President Signs $1.3 Trillion Spending Bill Featuring Extensive Technical Tax Corrections

(Parker Tax Publishing April 2018)

On March 23, 2018, President Trump signed into law the Consolidated Appropriations Act of 2018 (CAA). In addition to funding the federal government through September 30, 2018, the $1.3 trillion spending bill also makes technical corrections to numerous tax bills enacted over the past fifteen years. Most notably, CAA fixes the Code Sec. 199A "grain glitch" that created a disparity between farmers marketing products to cooperatives versus farmers marketing products to non-cooperatives, enacts major changes to the centralized partnership audit regime rules, and makes extensive corrections to the PATH Act of 2015. Pub. L. 115-141.

I. Fixing the "Grain Glitch" and Other Farm-Related Provisions Enacted in TCJA

TCJA created a new deduction in Code Sec. 199A called the qualified business income deduction. As enacted, for tax years beginning after December 31, 2017, and before January 1, 2026, Code Sec. 199A provides a deduction to any specified agricultural or horticultural cooperative equal to the lesser of (1) 20 percent of the excess (if any) of the gross income of a specified agricultural or horticultural cooperative over the qualified cooperative dividends paid during the tax year for the tax year, or (2) the greater of 50 percent of the W-2 wages paid by the cooperative with respect to its trade or business, or the sum of 25 percent of the W-2 wages of the cooperative with respect to its trade or business plus 2.5 percent of the unadjusted basis immediately after acquisition of qualified property of the cooperative. The cooperative's Code Sec. 199A(g) deduction may not exceed its taxable income for the tax year.

A specified agricultural or horticultural cooperative is an organization to which Code Sec. 1381, Code Sec. 1382, and Code Sec. 1383 apply and that is engaged in (1) the manufacturing, production, growth, or extraction in whole or significant part of any agricultural or horticultural product, (2) the marketing of agricultural or horticultural products that its patrons have so manufactured, produced, grown, or extracted, or (3) the provision of supplies, equipment, or services to farmers or organizations described in the foregoing.

An unintended consequence of the provision in TCJA was that it created a disparity between marketing products to cooperatives versus non-cooperatives. This became known as the "grain glitch."

To resolve the "grain glitch," the Section 101 of CAA modifies the deduction for qualified business income of a specified agricultural or horticultural cooperative under Code Sec. 199A(g) to provide a deduction for qualified production activities income of a specified agricultural or horticultural cooperative that is similar to the deduction for qualified production activities income under former Code Sec. 199. The modification is effective as if originally included in TCJA, that is, for tax years beginning after December 31, 2017.

CAA provides a deduction from taxable income that is equal to nine percent of the lesser of the cooperative's qualified production activities income or taxable income (determined without regard to the cooperative's Code Sec. 199A(g) deduction and any deduction allowable under Code Sec. 1382(b) and Code Sec. 1382(c) (relating to patronage dividends, per-unit retain allocations, and nonpatronage distributions)) for the tax year. The amount of the deduction for a tax year is limited to 50 percent of the W-2 wages paid by the cooperative during the calendar year that ends in such tax year. For this purpose, W-2 wages are determined in the same manner as under the other provisions of section 199A, except that such wages do not include any amount that is not properly allocable to domestic production gross receipts.

In the case of oil related qualified production activities income, CAA provides that the Code Sec. 199A(g) deduction is reduced by 3 percent of the least of the cooperative's oil related qualified production activities income, qualified production activities income, or tax income (determined without regard to the cooperative's Code Sec. 199A(g) deduction and any deduction allowable under Code Sec. 1382(b) and (c) (relating to patronage dividends, per-unit retain allocations, and nonpatronage distributions)) for the tax year. For this purpose, oil related qualified production activities income for any tax year is the portion of qualified production activities income attributable to the production, refining, processing, transportation, or distribution of oil, gas, or any primary product thereof during the tax year.

In general, qualified production activities income is equal to domestic production gross receipts reduced by the sum of: (1) the cost of goods sold that are allocable to such receipts; and (2) other expenses, losses, or deductions that are properly allocable to such receipts. Domestic production gross receipts generally are gross receipts of the cooperative that are derived from any lease, rental, license, sale, exchange, or other disposition of any agricultural or horticultural product that was manufactured, produced, grown, or extracted by the cooperative in whole or in significant part within the United States. The cooperative is treated as having manufactured, produced, grown, or extracted in whole or significant part any agricultural or horticultural products marketed by the cooperative if such items were manufactured, produced, grown, or extracted in whole or significant part by its patrons.

Domestic production gross receipts do not include any gross receipts of the cooperative derived from property leased, licensed, or rented by the taxpayer for use by any related person. In addition, domestic production gross receipts do not include gross receipts that are derived from the lease, rental, license, sale, exchange, or other disposition of land.

CAA limits the definition of "specified agricultural or horticultural cooperative" to organizations to which Code Sec. 1381, Code Sec. 1382, and Code Sec. 1383 apply that (1) manufacture, produce, grow, or extract in whole or significant part any agricultural or horticultural product, or (2) market any agricultural or horticultural product that their patrons have so manufactured, produced, grown, or extracted in whole or significant part. The definition no longer includes a cooperative solely engaged in the provision of supplies, equipment, or services to farmers or other specified agricultural or horticultural cooperatives.

CAA repeals the special deduction for qualified cooperative dividends. In addition, CAA repeals the rule that excludes qualified cooperative dividends from qualified business income of a qualified trade or business. The proposal also clarifies that items of income excluded from qualified items of income, and thus excluded from qualified business income, do not include any amount described in section 1385(a)(1) (i.e., patronage dividends). Accordingly, qualified business income of a qualified trade or business includes any patronage dividend, per-unit retain allocation, qualified written notice of allocation, or any other similar amount received from a cooperative, provided such amount is otherwise a qualified item of income, gain, deduction, or loss (i.e., such amount is (i) effectively connected with the conduct of a trade or business within the United States, and (ii) included or allowed in determining taxable income for the taxable year).

In the case of any qualified trade or business of a patron of a specified agricultural or horticultural cooperative, the deductible amount determined under Code Sec. 199A(b)(2) for such trade or business is reduced by the lesser of (1) 9 percent of the amount of qualified business income with respect to such trade or business as is properly allocable to qualified payments received from such specified agricultural or horticultural cooperative, or (2) 50 percent of the amount of W-2 wages with respect to such qualified trade or business that are properly allocable to such amount.

CAA grants specific regulatory authority to the IRS to issue regulations under Code Sec. 199A(g) including regulations that prevent more than one cooperative taxpayer from being allowed a deduction with respect to the same activity (i.e., the same lease, rental, license, sale, exchange, or other disposition of any agricultural or horticultural product that was manufactured, produced, grown, or extracted in whole or in significant part within the United States). In addition, regulatory authority is provided to address the proper allocation of items of income, deduction, expense, and loss for purposes of determining qualified production activities income. CAA provides that the regulations be based on the regulations applicable to cooperatives and their patrons under former Code Sec. 199 (as in effect before its repeal).

Example: ABC Cooperative is a grain marketing cooperative with $5,250,000 in gross receipts during 2018 from the sale of grain grown by its patrons. ABC paid $4,000,000 to its patrons at the time the grain was delivered in the form of per-unit retain allocations and another $1,000,000 in patronage dividends after the close of the 2018 tax year. ABC has other expenses of $250,000 during 2018, including $100,000 of W-2 wages. ABC has domestic production gross receipts of $5,250,000 and qualified production activities income of $5,000,000 for 2018. ABC's Code Sec. 199A(g) deduction is $50,000 and is equal to the least of nine percent of qualified production activities income ($450,000), 9 percent of taxable income ($450,000), or 50 percent of W-2 wages ($50,000). ABC passes through the entire Code Sec. 199A(g) deduction to its patrons. Accordingly, ABC reduces its $5,000,000 deduction allowable under Code Sec. 1382(b) and (c) (relating to the $1,000,000 patronage dividends and $4,000,000 per-unit retain allocations) by $50,000.

Example: (continued) Patron's grain delivered to ABC during 2018 is two percent of all grain marketed through ABC during such year. During 2019, Patron receives $20,000 in patronage dividends and $1,000 of allocated Code Sec. 199A(g) deduction from ABC related to the grain delivered to ABC during 2018. Patron is a grain farmer with taxable income of $75,000 for 2019 (determined without regard to section 199A) and has a filing status of married filing jointly. Patron's qualified business income related to its grain trade or business for 2019 is $50,000, which consists of gross receipts of $150,000 from sales to an independent grain elevator, per-unit retain allocations received from ABC during 2019 of $80,000, patronage dividends received from ABC during 2019 related to ABC's 2018 net earnings of $20,000, and expenses of $200,000 (including $50,000 of W-2 wages). The portion of the qualified business income from Patron's grain trade or business related to qualified payments received from ABC during 2019 is $10,000, which consists of per-unit retain allocations received from ABC during 2019 of $80,000, patronage received from ABC during 2019 related to ABC's 2018 net earnings of $20,000, and properly allocable expenses of $90,000 (including $25,000 of W-2 wages). Patron's deductible amount related to the grain trade or business is 20 percent of qualified business income ($10,000) reduced by the lesser of nine percent of qualified business income related to qualified payments received from ABC ($900)135 or 50 percent of W-2 wages related to qualified payments received from ABC ($12,500),136 or $9,100. As Patron does not have any other qualified trades or business, the combined qualified business income amount is also $9,100. Patron's deduction under Code Sec. 199A for 2019 is $10,100, which consists of the combined qualified business income amount of $9,100, plus Patron's deduction passed through from ABC of $1,000.

II. Changes to Centralized Partnership Audit Regime Rules that Were Enacted in the Bipartisan Budget Act of 2015

CAA made major changes to the centralized partnership audit regime rules that were enacted in the Bipartisan Budget Act of 2015 (2015 BBA) and which apply generally to partnership tax years beginning after 2017. These changes are the subject of their own article in this issue of Parker's Federal Tax Bulletin. See "Appropriations Act Makes Major Changes to the Partnership Audit Rules" (PFTB 2018-03-30).

III. Other Technical Corrections

CAA includes technical corrections, other corrections, and clerical and deadwood corrections to recent tax legislation enacted before 2017. Except as otherwise provided, the amendments made by the technical corrections and other corrections take effect as if included in the original legislation to which each amendment relates.

Amendments Relating to the Protecting Americans from Tax Hikes (PATH) Act of 2015

Earned Income Tax Credit. With respect to the earned income credit PATH made permanent the $5,000 increase in the phaseout amount for married couples filing joint returns. PATH retained rules providing for the indexation of the prior-law $3,000 amount (notwithstanding that this amount had been repealed). CAA deletes references to the prior law amount and consolidates the inflation adjustment in one subsection.

Transit Parity. Under Code Sec. 132(f)(2) as in effect before the changes made by PATH, the monthly limit on the fringe benefit exclusion for employer-provided parking was $175, and the monthly limit on employer-provided benefits for mass transit and van pooling combined was $100. These monthly limits were indexed under Code Sec. 132(f)(6) using a base year determined by when the particular monthly limit became effective - a base year of 1998 for parking and 2001 for transit/vanpooling. Parity between the exclusions was provided on a temporary basis from 2009 through 2014. PATH created permanent parity in the exclusions by changing the monthly transit/vanpooling limit in Code Sec. 132(f)(2) to $175. However, PATH failed to include a conforming change to repeal the base-year rule in Code Sec. 132(f)(6) for transit/vanpooling. CAA repeals the transit/vanpooling base-year rule.

Research Credit. The alternative incremental credit expired in 2008. CAA clarifies that the alternative incremental credit is not reinstated by PATH, and makes conforming changes.

Bonus Depreciation. CAA clarifies that, among the criteria in PATH defining certain property having a longer production period that is treated as qualified property, the requirement that the property be acquired pursuant to a written contract before 2020 requires that the contract be a written binding contract. This corrects an unintended error that changed prior law. CAA also clarifies that the preproductive period under Code Sec. 168(k)(5)(B)(ii) is consistent with the preproductive period under Code Sec. 263A(e)(3).

CAA amends Code Sec. 168(k)(6), as in effect prior to the amendments made by section 13201 of PATH to provide the intended applicable percentages. Thus, CAA clarifies that in the case of longer production period property and certain aircraft acquired before September 28, 2017, and placed in service in 2018, 50 percent applies to the entire adjusted basis, and if placed in service in 2019, 40 percent applies to the entire adjusted basis.

CAA clarifies that if, for a tax year, a taxpayer makes both an election under Code Sec. 168(k)(7) not to claim bonus depreciation for all property in a particular class of property and an election under Code Sec. 168(k)(4) to claim AMT credits in lieu of bonus depreciation, Code Sec. 168(k)(4) does not apply to property in the particular class. This corrects an unintended error which changed prior law.

Election Out of Accelerated Recovery Periods for Qualified Indian Reservation Property. As amended by PATH, Code Sec. 168(j) permits taxpayers to elect out of the otherwise applicable accelerated recovery periods in the case of qualified Indian reservation property. In general, if Code Sec. 168(j) applies, there is no AMT adjustment. CAA clarifies that no AMT adjustment applies in the case of qualified Indian reservation property if the taxpayer makes the election out.

Failure to Furnish Correct Payee Statements. CAA clarifies Code Sec. 6722(c)(3)(A), relating to failure to furnish correct payee statements, to refer to the payee statement (rather than to information returns) that are furnished (rather than filed). A corresponding change in the effective date stated in PATH refers to statements that are furnished (rather than provided). Similarly-structured language in Code Sec. 6721(c)(3)(A) is conformed so that it refers to the information return (rather than to any information return).

Requirements for the Issuance of Individual Taxpayer Identification Numbers (ITINs). CAA clarifies that community-based Certifying Acceptance Agents are among the entities that are available to individuals living abroad who wish to obtain ITINs for purposes of meeting their U.S. tax filing obligations.

CAA clarifies that the expiration of ITINs that have not been used for three consecutive tax years is to occur on the date following the due date of the tax return for such third consecutive tax year. For ITINs issued prior to January 1, 2013, the ITIN will expire on the applicable date, or if earlier, the day following the due date of the tax return for the third consecutive tax year such ITIN was not used on a return. In the event that such an ITIN has not been used for three (or more) consecutive tax years on the tax return due date for the 2015 tax year, such ITIN will expire on the day following that date.

CAA clarifies that the effective date of PATH, which is effective for ITIN applications made after the date of enactment, does not prevent the provision relating to outstanding ITINs from taking effect.

Retroactive Claims of Credits. CAA conforms a reference in Code Sec. 24(e)(2) to the taxpayer identification number (not to the identifying number). The provisions remove special effective date rules in each of in certain PATH sections that have no practical effect.

Effective Date for Treatment of Credits for Certain Penalties. PATH inadvertently failed to state the effective date for the rule providing a reasonable cause exception for erroneous claims for refund or credit. CAA states that the effective date is for claims filed after the date of enactment of PATH.

Making American Opportunity Tax Credit Permanent. CAA reflects the permanent extension of the American Opportunity Tax Credit by eliminating deadwood and consolidating the provisions of Code Sec. 25A.

Section 529 Programs and Qualified ABLE Programs. For Section 529 qualified tuition programs, PATH repealed the rules providing that Section 529 accounts must be aggregated for purposes of calculating the amount of a distribution that is included in a taxpayer's income. Though PATH modified certain rules for qualified ABLE programs, it did not make a parallel change to the rules for distributions from ABLE accounts. CAA makes a parallel change that conforms the treatment of multiple distributions during a taxable year from an ABLE account in Code Sec. 529A to the treatment of multiple distributions during a tax year from a Code Sec. 529 account.

Restriction on Tax-free Distributions Involving Real Estate Investment Trusts. CAA clarifies that, for purposes of Code Sec. 355(h)(2)(B), control of a partnership means ownership of at least 80 percent of the profits interests and at least 80 percent of the capital interests. That is, control is not limited to exactly 80 percent ownership.

Ancillary Personal Property of a REIT. As amended by PATH, Code Sec. 856(c)(9) treats ancillary personal property as a real estate asset for purposes of the REIT 75 percent asset test to the extent that rents attributable to such ancillary personal property are treated, under a separate provision, as rents from real property. CAA makes two conforming changes with respect to the REIT income tests. First, the provision treats gain from the sale or disposition of such ancillary personal property as gain from the sale or disposition of a real estate asset for purposes of the REIT income tests. Second, the provision treats gain from the sale or disposition of certain obligations secured by mortgages on both real property and personal property as gain from the sale or disposition of real property for purposes of the REIT income tests.

Exception from Foreign Investment in U.S. Real Property Tax Act (FIRPTA) for Certain Stock of REITs. CAA restates provisions of Code Sec. 897(k) as amended, makes clerical conforming changes, and strikes a modification to a repealed provision. Further, under Code Sec. 897(k), as amended, the provision addresses the definition of a qualified collective investment vehicle that is eligible for benefits of a comprehensive income tax treaty with the United States that includes an exchange of information program. Specifically, the provision clarifies that the definition can be met only if the dividends article in the treaty imposes conditions on the benefits allowable in the case of dividends paid by a REIT.

The provision clarifies the effective date for the determination of domestic control by stating that the rule applies with respect to each testing period ending on or after the date of enactment (not that the rule takes effect on the date of enactment).

FIRPTA Exception for Qualified Foreign Pension Funds. As amended by PATH, Code Sec. 897(l)(1) provides that Code Sec. 897 does not apply (1) to any United States real property interest held directly (or indirectly through one or more partnerships) by, or (2) to any distribution received from a REIT by, a qualified foreign pension fund or an entity all the interests of which are held by a qualified foreign pension fund. CAA clarifies that, for purposes of Code Sec. 897, a qualified foreign pension fund is not treated as a nonresident alien individual or as a foreign corporation; in other words, in determining the U.S. income tax of a qualified foreign pension fund, Code Sec. 897 does not apply. The provision provides that, also for that purpose, an entity all the interests of which are held by a qualified foreign pension fund is treated as such a fund.

As amended by PATH, Code Sec. 897(l)(2) establishes a five-prong definition of the term "qualified foreign pension fund." CAA revises the second prong of the definition to clarify that a government-established fund to provide public retirement or pension benefits may qualify, as well as a fund established by more than one employer to provide retirement or pension benefits to their employees, such as a multiple-employer or multiemployer plan. In addition, the provision makes clarifying changes to the fourth and fifth prongs of the definition.

Election of Certain Small Insurance Companies to be Taxed Only on Taxable Investment Income. As amended by PATH, Code Sec. 831(b) requires that an otherwise eligible electing insurance company meet one of two diversification requirements. The first requires that no more than 20 percent of the company's net (or if greater, direct) written premiums for the taxable year is attributable to any one policyholder. The second, applicable if the first is not met, requires that no person holds (directly or indirectly) aggregate interests in the company that constitute a percentage of the entire interest in the company that is more than a de minimis percentage higher than the percentage of interests in specified assets with respect to the company held (directly or indirectly) by a specified holder.

CAA clarifies the first diversification rule to provide a look-through rule with respect to an intermediary (for example, an aggregate fund). Specifically, the provision provides that in the case of reinsurance or any fronting, intermediary, or similar arrangement, a policyholder means each policyholder of the underlying direct written insurance with respect to the reinsurance or arrangement.

The provision clarifies the determination of percentages under the second diversification rule by making the determination with respect to relevant specified assets. They are defined (with respect to any specified holder with respect to any insurance company) to mean the aggregate amount of the specified assets, with respect to the insurance company, any interest in which is held directly or indirectly by a spouse or specified relation. A specified relation is a lineal descendent (including by adoption) of an individual who holds, directly or indirectly, an interest in the insurance company, and the lineal descendant's spouse. Thus, for example, a specified relation of an individual includes the individual's step-children. The provision further clarifies that relevant specified assets do not include any specified asset that was acquired by the spouse or specified relation by bequest, devise, or inheritance from a decedent for a two-year period.

A specified holder is defined to include a lineal descendent (including by adoption) of an individual who holds, directly or indirectly, an interest in the insurance company, and the lineal descendant's spouse. Thus, a specified holder includes an individual's step-children. A specified holder is defined also to include a non-U.S.-citizen spouse of an individual who holds, directly or indirectly, an interest in the specified assets with respect to the insurance company. A non-U.S.-citizen spouse would generally not be an eligible recipient for purposes of the unified estate and gift tax marital deduction, for example, and so assets passing to such a spouse from such an individual would not be deductible for estate and gift tax purposes. By contrast, a U.S.-citizen spouse could receive assets from the individual without giving rise to estate tax or gift tax with respect to those assets.

CAA specifies that Treasury Department guidance under the provision may provide that factors such as ownership, premiums, gross revenue, and factors taken into account under applicable state law for assessing risk are taken into account, to the extent this is consistent with the purpose of the provision to accurately determine percentages based on the real economic arrangement among the parties.

Amendment Relating to the Consolidated Appropriations Act, 2016 (2016 CAA)

CAA clarifies that Code Sec. 199(c)(3)(C) applies for purposes of calculating qualified production activities income under Code Sec. 199(c) and for purposes of calculating oil related qualified production activities income under Code Sec. 199(d)(9), as in effect before the repeal of Code Sec. 199 as part of TCJA. CAA clarifies that an independent refiner may elect to apply Code Sec. 199(c)(3)(C) to its oil transportation costs for purposes of calculating its deduction under Code Sec. 199 (i.e., it is not required to apply the provision to its oil transportation costs). It is anticipated that the IRS will issue guidance prescribing the manner in which such election shall be made.

Amendments Relating to the Fixing America's Surface Transportation Act (2015) (FAST)

Revocation or Denial of Passport in Case of Certain Unpaid Taxes. FAST provides for judicial review of the IRS's certification that an individual has a seriously delinquent tax debt, either in a U.S. district court or in the Tax Court. CAA clarifies that the party against whom a Tax Court petition is filed is the Commissioner of the Internal Revenue Service. CAA also provides a tie-breaker rule clarifying that the court first acquiring jurisdiction over CAAion has sole jurisdiction, and corrects a cross reference.

Amendments Relating to the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (2015 Surface Transportation Act)

Consistent Value for Transfer and Income Tax Purposes. The 2015 Surface Transportation Act generally requires that, under Code Sec. 1014(f), an heir who acquires property from a decedent (whether or not reported on an estate tax return) claim a basis no greater than the final value of the property for estate tax purposes. Code Sec. 6662(b)(8) imposes a penalty in the case of an inconsistent estate basis. Under CAA, the term "inconsistent estate basis" means any portion of an underpayment attributable to the failure to comply with Code Sec. 1014(f). The penalty could have been viewed as applying when an heir claims a basis higher than the final estate tax value by reason of making basis adjustments relating to post-acquisition events (e.g., improvements to the property). This result is not intended. The provision modifies the definition of inconsistent estate basis to avoid this unintended result.

Mass Transit Account ("MTA") Financing. The 2015 Surface Transportation Act changes the taxation of liquefied natural gas (LNG) and liquefied petroleum gas (LPG) from a per-gallon basis to an energy-equivalent basis. That is, CAA provides that the tax is based on the LNG energy equivalent to a gallon of diesel (DGE) (24.3 cents per DGE, which is 6.06 pounds of LNG), and on the LPG energy equivalent to a gallon of gasoline (GGE) (18.3 cents per GGE, which is 5.75 pounds of LPG). Code Sec. 9503(e)(2) allocates 1.86 cents per gallon of LNG and 2.13 cents per gallon of LPG to the MTA of the Highway Trust Fund, but does not specifically conform the per-gallon basis to an energy-equivalent basis for purposes of the allocation. CAA conforms the per-gallon basis in Code Sec. 9503(e)(2) to the energy-equivalent basis, using DGE for LNG and GGE for LPG, to reflect the energy-equivalent basis used for the taxes imposed on LNG and LPG.

Amendments Relating to the Stephen Beck, Jr., ABLE Act of 2014 (ABLE Act)

The ABLE Act provides an annual inflation adjustment for fixed-dollar civil tax penalties in the case of: (1) Code Sec. 6651(a), failure to file a tax return; (2) Code Sec. 6652(c), failure to file or disclose information returns by exempt organizations and certain trusts, (3) Code Sec. 6695, preparation of tax returns for other persons, (iv) Code Sec. 6698, failure to file a partnership return, (v) Code Sec. 6699, failure to file an S corporation return, (vi) Code Sec. 6721, failure to file correct information returns, and (vii) Code Sec. 6722, failure to furnish correct payee statements. The provision clarifies that the effective date of the annual inflation adjustments added to these civil penalties generally is for returns required to be filed, and statements required to be furnished, after December 31, 2014, and in the case of the annual inflation adjustment for penalties relating to preparation of tax returns for other persons, is for returns or claims for refund filed after December 31, 2014.

Amendment Relating to the American Taxpayer Relief Act of 2012 (ATRA)

CAA conforms a reference in Code Sec. 6211(b)(4)(A), relating to the definition of a deficiency, to a provision of the American Opportunity Tax Credit that was renumbered by the ATRA.

Amendment Relating to the United States - Korea Free Trade Agreement Implementation Act (2011)

CAA clarifies that the effective date of the Code Sec. 6695(g) penalty increase is for documents prepared (not returns required to be filed) after December 31, 2011.

Amendments Relating to the American Jobs Creation Act of 2004

Treatment of Certain Trusts as Shareholder of S Corporation. CAA clarifies that only the individual for whose benefit the trust is created is treated as "the shareholder."

Rural Electric Cooperatives. Code Sec. 501(c)(12) provides an income tax exemption for rural electric cooperatives if at least 85 percent of the cooperative's income consists of amounts collected from members for the sole purpose of meeting losses and expenses of providing service to its members. The Energy Policy Act of 2005 made permanent a rule to exclude from the 85 percent test income from transactions related to open access transmission if approved by the Federal Energy Regulatory Commission (FERC). FERC regulates transmission lines in all States except Alaska, Hawaii, and most of Texas. Because of an oversight, only transmission systems in Texas received the treatment accorded to FERC-regulated electric cooperatives. Electric cooperatives in Alaska are regulated by the Regulatory Commission of Alaska (RCA). Regulated utilities in Alaska with an RCA-approved open access transmission tariff modeled after FERC should have received the same tax treatment as their similarly situated counterparts in the other States. CAA clarifies that that such utilities in Alaska and Hawaii are treated the same as those in Texas for purposes of the exclusion from the 85-percent test.

IV. Changes to Low-Income Housing Credit Ceiling and Average Income Test

The low-income housing credit may be claimed over a 10-year credit period after each low-income building is placed in service. The amount of the credit for any tax year in the credit period is the applicable percentage of the qualified basis of each qualified low-income building. A state housing credit ceiling applies. For determining the current-year state dollar amount of the ceiling in any calendar year, the greater of (1) $1.75 multiplied by the state population, or (2) $2,000,000, is taken into account. These amounts are indexed for inflation. For calendar year 2018, the amounts are $2.40 and $2,760,000.

To be eligible for the low-income housing credit, a qualified low-income building must be part of a qualified low-income housing project. In general, a qualified low-income housing project is defined as a project that satisfies one of two tests at the election of the taxpayer. The first test is met if 20 percent or more of the residential units in the project are both rent-restricted and occupied by individuals whose income is 50 percent or less of area median gross income (the "20-50 test"). The second test is met if 40 percent or more of the residential units in the project are both rent-restricted and occupied by individuals whose income is 60 percent or less of area median gross income (the "40-60 test").

A unit occupied by individuals whose incomes rise above 140 percent of the applicable income limit shall continue to be treated as a low-income unit if the income of such occupants initially met such income limitation and such unit continues to be rent-restricted so long as the next available unit is occupied by a tenant whose income does not exceed such limitation. In the case of deep rent skewed projects, special rules apply. A deep rent skewed project is a project in which (1) 15 percent or more of the low-income units in the project are occupied by individuals whose incomes are 40 percent or less of area median gross income, (2) the gross rent with respect to each low-income unit in the project does not exceed 30 percent of the applicable income limit that applies to individuals occupying the unit, and (3) the gross rent with respect to each low-income unit in the project does not exceed one-half of the average gross rent with respect to units of comparable size that are not occupied by individuals who meet the applicable income limit.

CAA provides an increase in the state housing credit ceiling for 2018, 2019, 2020, and 2021. In each of those calendar years, the dollar amounts in effect for determining the current-year ceiling (after any increase due to the applicable cost of living adjustment) are increased by multiplying the dollar amounts for that year by 1.125.

CAA adds a third optional test to the 20-50 and 40-60 tests for a qualified low-income housing project. A project meets the minimum requirements of the average income test if 40 percent or more (25 percent or more in the case of a project located in a high cost housing area) of the residential units in such project are both rent-restricted and occupied by individuals whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the respective unit. The taxpayer designates the imputed income limitation. The imputed income limitation is determined in 10-percentage-point increments, and may be designated as 20, 30, 40, 50, 60, 70, or 80 percent. The average of the imputed income limitations designated must not exceed 60 percent of area median gross income.

For purposes of the rental of the next available unit in a project with respect to which the taxpayer elects the average income test, if the income of the occupants of the unit increases above 140 percent of the greater of (1) 60 percent of area median gross income, or (2) the imputed income limitation designated by the taxpayer with respect to the unit, then the unit ceases to be treated as a low-income unit if any residential rental unit in the building (of a size comparable to, or smaller than, such unit) is occupied by a new resident whose income exceeds the applicable imputed income limitation. In the case of a deep rent skewed project, 170 percent applies instead of 140 percent, and other special rules apply.

The provision relating to the state housing credit ceiling is effective for calendar years beginning after December 31, 2017, and before January 1, 2022. The provision relating to the average income test is effective for elections made after March 23, 2018.

V. Extension of Airport and Airway Trust Fund Excise Taxes

Excise taxes are imposed on amounts paid for commercial air passenger and freight transportation and on fuels used in commercial and noncommercial (i.e., transportation that is not "for hire") aviation to fund the Airport and Airway Trust Fund. Most of the Airport and Airway Trust Fund excise taxes were scheduled to expire after March 31, 2018. Effective March 23, 2018, the taxes and expenditure authority that were scheduled to expire on March 31, 2018, are extended to September 30, 2018.

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