met particular tests. Accordingly, the
Joint Committee 1997 Guidance regarding the application of the Line Item Veto Act may provide insight about
the meaning of these terms.
Looking at the Joint Committee 1997 Guidance, several points seem clear. First, to constitute a limited tax
benefit, a provision88 must relate to the Internal Revenue
Code. As the JCT explained, ‘‘A provision that is estimated to lose revenue will not be considered a revenuelosing provision under the Act unless the revenue loss is
due to a change (direct or indirect) in the operation of the
Code.’’89 For example, the JCT further explained, a provision that amends federal labor law to require that
employer-provided health plans meet additional requirements might have an effect on federal revenue because it
affects the amount of taxable and nontaxable wages paid
85
154 Cong. Rec. H1032 (daily ed. Feb. 25, 2008).
154 Cong. Rec. H1107 (daily ed. Feb. 27, 2008).
87
Id.
88
The JCT said that in applying the act to a ‘‘provision,’’ it
will consider the substance rather than merely whether statutory language is in the same section, subsection, paragraph, or
subparagraph. Thus, for example, ‘‘if conforming amendments
with respect to a provision are made in different parts of a bill,
the conforming amendments may be considered to be part of
the same provision.’’ Joint Committee 1997 Guidance, supra note
48, at 22 (1997).
89
Id. at 23.
86
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As a practical matter, the rules will be enforced
primarily by the chairs of the Ways and Means and
Finance committees, who must determine whether a
member requesting a limited tax benefit has complied
with the disclosure requirement and whether a provision
proposed by the committee is subject to the requirement
of disclosure in the committee report or otherwise, and
by the presiding officers and parliamentarians of the
House and Senate, who must, when a point of order is
made, decide whether a committee has properly complied with the new rules. In this work, the chairs of the
tax committees are likely to rely significantly on the JCT.
However, the JCT’s role is different than it was under the
Line Item Veto Act, when it had an express statutory role,
with members of Congress required to either accept or
reject the JCT’s identification of limited tax benefits in its
entirety. In analyzing the application of the new rules, the
JCT will function in its conventional role — providing
advice to the chairs of the tax committees, who then
exercise judgment in applying the new rules.
It is important to note that as the House and Senate
apply their new rules, they may reach different conclusions about what constitutes a limited tax benefit. The
two rules differ in some respects. Moreover, both the
House and Senate are the sole judges of the application of
their own rules,80 and even when the text of the rules is
similar or identical, the House and Senate can establish
different precedents and arrive at different interpretations; an interpretation reached by the House does not
bind the Senate, and vice versa.
This is illustrated by a recent example. In 2007, Finance Committee member Charles E. Schumer, D-N.Y.,
proposed an amendment that would modify the tax
benefits available to New York state and New York City
under the Liberty Zone provisions that were enacted
after the 2001 terrorist attacks.81 After questions arose
about whether the provision constituted tax benefit under the new rules, the Finance Committee asked the JCT
to analyze the application of the new Senate rule to the
provision, and the JCT responded with a memorandum
containing a detailed analysis concluding that the provision was indeed a limited tax benefit.82 The Finance
Committee included the memorandum in its report on
the bill,83 and the committee chair, Sen. Baucus, stated, ‘‘I
have determined that section 301 of the bill, relating to
the restructuring of New York Liberty Zone tax incentives, is a limited tax benefit.’’84 A few months later, when
the House was considering a bill containing a similar
provision, the chair of the Ways and Means Committee,
COMMENTARY / SPECIAL REPORT
90
Id.
Id.
92
Id.
93
Id.
94
Id.
91
at 24.
at 85-86.
at 19.
at 32.
TAX NOTES, May 12, 2008
the pooling of health risks by high-risk individuals. Any
revenue loss attributable to the provision would come
not from reduced tax payments from such entities themselves (because no such entities currently exist), but
instead from reduced tax payments by their future competitors, which will earn less income, and hence pay less
tax, because of the competition that they face from the
new tax-exempt organizations. This provision, the JCT
explained, would nevertheless be a revenue-losing provision.95
Finally, the JCT has explained that although multiple
tax provisions often have interactive revenue effects, for
purposes of the limited tax benefit analysis, each provision should be analyzed in isolation.96
D. Targeted Beneficiary
If a provision does indeed constitute a revenue-losing
provision (House rule) or a revenue provision (Senate
rule), the next question is whether the provision has so
few beneficiaries that the disclosure rules may apply. The
House and Senate rules use different tests.
The House rule uses a bright-line numerical test:
whether the provision applies to ‘‘10 or fewer beneficiaries.’’ This appears to be very straightforward: If the
provision has 10 or fewer beneficiaries, it may be a
limited tax benefit (depending on the application of the
uniformity exception, discussed below). If it has more
than 10 beneficiaries, it is not a limited tax benefit.
The Senate rule, in contrast, uses a narrative test:
whether a revenue provision applies to ‘‘a particular
beneficiary or limited group of beneficiaries.’’ As explained above, there was a debate about the appropriate
test on the Senate floor; the legislative history shows that
the Senate, concerned that the ‘‘10 or fewer’’ test in the
House rule was too narrow, preferred a narrative test to
allow the rule to apply in some cases in which there were
more than 10 beneficiaries. Therefore, if a provision
benefits 10 or fewer beneficiaries, there is likely to be a
presumption that the rule applies; as Sen. Baucus said in
the Baucus-Grassley Colloquy, ‘‘The proposed rule
would apply in most cases where the number of beneficiaries is 10 or fewer for a particular tax benefit.’’97 If,
however, a provision benefits more than 10 beneficiaries,
there does not appear to be such a presumption. In that
case, Baucus said, the rule will be applied ‘‘appropriately
within the unique circumstances of each proposal,’’ explaining by example that ‘‘if a proposal gave a tax benefit
directed only to each of the 11 head football coaches in
the Big Ten Conference, we may conclude that the rule
would nonetheless require disclosure of this benefit, even
though the number of beneficiaries would be more than
10.’’98 Pending further guidance about how the Finance
Committee will apply this test, the most that can be said
is that the closer the number of beneficiaries is to 10, the
more likely it is that the provision will be determined to
benefit a ‘‘limited number of beneficiaries,’’ and the
95
Id. at 35.
Id. at 33.
97
153 Cong. Rec. S10,700 (daily ed. Aug. 2, 2007).
98
Id.
96
607
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to employees. But, even so, the provision ‘‘would not be
considered a revenue-losing provision . . . because the
revenue loss is not a result of a change . . . to the Internal
Revenue Code.’’90 At the same time, the JCT made clear
that the effect on the code can be either direct or indirect,
and it described, as provisions that have an indirect
effect, ‘‘off-code’’ provisions that do not directly amend
the code but that provide for special tax treatment, giving
as a hypothetical example a provision saying that ‘‘notwithstanding any other provision of law,’’ a specified
group of companies may deduct 100 percent rather than
50 percent of their meal and entertainment expenses. In
such cases, ‘‘the fact that the amendment is accomplished
without a specific reference to the Code is immaterial,’’
said the JCT.91
Second, a provision that relates to the code is covered
even if its economic effect is only on federal outlays
rather than on federal revenue. This point was made in
the Joint Committee 2007 Memo. The provision in question modified the tax incentives for the New York Liberty
Zone by providing particular beneficiaries a tax credit
against payroll taxes. In concluding that the provision
was a limited tax benefit, the JCT said that ‘‘an amendment to the Internal Revenue Code that has an outlay
effect is not by virtue of that fact alone a spending item’’
rather than a revenue item. As further examples, the JCT
said, ‘‘We believe that the refundable portions of the child
tax credit and the earned income credit should be considered tax benefits for these purposes, notwithstanding
the fact that these provisions have substantial outlay
effects.’’92
Third, in determining whether a provision is a
‘‘revenue-losing’’ provision under the House rule, the
revenue tables prepared by the JCT are not necessarily
determinative. As the Joint Committee 1997 Guidance
explained, these tables are prepared for a different purpose (to inform Congress of the budgetary consequences
of tax proposals), and a single estimate may cover several
specific provisions. Accordingly, the JCT said, ‘‘the manner in which items are presented on a revenue table will
not be determinative of whether an item is a limited tax
benefit, unless the table was specifically prepared for
purposes’’ of applying the definition of limited tax benefit.93
As a related matter, the JCT has explained that a
provision whose revenue effect is estimated to be negligible for purposes of a revenue table may nevertheless
constitute a revenue-losing provision because ‘‘an expected revenue loss of even a very small dollar amount
would be sufficient to cause a provision to be a revenuelosing provision.’’94 Further, the revenue loss does not
have to be directly attributable to the benefits provided
under the provision, but instead can be indirect. As an
example, the JCT described a provision that provides a
tax exemption to organizations established to facilitate
COMMENTARY / SPECIAL REPORT
The Baucus-Grassley Colloquy and the Joint Committee 1997 Guidance clarify two additional points. First, the
‘‘beneficiary’’ of a provision is the taxpayer to whom the
provision applies rather than a person, such as a shareholder, who might bear the economic incidence of the
tax.99 Second, in counting the number of beneficiaries, a
related group of corporations is treated as one beneficiary,100 all qualified plans of a single employer are
treated as one beneficiary,101 all holders of the same bond
issue are treated as one beneficiary,102 and all of the
individual shareholders of a corporation, partners of a
partnership, members of an association, and beneficiaries
of a trust or estate are treated as one beneficiary.103
Finally, the Baucus-Grassley Colloquy explains that
the time period for counting the number of beneficiaries
is the one used for applying the Congressional Budget
Act: the current fiscal year and the 10 succeeding fiscal
years.104
99
Sen. Baucus said:
The rule defines a beneficiary as a taxpayer; that is, a
person liable for the payment of tax, who is entitled to the
deduction, credit, exclusion, or preference. Beneficiaries
include entities that are liable for payroll tax, excise tax,
and the tax on unrelated business income on certain
activities. The rule does not define a beneficiary as the
person bearing the economic incidence of the tax. For
example, in some instances, a taxpayer may pass the
economic incidence of a tax liability or tax benefit to that
taxpayer’s customers or shareholders. The proposed rule
would look to the number of taxpayers. That number is
easier to identify than the number of persons who might
bear the incidence of the tax. Id.
100
Sen. Baucus said:
Without such a rule, a parent corporation could avoid
application of the disclosure rule by simply creating a
sufficient number of subsidiary corporations to avoid
classification as a limited tax benefit under the proposed
rule. For example, if a related group of corporations —
like parent-subsidiary corporations or brother-sister corporations — owns a football team, then the related group
will be considered one beneficiary. That treatment is
analogous to the team being one entity, not separate
entities, like the coaching staff, offensive unit, defensive
unit, specialty unit, and practice squad. Id.
101
This point was made expressly by Sen. Baucus in the
Baucus-Grassley Colloquy. Id. A similar rule applied under
section 106(9)(D) of the Line Item Veto Act. See Joint Committee
1997 Guidance, supra note 48, at 25.
102
Sen. Baucus said that ‘‘in determining the number of
beneficiaries of a tax benefit, we will use rules similar to those
used in the prior law line item veto legislation.’’ 153 Cong. Rec.
S10,700 (daily ed. Aug. 2, 2007). Section 106(9)(D) of the Line
Item Veto Act provided that all qualified plans of a single
employer are to be treated as one beneficiary. See Joint Committee 1997 Guidance, supra note 48, at 25.
103
See previous footnote. Section 106(9)(D) of the Line Item
Veto Act provided that all holders of the same bond issue are
treated as one beneficiary. See Joint Committee 1997 Guidance,
supra note 48, at 25.
104
See supra note 103. Section 106(9)(D) of the Line Item Veto
Act provided that all of the individual shareholders of a
E. Uniform Application
Both the House and Senate rules contain an important
additional element. Both apply to a provision that affects
a sufficiently small number of beneficiaries (that is, under
the House rule, 10 or fewer beneficiaries; under the
Senate rule, a particular beneficiary or limited group of
beneficiaries) only if the provision also ‘‘contains eligibility criteria that are not uniform in application with
respect to potential beneficiaries of such provision.’’ In
other words, if a provision applies uniformly, it is not a
limited tax benefit subject to disclosure, even if it has only
a small number of beneficiaries.
As a threshold matter, the fact that a provision is
drafted generically, rather than to refer to a specific entity,
is not sufficient to satisfy the uniform application test. As
the JCT said in its guidance regarding the Line Item Veto
Act (which, as discussed below, contained a somewhat
similar set of exceptions), ‘‘Congress did not intend an
interpretation under which the Act potentially would
apply only to those provisions that mention particular
taxpayers by name but would not apply to any provision
that has the same effect merely because it is drafted in a
generic fashion on its face.’’105
Regarding specific types of provisions, it appears that
if a provision applies to a class of beneficiaries that is
‘‘closed,’’ the provision will not be considered to apply
uniformly. In the Baucus-Grassley Colloquy, Sen. Baucus,
giving a series of examples of how the uniformity exception of the new Senate rule would apply, started with the
example of a ‘‘closed class.’’ He said that if a proposal
provided a tax cut for ‘‘all individuals who hit at least 755
career home runs before July 2007,’’ the provision would
not apply uniformly. It would be a ‘‘closed class,’’ he
explained, ‘‘since only Henry Aaron satisfies this criteria.’’106 If, however, the proposal instead gave a tax cut to
all individuals who hit at least 755 career home runs at
any time — deleting the requirement that they be hit
before July 2007 — it might be determined to apply
uniformly. The determination, he said, would depend on
‘‘the likelihood that others will join that class over the
time period for measuring the existence of a limited tax
benefit’’ (that is, over 10 years).107 Finally, he said that ‘‘if
the same proposal is altered so as to exclude otherwise
eligible career home-run hitters who played for the
Pittsburgh Pirates at some point in their career, then that
kind of a limited tax benefit would require disclosure
under the proposed rule.’’108 Later, the JCT got into this
home run derby, opining that ‘‘a permanent tax benefit
made available on a uniform basis to all individuals who
hit at least 755 major league career home runs is probably
not a limited tax benefit (because the number of individuals who could qualify in the future is unlimited), but a
corporation, partners of a partnership, members of an association, and beneficiaries of a trust or estate are treated as one
beneficiary. See Joint Committee 1997 Guidance, supra note 48, at
25.
105
Joint Committee 1997 Guidance, supra note 48, at 37.
106
153 Cong. Rec. S10,700 (daily ed. Aug. 2, 2007).
107
Id. at S10,701.
108
Id.
(Footnote continued in next column.)
608
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Chairman of the Finance Committee has some discretion
regarding the application of the standard.
COMMENTARY / SPECIAL REPORT
109
See supra note 83, at 87 (2007).
Id. at 38.
111
153 Cong. Rec. S10,700 (daily ed. Aug. 2, 2007).
112
Id. at S10,701.
113
See Sheppard, supra note 44.
114
Joint Committee 1997 Guidance, supra note 49, at 38.
110
TAX NOTES, May 12, 2008
tions were for provisions that applied to persons in the
same industry, persons engaged in the same activity,
persons owning the same type of property, or persons
issuing the same type of investment instrument; and for
provisions extending different tax treatment only because
of differences in the size of the entity involved, differences in demographic conditions affecting individuals
(such as income level, marital status, number of dependents, or tax return filing status), or the decision to make
a generally available election.115 The Joint Committee
1997 Guidance discussed the application of these exceptions in some detail, and Sen. Baucus has said that the
JCT’s discussion ‘‘may be helpful in determining the class
of potential beneficiaries’’ under the uniformity test of
the new Senate rule.116 Further, the JCT applied the
exceptions when reviewing the Taxpayer Relief Act of
1997.
The JCT used a broad definition of the appropriate
class when applying these exceptions, with the result that
few provisions that applied to a sufficiently small number of taxpayers (under the Line Item Veto Act, 100 or
fewer) escaped identification as limited tax benefits. In
the Joint Committee 1997 Guidance, after generally discussing the application of the targeted benefit provisions
of the Line Item Veto Act, the JCT gave 12 specific
examples, each analyzing how the limited tax benefit
tests would have applied to a specific legislative proposal.117 Six of the examples were fairly straightforward,
confirming that a provision would not qualify for any of
the uniformity exceptions if it was limited to activities or
transactions occurring before a particular date (three
examples)118 or was limited to specific taxpayers or
specific geographic locations (three examples).119 The
other six examples were more difficult because they
involved provisions that were not such obvious rifle
shots, but that instead made a general policy change,
albeit one that applied to a relatively small number of
taxpayers. For example, one provision would have extended an exemption from the generation-skipping transfer tax to cases in which the transferor has no living lineal
descendants and makes a transfer to a grandniece or
grandnephew whose parent (related to the transferor) is
deceased.120 Another would have granted tax-exempt
status to a cooperative service organization composed
115
See Line Item Veto Act, section 1026(9)(A), 110 Stat. 1209
(1996). The act also contained exceptions for transition rules. Id.
at section 1026(9)(B).
116
153 Cong. Rec. S10,701 (2007).
117
Joint Committee 1997 Guidance, supra note 49, at 55-59.
The JCT also analyzed the application of the limited tax benefit
rules to seven transition rules. Id. at 60-63.
118
Id. at 55 (extension of binding contract date for biomass
and coal facilities), 57 (organizations subject to section 833 of
HIPAA), and 59 (special rule under section 2056A).
119
Id. at 56 (exemption from diesel fuel dyeing requirements
for some states), 56-57 (tax-exempt bonds for sale of Alaska
Power Administration facility), and 59-60 (conveyance of specified real property owned by James H.W. Thompson).
120
Id. at 57-58.
609
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comparable temporary provision expiring December 3,
2008, probably does constitute a limited tax benefit,
because the class of individuals who could reasonably be
expected to satisfy that test would come down to two
identifiable individuals.’’109 Thus, a provision does not
apply uniformly if it is limited to beneficiaries who
qualify by a particular date (for example, home runs hit
by July 2007, or December 3, 2008) or if it contains an
arbitrary exclusion (for example, having played for the
Pittsburgh Pirates).
The greater difficulty comes in the case of a provision
that is not limited to those who qualify by a particular
date, does not contain an arbitrary exclusion, and is
likely, as a factual matter, to apply to other similarly
situated persons based on their qualification under criteria that are generic on their face. The question in such a
case is whether, as the JCT has said, ‘‘the practical
effect . . . is that all similarly situated persons receive the
same treatment.’’110 This requires a determination of the
appropriate class of similarly situated persons against
which to measure whether all similarly situated persons
receive uniform treatment.
Making this determination is likely to be the most
difficult and complex issue arising under the new rules.
Sen. Baucus said, in the Baucus-Grassley Colloquy, that
‘‘for purposes of determining whether eligibility criteria
are uniform in application with respect to potential
beneficiaries . . . we will need to determine the class of
potential beneficiaries,’’111 and that this ‘‘will be a factual
determination.’’112 But it may also require a policy judgment because, as Sheppard wrote regarding the Line Item
Veto Act, ‘‘an attempt to define the affected class is
implicitly an inquiry into the fairness of the tax benefit.’’113 To put it another way, for virtually any tax
provision, the class of beneficiaries can be formulated so
narrowly that the provision applies uniformly within that
class: say, the class of steel mills in Ohio. However, it
would thwart the purpose of the limited tax benefit rules
if, as the JCT has said, ‘‘the tax-preferred industry,
activity or property is so precisely defined (and limited)
that the effect of the provision is that similarly situated
persons are denied the same tax treatment granted to the
benefited class.’’114 At the other end of the spectrum, an
interpretation that defines the class of beneficiaries too
broadly could lead to provisions being considered limited tax benefits even though they accomplish a general
policy change.
There are two sets of precedents regarding the determination of the appropriate class, and they cut in different ways.
The first set of precedents is under the Line Item Veto
Act. Although the Line Item Veto Act did not establish a
general uniformity test, it did contain a set of specific
exceptions that embody similar concepts. These excep-
COMMENTARY / SPECIAL REPORT
121
Id. at 58.
One example was a provision that gave a tax credit for
clinical testing expenses incurred in testing drugs to treat rare
conditions or diseases. The JCT concluded that the same activity
exception did not apply because ‘‘only certain types of drug
testing qualify for the credit.’’ Id. Another example was a
provision that extended an exemption from the excise tax on
ozone-depleting chemicals for chemicals recovered and recycled
within the U.S. to recycled halons. The JCT concluded that none
of the exceptions would apply because ‘‘the provision does not
provide similar treatment to all similarly situated taxpayers.’’ Id.
at 58-59. Another example was a provision that would have
allowed tax-exempt bonds to be used to benefit private businesses that serve more than two contiguous counties (as limited
under existing law) without penalty in some circumstances. The
JCT concluded that the provision would not have benefited an
entire industry and also would not have qualified for the same
activity exception, because ‘‘all persons engaged in the activity
of generating electricity or gas would not be treated the same,’’
in that ‘‘the process of producing electricity or gas locally is not
different from the process of generating electricity or gas
generally.’’ Id. at 58-59. Another example was a provision that
created an income tax credit for entities that make contributions
to one of 20 community development corporations (CDCs)
selected by the Secretary of Housing and Urban Development
according to specified selection criteria. The JCT concluded that
the provision would not qualify for the same activity exception
because ‘‘all persons who engage in the activity of making
contributions to CDCs were not treated the same (i.e., only those
persons contributing to the selected CDCs receive the benefits).’’
Id. at 59.
122
610
have collateral relatives whose parents are deceased — a
combination of factors not general in nature.’’123
The JCT’s broad definition of the appropriate class
was confirmed by its application of the Taxpayer Relief
Act of 1997. As explained above, the JCT identified 66
revenue-losing provisions of that law as limited tax
benefits (and another 13 transition rules as limited tax
benefits), implicitly concluding that those 66 provisions
not only fell below the threshold (applying to 100 or
fewer taxpayers) but also did not meet any of the specific
uniformity exceptions. Thus, under the Line Item Veto
Act, there is precedent for the JCT defining the appropriate class of similarly situated persons broadly, and,
accordingly, finding that few provisions apply uniformly.
The second and more recent precedent involves the
New York Liberty Zone provision. That provision, again,
modified tax incentives for the New York Liberty Zone;
the only potential beneficiaries were New York state and
New York City. The appropriate class of similarly situated beneficiaries could be viewed either of two ways. If
the appropriate class of similarly situated beneficiaries
was defined broadly as all state and local governments,
the provision did not apply uniformly within that class.
If, however, the appropriate class was only state and local
governments that were directly affected by the terrorist
attacks of September 11, 2001 (after which the Liberty
Zone provisions originally were enacted), the provision
did apply uniformly within that class.
In response to the Finance Committee’s request that it
review the provision, the JCT reached what it considered
the ‘‘straightforward’’ conclusion that the provision was
indeed a limited tax benefit because ‘‘in practice, only
New York State and New York City (and political subdivisions thereof) can be expected to qualify for the benefits’’ of the provision, adding that ‘‘the fact that these
two identifiable beneficiaries are treated equally is not
enough, in our view, to avoid the reach of [the new
rule].’’124 The chair of the Finance Committee agreed,
concluding that the provision was a limited tax benefit.
However, during the later consideration of a similar
provision on the House floor, the chair of the Ways and
Means Committee disagreed, concluding that the provision was not a limited tax benefit, and thereby implicitly
concluding that the provision applied uniformly within
the appropriate class.125 Thus, the JCT seemed to define
the appropriate class broadly, consistent with its approach under the Line Item Veto Act. The chair of the
Finance Committee agreed with the JCT’s view, but the
chair of the Ways and Means Committee did not, leading
to the possibility of the House and Senate taking different
approaches to the definition of the appropriate class for
purposes of applying the uniformity tests of the new
rules.
In its memo to the Finance Committee regarding the
New York Liberty Zone provision, the JCT acknowledged
that the uniformity test is ‘‘both vague and difficult to
123
Id. at 57-58.
S. Rep. No. 81, at 88 (2007).
125
154 Cong. Rec. H1107 (daily ed. Feb. 27, 2008) (remarks of
Rep. Rangel).
124
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solely of tax-exempt foundations and community organizations, if the organization was organized and operated solely to manage and invest the funds of such
organizations.121 The other four examples similarly established what purports to be a general rule that applies in
a relatively narrow set of circumstances, but circumstances that, it could be argued, were justified on policy
grounds.122
In each case, the JCT defined the appropriate class of
similarly situated persons broadly and found that the
provision did not provide uniform treatment to all persons within the class; accordingly, none of the exceptions
applied, and the provision was considered to be a limited
tax benefit. The breadth of the definition can be seen by
considering the example regarding the generationskipping transfer tax. The tax generally is imposed on
transfers to individuals more than one generation
younger than the transferor. There is an exception for
transfers from a grandparent to a grandchild whose
parent is deceased. The relevant provision would have
expanded this exception to include transfers from a
childless granduncle or grandaunt to a grandniece or
grandnephew whose parent is deceased. It did not single
out a particular family, but instead purported to establish
a general rule, and it arguably was an expansion of the
existing exception to a set of cases that Congress determined were worthy of similar treatment. Nevertheless,
the JCT concluded that ‘‘the provision does not meet the
requirements for the ‘general demographic condition’
exception because the only individuals who could
qualify for beneficial treatment under the provision are
individuals who have no lineal descendants and who
COMMENTARY / SPECIAL REPORT
F. Transition Rules
To this point, our discussion has focused on revenuelosing provisions — that is, in the words of the new rules,
provisions that provide ‘‘a Federal tax deduction, credit,
exclusion, or preference.’’ With the differences that have
been noted (such as those regarding procedure and the
number of beneficiaries), the House and Senate approaches to revenue-losing provisions are similar. However, when it comes to transition rules — that is,
provisions that prevent or defer the application of a tax
increase — the House and Senate approaches are sharply
different.
The Senate rule applies the same standards to transition rules as to provisions that lose revenue. This is
because the Senate rule expressly applies to any ‘‘revenue’’ provision, rather than to any ‘‘revenue-losing’’
provision. Sen. Baucus confirmed this in the BaucusGrassley Colloquy, saying that the Senate rule would
apply not only to provisions that reduce revenue, but also
to provisions ‘‘that provide a temporary or permanent
tax benefit relative to a tax increase provided in the
proposal, like, for example, exempting a limited group of
beneficiaries from an otherwise applicable across-theboard tax rate increase.’’127 As an example, he said that
the Senate rule would apply not only to a tax credit for
National Basketball Association players who scored 100
points or more in a single game (a revenue-losing provision), but also to ‘‘a new income tax surtax on players in
the National Hockey League that exempted from the new
income surtax any players who were exempted from the
league’s requirement that players wear helmets when on
the ice.’’128 Thus, under the Senate rule, the same analysis
that applies to a revenue-losing provision applies to a
transition rule, with the key issues being whether the
provision provides a benefit under the Internal Revenue
Code to a particular beneficiary or limited group of
beneficiaries and does so in a way that is not uniform.
Not so in the House. The House rule distinguishes
between, on one hand, revenue-losing provisions, which
are subject to disclosure if they benefit 10 or fewer
beneficiaries and do not apply uniformly, and, on the
other hand, ‘‘any federal tax provision which provides
one beneficiary temporary or permanent transition relief
from a change to the’’ tax code. In taking this approach,
the House rule follows the structure of the Line Item Veto
Act (and, for that matter, earlier versions of the Senate
rule), which similarly distinguished between revenuelosing provisions and transition rules.
There are, however, two differences between the new
House rule and the Line Item Veto Act standard for
transition rules. First, and most significantly, the Line
Item Veto Act applied to a transition rule that benefited
10 or fewer beneficiaries, but the new House rule applies
only to a transition rule that benefits one beneficiary.
Second, perhaps reflecting its narrower scope, the new
House rule omits two exceptions that were contained in
the Line Item Veto Act — for transition rules that simply
retained prior law for binding contracts in existence
contemporaneously with congressional action and for
technical corrections that had no revenue effect.129 Under
the House rule, if a provision is a transition rule, the sole
question is whether it benefits only one beneficiary; if it
benefits only one, that’s it — it must be disclosed; if it
benefits more than one, it need not be disclosed.
An issue that is likely to arise under the House rule is
distinguishing a transition rule from a revenue-losing
provision. In most cases, this will be straightforward. The
Joint Committee 1997 Guidance discusses the issue
(which also was relevant under the Line Item Veto Act),
saying that as a starting point, the JCT will ‘‘treat a
provision as transitional relief if it provides relief to
. . . taxpayers that otherwise would be affected by a
change in law,’’ giving as examples ‘‘a rule granting relief
from a change in law to taxpayers incorporated as of a
certain date, or permitting favorable ongoing treatment
to taxpayers engaging in a certain type of business
activity or business structure before a certain date.’’130
Thus, to constitute a transition rule, a provision must
provide relief from a tax increase that otherwise would
occur. This would include situations in which the provision provides only partial rather than complete relief, or
provides relief by establishing a different and more
favorable set of rules.131
The Joint Committee 1997 Guidance also notes that
there may be situations in which a single provision
constitutes both a revenue-losing provision and a transition rule, such as when a bill increases taxes for some
taxpayers in a class but reduces them for others in the
same class. In such a case, the JCT said that it would
analyze the provision under both tests.132
V. Conclusion
Several concluding observations may help to summarize the most important points about the new rules:
1. The new rules are the result of a long effort to
impose constraints on the consideration of tax
provisions that do not apply generally but instead
benefit a small number of beneficiaries. Over the
years, the scope of Congress’s concern has expanded, beyond rifle-shot provisions to a broader
set of tax provisions.
2. Both the House and Senate rules rely not on
prohibitions but on disclosure, requiring members
129
126
S. Rep. No. 110-228, at 87 (2007).
127
153 Cong. Rec. S10,700 (daily ed. Aug. 2, 2007).
128
Id.
TAX NOTES, May 12, 2008
Joint Committee 1997 Guidance, supra note 48, at 53.
Id. at 48.
131
Id. at 49-50.
132
Id.
130
611
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apply.’’126 The difficulty is exacerbated by the breadth of
the JCT’s definition of the appropriate class under the
Line Item Veto Act, and by the apparent disagreement
over the application of the uniformity tests to the New
York Liberty Zone provision. In light of this, the proper
application of the uniformity test remains unclear, and it
is not likely to become clearer until further guidance is
provided or additional precedents are established.
COMMENTARY / SPECIAL REPORT
applies to a limited group of beneficiaries; for
provisions that apply to more than 10 beneficiaries,
the test is uncertain.
7. Both the House and Senate rules contain an
exception for provisions that benefit a small number of beneficiaries but that apply uniformly. If a
provision applies to a ‘‘closed class,’’ in the sense
that it applies only to those who qualify by a
particular date, or is otherwise specifically limited,
or if it contains an arbitrary exclusion, the provision
is likely to be determined to not apply uniformly.
Beyond that, the application of this test is likely to
be the most difficult issue arising under the new
rules, with the principal issue being the definition
of the appropriate class for measuring whether all
persons within that class are treated uniformly.
8. The congressional tax committees are likely to
consider the interpretation of the rules by the JCT,
which is likely to apply a series of precedents
established under the Line Item Veto Act, and, with
respect to the Senate rule, to follow the legislative
intent established during the consideration of the
Senate rule, including the Baucus-Grassley Colloquy. However, unlike under the Line Item Veto Act,
the JCT’s analysis is only advisory.
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TAX NOTES, May 12, 2008
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of Congress to disclose detailed information about
limited tax benefits and creating potential procedural penalties if they fail to do so.
3. There are some differences between the House
and Senate approaches, with the likely result that
there will be provisions that constitute limited tax
benefits under the Senate rule but not under the
House rule, or possibly, vice versa. This already has
been the case, with the chair of the Finance Committee concluding that the New York Liberty Zone
provision is a limited tax benefit and the chair of
the Ways and Means Committee concluding that it
is not.
4. One key difference is that the House rule uses
different tests for revenue-losing provisions and for
transition rules, while the Senate rule uses a single
test for both.
5. Another key difference is that the House rule
uses bright-line numerical tests, while the Senate
uses a narrative test.
6. Under the Senate test, which defines a limited tax
benefit as a revenue provision that applies to a
‘‘particular beneficiary or limited group of beneficiaries,’’ there is likely to be a presumption that a
provision that applies to 10 or fewer beneficiaries