PUBLIC LAW 109–222—MAY 17, 2006 120 STAT. 345

Public Law 109–222

109th Congress

An Act

To provide for reconciliation pursuant to section 201(b) of the concurrent resolution

on the budget for fiscal year 2006.

Be it enacted by the Senate and House of Representatives of

the United States of America in Congress assembled,

SECTION 1. SHORT TITLE, ETC.

(a) SHORT TITLE.—This Act may be cited as the ‘‘Tax Increase

Prevention and Reconciliation Act of 2005’’.

(b) AMENDMENT OF 1986 CODE.—Except as otherwise expressly

provided, whenever in this Act an amendment or repeal is expressed

in terms of an amendment to, or repeal of, a section or other

provision, the reference shall be considered to be made to a section

or other provision of the Internal Revenue Code of 1986.

(c) TABLE OF CONTENTS.—The table of contents for this Act

is as follows:

Sec. 1. Short title, etc.

TITLE I—EXTENSION AND MODIFICATION OF CERTAIN PROVISIONS

Sec. 101. Increased expensing for small business.

Sec. 102. Capital gains and dividends rates.

Sec. 103. Controlled foreign corporations.

TITLE II—OTHER PROVISIONS

Sec. 201. Clarification of taxation of certain settlement funds.

Sec. 202. Modification of active business definition under section 355.

Sec. 203. Veterans’ mortgage bonds.

Sec. 204. Capital gains treatment for certain self-created musical works.

Sec. 205. Vessel tonnage limit.

Sec. 206. Modification of special arbitrage rule for certain funds.

Sec. 207. Amortization of expenses incurred in creating or acquiring music or music

copyrights. Sec. 208. Modification of effective date of disregard of certain capital expenditures

for purposes of qualified small issue bonds.

Sec. 209. Modification of treatment of loans to qualified continuing care facilities.

TITLE III—ALTERNATIVE MINIMUM TAX RELIEF

Sec. 301. Increase in alternative minimum tax exemption amount for 2006.

Sec. 302. Allowance of nonrefundable personal credits against regular and alternative minimum tax liability.

TITLE IV—CORPORATE ESTIMATED TAX PROVISIONS

Sec. 401. Time for payment of corporate estimated taxes.

TITLE V—REVENUE OFFSET PROVISIONS

Sec. 501. Application of earnings stripping rules to partners which are corporations.

Sec. 502. Reporting of interest on tax-exempt bonds.

Sec. 503. 5-year amortization of geological and geophysical expenditures for certain

major integrated oil companies. Sec. 504. Application of FIRPTA to regulated investment companies.

26 USC 1 et. seq.

26 USC 1 note.

Tax Increase

Prevention and

Reconciliation

Act of 2005.

May 17, 2006

[H.R. 4297]

120 STAT. 346 PUBLIC LAW 109–222—MAY 17, 2006

Sec. 505. Treatment of distributions attributable to FIRPTA gains.

Sec. 506. Prevention of avoidance of tax on investments of foreign persons in

United States real property through wash sale transactions.

Sec. 507. Section 355 not to apply to distributions involving disqualified investment

companies.

Sec. 508. Loan and redemption requirements on pooled financing requirements.

Sec. 509. Partial payments required with submission of offers-in-compromise.

Sec. 510. Increase in age of minor children whose unearned income is taxed as if

parent’s income.

Sec. 511. Imposition of withholding on certain payments made by government entities.

Sec. 512. Conversions to Roth IRAs.

Sec. 513. Repeal of FSC/ETI binding contract relief.

Sec. 514. Only wages attributable to domestic production taken into account in determining deduction for domestic production.

Sec. 515. Modification of exclusion for citizens living abroad.

Sec. 516. Tax involvement of accommodation parties in tax shelter transactions.

TITLE I—EXTENSION AND MODIFICATION OF CERTAIN PROVISIONS

SEC. 101. INCREASED EXPENSING FOR SMALL BUSINESS.

Subsections (b)(1), (b)(2), (b)(5), (c)(2), and (d)(1)(A)(ii) of section

179 (relating to election to expense certain depreciable business

assets) are each amended by striking ‘‘2008’’ and inserting ‘‘2010’’.

SEC. 102. CAPITAL GAINS AND DIVIDENDS RATES.

Section 303 of the Jobs and Growth Tax Relief Reconciliation

Act of 2003 is amended by striking ‘‘December 31, 2008’’ and

inserting ‘‘December 31, 2010’’.

SEC. 103. CONTROLLED FOREIGN CORPORATIONS.

(a) SUBPART F EXCEPTION FOR ACTIVE FINANCING.—

(1) EXEMPT INSURANCE INCOME.—Paragraph (10) of section

953(e) (relating to application) is amended—

(A) by striking ‘‘January 1, 2007’’ and inserting

‘‘January 1, 2009’’, and (B) by striking ‘‘December 31, 2006’’ and inserting

‘‘December 31, 2008’’.

(2) EXCEPTION TO TREATMENT AS FOREIGN PERSONAL

HOLDING COMPANY INCOME.—Paragraph (9) of section 954(h)

(relating to application) is amended by striking ‘‘January 1,

2007’’ and inserting ‘‘January 1, 2009’’.

(b) LOOK-THROUGH TREATMENT OF PAYMENTS BETWEEN

RELATED CONTROLLED FOREIGN CORPORATIONS UNDER THE FOREIGN

PERSONAL HOLDING COMPANY RULES.—

(1) IN GENERAL.—Subsection (c) of section 954 (relating

to foreign personal holding company income) is amended by

adding at the end the following new paragraph:

‘‘(6) LOOK-THRU RULE FOR RELATED CONTROLLED FOREIGN

CORPORATIONS.—

‘‘(A) IN GENERAL.—For purposes of this subsection, dividends, interest, rents, and royalties received or accrued

from a controlled foreign corporation which is a related

person shall not be treated as foreign personal holding

company income to the extent attributable or properly allocable (determined under rules similar to the rules of subparagraphs (C) and (D) of section 904(d)(3)) to income

of the related person which is not subpart F income. For

26 USC 1 note.

26 USC 179.

PUBLIC LAW 109–222—MAY 17, 2006 120 STAT. 347

purposes of this subparagraph, interest shall include factoring income which is treated as income equivalent to

interest for purposes of paragraph (1)(E). The Secretary

shall prescribe such regulations as may be appropriate

to prevent the abuse of the purposes of this paragraph.

‘‘(B) APPLICATION.—Subparagraph (A) shall apply to

taxable years of foreign corporations beginning after

December 31, 2005, and before January 1, 2009, and to

taxable years of United States shareholders with or within

which such taxable years of foreign corporations end.’’.

(2) EFFECTIVE DATE.—The amendment made by this subsection shall apply to taxable years of foreign corporations

beginning after December 31, 2005, and to taxable years of

United States shareholders with or within which such taxable

years of foreign corporations end.

TITLE II—OTHER PROVISIONS

SEC. 201. CLARIFICATION OF TAXATION OF CERTAIN SETTLEMENT

FUNDS.

(a) IN GENERAL.—Subsection (g) of section 468B (relating to

clarification of taxation of certain funds) is amended to read as

follows:

‘‘(g) CLARIFICATION OF TAXATION OF CERTAIN FUNDS.—

‘‘(1) IN GENERAL.—Except as provided in paragraph (2),

nothing in any provision of law shall be construed as providing

that an escrow account, settlement fund, or similar fund is

not subject to current income tax. The Secretary shall prescribe

regulations providing for the taxation of any such account or

fund whether as a grantor trust or otherwise.

‘‘(2) EXEMPTION FROM TAX FOR CERTAIN SETTLEMENT

FUNDS.—An escrow account, settlement fund, or similar fund

shall be treated as beneficially owned by the United States

and shall be exempt from taxation under this subtitle if—

‘‘(A) it is established pursuant to a consent decree

entered by a judge of a United States District Court,

‘‘(B) it is created for the receipt of settlement payments

as directed by a government entity for the sole purpose

of resolving or satisfying one or more claims asserting

liability under the Comprehensive Environmental

Response, Compensation, and Liability Act of 1980,

‘‘(C) the authority and control over the expenditure

of funds therein (including the expenditure of contributions

thereto and any net earnings thereon) is with such government entity, and

‘‘(D) upon termination, any remaining funds will be

disbursed to such government entity for use in accordance

with applicable law.

For purposes of this paragraph, the term ‘government entity’

means the United States, any State or political subdivision

thereof, the District of Columbia, any possession of the United

States, and any agency or instrumentality of any of the foregoing.

‘‘(3) TERMINATION.—Paragraph (2) shall not apply to

accounts and funds established after December 31, 2010.’’.

Regulations.

26 USC 468B.

26 USC 954 note.

120 STAT. 348 PUBLIC LAW 109–222—MAY 17, 2006

(b) EFFECTIVE DATE.—The amendment made by subsection (a)

shall apply to accounts and funds established after the date of

the enactment of this Act.

SEC. 202. MODIFICATION OF ACTIVE BUSINESS DEFINITION UNDER

SECTION 355.

Subsection (b) of section 355 (defining active conduct of a trade or business) is amended by adding at the end the following new

paragraph: ‘‘(3) SPECIAL RULE RELATING TO ACTIVE BUSINESS REQUIRE- MENT.— ‘‘(A) IN GENERAL.—In the case of any distribution made

after the date of the enactment of this paragraph and

on or before December 31, 2010, a corporation shall be

treated as meeting the requirement of paragraph (2)(A)

if and only if such corporation is engaged in the active

conduct of a trade or business.

‘‘(B) AFFILIATED GROUP RULE.—For purposes of

subparagraph (A), all members of such corporation’s separate affiliated group shall be treated as one corporation.

For purposes of the preceding sentence, a corporation’s

separate affiliated group is the affiliated group which would

be determined under section 1504(a) if such corporation

were the common parent and section 1504(b) did not apply.

‘‘(C) TRANSITION RULE.—Subparagraph (A) shall not

apply to any distribution pursuant to a transaction which

is—

‘‘(i) made pursuant to an agreement which was

binding on the date of the enactment of this paragraph

and at all times thereafter,

‘‘(ii) described in a ruling request submitted to

the Internal Revenue Service on or before such date,

or

‘‘(iii) described on or before such date in a public

announcement or in a filing with the Securities and

Exchange Commission.

The preceding sentence shall not apply if the distributing

corporation elects not to have such sentence apply to distributions of such corporation. Any such election, once

made, shall be irrevocable.

‘‘(D) SPECIAL RULE FOR CERTAIN PRE-ENACTMENT DISTRIBUTIONS.—For purposes of determining the continued

qualification under paragraph (2)(A) of distributions made

on or before the date of the enactment of this paragraph

as a result of an acquisition, disposition, or other restructuring after such date and on or before December 31,

2010, such distribution shall be treated as made on the

date of such acquisition, disposition, or restructuring for

purposes of applying subparagraphs (A) through (C) of

this paragraph.’’.

SEC. 203. VETERANS’ MORTGAGE BONDS.

(a) EXPANSION OF DEFINITION OF VETERANS ELIGIBLE FOR STATE

HOME LOAN PROGRAMS FUNDED BY QUALIFIED VETERANS’ MORTGAGE BONDS.— (1) IN GENERAL.—Paragraph (4) of section 143(l) (defining qualified veteran) is amended to read as follows:

26 USC 355.

26 USC 468B

note.

PUBLIC LAW 109–222—MAY 17, 2006 120 STAT. 349

‘‘(4) QUALIFIED VETERAN.—For purposes of this subsection,

the term ‘qualified veteran’ means— ‘‘(A) in the case of the States of Alaska, Oregon, and

Wisconsin, any veteran— ‘‘(i) who served on active duty, and

‘‘(ii) who applied for the financing before the date 25 years after the last date on which such veteran

left active service, and

‘‘(B) in the case of any other State, any veteran— ‘‘(i) who served on active duty at some time before January 1, 1977, and ‘‘(ii) who applied for the financing before the later of—

‘‘(I) the date 30 years after the last date on which such veteran left active service, or

‘‘(II) January 31, 1985.’’. (2) EFFECTIVE DATE.—The amendments made by this sub- section shall apply to bonds issued on or after the date of

the enactment of this Act.

(b) REVISION OF STATE VETERANS LIMIT.— (1) IN GENERAL.—Subparagraph (B) of section 143(l)(3) (relating to volume limitation) is amended— (A) by redesignating clauses (i) and (ii) as subclauses (I) and (II), respectively, and moving such clauses 2 ems

to the right, (B) by amending the matter preceding subclause (I), as designated by subparagraph (A), to read as follows: ‘‘(B) STATE VETERANS LIMIT.— ‘‘(i) IN GENERAL.—In the case of any State to which clause (ii) does not apply, the State veterans limit

for any calendar year is the amount equal to—’’, and

(C) by adding at the end the following new clauses:

‘‘(ii) ALASKA, OREGON, AND WISCONSIN.—In the case

of the following States, the State veterans limit for

any calendar year is the amount equal to—

‘‘(I) $25,000,000 for the State of Alaska,

‘‘(II) $25,000,000 for the State of Oregon, and

‘‘(III) $25,000,000 for the State of Wisconsin.

‘‘(iii) PHASEIN.—In the case of calendar years

beginning before 2010, clause (ii) shall be applied by

substituting for each of the dollar amounts therein

an amount equal to the applicable percentage of such

dollar amount. For purposes of the preceding sentence,

the applicable percentage shall be determined in

accordance with the following table:

‘‘For Calendar Year: Applicable percentage

is:

2006 .............................................................. 20 percent

2007 .............................................................. 40 percent

2008 .............................................................. 60 percent

2009 .............................................................. 80 percent.

‘‘(iv) TERMINATION.—The State veterans limit for

the States specified in clause (ii) for any calendar

year after 2010 is zero.’’.

Applicability.

26 USC 143.

26 USC 143 note.

120 STAT. 350 PUBLIC LAW 109–222—MAY 17, 2006

(2) EFFECTIVE DATE.—The amendments made by this subsection shall apply to allocations of State volume limit after

April 5, 2006.

SEC. 204. CAPITAL GAINS TREATMENT FOR CERTAIN SELF-CREATED

MUSICAL WORKS.

(a) IN GENERAL.—Subsection (b) of section 1221 (relating to

capital asset defined) is amended by redesignating paragraph (3)

as paragraph (4) and by inserting after paragraph (2) the following

new paragraph:

‘‘(3) SALE OR EXCHANGE OF SELF-CREATED MUSICAL

WORKS.—At the election of the taxpayer, paragraphs (1) and

(3) of subsection (a) shall not apply to musical compositions

or copyrights in musical works sold or exchanged before

January 1, 2011, by a taxpayer described in subsection (a)(3).’’.

(b) LIMITATION ON CHARITABLE CONTRIBUTIONS.—Subparagraph (A) of section 170(e)(1) is amended by inserting ‘‘(determined

without regard to section 1221(b)(3))’’ after ‘‘long-term capital gain’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to sales and exchanges in taxable years beginning

after the date of the enactment of this Act.

SEC. 205. VESSEL TONNAGE LIMIT.

(a) IN GENERAL.—Paragraph (4) of section 1355(a) (relating

to qualifying vessel) is amended by inserting ‘‘(6,000, in the case

of taxable years beginning after December 31, 2005, and ending

before January 1, 2011)’’ after ‘‘10,000’’.

(b) EFFECTIVE DATE.—The amendment made by subsection (a)

shall apply to taxable years beginning after December 31, 2005.

SEC. 206. MODIFICATION OF SPECIAL ARBITRAGE RULE FOR CERTAIN

FUNDS.

In the case of bonds issued after the date of the enactment

of this Act and before August 31, 2009—

(1) the requirement of paragraph (1) of section 648 of

the Deficit Reduction Act of 1984 (98 Stat. 941) shall be treated

as met with respect to the securities or obligations referred

to in such section if such securities or obligations are held

in a fund the annual distributions from which cannot exceed

7 percent of the average fair market value of the assets held

in such fund except to the extent distributions are necessary

to pay debt service on the bond issue, and

(2) paragraph (3) of such section shall be applied by substituting ‘‘distributions from’’ for ‘‘the investment earnings of’’

both places it appears.

SEC. 207. AMORTIZATION OF EXPENSES INCURRED IN CREATING OR

ACQUIRING MUSIC OR MUSIC COPYRIGHTS.

(a) IN GENERAL.—Section 167(g) (relating to depreciation under

income forecast method) is amended by adding at the end the

following new paragraph:

‘‘(8) SPECIAL RULES FOR CERTAIN MUSICAL WORKS AND COPYRIGHTS.—

‘‘(A) IN GENERAL.—If an election is in effect under

this paragraph for any taxable year, then, notwithstanding

paragraph (1), any expense which—

Applicability.

26 USC 1355

note.

26 USC 170 note.

26 USC 1221.

26 USC 143 note.

PUBLIC LAW 109–222—MAY 17, 2006 120 STAT. 351

‘‘(i) is paid or incurred by the taxpayer in creating or acquiring any applicable musical property placed

in service during the taxable year, and ‘‘(ii) is otherwise properly chargeable to capital

account,

shall be amortized ratably over the 5-year period beginning

with the month in which the property was placed in service.

The preceding sentence shall not apply to any expense

which, without regard to this paragraph, would not be

allowable as a deduction.

‘‘(B) EXCLUSIVE METHOD.—Except as provided in this

paragraph, no depreciation or amortization deduction shall

be allowed with respect to any expense to which subparagraph (A) applies. ‘‘(C) APPLICABLE MUSICAL PROPERTY.—For purposes of

this paragraph— ‘‘(i) IN GENERAL.—The term ‘applicable musical property’ means any musical composition (including

any accompanying words), or any copyright with

respect to a musical composition, which is property

to which this subsection applies without regard to this

paragraph. ‘‘(ii) EXCEPTIONS.—Such term shall not include any

property—‘‘(I) with respect to which expenses are treated

as qualified creative expenses to which section

263A(h) applies, ‘‘(II) to which a simplified procedure estab- lished under section 263A(j)(2) applies, or ‘‘(III) which is an amortizable section 197

intangible (as defined in section 197(c)). ‘‘(D) ELECTION.—An election under this paragraph shall be made at such time and in such form as the Secretary may prescribe and shall apply to all applicable

musical property placed in service during the taxable year

for which the election applies. ‘‘(E) TERMINATION.—An election may not be made under this paragraph for any taxable year beginning after

December 31, 2010.’’.

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to expenses paid or incurred with respect to property

placed in service in taxable years beginning after December 31,

2005.

SEC. 208. MODIFICATION OF EFFECTIVE DATE OF DISREGARD OF CERTAIN CAPITAL EXPENDITURES FOR PURPOSES OF QUALIFIED SMALL ISSUE BONDS.

(a) IN GENERAL.—Section 144(a)(4)(G) is amended by striking

‘‘September 30, 2009’’ and inserting ‘‘December 31, 2006’’. (b) CONFORMING AMENDMENT.—Section 144(a)(4)(F) is amended

by striking ‘‘September 30, 2009’’ and inserting ‘‘December 31,

2006’’.

SEC. 209. MODIFICATION OF TREATMENT OF LOANS TO QUALIFIED

CONTINUING CARE FACILITIES.

(a) IN GENERAL.—Section 7872 is amended by redesignating

subsection (h) as subsection (i) and inserting after subsection (g)

the following new subsection:

26 USC 167 note.

Applicability.

120 STAT. 352 PUBLIC LAW 109–222—MAY 17, 2006

‘‘(h) EXCEPTION FOR LOANS TO QUALIFIED CONTINUING CARE

FACILITIES.—

‘‘(1) IN GENERAL.—This section shall not apply for any

calendar year to any below-market loan owed by a facility

which on the last day of such year is a qualified continuing

care facility, if such loan was made pursuant to a continuing

care contract and if the lender (or the lender’s spouse) attains

age 62 before the close of such year. ‘‘(2) CONTINUING CARE CONTRACT.—For purposes of this

section, the term ‘continuing care contract’ means a written

contract between an individual and a qualified continuing care

facility under which— ‘‘(A) the individual or individual’s spouse may use a

qualified continuing care facility for their life or lives, ‘‘(B) the individual or individual’s spouse will be provided with housing, as appropriate for the health of such

individual or individual’s spouse—

‘‘(i) in an independent living unit (which has additional available facilities outside such unit for the

provision of meals and other personal care), and

‘‘(ii) in an assisted living facility or a nursing

facility, as is available in the continuing care facility,

and

‘‘(C) the individual or individual’s spouse will be provided assisted living or nursing care as the health of such

individual or individual’s spouse requires, and as is available in the continuing care facility.

The Secretary shall issue guidance which limits such term

to contracts which provide only facilities, care, and services

described in this paragraph.

‘‘(3) QUALIFIED CONTINUING CARE FACILITY.—

‘‘(A) IN GENERAL.—For purposes of this section, the

term ‘qualified continuing care facility’ means 1 or more

facilities—

‘‘(i) which are designed to provide services under

continuing care contracts,

‘‘(ii) which include an independent living unit, plus

an assisted living or nursing facility, or both, and

‘‘(iii) substantially all of the independent living

unit residents of which are covered by continuing care

contracts.

‘‘(B) NURSING HOMES EXCLUDED.—The term ‘qualified

continuing care facility’ shall not include any facility which

is of a type which is traditionally considered a nursing

home.

‘‘(4) TERMINATION.—This subsection shall not apply to any

calendar year after 2010.’’.

(b) CONFORMING AMENDMENTS.—

(1) Section 7872(g) is amended by adding at the end the

following new paragraph:

‘‘(6) SUSPENSION OF APPLICATION.—Paragraph (1) shall not apply for any calendar year to which subsection (h) applies.’’.

(2) Section 142(d)(2)(B) is amended by striking ‘‘Section

7872(g)’’ and inserting ‘‘Subsections (g) and (h) of section 7872’’.

(c) EFFECTIVE DATE.—The amendment made by this section

shall apply to calendar years beginning after December 31, 2005,

with respect to loans made before, on, or after such date.

26 USC 142 note.

26 USC 7872.

Guidelines.

PUBLIC LAW 109–222—MAY 17, 2006 120 STAT. 353

TITLE III—ALTERNATIVE MINIMUM TAX

RELIEF

SEC. 301. INCREASE IN ALTERNATIVE MINIMUM TAX EXEMPTION

AMOUNT FOR 2006.

(a) IN GENERAL.—Section 55(d)(1) (relating to exemption amount for taxpayers other than corporations) is amended— (1) by striking ‘‘$58,000’’ and all that follows through ‘‘2005’’ in subparagraph (A) and inserting ‘‘$62,550 in the case of

taxable years beginning in 2006’’, and (2) by striking ‘‘$40,250’’ and all that follows through ‘‘2005’’ in subparagraph (B) and inserting ‘‘$42,500 in the case of

taxable years beginning in 2006’’.

(b) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2005.

SEC. 302. ALLOWANCE OF NONREFUNDABLE PERSONAL CREDITS

AGAINST REGULAR AND ALTERNATIVE MINIMUM TAX

LIABILITY.

(a) IN GENERAL.—Paragraph (2) of section 26(a) is amended—

(1) by striking ‘‘2005’’ in the heading thereof and inserting

‘‘2006’’, and

(2) by striking ‘‘or 2005’’ and inserting ‘‘2005, or 2006’’.

(b) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2005.

TITLE IV—CORPORATE ESTIMATED TAX

PROVISIONS

SEC. 401. TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES.

Notwithstanding section 6655 of the Internal Revenue Code

of 1986—

(1) in the case of a corporation with assets of not less

than $1,000,000,000 (determined as of the end of the preceding

taxable year)—

(A) the amount of any required installment of corporate

estimated tax which is otherwise due in July, August,

or September of 2006 shall be 105 percent of such amount,

(B) the amount of any required installment of corporate

estimated tax which is otherwise due in July, August,

or September of 2012 shall be 106.25 percent of such

amount,

(C) the amount of any required installment of corporate

estimated tax which is otherwise due in July, August,

or September of 2013 shall be 100.75 percent of such

amount, and

(D) the amount of the next required installment after

an installment referred to in subparagraph (A), (B), or

(C) shall be appropriately reduced to reflect the amount

of the increase by reason of such subparagraph,

(2) 20.5 percent of the amount of any required installment

of corporate estimated tax which is otherwise due in September

2010 shall not be due until October 1, 2010, and

26 USC 6655

note.

26 USC 26 note.

26 USC 55 note.

26 USC 55.

120 STAT. 354 PUBLIC LAW 109–222—MAY 17, 2006

(3) 27.5 percent of the amount of any required installment

of corporate estimated tax which is otherwise due in September

2011 shall not be due until October 1, 2011.

TITLE V—REVENUE OFFSET

PROVISIONS

SEC. 501. APPLICATION OF EARNINGS STRIPPING RULES TO PARTNERS

WHICH ARE CORPORATIONS.

(a) IN GENERAL.—Section 163(j) (relating to limitation on deduc- tion for interest on certain indebtedness) is amended by redesignating paragraph (8) as paragraph (9) and by inserting after paragraph (7) the following new paragraph: ‘‘(8) TREATMENT OF CORPORATE PARTNERS.—Except to the

extent provided by regulations, in applying this subsection to

a corporation which owns (directly or indirectly) an interest

in a partnership—

‘‘(A) such corporation’s distributive share of interest

income paid or accrued to such partnership shall be treated

as interest income paid or accrued to such corporation,

‘‘(B) such corporation’s distributive share of interest

paid or accrued by such partnership shall be treated as

interest paid or accrued by such corporation, and ‘‘(C) such corporation’s share of the liabilities of such

partnership shall be treated as liabilities of such corporation.’’.

(b) ADDITIONAL REGULATORY AUTHORITY.—Section 163(j)(9)

(relating to regulations), as redesignated by subsection (a), is

amended by striking ‘‘and’’ at the end of subparagraph (B), by

striking the period at the end of subparagraph (C) and inserting

‘‘, and’’, and by adding at the end the following new subparagraph:

‘‘(D) regulations providing for the reallocation of shares

of partnership indebtedness, or distributive shares of the

partnership’s interest income or interest expense.’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning on or after the date of

the enactment of this Act.

SEC. 502. REPORTING OF INTEREST ON TAX-EXEMPT BONDS.

(a) IN GENERAL.—Section 6049(b)(2) (relating to exceptions)

is amended by striking subparagraph (B) and by redesignating

subparagraphs (C) and (D) as subparagraphs (B) and (C), respectively.

(b) CONFORMING AMENDMENT.—Section 6049(b)(2)(C), as

redesignated by subsection (a), is amended by striking ‘‘subparagraph (C)’’ and inserting ‘‘subparagraph (B)’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to interest paid after December 31, 2005.

SEC. 503. 5-YEAR AMORTIZATION OF GEOLOGICAL AND GEOPHYSICAL

EXPENDITURES FOR CERTAIN MAJOR INTEGRATED OIL

COMPANIES.

(a) IN GENERAL.—Section 167(h) (relating to amortization of geological and geophysical expenditures) is amended by adding

at the end the following new paragraph:

26 USC 6049

note.

26 USC 163 note.

26 USC 163.

PUBLIC LAW 109–222—MAY 17, 2006 120 STAT. 355

‘‘(5) SPECIAL RULE FOR MAJOR INTEGRATED OIL COMPA- NIES.— ‘‘(A) IN GENERAL.—In the case of a major integrated oil company, paragraphs (1) and (4) shall be applied by

substituting ‘5-year’ for ‘24 month’. ‘‘(B) MAJOR INTEGRATED OIL COMPANY.—For purposes

of this paragraph, the term ‘major integrated oil company’

means, with respect to any taxable year, a producer of

crude oil—

‘‘(i) which has an average daily worldwide produc- tion of crude oil of at least 500,000 barrels for the

taxable year, ‘‘(ii) which had gross receipts in excess of $1,000,000,000 for its last taxable year ending during

calendar year 2005, and ‘‘(iii) to which subsection (c) of section 613A does

not apply by reason of paragraph (4) of section 613A(d),

determined—

‘‘(I) by substituting ‘15 percent’ for ‘5 percent’ each place it occurs in paragraph (3) of section

613A(d), and

‘‘(II) without regard to whether subsection (c) of section 613A does not apply by reason of paragraph (2) of section 613A(d). For purposes of clauses (i) and (ii), all persons treated

as a single employer under subsections (a) and (b) of section

52 shall be treated as 1 person and, in case of a short

taxable year, the rule under section 448(c)(3)(B) shall

apply.’’. (b) EFFECTIVE DATE.—The amendment made by this section shall apply to amounts paid or incurred after the date of the

enactment of this Act.

SEC. 504. APPLICATION OF FIRPTA TO REGULATED INVESTMENT

COMPANIES.

(a) IN GENERAL.—Subclause (II) of section 897(h)(4)(A)(i)

(defining qualified investment entity) is amended by inserting

‘‘which is a United States real property holding corporation or

which would be a United States real property holding corporation

if the exceptions provided in subsections (c)(3) and (h)(2) did not

apply to interests in any real estate investment trust or regulated

investment company’’ after ‘‘regulated investment company’’. (b) EFFECTIVE DATE.—The amendment made by this section shall take effect as if included in the provisions of section 411

of the American Jobs Creation Act of 2004 to which it relates.

SEC. 505. TREATMENT OF DISTRIBUTIONS ATTRIBUTABLE TO FIRPTA

GAINS.

(a) QUALIFIED INVESTMENT ENTITY.—

(1) IN GENERAL.—Section 897(h)(1) is amended—

(A) by striking ‘‘a nonresident alien individual or a

foreign corporation’’ in the first sentence and inserting

‘‘a nonresident alien individual, a foreign corporation, or

other qualified investment entity’’,

(B) by striking ‘‘such nonresident alien individual or

foreign corporation’’ in the first sentence and inserting

‘‘such nonresident alien individual, foreign corporation, or

other qualified investment entity’’, and

26 USC 897 note.

26 USC 897.

26 USC 167 note.

Applicability.

Applicability.

120 STAT. 356 PUBLIC LAW 109–222—MAY 17, 2006

(C) by striking the second sentence and inserting the

following new sentence: ‘‘Notwithstanding the preceding

sentence, any distribution by a qualified investment entity

to a nonresident alien individual or a foreign corporation

with respect to any class of stock which is regularly traded

on an established securities market located in the United

States shall not be treated as gain recognized from the

sale or exchange of a United States real property interest

if such individual or corporation did not own more than

5 percent of such class of stock at any time during the

1-year period ending on the date of such distribution.’’.

(2) EXCEPTION TO TERMINATION OF APPLICATION OF SECTION

897 RULES TO REGULATED INVESTMENT COMPANIES.—Clause (ii)

of section 897(h)(4)(A) is amended by adding at the end the

following new sentence: ‘‘Notwithstanding the preceding sentence, an entity described in clause (i)(II) shall be treated

as a qualified investment entity for purposes of applying paragraphs (1) and (5) and section 1445 with respect to any distribution by the entity to a nonresident alien individual or a foreign

corporation which is attributable directly or indirectly to a

distribution to the entity from a real estate investment trust.’’.

(b) WITHHOLDING ON DISTRIBUTIONS TREATED AS GAIN FROM

UNITED STATES REAL PROPERTY INTERESTS.—Section 1445(e)

(relating to special rules for distributions, etc. by corporations,

partnerships, trusts, or estates) is amended by redesignating paragraph (6) as paragraph (7) and by inserting after paragraph (5)

the following new paragraph:

‘‘(6) DISTRIBUTIONS BY REGULATED INVESTMENT COMPANIES

AND REAL ESTATE INVESTMENT TRUSTS.—If any portion of a

distribution from a qualified investment entity (as defined in

section 897(h)(4)) to a nonresident alien individual or a foreign

corporation is treated under section 897(h)(1) as gain realized

by such individual or corporation from the sale or exchange

of a United States real property interest, the qualified investment entity shall deduct and withhold under subsection (a)

a tax equal to 35 percent (or, to the extent provided in regulations, 15 percent (20 percent in the case of taxable years beginning after December 31, 2010)) of the amount so treated.’’.

(c) TREATMENT OF CERTAIN DISTRIBUTIONS AS DIVIDENDS.—

(1) IN GENERAL.—Section 852(b)(3) (relating to capital

gains) is amended by adding at the end the following new

subparagraph:

‘‘(E) CERTAIN DISTRIBUTIONS.—In the case of a distribution to which section 897 does not apply by reason of

the second sentence of section 897(h)(1), the amount of

such distribution which would be included in computing

long-term capital gains for the shareholder under subparagraph (B) or (D) (without regard to this subparagraph)—

‘‘(i) shall not be included in computing such shareholder’s long-term capital gains, and

‘‘(ii) shall be included in such shareholder’s gross

income as a dividend from the regulated investment

company.’’.

(2) CONFORMING AMENDMENT.—Section 871(k)(2) (relating

to short-term capital gain dividends) is amended by adding

at the end the following new subparagraph:

26 USC 897.

PUBLIC LAW 109–222—MAY 17, 2006 120 STAT. 357

‘‘(E) CERTAIN DISTRIBUTIONS.—In the case of a distribution to which section 897 does not apply by reason of

the second sentence of section 897(h)(1), the amount which

would be treated as a short-term capital gain dividend

to the shareholder (without regard to this subparagraph)—

‘‘(i) shall not be treated as a short-term capital

gain dividend, and

‘‘(ii) shall be included in such shareholder’s gross

income as a dividend from the regulated investment

company.’’.

(d) EFFECTIVE DATES.—The amendments made by this section

shall apply to taxable years of qualified investment entities beginning after December 31, 2005, except that no amount shall be

required to be withheld under section 1441, 1442, or 1445 of the

Internal Revenue Code of 1986 with respect to any distribution

before the date of the enactment of this Act if such amount was

not otherwise required to be withheld under any such section as

in effect before such amendments.

SEC. 506. PREVENTION OF AVOIDANCE OF TAX ON INVESTMENTS OF

FOREIGN PERSONS IN UNITED STATES REAL PROPERTY

THROUGH WASH SALE TRANSACTIONS.

(a) IN GENERAL.—Section 897(h) (relating to special rules for

certain investment entities) is amended by adding at the end the

following new paragraph:

‘‘(5) TREATMENT OF CERTAIN WASH SALE TRANSACTIONS.—

‘‘(A) IN GENERAL.—If an interest in a domestically controlled qualified investment entity is disposed of in an

applicable wash sale transaction, the taxpayer shall, for

purposes of this section, be treated as having gain from

the sale or exchange of a United States real property

interest in an amount equal to the portion of the distribution described in subparagraph (B) with respect to such

interest which, but for the disposition, would have been

treated by the taxpayer as gain from the sale or exchange

of a United States real property interest under paragraph

(1).

‘‘(B) APPLICABLE WASH SALES TRANSACTION.—For purposes of this paragraph—

‘‘(i) IN GENERAL.—The term ‘applicable wash sales

transaction’ means any transaction (or series of transactions) under which a nonresident alien individual,

foreign corporation, or qualified investment entity—

‘‘(I) disposes of an interest in a domestically

controlled qualified investment entity during the

30-day period preceding the ex-dividend date of

a distribution which is to be made with respect

to the interest and any portion of which, but for

the disposition, would have been treated by the

taxpayer as gain from the sale or exchange of

a United States real property interest under paragraph (1), and

‘‘(II) acquires, or enters into a contract or

option to acquire, a substantially identical interest

in such entity during the 61-day period beginning

with the 1st day of the 30-day period described

in subclause (I).

26 USC 897.

26 USC 852 note.

120 STAT. 358 PUBLIC LAW 109–222—MAY 17, 2006

For purposes of subclause (II), a nonresident alien

individual, foreign corporation, or qualified investment

entity shall be treated as having acquired any interest

acquired by a person related (within the meaning of

section 267(b) or 707(b)(1)) to the individual, corporation, or entity, and any interest which such person

has entered into any contract or option to acquire.

‘‘(ii) APPLICATION TO SUBSTITUTE DIVIDEND AND

SIMILAR PAYMENTS.—Subparagraph (A) shall apply to— ‘‘(I) any substitute dividend payment (within the meaning of section 861), or ‘‘(II) any other similar payment specified in

regulations which the Secretary determines necessary to prevent avoidance of the purposes of

this paragraph.

The portion of any such payment treated by the taxpayer as gain from the sale or exchange of a United

States real property interest under subparagraph (A)

by reason of this clause shall be equal to the portion

of the distribution such payment is in lieu of which

would have been so treated but for the transaction

giving rise to such payment. ‘‘(iii) EXCEPTION WHERE DISTRIBUTION ACTUALLY

RECEIVED.—A transaction shall not be treated as an

applicable wash sales transaction if the nonresident

alien individual, foreign corporation, or qualified

investment entity receives the distribution described

in clause (i)(I) with respect to either the interest which

was disposed of, or acquired, in the transaction.

‘‘(iv) EXCEPTION FOR CERTAIN PUBLICLY TRADED

STOCK.—A transaction shall not be treated as an

applicable wash sales transaction if it involves the

disposition of any class of stock in a qualified investment entity which is regularly traded on an established

securities market within the United States but only

if the nonresident alien individual, foreign corporation,

or qualified investment entity did not own more than

5 percent of such class of stock at any time during

the 1-year period ending on the date of the distribution

described in clause (i)(I).’’.

(b) NO WITHHOLDING REQUIRED.—Section 1445(b) (relating to

exemptions) is amended by adding at the end the following new

paragraph:

‘‘(8) APPLICABLE WASH SALES TRANSACTIONS.—No person

shall be required to deduct and withhold any amount under

subsection (a) with respect to a disposition which is treated

as a disposition of a United States real property interest solely

by reason of section 897(h)(5).’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2005,

except that such amendments shall not apply to any distribution,

or substitute dividend payment, occurring before the date that

is 30 days after the date of the enactment of this Act.

SEC. 507. SECTION 355 NOT TO APPLY TO DISTRIBUTIONS INVOLVING

DISQUALIFIED INVESTMENT COMPANIES.

(a) IN GENERAL.—

26 USC 897 note.

26 USC 1445.

PUBLIC LAW 109–222—MAY 17, 2006 120 STAT. 359

Section 355 (relating to distributions of stock and securities

of a controlled corporation) is amended by adding at the end

the following new subsection:

‘‘(g) SECTION NOT TO APPLY TO DISTRIBUTIONS INVOLVING DISQUALIFIED INVESTMENT CORPORATIONS.—

‘‘(1) IN GENERAL.—This section (and so much of section

356 as relates to this section) shall not apply to any distribution

which is part of a transaction if—

‘‘(A) either the distributing corporation or controlled

corporation is, immediately after the transaction, a disqualified investment corporation, and

‘‘(B) any person holds, immediately after the transaction, a 50-percent or greater interest in any disqualified

investment corporation, but only if such person did not

hold such an interest in such corporation immediately

before the transaction.

‘‘(2) DISQUALIFIED INVESTMENT CORPORATION.—For purposes of this subsection—

‘‘(A) IN GENERAL.—The term ‘disqualified investment

corporation’ means any distributing or controlled corporation if the fair market value of the investment assets

of the corporation is—

‘‘(i) in the case of distributions after the end of

the 1-year period beginning on the date of the enactment of this subsection, 2⁄3 or more of the fair market

value of all assets of the corporation, and

‘‘(ii) in the case of distributions during such 1-

year period, 3⁄4 or more of the fair market value of

all assets of the corporation.

‘‘(B) INVESTMENT ASSETS.—

‘‘(i) IN GENERAL.—Except as otherwise provided

in this subparagraph, the term ‘investment assets’

means—

‘‘(I) cash,

‘‘(II) any stock or securities in a corporation,

‘‘(III) any interest in a partnership,

‘‘(IV) any debt instrument or other evidence

of indebtedness,

‘‘(V) any option, forward or futures contract,

notional principal contract, or derivative,

‘‘(VI) foreign currency, or

‘‘(VII) any similar asset.

‘‘(ii) EXCEPTION FOR ASSETS USED IN ACTIVE CONDUCT OF CERTAIN FINANCIAL TRADES OR BUSINESSES.—

Such term shall not include any asset which is held

for use in the active and regular conduct of—

‘‘(I) a lending or finance business (within the

meaning of section 954(h)(4)),

‘‘(II) a banking business through a bank (as

defined in section 581), a domestic building and

loan association (within the meaning of section

7701(a)(19)), or any similar institution specified

by the Secretary, or

‘‘(III) an insurance business if the conduct of

the business is licensed, authorized, or regulated

by an applicable insurance regulatory body.

26 USC 355.

120 STAT. 360 PUBLIC LAW 109–222—MAY 17, 2006

This clause shall only apply with respect to any business if substantially all of the income of the business

is derived from persons who are not related (within

the meaning of section 267(b) or 707(b)(1)) to the person

conducting the business.

‘‘(iii) EXCEPTION FOR SECURITIES MARKED TO

MARKET.—Such term shall not include any security (as defined in section 475(c)(2)) which is held by a

dealer in securities and to which section 475(a) applies.

‘‘(iv) STOCK OR SECURITIES IN A 20-PERCENT CON- TROLLED ENTITY.— ‘‘(I) IN GENERAL.—Such term shall not include

any stock and securities in, or any asset described

in subclause (IV) or (V) of clause (i) issued by,

a corporation which is a 20-percent controlled

entity with respect to the distributing or controlled

corporation.

‘‘(II) LOOK-THRU RULE.—The distributing or

controlled corporation shall, for purposes of

applying this subsection, be treated as owning its

ratable share of the assets of any 20-percent controlled entity.

‘‘(III) 20-PERCENT CONTROLLED ENTITY.—For

purposes of this clause, the term ‘20-percent controlled entity’ means, with respect to any distributing or controlled corporation, any corporation

with respect to which the distributing or controlled

corporation owns directly or indirectly stock

meeting the requirements of section 1504(a)(2),

except that such section shall be applied by substituting ‘20 percent’ for ‘80 percent’ and without

regard to stock described in section 1504(a)(4).

‘‘(v) INTERESTS IN CERTAIN PARTNERSHIPS.—

‘‘(I) IN GENERAL.—Such term shall not include

any interest in a partnership, or any debt

instrument or other evidence of indebtedness,

issued by the partnership, if 1 or more of the

trades or businesses of the partnership are (or,

without regard to the 5-year requirement under

subsection (b)(2)(B), would be) taken into account

by the distributing or controlled corporation, as

the case may be, in determining whether the

requirements of subsection (b) are met with respect

to the distribution.

‘‘(II) LOOK-THRU RULE.—The distributing or

controlled corporation shall, for purposes of

applying this subsection, be treated as owning its

ratable share of the assets of any partnership

described in subclause (I).

‘‘(3) 50-PERCENT OR GREATER INTEREST.—For purposes of

this subsection—

‘‘(A) IN GENERAL.—The term ‘50-percent or greater

interest’ has the meaning given such term by subsection

(d)(4).

‘‘(B) ATTRIBUTION RULES.—The rules of section 318

shall apply for purposes of determining ownership of stock

for purposes of this paragraph.

Applicability.

Applicability.

Applicability.

PUBLIC LAW 109–222—MAY 17, 2006 120 STAT. 361

‘‘(4) TRANSACTION.—For purposes of this subsection, the

term ‘transaction’ includes a series of transactions.

‘‘(5) REGULATIONS.—The Secretary shall prescribe such

regulations as may be necessary to carry out, or prevent the

avoidance of, the purposes of this subsection, including

regulations— ‘‘(A) to carry out, or prevent the avoidance of, the

purposes of this subsection in cases involving— ‘‘(i) the use of related persons, intermediaries,

pass-thru entities, options, or other arrangements, and ‘‘(ii) the treatment of assets unrelated to the trade

or business of a corporation as investment assets if,

prior to the distribution, investment assets were used

to acquire such unrelated assets,

‘‘(B) which in appropriate cases exclude from the

application of this subsection a distribution which does

not have the character of a redemption which would be

treated as a sale or exchange under section 302, and ‘‘(C) which modify the application of the attribution

rules applied for purposes of this subsection.’’.

(b) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendments made by this section

shall apply to distributions after the date of the enactment

of this Act.

(2) TRANSITION RULE.—The amendments made by this section shall not apply to any distribution pursuant to a transaction which is—

(A) made pursuant to an agreement which was binding

on such date of enactment and at all times thereafter,

(B) described in a ruling request submitted to the

Internal Revenue Service on or before such date, or

(C) described on or before such date in a public

announcement or in a filing with the Securities and

Exchange Commission.

SEC. 508. LOAN AND REDEMPTION REQUIREMENTS ON POOLED

FINANCING REQUIREMENTS.

(a) STRENGTHENED REASONABLE EXPECTATION REQUIREMENT.—

Subparagraph (A) of section 149(f)(2) (relating to reasonable

expectation requirement) is amended to read as follows:

‘‘(A) IN GENERAL.—The requirements of this paragraph

are met with respect to an issue if the issuer reasonably

expects that—

‘‘(i) as of the close of the 1-year period beginning

on the date of issuance of the issue, at least 30 percent

of the net proceeds of the issue (as of the close of

such period) will have been used directly or indirectly

to make or finance loans to ultimate borrowers, and

‘‘(ii) as of the close of the 3-year period beginning

on such date of issuance, at least 95 percent of the

net proceeds of the issue (as of the close of such period)

will have been so used.’’.

(b) WRITTEN LOAN COMMITMENT AND REDEMPTION REQUIREMENTS.—Section 149(f) (relating to treatment of certain pooled

financing bonds) is amended by redesignating paragraphs (4) and

(5) as paragraphs (6) and (7), respectively, and by inserting after

paragraph (3) the following new paragraphs:

26 USC 149.

26 USC 355 note.

120 STAT. 362 PUBLIC LAW 109–222—MAY 17, 2006

‘‘(4) WRITTEN LOAN COMMITMENT REQUIREMENT.—

‘‘(A) IN GENERAL.—The requirement of this paragraph

is met with respect to an issue if the issuer receives prior

to issuance written loan commitments identifying the ultimate potential borrowers of at least 30 percent of the

net proceeds of such issue.

‘‘(B) EXCEPTION.—Subparagraph (A) shall not apply

with respect to any issuer which—

‘‘(i) is a State (or an integral part of a State)

issuing pooled financing bonds to make or finance loans

to subordinate governmental units of such State, or

‘‘(ii) is a State-created entity providing financing

for water-infrastructure projects through the federallysponsored State revolving fund program.

‘‘(5) REDEMPTION REQUIREMENT.—The requirement of this

paragraph is met if to the extent that less than the percentage

of the proceeds of an issue required to be used under clause

(i) or (ii) of paragraph (2)(A) is used by the close of the period

identified in such clause, the issuer uses an amount of proceeds

equal to the excess of—

‘‘(A) the amount required to be used under such clause,

over

‘‘(B) the amount actually used by the close of such

period,

to redeem outstanding bonds within 90 days after the end

of such period.’’.

(c) ELIMINATION OF DISREGARD OF POOLED BONDS IN DETERMINING ELIGIBILITY FOR SMALL ISSUER EXCEPTION TO ARBITRAGE

REBATE.—Section 148(f)(4)(D)(ii) (relating to aggregation of issuers)

is amended by striking subclause (II) and by redesignating subclauses (III) and (IV) as subclauses (II) and (III), respectively.

(d) CONFORMING AMENDMENTS.—

(1) Section 149(f)(1) is amended by striking ‘‘paragraphs

(2) and (3)’’ and inserting ‘‘paragraphs (2), (3), (4), and (5)’’.

(2) Section 149(f)(7)(B), as redesignated by subsection (b),

is amended by striking ‘‘paragraph (4)(A)’’ and inserting ‘‘paragraph (6)(A)’’.

(3) Section 54(l)(2) is amended by striking ‘‘section

149(f)(4)(A)’’ and inserting ‘‘section 149(f)(6)(A)’’.

(e) EFFECTIVE DATE.—The amendments made by this section

shall apply to bonds issued after the date of the enactment of

this Act.

SEC. 509. PARTIAL PAYMENTS REQUIRED WITH SUBMISSION OF

OFFERS-IN-COMPROMISE.

(a) IN GENERAL.—Section 7122 (relating to compromises) is

amended by redesignating subsections (c) and (d) as subsections

(d) and (e), respectively, and by inserting after subsection (b) the

following new subsection:

‘‘(c) RULES FOR SUBMISSION OF OFFERS-IN-COMPROMISE.—

‘‘(1) PARTIAL PAYMENT REQUIRED WITH SUBMISSION.—

‘‘(A) LUMP-SUM OFFERS.—

‘‘(i) IN GENERAL.—The submission of any lumpsum offer-in-compromise shall be accompanied by the

payment of 20 percent of the amount of such offer.

26 USC 54 note.

26 USC 148.

PUBLIC LAW 109–222—MAY 17, 2006 120 STAT. 363

‘‘(ii) LUMP-SUM OFFER-IN-COMPROMISE.—For purposes of this section, the term ‘lump-sum offer-in-compromise’ means any offer of payments made in 5 or

fewer installments.

‘‘(B) PERIODIC PAYMENT OFFERS.— ‘‘(i) IN GENERAL.—The submission of any periodic

payment offer-in-compromise shall be accompanied by

the payment of the amount of the first proposed installment.

‘‘(ii) FAILURE TO MAKE INSTALLMENT DURING PEND- ENCY OF OFFER.—Any failure to make an installment (other than the first installment) due under such offerin-compromise during the period such offer is being

evaluated by the Secretary may be treated by the

Secretary as a withdrawal of such offer-in-compromise. ‘‘(2) RULES OF APPLICATION.— ‘‘(A) USE OF PAYMENT.—The application of any payment

made under this subsection to the assessed tax or other

amounts imposed under this title with respect to such

tax may be specified by the taxpayer.

‘‘(B) APPLICATION OF USER FEE.—In the case of any

assessed tax or other amounts imposed under this title

with respect to such tax which is the subject of an offerin-compromise to which this subsection applies, such tax

or other amounts shall be reduced by any user fee imposed

under this title with respect to such offer-in-compromise.

‘‘(C) WAIVER AUTHORITY.—The Secretary may issue

regulations waiving any payment required under paragraph (1) in a manner consistent with the practices established in accordance with the requirements under subsection (d)(3).’’.

(b) ADDITIONAL RULES RELATING TO TREATMENT OF OFFERS.—

(1) UNPROCESSABLE OFFER IF PAYMENT REQUIREMENTS ARE

NOT MET.—Paragraph (3) of section 7122(d) (relating to standards for evaluation of offers), as redesignated by subsection

(a), is amended by striking ‘‘; and’’ at the end of subparagraph

(A) and inserting a comma, by striking the period at the end

of subparagraph (B) and inserting ‘‘, and’’, and by adding at

the end the following new subparagraph:

‘‘(C) any offer-in-compromise which does not meet the

requirements of subparagraph (A)(i) or (B)(i), as the case

may be, of subsection (c)(1) may be returned to the taxpayer

as unprocessable.’’.

(2) DEEMED ACCEPTANCE OF OFFER NOT REJECTED WITHIN

CERTAIN PERIOD.—Section 7122, as amended by subsection (a),

is amended by adding at the end the following new subsection:

‘‘(f) DEEMED ACCEPTANCE OF OFFER NOT REJECTED WITHIN

CERTAIN PERIOD.—Any offer-in-compromise submitted under this

section shall be deemed to be accepted by the Secretary if such

offer is not rejected by the Secretary before the date which is

24 months after the date of the submission of such offer. For

purposes of the preceding sentence, any period during which any

tax liability which is the subject of such offer-in-compromise is

in dispute in any judicial proceeding shall not be taken into account

in determining the expiration of the 24-month period.’’.

(c) CONFORMING AMENDMENT.—Section 6159(f) is amended by striking ‘‘section 7122(d)’’ and inserting ‘‘section 7122(e)’’.

26 USC 7122.

120 STAT. 364 PUBLIC LAW 109–222—MAY 17, 2006

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to offers-in-compromise submitted on and after the

date which is 60 days after the date of the enactment of this

Act.

SEC. 510. INCREASE IN AGE OF MINOR CHILDREN WHOSE UNEARNED

INCOME IS TAXED AS IF PARENT’S INCOME.

(a) IN GENERAL.—Section 1(g)(2)(A) (relating to child to whom subsection applies) is amended by striking ‘‘age 14’’ and inserting

‘‘age 18’’. (b) TREATMENT OF DISTRIBUTIONS FROM QUALIFIED DISABILITY

TRUSTS.—Section 1(g)(4) (relating to net unearned income) is amended by adding at the end the following new subparagraph: ‘‘(C) TREATMENT OF DISTRIBUTIONS FROM QUALIFIED

DISABILITY TRUSTS.—For purposes of this subsection, in

the case of any child who is a beneficiary of a qualified

disability trust (as defined in section 642(b)(2)(C)(ii)), any

amount included in the income of such child under sections

652 and 662 during a taxable year shall be considered

earned income of such child for such taxable year.’’. (c) CONFORMING AMENDMENT.—Section 1(g)(2) is amended by striking ‘‘and’’ at the end of subparagraph (A), by striking the

period at the end of subparagraph (B) and inserting ‘‘, and’’, and

by inserting after subparagraph (B) the following new subparagraph: ‘‘(C) such child does not file a joint return for the taxable year.’’. (d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2005.

SEC. 511. IMPOSITION OF WITHHOLDING ON CERTAIN PAYMENTS

MADE BY GOVERNMENT ENTITIES.

(a) IN GENERAL.—Section 3402 is amended by adding at the end the following new subsection: ‘‘(t) EXTENSION OF WITHHOLDING TO CERTAIN PAYMENTS MADE

BY GOVERNMENT ENTITIES.— ‘‘(1) GENERAL RULE.—The Government of the United States,

every State, every political subdivision thereof, and every

instrumentality of the foregoing (including multi-State agencies) making any payment to any person providing any property

or services (including any payment made in connection with

a government voucher or certificate program which functions

as a payment for property or services) shall deduct and withhold

from such payment a tax in an amount equal to 3 percent

of such payment. ‘‘(2) PROPERTY AND SERVICES SUBJECT TO WITHHOLDING.— Paragraph (1) shall not apply to any payment— ‘‘(A) except as provided in subparagraph (B), which is subject to withholding under any other provision of this

chapter or chapter 3,

‘‘(B) which is subject to withholding under section 3406

and from which amounts are being withheld under such

section,

‘‘(C) of interest,

‘‘(D) for real property,

‘‘(E) to any governmental entity subject to the require- ments of paragraph (1), any tax-exempt entity, or any

foreign government,

26 USC 1 note.

26 USC 1.

26 USC 6159

note.

PUBLIC LAW 109–222—MAY 17, 2006 120 STAT. 365

‘‘(F) made pursuant to a classified or confidential contract described in section 6050M(e)(3),

‘‘(G) made by a political subdivision of a State (or any instrumentality thereof) which makes less than

$100,000,000 of such payments annually,

‘‘(H) which is in connection with a public assistance

or public welfare program for which eligibility is determined by a needs or income test, and

‘‘(I) to any government employee not otherwise excludable with respect to their services as an employee.

‘‘(3) COORDINATION WITH OTHER SECTIONS.—For purposes

of sections 3403 and 3404 and for purposes of so much of

subtitle F (except section 7205) as relates to this chapter,

payments to any person for property or services which are

subject to withholding shall be treated as if such payments

were wages paid by an employer to an employee.’’.

(b) EFFECTIVE DATE.—The amendment made by this section

shall apply to payments made after December 31, 2010.

SEC. 512. CONVERSIONS TO ROTH IRAS.

(a) REPEAL OF INCOME LIMITATIONS.—

(1) IN GENERAL.—Paragraph (3) of section 408A(c) (relating

to limits based on modified adjusted gross income) is amended

by striking subparagraph (B) and redesignating subparagraphs

(C) and (D) as subparagraphs (B) and (C), respectively.

(2) CONFORMING AMENDMENT.—Clause (i) of section

408A(c)(3)(B) (as redesignated by paragraph (1)) is amended

by striking ‘‘except that—’’ and all that follows and inserting

‘‘except that any amount included in gross income under subsection (d)(3) shall not be taken into account, and’’.

(b) ROLLOVERS TO A ROTH IRA FROM AN IRA OTHER THAN

A ROTH IRA.—

(1) IN GENERAL.—Clause (iii) of section 408A(d)(3)(A)

(relating to rollovers from an IRA other than a Roth IRA)

is amended to read as follows:

‘‘(iii) unless the taxpayer elects not to have this

clause apply, any amount required to be included in

gross income for any taxable year beginning in 2010

by reason of this paragraph shall be so included ratably

over the 2-taxable-year period beginning with the first

taxable year beginning in 2011.’’.

(2) CONFORMING AMENDMENTS.—

(A) Clause (i) of section 408A(d)(3)(E) is amended to

read as follows:

‘‘(i) ACCELERATION OF INCLUSION.—

‘‘(I) IN GENERAL.—The amount otherwise

required to be included in gross income for any

taxable year beginning in 2010 or the first taxable

year in the 2-year period under subparagraph

(A)(iii) shall be increased by the aggregate distributions from Roth IRAs for such taxable year which

are allocable under paragraph (4) to the portion

of such qualified rollover contribution required to

be included in gross income under subparagraph

(A)(i).

‘‘(II) LIMITATION ON AGGREGATE AMOUNT

INCLUDED.—The amount required to be included

26 USC 408A.

26 USC 3402

note.

120 STAT. 366 PUBLIC LAW 109–222—MAY 17, 2006

in gross income for any taxable year under

subparagraph (A)(iii) shall not exceed the aggregate amount required to be included in gross

income under subparagraph (A)(iii) for all taxable

years in the 2-year period (without regard to subclause (I)) reduced by amounts included for all

preceding taxable years.’’.

(B) The heading for section 408A(d)(3)(E) is amended

by striking ‘‘4-YEAR’’ and inserting ‘‘2-YEAR’’.

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2009.

SEC. 513. REPEAL OF FSC/ETI BINDING CONTRACT RELIEF.

(a) FSC PROVISIONS.—Paragraph (1) of section 5(c) of the FSC

Repeal and Extraterritorial Income Exclusion Act of 2000 is

amended by striking ‘‘which occurs—’’ and all that follows and

inserting ‘‘which occurs before January 1, 2002.’’.

(b) ETI PROVISIONS.—Section 101 of the American Jobs Creation Act of 2004 is amended by striking subsection (f).

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after the date of the enactment of this Act.

SEC. 514. ONLY WAGES ATTRIBUTABLE TO DOMESTIC PRODUCTION

TAKEN INTO ACCOUNT IN DETERMINING DEDUCTION

FOR DOMESTIC PRODUCTION.

(a) IN GENERAL.—Paragraph (2) of section 199(b) (relating to

W-2 wages) is amended to read as follows:

‘‘(2) W-2 WAGES.—For purposes of this section—

‘‘(A) IN GENERAL.—The term ‘W-2 wages’ means, with

respect to any person for any taxable year of such person,

the sum of the amounts described in paragraphs (3) and

(8) of section 6051(a) paid by such person with respect

to employment of employees by such person during the

calendar year ending during such taxable year.

‘‘(B) LIMITATION TO WAGES ATTRIBUTABLE TO DOMESTIC

PRODUCTION.—Such term shall not include any amount

which is not properly allocable to domestic production gross

receipts for purposes of subsection (c)(1).

‘‘(C) RETURN REQUIREMENT.—Such term shall not

include any amount which is not properly included in a

return filed with the Social Security Administration on

or before the 60th day after the due date (including extensions) for such return.’’.

(b) SIMPLIFICATION OF RULES FOR DETERMINING W-2 WAGES

OF PARTNERS AND S CORPORATION SHAREHOLDERS.—

(1) IN GENERAL.—Clause (iii) of section 199(d)(1)(A) is

amended to read as follows:

‘‘(iii) each partner or shareholder shall be treated

for purposes of subsection (b) as having W-2 wages

for the taxable year in an amount equal to such person’s allocable share of the W-2 wages of the partnership or S corporation for the taxable year (as determined under regulations prescribed by the Secretary).’’.

(2) CONFORMING AMENDMENT.—Paragraph (2) of section

199(a) is amended by striking ‘‘and subsection (d)(1)’’.

26 USC 56 note.

26 USC 114 note.

26 USC 56 note.

26 USC 408A

note.

26 USC 408A.

PUBLIC LAW 109–222—MAY 17, 2006 120 STAT. 367

(c) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after the date of the enactment of this Act.

SEC. 515. MODIFICATION OF EXCLUSION FOR CITIZENS LIVING

ABROAD.

(a) INFLATION ADJUSTMENT OF FOREIGN EARNED INCOME

LIMITATION.—Clause (ii) of section 911(b)(2)(D) (relating to inflation

adjustment) is amended—

(1) by striking ‘‘2007’’ and inserting ‘‘2005’’, and

(2) by striking ‘‘2006’’ in subclause (II) and inserting ‘‘2004’’.

(b) MODIFICATION OF HOUSING COST AMOUNT.—

(1) MODIFICATION OF HOUSING COST FLOOR.—Clause (i) of

section 911(c)(1)(B) is amended to read as follows:

‘‘(i) 16 percent of the amount (computed on a daily

basis) in effect under subsection (b)(2)(D) for the calendar year in which such taxable year begins, multiplied by’’.

(2) MAXIMUM AMOUNT OF EXCLUSION.—

(A) IN GENERAL.—Subparagraph (A) of section 911(c)(1)

is amended by inserting ‘‘to the extent such expenses do

not exceed the amount determined under paragraph (2)’’

after ‘‘the taxable year’’.

(B) LIMITATION.—Subsection (c) of section 911 is

amended by redesignating paragraphs (2) and (3) as paragraphs (3) and (4), respectively, and by inserting after

paragraph (1) the following new paragraph:

‘‘(2) LIMITATION.—

‘‘(A) IN GENERAL.—The amount determined under this

paragraph is an amount equal to the product of—

‘‘(i) 30 percent (adjusted as may be provided under

subparagraph (B)) of the amount (computed on a daily

basis) in effect under subsection (b)(2)(D) for the calendar year in which the taxable year of the individual

begins, multiplied by

‘‘(ii) the number of days of such taxable year within

the applicable period described in subparagraph (A)

or (B) of subsection (d)(1).

‘‘(B) REGULATIONS.—The Secretary may issue regulations or other guidance providing for the adjustment of

the percentage under subparagraph (A)(i) on the basis of

geographic differences in housing costs relative to housing

costs in the United States.’’.

(C) CONFORMING AMENDMENTS.—

(i) Section 911(d)(4) is amended by striking ‘‘and

(c)(1)(B)(ii)’’ and inserting ‘‘, (c)(1)(B)(ii), and

(c)(2)(A)(ii)’’.

(ii) Section 911(d)(7) is amended by striking ‘‘subsection (c)(3)’’ and inserting ‘‘subsection (c)(4)’’.

(c) RATES OF TAX APPLICABLE TO NONEXCLUDED INCOME.—

Section 911 (relating to exclusion of certain income of citizens

and residents of the United States living abroad) is amended by

redesignating subsection (f) as subsection (g) and by inserting after

subsection (e) the following new subsection:

‘‘(f) DETERMINATION OF TAX LIABILITY ON NONEXCLUDED

AMOUNTS.—For purposes of this chapter, if any amount is excluded

26 USC 911.

26 USC 199 note.

120 STAT. 368 PUBLIC LAW 109–222—MAY 17, 2006

from the gross income of a taxpayer under subsection (a) for any

taxable year, then, notwithstanding section 1 or 55— ‘‘(1) the tax imposed by section 1 on the taxpayer for such taxable year shall be equal to the excess (if any) of—

‘‘(A) the tax which would be imposed by section 1

for the taxable year if the taxpayer’s taxable income were

increased by the amount excluded under subsection (a)

for the taxable year, over

‘‘(B) the tax which would be imposed by section 1

for the taxable year if the taxpayer’s taxable income were

equal to the amount excluded under subsection (a) for

the taxable year, and

‘‘(2) the tentative minimum tax under section 55 for such

taxable year shall be equal to the excess (if any) of—

‘‘(A) the amount which would be such tentative minimum tax for the taxable year if the taxpayer’s taxable

excess were increased by the amount excluded under subsection (a) for the taxable year, over

‘‘(B) the amount which would be such tentative minimum tax for the taxable year if the taxpayer’s taxable

excess were equal to the amount excluded under subsection

(a) for the taxable year.

For purposes of this subsection, the amount excluded under subsection (a) shall be reduced by the aggregate amount of any deductions or exclusions disallowed under subsection (d)(6) with respect

to such excluded amount.’’.

(d) EFFECTIVE DATE.—The amendments made by this section

shall apply to taxable years beginning after December 31, 2005.

SEC. 516. TAX INVOLVEMENT OF ACCOMMODATION PARTIES IN TAX

SHELTER TRANSACTIONS.

(a) IMPOSITION OF EXCISE TAX.—

(1) IN GENERAL.—Chapter 42 (relating to private foundations and certain other tax-exempt organizations) is amended

by adding at the end the following new subchapter:

‘‘Subchapter F—Tax Shelter Transactions

‘‘Sec. 4965. Excise tax on certain tax-exempt entities entering into prohibited tax

shelter transactions.

‘‘SEC. 4965. EXCISE TAX ON CERTAIN TAX-EXEMPT ENTITIES ENTERING

INTO PROHIBITED TAX SHELTER TRANSACTIONS.

‘‘(a) BEING A PARTY TO AND APPROVAL OF PROHIBITED TRANSACTIONS.—

‘‘(1) TAX-EXEMPT ENTITY.—

‘‘(A) IN GENERAL.—If a transaction is a prohibited tax

shelter transaction at the time any tax-exempt entity

described in paragraph (1), (2), or (3) of subsection (c)

becomes a party to the transaction, such entity shall pay

a tax for the taxable year in which the entity becomes

such a party and any subsequent taxable year in the

amount determined under subsection (b)(1).

‘‘(B) POST-TRANSACTION DETERMINATION.—If any taxexempt entity described in paragraph (1), (2), or (3) of

subsection (c) is a party to a subsequently listed transaction

at any time during a taxable year, such entity shall pay

26 USC 911 note.

PUBLIC LAW 109–222—MAY 17, 2006 120 STAT. 369

a tax for such taxable year in the amount determined

under subsection (b)(1).

‘‘(2) ENTITY MANAGER.—If any entity manager of a taxexempt entity approves such entity as (or otherwise causes

such entity to be) a party to a prohibited tax shelter transaction

at any time during the taxable year and knows or has reason

to know that the transaction is a prohibited tax shelter transaction, such manager shall pay a tax for such taxable year

in the amount determined under subsection (b)(2).

‘‘(b) AMOUNT OF TAX.— ‘‘(1) ENTITY.—In the case of a tax-exempt entity— ‘‘(A) IN GENERAL.—Except as provided in subparagraph (B), the amount of the tax imposed under subsection (a)(1)

with respect to any transaction for a taxable year shall

be an amount equal to the product of the highest rate

of tax under section 11, and the greater of— ‘‘(i) the entity’s net income (after taking into account any tax imposed by this subtitle (other than

by this section) with respect to such transaction) for

such taxable year which— ‘‘(I) in the case of a prohibited tax shelter

transaction (other than a subsequently listed

transaction), is attributable to such transaction,

or

‘‘(II) in the case of a subsequently listed transaction, is attributable to such transaction and

which is properly allocable to the period beginning

on the later of the date such transaction is identified by guidance as a listed transaction by the

Secretary or the first day of the taxable year,

or

‘‘(ii) 75 percent of the proceeds received by the

entity for the taxable year which—

‘‘(I) in the case of a prohibited tax shelter

transaction (other than a subsequently listed

transaction), are attributable to such transaction,

or

‘‘(II) in the case of a subsequently listed transaction, are attributable to such transaction and

which are properly allocable to the period beginning on the later of the date such transaction

is identified by guidance as a listed transaction

by the Secretary or the first day of the taxable

year.

‘‘(B) INCREASE IN TAX FOR CERTAIN KNOWING TRANSACTIONS.—In the case of a tax-exempt entity which knew,

or had reason to know, a transaction was a prohibited

tax shelter transaction at the time the entity became a

party to the transaction, the amount of the tax imposed

under subsection (a)(1)(A) with respect to any transaction

for a taxable year shall be the greater of— ‘‘(i) 100 percent of the entity’s net income (after

taking into account any tax imposed by this subtitle

(other than by this section) with respect to the prohibited tax shelter transaction) for such taxable year

which is attributable to the prohibited tax shelter

transaction, or

120 STAT. 370 PUBLIC LAW 109–222—MAY 17, 2006

‘‘(ii) 75 percent of the proceeds received by the

entity for the taxable year which are attributable to

the prohibited tax shelter transaction.

This subparagraph shall not apply to any prohibited tax

shelter transaction to which a tax-exempt entity became

a party on or before the date of the enactment of this

section.

‘‘(2) ENTITY MANAGER.—In the case of each entity manager, the amount of the tax imposed under subsection (a)(2) shall

be $20,000 for each approval (or other act causing participation)

described in subsection (a)(2).

‘‘(c) TAX-EXEMPT ENTITY.—For purposes of this section, the

term ‘tax-exempt entity’ means an entity which is— ‘‘(1) described in section 501(c) or 501(d),

‘‘(2) described in section 170(c) (other than the United

States),

‘‘(3) an Indian tribal government (within the meaning of section 7701(a)(40)),

‘‘(4) described in paragraph (1), (2), or (3) of section 4979(e),

‘‘(5) a program described in section 529,

‘‘(6) an eligible deferred compensation plan described in section 457(b) which is maintained by an employer described

in section 4457(e)(1)(A), or

‘‘(7) an arrangement described in section 4973(a). ‘‘(d) ENTITY MANAGER.—For purposes of this section, the term

‘entity manager’ means—

‘‘(1) in the case of an entity described in paragraph (1),

(2), or (3) of subsection (c)—

‘‘(A) the person with authority or responsibility similar

to that exercised by an officer, director, or trustee of an

organization, and

‘‘(B) with respect to any act, the person having

authority or responsibility with respect to such act, and

‘‘(2) in the case of an entity described in paragraph (4),

(5), (6), or (7) of subsection (c), the person who approves or

otherwise causes the entity to be a party to the prohibited

tax shelter transaction.

‘‘(e) PROHIBITED TAX SHELTER TRANSACTION; SUBSEQUENTLY

LISTED TRANSACTION.—For purposes of this section—

‘‘(1) PROHIBITED TAX SHELTER TRANSACTION.—

‘‘(A) IN GENERAL.—The term ‘prohibited tax shelter

transaction’ means—

‘‘(i) any listed transaction, and

‘‘(ii) any prohibited reportable transaction.

‘‘(B) LISTED TRANSACTION.—The term ‘listed transaction’ has the meaning given such term by section

6707A(c)(2).

‘‘(C) PROHIBITED REPORTABLE TRANSACTION.—The term

‘prohibited reportable transaction’ means any confidential

transaction or any transaction with contractual protection

(as defined under regulations prescribed by the Secretary)

which is a reportable transaction (as defined in section

6707A(c)(1)).

‘‘(2) SUBSEQUENTLY LISTED TRANSACTION.—The term ‘subsequently listed transaction’ means any transaction to which

a tax-exempt entity is a party and which is determined by

the Secretary to be a listed transaction at any time after

PUBLIC LAW 109–222—MAY 17, 2006 120 STAT. 371

the entity has become a party to the transaction. Such term

shall not include a transaction which is a prohibited reportable

transaction at the time the entity became a party to the transaction.

‘‘(f) REGULATORY AUTHORITY.—The Secretary is authorized to promulgate regulations which provide guidance regarding the determination of the allocation of net income or proceeds of a taxexempt entity attributable to a transaction to various periods,

including before and after the listing of the transaction or the

date which is 90 days after the date of the enactment of this

section.

‘‘(g) COORDINATION WITH OTHER TAXES AND PENALTIES.—The

tax imposed by this section is in addition to any other tax, addition

to tax, or penalty imposed under this title.’’. (2) CONFORMING AMENDMENT.—The table of subchapters

for chapter 42 is amended by adding at the end the following

new item:

‘‘SUBCHAPTER F. TAX SHELTER TRANSACTIONS.’’.

(b) DISCLOSURE REQUIREMENTS.— (1) DISCLOSURE BY ENTITY TO THE INTERNAL REVENUE

SERVICE.—

(A) IN GENERAL.—Section 6033(a) (relating to organiza- tions required to file) is amended by redesignating paragraph (2) as paragraph (3) and by inserting after paragraph

(1) the following new paragraph:

‘‘(2) BEING A PARTY TO CERTAIN REPORTABLE TRANS- ACTIONS.—Every tax-exempt entity described in section 4965(c) shall file (in such form and manner and at such time as

determined by the Secretary) a disclosure of— ‘‘(A) such entity’s being a party to any prohibited tax shelter transaction (as defined in section 4965(e)), and

‘‘(B) the identity of any other party to such transaction which is known by such tax-exempt entity.’’. (B) CONFORMING AMENDMENT.—Section 6033(a)(1) is

amended by striking ‘‘paragraph (2)’’ and inserting ‘‘paragraph (3)’’.

(2) DISCLOSURE BY OTHER TAXPAYERS TO THE TAX-EXEMPT

ENTITY.—Section 6011 (relating to general requirement of

return, statement, or list) is amended by redesignating subsection (g) as subsection (h) and by inserting after subsection

(f) the following new subsection:

‘‘(g) DISCLOSURE OF REPORTABLE TRANSACTION TO TAX-EXEMPT

ENTITY.—Any taxable party to a prohibited tax shelter transaction

(as defined in section 4965(e)(1)) shall by statement disclose to

any tax-exempt entity (as defined in section 4965(c)) which is a

party to such transaction that such transaction is such a prohibited

tax shelter transaction.’’.

(c) PENALTY FOR NONDISCLOSURE.—

(1) IN GENERAL.—Section 6652(c) (relating to returns by

exempt organizations and by certain trusts) is amended by

redesignating paragraphs (3) and (4) as paragraphs (4) and

(5), respectively, and by inserting after paragraph (2) the following new paragraph:

‘‘(3) DISCLOSURE UNDER SECTION 6033(a)(2).—

‘‘(A) PENALTY ON ENTITIES.—In the case of a failure

to file a disclosure required under section 6033(a)(2), there

shall be paid by the tax-exempt entity (the entity manager

26 USC 6033.

120 STAT. 372 PUBLIC LAW 109–222—MAY 17, 2006

in the case of a tax-exempt entity described in paragraph

(4), (5), (6), or (7) of section 4965(c)) $100 for each day

during which such failure continues. The maximum penalty

under this subparagraph on failures with respect to any

1 disclosure shall not exceed $50,000.

‘‘(B) WRITTEN DEMAND.—

‘‘(i) IN GENERAL.—The Secretary may make a written demand on any entity or manager subject to penalty under subparagraph (A) specifying therein a

reasonable future date by which the disclosure shall

be filed for purposes of this subparagraph.

‘‘(ii) FAILURE TO COMPLY WITH DEMAND.—If any

entity or manager fails to comply with any demand

under clause (i) on or before the date specified in

such demand, there shall be paid by such entity or

manager failing to so comply $100 for each day after

the expiration of the time specified in such demand

during which such failure continues. The maximum

penalty imposed under this subparagraph on all entities and managers for failures with respect to any

1 disclosure shall not exceed $10,000.

‘‘(C) DEFINITIONS.—Any term used in this section which

is also used in section 4965 shall have the meaning given

such term under section 4965.’’.

(2) CONFORMING AMENDMENT.—Paragraph (1) of section

6652(c) is amended by striking ‘‘6033’’ each place it appears

in the text and heading thereof and inserting ‘‘6033(a)(1)’’.

(d) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as provided in paragraph (2), the

amendments made by this section shall apply to taxable years

ending after the date of the enactment of this Act, with respect

to transactions before, on, or after such date, except that no

tax under section 4965(a) of the Internal Revenue Code of

1986 (as added by this section) shall apply with respect to

income or proceeds that are properly allocable to any period

ending on or before the date which is 90 days after such

date of enactment.

26 USC 4965

note.

26 USC 6652.

PUBLIC LAW 109–222—MAY 17, 2006 120 STAT. 373

LEGISLATIVE HISTORY—H.R. 4297 (S. 2020):

HOUSE REPORTS: Nos. 109–304 (Comm. on Ways and Means) and 109–455

(Comm. of Conference).

CONGRESSIONAL RECORD:

Vol. 151 (2005): Dec. 8, considered and passed House.

Vol. 152 (2006): Feb. 1, 2, considered and passed Senate, amended.

May 10, House agreed to conference report.

May 11, Senate agreed to conference report.

WEEKLY COMPILATION OF PRESIDENTIAL DOCUMENTS, Vol. 42 (2006):

May 17, Presidential remarks.

fi

(2) DISCLOSURE.—The amendments made by subsections (b) and (c) shall apply to disclosures the due date for which

are after the date of the enactment of this Act.

Approved May 17, 2006.