I 

108TH CONGRESS 

1ST SESSION H. R. 2046

To amend the Internal Revenue Code of 1986 to rebuild America through 

job creation. 

IN THE HOUSE OF REPRESENTATIVES 

MAY 9, 2003

Mr. RANGEL (for himself, Mr. ANDREWS, Mr. BACA, Mr. BELL, Mr. 

BLUMENAUER, Mr. BROWN of Ohio, Mrs. CHRISTENSEN, Mr. CUMMINGS, 

Mr. DAVIS of Illinois, Mr. DELAHUNT, Ms. DELAURO, Mr. ENGEL, Ms. 

ESHOO, Mr. ETHERIDGE, Mr. GUTIERREZ, Mr. HILL, Mr. HOLT, Mr. 

HONDA, Mr. HOYER, Mr. LANTOS, Ms. LEE, Mr. LEVIN, Mr. MCGOVERN, Mr. MENENDEZ, Mr. MICHAUD, Ms. MILLENDER-MCDONALD, Mr. 

GEORGE MILLER of California, Mr. OBERSTAR, Mr. ORTIZ, Mr. 

PALLONE, Ms. PELOSI, Mr. PRICE of North Carolina, Mr. ROTHMAN, Mr. 

RYAN of Ohio, Mr. SABO, Mr. SANDLIN, Ms. SLAUGHTER, Mrs. JONES

of Ohio, Ms. WATERS, Mr. WAXMAN, and Mr. BALLANCE) introduced the 

following bill; which was referred to the Committee on Ways and Means 

A BILL

To amend the Internal Revenue Code of 1986 to rebuild 

America through job creation.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CON4 TENTS. 

5 (a) SHORT TITLE.—This Act may be cited as the 

6 ‘‘Jobs and Growth Reconciliation Tax Act of 2003’’. 
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1 (b) AMENDMENT OF 1986 CODE.—Except as other2 wise expressly provided, whenever in this Act an amend3 ment or repeal is expressed in terms of an amendment 

4 to, or repeal of, a section or other provision, the reference 

5 shall be considered to be made to a section or other provi6 sion of the Internal Revenue Code of 1986. 

7 (c) TABLE OF CONTENTS.—The table of contents of 

8 this Act is as follows:

Sec. 1. Short title; references; table of contents. 

TITLE I—IMMEDIATE STIMULUS AND JOB CREATION 

Subtitle A—Family Tax Relief 

Sec. 101. Acceleration of increase in child tax credit. 

Sec. 102. Increase in standard deduction for married taxpayers filing joint returns accelerated. 

Sec. 103. Acceleration of 10-percent individual income tax rate bracket expansion. 

Sec. 104. Acceleration of elimination of marriage penalty in earned income 

credit. 

Subtitle B—Incentives to Hire the Long-Term Unemployed 

Sec. 111. Incentives to hire the long-term unemployed. 

Subtitle C—Extension of Unemployment Benefits 

Sec. 121. Short title. 

PART I—TEMPORARY EXTENDED UNEMPLOYMENT COMPENSATION

Sec. 131. References. 

Sec. 132. Extension of the Temporary Extended Unemployment Compensation 

Act of 2002. 

Sec. 133. Entitlement to additional weeks of temporary extended unemployment 

compensation. 

Sec. 134. Extended benefit periods. 

PART II—UNEMPLOYMENT BENEFITS FOR INDIVIDUALS QUALIFYING BASED

ON PART-TIME WORK OR AN ALTERNATIVE BASE PERIOD

Sec. 141. Federal-State agreements. 

Sec. 142. Payments to States having agreements under this part. 

Sec. 143. Financing provisions. 

Sec. 144. Definitions. 

Sec. 145. Applicability. 
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PART III—ENHANCED UNEMPLOYMENT BENEFITS

Sec. 151. Federal-State agreements. 

Sec. 152. Payments to States having agreements under this part. 

Sec. 153. Definitions. 

Sec. 154. Applicability. 

Subtitle D—Trust Fund to Meet Nation’s Pressing Needs 

Sec. 161. Trust fund to meet nation’s pressing needs. 

TITLE II—LONG-TERM JOB CREATION AND GROWTH 

Sec. 201. Increase and extension of bonus depreciation. 

Sec. 202. Increased expensing for small business. 

Sec. 203. Deduction relating to income attributable to United States production 

activities. 

TITLE III—FISCAL RESPONSIBILITY AND PROVISIONS 

ADDRESSING CORPORATE ABUSE 

Subtitle A— General Provisions 

Sec. 301. Freeze of top individual income tax rates. 

Sec. 302. Restoration of phaseouts of deductions for personal exemptions and 

of itemized deductions. 

Sec. 303. Repeal of exclusion for extraterritorial income. 

Subtitle B—Abusive Tax Shelter Shutdown and Taxpayer Accountability 

PART I—PROVISIONS DESIGNED TO CURTAIL TAX SHELTERS

Sec. 311. Clarification of economic substance doctrine. 

Sec. 312. Penalty for failing to disclose reportable transaction. 

Sec. 313. Accuracy-related penalty for listed transactions and other reportable 

transactions having a significant tax avoidance purpose. 

Sec. 314. Penalty for understatements attributable to transactions lacking economic substance, etc. 

Sec. 315. Modifications of substantial understatement penalty for nonreportable 

transactions. 

Sec. 316. Tax shelter exception to confidentiality privileges relating to taxpayer 

communications. 

Sec. 317. Disclosure of reportable transactions. 

Sec. 318. Modifications to penalty for failure to register tax shelters. 

Sec. 319. Modification of penalty for failure to maintain lists of investors. 

Sec. 320. Modification of actions to enjoin certain conduct related to tax shelters and reportable transactions. 

Sec. 321. Understatement of taxpayer’s liability by income tax return preparer. 

Sec. 322. Penalty on failure to report interests in foreign financial accounts. 

Sec. 323. Frivolous tax submissions. 

Sec. 324. Regulation of individuals practicing before the department of treasury. 

Sec. 325. Penalty on promoters of tax shelters. 

Sec. 326. Statute of limitations for taxable years for which listed transactions 

not reported. 

Sec. 327. Denial of deduction for interest on underpayments attributable to 

nondisclosed reportable and noneconomic substance transactions. 
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PART II—OTHER PROVISIONS

Sec. 331. Limitation on transfer or importation of built-in losses. 

Sec. 332. Disallowance of certain partnership loss transfers. 

Sec. 333. No reduction of basis under section 734 in stock held by partnership 

in corporate partner. 

Sec. 334. Repeal of special rules for fasits. 

Sec. 335. Expanded disallowance of deduction for interest on convertible debt. 

Sec. 336. Expanded authority to disallow tax benefits under section 269. 

Sec. 337. Modifications of certain rules relating to controlled foreign corporations. 

Sec. 338. Basis for determining loss always reduced by nontaxed portion of 

dividends. 

Sec. 339. Affirmation of consolidated return regulation authority. 

Subtitle C—Prevention of Corporate Expatriation To Avoid United States 

Income Tax 

Sec. 341. Prevention of corporate expatriation to avoid United States income 

tax. 

Subtitle D—Inclusion in Gross Income of Funded Deferred Compensation of 

Corporate Insiders 

Sec. 351. Inclusion in gross income of funded deferred compensation of corporate insiders.

1 TITLE I—IMMEDIATE STIMULUS 

2 AND JOB CREATION 

3 Subtitle A—Family Tax Relief 

4 SEC. 101. ACCELERATION OF INCREASE IN CHILD TAX 

5 CREDIT. 

6 (a) IN GENERAL.—The items relating to calendar 

7 years 2001 through 2008 in the table contained in para8 graph (2) of section 24(a) (relating to per child amount) 

9 are amended to read as follows:

‘‘2003 thru 2009 ...................................................................... $800

2010 or thereafter .................................................................. 1,000’’.

10 (b) ACCELERATION OF INCREASE IN REFUNDABLE

11 PORTION OF CREDIT.—
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1 (1) IN GENERAL.—Clause (i) of section 

2 24(d)(1)(B) is amended to read as follows: 

3 ‘‘(i) 15 percent of so much of the tax4 payer’s earned income (within the meaning 

5 of section 32) which is taken into account 

6 in computing taxable income for the tax7 able year as exceeds $7,500, or’’. 

8 (2) CONFORMING AMENDMENT.—Paragraph (3) 

9 of section 24(d) is amended—

10 (A) by striking ‘‘$10,000’’ and inserting 

11 ‘‘$7,500’’, and 

12 (B) by striking ‘‘2000’’ and inserting 

13 ‘‘2002’’.

14 (c) EFFECTIVE DATES.—The amendments made by 

15 this section shall apply to taxable years beginning after 

16 December 31, 2002. 

17 SEC. 102. INCREASE IN STANDARD DEDUCTION FOR MAR18 RIED TAXPAYERS FILING JOINT RETURNS AC19 CELERATED. 

20 (a) IN GENERAL.—Subparagraph (A) of section 

21 63(c)(2), as amended by the Economic Growth and Tax 

22 Relief Reconciliation Act of 2001, is amended by striking 

23 ‘‘the applicable percentage of’’ and inserting ‘‘twice’’. 

24 (b) CONFORMING AMENDMENTS.—
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1 (1) Section 301(d) of the Economic Growth and 

2 Tax Relief Reconciliation Act of 2001 is amended by 

3 striking ‘‘2004’’ and inserting ‘‘2002’’. 

4 (2) Section 63(c) is amended by striking para5 graph (7). 

6 (c) EFFECTIVE DATE.—The amendments made by 

7 this section shall apply to taxable years beginning after 

8 December 31, 2002. 

9 SEC. 103. ACCELERATION OF 10-PERCENT INDIVIDUAL IN10 COME TAX RATE BRACKET EXPANSION. 

11 (a) IN GENERAL.—Clause (i) of section 1(i)(1)(B) 

12 (relating to the initial bracket amount) is amended by 

13 striking ‘‘($12,000 in the case of taxable years beginning 

14 before January 1, 2008)’’. 

15 (b) INFLATION ADJUSTMENT.—Subparagraph (C) of 

16 section 1(i)(1) is amended to read as follows: 

17 ‘‘(C) INFLATION ADJUSTMENT.—In pre18 scribing the tables under subsection (f)—

19 ‘‘(i) no adjustment shall be made in 

20 the $14,000 amount for any taxable year 

21 beginning before 2004, and 

22 ‘‘(ii) the adjustment in such amount 

23 with respect to taxable years beginning 

24 after 2003 shall be determined under sub-
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1 section (f)(3) by substituting ‘2003’ for 

2 ‘1992’ in subparagraph (B) thereof.’’

3 (c) EFFECTIVE DATE.—

4 (1) IN GENERAL.—The amendments made by 

5 this section shall apply to taxable years beginning 

6 after December 31, 2002. 

7 (2) TABLES FOR 2003.—The Secretary of the 

8 Treasury shall modify each table which has been 

9 prescribed under section 1(f) of the Internal Rev10 enue Code of 1986 for taxable years beginning in 

11 2003 and which relates to the amendment made by 

12 this section to reflect such amendment. 

13 SEC. 104. ACCELERATION OF ELIMINATION OF MARRIAGE 

14 PENALTY IN EARNED INCOME CREDIT. 

15 (a) IN GENERAL.—Subparagraph (B) of section 

16 32(b)(2) is amended to read as follows: 

17 ‘‘(B) JOINT RETURNS.—In the case of a 

18 joint return filed by an eligible individual and 

19 such individual’s spouse, the phaseout amount 

20 determined under subparagraph (A) shall be in21 creased by $3,000.’’

22 (b) CONFORMING AMENDMENT.—Clause (ii) of sec23 tion 32(j)(1)(B) is amended by striking ‘‘2007’’ and in24 serting ‘‘2002’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to taxable years beginning after 

3 December 31, 2002. 

4 Subtitle B—Incentives to Hire the 

5 Long-Term Unemployed 

6 SEC. 111. INCENTIVES TO HIRE THE LONG-TERM UNEM7 PLOYED. 

8 (a) IN GENERAL.—Paragraph (1) of section 51(d) 

9 (relating to members of targeted groups) is amended by 

10 striking ‘‘or’’ at the end of subparagraph (G), by striking 

11 the period at the end of subparagraph (H) and inserting 

12 ‘‘, or’’, and by adding at the end the following new sub13 paragraph: 

14 ‘‘(I) a qualified long-term unemployed indi15 vidual.’’

16 (b) QUALIFIED LONG-TERM UNEMPLOYED INDI17 VIDUAL.—Subsection (d) of section 51 is amended by re18 designating paragraphs (10), (11), and (12) as para19 graphs (11), (12), and (13), respectively, and by inserting 

20 after paragraph (9) the following new paragraph: 

21 ‘‘(10) QUALIFIED LONG-TERM UNEMPLOYED

22 INDIVIDUAL.—

23 ‘‘(A) IN GENERAL.—The term ‘qualified 

24 long-term unemployed individual’ means any in-
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1 dividual who is certified by the designated local 

2 agency—

3 ‘‘(i) as having exhausted, during the 

4 1-year period ending on the hiring date, all 

5 rights to regular unemployment compensa6 tion under State or Federal law, and 

7 ‘‘(ii) as having a hiring date which is 

8 during the 1-year period beginning on the 

9 date of the enactment of this paragraph. 

10 Subsection (c)(4) shall not apply to any quali11 fied long-term unemployed individual. 

12 ‘‘(B) EXHAUSTION OF BENEFITS.—For 

13 purposes of subparagraph (A), an individual 

14 shall be deemed to have exhausted such individ15 ual’s rights to regular compensation when—

16 ‘‘(i) no payments of regular com17 pensation can be made under such law be18 cause such individual has received all reg19 ular compensation available to such indi20 vidual based on employment or wages dur21 ing such individual’s base period, or 

22 ‘‘(ii) such individual’s rights to such 

23 compensation have been terminated by rea24 son of the expiration of the benefit year 

25 with respect to which such rights existed.’’
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to individuals who begin work for 

3 the employer after the date of the enactment of this Act. 

4 Subtitle C—Extension of 

5 Unemployment Benefits 

6 SEC. 121. SHORT TITLE. 

7 This subtitle may be cited as the ‘‘Unemployment 

8 Benefits Extension Act’’. 

9 PART I—TEMPORARY EXTENDED 

10 UNEMPLOYMENT COMPENSATION 

11 SEC. 131. REFERENCES. 

12 Except as otherwise expressly provided, whenever in 

13 this part an amendment is expressed in terms of an 

14 amendment to a section or other provision, the reference 

15 shall be considered to be made to a section or other provi16 sion of the Temporary Extended Unemployment Com17 pensation Act of 2002 (Public Law 107–147; 26 U.S.C. 

18 3304 note). 

19 SEC. 132. EXTENSION OF THE TEMPORARY EXTENDED UN20 EMPLOYMENT COMPENSATION ACT OF 2002. 

21 (a) EXTENSION OF PROGRAM.—Section 208 is 

22 amended to read as follows: 
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1 ‘‘SEC. 208. APPLICABILITY. 

2 ‘‘(a) IN GENERAL.—Subject to subsection (b), an 

3 agreement entered into under this title shall apply to 

4 weeks of unemployment—

5 ‘‘(1) beginning after the date on which such 

6 agreement is entered into; and 

7 ‘‘(2) ending before March 1, 2004. 

8 ‘‘(b) TRANSITION.—In the case of an individual who 

9 is receiving temporary extended unemployment compensa10 tion for the week which immediately precedes the first day 

11 of the week that includes March 1, 2004, temporary ex12 tended unemployment compensation shall continue to be 

13 payable to such individual for any week thereafter from 

14 the account from which such individual received com15 pensation for the week immediately preceding that termi16 nation date. No compensation shall be payable by reason 

17 of the preceding sentence for any week beginning after Oc18 tober 31, 2004.’’. 

19 (b) EFFECTIVE DATE.—The amendment made by 

20 this section shall take effect as if included in the enact21 ment of the Temporary Extended Unemployment Com22 pensation Act of 2002 (Public Law 107–147; 116 Stat. 

23 21). 
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1 SEC. 133. ENTITLEMENT TO ADDITIONAL WEEKS OF TEM2 PORARY EXTENDED UNEMPLOYMENT COM3 PENSATION. 

4 (a) WEEKS OF TEUC AMOUNTS.—Paragraph (1) of 

5 section 203(b) is amended to read as follows: 

6 ‘‘(1) IN GENERAL.—The amount established in 

7 an account under subsection (a) shall be equal to 26 

8 times the individual’s weekly benefit amount for the 

9 benefit year.’’. 

10 (b) WEEKS OF TEUC–X AMOUNTS.—Section 

11 203(c)(1) is amended by striking ‘‘an amount equal to the 

12 amount originally established in such account (as deter13 mined under subsection (b)(1))’’ and inserting ‘‘7 times 

14 the individual’s weekly benefit amount for the benefit 

15 year’’. 

16 (c) EFFECTIVE DATE.—

17 (1) IN GENERAL.—The amendments made by 

18 this section—

19 (A) shall take effect as if included in the 

20 enactment of the Temporary Extended Unem21 ployment Compensation Act of 2002 (Public 

22 Law 107–147; 116 Stat. 21); but

23 (B) shall apply only with respect to weeks 

24 of unemployment beginning on or after the date 

25 of enactment of this Act, subject to paragraph 

26 (2). 
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1 (2) SPECIAL RULES.—In the case of an indi2 vidual for whom a temporary extended unemploy3 ment account was established before the date of en4 actment of this Act, the Temporary Extended Un5 employment Compensation Act of 2002 (as amended 

6 by this part) shall be applied subject to the fol7 lowing: 

8 (A) Any amounts deposited in the individ9 ual’s temporary extended unemployment com10 pensation account by reason of section 203(c) 

11 of such Act (commonly known as ‘‘TEUC–X 

12 amounts’’) before the date of enactment of this 

13 Act shall be treated as amounts deposited by 

14 reason of section 203(b) of such Act (commonly 

15 known as ‘‘TEUC amounts’’), as amended by 

16 subsection (a). 

17 (B) For purposes of determining whether 

18 the individual is eligible for any TEUC–X 

19 amounts under such Act, as amended by this 

20 part—

21 (i) any determination made under sec22 tion 203(c) of such Act before the applica23 tion of the amendments made by this part 

24 shall be disregarded; and 
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1 (ii) any such determination shall in2 stead be made by applying section 203(c) 

3 of such Act, as amended by this part—

4 (I) as of the time that all 

5 amounts established in such account 

6 in accordance with section 203(b) of 

7 such Act (as amended by this part, 

8 and including any amounts described 

9 in subparagraph (A)) are in fact ex10 hausted, except that 

11 (II) if such individual’s account 

12 was both augmented by and exhausted 

13 of all TEUC–X amounts before the 

14 date of enactment of this Act, such 

15 determination shall be made as if ex16 haustion (as described in section 

17 203(c)(1) of such Act) had not oc18 curred until such date of enactment. 

19 SEC. 134. EXTENDED BENEFIT PERIODS. 

20 (a) APPLICATION OF REVISED RATE OF INSURED

21 UNEMPLOYMENT.—Section 207 is amended—

22 (1) by striking ‘‘In’’ and inserting ‘‘(a) IN GEN23 ERAL.—In’’; and 

24 (2) by adding at the end the following: 
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1 ‘‘(b) INSURED UNEMPLOYMENT RATE.—For pur2 poses of carrying out section 203(c) with respect to weeks 

3 of unemployment beginning on or after the date of enact4 ment of this subsection, the term ‘rate of insured unem5 ployment’, as used in section 203(d) of the Federal-State 

6 Extended Unemployment Compensation Act of 1970 (26 

7 U.S.C. 3304 note), has the meaning given such term 

8 under section 203(e)(1) of such Act, except that individ9 uals exhausting their right to regular compensation during 

10 the most recent 3 calendar months for which data are 

11 available before the close of the period for which such rate 

12 is being determined shall be taken into account as if they 

13 were individuals filing claims for regular compensation for 

14 each week during the period for which such rate is being 

15 determined, and section 203(d)(1)(A) of such Act shall be 

16 applied by substituting ‘either (or both)’ for ‘each’.’’. 

17 (b) ADDITIONAL EXTENDED BENEFIT PERIOD TRIG18 GER.—

19 (1) IN GENERAL.—Section 203(c) is amended 

20 by adding at the end the following: 

21 ‘‘(3) ADDITIONAL EXTENDED BENEFIT PERIOD

22 TRIGGER.—

23 ‘‘(A) IN GENERAL.—Effective with respect 

24 to compensation for weeks of unemployment be25 ginning on or after the date of enactment of 
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1 this paragraph, an agreement under this title 

2 shall provide that, in addition to any other ex3 tended benefit period trigger, for purposes of 

4 beginning or ending any extended benefit period 

5 under this section—

6 ‘‘(i) there is a State ‘on’ indicator for 

7 a week if—

8 ‘‘(I) the average rate of total un9 employment in such State (seasonally 

10 adjusted) for the period consisting of 

11 the most recent 3 months for which 

12 data for all States are published be13 fore the close of such week equals or 

14 exceeds 6 percent; and 

15 ‘‘(II) the average rate of total 

16 unemployment in such State (season17 ally adjusted) for the 3-month period 

18 referred to in subclause (I) equals or 

19 exceeds 110 percent of such average 

20 rate for either (or both) of the cor21 responding 3-month periods ending in 

22 the 2 preceding calendar years; and 

23 ‘‘(ii) there is a State ‘off’ indicator for 

24 a week if either the requirements of sub-
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1 clause (I) or (II) of clause (i) are not satis2 fied. 

3 ‘‘(B) NO EFFECT ON OTHER DETERMINA4 TIONS.—Notwithstanding the provisions of any 

5 agreement described in subparagraph (A), any 

6 week for which there would otherwise be a 

7 State ‘on’ indicator shall continue to be such a 

8 week and shall not be determined to be a week 

9 for which there is a State ‘off’ indicator. 

10 ‘‘(C) DETERMINATIONS MADE BY THE

11 SECRETARY.—For purposes of this subsection, 

12 determinations of the rate of total unemploy13 ment in any State for any period (and of any 

14 seasonal adjustment) shall be made by the Sec15 retary.’’. 

16 (2) CONFORMING AMENDMENT.—Section 

17 203(c)(1) is amended by inserting ‘‘or (3)’’ after 

18 ‘‘paragraph (2)’’.

19 PART II—UNEMPLOYMENT BENEFITS FOR INDI20 VIDUALS QUALIFYING BASED ON PART-TIME 

21 WORK OR AN ALTERNATIVE BASE PERIOD 

22 SEC. 141. FEDERAL-STATE AGREEMENTS. 

23 (a) IN GENERAL.—Any State which desires to do so 

24 may enter into and participate in an agreement under this 

25 part with the Secretary of Labor (hereinafter in this part 
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1 referred to as the ‘‘Secretary’’). Any State which is a party 

2 to an agreement under this part may, upon providing 30 

3 days’ written notice to the Secretary, terminate such 

4 agreement. 

5 (b) PROVISIONS OF AGREEMENT.—

6 (1) IN GENERAL.—Any agreement under sub7 section (a) shall provide that the State agency of the 

8 State will make payments of regular compensation 

9 to individuals in amounts and to the extent that they 

10 would be determined if the State law were applied 

11 with the modifications described in paragraph (2). 

12 (2) MODIFICATIONS DESCRIBED.—The modi13 fications described in this paragraph are as follows: 

14 (A) In the case of an individual who is not 

15 eligible for regular compensation under the 

16 State law because of the use of a definition of 

17 base period that does not count wages earned 

18 in the most recently completed calendar quar19 ter, eligibility for compensation under this part 

20 shall be determined by applying a base period 

21 ending at the close of the most recently com22 pleted calendar quarter. 

23 (B) In the case of an individual who is not 

24 eligible for regular compensation under the 

25 State law because such individual does not meet 
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1 requirements relating to availability for work, 

2 active search for work, or refusal to accept 

3 work, because such individual is seeking, or is 

4 available for, less than full-time work, com5 pensation under this part shall not be denied by 

6 such State to an otherwise eligible individual 

7 who seeks less than full-time work or fails to 

8 accept full-time work. 

9 (c) COORDINATION RULE.—The modifications de10 scribed in subsection (b)(2) shall also apply in determining 

11 the amount of benefits payable under any Federal law to 

12 the extent that those benefits are determined by reference 

13 to regular compensation payable under the State law of 

14 the State involved. 

15 SEC. 142. PAYMENTS TO STATES HAVING AGREEMENTS 

16 UNDER THIS PART. 

17 (a) GENERAL RULE.—There shall be paid to each 

18 State which has entered into an agreement under this part 

19 an amount equal to—

20 (1) 100 percent of any regular compensation 

21 made payable to individuals by such State by virtue 

22 of the modifications which are described in section 

23 141(b)(2) and deemed to be in effect with respect to 

24 such State pursuant to section 141(b)(1), and 

25 (2) 100 percent of any regular compensation—
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1 (A) which is paid to individuals by such 

2 State by reason of the fact that its State law 

3 contains provisions comparable to the modifica4 tions described in section 141(b)(2), but only 

5 (B) to the extent that those amounts 

6 would, if such amounts were instead payable by 

7 virtue of the State law’s being deemed to be so 

8 modified pursuant to section 141(b)(1), have 

9 been reimbursable under paragraph (1). 

10 (b) DETERMINATION OF AMOUNT.—Sums under sub11 section (a) payable to any State by reason of such State 

12 having an agreement under this part shall be payable, ei13 ther in advance or by way of reimbursement (as may be 

14 determined by the Secretary), in such amounts as the Sec15 retary estimates the State will be entitled to receive under 

16 this part for each calendar month, reduced or increased, 

17 as the case may be, by any amount by which the Secretary 

18 finds that the Secretary’s estimates for any prior calendar 

19 month were greater or less than the amounts which should 

20 have been paid to the State. Such estimates may be made 

21 on the basis of such statistical, sampling, or other method 

22 as may be agreed upon by the Secretary and the State 

23 agency of the State involved. 

24 (c) ADMINISTRATIVE AND OTHER EXPENSES.—

25 There is hereby appropriated out of the employment secu-
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1 rity administration account of the Unemployment Trust 

2 Fund (as established by section 901(a) of the Social Secu3 rity Act) $500,000,000 to reimburse States for the costs 

4 of the administration of agreements under this part (in5 cluding any improvements in technology in connection 

6 therewith) and to provide reemployment services to unem7 ployment compensation claimants in States having agree8 ments under this part. Each State’s share of the amount 

9 appropriated by the preceding sentence shall be deter10 mined by the Secretary according to the factors described 

11 in section 302(a) of the Social Security Act and certified 

12 by the Secretary to the Secretary of the Treasury. 

13 SEC. 143. FINANCING PROVISIONS. 

14 (a) IN GENERAL.—Funds in the extended unemploy15 ment compensation account (as established by section 

16 905(a) of the Social Security Act), and the Federal unem17 ployment account (as established by section 904(g) of the 

18 Social Security Act), of the Unemployment Trust Fund 

19 shall be used, in accordance with subsection (b), for the 

20 making of payments (described in section 142(a)) to 

21 States having agreements entered into under this part. 

22 (b) CERTIFICATION.—The Secretary shall from time 

23 to time certify to the Secretary of the Treasury for pay24 ment to each State the sums described in section 142(a) 

25 which are payable to such State under this part. The Sec-
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1 retary of the Treasury, prior to audit or settlement by the 

2 General Accounting Office, shall make payments to the 

3 State in accordance with such certification by transfers 

4 from the extended unemployment compensation account 

5 (or, to the extent that there are insufficient funds in that 

6 account, from the Federal unemployment account) to the 

7 account of such State in the Unemployment Trust Fund. 

8 SEC. 144. DEFINITIONS. 

9 For purposes of this part: 

10 (1) IN GENERAL.—The terms ‘‘compensation’’, 

11 ‘‘regular compensation’’, ‘‘base period’’, ‘‘State’’, 

12 ‘‘State agency’’, ‘‘State law’’, and ‘‘week’’ have the 

13 respective meanings given such terms under section 

14 205 of the Federal-State Extended Unemployment 

15 Compensation Act of 1970, subject to paragraph 

16 (2). 

17 (2) STATE LAW AND REGULAR COMPENSA18 TION.—In the case of a State entering into an 

19 agreement under this part—

20 (A) ‘‘State law’’ shall be considered to 

21 refer to the State law of such State, applied in 

22 conformance with the modifications described in 

23 section 201(b)(2), and 

24 (B) ‘‘regular compensation’’ shall be con25 sidered to refer to such compensation, deter-
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1 mined under its State law (applied in the man2 ner described in subparagraph (A)), 

3 except as otherwise provided or where the context 

4 clearly indicates otherwise. 

5 SEC. 145. APPLICABILITY. 

6 An agreement entered into under this part shall apply 

7 to weeks of unemployment—

8 (1) beginning after the date on which such 

9 agreement is entered into, and 

10 (2) ending before July 1, 2004. 

11 PART III—ENHANCED UNEMPLOYMENT 

12 BENEFITS 

13 SEC. 151. FEDERAL-STATE AGREEMENTS. 

14 (a) IN GENERAL.—Any State which desires to do so 

15 may enter into and participate in an agreement under this 

16 part with the Secretary of Labor (hereinafter in this part 

17 referred to as the ‘‘Secretary’’). Any State which is a party 

18 to an agreement under this part may, upon providing 30 

19 days’ written notice to the Secretary, terminate such 

20 agreement. 

21 (b) PROVISIONS OF AGREEMENT.—

22 (1) IN GENERAL.—Any agreement under sub23 section (a) shall provide that the State agency of the 

24 State will make payments of regular compensation 

25 to individuals in amounts and to the extent that they 
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1 would be determined if the State law were applied 

2 with the modification described in paragraph (2). 

3 (2) MODIFICATION DESCRIBED.—The modifica4 tion described in this paragraph is that the amount 

5 of regular compensation (including dependents’ al6 lowances) payable for any week shall be equal to the 

7 amount determined under the State law (before the 

8 application of this paragraph), plus an additional—

9 (A) 15 percent, or 

10 (B) $25, 

11 whichever is greater. 

12 (c) NONREDUCTION RULE.—Each agreement shall 

13 provide that such agreement shall not apply (or shall cease 

14 to apply) upon a determination by the Secretary that the 

15 method governing the computation of regular compensa16 tion under the State law of that State has been modified 

17 in a way such that—

18 (1) the average weekly amount of regular com19 pensation which will be payable during the period of 

20 the agreement (determined disregarding the modi21 fication described in subsection (b)(2)) will be less 

22 than 

23 (2) the average weekly amount of regular com24 pensation which would otherwise have been payable 
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1 during such period under the State law, as in effect 

2 on September 11, 2001. 

3 (d) COORDINATION RULE.—The modification de4 scribed in subsection (b)(2) shall also apply in determining 

5 the amount of benefits payable under any Federal law to 

6 the extent that those benefits are determined by reference 

7 to regular compensation payable under the State law of 

8 the State involved. 

9 SEC. 152. PAYMENTS TO STATES HAVING AGREEMENTS 

10 UNDER THIS PART. 

11 (a) GENERAL RULE.—There shall be paid to each 

12 State which has entered into an agreement under this part 

13 an amount equal to 100 percent of any regular compensa14 tion made payable to individuals by such State by virtue 

15 of the modification described in section 151(b)(2) and 

16 deemed to be in effect with respect to such State pursuant 

17 to section 151(b)(1). 

18 (b) DETERMINATION OF AMOUNT.—Sums under sub19 section (a) payable to any State by reason of such State 

20 having an agreement under this part shall be payable, ei21 ther in advance or by way of reimbursement (as may be 

22 determined by the Secretary), in such amounts as the Sec23 retary estimates the State will be entitled to receive under 

24 this part for each calendar month, reduced or increased, 

25 as the case may be, by any amount by which the Secretary 
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1 finds that the Secretary’s estimates for any prior calendar 

2 month were greater or less than the amounts which should 

3 have been paid to the State. Such estimates may be made 

4 on the basis of such statistical, sampling, or other method 

5 as may be agreed upon by the Secretary and the State 

6 agency of the State involved. 

7 SEC. 153. DEFINITIONS. 

8 For purposes of this part: 

9 (1) IN GENERAL.—The terms ‘‘compensation’’, 

10 ‘‘regular compensation’’, ‘‘extended compensation’’, 

11 ‘‘additional compensation’’, ‘‘benefit year’’, ‘‘base pe12 riod’’, ‘‘State’’, ‘‘State agency’’, ‘‘State law’’, and 

13 ‘‘week’’ have the respective meanings given such 

14 terms under section 205 of the Federal-State Ex15 tended Unemployment Compensation Act of 1970, 

16 subject to paragraph (2). 

17 (2) STATE LAW AND REGULAR COMPENSA18 TION.—In the case of a State entering into an 

19 agreement under this part—

20 (A) ‘‘State law’’ shall be considered to 

21 refer to the State law of such State, applied in 

22 conformance with the modification described in 

23 section 151(b)(2), subject to section 151(c), 

24 and 
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1 (B) ‘‘regular compensation’’ shall be con2 sidered to refer to such compensation, deter3 mined under its State law (applied in the man4 ner described in subparagraph (A)), 

5 except as otherwise provided or where the context 

6 clearly indicates otherwise. 

7 SEC. 154. APPLICABILITY. 

8 (a) IN GENERAL.—An agreement entered into under 

9 this part shall apply to weeks of unemployment—

10 (1) beginning after the date on which such 

11 agreement is entered into, and 

12 (2) ending before January 1, 2004. 

13 Subtitle D—Trust Fund to Meet 

14 Nation’s Pressing Needs 

15 SEC. 161. TRUST FUND TO MEET NATION’S PRESSING 

16 NEEDS. 

17 (a) CREATION OF TRUST FUND.—There is estab18 lished in the Treasury of the United States a trust fund 

19 to be known as the ‘Pressing Domestic Needs Trust 

20 Fund’, consisting of such amounts as may be transferred 

21 to the Trust Fund as provided in this section. 

22 (b) TRANSFERS TO FUND.—There are hereby trans23 ferred from the general Fund of the Treasury to the 

24 Pressing Domestic Needs Trust Fund so much of the ad25 ditional amounts received in the Treasury by reason of the 
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1 amendments made by title III of this Act as does not ex2 ceed—

3 (1) $18,000,000,000 to be used for increasing 

4 Federal matching funds under medicaid, and 

5 (2) $26,000,000,000 to be used for infrastruc6 ture improvements, homeland security, community 

7 development, and education. 

8 (c) EXPENDITURES.—Amounts in the Pressing Do9 mestic Needs Trust Fund shall be available, as provided 

10 by appropriation Acts, for purposes and in the amount 

11 specified in subsection (b). 

12 Subtitle D—Trust Fund to Meet 

13 Nation’s Pressing Needs 

14 SEC. 161. TRUST FUND TO MEET NATION’S PRESSING 

15 NEEDS. 

16 (a) CREATION OF TRUST FUND.—There is estab17 lished in the Treasury of the United States a trust fund 

18 to be known as the ‘Pressing Domestic Needs Trust 

19 Fund’, consisting of such amounts as may be transferred 

20 to the Trust Fund as provided in this section. 

21 (b) TRANSFERS TO FUND.—There are hereby trans22 ferred from the general Fund of the Treasury to the 

23 Pressing Domestic Needs Trust Fund so much of the ad24 ditional amounts received in the Treasury by reason of the 
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1 amendments made by title III of this Act as does not ex2 ceed—

3 (1) $18,000,000,000 to be used for increasing 

4 Federal matching funds under medicaid, and 

5 (2) $26,000,000,000 to be used for infrastruc6 ture improvements, homeland security, community 

7 development, and education. 

8 (c) EXPENDITURES.—Amounts in the Pressing Do9 mestic Needs Trust Fund shall be available, as provided 

10 by appropriation Acts, for purposes and in the amount 

11 specified in subsection (b). 

12 TITLE II—LONG-TERM JOB 

13 CREATION AND GROWTH

14 SEC. 201. INCREASE AND EXTENSION OF BONUS DEPRECIA15 TION. 

16 (a) IN GENERAL.—Section 168(k) (relating to special 

17 allowance for certain property acquired after September 

18 10, 2001, and before September 11, 2004) is amended by 

19 adding at the end the following new paragraph: 

20 ‘‘(4) 50-PERCENT BONUS DEPRECIATION FOR

21 CERTAIN PROPERTY.—

22 ‘‘(A) IN GENERAL.—In the case of 50-per23 cent bonus depreciation property—
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1 ‘‘(i) paragraph (1)(A) shall be applied 

2 by substituting ‘50 percent’ for ‘30 per3 cent’, and 

4 ‘‘(ii) except as provided in paragraph 

5 (2)(C), such property shall be treated as 

6 qualified property for purposes of this sub7 section. 

8 ‘‘(B) 50-PERCENT BONUS DEPRECIATION

9 PROPERTY.—For purposes of this subsection, 

10 the term ‘50-percent bonus depreciation prop11 erty’ means property described in paragraph 

12 (2)(A)(i)—

13 ‘‘(i) the original use of which com14 mences with the taxpayer after April 30, 

15 2003, 

16 ‘‘(ii) which is acquired by the taxpayer 

17 after April 30, 2003, and before May 1, 

18 2004, but only if no written binding con19 tract for the acquisition was in effect be20 fore May 1, 2003, and 

21 ‘‘(iii) which is placed in service by the 

22 taxpayer before January 1, 2005, or, in 

23 the case of property described in para24 graph (2)(B) (as modified by subpara-
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1 graph (C) of this paragraph), before Janu2 ary 1, 2006. 

3 ‘‘(C) SPECIAL RULES.—Rules similar to 

4 the rules of subparagraphs (B) and (D) of 

5 paragraph (2) shall apply for purposes of this 

6 paragraph; except that reference to September 

7 10, 2001, shall be treated as references to April 

8 30, 2003. 

9 ‘‘(D) AUTOMOBILES.—Paragraph (2)(E) 

10 shall be applied by substituting ‘$9,200’ for 

11 ‘$4,600’ in the case of 50-percent bonus depre12 ciation property. 

13 ‘‘(E) ELECTION OF 30 PERCENT BONUS.—

14 If a taxpayer makes an election under this sub15 paragraph with respect to any class of property 

16 for any taxable year, subparagraph (A)(i) shall 

17 not apply to all property in such class placed in 

18 service during such taxable year.’’

19 (b) MODIFICATION TO 30-PERCENT BONUS DEPRE20 CIATION PROPERTY.—

21 (1) PORTION OF BASIS TAKEN INTO AC22 COUNT.—Subparagraphs (B)(ii) and (D)(i) of sec23 tion 168(k)(2) are each amended by striking ‘‘Sep24 tember 11, 2004’’ each place it appears and insert25 ing ‘‘January 1, 2005’’. 
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1 (2) ELECTION.—Clause (iii) of section 

2 168(k)(2)(C) is amended by adding at the end the 

3 following: ‘‘The preceding sentence shall be applied 

4 separately with respect to property treated as quali5 fied property by paragraph (4) and other qualified 

6 property.’’

7 (3) ACQUISITION DATE.—Clause (iii) of section 

8 168(k)(2)(A) is amended by striking ‘‘September 11, 

9 2004’’ each place it appears and inserting ‘‘January 

10 1, 2005’’. 

11 (c) CONFORMING AMENDMENTS.—

12 (1) The subsection heading for section 168(k) is 

13 amended by striking ‘‘SEPTEMBER 11, 2004’’ and 

14 inserting ‘‘JANUARY 1, 2005’’. 

15 (2) The heading for clause (i) of section 

16 1400L(b)(2)(C) is amended by striking ‘‘30-PER17 CENT ADDITIONAL ALLOWABLE PROPERTY’’ and in18 serting ‘‘BONUS DEPRECIATION PROPERTY UNDER

19 SECTION 168(k)’’. 

20 (d) EFFECTIVE DATE.—The amendments made by 

21 this section shall apply to taxable years ending after the 

22 date of the enactment of this Act. 
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1 SEC. 202. INCREASED EXPENSING FOR SMALL BUSINESS. 

2 (a) IN GENERAL.—Paragraph (1) of section 179(b) 

3 (relating to dollar limitation) is amended to read as fol4 lows: 

5 ‘‘(1) DOLLAR LIMITATION.—The aggregate cost 

6 which may be taken into account under subsection 

7 (a) for any taxable year shall not exceed $25,000 

8 ($75,000 in the case of taxable years beginning in 

9 2003 or 2004).’’. 

10 (b) EFFECTIVE DATE.—The amendment made by 

11 this section shall apply to taxable years beginning after 

12 December 31, 2002. 

13 SEC. 203. DEDUCTION RELATING TO INCOME ATTRIB14 UTABLE TO UNITED STATES PRODUCTION 

15 ACTIVITIES. 

16 (a) IN GENERAL.—Part VIII of subchapter B of 

17 chapter 1 (relating to special deductions for corporations) 

18 is amended by adding at the end the following new section: 

19 ‘‘SEC. 250. INCOME ATTRIBUTABLE TO DOMESTIC PRODUC20 TION ACTIVITIES. 

21 ‘‘(a) IN GENERAL.—In the case of a corporation, 

22 there shall be allowed as a deduction an amount equal to 

23 10 percent of the qualified production activities income of 

24 the corporation for the taxable year. 

25 ‘‘(b) PHASEIN.—In the case of taxable years begin26 ning in 2006, 2007, 2008 or 2009, subsection (a) shall 
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1 be applied by substituting for the percentage contained 

2 therein the transition percentage determined under the 

3 following table:

‘‘Taxable years The transition 

beginning in: percentage is: 

2006 ............................................................................ 1

2007 ............................................................................ 2

2008 ............................................................................ 4

2009 ............................................................................ 9

4 ‘‘(c) QUALIFIED PRODUCTION ACTIVITIES IN5 COME.—For purposes of this section, the term ‘qualified 

6 production activities income’ means the product of—

7 ‘‘(1) the portion of the modified taxable income 

8 of the taxpayer which is attributable to domestic 

9 production activities, and 

10 ‘‘(2) the domestic/foreign fraction. 

11 ‘‘(d) DETERMINATION OF INCOME ATTRIBUTABLE

12 TO DOMESTIC PRODUCTION ACTIVITIES.—For purposes 

13 of this section—

14 ‘‘(1) IN GENERAL.—The portion of the modified 

15 taxable income which is attributable to domestic pro16 duction activities is so much of the modified taxable 

17 income for the taxable year as does not exceed—

18 ‘‘(A) the taxpayer’s domestic production 

19 gross receipts for such taxable year, reduced by 

20 ‘‘(B) the sum of—

21 ‘‘(i) the costs of goods sold that are 

22 allocable to such receipts, 
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1 ‘‘(ii) other deductions, expenses, or 

2 losses directly allocable to such receipts, 

3 and 

4 ‘‘(iii) a ratable portion of other deduc5 tions, expenses, and losses that are not di6 rectly allocable to such receipts or another 

7 class of income. 

8 ‘‘(2) ALLOCATION METHOD.—Except as pro9 vided in regulations, allocations under clauses (ii) 

10 and (iii) of paragraph (1)(B) shall be made under 

11 the principles used in determining the portion of tax12 able income from sources within and without the 

13 United States. 

14 ‘‘(3) SPECIAL RULE.—

15 ‘‘(A) For purposes of determining costs 

16 under clause (i) of paragraph (1)(B), any item 

17 or service brought into the United States with18 out a transfer price meeting the requirements 

19 of section 482 shall be treated as acquired by 

20 purchase, and its cost shall be treated as not 

21 less than its value when it entered the United 

22 States. A similar rule shall apply in determining 

23 the adjusted basis of leased or rented property 

24 where the lease or rental gives rise to domestic 

25 production gross receipts. 
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1 ‘‘(B) In the case of any property described 

2 in subparagraph (A) that had been exported by 

3 the taxpayer for further manufacture, the in4 crease in cost (or adjusted basis) under sub5 paragraph (A) shall not exceed the difference 

6 between the value of the property when ex7 ported and the value of the property when 

8 brought back into the United States after the 

9 further manufacture. 

10 ‘‘(4) MODIFIED TAXABLE INCOME.—The term 

11 ‘modified taxable income’ means taxable income 

12 computed without regard to the deduction allowable 

13 under this section. 

14 ‘‘(e) DOMESTIC PRODUCTION GROSS RECEIPTS.—

15 For purposes of this section—

16 ‘‘(1) IN GENERAL.—The term ‘domestic produc17 tion gross receipts’ means the gross receipts of the 

18 taxpayer which are derived from—

19 ‘‘(A) any sale, exchange, or other disposi20 tion of, or 

21 ‘‘(B) any lease, rental or license of, 

22 qualifying production property which was manufac23 tured, produced, grown, or extracted in whole or in 

24 significant part by the taxpayer within the United 

25 States. 
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1 ‘‘(2) SPECIAL RULE.—The term ‘domestic pro2 duction gross receipts’ includes gross receipts of the 

3 taxpayer from the sale, exchange, or other disposi4 tion of replacement parts if— 

5 ‘‘(A) such parts are sold by the taxpayer 

6 as replacement parts for qualified production 

7 property produced or manufactured in whole or 

8 significant part by the taxpayer in the United 

9 States, and 

10 ‘‘(B) the taxpayer (or a related party) 

11 owns the designs for such parts. 

12 ‘‘(3) RELATED PARTY.—The term ‘related 

13 party’ means any corporation which is a member of 

14 the taxpayer’s expanded affiliated group. 

15 ‘‘(f) QUALIFYING PRODUCTION PROPERTY.—For 

16 purposes of this section—

17 ‘‘(1) IN GENERAL.—Except as otherwise pro18 vided in this paragraph, the term ‘qualifying produc19 tion property’ means—

20 ‘‘(A) any tangible personal property, 

21 ‘‘(B) any computer software, and 

22 ‘‘(C) any films, tapes, records, or similar 

23 reproductions. 
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1 ‘‘(2) EXCLUSIONS FROM QUALIFYING PRODUC2 TION PROPERTY.—The term ‘qualifying production 

3 property’ shall not include—

4 ‘‘(A) consumable property that is sold, 

5 leased, or licensed by the taxpayer as an inte6 gral part of the provision of services, 

7 ‘‘(B) oil or gas (or any primary product 

8 thereof), 

9 ‘‘(C) electricity, 

10 ‘‘(D) water supplied by pipeline to the con11 sumer, 

12 ‘‘(E) any unprocessed timber which is 

13 softwood, 

14 ‘‘(F) utility services, or 

15 ‘‘(G) any property (not described in para16 graph (1)(B)) which is a film, tape, recording, 

17 book, magazine, newspaper, or similar property 

18 the market for which is primarily topical or oth19 erwise essentially transitory in nature. 

20 For purposes of subparagraph (E), the term ‘un21 processed timber’ means any log, cant, or similar 

22 form of timber. 

23 ‘‘(g) DOMESTIC/FOREIGN FRACTION.—For purposes 

24 of this section—
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1 ‘‘(1) IN GENERAL.—The term ‘domestic/foreign 

2 fraction’ means a fraction—

3 ‘‘(A) the numerator of which is the value 

4 of the domestic production of the taxpayer, and 

5 ‘‘(B) the denominator of which is the value 

6 of the worldwide production of the taxpayer. 

7 ‘‘(2) VALUE OF DOMESTIC PRODUCTION.—The 

8 value of domestic production is the excess of—

9 ‘‘(A) the domestic production gross re10 ceipts, over 

11 ‘‘(B) the cost of purchased inputs allocable 

12 to such receipts that are deductible under this 

13 chapter for the taxable year. 

14 ‘‘(3) PURCHASED INPUTS.—

15 ‘‘(A) IN GENERAL.—Purchased inputs are 

16 any of the following items acquired by pur17 chase: 

18 ‘‘(i) Services (other than services of 

19 employees) used in manufacture, produc20 tion, growth, or extraction activities. 

21 ‘‘(ii) Items consumed in connection 

22 with such activities.

23 ‘‘(iii) Items incorporated as part of 

24 the property being manufactured, pro25 duced, grown, or extracted. 
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1 ‘‘(B) SPECIAL RULE.—Rules similar to the 

2 rules of subsection (d)(3) shall apply for pur3 poses of this subsection. 

4 ‘‘(4) VALUE OF WORLDWIDE PRODUCTION.—

5 ‘‘(A) IN GENERAL.—The value of world6 wide production shall be determined under the 

7 principles of paragraph (2), except that—

8 ‘‘(i) worldwide production gross re9 ceipts shall be taken into account, and 

10 ‘‘(ii) paragraph (3)(B) shall not apply. 

11 ‘‘(B) WORLDWIDE PRODUCTION GROSS RE12 CEIPTS.—The worldwide production gross re13 ceipts is the amount that would be determined 

14 under subsection (e) if such subsection were ap15 plied without any reference to the United 

16 States. 

17 ‘‘(5) SPECIAL RULE FOR AFFILIATED

18 GROUPS.—

19 ‘‘(A) IN GENERAL.—In the case of a tax20 payer that is a member of an expanded affili21 ated group, the domestic/foreign fraction shall 

22 be the amount determined under the preceding 

23 provisions of this subsection by treating all 

24 members of such group as a single corporation. 
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1 ‘‘(B) EXPANDED AFFILIATED GROUP.—

2 The term ‘expanded affiliated group’ means an 

3 affiliated group as defined in section 1504(a), 

4 determined—

5 ‘‘(i) by substituting ‘50 percent’ for 

6 ‘80 percent’ each place it appears, and 

7 ‘‘(ii) without regard to paragraphs 

8 (2), (3), and (4) of section 1504(b). 

9 ‘‘(h) DEFINITIONS AND SPECIAL RULES.—

10 ‘‘(1) UNITED STATES.—For purposes of this 

11 section, the term ‘United States’ includes the Com12 monwealth of Puerto Rico and any other possession 

13 of the United States. 

14 ‘‘(2) SPECIAL RULE FOR PARTNERSHIPS.—For 

15 purposes of this section, a corporation’s distributive 

16 share of any partnership item shall be taken into ac17 count as if directly realized by the corporation. 

18 ‘‘(3) COORDINATION WITH MINIMUM TAX.—The 

19 deduction under this section shall be allowed for 

20 purposes of the tax imposed by section 55; except 

21 that for purposes of section 55, alternative minimum 

22 taxable income shall be taken into account in deter23 mining the deduction under this section. 
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1 ‘‘(4) ORDERING RULE.—The amount of any 

2 other deduction allowable under this chapter shall be 

3 determined as if this section had not been enacted. 

4 ‘‘(5) COORDINATION WITH TRANSITION

5 RULES.—For purposes of this section—

6 ‘‘(A) domestic production gross receipts 

7 shall not include gross receipts from any trans8 action if the binding contract transition relief of 

9 section 303(c)(2) of the Jobs and Growth Rec10 onciliation Tax Act of 2003 applies to such 

11 transaction, and 

12 ‘‘(B) any deduction allowed under section 

13 2(e) of such Act shall be disregarded in deter14 mining the portion of the taxable income which 

15 is attributable to domestic production gross re16 ceipts.’’. 

17 (b) CLERICAL AMENDMENT.—The table of sections 

18 for part VIII of subchapter B of chapter 1 is amended 

19 by adding at the end the following new item:

‘‘Sec. 250. Income attributable to domestic production activities.’’.

20 (c) EFFECTIVE DATE.—

21 ‘‘(1) IN GENERAL.—The amendments made by 

22 this section shall apply to taxable years beginning 

23 after 2005. 
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1 ‘‘(2) APPLICATION OF SECTION 15.—Section 15 

2 of the Internal Revenue Code of 1986 shall apply to 

3 the amendments made by this section as if they were 

4 changes in a rate of tax. 

5 TITLE III—FISCAL RESPONSI6 BILITY AND PROVISIONS AD7 DRESSING CORPORATE 

8 ABUSE 

9 Subtitle A— General Provisions 

10 SEC. 301. FREEZE OF TOP INDIVIDUAL INCOME TAX RATES. 

11 (a) FREEZE OF TOP INDIVIDUAL INCOME TAX

12 RATES.—Paragraph (2) of section 1(i) (relating to reduc13 tions in rates after June 30, 2001) is amended—

14 (1) in the column for the highest rate—

15 (A) by striking ‘‘37.6’’ and inserting 

16 ‘‘38.6’’, and 

17 (B) by striking ‘‘35.0’’ and inserting 

18 ‘‘38.6’’, and 

19 (2) in the column for the next highest rate—

20 (A) by striking ‘‘34.0’’ and inserting 

21 ‘‘35.0’’, and 

22 (B) by striking ‘‘33.0’’ and inserting 

23 ‘‘35.0’’.
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1 (b) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to taxable years beginning after 

3 December 31, 2003. 

4 (c) RESTORATION OF RATE REDUCTIONS IF FUNDS

5 NOT COMMITTED TO MEET NATION’S PRESSING

6 NEEDS.—

7 (1) IN GENERAL.—On December 31, 2003, the 

8 Director of the Office of Management and Budget 

9 shall determine whether there is a noncommitted 

10 balance in the Pressing Domestic Needs Trust Fund 

11 (established by section 161 of this Act). If such a 

12 noncommitted balance is determined, the Secretary 

13 of the Treasury shall reduce the rates otherwise ap14 plicable under the amendment made by subsection 

15 (a) so that the total revenue raised by such amend16 ment is reduced by the amount of such noncom17 mitted balance. 

18 (2) NONCOMMITTED BALANCE.—For purposes 

19 of paragraph (1), the noncommitted balance of the 

20 trust fund is the portion of the amounts in the trust 

21 fund which are not committed to meeting the press22 ing needs specified in section 161. 

23 (d) RESTORATION OF RATE REDUCTIONS IF BAL24 ANCED BUDGET.—The amendments made by this section 

25 shall cease to apply to any taxable year beginning after 
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1 a calendar year if there is no deficit in the Federal budget 

2 for the fiscal year ending in such calendar year. 

3 SEC. 302. RESTORATION OF PHASEOUTS OF DEDUCTIONS 

4 FOR PERSONAL EXEMPTIONS AND OF 

5 ITEMIZED DEDUCTIONS. 

6 (a) PHASEOUT OF PERSONAL EXEMPTIONS.—Para7 graph (3) of section 151(d) is amended by striking sub8 paragraphs (E) and (F). 

9 (b) PHASEOUT OF ITEMIZED DEDUCTIONS.—Section 

10 68 (relating to overall limitation on itemized deductions) 

11 is amended by striking subsections (f) and (g). 

12 (c) EFFECTIVE DATE.—The amendments made by 

13 this section shall apply to taxable years beginning after 

14 December 31, 2002. 

15 SEC. 303. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL 

16 INCOME. 

17 (a) IN GENERAL.—Section 114 is hereby repealed. 

18 (b) CONFORMING AMENDMENTS.—

19 (1) Subpart E of part III of subchapter N of 

20 chapter 1 (relating to qualifying foreign trade in21 come) is hereby repealed. 

22 (2) The table of subparts for such part III is 

23 amended by striking the item relating to subpart E. 
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1 (3) The table of sections for part III of sub2 chapter B of chapter 1 is amended by striking the 

3 item relating to section 114. 

4 (c) EFFECTIVE DATE.—

5 (1) IN GENERAL.—The amendments made by 

6 this section shall apply to transactions occurring 

7 after the date of the enactment of this Act. 

8 (2) BINDING CONTRACTS.—The amendments 

9 made by this section shall not apply to any trans10 action in the ordinary course of a trade or business 

11 which occurs pursuant to a binding contract—

12 (A) which is between the taxpayer and a 

13 person who is not a related person (as defined 

14 in section 943(b)(3) of such Code, as in effect 

15 on the day before the date of the enactment of 

16 this Act), and 

17 (B) which is in effect on April 11, 2003, 

18 and at all times thereafter. 

19 For purposes of this paragraph, a binding contract 

20 shall include a purchase option, renewal option, or 

21 replacement option which is included in such con22 tract. 

23 (d) REVOCATION OF SECTION 943(e) ELECTIONS.—

24 (1) IN GENERAL.—In the case of a corporation 

25 that elected to be treated as a domestic corporation 
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1 under section 943(e) of the Internal Revenue Code 

2 of 1986 (as in effect on the day before the date of 

3 the enactment of this Act)—

4 (A) the corporation may revoke such elec5 tion, effective as of the date of the enactment 

6 of this Act, and 

7 (B) if the corporation does revoke such 

8 election—

9 (i) such corporation shall be treated 

10 as a domestic corporation transferring (as 

11 of the date of the enactment of this Act) 

12 all of its property to a foreign corporation 

13 in connection with an exchange described 

14 in section 354 of the Internal Revenue 

15 Code of 1986, and 

16 (ii) no gain or loss shall be recognized 

17 on such transfer. 

18 (2) EXCEPTION.—Subparagraph (B)(ii) of 

19 paragraph (1) shall not apply to gain on any asset 

20 held by the revoking corporation if—

21 (A) the basis of such asset is determined 

22 in whole or in part by reference to the basis of 

23 such asset in the hands of the person from 

24 whom the revoking corporation acquired such 

25 asset, 
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1 (B) the asset was acquired by transfer (not 

2 as a result of the election under section 943(e) 

3 of such Code) occurring on or after the 1st day 

4 on which its election under section 943(e) of 

5 such Code was effective, and 

6 (C) a principal purpose of the acquisition 

7 was the reduction or avoidance of tax. 

8 (e) GENERAL TRANSITION.—

9 (1) IN GENERAL.—In the case of a taxable year 

10 ending after the date of the enactment of this Act 

11 and beginning before January 1, 2009, for purposes 

12 of chapter 1 of such Code, each current FSC/ETI 

13 beneficiary shall be allowed a deduction equal to the 

14 transition amount determined under this subsection 

15 with respect to such beneficiary for such year. 

16 (2) CURRENT FSC/ETI BENEFICIARY.—The 

17 term ‘‘current FSC/ETI beneficiary’’ means any cor18 poration which entered into one or more transactions 

19 during its taxable year beginning in calendar year 

20 2001 with respect to which FSC/ETI benefits were 

21 allowable. 

22 (3) TRANSITION AMOUNT.—For purposes of 

23 this subsection—

24 (A) IN GENERAL.—The transition amount 

25 applicable to any current FSC/ETI beneficiary 
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1 for any taxable year is the phaseout percentage 

2 of the adjusted base period amount. 

3 (B) PHASEOUT PERCENTAGE.—

4 (i) IN GENERAL.—In the case of a 

5 taxpayer using the calendar year as its 

6 taxable year, the phaseout percentage shall 

7 be determined under the following table:

The phaseout 

‘‘Years: percentage is:

2004 and 2005 ............................................................ 100

2006 ............................................................................ 75

2007 ............................................................................ 75

2008 ............................................................................ 50

2009 and thereafter .................................................... 0

8 (ii) SPECIAL RULE FOR 2003.—The 

9 phaseout percentage for 2003 shall be the 

10 amount that bears the same ratio to 100 

11 percent as the number of days after the 

12 date of the enactment of this Act bears to 

13 365. 

14 (iii) SPECIAL RULE FOR FISCAL YEAR

15 TAXPAYERS.—In the case of a taxpayer 

16 not using the calendar year as its taxable 

17 year, the phaseout percentage is the 

18 weighted average of the phaseout percent19 ages determined under the preceding provi20 sions of this paragraph with respect to cal21 endar years any portion of which is in22 cluded in the taxpayer’s taxable year. The 
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1 weighted average shall be determined on 

2 the basis of the respective portions of the 

3 taxable year in each calendar year. 

4 (4) ADJUSTED BASE PERIOD AMOUNT.—

5 For purposes of this subsection—

6 (A) IN GENERAL.—In the case of a 

7 taxpayer using the calendar year as its 

8 taxable year, the adjusted base period 

9 amount for any taxable year is the base 

10 period amount multiplied by the applicable 

11 percentage, as determined in the following 

12 table:

The applicable 

‘‘Years: percentage is:

2003 ............................................................................ 100

2004 ............................................................................ 100

2005 ............................................................................ 105

2006 ............................................................................ 110

2007 ............................................................................ 115

2008 ............................................................................ 120

2009 and thereafter .................................................... 0

13 (B) BASE PERIOD AMOUNT.—The 

14 base period amount is the aggregate FSC/

15 ETI benefits for the taxpayer’s taxable 

16 year beginning in calendar year 2001. 

17 (C) SPECIAL RULES FOR FISCAL YEAR

18 TAXPAYERS, ETC.—Rules similar to rules 

19 of clauses (ii) and (iii) of paragraph (3)(B) 

20 shall apply for purposes of this paragraph. 
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1 (5) FSC/ETI BENEFIT.—For purposes of this 

2 subsection, the term ‘‘FSC/ETI benefit’’ means—

3 (A) amounts excludable from gross income 

4 under section 114 of such Code, and 

5 (B) the exempt foreign trade income of re6 lated foreign sales corporations from property 

7 acquired from the taxpayer (determined without 

8 regard to section 923(a)(5) of such Code (relat9 ing to special rule for military property), as in 

10 effect on the day before the date of the enact11 ment of the FSC Repeal and Extraterritorial 

12 Income Exclusion Act of 2000). 

13 In determining the FSC/ETI benefit there shall be 

14 excluded any amount attributable to a transaction 

15 with respect to which the taxpayer is the lessor un16 less the leased property was manufactured or pro17 duced in whole or in part by the taxpayer. 

18 (6) SPECIAL RULE FOR FARM COOPERATIVES.—

19 Under regulations prescribed by the Secretary, de20 terminations under this subsection with respect to 

21 an organization described in section 943(g)(1) of 

22 such Code, as in effect on the day before the date 

23 of the enactment of this Act, shall be made at the 

24 cooperative level and the purposes of this subsection 
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1 shall be carried out by excluding amounts from the 

2 gross income of its patrons. 

3 (7) CERTAIN RULES TO APPLY.—Rules similar 

4 to the rules of section 41(f) of such Code shall apply 

5 for purposes of this subsection. 

6 (8) COORDINATION WITH BINDING CONTRACT

7 RULE.—The deduction determined under paragraph 

8 (1) for any taxable year shall be reduced by the 

9 phaseout percentage of any FSC/ETI benefit real10 ized for the taxable year by reason of subsection 

11 (c)(2). The preceding sentence shall not apply to any 

12 FSC/ETI benefit attributable to a transaction de13 scribed in the last sentence of paragraph (5). 

14 (9) SPECIAL RULE FOR TAXABLE YEAR WHICH

15 INCLUDES DATE OF ENACTMENT.—In the case of a 

16 taxable year which includes the date of the enact17 ment of this Act, the deduction allowed under this 

18 subsection to any current FSC/ETI beneficiary shall 

19 in no event exceed—

20 (A) 100 percent of such beneficiary’s ad21 justed base period amount for calendar year 

22 2003, reduced by 

23 (B) the aggregate FSC/ETI benefits of 

24 such beneficiary with respect to transactions oc-
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1 curring during the portion of the taxable year 

2 ending on the date of the enactment of this Act. 

3 Subtitle B—Abusive Tax Shelter 

4 Shutdown and Taxpayer Ac5 countability 

6 PART I—PROVISIONS DESIGNED TO CURTAIL TAX 

7 SHELTERS 

8 SEC. 311. CLARIFICATION OF ECONOMIC SUBSTANCE DOC9 TRINE. 

10 (a) IN GENERAL.—Section 7701 is amended by re11 designating subsection (m) as subsection (n) and by in12 serting after subsection (l) the following new subsection: 

13 ‘‘(m) CLARIFICATION OF ECONOMIC SUBSTANCE

14 DOCTRINE; ETC.—

15 ‘‘(1) GENERAL RULES.—

16 ‘‘(A) IN GENERAL.—In applying the eco17 nomic substance doctrine, the determination of 

18 whether a transaction has economic substance 

19 shall be made as provided in this paragraph. 

20 ‘‘(B) DEFINITION OF ECONOMIC SUB21 STANCE.—For purposes of subparagraph (A)—

22 ‘‘(i) IN GENERAL.—A transaction has 

23 economic substance only if—

24 ‘‘(I) the transaction changes in a 

25 meaningful way (apart from Federal 
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1 tax effects and, if there is any Federal 

2 tax effects, also apart from any for3 eign, State, or local tax effects) the 

4 taxpayer’s economic position, and 

5 ‘‘(II) the taxpayer has a substan6 tial nontax purpose for entering into 

7 such transaction and the transaction 

8 is a reasonable means of accom9 plishing such purpose. 

10 ‘‘(ii) SPECIAL RULE WHERE TAX11 PAYER RELIES ON PROFIT POTENTIAL.—A 

12 transaction shall not be treated as having 

13 economic substance by reason of having a 

14 potential for profit unless—

15 ‘‘(I) the present value of the rea16 sonably expected pre-tax profit from 

17 the transaction is substantial in rela18 tion to the present value of the ex19 pected net tax benefits that would be 

20 allowed if the transaction were re21 spected, and 

22 ‘‘(II) the reasonably expected 

23 pre-tax profit from the transaction ex24 ceeds a risk-free rate of return.
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1 ‘‘(C) TREATMENT OF FEES AND FOREIGN

2 TAXES.—Fees and other transaction expenses 

3 and foreign taxes shall be taken into account as 

4 expenses in determining pre-tax profit under 

5 subparagraph (B)(ii). 

6 ‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH

7 TAX-INDIFFERENT PARTIES.—

8 ‘‘(A) SPECIAL RULES FOR FINANCING

9 TRANSACTIONS.—The form of a transaction 

10 which is in substance the borrowing of money 

11 or the acquisition of financial capital directly or 

12 indirectly from a tax-indifferent party shall not 

13 be respected if the present value of the deduc14 tions to be claimed with respect to the trans15 action is substantially in excess of the present 

16 value of the anticipated economic returns of the 

17 person lending the money or providing the fi18 nancial capital. A public offering shall be treat19 ed as a borrowing, or an acquisition of financial 

20 capital, from a tax-indifferent party if it is rea21 sonably expected that at least 50 percent of the 

22 offering will be placed with tax-indifferent par23 ties. 

24 ‘‘(B) ARTIFICIAL INCOME SHIFTING AND

25 BASIS ADJUSTMENTS.—The form of a trans-
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1 action with a tax-indifferent party shall not be 

2 respected if—

3 ‘‘(i) it results in an allocation of in4 come or gain to the tax-indifferent party in 

5 excess of such party’s economic income or 

6 gain, or 

7 ‘‘(ii) it results in a basis adjustment 

8 or shifting of basis on account of over9 stating the income or gain of the tax-indif10 ferent party. 

11 ‘‘(3) DEFINITIONS AND SPECIAL RULES.—For 

12 purposes of this subsection—

13 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.—

14 The term ‘economic substance doctrine’ means 

15 the common law doctrine under which tax bene16 fits under subtitle A with respect to a trans17 action are not allowable if the transaction does 

18 not have economic substance or lacks a business 

19 purpose. 

20 ‘‘(B) TAX-INDIFFERENT PARTY.—The 

21 term ‘tax-indifferent party’ means any person 

22 or entity not subject to tax imposed by subtitle 

23 A. A person shall be treated as a tax-indifferent 

24 party with respect to a transaction if the items 

25 taken into account with respect to the trans-
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1 action have no substantial impact on such per2 son’s liability under subtitle A. 

3 ‘‘(C) SUBSTANTIAL NONTAX PURPOSE.—In 

4 applying subclause (II) of paragraph (1)(B)(i), 

5 a purpose of achieving a financial accounting 

6 benefit shall not be taken into account in deter7 mining whether a transaction has a substantial 

8 nontax purpose if the origin of such financial 

9 accounting benefit is a reduction of income tax. 

10 ‘‘(D) EXCEPTION FOR PERSONAL TRANS11 ACTIONS OF INDIVIDUALS.—In the case of an 

12 individual, this subsection shall apply only to 

13 transactions entered into in connection with a 

14 trade or business or an activity engaged in for 

15 the production of income. 

16 ‘‘(E) TREATMENT OF LESSORS.—In apply17 ing subclause (I) of paragraph (1)(B)(ii) to the 

18 lessor of tangible property subject to a lease, 

19 the expected net tax benefits shall not include 

20 the benefits of depreciation, or any tax credit, 

21 with respect to the leased property and sub22 clause (II) of paragraph (1)(B)(ii) shall be dis23 regarded in determining whether any of such 

24 benefits are allowable.
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1 ‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF2 FECTED.—Except as specifically provided in this 

3 subsection, the provisions of this subsection shall not 

4 be construed as altering or supplanting any other 

5 rule of law, and the requirements of this subsection 

6 shall be construed as being in addition to any such 

7 other rule of law. 

8 ‘‘(5) REGULATIONS.—The Secretary shall pre9 scribe such regulations as may be necessary or ap10 propriate to carry out the purposes of this sub11 section. Such regulations may include exemptions 

12 from the application of this subsection.’’

13 (b) EFFECTIVE DATE.—The amendments made by 

14 this section shall apply to transactions entered into after 

15 February 13, 2003. 

16 SEC. 312. PENALTY FOR FAILING TO DISCLOSE REPORT17 ABLE TRANSACTION. 

18 (a) IN GENERAL.—Part I of subchapter B of chapter 

19 68 (relating to assessable penalties) is amended by insert20 ing after section 6707 the following new section: 

21 ‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORT22 ABLE TRANSACTION INFORMATION WITH RE23 TURN OR STATEMENT. 

24 ‘‘(a) IMPOSITION OF PENALTY.—Any person who 

25 fails to include on any return or statement any informa-
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1 tion with respect to a reportable transaction which is re2 quired under section 6011 to be included with such return 

3 or statement shall pay a penalty in the amount determined 

4 under subsection (b). 

5 ‘‘(b) AMOUNT OF PENALTY.—

6 ‘‘(1) IN GENERAL.—Except as provided in para7 graphs (2) and (3), the amount of the penalty under 

8 subsection (a) shall be $50,000. 

9 ‘‘(2) LISTED TRANSACTION.—The amount of 

10 the penalty under subsection (a) with respect to a 

11 listed transaction shall be $100,000. 

12 ‘‘(3) INCREASE IN PENALTY FOR LARGE ENTI13 TIES AND HIGH NET WORTH INDIVIDUALS.—

14 ‘‘(A) IN GENERAL.—In the case of a fail15 ure under subsection (a) by—

16 ‘‘(i) a large entity, or 

17 ‘‘(ii) a high net worth individual, 

18 the penalty under paragraph (1) or (2) shall be 

19 twice the amount determined without regard to 

20 this paragraph. 

21 ‘‘(B) LARGE ENTITY.—For purposes of 

22 subparagraph (A), the term ‘large entity’ 

23 means, with respect to any taxable year, a per24 son (other than a natural person) with gross re25 ceipts in excess of $10,000,000 for the taxable 
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1 year in which the reportable transaction occurs 

2 or the preceding taxable year. Rules similar to 

3 the rules of paragraph (2) and subparagraphs 

4 (B), (C), and (D) of paragraph (3) of section 

5 448(c) shall apply for purposes of this subpara6 graph. 

7 ‘‘(C) HIGH NET WORTH INDIVIDUAL.—For 

8 purposes of subparagraph (A), the term ‘high 

9 net worth individual’ means, with respect to a 

10 reportable transaction, a natural person whose 

11 net worth exceeds $2,000,000 immediately be12 fore the transaction. 

13 ‘‘(c) DEFINITIONS.—For purposes of this section—

14 ‘‘(1) REPORTABLE TRANSACTION.—The term 

15 ‘reportable transaction’ means any transaction with 

16 respect to which information is required to be in17 cluded with a return or statement because, as deter18 mined under regulations prescribed under section 

19 6011, such transaction is of a type which the Sec20 retary determines as having a potential for tax 

21 avoidance or evasion. 

22 ‘‘(2) LISTED TRANSACTION.—Except as pro23 vided in regulations, the term ‘listed transaction’ 

24 means a reportable transaction which is the same as, 

25 or substantially similar to, a transaction specifically 
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1 identified by the Secretary as a tax avoidance trans2 action for purposes of section 6011. 

3 ‘‘(d) AUTHORITY TO RESCIND PENALTY.—

4 ‘‘(1) IN GENERAL.—The Commissioner of In5 ternal Revenue may rescind all or any portion of any 

6 penalty imposed by this section with respect to any 

7 violation if—

8 ‘‘(A) the violation is with respect to a re9 portable transaction other than a listed trans10 action, 

11 ‘‘(B) the person on whom the penalty is 

12 imposed has a history of complying with the re13 quirements of this title, 

14 ‘‘(C) it is shown that the violation is due 

15 to an unintentional mistake of fact; 

16 ‘‘(D) imposing the penalty would be 

17 against equity and good conscience, and 

18 ‘‘(E) rescinding the penalty would promote 

19 compliance with the requirements of this title 

20 and effective tax administration. 

21 ‘‘(2) DISCRETION.—The exercise of authority 

22 under paragraph (1) shall be at the sole discretion 

23 of the Commissioner and may be delegated only to 

24 the head of the Office of Tax Shelter Analysis. The 

25 Commissioner, in the Commissioner’s sole discretion, 
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1 may establish a procedure to determine if a penalty 

2 should be referred to the Commissioner or the head 

3 of such Office for a determination under paragraph 

4 (1). 

5 ‘‘(3) NO APPEAL.—Notwithstanding any other 

6 provision of law, any determination under this sub7 section may not be reviewed in any administrative or 

8 judicial proceeding. 

9 ‘‘(4) RECORDS.—If a penalty is rescinded under 

10 paragraph (1), the Commissioner shall place in the 

11 file in the Office of the Commissioner the opinion of 

12 the Commissioner or the head of the Office of Tax 

13 Shelter Analysis with respect to the determination, 

14 including—

15 ‘‘(A) the facts and circumstances of the 

16 transaction, 

17 ‘‘(B) the reasons for the rescission, and 

18 ‘‘(C) the amount of the penalty rescinded. 

19 ‘‘(5) REPORT.—The Commissioner shall each 

20 year report to the Committee on Ways and Means 

21 of the House of Representatives and the Committee 

22 on Finance of the Senate—

23 ‘‘(A) a summary of the total number and 

24 aggregate amount of penalties imposed, and re25 scinded, under this section, and 
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1 ‘‘(B) a description of each penalty re2 scinded under this subsection and the reasons 

3 therefor. 

4 ‘‘(e) PENALTY REPORTED TO SEC.—In the case of 

5 a person—

6 ‘‘(1) which is required to file periodic reports 

7 under section 13 or 15(d) of the Securities Ex8 change Act of 1934 or is required to be consolidated 

9 with another person for purposes of such reports, 

10 and 

11 ‘‘(2) which— 

12 ‘‘(A) is required to pay a penalty under 

13 this section with respect to a listed transaction, 

14 ‘‘(B) is required to pay a penalty under 

15 section 6662A with respect to any reportable 

16 transaction at a rate prescribed under section 

17 6662A(c), or 

18 ‘‘(C) is required to pay a penalty under 

19 section 6662B with respect to any noneconomic 

20 substance transaction, 

21 the requirement to pay such penalty shall be disclosed in 

22 such reports filed by such person for such periods as the 

23 Secretary shall specify. Failure to make a disclosure in 

24 accordance with the preceding sentence shall be treated 
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1 as a failure to which the penalty under subsection (b)(2) 

2 applies. 

3 ‘‘(f) COORDINATION WITH OTHER PENALTIES.—The 

4 penalty imposed by this section is in addition to any pen5 alty imposed under this title.’’

6 (b) CONFORMING AMENDMENT.—The table of sec7 tions for part I of subchapter B of chapter 68 is amended 

8 by inserting after the item relating to section 6707 the 

9 following:

‘‘Sec. 6707A. Penalty for failure to include reportable transaction 

information with return or statement.’’

10 (c) EFFECTIVE DATE.—The amendments made by 

11 this section shall apply to returns and statements the due 

12 date for which is after the date of the enactment of this 

13 Act.

14 SEC. 313. ACCURACY-RELATED PENALTY FOR LISTED 

15 TRANSACTIONS AND OTHER REPORTABLE 

16 TRANSACTIONS HAVING A SIGNIFICANT TAX 

17 AVOIDANCE PURPOSE. 

18 (a) IN GENERAL.—Subchapter A of chapter 68 is 

19 amended by inserting after section 6662 the following new 

20 section: 
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1 ‘‘SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PEN2 ALTY ON UNDERSTATEMENTS WITH RESPECT 

3 TO REPORTABLE TRANSACTIONS. 

4 ‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has a 

5 reportable transaction understatement for any taxable 

6 year, there shall be added to the tax an amount equal to 

7 20 percent of the amount of such understatement. 

8 ‘‘(b) REPORTABLE TRANSACTION UNDERSTATE9 MENT.—For purposes of this section—

10 ‘‘(1) IN GENERAL.—The term ‘reportable trans11 action understatement’ means the sum of—

12 ‘‘(A) the product of—

13 ‘‘(i) the amount of the increase (if 

14 any) in taxable income which results from 

15 a difference between the proper tax treat16 ment of an item to which this section ap17 plies and the taxpayer’s treatment of such 

18 item (as shown on the taxpayer’s return of 

19 tax), and 

20 ‘‘(ii) the highest rate of tax imposed 

21 by section 1 (section 11 in the case of a 

22 taxpayer which is a corporation), and 

23 ‘‘(B) the amount of the decrease (if any) 

24 in the aggregate amount of credits determined 

25 under subtitle A which results from a difference 

26 between the taxpayer’s treatment of an item to 
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1 which this section applies (as shown on the tax2 payer’s return of tax) and the proper tax treat3 ment of such item. 

4 For purposes of subparagraph (A), any reduction of 

5 the excess of deductions allowed for the taxable year 

6 over gross income for such year, and any reduction 

7 in the amount of capital losses which would (without 

8 regard to section 1211) be allowed for such year, 

9 shall be treated as an increase in taxable income. 

10 ‘‘(2) ITEMS TO WHICH SECTION APPLIES.—This 

11 section shall apply to any item which is attributable 

12 to—

13 ‘‘(A) any listed transaction, and 

14 ‘‘(B) any reportable transaction (other 

15 than a listed transaction) if a significant pur16 pose of such transaction is the avoidance or 

17 evasion of Federal income tax. 

18 ‘‘(c) HIGHER PENALTY FOR NONDISCLOSED LISTED

19 AND OTHER AVOIDANCE TRANSACTIONS.—

20 ‘‘(1) IN GENERAL.—Subsection (a) shall be ap21 plied by substituting ‘30 percent’ for ‘20 percent’ 

22 with respect to the portion of any reportable trans23 action understatement with respect to which the re24 quirement of section 6664(d)(2)(A) is not met. 
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1 ‘‘(2) RULES APPLICABLE TO COMPROMISE OF

2 PENALTY.—

3 ‘‘(A) IN GENERAL.—If the 1st letter of 

4 proposed deficiency which allows the taxpayer 

5 an opportunity for administrative review in the 

6 Internal Revenue Service Office of Appeals has 

7 been sent with respect to a penalty to which 

8 paragraph (1) applies, only the Commissioner 

9 of Internal Revenue may compromise all or any 

10 portion of such penalty. 

11 ‘‘(B) APPLICABLE RULES.—The rules of 

12 paragraphs (3), (4), and (5) of section 

13 6707A(d) shall apply for purposes of subpara14 graph (A). 

15 ‘‘(d) DEFINITIONS OF REPORTABLE AND LISTED

16 TRANSACTIONS.—For purposes of this section, the terms 

17 ‘reportable transaction’ and ‘listed transaction’ have the 

18 respective meanings given to such terms by section 

19 6707A(c). 

20 ‘‘(e) SPECIAL RULES.—

21 ‘‘(1) COORDINATION WITH PENALTIES, ETC., 

22 ON OTHER UNDERSTATEMENTS.—In the case of an 

23 understatement (as defined in section 6662(d)(2))—

24 ‘‘(A) the amount of such understatement 

25 (determined without regard to this paragraph) 
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1 shall be increased by the aggregate amount of 

2 reportable transaction understatements and 

3 noneconomic substance transaction understate4 ments for purposes of determining whether 

5 such understatement is a substantial under6 statement under section 6662(d)(1), and 

7 ‘‘(B) the addition to tax under section 

8 6662(a) shall apply only to the excess of the 

9 amount of the substantial understatement (if 

10 any) after the application of subparagraph (A) 

11 over the aggregate amount of reportable trans12 action understatements and noneconomic sub13 stance transaction understatements. 

14 ‘‘(2) COORDINATION WITH OTHER PEN15 ALTIES.—

16 ‘‘(A) APPLICATION OF FRAUD PENALTY.—

17 References to an underpayment in section 6663 

18 shall be treated as including references to a re19 portable transaction understatement and a non20 economic substance transaction understatement. 

21 ‘‘(B) NO DOUBLE PENALTY.—This section 

22 shall not apply to any portion of an understate23 ment on which a penalty is imposed under sec24 tion 6662B or 6663. 
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1 ‘‘(3) SPECIAL RULE FOR AMENDED RE2 TURNS.—Except as provided in regulations, in no 

3 event shall any tax treatment included with an 

4 amendment or supplement to a return of tax be 

5 taken into account in determining the amount of any 

6 reportable transaction understatement or non7 economic substance transaction understatement if 

8 the amendment or supplement is filed after the ear9 lier of the date the taxpayer is first contacted by the 

10 Secretary regarding the examination of the return or 

11 such other date as is specified by the Secretary. 

12 ‘‘(4) NONECONOMIC SUBSTANCE TRANS13 ACTION UNDERSTATEMENT.—For purposes of 

14 this subsection, the term ‘noneconomic sub15 stance transaction understatement’ has the 

16 meaning given such term by section 6662B(c). 

17 ‘‘(5) CROSS REFERENCE.—

‘‘For reporting of section 6662A(c) penalty to the 

Securities and Exchange Commission, see section 

6707A(e).’’

18 (b) DETERMINATION OF OTHER UNDERSTATE19 MENTS.—Subparagraph (A) of section 6662(d)(2) is 

20 amended by adding at the end the following flush sen21 tence: 

22 ‘‘The excess under the preceding sentence shall 

23 be determined without regard to items to which 

24 section 6662A applies and without regard to 
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1 items with respect to which a penalty is im2 posed by section 6662B.’’

3 (c) REASONABLE CAUSE EXCEPTION.—

4 (1) IN GENERAL.—Section 6664 is amended by 

5 adding at the end the following new subsection: 

6 ‘‘(d) REASONABLE CAUSE EXCEPTION FOR REPORT7 ABLE TRANSACTION UNDERSTATEMENTS.— 

8 ‘‘(1) IN GENERAL.—No penalty shall be im9 posed under section 6662A with respect to any por10 tion of a reportable transaction understatement if it 

11 is shown that there was a reasonable cause for such 

12 portion and that the taxpayer acted in good faith 

13 with respect to such portion. 

14 ‘‘(2) SPECIAL RULES.—Paragraph (1) shall not 

15 apply to any reportable transaction understatement 

16 unless—

17 ‘‘(A) the relevant facts affecting the tax 

18 treatment of the item are adequately disclosed 

19 in accordance with the regulations prescribed 

20 under section 6011, 

21 ‘‘(B) there is or was substantial authority 

22 for such treatment, and 

23 ‘‘(C) the taxpayer reasonably believed that 

24 such treatment was more likely than not the 

25 proper treatment. 
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1 A taxpayer failing to adequately disclose in accord2 ance with section 6011 shall be treated as meeting 

3 the requirements of subparagraph (A) if the penalty 

4 for such failure was rescinded under section 

5 6707A(d). 

6 ‘‘(3) RULES RELATING TO REASONABLE BE7 LIEF.—For purposes of paragraph (2)(C)—

8 ‘‘(A) IN GENERAL.—A taxpayer shall be 

9 treated as having a reasonable belief with re10 spect to the tax treatment of an item only if 

11 such belief—

12 ‘‘(i) is based on the facts and law that 

13 exist at the time the return of tax which 

14 includes such tax treatment is filed, and 

15 ‘‘(ii) relates solely to the taxpayer’s 

16 chances of success on the merits of such 

17 treatment and does not take into account 

18 the possibility that a return will not be au19 dited, such treatment will not be raised on 

20 audit, or such treatment will be resolved 

21 through settlement if it is raised. 

22 ‘‘(B) CERTAIN OPINIONS MAY NOT BE RE23 LIED UPON.—

24 ‘‘(i) IN GENERAL.—An opinion of a 

25 tax advisor may not be relied upon to es-
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1 tablish the reasonable belief of a taxpayer 

2 if—

3 ‘‘(I) the tax advisor is described 

4 in clause (ii), or 

5 ‘‘(II) the opinion is described in 

6 clause (iii). 

7 ‘‘(ii) DISQUALIFIED TAX ADVISORS.—

8 A tax advisor is described in this clause if 

9 the tax advisor—

10 ‘‘(I) is a material advisor (within 

11 the meaning of section 6111(b)(1)) 

12 who participates in the organization, 

13 management, promotion, or sale of 

14 the transaction or who is related 

15 (within the meaning of section 267(b) 

16 or 707(b)(1)) to any person who so 

17 participates, 

18 ‘‘(II) is compensated directly or 

19 indirectly by a material advisor with 

20 respect to the transaction, 

21 ‘‘(III) has a fee arrangement 

22 with respect to the transaction which 

23 is contingent on all or part of the in24 tended tax benefits from the trans25 action being sustained, or 
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1 ‘‘(IV) as determined under regu2 lations prescribed by the Secretary, 

3 has a continuing financial interest 

4 with respect to the transaction. 

5 ‘‘(iii) DISQUALIFIED OPINIONS.—For 

6 purposes of clause (i), an opinion is dis7 qualified if the opinion—

8 ‘‘(I) is based on unreasonable 

9 factual or legal assumptions (includ10 ing assumptions as to future events), 

11 ‘‘(II) unreasonably relies on rep12 resentations, statements, findings, or 

13 agreements of the taxpayer or any 

14 other person, 

15 ‘‘(III) does not identify and con16 sider all relevant facts, or 

17 ‘‘(IV) fails to meet any other re18 quirement as the Secretary may pre19 scribe.’’

20 (2) CONFORMING AMENDMENT.—The heading 

21 for subsection (c) of section 6664 is amended by in22 serting ‘‘FOR UNDERPAYMENTS’’ after ‘‘EXCEP23 TION’’. 

24 (d) CONFORMING AMENDMENTS.—
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1 (1) Subparagraph (C) of section 461(i)(3) is 

2 amended by striking ‘‘section 6662(d)(2)(C)(iii)’’ 

3 and inserting ‘‘section 1274(b)(3)(C)’’. 

4 (2) Paragraph (3) of section 1274(b) is amend5 ed—

6 (A) by striking ‘‘(as defined in section 

7 6662(d)(2)(C)(iii))’’ in subparagraph (B)(i), 

8 and 

9 (B) by adding at the end the following new 

10 subparagraph: 

11 ‘‘(C) TAX SHELTER.—For purposes of sub12 paragraph (B), the term ‘tax shelter’ means—

13 ‘‘(i) a partnership or other entity, 

14 ‘‘(ii) any investment plan or arrange15 ment, or 

16 ‘‘(iii) any other plan or arrangement, 

17 if a significant purpose of such partnership, en18 tity, plan, or arrangement is the avoidance or 

19 evasion of Federal income tax.’’

20 (3) Section 6662(d)(2) is amended by striking 

21 subparagraphs (C) and (D). 

22 (4) Section 6664(c)(1) is amended by striking 

23 ‘‘this part’’ and inserting ‘‘section 6662 or 6663’’. 
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1 (5) Subsection (b) of section 7525 is amended 

2 by striking ‘‘section 6662(d)(2)(C)(iii)’’ and insert3 ing ‘‘section 1274(b)(3)(C)’’. 

4 (6)(A) The heading for section 6662 is amend5 ed to read as follows: 

6 ‘‘SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY 

7 ON UNDERPAYMENTS.’’

8 (B) The table of sections for part II of sub9 chapter A of chapter 68 is amended by striking the 

10 item relating to section 6662 and inserting the fol11 lowing new items:

‘‘Sec. 6662. Imposition of accuracy-related penalty on underpayments. 

‘‘Sec. 6662A. Imposition of accuracy-related penalty on understatements with respect to reportable transactions.’’

12 (e) EFFECTIVE DATE.—The amendments made by 

13 this section shall apply to taxable years ending after the 

14 date of the enactment of this Act. 

15 SEC. 314. PENALTY FOR UNDERSTATEMENTS ATTRIB16 UTABLE TO TRANSACTIONS LACKING ECO17 NOMIC SUBSTANCE, ETC. 

18 (a) IN GENERAL.—Subchapter A of chapter 68 is 

19 amended by inserting after section 6662A the following 

20 new section: 
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1 ‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB2 UTABLE TO TRANSACTIONS LACKING ECO3 NOMIC SUBSTANCE, ETC. 

4 ‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has an 

5 noneconomic substance transaction understatement for 

6 any taxable year, there shall be added to the tax an 

7 amount equal to 40 percent of the amount of such under8 statement. 

9 ‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED

10 TRANSACTIONS.—Subsection (a) shall be applied by sub11 stituting ‘20 percent’ for ‘40 percent’ with respect to the 

12 portion of any noneconomic substance transaction under13 statement with respect to which the relevant facts affect14 ing the tax treatment of the item are adequately disclosed 

15 in the return or a statement attached to the return. 

16 ‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UN17 DERSTATEMENT.—For purposes of this section—

18 ‘‘(1) IN GENERAL.—The term ‘noneconomic 

19 substance transaction understatement’ means any 

20 amount which would be an understatement under 

21 section 6662A(b)(1) if section 6662A were applied 

22 by taking into account items attributable to non23 economic substance transactions rather than items 

24 to which section 6662A would apply without regard 

25 to this paragraph. 
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1 ‘‘(2) NONECONOMIC SUBSTANCE TRANS2 ACTION.—The term ‘noneconomic substance trans3 action’ means any transaction if—

4 ‘‘(A) there is a lack of economic substance 

5 (within the meaning of section 7701(m)(1)) for 

6 the transaction giving rise to the claimed tax 

7 benefit or the transaction was not respected 

8 under section 7701(m)(2), or 

9 ‘‘(B) the transaction fails to meet the re10 quirements of any similar rule of law. 

11 ‘‘(d) RULES APPLICABLE TO COMPROMISE OF PEN12 ALTY.—

13 ‘‘(1) IN GENERAL.—If the 1st letter of pro14 posed deficiency which allows the taxpayer an oppor15 tunity for administrative review in the Internal Rev16 enue Service Office of Appeals has been sent with 

17 respect to a penalty to which this section applies, 

18 only the Commissioner of Internal Revenue may 

19 compromise all or any portion of such penalty. 

20 ‘‘(2) APPLICABLE RULES.—The rules of para21 graphs (3), (4), and (5) of section 6707A(d) shall 

22 apply for purposes of paragraph (1). 

23 ‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex24 cept as otherwise provided in this part, the penalty im-
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1 posed by this section shall be in addition to any other pen2 alty imposed by this title. 

3 ‘‘(f) CROSS REFERENCES.—

‘‘(1) For coordination of penalty with understatements under section 6662 and other special rules, 

see section 6662A(e). 

‘‘(2) For reporting of penalty imposed under this 

section to the Securities and Exchange Commission, 

see section 6707A(e).’’

4 (b) CLERICAL AMENDMENT.—The table of sections 

5 for part II of subchapter A of chapter 68 is amended by 

6 inserting after the item relating to section 6662A the fol7 lowing new item:

‘‘Sec. 6662B. Penalty for understatements attributable to transactions lacking economic substance, etc.’’

8 (c) EFFECTIVE DATE.—The amendments made by 

9 this section shall apply to transactions entered into after 

10 February 13, 2003. 

11 SEC. 315. MODIFICATIONS OF SUBSTANTIAL UNDERSTATE12 MENT PENALTY FOR NONREPORTABLE 

13 TRANSACTIONS. 

14 (a) SUBSTANTIAL UNDERSTATEMENT OF CORPORA15 TIONS.—Section 6662(d)(1)(B) (relating to special rule 

16 for corporations) is amended to read as follows: 

17 ‘‘(B) SPECIAL RULE FOR CORPORA18 TIONS.—In the case of a corporation other than 

19 an S corporation or a personal holding company 

20 (as defined in section 542), there is a substan21 tial understatement of income tax for any tax-
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1 able year if the amount of the understatement 

2 for the taxable year exceeds the lesser of—

3 ‘‘(i) 10 percent of the tax required to 

4 be shown on the return for the taxable 

5 year (or, if greater, $10,000), or 

6 ‘‘(ii) $10,000,000.’’

7 (b) REDUCTION FOR UNDERSTATEMENT OF TAX8 PAYER DUE TO POSITION OF TAXPAYER OR DISCLOSED

9 ITEM.—

10 (1) IN GENERAL.—Section 6662(d)(2)(B)(i) 

11 (relating to substantial authority) is amended to 

12 read as follows: 

13 ‘‘(i) the tax treatment of any item by 

14 the taxpayer if the taxpayer had reason15 able belief that the tax treatment was more 

16 likely than not the proper treatment, or’’. 

17 (2) CONFORMING AMENDMENT.—Section 

18 6662(d) is amended by adding at the end the fol19 lowing new paragraph: 

20 ‘‘(3) SECRETARIAL LIST.—For purposes of this 

21 subsection, section 6664(d)(2), and section 

22 6694(a)(1), the Secretary may prescribe a list of po23 sitions for which the Secretary believes there is not 

24 substantial authority or there is no reasonable belief 

25 that the tax treatment is more likely than not the 
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1 proper tax treatment. Such list (and any revisions 

2 thereof) shall be published in the Federal Register 

3 or the Internal Revenue Bulletin.’’

4 (c) EFFECTIVE DATE.—The amendments made by 

5 this section shall apply to taxable years beginning after 

6 the date of the enactment of this Act. 

7 SEC. 316. TAX SHELTER EXCEPTION TO CONFIDENTIALITY 

8 PRIVILEGES RELATING TO TAXPAYER COM9 MUNICATIONS. 

10 (a) IN GENERAL.—Section 7525(b) (relating to sec11 tion not to apply to communications regarding corporate 

12 tax shelters) is amended to read as follows: 

13 ‘‘(b) SECTION NOT TO APPLY TO COMMUNICATIONS

14 REGARDING TAX SHELTERS.—The privilege under sub15 section (a) shall not apply to any written communication 

16 which is—

17 ‘‘(1) between a federally authorized tax practi18 tioner and—

19 ‘‘(A) any person, 

20 ‘‘(B) any director, officer, employee, agent, 

21 or representative of the person, or 

22 ‘‘(C) any other person holding a capital or 

23 profits interest in the person, and 
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1 ‘‘(2) in connection with the promotion of the di2 rect or indirect participation of the person in any 

3 tax shelter (as defined in section 1274(b)(3)(C)).’’

4 (b) EFFECTIVE DATE.—The amendment made by 

5 this section shall apply to communications made on or 

6 after the date of the enactment of this Act. 

7 SEC. 317. DISCLOSURE OF REPORTABLE TRANSACTIONS. 

8 (a) IN GENERAL.—Section 6111 (relating to registra9 tion of tax shelters) is amended to read as follows: 

10 ‘‘SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS. 

11 ‘‘(a) IN GENERAL.—Each material advisor with re12 spect to any reportable transaction shall make a return 

13 (in such form as the Secretary may prescribe) setting 

14 forth—

15 ‘‘(1) information identifying and describing the 

16 transaction, 

17 ‘‘(2) information describing any potential tax 

18 benefits expected to result from the transaction, and 

19 ‘‘(3) such other information as the Secretary 

20 may prescribe. 

21 Such return shall be filed not later than the date specified 

22 by the Secretary. 

23 ‘‘(b) DEFINITIONS.—For purposes of this section—

24 ‘‘(1) MATERIAL ADVISOR.—
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1 ‘‘(A) IN GENERAL.—The term ‘material 

2 advisor’ means any person—

3 ‘‘(i) who provides any material aid, 

4 assistance, or advice with respect to orga5 nizing, promoting, selling, implementing, 

6 or carrying out any reportable transaction, 

7 and 

8 ‘‘(ii) who directly or indirectly derives 

9 gross income in excess of the threshold 

10 amount for such aid, assistance, or advice. 

11 ‘‘(B) THRESHOLD AMOUNT.—For purposes 

12 of subparagraph (A), the threshold amount is—

13 ‘‘(i) $50,000 in the case of a report14 able transaction substantially all of the tax 

15 benefits from which are provided to nat16 ural persons, and 

17 ‘‘(ii) $250,000 in any other case. 

18 ‘‘(2) REPORTABLE TRANSACTION.—The term 

19 ‘reportable transaction’ has the meaning given to 

20 such term by section 6707A(c). 

21 ‘‘(c) REGULATIONS.—The Secretary may prescribe 

22 regulations which provide—

23 ‘‘(1) that only 1 person shall be required to 

24 meet the requirements of subsection (a) in cases in 
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1 which 2 or more persons would otherwise be re2 quired to meet such requirements, 

3 ‘‘(2) exemptions from the requirements of this 

4 section, and 

5 ‘‘(3) such rules as may be necessary or appro6 priate to carry out the purposes of this section.’’

7 (b) CONFORMING AMENDMENTS.—

8 (1) The item relating to section 6111 in the 

9 table of sections for subchapter B of chapter 61 is 

10 amended to read as follows:

‘‘Sec. 6111. Disclosure of reportable transactions.’’

11 (2)(A) So much of section 6112 as precedes 

12 subsection (c) thereof is amended to read as follows: 

13 ‘‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANS14 ACTIONS MUST KEEP LISTS OF ADVISEES. 

15 ‘‘(a) IN GENERAL.—Each material advisor (as de16 fined in section 6111) with respect to any reportable 

17 transaction (as defined in section 6707A(c)) shall main18 tain, in such manner as the Secretary may by regulations 

19 prescribe, a list—

20 ‘‘(1) identifying each person with respect to 

21 whom such advisor acted as such a material advisor 

22 with respect to such transaction, and 

23 ‘‘(2) containing such other information as the 

24 Secretary may by regulations require. 
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1 This section shall apply without regard to whether a mate2 rial advisor is required to file a return under section 6111 

3 with respect to such transaction.’’

4 (B) Section 6112 is amended by redesignating 

5 subsection (c) as subsection (b).

6 (C) Section 6112(b), as redesignated by sub7 paragraph (B), is amended—

8 (i) by inserting ‘‘written’’ before ‘‘request’’ 

9 in paragraph (1)(A), and 

10 (ii) by striking ‘‘shall prescribe’’ in para11 graph (2) and inserting ‘‘may prescribe’’. 

12 (D) The item relating to section 6112 in the 

13 table of sections for subchapter B of chapter 61 is 

14 amended to read as follows:

‘‘Sec. 6112. Material advisors of reportable transactions must 

keep lists of advisees.’’

15 (3)(A) The heading for section 6708 is amend16 ed to read as follows: 

17 ‘‘SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES 

18 WITH RESPECT TO REPORTABLE TRANS19 ACTIONS.’’

20 (B) The item relating to section 6708 in the 

21 table of sections for part I of subchapter B of chap22 ter 68 is amended to read as follows:

‘‘Sec. 6708. Failure to maintain lists of advisees with respect to 

reportable transactions.’’
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to transactions with respect to 

3 which material aid, assistance, or advice referred to in sec4 tion 6111(b)(1)(A)(i) of the Internal Revenue Code of 

5 1986 (as added by this section) is provided after the date 

6 of the enactment of this Act. 

7 SEC. 318. MODIFICATIONS TO PENALTY FOR FAILURE TO 

8 REGISTER TAX SHELTERS. 

9 (a) IN GENERAL.—Section 6707 (relating to failure 

10 to furnish information regarding tax shelters) is amended 

11 to read as follows: 

12 ‘‘SEC. 6707. FAILURE TO FURNISH INFORMATION REGARD13 ING REPORTABLE TRANSACTIONS. 

14 ‘‘(a) IN GENERAL.—If a person who is required to 

15 file a return under section 6111(a) with respect to any 

16 reportable transaction—

17 ‘‘(1) fails to file such return on or before the 

18 date prescribed therefor, or 

19 ‘‘(2) files false or incomplete information with 

20 the Secretary with respect to such transaction, 

21 such person shall pay a penalty with respect to such return 

22 in the amount determined under subsection (b). 

23 ‘‘(b) AMOUNT OF PENALTY.—
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1 ‘‘(1) IN GENERAL.—Except as provided in para2 graph (2), the penalty imposed under subsection (a) 

3 with respect to any failure shall be $50,000. 

4 ‘‘(2) LISTED TRANSACTIONS.—The penalty im5 posed under subsection (a) with respect to any listed 

6 transaction shall be an amount equal to the greater 

7 of—

8 ‘‘(A) $200,000, or 

9 ‘‘(B) 50 percent of the gross income de10 rived by such person with respect to aid, assist11 ance, or advice which is provided with respect 

12 to the reportable transaction before the date the 

13 return including the transaction is filed under 

14 section 6111. 

15 Subparagraph (B) shall be applied by substituting 

16 ‘75 percent’ for ‘50 percent’ in the case of an inten17 tional failure or act described in subsection (a). 

18 ‘‘(c) RESCISSION AUTHORITY.—The provisions of 

19 section 6707A(d) (relating to authority of Commissioner 

20 to rescind penalty) shall apply to any penalty imposed 

21 under this section. 

22 ‘‘(d) REPORTABLE AND LISTED TRANSACTIONS.—

23 The terms ‘reportable transaction’ and ‘listed transaction’ 

24 have the respective meanings given to such terms by sec25 tion 6707A(c).’’. 
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1 (b) CLERICAL AMENDMENT.—The item relating to 

2 section 6707 in the table of sections for part I of sub3 chapter B of chapter 68 is amended by striking ‘‘tax shel4 ters’’ and inserting ‘‘reportable transactions’’. 

5 (c) EFFECTIVE DATE.—The amendments made by 

6 this section shall apply to returns the due date for which 

7 is after the date of the enactment of this Act. 

8 SEC. 319. MODIFICATION OF PENALTY FOR FAILURE TO 

9 MAINTAIN LISTS OF INVESTORS. 

10 (a) IN GENERAL.—Subsection (a) of section 6708 is 

11 amended to read as follows: 

12 ‘‘(a) IMPOSITION OF PENALTY.—

13 ‘‘(1) IN GENERAL.—If any person who is re14 quired to maintain a list under section 6112(a) fails 

15 to make such list available upon written request to 

16 the Secretary in accordance with section 

17 6112(b)(1)(A) within 20 business days after the 

18 date of the Secretary’s request, such person shall 

19 pay a penalty of $10,000 for each day of such fail20 ure after such 20th day. 

21 ‘‘(2) REASONABLE CAUSE EXCEPTION.—No 

22 penalty shall be imposed by paragraph (1) with re23 spect to the failure on any day if such failure is due 

24 to reasonable cause.’’
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1 (b) EFFECTIVE DATE.—The amendment made by 

2 this section shall apply to requests made after the date 

3 of the enactment of this Act. 

4 SEC. 320. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN 

5 CONDUCT RELATED TO TAX SHELTERS AND 

6 REPORTABLE TRANSACTIONS. 

7 (a) IN GENERAL.—Section 7408 (relating to action 

8 to enjoin promoters of abusive tax shelters, etc.) is amend9 ed by redesignating subsection (c) as subsection (d) and 

10 by striking subsections (a) and (b) and inserting the fol11 lowing new subsections: 

12 ‘‘(a) AUTHORITY TO SEEK INJUNCTION.—A civil ac13 tion in the name of the United States to enjoin any person 

14 from further engaging in specified conduct may be com15 menced at the request of the Secretary. Any action under 

16 this section shall be brought in the district court of the 

17 United States for the district in which such person resides, 

18 has his principal place of business, or has engaged in spec19 ified conduct. The court may exercise its jurisdiction over 

20 such action (as provided in section 7402(a)) separate and 

21 apart from any other action brought by the United States 

22 against such person. 

23 ‘‘(b) ADJUDICATION AND DECREE.—In any action 

24 under subsection (a), if the court finds—
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1 ‘‘(1) that the person has engaged in any speci2 fied conduct, and 

3 ‘‘(2) that injunctive relief is appropriate to pre4 vent recurrence of such conduct, 

5 the court may enjoin such person from engaging in such 

6 conduct or in any other activity subject to penalty under 

7 this title. 

8 ‘‘(c) SPECIFIED CONDUCT.—For purposes of this 

9 section, the term ‘specified conduct’ means any action, or 

10 failure to take action, subject to penalty under section 

11 6700, 6701, 6707, or 6708.’’

12 (b) CONFORMING AMENDMENTS.—

13 (1) The heading for section 7408 is amended to 

14 read as follows: 

15 ‘‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RE16 LATED TO TAX SHELTERS AND REPORTABLE 

17 TRANSACTIONS.’’

18 (2) The table of sections for subchapter A of 

19 chapter 67 is amended by striking the item relating 

20 to section 7408 and inserting the following new 

21 item:

‘‘Sec. 7408. Actions to enjoin specified conduct related to tax shelters and 

reportable transactions.’’

22 (c) EFFECTIVE DATE.—The amendment made by 

23 this section shall take effect on the day after the date of 

24 the enactment of this Act. 
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1 SEC. 321. UNDERSTATEMENT OF TAXPAYER’S LIABILITY BY 

2 INCOME TAX RETURN PREPARER. 

3 (a) STANDARDS CONFORMED TO TAXPAYER STAND4 ARDS.—Section 6694(a) (relating to understatements due 

5 to unrealistic positions) is amended—

6 (1) by striking ‘‘realistic possibility of being 

7 sustained on its merits’’ in paragraph (1) and in8 serting ‘‘reasonable belief that the tax treatment in 

9 such position was more likely than not the proper 

10 treatment’’, 

11 (2) by striking ‘‘or was frivolous’’ in paragraph 

12 (3) and inserting ‘‘or there was no reasonable basis 

13 for the tax treatment of such position’’, and 

14 (3) by striking ‘‘UNREALISTIC’’ in the heading 

15 and inserting ‘‘IMPROPER’’. 

16 (b) AMOUNT OF PENALTY.—Section 6694 is amend17 ed—

18 (1) by striking ‘‘$250’’ in subsection (a) and in19 serting ‘‘$1,000’’, and 

20 (2) by striking ‘‘$1,000’’ in subsection (b) and 

21 inserting ‘‘$5,000’’. 

22 (c) EFFECTIVE DATE.—The amendments made by 

23 this section shall apply to documents prepared after the 

24 date of the enactment of this Act. 
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1 SEC. 322. PENALTY ON FAILURE TO REPORT INTERESTS IN 

2 FOREIGN FINANCIAL ACCOUNTS. 

3 (a) IN GENERAL.—Section 5321(a)(5) of title 31, 

4 United States Code, is amended to read as follows: 

5 ‘‘(5) FOREIGN FINANCIAL AGENCY TRANS6 ACTION VIOLATION.—

7 ‘‘(A) PENALTY AUTHORIZED.—The Sec8 retary of the Treasury may impose a civil 

9 money penalty on any person who violates, or 

10 causes any violation of, any provision of section 

11 5314. 

12 ‘‘(B) AMOUNT OF PENALTY.—

13 ‘‘(i) IN GENERAL.—Except as pro14 vided in subparagraph (C), the amount of 

15 any civil penalty imposed under subpara16 graph (A) shall not exceed $5,000. 

17 ‘‘(ii) REASONABLE CAUSE EXCEP18 TIONNo penalty shall be imposed under 

19 subparagraph (A) with respect to any vio20 lation if—

21 ‘‘(I) such violation was due to 

22 reasonable cause, and 

23 ‘‘(II) the amount of the trans24 action or the balance in the account 

25 at the time of the transaction was 

26 properly reported. 
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1 ‘‘(C) WILLFUL VIOLATIONS.—In the case 

2 of any person willfully violating, or willfully 

3 causing any violation of, any provision of sec4 tion 5314—

5 ‘‘(i) the maximum penalty under sub6 paragraph (B)(i) shall be increased to the 

7 greater of—

8 ‘‘(I) $25,000, or 

9 ‘‘(II) the amount (not exceeding 

10 $100,000) determined under subpara11 graph (D), and 

12 ‘‘(ii) subparagraph (B)(ii) shall not 

13 apply. 

14 ‘‘(D) AMOUNT.—The amount determined 

15 under this subparagraph is—

16 ‘‘(i) in the case of a violation involving 

17 a transaction, the amount of the trans18 action, or 

19 ‘‘(ii) in the case of a violation involv20 ing a failure to report the existence of an 

21 account or any identifying information re22 quired to be provided with respect to an 

23 account, the balance in the account at the 

24 time of the violation.’’
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1 (b) EFFECTIVE DATE.—The amendment made by 

2 this section shall apply to violations occurring after the 

3 date of the enactment of this Act. 

4 SEC. 323. FRIVOLOUS TAX SUBMISSIONS. 

5 (a) CIVIL PENALTIES.—Section 6702 is amended to 

6 read as follows: 

7 ‘‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS. 

8 ‘‘(a) CIVIL PENALTY FOR FRIVOLOUS TAX RE9 TURNS.—A person shall pay a penalty of $5,000 if—

10 ‘‘(1) such person files what purports to be a re11 turn of a tax imposed by this title but which—

12 ‘‘(A) does not contain information on 

13 which the substantial correctness of the self-as14 sessment may be judged, or 

15 ‘‘(B) contains information that on its face 

16 indicates that the self-assessment is substan17 tially incorrect; and 

18 ‘‘(2) the conduct referred to in paragraph (1)— 

19 ‘‘(A) is based on a position which the Sec20 retary has identified as frivolous under sub21 section (c), or 

22 ‘‘(B) reflects a desire to delay or impede 

23 the administration of Federal tax laws. 

24 ‘‘(b) CIVIL PENALTY FOR SPECIFIED FRIVOLOUS

25 SUBMISSIONS.—
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1 ‘‘(1) IMPOSITION OF PENALTY.—Except as pro2 vided in paragraph (3), any person who submits a 

3 specified frivolous submission shall pay a penalty of 

4 $5,000. 

5 ‘‘(2) SPECIFIED FRIVOLOUS SUBMISSION.—For 

6 purposes of this section—

7 ‘‘(A) SPECIFIED FRIVOLOUS SUBMIS8 SION.—The term ‘specified frivolous submis9 sion’ means a specified submission if any por10 tion of such submission—

11 ‘‘(i) is based on a position which the 

12 Secretary has identified as frivolous under 

13 subsection (c), or 

14 ‘‘(ii) reflects a desire to delay or im15 pede the administration of Federal tax 

16 laws. 

17 ‘‘(B) SPECIFIED SUBMISSION.—The term 

18 ‘specified submission’ means—

19 ‘‘(i) a request for a hearing under—

20 ‘‘(I) section 6320 (relating to no21 tice and opportunity for hearing upon 

22 filing of notice of lien), or 

23 ‘‘(II) section 6330 (relating to 

24 notice and opportunity for hearing be25 fore levy), and 
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1 ‘‘(ii) an application under—

2 ‘‘(I) section 6159 (relating to 

3 agreements for payment of tax liabil4 ity in installments), 

5 ‘‘(II) section 7122 (relating to 

6 compromises), or 

7 ‘‘(III) section 7811 (relating to 

8 taxpayer assistance orders). 

9 ‘‘(3) OPPORTUNITY TO WITHDRAW SUBMIS10 SION.—If the Secretary provides a person with no11 tice that a submission is a specified frivolous sub12 mission and such person withdraws such submission 

13 within 30 days after such notice, the penalty im14 posed under paragraph (1) shall not apply with re15 spect to such submission. 

16 ‘‘(c) LISTING OF FRIVOLOUS POSITIONS.—The Sec17 retary shall prescribe (and periodically revise) a list of po18 sitions which the Secretary has identified as being frivo19 lous for purposes of this subsection. The Secretary shall 

20 not include in such list any position that the Secretary 

21 determines meets the requirement of section 

22 6662(d)(2)(B)(ii)(II). 

23 ‘‘(d) REDUCTION OF PENALTY.—The Secretary may 

24 reduce the amount of any penalty imposed under this sec25 tion if the Secretary determines that such reduction would 
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1 promote compliance with and administration of the Fed2 eral tax laws. 

3 ‘‘(e) PENALTIES IN ADDITION TO OTHER PEN4 ALTIES.—The penalties imposed by this section shall be 

5 in addition to any other penalty provided by law.’’

6 (b) TREATMENT OF FRIVOLOUS REQUESTS FOR

7 HEARINGS BEFORE LEVY.—

8 (1) FRIVOLOUS REQUESTS DISREGARDED.—

9 Section 6330 (relating to notice and opportunity for 

10 hearing before levy) is amended by adding at the 

11 end the following new subsection: 

12 ‘‘(g) FRIVOLOUS REQUESTS FOR HEARING, ETC.—

13 Notwithstanding any other provision of this section, if the 

14 Secretary determines that any portion of a request for a 

15 hearing under this section or section 6320 meets the re16 quirement of clause (i) or (ii) of section 6702(b)(2)(A), 

17 then the Secretary may treat such portion as if it were 

18 never submitted and such portion shall not be subject to 

19 any further administrative or judicial review.’’

20 (2) PRECLUSION FROM RAISING FRIVOLOUS

21 ISSUES AT HEARING.—Section 6330(c)(4) is amend22 ed—

23 (A) by striking ‘‘(A)’’ and inserting 

24 ‘‘(A)(i)’’; 

25 (B) by striking ‘‘(B)’’ and inserting ‘‘(ii)’’; 
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1 (C) by striking the period at the end of the 

2 first sentence and inserting ‘‘; or’’; and 

3 (D) by inserting after subparagraph (A)(ii) 

4 (as so redesignated) the following: 

5 ‘‘(B) the issue meets the requirement of 

6 clause (i) or (ii) of section 6702(b)(2)(A).’’

7 (3) STATEMENT OF GROUNDS.—Section 

8 6330(b)(1) is amended by striking ‘‘under sub9 section (a)(3)(B)’’ and inserting ‘‘in writing under 

10 subsection (a)(3)(B) and states the grounds for the 

11 requested hearing’’. 

12 (c) TREATMENT OF FRIVOLOUS REQUESTS FOR

13 HEARINGS UPON FILING OF NOTICE OF LIEN.—Section 

14 6320 is amended—

15 (1) in subsection (b)(1), by striking ‘‘under sub16 section (a)(3)(B)’’ and inserting ‘‘in writing under 

17 subsection (a)(3)(B) and states the grounds for the 

18 requested hearing’’, and 

19 (2) in subsection (c), by striking ‘‘and (e)’’ and 

20 inserting ‘‘(e), and (g)’’. 

21 (d) TREATMENT OF FRIVOLOUS APPLICATIONS FOR

22 OFFERS-IN-COMPROMISE AND INSTALLMENT AGREE23 MENTS.—Section 7122 is amended by adding at the end 

24 the following new subsection: 
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1 ‘‘(e) FRIVOLOUS SUBMISSIONS, ETC.—Notwith2 standing any other provision of this section, if the Sec3 retary determines that any portion of an application for 

4 an offer-in-compromise or installment agreement sub5 mitted under this section or section 6159 meets the re6 quirement of clause (i) or (ii) of section 6702(b)(2)(A), 

7 then the Secretary may treat such portion as if it were 

8 never submitted and such portion shall not be subject to 

9 any further administrative or judicial review.’’

10 (e) CLERICAL AMENDMENT.—The table of sections 

11 for part I of subchapter B of chapter 68 is amended by 

12 striking the item relating to section 6702 and inserting 

13 the following new item:

‘‘Sec. 6702. Frivolous tax submissions.’’

14 (f) EFFECTIVE DATE.—The amendments made by 

15 this section shall apply to submissions made and issues 

16 raised after the date on which the Secretary first pre17 scribes a list under section 6702(c) of the Internal Rev18 enue Code of 1986, as amended by subsection (a). 

19 SEC. 324. REGULATION OF INDIVIDUALS PRACTICING BE20 FORE THE DEPARTMENT OF TREASURY. 

21 (a) CENSURE; IMPOSITION OF PENALTY.—

22 (1) IN GENERAL.—Section 330(b) of title 31, 

23 United States Code, is amended—

24 (A) by inserting ‘‘, or censure,’’ after ‘‘De25 partment’’, and 
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1 (B) by adding at the end the following new 

2 flush sentence: 

3 ‘‘The Secretary may impose a monetary penalty on any 

4 representative described in the preceding sentence. If the 

5 representative was acting on behalf of an employer or any 

6 firm or other entity in connection with the conduct giving 

7 rise to such penalty, the Secretary may impose a monetary 

8 penalty on such employer, firm, or entity if it knew, or 

9 reasonably should have known, of such conduct. Such pen10 alty shall not exceed the gross income derived (or to be 

11 derived) from the conduct giving rise to the penalty and 

12 may be in addition to, or in lieu of, any suspension, disbar13 ment, or censure.’’

14 (2) EFFECTIVE DATE.—The amendments made 

15 by this subsection shall apply to actions taken after 

16 the date of the enactment of this Act. 

17 (b) TAX SHELTER OPINIONS, ETC.—Section 330 of 

18 such title 31 is amended by adding at the end the fol19 lowing new subsection: 

20 ‘‘(d) Nothing in this section or in any other provision 

21 of law shall be construed to limit the authority of the Sec22 retary of the Treasury to impose standards applicable to 

23 the rendering of written advice with respect to any entity, 

24 transaction plan or arrangement, or other plan or arrange-
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1 ment, which is of a type which the Secretary determines 

2 as having a potential for tax avoidance or evasion.’’

3 SEC. 325. PENALTY ON PROMOTERS OF TAX SHELTERS. 

4 (a) PENALTY ON PROMOTING ABUSIVE TAX SHEL5 TERS.—Section 6700(a) is amended by adding at the end 

6 the following new sentence: ‘‘Notwithstanding the first 

7 sentence, if an activity with respect to which a penalty 

8 imposed under this subsection involves a statement de9 scribed in paragraph (2)(A), the amount of the penalty 

10 shall be equal to 50 percent of the gross income derived 

11 (or to be derived) from such activity by the person on 

12 which the penalty is imposed.’’

13 (b) EFFECTIVE DATE.—The amendment made by 

14 this section shall apply to activities after the date of the 

15 enactment of this Act. 

16 SEC. 326. STATUTE OF LIMITATIONS FOR TAXABLE YEARS 

17 FOR WHICH LISTED TRANSACTIONS NOT RE18 PORTED. 

19 (a) IN GENERAL.—Section 6501(e)(1) (relating to 

20 substantial omission of items for income taxes) is amended 

21 by adding at the end the following new subparagraph: 

22 ‘‘(C) LISTED TRANSACTIONS.—If a tax23 payer fails to include on any return or state24 ment for any taxable year any information with 

25 respect to a listed transaction (as defined in 
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1 section 6707A(c)(2)) which is required under 

2 section 6011 to be included with such return or 

3 statement, the tax for such taxable year may be 

4 assessed, or a proceeding in court for collection 

5 of such tax may be begun without assessment, 

6 at any time within 6 years after the time the 

7 return is filed. This subparagraph shall not 

8 apply to any taxable year if the time for assess9 ment or beginning the proceeding in court has 

10 expired before the time a transaction is treated 

11 as a listed transaction under section 6011.’’ 

12 (b) EFFECTIVE DATE.—The amendment made by 

13 this section shall apply to transactions after the date of 

14 the enactment of this Act in taxable years ending after 

15 such date. 

16 SEC. 327. DENIAL OF DEDUCTION FOR INTEREST ON UN17 DERPAYMENTS ATTRIBUTABLE TO NONDIS18 CLOSED REPORTABLE AND NONECONOMIC 

19 SUBSTANCE TRANSACTIONS. 

20 (a) IN GENERAL.—Section 163 (relating to deduction 

21 for interest) is amended by redesignating subsection (m) 

22 as subsection (n) and by inserting after subsection (l) the 

23 following new subsection: 

24 ‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE

25 TO NONDISCLOSED REPORTABLE TRANSACTIONS AND
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1 NONECONOMIC SUBSTANCE TRANSACTIONS.—No deduc2 tion shall be allowed under this chapter for any interest 

3 paid or accrued under section 6601 on any underpayment 

4 of tax which is attributable to—

5 ‘‘(1) the portion of any reportable transaction 

6 understatement (as defined in section 6662A(b)) 

7 with respect to which the requirement of section 

8 6664(d)(2)(A) is not met, or 

9 ‘‘(2) any noneconomic substance transaction 

10 understatement (as defined in section 6662B(c)).’’

11 (b) EFFECTIVE DATE.—The amendments made by 

12 this section shall apply to transactions after the date of 

13 the enactment of this Act in taxable years ending after 

14 such date. 

15 PART II—OTHER PROVISIONS 

16 SEC. 331. LIMITATION ON TRANSFER OR IMPORTATION OF 

17 BUILT-IN LOSSES. 

18 (a) IN GENERAL.—Section 362 (relating to basis to 

19 corporations) is amended by adding at the end the fol20 lowing new subsection: 

21 ‘‘(e) LIMITATIONS ON BUILT-IN LOSSES.—

22 ‘‘(1) LIMITATION ON IMPORTATION OF BUILT23 IN LOSSES.—

24 ‘‘(A) IN GENERAL.—If in any transaction 

25 described in subsection (a) or (b) there would 
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1 (but for this subsection) be an importation of a 

2 net built-in loss, the basis of each property de3 scribed in subparagraph (B) which is acquired 

4 in such transaction shall (notwithstanding sub5 sections (a) and (b)) be its fair market value 

6 immediately after such transaction. 

7 ‘‘(B) PROPERTY DESCRIBED.—For pur8 poses of subparagraph (A), property is de9 scribed in this paragraph if—

10 ‘‘(i) gain or loss with respect to such 

11 property is not subject to tax under this 

12 subtitle in the hands of the transferor im13 mediately before the transfer, and 

14 ‘‘(ii) gain or loss with respect to such 

15 property is subject to such tax in the 

16 hands of the transferee immediately after 

17 such transfer. 

18 In any case in which the transferor is a part19 nership, the preceding sentence shall be applied 

20 by treating each partner in such partnership as 

21 holding such partner’s proportionate share of 

22 the property of such partnership. 

23 ‘‘(C) IMPORTATION OF NET BUILT-IN

24 LOSS.—For purposes of subparagraph (A), 

25 there is an importation of a net built-in loss in 
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1 a transaction if the transferee’s aggregate ad2 justed bases of property described in subpara3 graph (B) which is transferred in such trans4 action would (but for this paragraph) exceed 

5 the fair market value of such property imme6 diately after such transaction.’’

7 ‘‘(2) LIMITATION ON TRANSFER OF BUILT-IN

8 LOSSES IN SECTION 351 TRANSACTIONS.—

9 ‘‘(A) IN GENERAL.—If—

10 ‘‘(i) property is transferred in any 

11 transaction which is described in sub12 section (a) and which is not described in 

13 paragraph (1) of this subsection, and 

14 ‘‘(ii) the transferee’s aggregate ad15 justed bases of the property so transferred 

16 would (but for this paragraph) exceed the 

17 fair market value of such property imme18 diately after such transaction, 

19 then, notwithstanding subsection (a), the trans20 feree’s aggregate adjusted bases of the property 

21 so transferred shall not exceed the fair market 

22 value of such property immediately after such 

23 transaction. 

24 ‘‘(B) ALLOCATION OF BASIS REDUC25 TION.—The aggregate reduction in basis by 
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1 reason of subparagraph (A) shall be allocated 

2 among the property so transferred in proportion 

3 to their respective built-in losses immediately 

4 before the transaction. 

5 ‘‘(C) EXCEPTION FOR TRANSFERS WITHIN

6 AFFILIATED GROUP.—Subparagraph (A) shall 

7 not apply to any transaction if the transferor 

8 owns stock in the transferee meeting the re9 quirements of section 1504(a)(2). In the case of 

10 property to which subparagraph (A) does not 

11 apply by reason of the preceding sentence, the 

12 transferor’s basis in the stock received for such 

13 property shall not exceed its fair market value 

14 immediately after the transfer.’’ 

15 (b) COMPARABLE TREATMENT WHERE LIQUIDA16 TION.—Paragraph (1) of section 334(b) (relating to liq17 uidation of subsidiary) is amended to read as follows: 

18 ‘‘(1) IN GENERAL.—If property is received by a 

19 corporate distributee in a distribution in a complete 

20 liquidation to which section 332 applies (or in a 

21 transfer described in section 337(b)(1)), the basis of 

22 such property in the hands of such distributee shall 

23 be the same as it would be in the hands of the trans24 feror; except that the basis of such property in the 

25 hands of such distributee shall be the fair market 
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1 value of the property at the time of the distribu2 tion—

3 ‘‘(A) in any case in which gain or loss is 

4 recognized by the liquidating corporation with 

5 respect to such property, or 

6 ‘‘(B) in any case in which the liquidating 

7 corporation is a foreign corporation, the cor8 porate distributee is a domestic corporation, 

9 and the corporate distributee’s aggregate ad10 justed bases of property described in section 

11 362(e)(1)(B) which is distributed in such liq12 uidation would (but for this subparagraph) ex13 ceed the fair market value of such property im14 mediately after such liquidation.’’

15 (c) EFFECTIVE DATE.—The amendments made by 

16 this section shall apply to transactions after the date of 

17 the enactment of this Act. 

18 SEC. 332. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS 

19 TRANSFERS. 

20 (a) TREATMENT OF CONTRIBUTED PROPERTY WITH

21 BUILT-IN LOSS.—Paragraph (1) of section 704(c) is 

22 amended by striking ‘‘and’’ at the end of subparagraph 

23 (A), by striking the period at the end of subparagraph 

24 (B) and inserting ‘‘, and’’, and by adding at the end the 

25 following: 
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1 ‘‘(C) if any property so contributed has a 

2 built-in loss—

3 ‘‘(i) such built-in loss shall be taken 

4 into account only in determining the 

5 amount of items allocated to the contrib6 uting partner, and 

7 ‘‘(ii) except as provided in regulations, 

8 in determining the amount of items allo9 cated to other partners, the basis of the 

10 contributed property in the hands of the 

11 partnership shall be treated as being equal 

12 to its fair market value immediately after 

13 the contribution. 

14 For purposes of subparagraph (C), the term ‘built15 in loss’ means the excess of the adjusted basis of the 

16 property (determined without regard to subpara17 graph (C)(ii)) over its fair market value immediately 

18 after the contribution.’’

19 (b) ADJUSTMENT TO BASIS OF PARTNERSHIP PROP20 ERTY ON TRANSFER OF PARTNERSHIP INTEREST IF

21 THERE IS SUBSTANTIAL BUILT-IN LOSS.—

22 (1) ADJUSTMENT REQUIRED.—Subsection (a) 

23 of section 743 (relating to optional adjustment to 

24 basis of partnership property) is amended by insert25 ing before the period ‘‘or unless the partnership has 
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1 a substantial built-in loss immediately after such 

2 transfer’’. 

3 (2) ADJUSTMENT.—Subsection (b) of section 

4 743 is amended by inserting ‘‘or with respect to 

5 which there is a substantial built-in loss immediately 

6 after such transfer’’ after ‘‘section 754 is in effect’’. 

7 (3) SUBSTANTIAL BUILT-IN LOSS.—Section 743 

8 is amended by adding at the end the following new 

9 subsection: 

10 ‘‘(d) SUBSTANTIAL BUILT-IN LOSS.—

11 ‘‘(1) IN GENERAL.—For purposes of this sec12 tion, a partnership has a substantial built-in loss 

13 with respect to a transfer of an interest in a part14 nership if the transferee partner’s proportionate 

15 share of the adjusted basis of the partnership prop16 erty exceeds by more than $250,000 the basis of 

17 such partner’s interest in the partnership. 

18 ‘‘(2) REGULATIONS.—The Secretary shall pre19 scribe such regulations as may be appropriate to 

20 carry out the purposes of paragraph (1) and section 

21 734(d), including regulations aggregating related 

22 partnerships and disregarding property acquired by 

23 the partnership in an attempt to avoid such pur24 poses.’’

25 (4) CLERICAL AMENDMENTS.—
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1 (A) The section heading for section 743 is 

2 amended to read as follows: 

3 ‘‘SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROP4 ERTY WHERE SECTION 754 ELECTION OR 

5 SUBSTANTIAL BUILT-IN LOSS.’’

6 (B) The table of sections for subpart C of 

7 part II of subchapter K of chapter 1 is amend8 ed by striking the item relating to section 743 

9 and inserting the following new item:

‘‘Sec. 743. Adjustment to basis of partnership property where section 754 election or substantial built-in loss.’’

10 (c) ADJUSTMENT TO BASIS OF UNDISTRIBUTED

11 PARTNERSHIP PROPERTY IF THERE IS SUBSTANTIAL

12 BASIS REDUCTION.—

13 (1) ADJUSTMENT REQUIRED.—Subsection (a) 

14 of section 734 (relating to optional adjustment to 

15 basis of undistributed partnership property) is 

16 amended by inserting before the period ‘‘or unless 

17 there is a substantial basis reduction’’. 

18 (2) ADJUSTMENT.—Subsection (b) of section 

19 734 is amended by inserting ‘‘or unless there is a 

20 substantial basis reduction’’ after ‘‘section 754 is in 

21 effect’’. 

22 (3) SUBSTANTIAL BASIS REDUCTION.—Section 

23 734 is amended by adding at the end the following 

24 new subsection: 
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1 ‘‘(d) SUBSTANTIAL BASIS REDUCTION.—

2 ‘‘(1) IN GENERAL.—For purposes of this sec3 tion, there is a substantial basis reduction with re4 spect to a distribution if the sum of the amounts de5 scribed in subparagraphs (A) and (B) of subsection 

6 (b)(2) exceeds $250,000. 

7 ‘‘(2) REGULATIONS.—

‘‘For regulations to carry out this subsection, see 

section 743(d)(2).’’

8 (4) CLERICAL AMENDMENTS.—

9 (A) The section heading for section 734 is 

10 amended to read as follows: 

11 ‘‘SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED 

12 PARTNERSHIP PROPERTY WHERE SECTION 

13 754 ELECTION OR SUBSTANTIAL BASIS RE14 DUCTION.’’

15 (B) The table of sections for subpart B of 

16 part II of subchapter K of chapter 1 is amend17 ed by striking the item relating to section 734 

18 and inserting the following new item:

‘‘Sec. 734. Adjustment to basis of undistributed partnership property where section 754 election or substantial basis 

reduction.’’

19 (d) EFFECTIVE DATES.—

20 (1) SUBSECTION (a).—The amendment made 

21 by subsection (a) shall apply to contributions made 

22 after the date of the enactment of this Act. 
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1 (2) SUBSECTION (b).—The amendments made 

2 by subsection (b) shall apply to transfers after the 

3 date of the enactment of this Act. 

4 (3) SUBSECTION (c).—The amendments made 

5 by subsection (c) shall apply to distributions after 

6 the date of the enactment of this Act. 

7 SEC. 333. NO REDUCTION OF BASIS UNDER SECTION 734 IN 

8 STOCK HELD BY PARTNERSHIP IN COR9 PORATE PARTNER. 

10 (a) IN GENERAL.—Section 755 is amended by adding 

11 at the end the following new subsection: 

12 ‘‘(c) NO ALLOCATION OF BASIS DECREASE TO

13 STOCK OF CORPORATE PARTNER.—In making an alloca14 tion under subsection (a) of any decrease in the adjusted 

15 basis of partnership property under section 734(b)—

16 ‘‘(1) no allocation may be made to stock in a 

17 corporation which is a partner in the partnership, 

18 and 

19 ‘‘(2) any amount not allocable to stock by rea20 son of paragraph (1) shall be allocated under sub21 section (a) to other partnership property. 

22 Gain shall be recognized to the partnership to the extent 

23 that the amount required to be allocated under paragraph 

24 (2) to other partnership property exceeds the aggregate 
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1 adjusted basis of such other property immediately before 

2 the allocation required by paragraph (2).’’

3 (b) EFFECTIVE DATE.—The amendment made by 

4 this section shall apply to distributions after the date of 

5 the enactment of this Act. 

6 SEC. 334. REPEAL OF SPECIAL RULES FOR FASITS. 

7 (a) IN GENERAL.—Part V of subchapter M of chap8 ter 1 (relating to financial asset securitization investment 

9 trusts) is hereby repealed. 

10 (b) CONFORMING AMENDMENTS.—

11 (1) Paragraph (6) of section 56(g) is amended 

12 by striking ‘‘REMIC, or FASIT’’ and inserting ‘‘or 

13 REMIC’’. 

14 (2) Clause (ii) of section 382(l)(4)(B) is amend15 ed by striking ‘‘a REMIC to which part IV of sub16 chapter M applies, or a FASIT to which part V of 

17 subchapter M applies,’’ and inserting ‘‘or a REMIC 

18 to which part IV of subchapter M applies,’’. 

19 (3) Paragraph (1) of section 582(c) is amended 

20 by striking ‘‘, and any regular interest in a 

21 FASIT,’’. 

22 (4) Subparagraph (E) of section 856(c)(5) is 

23 amended by striking the last sentence. 

24 (5) Paragraph (5) of section 860G(a) is amend25 ed by adding ‘‘and’’ at the end of subparagraph (B), 
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1 by striking ‘‘, and’’ at the end of subparagraph (C) 

2 and inserting a period, and by striking subparagraph 

3 (D). 

4 (6) Subparagraph (C) of section 1202(e)(4) is 

5 amended by striking ‘‘REMIC, or FASIT’’ and in6 serting ‘‘or REMIC’’. 

7 (7) Subparagraph (C) of section 7701(a)(19) is 

8 amended by adding ‘‘and’’ at the end of clause (ix), 

9 by striking ‘‘, and’’ at the end of clause (x) and in10 serting a period, and by striking clause (xi). 

11 (8) The table of parts for subchapter M of 

12 chapter 1 is amended by striking the item relating 

13 to part V. 

14 (c) EFFECTIVE DATE.—

15 (1) IN GENERAL.—Except as provided in para16 graph (2), the amendments made by this section 

17 shall apply to taxable years beginning after Decem18 ber 31, 2003. 

19 (2) EXCEPTION FOR EXISTING FASITS.—

20 (A) IN GENERAL.—Paragraph (1) shall not 

21 apply to any FASIT in existence on the date of 

22 the enactment of this Act. 

23 (B) TRANSFER OF ADDITIONAL ASSETS

24 NOT PERMITTED.—Except as provided in regu25 lations prescribed by the Secretary of the 
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1 Treasury or the Secretary’s delegate, subpara2 graph (A) shall cease to apply as of the earliest 

3 date after the date of the enactment of this Act 

4 that any property is transferred to the FASIT. 

5 SEC. 335. EXPANDED DISALLOWANCE OF DEDUCTION FOR 

6 INTEREST ON CONVERTIBLE DEBT. 

7 (a) IN GENERAL.—Paragraph (2) of section 163(l) 

8 is amended by striking ‘‘or a related party’’ and inserting 

9 ‘‘or equity held by the issuer (or any related party) in any 

10 other person’’. 

11 (b) CONFORMING AMENDMENT.—Paragraph (3) of 

12 section 163(l) is amended by striking ‘‘or a related party’’ 

13 in the material preceding subparagraph (A) and inserting 

14 ‘‘or any other person’’. 

15 (c) EFFECTIVE DATE.—The amendments made by 

16 this section shall apply to debt instruments issued after 

17 the date of the enactment of this Act. 

18 SEC. 336. EXPANDED AUTHORITY TO DISALLOW TAX BENE19 FITS UNDER SECTION 269. 

20 (a) IN GENERAL.—Subsection (a) of section 269 (re21 lating to acquisitions made to evade or avoid income tax) 

22 is amended to read as follows: 

23 ‘‘(a) IN GENERAL.—If—

24 ‘‘(1)(A) any person acquires stock in a corpora25 tion, or 
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1 ‘‘(B) any corporation acquires, directly or indi2 rectly, property of another corporation and the basis 

3 of such property, in the hands of the acquiring cor4 poration, is determined by reference to the basis in 

5 the hands of the transferor corporation, and 

6 ‘‘(2) the principal purpose for which such acqui7 sition was made is evasion or avoidance of Federal 

8 income tax by securing the benefit of a deduction, 

9 credit, or other allowance, 

10 then the Secretary may disallow such deduction, credit, 

11 or other allowance.’’

12 (b) EFFECTIVE DATE.—The amendment made by 

13 this section shall apply to stock and property acquired 

14 after February 13, 2003. 

15 SEC. 337. MODIFICATIONS OF CERTAIN RULES RELATING 

16 TO CONTROLLED FOREIGN CORPORATIONS. 

17 (a) LIMITATION ON EXCEPTION FROM PFIC RULES

18 FOR UNITED STATES SHAREHOLDERS OF CONTROLLED

19 FOREIGN CORPORATIONS.—Paragraph (2) of section 

20 1297(e) (relating to passive investment company) is 

21 amended by adding at the end the following flush sen22 tence: 

23 ‘‘Such term shall not include any period if there is 

24 only a remote likelihood of an inclusion in gross in-
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1 come under section 951(a)(1)(A)(i) of subpart F in2 come of such corporation for such period.’’

3 (b) DETERMINATION OF PRO RATA SHARE OF SUB4 PART F INCOME.—Subsection (a) of section 951 (relating 

5 to amounts included in gross income of United States 

6 shareholders) is amended by adding at the end the fol7 lowing new paragraph: 

8 ‘‘(4) SPECIAL RULES FOR DETERMINING PRO

9 RATA SHARE OF SUBPART F INCOME.—The pro rata 

10 share under paragraph (2) shall be determined by 

11 disregarding—

12 ‘‘(A) any rights lacking substantial eco13 nomic effect, and 

14 ‘‘(B) stock owned by a shareholder who is 

15 a tax-indifferent party (as defined in section 

16 7701(m)(3)) if the amount which would (but 

17 for this paragraph) be allocated to such share18 holder does not reflect such shareholder’s eco19 nomic share of the earnings and profits of the 

20 corporation.’’

21 (c) EFFECTIVE DATE.—The amendments made by 

22 this section shall apply to taxable years on controlled for23 eign corporation beginning after February 13, 2003, and 

24 to taxable years of United States shareholder in which or 
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1 with which such taxable years of controlled foreign cor2 porations end. 

3 SEC. 338. BASIS FOR DETERMINING LOSS ALWAYS RE4 DUCED BY NONTAXED PORTION OF DIVI5 DENDS. 

6 (a) IN GENERAL.—Section 1059 (relating to cor7 porate shareholder’s basis in stock reduced by nontaxed 

8 portion of extraordinary dividends) is amended by redesig9 nating subsection (g) as subsection (h) and by inserting 

10 after subsection (f) the following new subsection: 

11 ‘‘(g) BASIS FOR DETERMINING LOSS ALWAYS RE12 DUCED BY NONTAXED PORTION OF DIVIDENDS.—The 

13 basis of stock in a corporation (for purposes of deter14 mining loss) shall be reduced by the nontaxed portion of 

15 any dividend received with respect to such stock if this 

16 section does not otherwise apply to such dividend.’’

17 (b) EFFECTIVE DATE.—The amendment made by 

18 this section shall apply to dividends received after the date 

19 of the enactment of this Act. 

20 SEC. 339. AFFIRMATION OF CONSOLIDATED RETURN REGU21 LATION AUTHORITY. 

22 (a) IN GENERAL.—Section 1502 (relating to consoli23 dated return regulations) is amended by adding at the end 

24 the following new sentence: ‘‘In prescribing such regula25 tions, the Secretary may prescribe rules applicable to cor-
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1 porations filing consolidated returns under section 1501 

2 that are different from other provisions of this title that 

3 would apply if such corporations filed separate returns.’’

4 (b) RESULT NOT OVERTURNED.—Notwithstanding 

5 subsection (a), the Internal Revenue Code of 1986 shall 

6 be construed by treating Treasury regulation § 1.1502–

7 20(c)(1)(iii) (as in effect on January 1, 2001) as being 

8 inapplicable to the type of factual situation in 255 F.3d 

9 1357 (Fed. Cir. 2001). 

10 (c) EFFECTIVE DATE.—The provisions of this section 

11 shall apply to taxable years beginning before, on, or after 

12 the date of the enactment of this Act. 

13 Subtitle C—Prevention of Cor14 porate Expatriation To Avoid 

15 United States Income Tax

16 SEC. 341. PREVENTION OF CORPORATE EXPATRIATION TO 

17 AVOID UNITED STATES INCOME TAX. 

18 (a) IN GENERAL.—Paragraph (4) of section 7701(a) 

19 (defining domestic) is amended to read as follows: 

20 ‘‘(4) DOMESTIC.—

21 ‘‘(A) IN GENERAL.—Except as provided in 

22 subparagraph (B), the term ‘domestic’ when ap23 plied to a corporation or partnership means cre24 ated or organized in the United States or under 

25 the law of the United States or of any State 
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1 unless, in the case of a partnership, the Sec2 retary provides otherwise by regulations. 

3 ‘‘(B) CERTAIN CORPORATIONS TREATED

4 AS DOMESTIC.—

5 ‘‘(i) IN GENERAL.—The acquiring cor6 poration in a corporate expatriation trans7 action shall be treated as a domestic cor8 poration. 

9 ‘‘(ii) CORPORATE EXPATRIATION

10 TRANSACTION.—For purposes of this sub11 paragraph, the term ‘corporate expatria12 tion transaction’ means any transaction 

13 if—

14 ‘‘(I) a nominally foreign corpora15 tion (referred to in this subparagraph 

16 as the ‘acquiring corporation’) ac17 quires, as a result of such transaction, 

18 directly or indirectly substantially all 

19 of the properties held directly or indi20 rectly by a domestic corporation, and 

21 ‘‘(II) immediately after the trans22 action, more than 80 percent of the 

23 stock (by vote or value) of the acquir24 ing corporation is held by former 

25 shareholders of the domestic corpora-
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1 tion by reason of holding stock in the 

2 domestic corporation. 

3 ‘‘(iii) LOWER STOCK OWNERSHIP RE4 QUIREMENT IN CERTAIN CASES.—Sub5 clause (II) of clause (ii) shall be applied by 

6 substituting ‘50 percent’ for ‘80 percent’ 

7 with respect to any nominally foreign cor8 poration if—

9 ‘‘(I) such corporation does not 

10 have substantial business activities 

11 (when compared to the total business 

12 activities of the expanded affiliated 

13 group) in the foreign country in which 

14 or under the law of which the corpora15 tion is created or organized, and 

16 ‘‘(II) the stock of the corporation 

17 is publicly traded and the principal 

18 market for the public trading of such 

19 stock is in the United States. 

20 ‘‘(iv) PARTNERSHIP TRANSACTIONS.—

21 The term ‘corporate expatriation trans22 action’ includes any transaction if—

23 ‘‘(I) a nominally foreign corpora24 tion (referred to in this subparagraph 

25 as the ‘acquiring corporation’) ac-
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1 quires, as a result of such transaction, 

2 directly or indirectly properties consti3 tuting a trade or business of a domes4 tic partnership, 

5 ‘‘(II) immediately after the trans6 action, more than 80 percent of the 

7 stock (by vote or value) of the acquir8 ing corporation is held by former 

9 partners of the domestic partnership 

10 or related foreign partnerships (deter11 mined without regard to stock of the 

12 acquiring corporation which is sold in 

13 a public offering related to the trans14 action), and 

15 ‘‘(III) the acquiring corporation 

16 meets the requirements of subclauses 

17 (I) and (II) of clause (iii). 

18 ‘‘(v) SPECIAL RULES.—For purposes 

19 of this subparagraph—

20 ‘‘(I) a series of related trans21 actions shall be treated as 1 trans22 action, and 

23 ‘‘(II) stock held by members of 

24 the expanded affiliated group which 

25 includes the acquiring corporation 
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1 shall not be taken into account in de2 termining ownership. 

3 ‘‘(vi) OTHER DEFINITIONS.—For pur4 poses of this subparagraph—

5 ‘‘(I) NOMINALLY FOREIGN COR6 PORATION.—The term ‘nominally for7 eign corporation’ means any corpora8 tion which would (but for this sub9 paragraph) be treated as a foreign 

10 corporation. 

11 ‘‘(II) EXPANDED AFFILIATED

12 GROUP.—The term ‘expanded affili13 ated group’ means an affiliated group 

14 (as defined in section 1504(a) without 

15 regard to section 1504(b)). 

16 ‘‘(III) RELATED FOREIGN PART17 NERSHIP.—A foreign partnership is 

18 related to a domestic partnership if 

19 they are under common control (with20 in the meaning of section 482), or 

21 they shared the same trademark or 

22 tradename.’’

23 (b) EFFECTIVE DATES.—
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1 (1) IN GENERAL.—The amendment made by 

2 this section shall apply to corporate expatriation 

3 transactions completed after September 11, 2001. 

4 (2) SPECIAL RULE.—The amendment made by 

5 this section shall also apply to corporate expatriation 

6 transactions completed on or before September 11, 

7 2001, but only with respect to taxable years of the 

8 acquiring corporation beginning after December 31, 

9 2003. 

10 Subtitle D—Inclusion in Gross In11 come of Funded Deferred Com12 pensation of Corporate Insiders 

13 SEC. 351. INCLUSION IN GROSS INCOME OF FUNDED DE14 FERRED COMPENSATION OF CORPORATE IN15 SIDERS. 

16 (a) IN GENERAL.—Subpart A of part I of subchapter 

17 D of chapter 1 is amended by adding at the end the fol18 lowing new section: 

19 ‘‘SEC. 409A. INCLUSION IN GROSS INCOME OF FUNDED DE20 FERRED COMPENSATION OF CORPORATE IN21 SIDERS. 

22 ‘‘(a) IN GENERAL.—If an employer maintains a fund23 ed deferred compensation plan—

24 ‘‘(1) compensation of any disqualified individual 

25 which is deferred under such funded deferred com-
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1 pensation plan shall be included in the gross income 

2 of the disqualified individual or beneficiary for the 

3 1st taxable year in which there is no substantial risk 

4 of forfeiture of the rights to such compensation, and 

5 ‘‘(2) the tax treatment of any amount made 

6 available under the plan to a disqualified individual 

7 or beneficiary shall be determined under section 72 

8 (relating to annuities, etc.). 

9 ‘‘(b) FUNDED DEFERRED COMPENSATION PLAN.—

10 For purposes of this section—

11 ‘‘(1) IN GENERAL.—The term ‘funded deferred 

12 compensation plan’ means any plan providing for the 

13 deferral of compensation unless—

14 ‘‘(A) the employee’s rights to the com15 pensation deferred under the plan are no great16 er than the rights of a general creditor of the 

17 employer, and 

18 ‘‘(B) all amounts set aside (directly or in19 directly) for purposes of paying the deferred 

20 compensation, and all income attributable to 

21 such amounts, remain (until made available to 

22 the participant or other beneficiary) solely the 

23 property of the employer (without being re24 stricted to the provision of benefits under the 

25 plan), and 
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1 ‘‘(C) the amounts referred to in subpara2 graph (B) are available to satisfy the claims of 

3 the employer’s general creditors at all times 

4 (not merely after bankruptcy or insolvency). 

5 Such term shall not include a qualified employer 

6 plan. 

7 ‘‘(2) SPECIAL RULES.—

8 ‘‘(A) EMPLOYEE’S RIGHTS.—A plan shall 

9 be treated as failing to meet the requirements 

10 of paragraph (1)(A) unless—

11 ‘‘(i) the compensation deferred under 

12 the plan is payable only upon separation 

13 from service, death, or at a specified time 

14 (or pursuant to a fixed schedule), and 

15 ‘‘(ii) the plan does not permit the ac16 celeration of the time such deferred com17 pensation is payable by reason of any 

18 event. 

19 If the employer and employee agree to a modi20 fication of the plan that accelerates the time for 

21 payment of any deferred compensation, then all 

22 compensation previously deferred under the 

23 plan shall be includible in gross income for the 

24 taxable year during which such modification 

25 takes effect and the taxpayer shall pay interest 
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1 at the underpayment rate on the underpay2 ments that would have occurred had the de3 ferred compensation been includible in gross in4 come on the earliest date that there is no sub5 stantial risk of forfeiture of the rights to such 

6 compensation. 

7 ‘‘(B) CREDITOR’S RIGHTS.—A plan shall 

8 be treated as failing to meet the requirements 

9 of paragraph (1)(B) with respect to amounts 

10 set aside in a trust unless—

11 ‘‘(i) the employee has no beneficial in12 terest in the trust, 

13 ‘‘(ii) assets in the trust are available 

14 to satisfy claims of general creditors at all 

15 times (not merely after bankruptcy or in16 solvency), and 

17 ‘‘(iii) there is no factor that would 

18 make it more difficult for general creditors 

19 to reach the assets in the trust than it 

20 would be if the trust assets were held di21 rectly by the employer in the United 

22 States. 

23 Except as provided in regulations prescribed by 

24 the Secretary, such a factor shall include the lo25 cation of the trust outside the United States. 
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1 ‘‘(c) DISQUALIFIED INDIVIDUAL.—For purposes of 

2 this section, the term ‘disqualified individual’ means, with 

3 respect to a corporation, any individual—

4 ‘‘(1) who is subject to the requirements of sec5 tion 16(a) of the Securities Exchange Act of 1934 

6 with respect to such corporation, or 

7 ‘‘(2) who would be subject to such requirements 

8 if such corporation were an issuer of equity securi9 ties referred to in such section. 

10 ‘‘(d) OTHER DEFINITIONS AND SPECIAL RULES.—

11 For purposes of this section—

12 ‘‘(1) QUALIFIED EMPLOYER PLAN.—The term 

13 ‘qualified employer plan’ means—

14 ‘‘(A) any plan, contract, pension, account, 

15 or trust described in subparagraph (A) or (B) 

16 of section 219(g)(5), and 

17 ‘‘(B) any other plan of an organization ex18 empt from tax under subtitle A. 

19 ‘‘(2) PLAN INCLUDES ARRANGEMENTS, ETC.—

20 The term ‘plan’ includes any agreement or arrange21 ment. 

22 ‘‘(3) SUBSTANTIAL RISK OF FORFEITURE.—The 

23 rights of a person to compensation are subject to a 

24 substantial risk of forfeiture if such person’s rights 

25 to such compensation are conditioned upon the fu-
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1 ture performance of substantial services by any indi2 vidual. 

3 ‘‘(4) TREATMENT OF EARNINGS.—Except for 

4 purposes of subsection (a)(1) and the last sentence 

5 of (b)(2)(A), references to deferred compensation 

6 shall be treated as including references to income at7 tributable to such compensation or such income.’’

8 (b) CLERICAL AMENDMENT.—The table of sections 

9 for such subpart A is amended by adding at the end the 

10 following new item:

‘‘Sec. 409A. Inclusion in gross income of funded deferred compensation of corporate insiders.’’

11 (b) EFFECTIVE DATE.—The amendments made by 

12 this section shall apply to amounts deferred after July 10, 

13 2002.

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