SECTION 1. RECOVERY PERIOD FOR DEPRECIATION OF CERTAIN LEASEHOLD 
              IMPROVEMENTS.

    (a) 10-Year Recovery Period.--Subparagraph (D) of section 168(e)(3) 
of the Internal Revenue Code of 1986 (relating to 10-year property) is 
amended by striking ``and'' at the end of clause (i), by striking the 
period at the end of clause (ii) and inserting ``, and'', and by adding 
at the end the following new clause:
                            ``(iii) any qualified leasehold improvement 
                        property.''.
    (b) Qualified Leasehold Improvement Property.--Subsection (e) of 
section 168 of such Code is amended by adding at the end the following 
new paragraph:
            ``(6) Qualified leasehold improvement property.--
                    ``(A) In general.--The term `qualified leasehold 
                improvement property' means any improvement to an 
                interior portion of a building which is nonresidential 
                real property if--
                            ``(i) such improvement is made under or 
                        pursuant to a lease (as defined in subsection 
                        (h)(7))--
                                    ``(I) by the lessee (or any 
                                sublessee) of such portion, or
                                    ``(II) by the lessor of such 
                                portion,
                            ``(ii) such portion is to be occupied 
                        exclusively by the lessee (or any sublessee) of 
                        such portion, and
                            ``(iii) such improvement is placed in 
                        service more than 3 years after the date the 
                        building was first placed in service.
                    ``(B) Certain improvements not included.--Such term 
                shall not include any improvement for which the 
                expenditure is attributable to--
                            ``(i) the enlargement of the building,
                            ``(ii) any elevator or escalator,
                            ``(iii) any structural component benefiting 
                        a common area, and
                            ``(iv) the internal structural framework of 
                        the building.
                    ``(C) Definitions and special rules.--For purposes 
                of this paragraph--
                            ``(i) Commitment to lease treated as 
                        lease.--A commitment to enter into a lease 
                        shall be treated as a lease, and the parties to 
                        such commitment shall be treated as lessor and 
                        lessee, respectively.
                            ``(ii) Related persons.--A lease between 
                        related persons shall not be considered a 
                        lease. For purposes of the preceding sentence, 
                        the term `related persons' means--
                                    ``(I) members of an affiliated 
                                group (as defined in section 1504), and
                                    ``(II) persons having a 
                                relationship described in subsection 
                                (b) of section 267; except that, for 
                                purposes of this clause, the phrase `80 
                                percent or more' shall be substituted 
                                for the phrase `more than 50 percent' 
                                each place it appears in such 
                                subsection.
                    ``(D) Improvements made by lessor.--
                            ``(i) In general.--In the case of an 
                        improvement made by the person who was the 
                        lessor of such improvement when such 
                        improvement was placed in service, such 
                        improvement shall be qualified leasehold 
                        improvement property (if at all) only so long 
                        as such improvement is held by such person.
                            ``(ii) Exception for changes in form of 
                        business.--Property shall not cease to be 
                        qualified leasehold improvement property under 
                        clause (i) by reason of--
                                    ``(I) death,
                                    ``(II) a transaction to which 
                                section 381(a) applies,
                                    ``(III) a mere change in the form 
                                of conducting the trade or business so 
                                long as the property is retained in 
                                such trade or business as qualified 
                                leasehold improvement property and the 
                                taxpayer retains a substantial interest 
                                in such trade or business,
                                    ``(IV) the acquisition of such 
                                property in an exchange described in 
                                section 1031, 1033, 1038, or 1039 to 
                                the extent that the basis of such 
                                property includes an amount 
                                representing the adjusted basis of 
                                other property owned by the taxpayer or 
                                a related person, or
                                    ``(V) the acquisition of such 
                                property by the taxpayer in a 
                                transaction described in section 332, 
                                351, 361, 721, or 731 (or the 
                                acquisition of such property by the 
                                taxpayer from the transferee or 
                                acquiring corporation in a transaction 
                                described in such section), to the 
                                extent that the basis of the property 
                                in the hands of the taxpayer is 
                                determined by reference to its basis in 
                                the hands of the transferor or 
                                distributor.
                            ``(iii) Related person.--For purposes of 
                        this subparagraph, a person (hereafter in this 
                        clause referred to as the `related person') is 
                        related to any person if the related person 
                        bears a relationship to such person specified 
                        in section 267(b) or 707(b)(1), or the related 
                        person and such person are engaged in trades or 
                        businesses under common control (within the 
                        meaning of subsections (a) and (b) of section 
                        52).''.
    (c) Requirement To Use Straight Line Method.--Paragraph (3) of 
section 168(b) of such Code is amended by adding at the end the 
following new subparagraph:
                    ``(G) Qualified leasehold improvement property 
                described in subsection (e)(6).''.
    (d) Alternative System.--The table contained in section 
168(g)(3)(B) of such Code is amended by inserting after the item 
relating to subparagraph (D)(ii) the following new item:

  ``(D)(iii).........................................       10''.      
    (e) Effective Date.--The amendments made by this section shall 
apply to qualified leasehold improvement property placed in service 
after September 11, 2004.
Amends the Internal Revenue Code to classify qualified leasehold improvement property (defined as certain improvements made to an interior portion of nonresidential real property) as ten-year property for depreciation purposes under the Accelerated Cost Recovery System.
To amend the Internal Revenue Code of 1986 to provide a shorter recovery period for the depreciation of certain leasehold improvements.