ing credits for a single project with multiple buildings or for multiple projects of a common taxpayer.

Agencies allocating credits must file reports with the Treasury Department containing (1) the maximum applicable percentage and qualified basis of each building, (2) the fees, if any, charged to credit recipients, (3) the aggregate amount of credits issued, and (4) other information required by Treasury. The time and manner of filing such reports and other information required are to be specified by the Treasury Department.

Transferability

A new owner of a building during its 15-year compliance period is eligible to continue to receive the credit as if the new owner were the original owner, using the same qualified basis and credit percentages as used by the original owner. Rehabilitation expenditures on such property may qualify for a credit in the same manner as rehabilitation expenditures on other qualifying property. The accelerated portion of credits claimed in previous years will be recaptured upon a transfer, subject to the election of the original owner to post a bond. All dispositions of ownership interests in buildings are treated as transfers for purposes of recapture, except for a special rule for certain partnerships. (There is no election for the new owner to assume the recapture liability for prior year credits.)

At-risk limitation

Property with respect to which a low-income housing tax credit is claimed is subject to an at-risk limitation similar to the investment tax credit at-risk rules in the case of nonqualified nonrecourse financing. An exception is provided for lenders related to the buyer of the low-income housing property. Another exception provides that the general investment tax credit at-risk rule, limiting the amount of nonrecourse financing to 80 percent of the credit base of the property, does not apply in the case of the low-income housing tax credit. 26

A further exception is provided for financing (including seller financing) not in excess of 60 percent of the basis of the property that is lent by 501(c)(3) and 501(c)(4) organizations whose exempt purpose includes fostering low-income housing. Further, if the rate of interest for any financing qualifying for this exception is below the applicable Federal rate at the time the financing is incurred, less 1 percentage point, then the qualified basis to which such fi nancing relates shall be reduced to reflect the present value of the payments of principal and interest, using as the discount rate such applicable Federal rate. The credit is recaptured if the financing provided by such organizations is not repaid with interest by the end of the 15-year credit compliance period.

Coordination with other provisions

The credit is subject to the rules of the general business credit, including the maximum amount of income tax liability that may

26 This exception was enacted in the Omnibus Budget Reconciliation Act of 1986, P.L. 99-509.

be reduced by a general business tax credit in any year. Unused credits for any taxable year may be carried back to each of the 3 preceding taxable years and then carried forward to each of the 15 following taxable years. Congress intended that no credits be carried back to taxable years ending prior to January 1, 1987.27

For purposes of the rules in the Act limiting passive loss deductions, the credit (but not losses) is treated as arising from rental real estate activities in which the taxpayer actively participates. Credits may be used to offset tax on up to $25,000 of nonpassive income, subject to a phaseout between $200,000 and $250,000 of adjusted gross income (disregarding passive losses).

The basis of property for purposes of depreciation is not reduced by the amount of low-income credits claimed.

Effective Date

The credit is effective for buildings placed in service after December 31, 1986, and before January 1, 1991, other than (1) property to which the depreciation rules of prior-law apply or (2) property with respect to which any investor is eligible for passive losses under the special transitional exception contained in section 502 of the Act. Congress further intended that no property to which the provision of prior law allowing five-year amortization of rehabilitation expenditures applies may be included in eligible basis.28 As stated above, all buildings eligible for the credit must be placed in service before January 1, 1991.29 A building placed in service in 1990 is eligible for the credit, however, only if expenditures of 10 percent or more of the reasonably expected cost of the building are incurred before January 1, 1989. Under a special rule, described above, credit authority for such property placed in service in 1990 may be carried over from the 1989 volume allocation for any credit agency.

Revenue Effect

The low-income rental housing tax credit is estimated to reduce fiscal year budget receipts by $67 million in 1987, $324 million in 1988, $705 million in 1989, $1,011 million in 1990, and $1,139 million in 1991.

27 A technical amendment may be needed so that the statute reflects this intent. 28 A technical amendment may be needed so that the statute reflects this intent. 29 The Act contains a general rule preventing the allocation of credit authority to buildings placed in service after 1990. Congress intended that tax-exempt bond-financed projects be treated in the same manner as other projects, and are not eligible for the credit if placed in service after 1990. A technical amendment may be needed so that the statute reflects this intent. Such an amendment was included in the versions of H. Con. Res. 395 which passed the House of Representatives and Senate in the 99th Congress.

F. Merchant Marine Capital Construction Fund (Sec. 261 of the Act and new sec. 7518 of the Code)30

Prior Law

The Merchant Marine Act of 1936

The Merchant Marine Act of 1936, as amended, provides federal income tax incentives for U.S. taxpayers who own or lease vessels operated in the foreign or domestic commerce of the United States or in U.S. fisheries; these provisions were not contained in the Internal Revenue Code of 1954.

In general, qualified taxpayers were entitled to deduct from income certain amounts deposited in a capital construction fund pursuant to an agreement with the Secretary of Transportation or, in the case of U.S. fisheries, the Secretary of Commerce. Earnings from the investment or reinvestment of amounts in a capital construction fund were excluded from income.

The tax treatment of a withdrawal from a capital construction fund depended on whether it was "qualified." A nonqualified withdrawal of previously deducted or excluded monies by a taxpayer from a fund generated income to the taxpayer. A qualified withdrawal did not generate income to the taxpayer. A qualified withdrawal was a withdrawal for the acquisition, construction, or reconstruction of a qualified vessel, or for the payment of principal on indebtedness incurred in connection with the acquisition, construction, or reconstruction of such a vessel. A qualified vessel was defined as a vessel (including barges and containers) constructed or reconstructed in the United States, documented under U.S. laws, and which is to be operated in the U.S., foreign, Great Lakes, or noncontiguous domestic trade, or in U.S. fisheries.

A nonqualified withdrawal of previously deducted or excluded monies from a fund generated income to the taxpayer. In addition, interest on the tax liability attributable to a nonqualified withdrawal was payable from the date of deposit.

Capital cost recovery

Because provision was made for the deduction (or exclusion) of certain amounts deposited in a capital construction fund and their tax-free withdrawal in the case of a qualified withdrawal, the amount of funds withdrawn reduced the tax basis of the qualified vessel. This provision was designed to prevent double deductions, which would occur if a taxpayer was permitted to take depreciation deductions for amounts the taxpayer had already deducted fromor never included in-income.

30 For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 13; H.Rep. 99-426, pp. 190-195; and H.Rep. 99-841, Vol. II (September 18, 1986), p. 104 (Conference Report).

Investment tax credit

In general, the amount of investment tax credit for eligible property was determined with reference to the basis. A taxpayer could compute the investment tax credit for a qualified vessel (i.e., one that was financed in whole or in part by qualified withdrawals from a capital construction fund) by including at least one-half of qualified withdrawals in basis.

Reasons for Change

The Congress concluded that the provision of tax benefits for U.S. shipping through the Capital Construction Fund mechanism is appropriate. Aid to U.S. shipping industries is necessary to assure an adequate supply of ships in the event of war. The Congress has adhered to a policy of providing tax incentives to the domestic shipping industry for many years, and there was a concern that the elimination of such incentives, coupled with reduced appropriations for maritime construction, could injure the industry.

The incentive under prior law may not have functioned properly as an incentive for U.S. shipbuilding. Consequently, the Congress determined that additional requirements should be imposed to insure that capital construction funds are used for the intended purpose. The Congress was also concerned about the ability of taxpayers to avoid taxation on nonqualified withdrawals by making such withdrawals in years for which there are net operating losses (or other tax attributes that reduce the tax attributable to the withdrawal).

The Congress became aware during its tax reform hearings that Treasury's proposal to terminate the Capital Construction Fund (CCF) could have a serious adverse impact on the financial reporting requirements of CCF holders. The Congress did not intend that the modifications to the CCF program be viewed as requiring any change in the financial statement presentation of income taxes by CCF holders. These taxpayers should be allowed to provide future financial statements necessary for ship financing on a basis consistent with that anticipated at the time these taxpayers entered into CCF agreements with the Federal government.

In general

Explanation of Provision

The Act coordinates the application of the Internal Revenue Code of 1986 with the capital construction fund program of the Merchant Marine Act of 1936, as amended. In addition, new requirements are imposed, relating to (1) the tax treatment of nonqualified withdrawals, (2) certain reports to be made by the Secretaries of Transportation and Commerce to the Secretary of the Treasury, and (3) a time limit on the amount of time monies can remain in a fund without being withdrawn for a qualified purpose. For purposes of the definition of the term "qualified withdrawals," under new section 7518(e) (sec. 607(f) of the Merchant Marine Act, 1936), the phrase "acquisition, construction, or reconstruction of a qualified vessel" is to be interpreted as including acquisition through either purchase or lease of an agreement vessel for a

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period of five years or more. This interpretation parallels the structure of: (1) the scope of eligibility to establish a capital construction fund under section 607(a) of the Merchant Marine Act, 1936 (which permits deposits into a CCF fund by either an owner/lessor or the lesee of an eligible vessel, or both, subject to certain limitations), and (2) the scope of qualified withdrawals for vessel acquisition through either purchase (in the form of a downpayment toward the purchase price) or payment of long-term indebtedness on an agreement vessel. This interpretation is also consistent with current industry acquisition practices reflecting a long-term trend toward vessel acquisition through lease rather than purchase.

Inclusion in Internal Revenue Code

The tax provisions relating to capital construction funds are recodified as part of the Internal Revenue Code of 1986. For purposes of the Internal Revenue Code of 1986, defined terms shall have the meaning given such terms in the Merchant Marine Act of 1936, as amended, as in effect, on the date of enactment of the Act.

Tax treatment of nonqualified withdrawals

The maximum rate of tax (34 percent for corporations and 28 percent for individuals) is to be imposed on nonqualified withdrawals made after December 31, 1986; This penalty is in addition to interest payable from the date the amount withdrawn was reported.

If a taxpayer makes a nonqualified withdrawal out of a capital construction fund, the income tax payable by the taxpayer for the year of withdrawal is generally to be increased by such amount as is necessary to assure that the tax liability with respect to the nonqualified withdrawal is determined by reference to the top marginal tax rates applicable to ordinary income and capital gains. Special rules are provided to limit the application of this provision in cases where the taxpayer derived no tax benefit from depositing the funds.

Departmental reports to Treasury

The Secretary of Transportation and the Secretary of Commerce are required to make annual reports to the Secretary of the Treasury regarding the establishment, maintenance, and termination of capital construction funds. These reports will also include determinations of whether a fundholder has failed to fulfill a substantial obligation under a capital construction fund agreement. Under joint regulations, and after notice and opportunity for hearing, if the Secretary determines that a substantial obligation is not being fulfilled, he or she may treat the entire fund-or any portion thereof-as a nonqualified withdrawal.

25-year limit on deposits

The Act imposes a 25-year limit on the amount of time monies can remain in a fund without being withdrawn for a qualified purpose. This rule applies to all deposits, including those made before the general effective date. The 25-year period begins to run on the later of the date of deposit or January 1, 1987.

Monies that are not withdrawn after a 25-year period are treated as nonqualified withdrawals, according to the following schedule: