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The original documents are located in Box 36, folder "12/23/75 HR9968 Revenue
Adjustment Act of 1975" of the White House Records Office: Legislation Case Files at the
Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Exact duplicates within this folder were not digitized.
APPROVED/5/5
DEC 23
THE WHITE HOUSE
WASHINGTON
December 22, 1975
Colorado posted 12/23
in
MR PRESIDENT:
Jo archine
Jo
Attached for your consideration is H.R. 9968,
10/24
the revised tax bill passed by the Congress after
your veto of the earlier bill.
Because of your announced intention to sign the
bill, the usual enrolled bill memorandum has not
been prepared.
Jim Connor
Digitized from Box 36 of the White House Records Office Legislation Case Files at the Gerald R. Ford Presidential Library
94TH CONGRESS
HOUSE OF REPRESENTATIVES
REPORT
1st Session
No. 94-531
TAX EXEMPT STATUS OF OBLIGATIONS USED TO
PROVIDE CERTAIN IRRIGATION FACILITIES
OCTOBER 3, 1975.-Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
Mr. ULLMAN, from the Committee on Ways and Means,
submitted the following
REPORT
[To accompany H.R. 9968]
The Committee on Ways and Means, to whom was referred the bill
(H.R. 9968) to amend section 103 of the Internal Revenue Code of
1954 with respect to certain obligations used to provide irrigation
facilities, having considered the same, report favorably thereon with-
out amendment and recommend that the bill do pass.
I. SUMMARY
The bill, H.R. 9968, deals with the tax-exempt status of obligations
the proceeds of which are to be used to reconstruct the American Falls
Dam in Idaho. The dam is used for irrigation purposes but the water
also has a subordinate use in generating electric energy. Under present
law, an industrial development bond whose proceeds are used to build
a dam that stores water for irrigation purposes may be eligible for
tax-exempt status. However, in this case where the water has a sub-
ordinate use in generating electric energy, the eligibility of the bond
issue for tax-exempt status is uncertain.
The American Falls Dam is under the supervision of the Bureau of
Reclamation of the Department of Interior and has been restricted to
two-thirds of its capacity because of certain structural defects. The
Federal Government might well eventually appropriate the funds to
reconstruct the dam. However, the American Falls Reservoir District
is undertaking the reconstruction project now in order to make the
dam fully operational. In addition, the Idaho Power Company is as-
sisting the financing of the project and is to use the water for electric
energy generation. It is the interrelationships of the use of the dam for
furnishing water for irrigation purposes and the use of the water for
electric energy that raises questions with the interpretation of the pres-
ent exceptions to industrial development bond treatment. In view of
57-006
2
3
the special circumstances in this case, your committee believes it is ap-
propriate to except the obligations for the reconstruction of the Ameri-
1.7 million acre foot capacity in 1972 by the Bureau of Reclamation of
can Falls Dam from industrial development bond treatment which
the, Department of the Interior for safety reasons because of exces-
would allow these obligations to receive tax-exempt status.
sive pressures on the dam which were caused by an alkali-aggregate
reaction and deterioration in the concrete.
PRESENT LAW
Legislation was enacted on December 28, 1973, to permit replace-
ment and rehabilitation of the American Falls dam by the American
Present law provides that interest on obligations of State and local
Falls Reservoir District, which is a political subdivision of the State
governments generally is exempt from Federal income tax. In 1968
of Idaho. Replacement of the existing dam by the American Falls
tax-exempt status was withdrawn from industrial development bonds
Reservoir District is an action to be taken in lieu of waiting for a
which State and local governments were using to finance and attract
Federal appropriation that would enable the Bureau of Reclamation
private industrial development within their jurisdictions.
to build the replacement dam.
Industrial development bonds are generally considered to be State
The Act of December 28, 1973, also provides that upon completion
or local obligations, a major portion of the proceeds of which are to
of construction the United States shall take title to the dam as a feature
be used in, and repaid by, a taxable trade or business. Such bonds are
of the Minidoka Project, located in the upper Snake River basin, Idaho.
normally issued to acquire a facility for private business in which the
As the constructing agent, the American Falls Reservoir District
beneficial ownership of the facility remains in the private trade or
was authorized to contract with an electric utility for the use of the
business, although (in order to secure repayment of the bonds) legal
falling water at the dam for hydroelectric power generation. Revenues
title normally remains with the State or local unit issuing the
from such a contract will help defer the costs of constructing the dam.
obligations.
Prior to the adoption of the Act of December 28, 1973, the Idaho Power
When the industrial development bond limitation was enacted, ex-
Company, which is a spaceholder in the reservoir and which owns.
ceptions were provided for certain small issues (sec. (6)) and
and operates a powerplant below the existing dam, expressed interest
for certain specified public activities (sec. 103'(c) (4)) in which cases
in the execution of a falling water contract. Subsequent to the adop-
tax-exempt status was continued. As initially enacted, one of the pub-
tion of the Act, the District, as the constructing agency, entered into
lic activities for which an exemption was provided (sec. 108 (c) (4)
negotiations with the Secretary of the Interior, the Idaho Power Com-
(E)) was "sewage or solid waste disposal facilities or facilities for the
pany and the other water users for the preparation of various contracts
local furnishing of electric energy, gas or water."
including a contract for the use of falling water.
In 1971, Congress amended the exception in subparagraph (E) to
It was intended that in normal circumstances, substantially all of
delete "water" and added the present law subpaingraph (G) which
the falling water would be made available to the Power Company only
extends the exception to "facilities for the furnishing of water, if
when water was released from the dam for irrigation purposes. There
available on reasonable demand to members of the general public."
has been no intention to release water specifically for use by the Idaho-
As a result, in those cases where obligations are issued for facilities
Power Company to generate electricity, except for 45,000 acre-feet
for the furnishing of water which meet the exception (under sec.
(2.65 percent of the storage capacity) whose release the power com-
103 (c) (4) (G)) but where the water is also used to generate electric-
pany can schedule for the purpose of generating electric energy. Thus,
ity, it is uncertain as to whether the obligations would qualify for
the use of water for electric energy would be subordinated to the use
exempt status unless the use of the electric energy meets the "local"
of the water for irrigation.
furnishing test (under sec. 103 (c) (4) (E) which has been interpreted
Although the Federal Government might well eventually completely
to cover an area of two contiguous counties.
finance the reconstruction of the American Falls Dam, the American
Falls Reservoir District is undertaking the reconstruction now in order
REASONS FOR THE BILL
to make the dam fully operational for the spaceholders (rather than
the present restricted two-thirds capacity). If it were not for the use
The American Falls Reservoir District applied to the Internal
of the water by the Idaho Power Company for hydroelectric power
Revenue Service in June 1974 for a ruling that bonds to be issued to
generation, any bonds issued by the Reservoir District would presently
finance the replacement and rehabilitation of the American Falls
qualify for tax-exempt status. In this case the Idaho Power Company
Dam would qualify as a tax-exempt issue under section 103 (c) (4) (G).
has a limited spaceholder right (under 3 percent) and is financing a
The Internal Revenue Service, however, had questions of interpreta-
large portion of the debt to assist the reconstruction of the dam and
tion with respect to the interrelationship of the exceptions for fa-
has use of the falling water for its hydroelectric power generation pur-
citities for furnishing of water and the local furnishing of electric
poses. In addition, since the dam is to be turned over the the Federal
energy and their application to the specific facts of this case. The com-
Government after its reconstruction for ownership and operation, in
mittee reviewed the facts involved, as described below, and believed
effect, this financing can ve viewed as saving the Federal Government
it is appropriate to specifically except the bond issue in this case as a
the expenditure it would have had to make to reconstruct the dam sev-
result of the special circumstances.
eral years in the future. In view of these special circumstances, your
The original American Falls dam was constructed in 1927 by the
committee believes it is appropriate to extend tax-exempt status to the
Bureau of Reclamation. The dam was restricted to two-thirds of its
bonds to be issued to finance the reconstruction of the dam.
H.R. 531
H.R. 531
1
5
EXPLANATION OF THE BILL
V. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
Your committee's bill adds a new exception to industrial develop-
In compliance with clause 3 of Rule XIII of the Rules of the House
ment bond treatment to specifically allow tax-exempt status for the
of Representatives, changes in existing law made by the bill, as re-
bonds issued to reconstruct the American Falls Dam. This exception
ported, are shown as follows (existing law proposed to be omitted is
is to apply to obligations for a dam which furnishes water for irri-
enclosed in black brackets, new matter is printed in italic, existing law
gation purposes which has a subordinate use in connection with the
in which no change is proposed is shown in roman)
generation of electric energy by water if substantially all of the
stored water is contractually available for release from the dam
INTERNAL REVENUE CODE OF 1954
for irrigation purposes and if the water released is available on rea-
sonable demand for members of the general public.
The committee intends that subordinate use of water for generating
Chapter 1-Normal Taxes and Surtaxes
electric energy means that less than 10 percent of the normal supply
of stored water may contractually be scheduled for release by the
power company and used for generating electric energy. "Normal"
refers to conditions that generally prevail in the service area of this
Subchapter B-Computation of Taxable Income
reservoir, and it is recognized that unusually wet or dry weather can
cause a significant distortion in the 2.65 percent of water contractually
scheduled for release to be used for generating electric energy. The
Part III-Items Specifically Excluded From Gross Income
committee intends that such unusual circumstances not be guiding
in determining the subordinate use of water. In addition, "normal"
use does not include a temporary increase in water released for the
Sec. 103. Interest on Certain Governmental Obligations.
power company following contractual default by a spaceholder and
(a) GENERAL RULE.-Gross income does not include interest on-
his water share being made available to other spaceholders under the
(1) the obligations of a State, a Territory, or a possession of the
terms of the contract for the construction and operation of the dam
United States, or any political subdivision of any of the fore-
and its facilities.
going, or of the District of Columbia;
Thus, the provision applies the requirements of subsection (c) (4)
(2) the obligations of the United States; or
(G) where substantially all of the stored water (under normal
(3) the obligations of a corporation organized under Act of
weather and climatic conditions) is available for release to be used
Congress, if such corporation is an instrumentality of the United
for irrigation in the American Falls Reservoir District. The require-
States and if under the respective Acts authorizing the issue of
ment that the released water be available on reasonable demand to
the obligations the interest is wholly exempt from the taxes im-
members of the general public is retained in the new subsection (e).
posed by this subtitle.
The committee understands that the American Falls project con-
(b) EXCEPTION.-Subsection (a) (2) shall not apply to interest on
forms with this requirement.
obligations of the United States issued after September 1, 1917 (other
Your committee's bill is to apply to obligations issued after the
than postal savings certificates of deposit, to the extent they represent
date of the enactment of this Act.
deposits made before March 1, 1941), unless under the respective Acts
authorizing the issuance thereof such interest is wholly exempt from
IV. EFFECT ON THE REVENUES OF THE BILL AND VOTE OF THE
the taxes imposed by this subtitle.
COMMITTEE IN REPORTING THE BILL
(c) INDUSTRIAL DEVELOPMENT BONDS.-
(1) SUBSECTION (a) (1) NOT TO APPLY.-Except as otherwise
In compliance with clause 7 of Rule XIII of the Rules of the House
provided in this subsection, any industrial development bond shall
of Representatives, the following statement is made relative to the
be treated as an obligation not described in subsection (a) (1).
effect on the revenues of this bill. Your committee believes that the
(2) INDUSTRIAL DEVELOPMENT BOND.-For purposes of this sub-
changes made by this bill will result in an annual revenue loss of about
section, the term "industrial development bond" means any
$1 million in each of the five fiscal years following the current fiscal
obligation-
year. No revenue loss is expected in the current fiscal year. The Treas-
(A) which is issued as part of an issue all or a major por-
ury Department agrees with this statement.
tion of the proceeds of which are to be used directly or indi-
In compliance with clause 2(1) (2) (B) of Rule XI of the Rules
rectly in any trade or business carried on by any person who
of the House of Representatives, the following statement is made rela-
is not an exempt person (within the meaning of paragraph
tive to the vote by the committee on the motion to report the bill. The
bill was ordered reported by a unanimous voice vote.
(3)), and
H.R. 531
H.R. 531
r.
6
7
(B) the payment of the principal or interest on which
are or will be used primarily with respect to facilities
(under the terms of such obligation or any underlying ar-
located in the same incorporated municipality or located
rangement) is, in whole or in major part-
in the same county (but not in any incorporated mu-
(i) secured by any interest in property used or to be
nicipality),
used in a trade or business or in payments in respect of
(ii) the principal user of such facilities is or will be
such property, or
the same person or two or more related persons, and
(ii) to be derived from payments in respect of prop-
(iii) but for this subparagraph, subparagraph (A)
erty, or borrowed money, used or to be used in a trade
would apply to each such issue,
or business.
then, for purposes of subparagraph (A), in determining the
(3) EXEMPT PERSON.-For purposes of paragraph (2) (A), the
aggregate face amount of any later issue there shall be taken
term "exempt person" means—
into account the face amount of obligations issued under all
(A) a governmental unit, or
prior such issues and outstanding at the time of such later
(B) an organization described in section 501 (c) (3) and
issue (not including as outstanding any obligation which is
exempt from tax under section 501 (a) (but only with respect
to be redeemed from the proceeds of the later issue).
to a trade or business carried on by such organization which
:
(C) RELATED PERSONS.-For purposes of this paragraph
is not an unrelated trade or business, determined by applying
and paragraph (7), a person is a related person to another
section 513 (a) to such organization).
person if-
(4) CERTAIN EXEMPT ACTIVITIES.-Paragraph (1) shall not
(i) the relationship between such persons would result
apply to any obligation which is issued as part of an issue sub-
in a disallowance of losses under section 267 or 707(b), or
stantially all of the proceeds of which are to be used to provide-
(ii) such persons are members of the same controlled
(A) residential real property for family units,
group of corporations (as defined in section 1563 (a), ex-
(B) sports facilities,
cept that "more than 50 percent" shall be substituted for
(C) convention or trade show facilities,
"at least 80 percent" each place it appears therein).
(D) airports, docks, wharves, mass commuting facilities,
(D) $5,000,000 LIMIT IN CERTAIN CASES.-At the election of
parking facilities, or storage or training facilities directly
the issuer, made at such time and in such manner as the Sec-
related to any of the foregoing,
retary or his delegate shall by regulations prescribe, with
(E) sewage or solid waste disposal facilities or facilities
respect to any issue this paragraph shall be applied-
for the local furnishing of electric energy or gas,
(i) by substituting "$5,000,000" for "$1,000,000" in sub-
(F) air or water pollution control facilities, or
paragraph (A), and
(G) facilities for the furnishing of water, if available on
(ii) in determining the aggregate face amount of such
reasonable demand to members of the general public.
issue, by taking into account not only the amount de-
(5) INDUSTRIAL PARKS.-Paragraph (1) shall not apply to any
scribed in subparagraph (B), but also the aggregate
obligation issued as part of an issue substantially all of the pro-
amount of capital expenditures with respect to facilities
ceeds of which are to be used for the acquisition or development
described in subparagraph (E) paid or incurred during
of land as the site for an industrial park. For purposes of the
the 6-year period beginning 3 years before the date of
preceding sentence, the term "development of land" includes the
such issue and ending 3 years after such date (and
provision of water, sewage, drainage, or similar facilities, or of
financed otherwise than out of the proceeds of outstand-
transportation, power, or communication facilities, which are
ing issues to which subparagraph (A) applied), as if the
incidental to use of the site as an industrial park, but, except with
aggregate amount of such capital expenditures consti-
respect to such facilities, does not include the provision of struc-
tuted the face amount of a prior outstanding issue de-
tures or buildings.
scribed in subparagraph (B).
(6) EXEMPTION FOR CERTAIN SMALL ISSUES.-
(E) FACILITIES TAKEN INTO ACCOUNT.-For purposes of sub-
(A) IN GENERAL.-Paragraph (1) shall not apply to any
paragraph (D) (ii), the facilities described in this subpara-
obligation issued as part of an issue the aggregate authorized
graph are facilities-
face amount of which is $1,000,000 or less and substantially
(i) located in the same incorporated municipality or
all of the proceeds of which are to be used (i) for the acqui-
located in the same county (but not in any incorporated
sition, construction, reconstruction, or improvement of land
municipality), and
or property of a character subject to the allowance for de-
(ii) the principal user of which is or will be the same
preciation, or (ii) to redeem part or all of a prior issue which
person or two or more related persons.
was issued for purposes described in clause (i) or this clause.
For purposes of clause (i), the determination of whether or
(B) CERTAIN PRIOR ISSUES TAKEN INTO ACCOUNT.-If-
not facilities are located in the same governmental unit shall
(i) the proceeds of two or more issues of obligations
be made as of the date of issue of the issue in question.
(whether or not the issuer of each such issue is the same)
H.R. 531
H.R. 531
8
9
(F) CERTAIN CAPITAL EXPENDITURES NOT TAKEN INTO AC-
(B) to replace funds which were used directly or indirectly
COUNT.-For purposes of subparagraph (D) (ii), any capital
to acquire securities or obligations described in subparagraph
expenditure-
(A).
(i) to replace property destroyed or damaged by fire,
(8) ENCEPTION.-Paragraph (1) shall not apply to any obli-
storm, or other casualty, to the extent of the fair market
gation-
value of the property replaced,
(A) which is issued as part of an issue substantially all of
(ii) required by a change made after the date of issue
the proceeds of which are reasonably expected to be used to
of the issue in question in a Federal or State law or local
provide permanent financing for real property used or to be
ordinance of general application or requíred by a change
used for residential purposes for the personnel of an educa-
made after such date in rules and regulations of general
tional institution (within the meaning of section 151 (e) (4))
application issued under such a law or ordinance, or
which grants baccalaureate or higher degrees, or to replace
(iii) required by circumstances which could not be
funds which were so used, and
reasonably froeseen on such date of issue or arising out
(B) the yield on which over the term of the issue is not
of a mistake of law or fact (but the aggregate amount of
reasonably expected, at the time of issuance of such issue,
expenditures not taken into account under this clause
to be substantially lower than the yield on obligations ac-
with respect to any issue shall not exceed $1,000,000),
quired or to be acquired in providing such financing.
shall not be taken into account.
This paragraph shall not apply with respect to any obligation for
(G) LIMITATION ON LOSS OF TAX EXEMPTION.-In applying
any period during which it is held by a person who is a substantial
subparagraph (D) (ii) with respect to capital expenditures
user of property financed by the proceeds of the issue of which
made after the date of any issue, no obligation issued as a part
such obligation is a part, or by a member of the family (within
of such issue shall be treated as an obligation not described in
the meaning of section 318(a) (1)) of any such person.
subsection (a) (1) by reason of any such expenditure for any
(4) SPECIAL RULES.-For purposes of paragraph (1), an obliga-
period before the date on which such expenditure is paid or
tion shall not be treated as an arbitrage bond solely by reason of
incurred.
the fact that-
(H) CERTAIN REFINANCING ISSUEs.-In the case of any
(A) the proceeds of the issue of which such obligation is
issue described in subparagraph (A) (ii), an election may be
a part may be invested for a temporary period in securities
made under subparagraph (D) only if all of the prior issues
or other obligations until such proceeds are needed for the
being redeemed are issues to which subparagraph (A) applies.
purpose for which such issue was issued, or
In applying subparagraph (D) (ii) with respect to such a re-
(B) an amount of the proceeds of the issue of which such
financing issue, capital expenditures shall be taken into ac-
obligation is a part may be invested in securities or other ob-
count only for purposes of determining whether the prior
ligations which are part of a reasonably required reserve or
issues being redeemed qualified (and would have continued
replacement fund.
to qualify) under subparagraph (A).
The amount referred to in subparagraph (B) shall not exceed 15
(7) EXCEPTION.-Paragraphs (4), (5), and (6) shall not apply
percent of the proceeds of the issue of which such obligation is a
with respect to any obligation for any period during which it is
part unless the issuer establishes that a higher amount is
held by a person who is a substantial user of the facilities or a
necessary.
related person.
(5) REGULATIONS.-The Secretary or his delegate shall pre-
(d) ARBITRAGE BONDS,-
scribe such regulations as may be necessary to carry out the pur-
(1) SUBSECTION (a) (1) NOT TO APPLY.-Except as provided in
poses of this subsection.
this subsection, any arbitrage bond shall be treated as an obliga-
(e) CERTAIN IRRIGATION DAMS.-A dam for the furnishing of water
tion not described in subsection (a) (1).
for irrigation purposes which has a subordinate use in connection with
(2) ARBITRAGE BOND,-For purposes of this subsection, the term
the generation of electric energy by water shall be treated as meeting
"arbitrage bond" means any obligation which is issued as part of
the requirements of subsection (c) (4) (G) if
an issue all or a major portion of the proceeds of which are reason-
(1) substantially all of the stored water is contractually avail-
ably expected to be used directly or indirectly-
able for release from such dam for irrigation purposes, and
(A) to acquire securities (within the meaning of section
(2) the water 80 released is available on reasonable demand to
165 (g) (2) (A) or (B)) or obligations (other than obligations
members of the general public.
described in subsection (a) (1)) which may be reasonably
[(e)] (f) CROSS REFERENCES.-
expected at the time of issuance of such issue, to produce a
For provisions relating to the taxable status of-
yield over the term of the issue which is materially higher
(1) Bonds and certificates of indebtedness authorized by the
(taking into account any discount or premium) than the yield
First Liberty Bond Act, see sections 1 and 6 of that Act (40 Stat.
on obligations of such issue, or
35, 36; 31 U.S.C. 746, 755)
H.R. 531
H.R. 531
10
11
(2) Bonds issued to restore or maintain the gold reserve, see
(18) Philippine bonds, etc., issued before the independence of
section 2 of the Act of March 14, 1900 (31 Stat. 46; 31 U.S.C.
the Philippines, see section 9 of the Philippine Independence Act
408)
(48 Stat. 463; 48 U.S.C. 1239) ;
(3) Bonds, notes, certificates of indebtedness, and Treasury
(19) Postal savings bonds, see section 10 of the Act of June 25,
bills authorized by the Second Liberty Bond Act, see sections 4,
1910 (36 Stat. 817; 39 U.S.C. 760) ;
5 (b) and (d), 7, 18 (b) and 22(d) of that Act as amended (40
(20) Puerto Rican bonds, see section 3 of the Act of March 2,
Stat. 290; 46 Stat: 20, 775; 40 Stat. 291, 1310; 55 Stat. 8; 31 U.S.C.
1917, as amended (50 Stat. 855; 48 U.S.C. 745)
752a, 754, 747, 753, 757c)
(21) Treasury notes issued to retire national bank notes, see
(4) Bonds, notes, and certificates of indebtedness of the United
section 18 of the Federal Reserve Act (38 Stat. 268; 12 U.S.C.
States and bonds of the War Finance Corporation owned by cer-
447) ;
tain nonresidents, see section 3 of the Fourth Liberty Bond Act, as
(22) United States Housing Authority obligations, see sections
amended (40 Stat. 1311, § 4; 31 U.S.C. 750)
5(e) and 20 (b) of the United States Housing Act of 1937 (50 Stat.
(5) Certificates of indebtedness issued after February 4, 1910,
890, 898; 42 U.S.C. 1405, 1420)
see section 2 of the Act of that date (36 Stat. 192; 31 U.S.C.
(23) Virgin Islands insular and municipal bonds, see section 1
769)
of the Act of October 27, 1949 (63 Stat. 940; 48 U.S.C. 1403).
(6) Consols of 1930, see section 11 of the Act of March 14, 1900
(31 Stat. 48; 31 U.S.C. 751);
VI. OTHER MATTERS REQUIRED To BE DISCUSSED UNDER HOUSE RULES
(7) Obligations and evidences of ownership issued by the
United States or any of its agencies or instrumentalities on or
In compliance with clauses 2(1) (3) and 2(1) (4) of Rule XI of the
after March 28, 1942, see section 4 of the Public Debt Act of 1941,
Rules of the House of Representatives, the following statements are
as amended (c. 147, 61 Stat. 180; 31 U.S.C. 742a)
made.
(8) Commodity Credit Corporation obligations, see section 5
With regard to subdivision (A) of Clause 3, the Committee advises
of the Act of March 8, 1938 (52 Stat. 108; 15 U.S.C. 713a-5)
that its oversight findings led it to the conclusion that an amendment
(9) Debentures issued by Federal Housing Administrator, see
to the Internal Revenue Code is necessary to establish the eligibility of
sections (d) and (i) of the National Housing Act, as
bons issued by the American Falls Reservoir District for a dam and
amended (52 Stat. 14, 20; 12 U.S.C. 1710, 1713);
related facilities for tax-exempt status as industrial development
(10) Debentures issued to mortgages by United States Mari-
bonds.
time Commission, see section 1105(c) of the Merchant Marine
In compliance with subdivision (B) of Clause 3, the committee
Act, 1936, as amended (52 Stat. 972; 46 U.S.C. 1275) ;
states that the change made in section 103 of the Internal Revenue
(11) Federal Deposit Insurance Corporation obligations, see
Code will produce an annual revenue loss of about $1 million at cur-
section 15 of the Federal Deposit Insurance Act (64 Stat. 890; 12
rent tax rates for the period of maturity during which the bonds
U.S.C. 1825) ;
to be issued will be outstanding. Alternatively, the cost to the Federal
(12) Federal Home Loan Bank obligations, see section 13 of the
Government of construction of this project as a direct expenditure
Federal Home Loan Bank Act, as amended (49 Stat. 295, § 8; 12
presently is estimated at about $50 million.
U.S.C. 1433) ;
With respect to subdivisions (C) and (D) of Clause 3, the Com-
(13) Federal savings and loan association loans, see section 5
mittee advises that no estimate or comparison has been prepared by
(h) of the Home Owners' Loan Act of 1933, as amended (48 Stat.
the Director of the Congressional Budget Office relative to any of the
133; U.S.C. 1464);
provisions of H.R. 9968, nor have any oversight findings or recom-
(14) Federal Savings and Loan Insurance Corporation obliga-
mendations been made by the Committee on Government Operations
tions, see section 402 (e) of the National Housing Act (48 Stat.
with respect to the subject matter contained in H.R. 9968.
1257 12 U.S.C. 1725)
In compliance with clause 2(1) (4) of Rule XI, the Committee
(15) Home Owners' Loan Corporation bonds, see section 4(c)
states that the bonds to be issued followed enactment of H.R. 9968 are
of the Home Owners' Loan Act of 1933, as amended (48 Stat. 644,
not expected to have an inflationary impact on prices and in costs in
c. 168; 12 U.S.C. 1463)
the operation of the national economy.
(16) Obligations of Central Bank for Cooperatives, production
credit corporations, production credit associations, and banks for
cooperatives, see section 63 of the Farm Credit Act of 1933 (48
Stat. 267; 12 U.S.C. 1138c)
(17) Panama Canal bonds, see section 1 of the Act of December
21, 1904 (34 Stat. 5; 31 U.S.C. 743), section 8 of the Act of June
28, 1902 (32 Stat. 484; 31 U.S.C. 744), and section 39 of the Tariff
Act of 1909 (36 Stat. 117; 31 U.S.C. 745)
H.R. 531
H.R. 531
Calendar No. 546
94TH CONGRESS
~
SENATE
REPORT
1st Session
No. 94-570
TAX EXEMPT STATUS OF OBLIGATIONS USED TO
PROVIDE CERTAIN IRRIGATION FACILITIES
DECEMBER 16 (legislative day, DECEMBER 15), 1975.-Ordered to be printed
Mr. LONG, from the Committee on Finance,
submitted the following
REPORT
[To accompany H.R. 9968]
The Committee on Finance, to which was referred the bill (H.R.
9968) to amend section 103 of the Internal Revenue Code of 1954
with respect to certain obligations used to provide irrigation facilities,
having considered the same, reports favorably thereon without amend-
ment and recommends that the bill do pass.
I. SUMMARY
H.R. 9968 would clarify the tax-exempt status of obligations the
proceeds of which are to be used to reconstruct the American Falls
Dam in Idaho.
Present law provides that an industrial revenue bond whose proceeds
are used to build a dam to store water for irrigation purposes may be
eligible for tax-exempt status. Where, however, the water also has a
subordinate use in generating electricity, the status of the bonds is not
clear under existing law. The American Falls Dam is used principally
for irrigation purposes, but the water has a subordinate use in generat-
ing electricity. H.R. 9968 provides that industrial revenue bonds issued
in such a case may qualify for exempt status if substantially all of
the stored water is contractually available for irrigation purposes
and the water is available on reasonable demand to members of the
general public.
II. GENERAL EXPLANATION OF THE BILL
Present law provides that interest on obligations of State and local
governments generally is exempt from Federal income tax. In 1968
tax-exempt status was withdrawn from industrial development bonds
57-010
2
3
which State and local governments were using to finance and attract
private industrial development within their jurisdictions.
The Act of December 28, 1973, also provides that upon completion
Industrial development bonds are generally considered to be State
of construction the United States shall take title to the dam as a fea-
or local obligations, a major portion of the proceeds of which are to
ture of the Minidoka Project, located in the upper Snake River basin,
be used in, and repaid by, a taxable trade or business. Such bonds are
Idaho.
normally issued to acquire a facility for private business in which the
As the constructing agent, the American Falls Reservoir District
beneficial ownership of the facility remains in the private trade or
was authorized to contract with an electric utility for the use of the
business, although (in order to secure repayment of the bonds) legal
falling water at the dam for hydroelectirc power generation. Reve-
title normally remains with the State or local unit issuing the
nues from such a contract with help defer the costs of constructing the
obligations.
dam. Prior to the adoption of the Act of December 28, 1973, the Idaho
When the industrial development bond limitation was enacted, ex-
Power Company, which is a spaceholder in the reservoir and which
ceptions were provided for certain small issues (sec. 103 (c) (6)) and
owns and operates a powerplant below the existing dam, expressed
for certain specified public activities (sec. 103 (c) (4)) in which cases
interest in the execution of a falling water contract. Subsequent to the
tax-exempt status was continued. As initially enacted, one of the pub-
adoption of the Act, the District, as the constructing agency, entered
lic activities for which an exemption was provided (sec. 103 (c) (4)
into negotiations with the Secretary of the Interior, the Idaho Power
(E)) was "sewage or solid waste disposal facilities or facilities for the
Company and the other water users for the preparation of various
local furnishing of electric energy, gas or water."
contracts including a contract for the use of falling water.
In 1971, Congress amended the exception in subparagraph (E) to
It was intended that in normal circumstances substantially all of
delete "water" and added the present law subparagraph (G) which
the falling water would be made available to the Power Company only
extends the exception to "facilities for the furnishing of water, if
when water was released from the dam for irrigation purposes. There
available on reasonable demand to members of the general public."
has been no intention to release water specifically for use by the Idaho
As a result, in those cases where obligations are issued for facilities
Power Company to generate electricity, except for 45,000 acre-feet
for the furnishing of water which meet the exception (under sec. 103
(2.65 percent of the storage capacity) whose release the power com-
(c) (4) (G)) but where the water is also used to generate electricity, it
pany, in its capacity as a space holder in the irrigation district, can
is uncertain as to whether the obligations would qualify for exempt
schedule for the purpose of generating electric energy. Thus, the use
status unless the use of the electric energy meets the "local" furnishing
of water for electric energy would be subordinated to the use of the
test (under sec. 103 (c) (4) (E)), which has been interpreted to cover
water for irrigation.
an area of two contiguous counties.
Although the Federal Government might well eventually com-
The American Falls Reservoir District applied to the Internal
pletely finance the reconstruction of the American Falls Dam, the
Revenue Service in June 1974 for a ruling that bonds to be issued to
American Falls Reservoir District is undertaking the reconstruction
finance the replacement and rehabilitation of the American Falls
now in order to make the dam fully operational for the spaceholders
Dam would qualify as a tax-exempt issue under section 103 (c) (4)
(rather than the present restricted two-thirds capacity). If it were not
(G). The Internal Revenue Service, however, had questions of inter-
for the use of the water by the Idaho Power Company for hydro-
pretation with respect to the interrelationship of the exceptions for fa-
electric power generation, any bonds issued by the Reservoir District
cilities for furnishing of water and the local furnishing of electric
would presently qualify for tax-exempt status. In this case the Idaho
energy and their application to the specific facts of this case. The com-
Power Company has a limited spaceholder right (under 3 percent)
mittee reviewed the facts involved, as described below, and believed
and is financing a large portion of the debt to assist the reconstruction
it is appropriate to specifically except the bond issue in this case as a
of the dam and has use of the falling water for its hydroelectric power
result of the special circumstances.
generation purposes. In addition, since the dam is to be turned over to
The original American Falls Dam was constructed in 1927 by the
the Federal Government after its reconstruction for ownership and
Bureau of Reclamation. The dam was restricted to two-thirds of its
operation. in effect, this financing can be viewed as saving the Federal
1.7 million acre foot capacity in 1972 by the Bureau of Reclamation of
Government the expenditure it would have had to make to recon-
the Department of the Interior for safety reasons because of exces-
struct the dam several years in the future. In view of these special
sive pressures on the dam which were caused by an alkali-aggregate
circumstances, the committee believes it is appropriate to extend tax-
reaction and deterioration in the concrete.
exempt status to the bonds to be issued to finance the reconstruction
of the dam.
Legislation was enacted on December 28, 1973, to permit replace-
ment and rehabilitation of the American Falls Dam by the American
The bill adds a new exception to industrial development bond treat-
Falls Reservoir District, which is a political subdivision of the State
ment to specifically allow tax-exempt status for the bonds issued to
of Idaho. Replacement of the existing dam by the American Falls
reconstruct the American Falls Dam. This exception is to apply to
Reservoir District is an action to be taken in lieu of waiting for a
obligations for a dam which furnishes water for irrigation purposes
Federal appropriation that would enable the Bureau of Reclamation
which has a subordinate use in connection with the generation of
to build the replacement dam.
electric energy by water if substantially all of the stored water is
contractually available for release from the dam for irrigation pur-
S.R. 570
S.R. 570
4
5
poses and if the water released is available on reasonable demand for
reported, are shown as follows (existing law proposed to be omitted
members of the general public.
The committee intends that subordinate use of water for generating
is enclosed in black brackets, new matter is printed in italic, exist-
electric energy means that less than 10 percent of the normal supply
ing law in which no change is proposed is shown in roman) :
of stored water may contractually be scheduled for release by the
INTERNAL REVENUE CODE OF 1954
power company and used for generating electric energy. Normal
refers to conditions that generally prevail in the service area of this
*
*
*
*
reservoir, and it is recognized that unusually wet or dry weather can
cause a significant distortion in the 2.65 percent of water contractually
Chapter 1-Normal Taxes and Surtaxes
scheduled for release to be used for generating electric energy. The
committee intends that such unusual circumstances not be guiding
*
in determining the subordinate use of water. In addition, normal
use does not include a temporary increase in water released for the
Subchapter B-Computation of Taxable Income
power company following contractual default by a spaceholder and
*
*
his water share being made available to other spaceholders under the
terms of the contract for the construction and operation of the dam
Part III-Items Specifically Excluded From Gross Income
and its facilities.
Thus, the provision applies the requirements of subsection (c) (4)
Sec. 103. Interest on Certain Governmental Obligations.
(G) where substantially all of the stored water (under normal
weather and climatic conditions) is available for release to be used
(a) GENERAL RULE.-Gross income does not include interest on-
for irrigation in the American Falls Reservoir District. The require-
(1) the obligations of a State, a Territory, or a possession of the
ment that the released water be available on reasonable demand to
United States, or any political subdivision of any of the fore-
members of the general public is retained in the new subsection (e).
going, or of the District of Columbia;
The committee understands that the American Falls project conforms
(2) the obligations of the United States; or
with this requirement.
(3) the obligations of a corporation organized under Act of
The bill is to apply to obligations issued after the date of the enact-
Congress, if such corporation is an instrumentality of the United
ment of this Act.
States and if under the respective Acts authorizing the issue of
the obligations the interest is wholly exempt from the taxes im-
III. COSTS OF CARRYING OUT THE BILL AND EFFECT ON THE
posed by this subtitle.
REVENUES OF THE BILL
(b) EXCEPTION.-Subsection (a) (2) shall not apply to interest on
obligations of the United States issued after September 1, 1917 (other
In compliance with section 252 (a) of the Legislative Reorganiza-
than postal savings certificates of deposit, to the extent they represent
tion Act of 1970, the following statement is made relative to the
deposits made before March 1, 1941), unless under the respective Acts
costs to be incurred in carrying out this bill and the effect on the
authorizing the issuance thereof such interest is wholly exempt from
revenues of the bill.
the taxes imposed by this subtitle.
The committee estimates that the bill, relating to the tax-exempt
(c) INDUSTRIAL DEVELOPMENT BONDS.-
status of obligations used to provide certain irrigation facilities, will
(1) SUBSECTION (a) (1) NOT TO APPLY.-Except as otherwise
result in an annual revenue loss of about $1 million in each of the five
provided in this subsection, any industrial development bond shall
fiscal years following the current fiscal year. No revenue loss is ex-
be treated as an obligation not described in subsection (a) (1).
pected in the current fiscal year.
(2) INDUSTRIAL DEVELOPMENT BOND.-For purposes of this sub-
section, the term "industrial development bond" means any
IV. VOTE OF COMMITTEE IN REPORTING THE BILL
obligation-
In compliance with section 133 of the Legislative Reorganization
(A) which is issued as part of an issue all or a major por-
Act, as amended, the following statement is made relative to the
tion of the proceeds of which are to be used directly or indi-
vote of the committee on reporting the bill. This bill was ordered
rectly in any trade or business carried on by any person who
favorably reported by the committee without a rollcall vote and
is not an exempt person (within the meaning of paragraph
(3) ), and
without objection.
(B) the payment of the principal or interest on which
V. CHANGES IN EXISTING LAW
(under the terms of such obligation or any underlying ar-
rangement) is, in whole or in major part-
In compliance with subsection (4) of rule XXIX of the Stand-
(i) secured by any interest in property used or to be
ing Rules of the Senate, changes in existing law made by the bill, as
used in a trade or business or in payments in respect of
such property, or
S.R. 570
S.R. 570
7
6
(ii) to be derived from payments in respect of prop-
(iii) but for this subparagraph, subparagraph (A)
erty, or borrowed money, used or to be used in a trade
would apply to each such issue,
or business.
then, for purposes of subparagraph (A), in determining the
(3) EXEMPT PERSON.-For purposes of paragraph (2) (A), the
aggregate face amount of any later issue there shall be taken
into account the face amount of obligations issued under all
term "exempt person" means—
(A) a governmental unit, or
prior such issues and outstanding at the time of such later
(B) an organization described in section 501 (c) (3) and
issue (not including as outstanding any obligation which is
to be redeemed from the proceeds of the later issue).
exempt from tax under section 501 (a) (but only with respect
to a trade or business carried on by such organization which
(C) RELATED PERSONS.-For purposes of this paragraph
is not an unrelated trade or business, determined by applying
and paragraph (7), a person is a related person to another
section 513 (a) to such organization).
person if-
(4) CERTAIN EXEMPT ACTIVITIES.-Paragraph (1) shall not
(i) the relationship between such persons would result
in a disallowance of losses under section 267 or 707 (b), or
apply to any obligation which is issued as part of an issue sub-
stantially all of the proceeds of which are to be used to provide-
(ii) such persons are members of the same controlled
(A) residential real property for family units,
group of corporations (as defined in section 1563 (a), ex-
cept that "more than 50 percent" shall be substituted for
(B) sports facilities,
"at least 80 percent" each place it appears therein).
(C) convention or trade show facilities,
(D) airports, docks, wharves, mass commuting facilities,
(D) $5,000,000 LIMIT IN CERTAIN CASES.-At the election of
the issuer, made at such time and in such manner as the Sec-
parking facilities, or storage or training facilities directly
related to any of the foregoing,
retary or his delegate shall by regulations prescribe, with
(E) sewage or solid waste disposal facilities or facilities
respect to any issue this paragraph shall be applied-
(i) by substituting $5,000,000" for "$1,000,000" in
for the local furnishing of electric energy or gas,
(F) air or water pollution control facilities, or
subparagraph (A), and
(ii) in determining the aggregate fact amount of such
(G) facilities for the furnishing of water, if available on
issue, by taking into account not only the amount de-
reasonable demand to members of the general public.
scribed in subparagraph (B), but also the aggregate
(5) INDUSTRIAL PARKS,-Paragraph (1) shall not apply to any
amount of capital expenditures with respect to facilities
obligation issued as part of an issue substantially all of the pro-
described in subparagraph (E) paid or incurred during
ceeds of which are to be used for the acquisition or development
of land as the site for an industrial park. For purposes of the
the 6-year period beginning 3 years before the date of
such issue and ending 3 years after such date (and
preceding sentence, the term "development of land" includes the
financed otherwise than out of the proceeds of outstand-
provision of water, sewage, drainage, or similar facilities, or of
transportation, power, or communication facilities, which are
ing issues to which subparagraph (A) applied), as if the
incidental to use of the site as an industrial park, but, except with
aggregate amount of such capital expenditures consti-
tuted the face amount of a prior outstanding issue de-
respect to such facilities, does not include the provision of struc-
tures or buildings.
scribed in subparagraph (B).
(6) EXEMPTION FOR CERTAIN SMALL ISSUES.-
(E) FACILITIES TAKEN INTO ACCOUNT.-For purposes of
(A) IN GENERAL.-Paragraph (1) shall not apply to any
subparagraph (D) (ii), the facilities described in this sub-
obligation issued as part of an issue the aggregate authorized
paragraph are facilities—
(i) located in the same incorporated municipality or
face amount of which is $1,000,000 or less and substantially
located in the same county (but not in any incorporated
all of the proceeds of which are to be used (i) for the acqui-
sition, construction, reconstruction, or improvement of land
municipality), and
(ii) the principal user of which is or will be the same
or property of a character subject to the allowance for de-
preciation, or (ii) to redeem part or all of a prior issue which
person or two or more related persons.
For purposes of clause (i), the determination of whether or
was issued for purposes described in clause (i) or this clause.
not facilities are located in the same governmental unit shall
(B) CERTAIN PRIOR ISSUES TAKEN INTO ACCOUNT.-If-
be made as of the date of issue of the issue in question.
(i) the proceeds of two or more issues of obligations
(whether or not the issuer of each such issue is the same)
(F) CERTAIN CAPITAL EXPENDITURES NOT TAKEN INTO AC-
COUNT.-For purposes of subparagraph (D) (ii), any capital
are or will be used primarily with respect to facilities
located in the same incorporated municipality or located
expenditure-
in the same county (but not in any incorporated
(i) to replace property destroyed or damaged by fire,
municipality),
storm, or other casualty, to the extent of the fair market
(ii) the principal user of such facilities is or will be
value of the property replaced,
the same person or two or more related persons, and
(ii) required by a change made after the date of issue
of the issue in question in a Federal or State law or local
S.R. 570
S.R. 570
8
9
ordinance of general application or required by a change
used for residential purposes for the personnel of an educa-
made after such date in rules and regulations of general
tional institution (within the meaning of section 151 (e) (4))
application issued under such a law or ordinance, or
which grants baccalaureate or higher degrees, or to replace
(iii) required by circumstances which could not be
funds which were so used, and
of a mistake of law or fact (but the aggregate amount of
reasonably foreseen on such date of issue or arising out
(B) the yield on which over the term of the issue is not
reasonably expected, at the time of issuance of such issue,
expenditures not taken into account under this clause
to be substantially lower than the yield on obligations ac-
with respect to any issue shall not exceed $1,000,000),
quired or to be acquired in providing such financing.
shall not be taken into account.
This paragraph shall not apply with respect to any obligation for
subparagraph (D) (ii) with respect to capital expenditures
(G) LIMITATION ON LOSS OF TAX EXEMPTION.-In applying
any period during which it is held by a person who is a substantial
user of property financed by the proceeds of the issue of which
made after the date of any issue, no obligation issued as a part
such obligation is a part, or by a member of the family (within
of such issue shall be treated as an obligation not described in
the meaning of section (1)) of any such person.
subsection (a) (1) by reason of any such expenditure for any
(4) SPECIAL RULES.-For purposes of paragraph (1), an obliga-
incurred. period before the date on which such expenditure is paid or
tion shall not be treated as an arbitrage bond solely by reason of
the fact that-
(H) CERTAIN REFINANCING ISSUES.- In the case of
(A) the proceeds of the issue of which such obligation is
issue described in subparagraph (A) (ii), an election may any be
a part may be invested for a temporary period in securities
made under subparagraph (D) only if all of the prior issues
or other obligations until such proceeds are needed for the
being redeemed are issues to which subparagraph (A)
purpose for which such issue was issued, or
plies. In applying subparagraph (D) (ii) with respect ap- to
(B) an amount of the proceeds of the issue of which such
such a refinancing issue, capital expenditures shall be taken
obligation is a part may be invested in securities or other ob-
into account only. for purposes of determining whether the
ligations which are part of a reasonably required reserve or
prior issues being redeemed qualified (and would have con-
replacement fund.
tinued to qualify) under subparagraph (A).
The amount referred to in subparagraph (B) shall not exceed 15
(7) Exception.-Paragraphs (4), (5), and (6) shall not apply
percent of the proceeds of the issue of which such obligation is a
with respect to any obligation for any period during which it is
part unless the issuer establishes that a higher amount is
held by a person who is a substantial user of the facilities or a
necessary.
related person.
(5) REGULATIONS.-The Secretary or his delegate shall pre-
(d) ARBITRAGE BONDS.-
scribe such regulations as may be necessary to carry out the pur-
(1) SUBSECTION (a) (1) NOT TO APPLY.-Except as provided in
poses of this subsection.
this subsection, any arbitrage bond shall be treated as an obliga-
(e) CERTAIN IRRIGATION DAMS.-A dam for the furnishing of water
tion not described in subsection (a) (1).
for irrigation purposes which has a subordinate use in connection with
(2) ARBITRAGE BOND.-For purposes of this subsection, the term
the generation of electric energy by water shall be treated as meeting
"arbitrage bond" means any obligation which is issued as part of
the requirements of subsection (c) (4) (G) if-
an issue all or a major portion of the proceeds of which are reason-
(1) substantially all of the stored water is contractually avail-
ably expected to be used directly or indirectly-
able for release from such dam for irrigation purposes, and
(A) to acquire securities (within the meaning of section
(2) the water 80 released is available on reasonable demand to
165 (g) (2) (A) or (B) or obligations (other than obligations
members of the general public.
described in subsection (a) (1)) which may be reasonably
[(e)] (f) CROSS REFEREN CES.-
expected at the time of issuance of such issue, to produce a
For provisions relating to the taxable status of-
yield over the term of the issue which is materially higher
(1) Bonds and certificates of indebtedness authorized by the
on obligations of such issue, or
(taking into account any discount or premium) than the yield
First Liberty Bond Act, see sections 1 and 6 of that Act (40 Stat.
35, 36; 31 U.S.C. 746, 755) ;
(B) to replace funds which were used directly or indirectly
(2) Bonds issued to restore or maintain the gold reserve, see
to (A). acquire securities or obligations described in subparagraph
section 2 of the Act of March 14, 1900 (31 Stat. 46; 31 U.S.C.
408) ;
gation- (3) Exception.-Paragraph (1) shall not apply to any obli-
(3) Bonds, notes, certificates of indebtedness, and Treasury
bills authorized by the Second Liberty Bond Act, see sections 4,
the proceeds of which are reasonably expected to be used to
(A) which is issued as part of an issue substantially all of
5 (b) and. (d), 7, 18 (b) and 22 (d) of the Act as amended (40
Stat. 290; 46 Stat. 20, 775; 40 Stat. 291, 1310; 55 Stat. 8; 31 U.S.C.
provide permanent financing for real property used or to be
752a, 754, 747, 753, 757c)
S.R. 570
S.R: 570
10
11
tain States and bonds of the War Finance Corporation owned by cer-
(4) Bonds, notes, and certificates of indebtedness of the United
(21) Treasury notes issued to retire national bank notes, see
section 18 of the Federal Reserve Act (38 Stat. 268; 12 U.S.C.
nonresidents, see section 3 of the Fourth Liberty Bond Act, as
447) ;
amended (40 Stat. 1311, § 4; 31 U.S.C. 750) ;
(22) United States Housing Authority obligations, see sections
(5) Certificates of indebtedness issued after February 4, 1910,
5 (e) and 20 (b) of the United States Housing Act of 1937 (50 Stat.
see section 2 of the Act of that date (36 Stat. 192; 31 U.S.C.
890, 898 42 U.S.C. 1405, 1420) ;
769)
(23) Virgin Islands insular and municipal bonds, see section 1
(31 Stat. 48; 31 U.S.C. 751) ;
(6) Consols of 1930, see section 11 of the Act of March 14, 1900
of the Act of October 27, 1949 (63 Stat. 940; 48 U.S.C. 1403).
United States or any of its agencies or instrumentalities on
(7) Obligations and evidences of ownership issued by the
as amended (c. 147, 61 Stat. 180; 31 U.S.C. 742a)
after March 28, 1942, see section 4 of the Public Debt Act of 1941, or
(8) Commodity Credit Corporation obligations, ; see section 5
of the Act of March 8, 1938 (52 Stat. 108; 15 U.S.C. 713a-5)
sections 204 (d) and 207 (i) of the National Housing Act, as
(9) Debentures issued by Federal Housing Administrator, ; see
amended (52 Stat. 14, 20; 12 U.S.C. 1710, 1713) ;
time Commission, see section 1105 (c) of the Merchant Marine
(10) Debentures issued to mortgages by United States Mari-
Act, 1936, as amended (52 Stat. 972; 46 U.S.C. 1275) ;
(11) Federal Deposit Insurance Corporation obligations, see
U.S.C. 1825) ;
section 15 of the Federal Deposit Insurance Act (64 Stat. 890; 12
U.S.C. 1433) ;
Federal Home Loan Bank Act, as amended (49 Stat. 295, § 8; 12
(12) Federal Home Loan Bank obligations, see section 13 of the
133; U.S.C. 1464) ;
(h) of the Home Owners' Loan Act of 1933, as amended (48 Stat.
(13) Federal savings and loan association loans, see section 5
1257 12 U.S.C. 1725)
tions, see section 402 (e) of the National Housing Act (48 Stat.
(14) Federal Savings and Loan Insurance Corporation obliga-
c. 12 U.S.C. 1463) ;
of 168 Home Owners' Loan Act of 1933, as amended (48 Stat. 4(c) 644,
(15) the Home Owners' Loan Corporation bonds, see section
credit corporations, production credit associations, and banks for
(16) Obligations of Central Bank for Cooperatives, production
Stat. cooperatives, see section 63 of the Farm Credit Act of 1933 (48
267; 12 U.S.C. 1138c)
21, 1904 (34 Stat. 5; 31 U.S.C. 743), section 8 of the Act of June
(17) Panama Canal bonds, see section 1 of the Act of December
Act 28, 1902 (32 Stat. 484; 31 U.S.C. 744), and section 39 of the Tariff
of 1909 (36 Stat. 117; 31 U.S.C. 745) ;
the Philippines, see section 9 of the Philippine Independence Act
(18) Philippine bonds, etc., issued before the independence of
(48 Stat. 463 48 U.S.C. 1239) ;
1910 (36 Stat. 817; 39 U.S.C. 760) ;
(19) Postal savings bonds. see section 10 of the Act of June 25,
1917, as amended (50 Stat. 855; 48 U.S.C. 745) ;
(20) Puerto Rican bonds. see section 3 of the Act of March 2,
S.R. 570
S.R. 570
H. R. 9968
Ainety-fourth Congress of the United States of America
AT THE FIRST SESSION
Begun and held at the City of Washington on Tuesday, the fourteenth day of January,
one thousand nine hundred and seventy-five
An Act
To change certain income tax provisions of the Internal Revenue Code of 1954,
and for other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the "Revenue Adjustment Act of 1975".
SEC. 1A. DECLARATION OF POLICY.
(a) Congress is determined to continue the tax reduction for the
first 6 months of 1976 in order to assure continued economic recovery.
(b) Congress is also determined to continue to control spending
levels in order to reduce the national deficit.
(c) Congress reaffirms its commitments to the procedures estab-
lished by the Congressional Budget and Impoundment Control Act
of 1974 under which it has already established a binding spending
ceiling for the fiscal year 1976.
(d) If the Congress adopts a continuation of the tax reduction
provided by this Act beyond June 30, 1976, and if economic conditions
warrant doing so, Congress shall provide, through the procedures in
the Budget Act, for reductions in the level of spending in the fiscal
year 1977 below what would otherwise occur, equal to any additional
reduction in taxes (from the 1974 tax rate levels) provided for the
fiscal year 1977: Provided, however, That nothing shall preclude the
right of the Congress to pass a budget resolution containing a higher
or lower expenditure figure if the Congress concludes that this is war-
ranted by economic conditions or unforeseen circumstances.
SEC. 2. INDIVIDUAL INCOME TAX REDUCTIONS.
(a) Low INCOME ALLOWANCE.-
(1) INCREASE.-Subsection (c) of section 141 of the Internal
Revenue Code of 1954 (relating to low income allowance) is
amended to read as follows:
"(c) Low INCOME ALLOWANCE.-
"(1) IN GENERAL.-The low income allowance is-
"(A) $2,100 in the case of-
(i) a joint return under section 6013, or
(ii) a surviving spouse (as defined in section 2(a))
"(B) $1,700 in the case of an individual who is not married
and who is not a surviving spouse (as so defined), or
"(C) $1,050 in the case of a married individual filing a
separate return.
"(2) APPLICATION OF 6-MONTH RULE.-Notwithstanding the pro-
visions of paragraph (1), the following amounts shall be substi-
tuted for the amount set forth in paragraph (1)-
"(A) '$1,700' for '$2,100' in subparagraph (A),
(B) '$1,500' for '$1,700' in subparagraph (B), and
(C) '$850' for '$1,050' in subparagraph (C)."
(2) CHANGE IN FILING REQUIREMENTS TO REFLECT INCREASE IN
LOW INCOME ALLOWANCE.-Paragraph (1) (A) of section 6012(a)
of such Code (relating to persons required to make returns of
income) is amended-
H. R. 9968-2
(A) by striking out "$2,350" in clause (i) of such para-
graph and inserting in lieu thereof "$2,450";
(B) by striking out "$2,650" in clause (ii) of such para-
graph and inserting in lieu thereof "$2,850"; and
(C) by striking out "$3,400" in clause (iii) of such para-
graph and inserting in lieu thereof "$3,600".
(b) PERCENTAGE STANDARD DEDUCTION.-
(1) INCREASE.-Subsection (b) of section 141 of such Code
(relating to percentage standard deduction) is amended to read
as follows:
"(b) PERCENTAGE STANDARD DEDUCTION.-
'(1) GENERAL RULE.-The percentage standard deduction is an
amount equal to 16 percent of adjusted gross income but not to
exceed—
"(A) $2,800 in the case of-
(i) a joint return under section 6013, or
(ii) a surviving spouse (as defined in section 2(a)),
"(B) $2,400 in the case of an individual who is not married
and who is not a surviving spouse (as SO defined), or
"(C) $1,400 in the case of a married individual filing a
separate return.
"(2) APPLICATION OF 6-MONTH RULE.-Notwithstanding the pro-
visions of paragraph (1) of this subsection, the following amounts
shall be substituted for the amounts set forth in paragraph (1)-
(A) '$2,400' for '$2,800' in subparagraph (A),
" (B) '$2,200' for '$2,400' in subparagraph (B), and
(C) '$1,200' for '$1,400' in subparagraph (C).".
(2) CONFORMING AMENDMENTS.-Section 3402 (m) of such Code
(relating to withholding allowances based on itemized deductions)
is amended-
(A) by striking out "$2,600" in paragraph (1) (B) and in-
serting in lieu thereof "$2,800", and
(B) by striking out "$2,300" in such paragraph and insert-
ing in lieu thereof "$2,400".
(c) EARNED INCOME CREDIT.-Subsections (a) and (b) of section
43 of such Code (relating to earned income credit) are amended to
read as follows:
"(a) ALLOWANCE OF CREDIT.-
"(1) GENERAL RULE.-In the case of an eligible individual,
there shall be allowed as a credit against the tax imposed by this
chapter for the taxable year an amount equal to 10 percent of SO
much of the earned income for the taxable year as does not
exceed $4,000.
'(2) APPLICATION OF 6-MONTH RULE.-Notwithstanding the
provisions of paragraph (1), the term '5 percent' shall be sub-
stituted for the term '10 percent' where it appears in that para-
graph.".
(b) LIMITATION.-
"(1) GENERAL RULE.-The amount of the credit allowable to
a taxpayer under subsection (a) for any taxable year shall be
reduced (but not below zero) by an amount equal to 10 percent
of SO much of the adjusted gross income (or, if greater, the earned
income) of the taxpayer for the taxable year as exceeds $4,000.
"(2) APPLICATION OF 6-MONTH RULE.-Notwithstanding the
provisions of paragraph (1), the term '5 percent' shall be sub-
stituted for the term '10 percent' where it appears in that
paragraph.".
H. R. 9968-3
(d) DISREGARD OF REFUND.-Any refund of Federal income taxes
made to any individual by reason of section 43 of the Internal Reve-
nue Code of 1954 (relating to earned income credit) shall not be
taken into account as income or receipts for purposes of determining
the eligibility, for the month in which such refund is made or any
month thereafter which begins prior to July 1, 1976, of such indi-
vidual or any other individual for benefits or assistance, or the
amount or extent of benefits or assistance, under any Federal pro-
gram or under any State or local program financed in whole or in
part with Federal funds, but only if such individual (or the family
unit of which he is a member) is a recipient of benefits or assistance
under such a program for the month before the month in which such
refund is made.
(e) EXTENSION OF CERTAIN Low-INCOME ALLOWANCE, PERCENTAGE
STANDARD DEDUCTION, AND Tax CREDIT PROVISIONS.-The last sentence
of section 209 (a) of the Tax Reduction Act of 1975 is amended to read
as follows: "The amendments made by section 201 (a) and 202(a)
shall cease to apply to taxable years ending after December 31, 1975;
those made by sections 201 (b), 201 (c), and 203 shall cease to apply to
taxable years ending after December 31, 1976.".
(f) EXTENSION OF EARNED INCOME CREDIT.-Section 209 (b) of the
Tax Reduction Act of 1975 (relating to effective date for section 204)
is amended by striking out "January 1, 1976," and inserting in lieu
thereof "January 1, 1977.".
(g) EFFECTIVE DATE.-The amendments made by this section apply
to taxable years ending after December 31, 1975, and before Janu-
ary 1, 1977.
SEC. 3. TAXABLE INCOME CREDIT.
(a) TAXABLE INCOME CREDIT.-
(1) IN GENERAL.-Section 42 of the Internal Revenue Code of
1954 (relating to credit for personal exemptions) is amended to
read as follows:
"SEC. 42. TAXABLE INCOME CREDIT.
'(a) ALLOWANCE OF CREDIT.-
"(1) IN GENERAL.-In the case of an individual, there shall be
allowed as a credit against the tax imposed by this chapter for the
taxable year an amount equal to the greater of-
(A) 2 percent of SO much of the taxpayer's taxable income
for the taxable year as does not exceed $9,000; or
(B) $35 multiplied by each exemption for which the tax-
payer is entitled to a deduction for the taxable year under
subsection (b) or (e) of section 151.
"(2) APPLICATION OF SIX-MONTH RULE-Notwithstanding the
provisions of paragraph (1) of this subsection, the percentage
"1 percent" shall be substituted for "2 percent" in subparagraph
(A) of such paragraph, and the amount "$17.50" shall be substi-
tuted for the amount "$35" in subparagraph (B) of such
paragraph.
"(b) APPLICATION WITH OTHER CREDITS.-The credit allowed by
subsection (a) shall not exceed the amount of the tax imposed by this
chapter for the taxable year. In determining the credits allowed
under-
"(1) section 33 (relating to foreign tax credit),
"(2) section 37 (relating to retirement income credit),
(3) section 38 (relating to investment in certain depreciable
property),
H. R. 9968-4
"(4) section 40 (relating to expenses of work incentive pro-
grams), and
"(5) section 41 (relating to contributions to candidates for
public office),
the tax imposed by this chapter shall (before any other reductions)
be reduced by the credit allowed by this section.
(c) SPECIAL RULE FOR MARRIED INDIVIDUALS FILING SEPARATE
RETURNS.-
"(1) IN GENERAL.-Notwithstanding subsection (a), in the case
of a married individual who files a separate return for the tax-
able year, the amount of the credit allowable under subsection
(a) for the taxable year shall be equal to either-
"(A) the amount determined under paragraph (1) (A)
of subsection (a) ; or
"(B) if this subparagraph applies to the individual for
the taxable year, the amount determined under paragraph
(1) (B) of subsection (a).
For purposes of the preceding sentence, paragraph (1) of sub-
section (a) shall be applied by substituting '$4,500' for '$9,000'.
"(2) APPLICATION OF PARAGRAPH (1) (B).Subparagraph (B)
of paragraph (1) shall apply to any taxpayer for any taxable
year if-
"(A) such taxpayer elects to have such subparagraph apply
for such taxable year, and
"(B) the spouse of such taxpayer elects to have such sub-
paragraph apply for any taxable year corresponding, for
purposes of section 142(a), to the taxable year of the
taxpayer.
Any such election shall be made at such time, and in such manner, as
the Secretary or his delegate shall by regulations prescribe.
"(3) MARITAL STATUS.-For purposes of this subsection, the
determination of marital status shall be made under section 143.
"(d) CERTAIN PERSONS NOT ELIGIBLE.-This section shall not apply
to any estate or trust, nor shall it apply to any nonresident alien
individual.".
(2) CLERICAL AMENDMENT.-The table of sections for subpart A
of part IV of subchapter A of chapter 1 of such Code is amended
by striking out the item relating to section 42 and inserting in lieu
thereof the following:
"Sec. 42. Taxable income credit.".
(b) EFFECTIVE DATE.-The amendments made by subsection (a)
shall apply to taxable years ending after December 31, 1975. Such
amendments shall cease to apply to taxable years ending after Decem-
ber 31, 1976.
SEC. 4. CORPORATE TAX RATES AND SURTAX EXEMPTION.
(a) CORPORATE NORMAL Tax.-Section 11(a) of the Internal Rev-
enue Code of 1954 (relating to corporate normal tax) is amended to
read as follows:
"(b) NORMAL Tax.-
"(1) GENERAL RULE.-The normal tax is equal to-
"(A) in the case of a taxable year ending after Decem-
ber 31, 1976, 22 percent of the taxable income, and
(B) in the case of a taxable year ending after Decem-
ber 31, 1974, and before January 1, 1977, the sum of-
(i) 20 percent of SO much of the taxable income as
does not exceed $25,000, plus
H. R. 9968-5
(iii) 22 percent of SO much of the taxable income as
exceeds $25,000.
"(2) SIX-MONTH APPLICATION OF GENERAL RULE.-
"(A) CALENDAR YEAR TaXPAYErs.-Notwithstanding the
provisions of paragraph (1), in the case of a taxpayer who
has as his taxable year the calendar year 1976, the normal
tax for such taxable year is equal to the sum of-
"(i) 21 percent of SO much of the taxable income as
does not exceed $25,000, plus
(ii) 22 percent of SO much of the taxable income as
exceeds $25,000.
(B) FISCAL YEAR taxpayers.-Notwithstanding the pro-
visions of paragraph (1), in the case of a taxpayer whose tax-
able year is not the calendar year, effective on July 1, 1976,
paragraph (1) shall cease to apply and the normal tax shall
be 22 percent.".
(b) CORPORATE SURTAX.-Section 11 (c) of such Code (relating
to surtax) is amended to read as follows:
(c) SURTAX.-
"(1) GENERAL RULE.-The surtax is 26 percent of the amount
by which the taxable income exceeds the surtax exemption for
the taxable year.
(2) SPECIAL RULE FOR 1976 FOR CALENDAR YEAR TAXPAYERS.-
Notwithstanding the provisions of paragraph (1), in the case
of a taxpayer who has as his taxable year the calendar year 1976,
the surtax for such taxable year is—
"(A) 13 percent of the amount by which the taxable
income exceeds the $25,000 surtax exemption (as in effect
under subsection (d) (2)) but does not exceed $50,000, plus
(B) 26 percent of the amount by which the taxable
income exceeds $50,000.".
- (c) SURTAX EXEMPTION.-Section (d) of such Code (relating to
surtax exemption) is amended to read as follows:
(d) SURTAX EXEMPTION.-
(1) GENERAL RULE.-For purposes of this subtitle, the surtax
exemption for any taxable year is $50,000, except that, with respect
to a corporation to which section 1561 or 1564 (relating to surtax
exemptions in case of certain controlled corporations) applies for
the taxable year, the surtax exemption for the taxable year is the
amount determined under such section.
(2) SIX-MONTH APPLICATION OF GENERAL RULE.-Notwithstand-
ing the provisions of paragraph (1)-
(A) CALENDAR YEAR TAXPAYERs.-In the case of a taxpayer
who has as his taxable year the calendar year 1976, the pro-
visions of paragraph (1) shall be applied for such taxable
year by substituting the amount '$25,000' for the amount
'$50,000' appearing therein.
'(B) FISCAL YEAR TAXPAYERs.-In the case of a taxpayer
whose taxable year is not the calendar year, effective on July 1,
1976, paragraph (1) shall be applied by substituting the
amount '$25,000' for the amount '$50,000' appearing therein,
and such substitution shall be treated, for purposes of section
21, as a change in a rate of tax.".
(d) TECHNICAL AND CONFORMING CHANGES.-
(1) Section 1561 (a) (1) of such Code (relating to limitations on
certain multiple tax benefits in the case of certain controlled cor-
porations) as such section is in effect for taxable years ending
after December 31, 1975, is amended by striking out "$25,000".
H. R. 9968-6
Section 962 (c) of such Code (relating to surtax exemption for
individuals electing to be subject to tax at corporate rates) as
such section is in effect for taxable years ending after Decem-
ber 31, 1975, is amended by striking out "$25,000" and inserting
in lieu thereof "the surtax exemption".
(2) Section 21 (f) of such Code (relating to increase in surtax
exemptions) is amended-
(A) by striking out "INCREASE" in the caption and insert-
ing "CHANGE" in lieu thereof, and
(B) by inserting after "Tax Reduction Act of 1975" the
following: "and the change made by section 3(c) of the
Revenue Adjustment Act of 1975".
(e) EFFECTIVE DATES.-The amendments made by subsections (b),
(c), and (d) apply to taxable years beginning after December 31,
1975. The amendment made by subsection (c) ceases to apply for tax-
able years beginning after December 31, 1976.
SEC. 5. WITHHOLDING; ESTIMATED TAX PAYMENTS.
(a) WITHHOLDING.-
(1) IN GENERAL.-Section 3402(a) of the Internal Revenue
Code of 1954 (relating to income tax collected at source), as
amended by section 205 of the Tax Reduction Act of 1975, is
amended by inserting after the second sentence thereof the fol-
lowing: "The tables SO prescribed with respect to wages paid
after December 31, 1975, and before July 1, 1976, shall be the same
as the tables prescribed under this subsection which were in
effect on December 10, 1975.".
(2) TECHNICAL AMENDMENT.-Section 209 (c) of the Tax Reduc-
tion Act of 1975 is amended by striking out "January 1, 1976"
and inserting in lieu thereof "July 1, 1976".
(b) ESTIMATED Tax PAYMENTS BY INDIVIDUALS.-Section 6153 of
such Code (relating to installment payments of estimated income
tax by individuals) is amended by adding at the end thereof the
following new subsection:
"(g) SIX-MONTH APPLICATION OF REVENUE ADJUSTMENT ACT OF
1975 CHANGES.-In the case of a taxpayer who has as his taxable year
the calendar year 1976, the amount of any installment the payment
of which is required to be made after December 31, 1975, and before
July 1, 1976, may be computed without regard to section 42 (a) (2),
43(a) (2), 43(b) (2), 141 (b) (2), or 141 (c) (2).".
(c) ESTIMATED TAX PAYMENTS BY CORPORATIONS-Section 6154 of
such Code (relating to installment payments of estimated income
tax by corporations) is amended by adding at the end thereof the
following new subsection:
"(h) SIX-MONTH APPLICATION OF REVENUE ADJUSTMENT AcT OF
1975 CHANGES.-In the case of a corporation which has as its taxable
year the calendar year 1976, the amount of any installment the payment
of which is required to be made after December 31, 1975, and before
July 1, 1976, may be computed without regard to sections 11 (b) (2),
11(c) (2), and 11(d) (2).".
SEC. 6. ROLLING STOCK.
(a) EXCLUSION FROM INCOME.-Section 883(a) of the Internal
Revenue Code of 1954 is hereby amended by adding at the end thereof
the following new paragraph:
(3) RAILROAD ROLLING STOCK OF FOREIGN CORPORATIONS.-Earn-
ings derived from payments by a common carrier for the use on a
temporary basis (not expected to exceed a total of 90 days in any
taxable year) of railroad rolling stock owned by a corporation of
H. R. 9968-7
a foreign country which grants an equivalent exemption to cor-
porations organized in the United States."
(b) EFFECTIVE DATE.-The amendment made by this section shall
apply to payments made after November 18, 1974.
SEC. 7. CERTAIN IRRIGATION FACILITIES.
(a) IN GENERAL-Section 103 of the Internal Revenue Code of 1954
(relating to interest on certain governmental obligations) is amended
by redesignating subsection (e) as subsection (f) and by inserting
after subsection (d) the following new subsection:
"(e) CERTAIN IRRIGATION DAMS.-A dam for the furnishing of water
for irrigation purposes which has a subordinate use in connection with
the generation of electric energy by water shall be treated as meeting
the requirements of subsection (c) (4) (G) if-
(1) substantially all of the stored water is contractually avail-
able for release from such dam for irrigation purposes, and
(2) the water SO released is available on reasonable demand to
members of the general public.".
(b) EFFECTIVE DATE.-The amendments made by this section shall
apply to obligations issued after the date of the enactment of this Act.
Speaker of the House of Representatives.
Vice President of the United States and
President of the Senate.
FOR IMMEDIATE RELEASE
DECEMBER 19, 1975
Office of the White House Press Secretary
THE WHITE HOUSE
STATEMENT BY THE PRESS SECRETARY
The President is very pleased by the actions taken in the Congress tonight on
the tax bill.
The bill which has been enacted not only continues cuts in taxes for the first
half of 1976 but also represents a good faith commitment by the Congress to
match future tax reductions with dollar-for-dollar reductions in projected
spending. This has been the essential issue at stake throughout these debates,
and the President is gratified that the Congress has now accepted this principle.
The essence of the bill, then, is that taxpayers will continue to enjoy a measure
of tax relief in 1976 and that for the first time in history, future reductions in
taxes will lead to similar reductions in spending.
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