SECTION 1. INTEREST PAYMENTS DEDUCTIBLE WHERE DISQUALIFIED GUARANTEE 
              HAS NO ECONOMIC EFFECT.

    (a) In General.--Section 163(j)(6)(D)(ii) of the Internal Revenue 
Code of 1986 (relating to exceptions to disqualified guarantee) is 
amended--
            (1) by striking ``or'' at the end of subclause (I),
            (2) by striking the period at the end of subclause (II) and 
        inserting ``, or'',
            (3) by inserting after subclause (II) the following new 
        subclause:
                                    ``(III) in the case of a guarantee 
                                by a foreign person, to the extent of 
                                the amount that the taxpayer 
                                establishes to the satisfaction of the 
                                Secretary that the taxpayer could have 
                                borrowed from an unrelated person 
                                without the guarantee.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to guarantees issued on and after the date of the enactment of 
this Act.

SEC. 2. INTEREST PAID TO CERTAIN LENDERS NOT DISQUALIFIED INTEREST.

    (a) In General.--Section 163(j)(3)(B) of the Internal Revenue Code 
of 1986 (defining disqualified interest) is amended by striking ``and'' 
at the end of clause (i) and by inserting after clause (ii) the 
following new clause:
                            ``(iii) the interest is not paid or accrued 
                        to a qualified lender, and''.
    (b) Qualified Lender.--Section 163(j)(6) of the Internal Revenue 
Code of 1986 (relating to other definitions and special rules) is 
amended by adding at the end the following new subparagraphs:
                    ``(F) Qualified lender.--A holder of debt shall be 
                a qualified lender with respect to such debt if such 
                person is--
                            ``(i) a United States person subject to the 
                        income tax imposed by this chapter (determined 
                        without regard to section 511) and--
                                    ``(I) such person is a financial 
                                institution, or
                                    ``(II) such debt is publicly issued 
                                debt, or
                            ``(ii) a foreign person which is subject to 
                        either net basis or gross basis taxation and--
                                    ``(I) such person is a financial 
                                institution required to include the 
                                interest on such debt in taxable income 
                                under section 882, or
                                    ``(II) such debt is publicly issued 
                                debt.
                    ``(G) Financial institution.--The term `financial 
                institution' means a person which is--
                            ``(i) predominantly engaged in the active 
                        conduct of a banking, financing, or similar 
                        business within the meaning of section 954(h),
                            ``(ii) a corporation described in section 
                        581 or 591 (relating to banks and other savings 
                        institutions), or
                            ``(iii) an insurance company subject to tax 
                        under subchapter L or which would be subject to 
                        tax under subchapter L if it were a domestic 
                        corporation.
                    ``(H) Publicly issued debt.--The term `publicly 
                issued debt' means--
                            ``(i) commercial paper described in section 
                        3(a)(3) or 4(2) of the Securities Act of 1933,
                            ``(ii) a debt instrument which is--
                                    ``(I) part of an issue of debt 
                                instruments meeting the requirements of 
                                section 871(h) or 881(c) (relating to 
                                the exemptions from withholding tax for 
                                certain portfolio debt investments) 
                                without regard to section 
                                871(h)(2)(B)(ii) and section 
                                881(c)(2)(B)(ii), and
                                    ``(II) readily tradable on an 
                                established securities market, or
                            ``(iii) a debt instrument which is part of 
                        an issue of debt instruments the initial 
                        offering of which is registered with the 
                        Securities and Exchange Commission or would be 
                        required to be registered under the Securities 
                        Act of 1933 but for an exemption from 
                        registration--
                                    ``(I) under section 3 of the 
                                Securities Act of 1933,
                                    ``(II) under any law (other than 
                                the Securities Act of 1933) because of 
                                the identity of the issuer or the 
                                nature of the security,
                                    ``(III) because the issue is 
                                intended for distribution to persons 
                                who are not United States persons, or
                                    ``(IV) pursuant to section 230.144A 
                                of title 17, Code of Federal 
                                Regulations (relating to securities 
                                placed with qualified institutional 
                                buyers) or any successor rule or 
                                regulation.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to debt issued on or after the date of the enactment of this Act.
Amends the Internal Revenue Code to eliminate the limitation for the deduction of interest for interest payments on debt guaranteed by a foreign person as long as the taxpayer establishes that it could have borrowed the same amount of debt from an unrelated lender without a guarantee.

Revises the definition of disqualified interest.
A bill to amend the Internal Revenue Code of 1986 to provide for the deduction of interest paid in certain situations where the debt is guaranteed by a related foreign person.