COMPARISON OF CERTAIN PROVISIONS OF H.R. 4520 AS PASSED BY THE

HOUSE OF REPRESENTATIVES AND AS AMENDED BY THE SENATE:

REVENUE PROVISIONS

Prepared by the Staff of the

JOINT COMMITTEE ON TAXATION

September 29, 2004

JCX-64-04
ii

Contents

Page

INTRODUCTION ...................................................................................................................................................................................... 1

A. Provisions to Reduce Tax Avoidance Through Individual and Corporate Expatriation ................................................................ 3

1. Tax treatment of inverted corporate entities (sec. 601 of the House bill and sec. 441 of the Senate amendment) .................... 3

2. Excise tax on stock compensation of insiders in inverted corporations (sec. 602 of the House bill and sec. 443 of the

Senate amendment)..................................................................................................................................................................... 5

3. Reinsurance agreements (sec. 603 of the House bill and sec. 444 of the Senate amendment)................................................... 6

4. Revision of tax rules on expatriation of individuals (sec. 604 of the House bill and sec. 442 of the Senate amendment) ........ 6

5. Reporting of taxable mergers and acquisitions (sec. 605 of the House bill and sec. 445 of the Senate amendment) ................ 8

6. Studies (sec. 606 of the House bill)............................................................................................................................................ 9

B. Tax Shelter Provisions .................................................................................................................................................................. 10

1. Provisions relating to reportable transactions and tax shelters................................................................................................. 10

2. Modifications of substantial understatement penalty for nonreportable transactions (sec. 619 of the House bill and

sec. 405 of the Senate amendment)........................................................................................................................................... 16

3. Modification of actions to enjoin certain conduct related to tax shelters and reportable transactions (sec. 620 of the

House bill and sec. 410 of the Senate amendment) .................................................................................................................. 16

4. Penalty on failure to report foreign financial accounts (sec. 621 of the House bill and sec. 412 of the Senate amendment) .. 16

5. Regulation of individuals practicing before the Department of the Treasury (sec. 622 of the House bill and sec. 414

of the Senate amendment)......................................................................................................................................................... 17

6. Treatment of stripped interests in bond and preferred stock funds, etc. (sec. 631 of the House bill and sec. 461 of the

Senate amendment)................................................................................................................................................................... 17

7. Minimum holding period for foreign tax credit on withholding taxes on income other than dividends (sec. 632 of the

House bill and sec. 456 of the Senate amendment) .................................................................................................................. 18

8. Partnership basis adjustments (sec. 633 of the House bill and sec. 469 of the Senate amendment) ........................................ 19

9. No reduction of basis under section 734 in stock held by partnership in corporate partner (sec. 634 of the House bill

and sec. 432 of the Senate amendment).................................................................................................................................... 20

10. Repeal of special rules for FASITs (sec. 635 of the House bill and sec. 433 of the Senate amendment) .............................. 20

11. Limitation on transfer or importation of built-in losses (sec. 636 of the House bill and sec. 431 of the Senate

 amendment)............................................................................................................................................................................. 21
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12. Clarification of banking business for purposes of determining investment of earnings in U.S. property (sec. 637 of the

 House bill and sec. 451 of the Senate amendment) ................................................................................................................ 22

13. Alternative tax for certain small insurance companies and modification of exemption from tax (sec. 638 of the House

 bill and sec. 493 of the Senate amendment)............................................................................................................................ 23

14. Denial of deduction for interest on underpayments attributable to nondisclosed tax avoidance transactions (sec. 639

 of the House bill and sec. 417 of the Senate amendment) ...................................................................................................... 24

15. Clarification of rules for payment of estimated tax for certain deemed asset sales (sec. 640 of the House bill and

 sec. 481 of the Senate amendment)......................................................................................................................................... 24

16. Exclusion of like-kind exchange property from nonrecognition treatment on the sale or exchange of a principal

 residence (sec. 641 of the House bill and sec. 492 of the Senate amendment)....................................................................... 25

17. Prevention of mismatching of interest and original issue discount deductions and income inclusions in transactions

 with related foreign persons (sec. 642 of the House bill and sec. 453 of the Senate amendment)......................................... 25

18. Exclusion from gross income for interest on overpayments of income tax by individuals (sec. 643 of the House bill)........ 27

19. Deposits made to suspend the running of interest on potential underpayments (sec. 644 of the House bill and sec. 486

 of the Senate amendment)....................................................................................................................................................... 27

20. Authorize IRS to enter into installment agreements that provide for partial payment (sec. 645 of the House bill and

 sec. 484 of the Senate amendment)......................................................................................................................................... 28

21. Affirmation of consolidated return authority (sec. 646 of the House bill and sec. 421 of the Senate amendment) ............... 28

22. Reform of tax treatment of leasing transactions with tax indifferent parties (secs. 647-649 of the House bill and

 secs. 475 and 476 of the Senate amendment) ......................................................................................................................... 29

23. Clarification of economic substance doctrine and penalty for understatements attributable to transactions lacking

 economic substance (secs. 401 and 404 of the Senate amendment)....................................................................................... 33

24. Understatement of taxpayer’s liability by income tax return preparer (sec. 411 of the Senate amendment) ......................... 35

25. Frivolous tax submissions (sec. 413 of the Senate amendment)............................................................................................. 35

26. Authorization of appropriations for tax law enforcement (sec. 418 of the Senate amendment) ............................................ 36

27. Study on information sharing among law enforcement agencies (sec. 420 of the Senate amendment)................................. 36

28. Declaration by chief executive officer relating to Federal annual corporate income tax return (sec. 422 of the Senate

 amendment)............................................................................................................................................................................. 37

29. Denial of deduction for certain fines, penalties, and other amounts (sec. 423 of the Senate amendment)............................. 37

30. Disallowance of deduction for punitive damages (sec. 424 of the Senate ame ndment)......................................................... 38

31. Expanded disallowance of deduction for interest on convertible debt (sec. 434 of the Senate amendment) ......................... 39

32. Increase in criminal monetary penalty limitation for the underpayment or overpayment of tax due to fraud (sec. 425

 of the Senate amendment)....................................................................................................................................................... 40
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33. Expanded authority to disallow tax benefits under section 269 (sec. 435 of the Senate amendment) ................................... 41

34. Modification of interaction between subpart F and passive foreign investment company rules (sec. 5646 of the Senate

 amendment)............................................................................................................................................................................. 42

C. Deferred Compensation Provisions .............................................................................................................................................. 43

1. Treatment of nonqualified deferred compensation plans (sec. 671 of the House bill and sec. 671 of the Senate

amendment)............................................................................................................................................................................... 43

2. Prohibition on deferral of gain from the exercise of stock options and restricted stock (sec. 672 of the Senate

amendment)............................................................................................................................................................................... 44

D. Other Revenue Provisions............................................................................................................................................................. 45

1. Permit private sector debt collection companies to collect tax debts (sec. 681 of the House bill and sec. 487 of the

Senate amendment)................................................................................................................................................................... 45

2. Modify charitable contribution rules for donations of patents and similar intellectual property (sec. 682 of the House bill

and sec. 494 of the Senate amendment).................................................................................................................................... 46

3. Require increased reporting for noncash charitable contributions (sec. 683 of the House bill)............................................... 47

4. Modify charitable contribution rules for donations of vehicles (sec. 684 of the House bill and sec. 731 of the Senate 

amendment)............................................................................................................................................................................... 48

5. Extension of amortization of intangibles to sports franchises (sec. 685 of the House bill and sec. 471 of the Senate

amendment)............................................................................................................................................................................... 49

6. Increase continuous levy for certain federal payments (sec. 686 of the House bill and 734 of the Senate amendment) ......... 50

7. Modification of straddle rules (sec. 687 of the Hosue bill and sec. 464 of the Senate amendment) ........................................ 50

8. Add vaccines against Hepatitis A to the list of taxable vaccines (sec. 688 of the House bill and sec. 491 of the Senate 

amendment)............................................................................................................................................................................... 51

9. Add vaccines against influenza to the list of taxable vaccines (sec. 689 of the House bill and sec. 732 of the Senate 

amendment)............................................................................................................................................................................... 52

10. Extension of IRS user fees (sec. 690 of the House bill and sec. 482 of the Senate amendment) ........................................... 52

11. Extension of customs user fees (sec. 691 of the House bill and sec. 485 of the Senate amendment) .................................... 53

12. Prohibition on nonrecognition of gain through complete liquidation of holding company (sec. 452 of the Senate 

 amendment)............................................................................................................................................................................. 54

13. Effectively connected income to include certain foreign source income (sec. 454 of the Senate amendment) ..................... 55

14. Recapture of overall foreign losses on sale of controlled foreign corporation stock (sec. 455 of the Senate amendment) ... 56

15. Application of earnings stripping rules to partnerships and S corporations (sec. 462 of the Senate amendment)................. 56

16. Recognition of cancellation of indebtedness income realized on satisfaction of debt with partnership interest

 (sec. 463 of the Senate amendment) ....................................................................................................................................... 57
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17. Denial of installment sale treatment for all readily tradeable debt (sec. 465 of the Senate amendment)............................... 57

18. Modification of treatment of transfers to creditors in divisive reorganizations (sec. 466 of the Senate amendment) ........... 58

19. Clarification of definition of nonqualified preferred stock (sec. 5681 of the Senate amendment)......................................... 59

20. Modification of definition of controlled group of corporations (sec. 468 of the Senate amendment) ................................... 59

21. Class lives for utility grading costs (sec. 472 of the Senate amendment)............................................................................... 60

22. Expansion of limitation on depreciation of certain passenger automobiles (sec. 473 of the Senate amendment) ................. 60

23. Consistent amortization of periods for intangibles (sec. 474 of the Senate amendment)....................................................... 61

24. Doubling of certain penalties, fines, and interest on underpayments related to certain offshore financial arrangements

 (sec. 483 of the Senate amendment) ....................................................................................................................................... 62

25. Whistleblower reforms (sec. 488 of the Senate amendment) ................................................................................................. 63

26. Increase in age of minor children whose unearned income is taxed as if parent’s income (sec. 495 of the Senate

 amendment)............................................................................................................................................................................. 65

27. Holding period for preferred stock (sec. 496 of Senate amendment) ..................................................................................... 65

28. Grant Treasury regulatory authority to address foreign tax credit transactions involving inappropriate separation of

 foreign taxes from related foreign income (sec. 661A of the Senate amendment)................................................................. 66

29. Freeze of provision regarding suspension of interest where Secretary fails to contact taxpayer (sec. 662B of the Senate

 amendment)............................................................................................................................................................................. 67

30. Increase in withholding for supplemental wage payments in excess of $1 million (sec. 673 of the Senate amendment) ..... 67

31. Treatment of sale of stock acquired pursuant to exercise of stock options to comply with conflict-of-interest

 requirements (sec. 674 of the Senate amendment) ................................................................................................................. 68

32. Application of basis rules to employer and employee contributions on behalf of nonresident aliens (sec. 675 of the

 Senate amendment)................................................................................................................................................................. 68

33. Substantial presence test required to determine bona fide residence in United States possession (sec. 497 of the Senate

 amendment)............................................................................................................................................................................. 70

34. Include employer provided housing under foreign earned income exclusion cap (sec. 632(c) of the Senate amendment)... 71

35. Limit deduction for certain entertainment expenses (including company-provided aircraft) for covered employees

 (sec. 103(b) of the Senate amendment)................................................................................................................................... 72

36. Treatment of contingent payment convertible debt instruments (sec. 733 of the Senate amendment) .................................. 73
1

INTRODUCTION

On June 17, 2004, the House of Representatives passed H.R. 4520, the “American Jobs Creations Act of 2004.” On July 15, 

2004, the Senate amended H.R. 4520 by substituting the text and title of S. 1637, the “Jumpstart Our Business Strength (JOBS) Act,”1

and an additional non-tax amendment.

The House bill and the Senate amendment each repeal the extraterritorial income exclusion provisions of present law, provide 

provisions to reduce the effective income tax imposed on income earned from certain domestic production activities, and make 

numerous other changes to the Internal Revenue Code. This document, 2 prepared by the staff of the Joint Committee on Taxation, 

compares certain provisions that raise revenue. 

In this publication set,3 (JCX-61-04 to JCX-66-04), the staff of the Joint Committee on Taxation compares provisions of H.R. 

4520 as passed by the House of Representatives and as amended by the Senate relating to the repeal of the extraterritorial income 

exclusions, domestic production, corporate income tax rates applicable to small corporations, tax incentives for manufacturers, small 

 

1

 The Senate originally passed S. 1637 on May 11, 2004.

2

 This document may be cited as follows: Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as 

Passed by the House of Representatives and as Amended by the Senate: Revenue Provisions (JCX-64-04), September 29, 2004.

3

 Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives 

and as Amended by the Senate: Provisions Relating to the Repeal of the Exclusion for Extraterritorial Income, Domestic Production, 

and the Corporate Income Tax Rates Applicable to Small Corporations (JCX-61-04), September 29, 2004; Joint Committee on 

Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: 

Job Creation Tax Incentives for Manufacturing, Small Business, and Farming (JCX-62-04), September 29, 2004; Joint Committee on 

Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: 

Provisions Relating to International Tax Reform and Simplification for United States Businesses (JCX-63-04), September 29, 2004; 

Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as 

Amended by the Senate: Revenue Provisions (JCX-64-04), September 29, 2004; Joint Committee on Taxation, Comparison of Certain 

Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Alcohol Fuels and Fuel Fraud 

Provisions (JCX-65-04), September 29, 2004; and Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as 

Passed by the House of Representatives and as Amended by the Senate: Expiring Provisions (JCX-66-04), September 29, 2004.
2

businesses and farming, international tax reform and simplification for United States businesses, alcohol fuels and fuel fraud, expiring 

provisions, and certain revenue raising provisions.
3

Provision Present Law House Bill Senate Amendment

A. Provisions to Reduce Tax 

Avoidance Through Individual 

and Corporate Expatriation

1. Tax treatment of inverted 

corporate entities (sec. 601 of the 

House bill and sec. 441 of the 

Senate amendment)

U.S. corporations may 

reincorporate in low-tax foreign 

jurisdictions and thereby replace 

the U.S. parent corporation of a 

multinational corporate group with 

a foreign parent corporation. This 

allows the corporate group to 

remove certain foreign operations 

from the U.S. taxing jurisdiction. 

The corporate group may derive 

further tax benefits from the 

inverted structure by reducing U.S. 

tax on U.S.-source income through 

various earnings stripping or other 

transactions. (See, e.g., secs. 163(j) 

and 482). Inversion transactions 

may give rise to immediate U.S. 

tax consequences at the 

shareholder and/or the corporate 

level, depending on the type of 

inversion.

Special tax rules apply to 

corporations that undertake certain 

defined inversion transactions. A 

corporate inversion transaction is a 

transaction in which:

(1) a U.S. corporation becomes a 

subsidiary of a foreignincorporated entity after March 4, 

2003;

(2) the former shareholders of the 

U.S. corporation hold (by reason of 

holding stock in the U.S. 

corporation) 60 percent or more of 

the stock (by vote or value) of the 

foreign-incorporated entity after 

the transaction; and 

(3) the foreign-incorporated entity, 

considered together with all 

companies connected to it by a 

chain of greater than 50-percent 

ownership (the “expanded 

affiliated group”), does not conduct 

substantial business activities in the 

entity’s country of incorporation, 

compared to the total worldwide 

Defines two different types of 

corporate inversion transactions 

and establishes a different set of 

consequences for each type.

The first type of inversion is a 

transaction in which: 

(1) a U.S. corporation becomes a 

subsidiary of a foreignincorporated entity; 

(2) the former shareholders of the 

U.S. corporation hold 80 percent or 

more of the stock (by vote or 

value) of the foreign-incorporated 

entity after the transaction; and 

(3) the foreign-incorporated entity, 

considered together with all 

companies connected to it by a 

chain of greater than 50-percent 

ownership (the “expanded 

affiliated group”), does not have 

substantial business activities in the 

entity’s country of incorporation, 

compared to the total worldwide 

business activities of the expanded 

affiliated group. 
4

Provision Present Law House Bill Senate Amendment

business activities of the expanded 

affiliated group. 

Certain partnership transactions are 

also treated as inversion 

transactions. 

Any applicable corporate-level 

“toll charges” for establishing the 

inverted structure are not offset by 

tax attributes such as net operating 

losses or foreign tax credits. This 

rule does not apply to certain 

transfers of inventory and similar 

property. These measures 

generally apply for a 10-year 

period following the inversion 

transaction.

Deems the top-tier foreign 

corporation in such an inversion 

transaction to be a domestic 

corporation for all purposes of the 

Code. 

The second type of inversion 

transaction meets the definition 

above, except that the 80-percent 

ownership threshold is not met.

In such a case, the inversion 

transaction is respected (i.e., the 

foreign corporation is treated as 

foreign), but:

(1) any applicable corporate-level 

“toll charges” for establishing the 

inverted structure may not be offset 

by tax attributes such as net 

operating losses or foreign tax 

credits; 

(2) the accuracy-related penalty is 

increased; and

(3) section 163(j), relating to 

“earnings stripping” through 

related-party debt, is strengthened. 

These measures generally apply for 

a 10-year period following the 

inversion transaction. 
5

Provision Present Law House Bill Senate Amendment

Effective date.–The provision 

applies to taxable years ending 

after March 4, 2003.

Effective date.–Regime applicable 

to transactions involving at least 80 

percent identity of ownership 

applies to inversion transactions 

completed after March 20, 2002. 

Rules for inversion transactions 

involving greater-than-50-percent 

identity of ownership apply to 

inversion transactions completed 

after 1996 that meet the 50-percent 

test and to inversion transactions 

completed after 1996 that would 

have met the 80-percent test but for 

the March 20, 2002, date.

2. Excise tax on stock 

compensation of insiders in 

inverted corporations (sec. 602 of 

the House bill and sec. 443 of the

Senate amendment)

While shareholders are generally 

required to recognize gain upon 

stock inversion transactions, an 

inversion transaction is generally 

not a taxable event for holders of 

stock options and other stock-based 

compensation.

Upon certain inversion 

transactions, imposes an excise tax 

on certain executives (including 

executives of the expanded 

affiliated group) holding stock 

options and other stock-based 

compensation equal to 15 percent 

of the value of the specified stock 

compensation.

Effective date.–Generally effective 

March 4, 2003.

Similar to the House bill, except 

that the excise tax is equal to 20 

percent of the value of the 

specified stock compensation and 

the excise tax does not apply to 

executives of the expanded 

affiliated group. 

Effective date.–Generally effective 

July 11, 2002.
6

Provision Present Law House Bill Senate Amendment

3. Reinsurance agreements

(sec. 603 of the House bill and 

sec. 444 of the Senate 

amendment)

In the case of a reinsurance 

agreement between two or more 

related persons, the Treasury 

Secretary has authority to allocate 

among the parties or recharacterize 

income (whether investment 

income, premium or otherwise), 

deductions, assets, reserves, credits 

and any other items related to the 

reinsurance agreement, or make 

any other adjustment, in order to 

reflect the proper source and 

character of the items for each 

party. 

Clarifies the rules giving Treasury 

the authority to allocate items 

among the parties to a reinsurance 

agreement, recharacterize items, or 

make any other adjustment, in 

order to reflect the proper source, 

character or amount of the items 

for each party.

Effective date.–Any risk reinsured 

after date of enactment.

Same as the House bill except for 

effective date.

Effective date.–Any risk reinsured 

after April 11, 2002.

4. Revision of tax rules on 

expatriation of individuals

(sec. 604 of the House bill and 

sec. 442 of the Senate 

amendment)

In general, an individual who 

relinquishes U.S. citizenship or 

terminates U.S. residency with a 

principal purpose of avoiding U.S. 

taxes is subject to an alternative tax 

regime for income tax purposes for 

the 10 taxable years ending after 

expatriation or residency 

termination. Special rules apply to 

such individuals for estate and gift 

tax purposes. A special

immigration rule denies certain 

former citizens re-entry into the 

United States if the Attorney 

General determines that their 

expatriation was tax-motivated.

Modifies present-law rules by 

providing:

(1) objective standards for 

determining whether former 

citizens or former long-term 

residents are subject to the 

alternative tax regime;

(2) tax-based (instead of 

immigration-based) rules for 

determining when an individual is 

no longer a U.S. citizen or longterm resident for U.S. Federal tax 

purposes;

(3) the imposition of full U.S. 

taxation for individuals who are 

The provision replaces the presentlaw income tax rules of the 

alternative tax regime with rules 

that generally:

(1) subject certain U.S. citizens 

who relinquish their U.S. 

citizenship and certain long-term 

U.S. residents who terminate their 

U.S. residence to a mark-to-market 

regime with respect to all their 

property interests;

(2) limit the net gain recognized on 

the deemed sale to the gain that 

exceeds $600,000 or $1.2 million 

(indexed) for a joint return; and
7

Provision Present Law House Bill Senate Amendment

subject to the alternative tax regime 

and who return to the United States 

for extended periods;

(4) imposition of U.S. gift tax on 

gifts of stock of certain closelyheld foreign corporations that hold 

U.S.-situated property; and

(5) an annual return-filing 

requirement for individuals who 

are subject to the alternative tax 

regime, for each of the 10 years 

following citizenship 

relinquishment or residency 

termination.

Effective date.–Applies to 

individuals who relinquish 

citizenship or terminate long-term 

residency after June 3, 2004.

(3) coordinate the present-law 

alternative tax regime and the 

mark-to-market regime such that 

the alternative tax regime generally 

does not apply to a former citizen 

or former long-term resident whose 

expatriation or residency 

termination occurs on or after 

January 1, 2004.

A U.S. taxpayer who receives a gift 

or inheritance from an expatriate 

generally is required to include the 

value of such gift or inheritance in 

gross income and is subject to U.S. 

income tax on such amount. The 

provision denies former citizens 

reentry into the United States if the 

individual is determined not to be 

in compliance with his or her tax 

obligations under the provision 

(regardless of the subjective motive 

for expatriating). 

Effective date.–Applies to 

individuals who relinquish 

citizenship or terminate long-term 

residency after January 1, 2004.
8

Provision Present Law House Bill Senate Amendment

5. Reporting of taxable mergers 

and acquisitions (sec. 605 of the 

House bill and sec. 445 of the 

Senate amendment) 

Brokers (defined to include stock 

transfer agents) are required to 

make information returns and to 

provide corresponding payee 

statements as to sales made on 

behalf of their customers, subject 

to the penalty provisions of 

sections 6721-6724. This 

requirement generally does not 

apply with respect to taxable 

transactions other than exchanges 

for cash (e.g., stock inversion 

transactions taxable to shareholders 

by reason of section 367(a)).

If gain or loss is recognized in 

whole or in part by shareholders of 

a corporation by reason of a second 

corporation’s acquisition of the 

stock or assets of the first 

corporation, then the acquiring 

corporation (or the acquired 

corporation, if so prescribed by the 

Secretary) is required to make a 

return containing certain 

information. 

Alternatively, a stock transfer agent 

who records transfers of stock in 

such transaction may make the 

return described above in lieu of 

the second corporation.

Also, every person required to 

make a return described above is 

required to furnish to each 

shareholder (or the shareholder’s 

nominee) whose name is required 

to be set forth in such return a 

written statement showing certain 

information.

The present-law penalties for 

failure to comply with information 

reporting requirements are 

extended to failures to comply with 

Same as the House bill.
9

Provision Present Law House Bill Senate Amendment

the requirements set forth under 

this bill.

Effective date.–Acquisitions after 

the date of enactment.

6. Studies (sec. 606 of the House 

bill)

Due to the variation in tax rates and 

tax systems among countries, a 

multinational enterprise (U.S.-

based or foreign-based) may have 

an incentive to shift income, 

deductions, or tax credits between 

group members in order to arrive at 

a reduced overall tax burden. 

Under section 482, the Treasury 

Secretary is authorized to 

reallocate income, deductions, or 

credits between or among two or 

more organizations, trades, or 

businesses under common control 

if she determines that such a 

reallocation is necessary to prevent 

tax evasion or to clearly reflect 

income. 

In addition to the statutory rules 

governing the taxation of foreign 

income of U.S. persons and U.S. 

income of foreign persons, bilateral 

income tax treaties limit the 

amount of income tax that may be 

imposed by one treaty partner on 

residents of the other treaty partner. 

Requires the Treasury Secretary to 

conduct and submit to the Congress 

three studies. The first study will 

examine the effectiveness of the 

transfer pricing rules of section 

482, with an emphasis on 

transactions involving intangible 

property. The second study will 

examine income tax treaties to 

which the United States is a party, 

with a view toward identifying any 

inappropriate reductions in 

withholding tax or opportunities 

for abuse that may exist. The third 

study will examine the impact of 

the provisions of this bill on 

inversion transactions.

Effective date.–The tax treaty study 

required under the provision is due 

no later than June 30, 2005. The 

transfer pricing study required 

under the provision is due no later 

than June 30, 2005. The inversions 

study required under the provision 

is due no later than December 31, 

No provision.
10

Provision Present Law House Bill Senate Amendment

For example, treaties often reduce 

or eliminate withholding taxes 

imposed by a treaty country on 

certain types of income (e.g., 

dividends, interest and royalties) 

paid to residents of the other treaty 

country. 

2005.

B. Tax Shelter Provisions

1. Provisions relating to 

reportable transactions and tax 

shelters

(a) Penalty for failing to disclose 

reportable transaction (sec. 611 

of House bill and sec. 402 of the 

Senate amendment)

Although Treasury regulations 

require a taxpayer to disclose with 

its tax return certain information 

with respect to each “reportable 

transaction” in which the taxpayer 

participates, there is no specific 

penalty for failing to disclose a 

reportable transaction.

Creates a new $50,000 penalty 

($10,000 in the case of a natural 

person) for any person who fails to 

disclose a reportable transaction. 

The amount is increased to 

$200,000 ($100,000 in the case of 

a natural person) if the failure is 

with respect to a listed transaction. 

The penalty with respect to a 

transaction (other than a listed 

transaction) can be waived by the 

Commissioner if the waiver would 

promote compliance and effective 

tax administration.

Effective date.–Returns and 

statements the due date for which 

is after the date of enactment.

Same as the House bill, except the 

penalty amounts are: (1) $50,000 

penalty for any person who fails to 

disclose a reportable transaction; 

(2) $100,000 if the failure is with 

respect to a listed transaction; and 

(3) doubled for large entities and 

high net worth individuals. 

Penalty waiver is same as House 

bill, except imposes additional 

conditions, including limited 

delegation of waiver authority by 

the Commissioner.

Also requires a publicly traded 

entity that is required to pay a 

penalty for failing to disclose a 

listed transaction to disclose the 

imposition of the penalty in reports 

to the SEC. Also requires the 

Secretary to make public the name 

of any person required to pay such
11

Provision Present Law House Bill Senate Amendment

penalty and the amount of such 

penalty.

(b) Accuracy-related penalty for 

listed transactions and other 

reportable transactions having a 

significant tax avoidance purpose 

(sec. 612 of the House bill and

sec. 403 of the Senate 

amendment)

In general, a 20-percent accuracyrelated penalty applies to the 

portion of any underpayment that is 

attributable to (1) negligence, (2) 

any substantial understatement of 

income tax, (3) any substantial 

valuation misstatement, (4) any 

substantial overstatement of 

pension liabilities, or (5) any 

substantial estate or gift tax 

valuation understatement.

Except in the case of tax shelters 

(as defined), the penalty is not 

applicable if substantial authority 

for the tax treatment exists or if the 

tax treatment is disclosed and 

reasonable basis for such treatment 

exists. In the case of non-corporate 

tax shelters, the penalty is not 

applicable if substantial authority 

for the tax treatment exists and the 

taxpayer reasonably believed that 

such treatment was more likely 

than not proper.

Provides a new accuracy-related 

penalty that applies to listed 

transactions and reportable 

transactions with a significant tax 

avoidance purpose (“reportable 

avoidance transactions”). The 

penalty rate and defenses available 

to avoid the penalty vary 

depending on whether the 

transaction was adequately 

disclosed. The present-law penalty 

does not apply to the extent the 

new penalty applies.

Repeals the exception from the 

present-law penalty for noncorporate tax shelters.

Effective date.–Taxable years 

ending after the date of enactment.

Same as the House bill, except also 

repeals the special rules for tax 

shelters.

Also provides special rules that 

limit the assertion and compromise 

of the penalty.

Also requires a publicly traded 

entity that is required to pay a 

penalty for an understatement of 

tax with respect to certain 

undisclosed tax avoidance 

transactions to disclose the 

imposition of the penalty in reports 

to the SEC. Also requires the 

Secretary to make public the name 

of any person required to pay such 

penalty and the amount of such 

penalty.
12

Provision Present Law House Bill Senate Amendment

(c) Tax shelter exception to 

confidentiality privileges relating 

to taxpayer communications

(sec. 613 of the House bill and

sec. 406 of the Senate 

amendment)

With respect to tax advice, the 

same common law protections of 

confidentiality that apply to a 

communication between a taxpayer 

and an attorney also apply to a 

communication between a taxpayer 

and a Federally authorized tax 

practitioner, except for 

communications regarding 

corporate tax shelters.

Expands the exception for 

corporate tax shelters to all tax 

shelters, whether entered into by 

corporations, individuals, 

partnerships, tax-exempt entities, 

or any other entity.

Effective date.–Communications 

made on or after the date of 

enactment.

Same as the House bill.

(d) Statute of limitations for 

taxable years for which required 

listed transactions not reported 

(sec. 614 of the House bill and

sec. 416 of the Senate 

amendment)

Taxes generally must be assessed 

within three years after the date a 

return is filed. If there has been a 

substantial omission of items of 

gross income that totals more than 

25 percent of the amount of gross 

income shown on the return, the 

period during which an assessment 

must be made is extended to six 

years. Tax may be assessed at any 

time if the taxpayer files a false or 

fraudulent return with the intent to 

evade tax or if the taxpayer does 

not file a tax return at all.

Extends the statute of limitations 

with respect to a listed transaction 

if a taxpayer fails to include with a 

tax return any required information 

with respect to the transaction. The 

statute of limitations with respect 

to such a transaction will not expire 

before the date which is one year 

after the earlier of (1) the date on 

which the Treasury Secretary is 

furnished the required information, 

or (2) the date that a material 

advisor satisfies the list 

maintenance requirements with 

respect to a request by the 

Secretary. 

Effective date.–Taxable years with 

respect to which the period for 

assessing a deficiency did not 

expire before the date of 

enactment.

Same as the House bill.
13

Provision Present Law House Bill Senate Amendment

(e) Disclosure of reportable 

transactions (secs. 615 and 616 of 

the House bill and secs. 407 and 

408 of the Senate amendment)

An organizer of a tax shelter is 

required to register the shelter with 

the Treasury Secretary not later 

than the day on which the shelter is 

first offered for sale.

The penalty for failing to timely 

register a tax shelter generally is 

the greater of one percent of the 

aggregate amount invested in the 

shelter or $500. However, if the 

tax shelter involves an arrangement

offered to a corporation under 

conditions of confidentiality, the 

penalty generally is the greater of 

$10,000 or 50 percent of the fees 

payable to any promoter with 

respect to offerings prior to the 

date of late registration.

Repeals the rules with respect to 

registration of tax shelters and, 

instead, requires each material 

advisor with respect to any 

reportable transaction to timely file 

an information return with the 

Secretary. Also repeals the penalty 

for failure to register tax shelters 

and, instead, imposes a penalty on 

any material advisor who fails to 

file an information return with 

respect to a reportable transaction.

Effective date.–The provision 

requiring disclosure of reportable 

transactions by material advisors 

applies to transactions with respect 

to which material aid, assistance or 

advice is provided after the date of 

enactment.

The provision imposing a penalty 

for failing to disclose reportable 

transactions applies to returns the 

due date for which is after the date 

of enactment.

Same as the House bill, except 

defines material advisers more 

broadly to include insurers of 

reportable transactions.
14

Provision Present Law House Bill Senate Amendment

(f) Investor lists and modification 

of penalty for failure to maintain 

lists of investors (secs. 615 and 

617 of the House bill and secs. 

407 and 409 of the Senate 

amendment)

Any organizer or seller of a 

potentially abusive tax shelter must 

maintain a list identifying each 

person who was sold an interest in 

any such tax shelter with respect to 

which registration was required. 

The penalty for failing to maintain 

a required list is $50 for each name 

omitted from the list (with a 

maximum penalty of $100,000 per 

year). 

Modifies the penalty for failing to 

maintain the required list by 

making it a time-sensitive penalty. 

Thus, a material advisor who is 

required to maintain an investor list 

and who fails to make the list 

available upon written request by 

the Secretary within 20 business 

days after the request will be 

subject to a $10,000 per day 

penalty.

Effective date.–Requests made 

after the date of enactment.

Same as the House bill, except 

defines material advisers more 

broadly to include insurers of 

reportable transactions.

Also clarifies that the identity of 

any person on an investor list is not 

privileged, effective as if included 

in the Deficit Reduction Act of 

1984.

(g) Penalty on promoters of tax 

shelters (sec. 618 of the House 

bill and sec. 415 of the Senate 

amendment)

In general, a $1,000 penalty is 

imposed on any person who 

organizes, assists in the 

organization of, or participates in 

the sale of an interest in any entity 

or plan or arrangement, if in 

connection with such activity the 

person knowingly makes or 

furnishes a false or fraudulent 

statement or a gross valuation 

overstatement regarding the 

securing of any tax benefit by 

reason of holding an interest in the 

entity or participating in the plan or 

arrangement. 

Modifies the penalty amount to 

equal 50 percent of the gross 

income derived by the person from 

the activity for which the penalty is 

imposed. The enhanced penalty 

does not apply to a gross valuation 

overstatement.

Effective date.–Activities after the 

date of enactment.

Same as the House bill, except (1) 

modifies the penalty amount to 

equal 100 percent of the gross 

income derived by the person from 

the activity for which the penalty is 

imposed, (2) calculates the penalty 

with respect to each instance of 

such activity, each instance in 

which income was derived by the 

person subject to the penalty, and 

each person who participated in 

such activity, (3) imposes joint and 

several liability upon all persons 

subject to the penalty for such 

activity, and (4) provides that the 

payment of such penalty or any 

amount to settle or avoid the 
15

Provision Present Law House Bill Senate Amendment

imposition of such penalty is not 

deductible.

(h) Penalty for aiding and 

abetting the understatement of 

tax liability (sec. 419 of the 

Senate amendment)

Imposes a penalty on persons who 

aid, assist in, procure, or advise 

with respect to the preparation or 

presentation of any portion of a 

return or other document if the 

person (1) knows or has reason to 

believe that the return or other 

document will be used in 

connection with any material 

matter arising under the tax laws, 

and (2) knows that such portion 

would result in an understatement 

of the tax liability of another 

person. The amount of the penalty 

is $1,000 ($10,000 if the other 

person is a corporation) with 

respect to each such document, up 

to one penalty per other person per 

taxable period.

No provision. Modifies the calculation of the 

penalty to apply to each instance of 

aid, assistance, procurement, or 

advice (in addition to each 

document), with no limitation on 

the number of penalties per other 

person per taxable period, except 

that the amount of the penalty 

cannot exceed 100 percent of the 

gross income derived from such 

aid, assistance, procurement, or 

advice.

Also imposes joint and several 

liability upon all persons subject to 

the penalty for such activity, and 

provides that the payment of such 

penalty or any amount to settle or 

avoid the imposition of such 

penalty is not deductible.

Effective date.–Activities after the 

date of enactment.
16

Provision Present Law House Bill Senate Amendment

2. Modifications of substantial 

understatement penalty for 

nonreportable transactions

(sec. 619 of the House bill and

sec. 405 of the Senate 

amendment)

An accuracy-related penalty equal 

to 20 percent applies to any 

substantial understatement of tax.

Modifies the definition of 

“substantial” for corporate 

taxpayers so that a corporate 

taxpayer has a substantial 

understatement if the amount of the 

understatement for the taxable year 

exceeds the lesser of: (1) 10 

percent of the tax required to be 

shown on the return for the taxable 

year (or, if greater, $10,000); or (2) 

$10 million.

Effective date.–Taxable years 

beginning after date of enactment.

Same as the House bill, except 

also: (1) elevates the standard that 

a taxpayer must satisfy in order to 

reduce the amount of an 

understatement for undisclosed 

items; and (2) authorizes (but does 

not require) the Secretary to 

publish a list of positions for which 

it believes there is not substantial 

authority or reasonable belief that 

the tax treatment is more likely 

than not the proper treatment.

3. Modification of actions to 

enjoin certain conduct related to 

tax shelters and reportable 

transactions (sec. 620 of the 

House bill and sec. 410 of the 

Senate amendment)

The Secretary may commence civil 

actions to enjoin any person from 

promoting abusive tax shelters or 

aiding or abetting the 

understatement of tax liability.

Expands present-law authority so 

that injunctions also may be sought 

with respect to the requirements 

relating to the reporting of 

reportable transactions and the 

keeping of lists of investors by 

material advisors.

Effective date.–Day after the date 

of enactment.

Same as the House bill, except also 

allows injunctions to be sought 

with respect to violations of 

Circular 230.

4. Penalty on failure to report 

foreign financial accounts

(sec. 621 of the House bill and

sec. 412 of the Senate 

amendment)

There is a civil penalty for persons 

who willfully fail to keep records 

and file reports when that person 

makes a transaction or maintains an 

account with a foreign financial 

entity. In addition, any person who 

willfully violates this reporting 

Adds an additional civil penalty of 

up to $5,000 that may be imposed 

on any person who violates this 

reporting requirement (without 

regard to willfulness).

Same as House bill, except: (1) the 

maximum additional civil penalty 

for non-willful act is up to $10,000; 

and (2) also increases the 

maximum present-law penalty for 

willful behavior to the greater of 

$100,000 or 50 percent of the 
17

Provision Present Law House Bill Senate Amendment

requirement is subject to a criminal 

penalty.

Effective date.–Failures to report 

occurring after the date of 

enactment.

amount of the transaction or 

account.

5. Regulation of individuals 

practicing before the Department 

of the Treasury (sec. 622 of the 

House bill and sec. 414 of the 

Senate amendment)

The Treasury Secretary is 

authorized to regulate the practice 

of representatives of persons before 

the Treasury Department. The 

Secretary also is authorized to 

suspend or disbar from practice 

before the Department a 

representative who is incompetent, 

disreputable, violates the rules 

regulating practice before the 

Department, or willfully and 

knowingly misleads or threatens 

the person being represented.

Makes two modifications to 

expand these sanctions: (1) 

expressly permits censure as a 

sanction and (2) permits the 

imposition of a monetary penalty 

as a sanction.

Effective date.–Actions taken after 

the date of enactment.

Same as the House bill, except for 

technical drafting differences.

6. Treatment of stripped interests 

in bond and preferred stock 

funds, etc. (sec. 631 of the House 

bill and sec. 461 of the Senate 

amendment)

Special rules are provided with 

respect to debt instruments in 

which there has been a separation 

in ownership between the 

underlying debt instrument and any 

interest coupon that has not yet 

become payable. Similar rules 

apply to preferred stock in which 

there has been a separation in 

ownership between such stock and 

any dividend on such stock that has 

not become payable.

Authorizes the Treasury 

Department to promulgate 

regulations that, in appropriate 

cases, apply rules that are similar to 

the present-law rules for stripped 

bonds and stripped preferred stock 

to direct or indirect interests in an 

entity or account substantially all 

of the assets of which consist of 

bonds, preferred stock, or any 

combination thereof.

Effective date.–Purchases and 

dispositions occurring after the 

date of enactment.

Same as the House bill.
18

Provision Present Law House Bill Senate Amendment

7. Minimum holding period for 

foreign tax credit on withholding 

taxes on income other than 

dividends (sec. 632 of the House 

bill and sec. 456 of the Senate 

amendment)

In general, U.S. persons may credit 

foreign taxes against U.S. tax on 

foreign-source income. The 

amount of foreign tax credits that 

may be claimed in a year is subject 

to a limitation that prevents 

taxpayers from using foreign tax 

credits to offset U.S. tax on U.S.-

source income. Separate 

limitations are applied to specific 

categories of income.

Present law generally denies a U.S. 

shareholder (other than a securities 

dealer) the foreign tax credits 

normally available with respect to a 

dividend from a corporation or a 

RIC if the shareholder has not held 

the stock for more than 15 days 

(within a 30-day testing period) in 

the case of common stock or more 

than 45 days (within a 90-day 

testing period) in the case of 

preferred stock. If a taxpayer is 

denied foreign tax credits because 

the applicable holding period is not 

satisfied, the taxpayer is entitled to 

a deduction for the foreign taxes 

for which the credit is disallowed.

Expands the present-law 

disallowance of foreign tax credits 

to include credits for gross-basis 

foreign withholding taxes with 

respect to any item of income or 

gain from property if the taxpayer 

who receives the income or gain 

has not held the property for more 

than 15 days (within a 30-day 

testing period), exclusive of foreign 

tax credits that are subject to the 

present-law disallowance with 

respect to dividends. Rules similar 

to the present-law disallowance for 

foreign tax credits with respect to 

dividends apply to foreign tax 

credits that are subject to the 

provision. In addition, the 

Treasury Department is authorized 

to issue regulations providing that 

the provision does not apply in 

appropriate cases.

Effective date.–Amounts paid or 

accrued more than 30 days after the 

date of enactment.

Same as the House bill.
19

Provision Present Law House Bill Senate Amendment

8. Partnership basis adjustments 

(sec. 633 of the House bill and 

sec. 469 of the Senate 

amendment) 

If a partnership elects under section 

754, adjustments to the basis of 

partnership property are made 

following a transfer of a 

partnership interest and following a 

distribution of partnership 

property. If a partner contributes 

property to the partnership, any 

items of partnership income, gain, 

loss and deduction with respect to 

the contributed property are 

allocated among partners to take 

into account any built-in gain or 

loss at the time of the contribution.

Partnership basis adjustments are 

required (not elective) for a transfer 

of a partnership interest when there 

is a substantial built-in loss in 

partnership property (basis exceeds 

value by more than $250,000). For 

transfers of interests in an electing 

investment partnership, a partnerlevel loss limitation applies in lieu 

of partnership basis adjustments.

Partnership basis adjustments are 

required for a distribution of 

property when there is a substantial 

basis reduction in partnership 

property (a downward adjustment 

of more than $250,000).

A built-in loss on contributed 

property may be taken into account 

only by the contributing partner 

and not by any other partner, 

including a partner purchasing the 

partnership interest from the 

contributing partner.

Effective date.–Transfers, 

distributions and contributions after 

the date of enactment.

Partnership basis adjustments are 

required (not elective) in the event 

of a partnership distribution or a 

transfer of a partnership interest, 

except that the partnership basis 

adjustments remain elective in the 

case of the transfer of a partnership 

interest by reason of the partner's 

death. The special rule of section 

732(d) (relating to determining a 

partner's basis in later-distributed 

property) is repealed.

Effective date.–Generally transfers 

and distributions after the date of 

enactment.
20

Provision Present Law House Bill Senate Amendment

9. No reduction of basis under 

section 734 in stock held by 

partnership in corporate partner 

(sec. 634 of the House bill and

sec. 432 of the Senate 

amendment)

If a partnership elects under section 

754, adjustments to the basis of 

partnership property are made 

following a transfer of a 

partnership interest and following a 

distribution of partnership 

property. The allocation of the 

increase or decrease in the basis of 

partnership property generally is 

made so as to reduce the difference 

between the value and the basis of 

the property.

A partnership is precluded from 

decreasing the basis of corporate 

stock of a partner or a related 

person, in applying the basis 

allocation rules following a 

distribution in liquidation of a 

partner's interest. Any decrease

that would have been allocated to 

the stock is allocated to other 

partnership property, or, if the 

decrease exceeds the basis of that 

property, then gain is recognized 

by the partnership in the amount of 

the excess.

Effective date.–Distributions after 

the date of enactment.

Same as the House bill, except for 

the effective date.

Effective date.–Distributions after 

February 13, 2003.

10. Repeal of special rules for 

FASITs (sec. 635 of the House 

bill and sec. 433 of the Senate 

amendment)

Financial asset securitization 

investment trusts (FASITs).–A 

FASIT is a non-taxable entity 

intended to facilitate the 

securitization of debt obligations 

such as credit card receivables, 

home equity loans, and auto loans.

Real estate mortgage investment 

conduits (REMICs).–A REMIC is 

a self-liquidating, non-taxable 

entity that holds a fixed pool of 

mortgages and issues multiple 

classes of investor interests. In 

FASITs.–Repeals the special rules 

for FASITs, with a transition 

period for existing FASITs, 

pursuant to which the repeal of the 

FASIT rules would not apply to 

any FASIT in existence on the date 

of enactment to the extent that 

regular interests issued by the 

FASIT prior to such date continue 

to remain outstanding in 

accordance with their original 

terms.

Same as the House bill, except for 

the effective date.
21

Provision Present Law House Bill Senate Amendment

order to qualify as a REMIC, 

substantially all of the assets of the 

entity must consist of qualified 

mortgages and permitted 

investments as of the close of the 

third month beginning after the 

startup day of the entity.

REMICs.–Modifies the definitions 

of REMIC regular interests, 

qualified mortgages, and permitted 

investments so that reverse 

mortgage loans and governmentoriginated loan pools can be 

transferred to, or purchased by, a 

REMIC.

Effective date.–After February 13, 

2003, except as provided by the

transition period for existing

FASITs.

Effective date.–After December 31, 

2004, except as provided by the 

transition period for existing 

FASITs.

11. Limitation on transfer or 

importation of built-in losses 

(sec. 636 of the House bill and

sec. 431 of the Senate 

amendment)

Generally, no gain or loss is 

recognized when one or more 

persons transfer property to a 

corporation in exchange for stock 

and immediately after the exchange 

such person or persons control the 

corporation. The transferor’s basis 

in the stock of the controlled 

corporation is the same as the basis 

of the property contributed to the 

controlled corporation, increased 

by the amount of any gain (or 

dividend) recognized by the 

transferor on the exchange, and 

reduced by the amount of any 

money or property received, and by 

the amount of any loss recognized 

by the transferor.

Provides that if a residual interest 

in a REMIC is contributed to a 

corporation and the transferee 

corporation’s adjusted basis in the 

REMIC residual interest exceeds 

the fair market value of the REMIC 

residual interest immediately after 

the contribution, the transferee 

corporation’s adjusted basis in the 

REMIC residual interest is limited 

to the fair market value of the 

REMIC residual interest 

immediately after the contribution, 

regardless of whether the fair 

market value of the REMIC 

residual interest is less than, equal 

to, or greater than zero.

Importation of built-in losses.–

Provides that if a net built-in loss is 

imported into the U.S in a tax-free 

organization, reorganization or 

liquidation from persons not 

subject to U.S. tax, the basis of 

each property so transferred is its 

fair market value.

Limitation on transfer of built-inlosses in section 351 transactions.–

Provides that if the aggregate 

adjusted bases of property 

contributed by a transferor (or by a 

control group of which the 

transferor is a member) to a 

corporation exceed the aggregate 

fair market value of the property 

transferred in a tax-free 

incorporation, the transferee’s 
22

Provision Present Law House Bill Senate Amendment

The basis of property received by a 

corporation, whether from 

domestic or foreign transferors, in 

a tax-free incorporation, 

reorganization, or liquidation of a 

subsidiary corporation is the same 

as the adjusted basis in the hands of 

the transferor, adjusted for any gain 

recognized by the transferor.

Effective date.–Transactions after 

date of enactment.

aggregate bases of the property is 

limited to the aggregate fair market 

value of the transferred property. 

In the case of a transfer after which 

the transferor owns at least 80 

percent of the vote and value of the 

stock of the transferee corporation, 

any required basis reduction is 

made to the stock received by the 

transferor and not to the assets 

transferred.

Effective date.–Transactions after 

December 31, 2003.

12. Clarification of banking 

business for purposes of 

determining investment of 

earnings in U.S. property

(sec. 637 of the House bill and

sec. 451 of the Senate 

amendment)

U.S. 10-percent shareholders of a 

CFC generally are subject to U.S. 

tax currently on their pro rata 

shares of the CFC’s earnings that 

have not previously been taxed in 

the United States, to the extent 

such earnings are invested by the 

CFC in certain U.S. property, 

including tangible property located

in the United States, stock of a U.S. 

corporation, an obligation of a U.S. 

person, and certain intangible 

assets (e.g., patents or copyrights, 

inventions, models or designs, 

secret formulae or processes or 

similar property rights acquired or 

developed by the CFC for use in 

the United States). Specified 

exceptions from the definition of 

Limits the exception from the 

definition of U.S. property for 

deposits with persons carrying on 

the banking business to deposits 

with persons at least 80 percent of 

the gross income of which is 

derived in the active conduct of a 

banking business from unrelated 

persons. For purposes of this 

provision, the deposit recipient and 

persons related to the deposit 

recipient are treated as one person 

in applying the 80-percent test.

Effective date.–Date of enactment.

Similar to House bill, except limits 

the exception to deposits with 

“financial services providers,” 

defined as persons (and related 

parties) at least 80 percent of the 

income of which is specified 

financial services income derived 

from unrelated persons.
23

Provision Present Law House Bill Senate Amendment

U.S. property are provided for, 

including (among other things) 

deposits with persons carrying on 

the banking business. With regard 

to the exception for deposits with 

persons carrying on the banking 

business, an appeals court recently 

concluded that a U.S. subsidiary of 

a U.S. shareholder was “carrying 

on the banking business” even 

though its operations were limited 

to the administration of the private 

label credit card program of the 

U.S. shareholder. Therefore, the 

court held that a CFC of the U.S. 

shareholder could make deposits 

with the subsidiary (e.g., through 

the purchase of certificates of 

deposit) under this exception, and 

avoid taxation of the deposits as an 

investment in U.S. property.

13. Alternative tax for certain 

small insurance companies and 

modification of exemption from 

tax (sec. 638 of the House bill and 

sec. 493 of the Senate 

amendment)

A property and casualty insurance 

company may elect to be taxed 

only on taxable investment income 

if its net written premiums or direct 

written premiums (whichever is 

greater) do not exceed $1.2 million. 

A property and casualty insurer is 

eligible for tax-exempt status if its 

gross receipts do not exceed 

$600,000, and premiums received 

The $1.2 million ceiling on net 

written premiums or direct written 

premiums for purposes of the 

election to be taxed only on taxable 

investment income is increased to 

$1.89 million, and is indexed after 

2004.

Generally, the same as the House 

bill, except that the $1.89 million 

ceiling is indexed after 2005; in 

addition, the 50-percent-of-grossreceipts test for tax-exempt status 

is increased to 60 percent.
24

Provision Present Law House Bill Senate Amendment

for the taxable year are greater than 

50 percent of its gross receipts.

Effective date.–Taxable years 

beginning after December 31, 

2003.

Effective date.–Taxable years 

beginning after December 31, 

2004, with transition rule for 

companies in receivership or 

liquidation.

14. Denial of deduction for 

interest on underpayments 

attributable to nondisclosed tax 

avoidance transactions

(sec. 639 of the House bill and

sec. 417 of the Senate 

amendment)

Corporations generally may deduct 

interest paid or accrued within a 

taxable year on indebtedness, 

including interest on indebtedness 

to the Federal government 

attributable to an underpayment of 

tax.

Disallows any deduction for 

interest paid or accrued within a 

taxable year on any portion of an 

underpayment of tax that is 

attributable to an understatement 

arising from: (1) an undisclosed 

reportable avoidance transaction; 

or (2) an undisclosed listed

transaction.

Effective date.–Underpayments 

attributable to transactions entered 

into in taxable years beginning 

after the date of enactment.

Same as the House bill, except also 

disallows any deduction for interest 

paid or accrued within a taxable 

year on any portion of an 

underpayment of tax that is 

attributable to an understatement 

arising from a transaction that lacks 

economic substance.

15. Clarification of rules for 

payment of estimated tax for 

certain deemed asset sales

(sec. 640 of the House bill and 

sec. 481 of the Senate 

amendment)

Section 338(a)(1) allows a buyer 

corporation to elect unilaterally to 

treat a qualified stock purchase of a 

target corporation as an asset 

purchase. Where the target is a 

subsidiary in an affiliated group, 

section 338(h)(10) allows the buyer 

and seller corporation to elect 

jointly to treat a stock sale of the 

target as an asset sale.

Clarifies section 338(h)(13) to 

provide that the exception for 

estimated tax purposes does not 

apply with respect to a qualified 

stock purchase for which an 

election is made under section 

338(h)(10). 

Effective date.–Transactions that 

occur after the date of enactment. 

Same as the House bill. 
25

Provision Present Law House Bill Senate Amendment

Section 338(h)(13) provides that 

for purposes of estimated tax 

penalties, tax attributable to a 

deemed asset sale under section 

338(a)(1) shall not be taken into 

account. 

16. Exclusion of like-kind 

exchange property from 

nonrecognition treatment on the 

sale or exchange of a principal 

residence (sec. 641 of the House 

bill and sec. 492 of the Senate 

amendment)

A taxpayer may exclude up to 

$250,000 ($500,000 if married 

filing a joint return) of gain 

realized on the sale or exchange of 

a principal residence. There are no 

special rules relating to the sale or 

exchange of a principal residence 

that was acquired in a like-kind 

exchange within the prior five 

years.

Provides that the exclusion for gain 

on the sale or exchange of a 

principal residence does not apply 

if the principal residence was 

acquired in a like-kind exchange in 

which any gain was not recognized 

within the prior five years.

Effective date.–Sales or exchanges 

of principal residences after the 

date of enactment.

Same as the House bill.

17. Prevention of mismatching of 

interest and original issue 

discount deductions and income 

inclusions in transactions with 

related foreign persons (sec. 642 

of the House bill and sec. 453 of 

the Senate amendment)

Income earned by a foreign 

corporation from its foreign 

operations generally is subject to 

U.S. tax only when such income is 

distributed to any U.S. person that 

holds stock in such corporation. 

However, certain anti-deferral 

regimes may cause the U.S. person 

to be taxed on a current basis in the 

United States on certain income 

earned by certain foreign 

corporations. The main antideferral regimes are the controlled

foreign corporation (“CFC”) rules 

Provides that deductions for 

amounts accrued but unpaid 

(whether by U.S. or foreign 

persons) to related FPHCs, CFCs, 

or PFICs are allowable only to the 

extent that the amounts accrued by 

the payor are, for U.S. tax 

purposes, currently includible in 

the income of the direct or indirect 

U.S. owners of the related foreign 

corporation under the relevant 

inclusion rules. Deductions that 

have accrued but are not allowable 

Same as the House bill.
26

Provision Present Law House Bill Senate Amendment

of subpart F, the passive foreign 

investment company (“PFIC”) 

rules, and the foreign personal 

holding company (“FPHC”) rules. 

As a general rule, there is allowed 

as a deduction all interest paid or 

accrued within the taxable year 

with respect to indebtedness, 

including the aggregate daily 

portions of original issue discount 

(“OID”) of the issuer for the days 

during such taxable year. If a debt 

instrument is held by a related 

foreign person, however, any 

portion of such OID is not 

allowable as a deduction by the 

payor of such instrument until paid 

(the “related-foreign-person rule”). 

Treasury regulations apply the 

related-foreign-person rule to the 

deduction of stated interest and 

other expense amounts owed to 

related foreign persons. The 

related-foreign-person rule is 

modified by Treasury regulations 

that provide that in the case of 

OID, stated interest, or other 

amounts owed to a related foreign 

person that is a FPHC, CFC or 

PFIC, a deduction is allowed as of 

the day on which the amount is 

under this proposal are allowed 

when the amounts are paid.

For purposes of determining how 

much of the amount accrued, if 

any, is currently includible in the 

income of a U.S. person under the 

relevant inclusion rules, properly 

allowable deductions of the related 

foreign corporation under the 

principles of section 954(b)(5) and 

qualified deficits under section 

952(c)(1)(B) are taken into 

account.

The Secretary is granted regulatory 

authority to provide exceptions to 

these rules, including an exception 

for amounts accrued where 

payment of the amount accrued 

occurs within a short period after 

accrual, and the transaction giving 

rise to the payment is entered into 

by the payor in the ordinary course 

of a business in which the payor is 

predominantly engaged.

Effective date.–Payments accrued 

on or after date of enactment.
27

Provision Present Law House Bill Senate Amendment

includible in the income of the 

FPHC, CFC or PFIC, respectively.

18. Exclusion from gross income 

for interest on overpayments of 

income tax by individuals

(sec. 643 of the House bill)

Interest is required to be included 

in gross income. Interest on 

overpayments of Federal income 

tax is required to be included in 

taxable income in the same manner 

as any other interest that is 

received by the taxpayer.

Excludes overpayment interest that 

is paid to individual taxpayers on 

overpayments of Federal income 

tax from gross income. The 

exclusion from income of 

overpayment interest does not 

apply if the Secretary determines 

that the taxpayer’s principal 

purpose for overpaying his or her 

tax is to take advantage of the 

exclusion.

Effective date.–Interest received in 

calendar years beginning after the 

date of enactment.

No provision.

19. Deposits made to suspend the 

running of interest on potential 

underpayments (sec. 644 of the 

House bill and sec. 486 of the 

Senate amendment)

The taxpayer may make a deposit 

in the nature of a cash bond to stop 

the running of interest on an 

amount of underpayment equal to 

the deposit, but the deposit does 

not itself earn interest.

Allows a taxpayer to deposit cash 

with the IRS that may subsequently 

be used to pay an underpayment of 

taxes. Interest will not be charged 

on the portion of the underpayment 

that is deposited for the period that 

the amount is on deposit. 

Generally, deposited amounts that 

have not been used to pay a tax 

may be withdrawn at any time if 

the taxpayer so requests in writing. 

The withdrawn amounts will earn 

interest at the applicable Federal 

Same as the House bill.
28

Provision Present Law House Bill Senate Amendment

rate to the extent they are 

attributable to a disputable tax.

Effective date.–Deposits made 

after date of enactment.

20. Authorize IRS to enter into 

installment agreements that 

provide for partial payment

(sec. 645 of the House bill and 

sec. 484 of the Senate 

amendment)

The Code authorizes the IRS to 

enter into written agreements with 

any taxpayer under which the 

taxpayer is allowed to pay taxes 

owed, as well as interest and 

penalties, in installment payments 

if the IRS determines that doing so 

will facilitate collection of the 

amounts owed. 

Prior to 1998, the IRS 

administratively entered into 

installment agreements that 

provided for partial payment 

(rather than full payment) of the 

total amount owed over the period 

of the agreement. In that year, the 

IRS Chief Counsel issued a 

memorandum concluding that 

partial payment installment 

agreements were not permitted.

Clarifies that the IRS is authorized 

to enter into installment 

agreements with taxpayers which 

do not provide for full payment of 

the taxpayer’s liability over the life 

of the agreement. Requires the IRS 

to review partial payment 

installment agreements at least 

every two years. 

Effective date.–Installment 

agreements entered into on or after 

the date of enactment.

Same as the House bill.

21. Affirmation of consolidated 

return authority (sec. 646 of the 

House bill and sec. 421 of the 

Senate amendment)

The Federal Circuit Court, in the 

case of Rite Aid Corp. v. United 

States, 255 F.3d 1357 (Fed. Cir. 

2001), held that a provision of the 

Treasury Department’s 

Confirms that in exercising its 

authority under section 1502 to 

issue consolidated return 

regulations, the Treasury 

Department may provide rules 

Same as the House bill.
29

Provision Present Law House Bill Senate Amendment

consolidated return regulations was 

invalid. The court’s language 

suggested in part that the Treasury 

Department may not have the 

authority to issue regulations that 

produced a result different than the 

result that would have obtained if 

the corporations had filed separate 

returns rather than consolidated 

returns.

treating corporations filing 

consolidated returns differently 

from corporations filing separate 

returns. Nevertheless, the result in 

Rite-Aid Corp. v. United States is 

allowed to stand with respect to the 

type of factual situation presented 

in the case.

Effective date.−Taxable years 

beginning before, on, or after the 

date of enactment.

22. Reform of tax treatment of 

leasing transactions with tax 

indifferent parties (secs. 647-649 

of the House bill and secs. 475 

and 476 of the Senate 

amendment)

Recovery period for tax-exempt 

use property subject to lease

Tax-exempt use property subject to 

a lease must be depreciated on a 

straight-line basis over a recovery 

period equal to the longer of the 

property’s class life or 125 percent 

of the lease term. “Tax-exempt use 

property” is tangible property that 

is leased (other than under a shortterm lease) to a tax-exempt entity 

(including governments, charities, 

and foreign entities). The recovery 

period for qualified technological 

equipment (“QTE”) that is treated 

as tax-exempt use property, and is 

not eligible for the QTE short-term 

lease exception (i.e., generally 

leases of five years or less), is five 

years.

Recovery period for tax-exempt 

use property subject to lease

Applies the minimum recovery 

period for tax-exempt use property 

(125 percent of the lease term) to: 

(1) QTE leased to a tax-exempt 

entity (unless the lease is eligible 

for the present-law QTE short-term 

lease exception); and (2) computer 

software leased to a tax-exempt 

entity (unless the lease is eligible 

for the present-law QTE short-term 

exception).

Also provides that the lease term 

includes all service contracts and 

other similar arrangements that 

follow a lease of property to a taxexempt entity and that are part of 

Recovery period for tax-exemp t 

use property subject to lease

Same as House bill, except: (1) 

does not except lessee renewal or 

extension options of up to 24 

months from the determination of 

whether a QTE lease satisfies the 

present-law QTE short-term lease 

exception; and (2) the effective 

date.

Effective date.–Leases entered into 

after December 31, 2003.
30

Provision Present Law House Bill Senate Amendment

In determining the lease term for 

purposes of the 125-percent 

calculation, taxpayers must include 

options to renew, and two or more 

successive leases with respect to 

the same or similar property are 

treated as one lease.

the same transaction (or series of 

transactions) as the lease.

For purposes of determining 

whether a QTE lease satisfies the 

present-law QTE short-term lease 

exception, also provides that the 

lease term generally does not 

include certain renewal or 

extension options of the lessee, 

provided the aggregate period of 

such renewals or extensions does 

not exceed 24 months.

Effective date.–Leases entered into 

after March 12, 2004, except for 

leases of domestic property if a 

formal approval application that 

includes a description and fair 

market value of the leased property 

is submitted to the Federal Transit 

Administration between July 1, 

2003 and March 12, 2004, and the 

application is approved before 

January 1, 2005. The like-kind 

exchange and involuntary 

conversion rules are effective with 

respect to property exchanged or 

converted after the date of 

enactment.
31

Provision Present Law House Bill Senate Amendment

Limitation on deductions allocable 

to property used by governments or 

other tax-exempt entities

Depreciation and other deductions 

or losses allocable to tax-exempt 

property are not limited to the 

income from the property.

Limitation on deductions allocable 

to property used by governments or 

other tax-exempt entities

Provides that if a taxpayer leases 

property to a tax-exempt entity, the 

taxpayer may not claim deductions 

or losses from the lease transaction 

in excess of the taxpayer’s gross 

income from the lease for that 

taxable year. Disallowed 

deductions are carried forward and 

treated as deductions related to the 

lease in the following taxable year 

subject to the same limitations, and 

are allowable upon complete 

disposition of the leased property. 

Also provides that this limitation 

does not apply to certain 

transactions involving low-income 

housing credit property or 

rehabilitation credit property.

A lease of property to a tax-exempt 

party is not subject to this 

limitation if the lease satisfies all of 

the following requirements: (1) the 

tax-exempt lessee does not 

monetize or defease its lease 

obligations in an amount that 

exceeds (a) 20 percent of the 

taxpayer’s adjusted basis in the 

leased property at the time the 

lease is entered into, (b) 50 percent 

Limitation on deductions allocable 

to property used by governments or 

other tax-exempt entities

Similar to House bill, except: (1) 

does not provide an exception for 

rehabilitation credit property; (2) 

requires (a) that the leased property 

not be financed with tax-exempt 

bonds or Federal funds, (b) that any 

lease of property with a class life of 

more than seven years not include 

a fixed-price purchase option of the 

lessee, and (c) that the lease meet 

any other requirements prescribed 

in regulations; (3) permits the 

Secretary to identify arrangements 

(in addition to those specified by 

statute) to which the monetization 

and defeasance requirement

applies; (4) provides only a partial 

exception from the equity 

investment requirement for shortterm leases (rather than a complete 

exception for leases with lease 

terms of five years or less); (5) 

does not provide an exception from 

the minimal risk of loss 

requirement for leases with lease 

terms of five years or less; (6) does 

not provide special rules relating to 

like-kind exchanges and 

involuntary conversions; and (7) 

the effective date.
32

Provision Present Law House Bill Senate Amendment

of such basis if the Secretary 

determines that the 

creditworthiness of the tax-exempt 

entity necessitates such increase, or 

(c) zero percent of such basis in the 

case of certain lease arrangements 

that involve circular cash flows or 

insulation of the taxpayer’s equity 

investment from the risk of loss; 

(2) except for leases with lease 

terms of five years or less, the 

taxpayer makes and maintains at 

least a 20-percent equity 

investment in the leased property 

and the fair market value of the 

property at the end of the lease 

term is reasonably expected to 

decline by no more than 80 

percent; (3) except for leases with 

lease terms of five years or less, the 

tax-exempt lessee does not bear 

more than a minimal risk of loss 

(i.e., requirement not satisfied if 

the lessee bears any of the first 25 

percent of loss or more than 50 

percent of the overall loss 

associated with a potential decline 

in the property’s market value).

Also provides special rules to 

prevent the circumvention of this 

limitation through the use of like-

kind exchanges and involuntary 

conversions.
33

Provision Present Law House Bill Senate Amendment

Effective date.–Leases entered into 

after March 12, 2004, except for 

leases of domestic property if a 

formal approval application that 

includes a description and fair 

market value of the leased property 

is submitted to the Federal Transit 

Administration between July 1, 

2003 and March 12, 2004, and the 

application is approved before 

January 1, 2005. The like-kind 

exchange and involuntary 

conversion rules are effective with 

respect to property exchanged or 

converted after the date of 

enactment.

Effective date.–Leases entered into 

after November 18, 2003, and with 

respect to property leased to 

foreign lessees, taxable years 

beginning after January 31, 2004, 

with respect to leases entered into 

on or before November 18, 2003.

23. Clarification of economic 

substance doctrine and penalty 

for understatements attributable 

to transactions lacking economic 

substance (secs. 401 and 404 of 

the Senate amendment)

Courts have developed several 

common law doctrines that can be 

applied to deny the tax benefits of 

tax-motivated transactions, 

notwithstanding that the transaction 

may satisfy the literal requirements 

of a specific statutory tax 

provision. A common law doctrine 

applied with increasing frequency 

is the “economic substance” 

doctrine. In general, this doctrine 

denies tax benefits arising from 

tax-motivated transactions that do 

not result in a meaningful change 

to the taxpayer’s economic position 

other than a purported reduction in 

Federal income tax.

No provision. Provides that, in any case in which 

a court determines that the 

economic substance doctrine is 

relevant to a transaction, the 

transaction satisfies the economic 

substance doctrine only if: (1) the 

transaction changes in a 

meaningful way (apart from 

Federal income tax consequences) 

the taxpayer’s economic position; 

and; (2) the taxpayer has a 

substantial non-tax purpose for 

entering into such transaction and 

the transaction is a reasonable 

means of accomplishing such 

purpose.
34

Provision Present Law House Bill Senate Amendment

No penalties are specifically 

applicable to transactions that 

result in an understatement of tax 

solely by virtue of lacking 

economic substance.

Provides that potential profit may 

not be relied on to establish 

economic substance unless: (1) 

reasonably expected pre-tax profit 

is substantial in relation to present 

value of expected net tax benefits 

and; (2) it exceeds a risk-free rate 

of return. Fees and foreign taxes 

taken into account as expenses. 

Financing transactions with tax-

indifferent parties not respected if 

present value of deductions to be 

claimed is substantially in excess 

of present value of anticipated 

economic returns of tax-indifferent 

party. Artificial income shifting to 

tax-indifferent party not respected.

Imposes a separate 40-percent 

penalty on understatements of tax 

resulting from transactions that 

lack economic substance, and 

limits the ability to assert or 

compromise and an asserted 

penalty. The penalty is reduced to 

20 percent for disclosed 

transactions.

Requires a publicly traded entity 

that is required to pay a penalty for 

an understatement of tax with 

respect to a transaction that lacks 

economic substance to disclose the 

imposition of the penalty in reports 

to the SEC. Also requires the 
35

Provision Present Law House Bill Senate Amendment

Secretary to make public the name 

of any person required to pay such 

penalty and the amount of such 

penalty.

Effective date.–Transactions 

entered into after the date of 

enactment.

24. Understatement of taxpayer’s 

liability by income tax return 

preparer (sec. 411 of the Senate 

amendment)

An income tax return preparer who 

prepares a return with respect to 

which there is an understatement of 

tax that is due to an undisclosed 

position for which there was not a 

realistic possibility of being 

sustained on its merits, or a 

frivolous position, is liable for a 

penalty of $250, provided the 

preparer knew or reasonably 

should have known of the position. 

An income tax return preparer who 

prepares a return and engages in 

specified willful or reckless 

conduct with respect to preparing 

such a return is liable for a penalty 

of $1,000.

No provision. Alters the standards of conduct that 

must be met to avoid imposition of 

the first penalty by replacing the 

realistic possibility standard with a 

requirement that there be a 

reasonable belief that the tax 

treatment of the position was more 

likely than not the proper 

treatment. Also replaces the not 

frivolous standard with the 

requirement that there be a 

reasonable basis for the tax 

treatment of the position. Also 

increases the amount of these 

penalties.

Effective date.–Documents 

prepared after the date of 

enactment.

25. Frivolous tax submissions

(sec. 413 of the Senate 

amendment)

An individual who files a frivolous 

income tax return is subject to a 

penalty of $500. The Tax Court 

also may impose a penalty of up to 

$25,000 if a taxpayer has instituted 

No provision. Modifies the penalty by increasing 

the amount of the $500 penalty to a 

maximum of $5,000 and applying 

it to all taxpayers and to all types 

of Federal taxes. Also modifies 
36

Provision Present Law House Bill Senate Amendment

or maintained proceedings 

primarily for delay or if the 

taxpayer’s position in the 

proceeding is frivolous or 

groundless.

present law with respect to certain 

submissions that raise frivolous 

arguments or that are intended to 

delay or impede tax administration.

Effective date.–Submissions made 

and issues raised after the date on 

which the Secretary first prescribes 

the required list of frivolous

positions.

26. Authorization of 

appropriations for tax law 

enforcement (sec. 418 of the 

Senate amendment)

There is no explicit authorization 

of appropriations to the IRS to be 

used to combat abusive tax 

avoidance transactions.

No provision. Authorizes an additional $300 

million to the IRS to be used to 

combat abusive tax avoidance 

transactions.

Effective date.–Date of enactment.

27. Study on information sharing 

among law enforcement agencies 

(sec. 420 of the Senate 

amendment)

No provision. No provision. Requires the Treasury Secretary, 

jointly with the Attorney General, 

the SEC, and the IRS 

Commissioner, to study the 

effectiveness of, and ways to 

improve, the sharing of information 

related to the promotion of 

prohibited tax shelters or tax 

avoidance schemes and other 

potential violations of Federal 

laws.

Also requires the Treasury 

Secretary to report to the 

appropriate committees of 
37

Provision Present Law House Bill Senate Amendment

Congress the results of the study, 

including any legislative 

recommendations, within one year 

after the date of enactment.

28. Declaration by chief 

executive officer relating to 

Federal annual corporate income 

tax return (sec. 422 of the Senate 

amendment)

The income tax return of a 

corporation must be signed by 

either the president, the vicepresident, the treasurer, the 

assistant treasurer, the chief 

accounting officer, or any other 

officer of the corporation 

authorized by the corporation to 

sign the return. A criminal penalty 

is imposed on any person who 

willfully signs any tax return under 

penalties of perjury that that person 

does not believe to be true and 

correct with respect to every 

material matter at the time of filing.

No provision. Requires the Federal income tax 

return of a corporation (other than 

that of a regulated investment 

company) also to include a 

declaration signed, under penalties 

of perjury, by the chief executive 

officer of the corporation that the 

corporation has in place processes 

and procedures that ensure the 

return is compliant and that the 

chief executive officer was 

provided reasonable assurance of 

the accuracy of all material aspects 

of the return.

Effective date.–Federal tax returns 

for taxable years ending after the 

date of enactment.

29. Denial of deduction for 

certain fines, penalties, and other 

amounts (sec. 423 of the Senate 

amendment)

No deduction is allowed as a trade 

or business expense under section 

162(a) for the payment of a fine or 

similar penalty to a government for 

the violation of any law. Treasury 

regulations provide that 

nondeductibility applies to 

settlement payments. However, 

No provision. Provides that amounts paid or 

incurred, to or at the direction of a

government in relation to the 

violation of any law or the 

governmental investigation or 

inquiry into the potential violation 

of any law, are nondeductible 

under any income tax provision. 
38

Provision Present Law House Bill Senate Amendment

there is a lack of clarity and 

consistency regarding when 

taxpayers may deduct payments in 

settlements, including cases where 

there has been no final 

determination of wrongdoing. 

Thus, a taxpayer may not avoid 

nondeductibility of a settlement 

payment by not admitting 

wrongdoing, or by characterizing 

the payment as a charitable 

deduction rather than as a business 

expense. An exception applies to 

payments that are for restitution or 

for remediation of property

Effective date.–Amounts paid or 

incurred on or after April 28, 2003, 

unless paid under a binding order 

or agreement entered before that 

date. If court approval is required, 

an order or agreement is not 

considered binding until such court 

approval is obtained. 

30. Disallowance of deduction for 

punitive damages (sec. 424 of the 

Senate amendment)

A deduction generally is allowed 

for all ordinary and necessary 

expenses that are paid or incurred 

by the taxpayer during the taxable 

year in carrying on any trade or 

business, including the payment of 

punitive damages.

In general, gross income does not 

include amounts received on 

account of personal physical 

injuries and physical sickness. 

However, this exclusion does not 

apply to punitive damages.

No provision. Denies any deduction for punitive 

damages that are paid or incurred 

by the taxpayer as a result of a 

judgment or in settlement of a 

claim. If the liability for punitive 

damages is covered by insurance, 

any such punitive damages paid by 

the insurer are included in gross 

income of the insured person and 

the insurer is required to report 

such amounts to both the insured 

person and the IRS.
39

Provision Present Law House Bill Senate Amendment

Effective date.–Punitive damages 

paid or incurred on or after the date 

of enactment.

31. Expanded disallowance of 

deduction for interest on 

convertible debt (sec. 434 of the 

Senate amendment)

No deduction is allowed for 

interest or Original Issue Discount 

(“OID”) on a debt instrument 

issued by a corporation (or issued 

by a partnership to the extent of its 

corporate partners) that is payable 

in equity of the issuer or a related 

party (defined to include a person 

related to the issuer through equity 

that represents more than a 50-

percent ownership interest), 

including a debt instrument a 

substantial portion of which is 

mandatorily convertible or 

convertible at the issuer’s option 

into equity of the issuer or a related 

party. In addition, a debt 

instrument is treated as payable in 

equity if a substantial portion of the 

principal or interest is required to 

be determined, or may be 

determined at the option of the 

issuer or related party, by reference 

to the value of equity of the issuer 

or related party.

No provision. Generally expands the present-law 

disallowance of interest deductions 

to include interest on corporate 

debt that is payable in, or by 

reference to the value of, any 

equity held by the issuer (or any 

related party) in any other person, 

without regard to whether such 

equity represents more than a 50-

percent ownership interest in such 

person. The basis of such equity is 

increased by the amount of interest 

deductions that is disallowed by the 

provision.

Effective date.–Debt instruments 

issued after February 13, 2003.
40

Provision Present Law House Bill Senate Amendment

32. Increase in criminal 

monetary penalty limitation for 

the underpayment or 

overpayment of tax due to fraud 

(sec. 425 of the Senate 

amendment)

Attempt to evade or defeat tax

A criminal penalty generally is 

imposed on persons who willfully 

attempt to evade or defeat any tax 

imposed by the Code. Upon 

conviction, the Code provides that 

the penalty is up to $100,000 or 

imprisonment of not more than five 

years (or both). In the case of a 

corporation, the Code increases the 

monetary penalty to a maximum of 

$500,000.

Willful failure to file return, supply 

information, or pay tax

A criminal penalty generally is 

imposed on persons required to 

make estimated tax payments, pay 

taxes, keep records, or supply 

information under the Code who 

willfully fails to do so. Upon 

conviction, the Code provides that 

the penalty is up to $25,000 or 

imprisonment of not more than one 

year (or both). In the case of a 

corporation, the Code increases the 

monetary penalty to a maximum of 

$100,000.

No provision. Attempt to evade or defeat tax

Increases the criminal penalty 

under section 7201 of the Code for 

individuals to $250,000 and for 

corporations to $1,000,000. The 

provision increases the maximum 

prison sentence to ten years.

Willful failure to file return, supply 

information, or pay tax

Increases the criminal penalty 

under section 7203 of the Code 

from a misdemeanor to a felony 

and increases the maximum prison 

sentence to ten years.
41

Provision Present Law House Bill Senate Amendment

Fraud and false statements

A criminal penalty generally is 

imposed on persons who make 

fraudulent or false statements 

under the Code. Upon conviction, 

the Code provides that the penalty 

is up to $100,000 or imprisonment 

of not more than three years (or 

both). In the case of a corporation, 

the Code increases the monetary 

penalty to a maximum of $500,000.

Uniform sentencing guidelines 

The uniform sentencing guidelines 

can provide for substantial 

increases in the levels of monetary 

penalties and are applicable to all 

criminal provisions in the United 

States Code, including those in the 

Code.

Fraud and false statements 

Increases the criminal penalty 

under section 7206 of the Code for 

individuals to $250,000 and for 

corporations to $1,000,000. 

Increases the maximum prison 

sentence to five years. Provides 

that in no event shall the amount of 

the monetary penalty under this 

provision be less than the amount 

of the underpayment or 

overpayment attributable to fraud.

Effective date.–Underpayments 

and overpayments attributable to 

actions occurring after the date of 

enactment.

33. Expanded authority to 

disallow tax benefits under 

section 269 (sec. 435 of the Senate 

amendment)

If a taxpayer acquires, directly or 

indirectly, control (defined as at 

least 50 percent of vote or value) of 

a corporation, and the principal 

purpose of the acquisition is the 

evasion or avoidance of Federal 

income tax by securing the benefit 

of a deduction, credit, or other 

allowance that would not otherwise 

have been available, such tax 

No provision. Repeals the requirement that the 

acquisition of property be from a 

corporation not controlled by the 

acquirer. Thus, disallows the tax 

benefits of: (1) any acquisition of 

stock sufficient to obtain control of 

a corporation (as under present 

law); and (2) any acquisition by a 

corporation of property from a 

corporation in which the basis of 
42

Provision Present Law House Bill Senate Amendment

benefits may be disallowed. 

Similarly, if a corporation acquires, 

directly or indirectly, property of 

another corporation (not controlled, 

directly or indirectly, by the 

acquiring corporation or its 

stockholders immediately before 

the acquisition), the basis of such 

property is determined by reference 

to the basis in the hands of the 

transferor corporation, and the 

principal purpose of the acquisition 

is the evasion or avoidance of 

Federal income tax by securing a 

tax benefit that would not 

otherwise have been available, 

such tax benefits may be 

disallowed.

such property is determined by 

reference to the basis in the hands 

of the transferor corporation, if the 

principal purpose of such 

acquisition is the evasion or 

avoidance of Federal income tax.

Effective date.–Stock and property 

acquired after February 13, 2003.

34. Modification of interaction 

between subpart F and passive 

foreign investment company 

rules (sec. 5646 of the Senate 

amendment)

Under an anti-overlap rule, a 

controlled foreign corporation 

generally is not also treated as a 

passive foreign investment 

company with respect to a U.S. 

shareholder of the corporation, 

regardless of the likelihood that the 

U.S. shareholder would actually be 

taxed under subpart F in the event 

that the controlled foreign 

corporation earns subpart F 

income.

No provision. Adds an exception to the antioverlap rule for U.S. shareholders 

that face only a remote likelihood 

of incurring a subpart F inclusion 

in the event that a controlled 

foreign corporation earns subpart F 

income, thus preserving the 

potential application of the passive 

foreign investment company rules 

in such cases.

Effective date.–Taxable years of 

controlled foreign corporations 

beginning after February 13, 2003, 

and taxable years of U.S. 
43

Provision Present Law House Bill Senate Amendment

shareholders in which or with 

which such taxable years of 

controlled foreign corporations 

end.

C. Deferred Compensation 

Provisions

1. Treatment of nonqualified 

deferred compensation plans 

(sec. 671 of the House bill and 

sec. 671 of the Senate 

amendment)

The determination of when 

amounts deferred under a 

nonqualified deferred 

compensation arrangement are 

includible in the gross income of 

the individual earning the 

compensation depends on the facts 

and circumstances of the 

arrangement. A variety of tax 

principles and Code provisions 

may be relevant in making this 

determination, including the 

doctrine of constructive receipt, the 

economic benefit doctrine, the 

provisions of section 83 relating 

generally to transfers of property in 

connection with the performance of 

services, and provisions relating 

specifically to nonexempt 

employee trusts and nonqualified 

annuities. While the general tax 

principles governing deferred 

compensation are well established, 

the determination whether a 

particular arrangement effectively 

allows deferral of income is 

generally made on a facts and 

circumstances basis. 

All amounts deferred under a 

nonqualified deferred 

compensation plan for all taxable 

years are currently includible in 

gross income to the extent not 

subject to a substantial risk of 

forfeiture, unless certain 

requirements relating to 

permissible distributions and 

elections are satisfied. 

Distributions may be allowed only 

upon separation from service, 

death, disability, specified time,

change in control or unforeseeable 

emergency.

Assets set aside in an offshore trust 

are treated as property transferred 

under section 83. A transfer of 

property also occurs if a plan 

provides that assets will be 

restricted upon a change in 

financial health. 

If the requirements of the provision 

are not satisfied, in addition to 

current income inclusion, interest 

at the underpayment rate plus one 

Similar to House bill, with certain 

modifications. 

Payments made to individuals 

subject to section 16(a) of the 

Securities and Exchange Act of 

1934 within one year of a change 

in control are treated as excess 

parachute payments. 

Unforeseeable emergency also 

includes hardship to the 

beneficiary. Participants must be 

limited to one subsequent election. 

Limits on investment direction 

apply. Provision does not apply to 

plans meeting the exception under 

section 457(e)(12) as of May 1, 

2004. 

If the requirements of the provision 

are not satisfied, in addition to 

current income inclusion, interest 

at the underpayment rate is 
44

Provision Present Law House Bill Senate Amendment

percentage point is imposed on the 

underpayments that would have 

occurred had the compensation 

been includible in income when 

first deferred, or if later, when not 

subject to a substantial risk of 

forfeiture.

Effective date.–Amounts deferred 

after June 3, 2004, except for 

amounts deferred before January 1, 

2005, pursuant to an irrevocable 

election or binding arrangement 

made before June 4, 2004.

imposed on the underpayments that 

would have occurred had the 

compensation been includible in 

income when first deferred, or if 

later, when not subject to a 

substantial risk of forfeiture. A ten 

percent additional tax also applies.

Effective date.–Amounts deferred 

in taxable years beginning after 

December 31, 2004. 

2. Prohibition on deferral of gain 

from the exercise of stock options 

and restricted stock (sec. 672 of 

the Senate amendment)

Under section 83, if, in connection 

with the performance of services, 

property is transferred to any 

person other than the person for 

whom such services are performed, 

the excess of the fair market value 

of such property over the amount 

(if any) paid for the property is 

includible in income at the first 

time that the property is 

transferable or not subject to 

substantial risk of forfeiture. 

Nonqualified stock options and 

stock granted to an employee are 

subject to the rules that apply under 

section 83. 

No provision. If a taxpayer exchanges: (1) 

employer securities; (2) an option 

to purchase employer securities; or 

(3) any other property based on 

employer securities, for a right to 

receive future payments, an amount 

equal to the present value of such 

right (or such other amount as the 

Secretary specifies) is required to 

be included in gross income for the 

taxable year of the exchange.

Effective date.–Exchanges made 

after December 31, 2004.
45

Provision Present Law House Bill Senate Amendment

D. Other Revenue Provisions

1. Permit private sector debt 

collection companies to collect 

tax debts (sec. 681 of the House 

bill and sec. 487 of the Senate 

amendment)

In general, Federal agencies are 

permitted to enter into contracts 

with private debt collection 

companies for collection services 

to recover indebtedness owed to 

the United States. That provision 

does not apply to the collection of 

debts under the Internal Revenue 

Code.

Permits the IRS to use private debt 

collection companies to locate and 

contact taxpayers owing 

outstanding tax liabilities and to 

arrange payment of those taxes by 

the taxpayers. If the taxpayer 

cannot pay in full immediately, the 

private debt collection company 

offers the taxpayer an installment 

agreement providing for full 

payment of the taxes over five 

years. If the taxpayer is unable to 

pay the outstanding tax liability in 

full over a five-year period, the 

private debt collection company 

obtains financial information from 

the taxpayer and will provide this 

information to the IRS for further 

processing and action by the IRS.

Creates a revolving fund from the 

amounts collected by the private 

debt collection companies. The 

private debt collection companies 

would be paid out of this fund.

Effective date.–Date of enactment.

Same as the House bill, except:

(1) sunsets provision in five years; 

(2) provides that, if the taxpayer 

cannot pay in full immediately, the 

private debt collection company 

may offer the taxpayer an 

installment agreement providing 

for full payment of the taxes over 

three years; (3) provides that up to 

25 percent of amount collected 

may be used for IRS collection 

enforcement activities; (4) and 

requires a biennial report.
46

Provision Present Law House Bill Senate Amendment

2. Modify charitable contribution 

rules for donations of patents 

and similar intellectual property 

(sec. 682 of the House bill and 

sec. 494 of the Senate 

amendment)

For charitable contributions of 

capital gain property, the amount 

of the deduction generally equals 

the fair market value of the 

contributed property on the date of 

the contribution. For contributions 

of ordinary income property, the 

taxpayer is required to reduce the 

deduction amount by any gain, 

generally resulting in a deduction

equal to the taxpayer’s basis. 

Capital gain property generally 

means any property the sale of 

which at the time of contribution 

would have resulted in long-term 

capital gain. In general, patents 

and similar intellectual property are 

considered capital gain property, in 

which case a fair market value 

deduction generally is available for 

charitable contributions of such 

assets. Certain copyrights are not 

considered capital gain property, in 

which case the charitable deduction 

for such copyrights generally is 

limited to the taxpayer’s basis.

Taxpayers that understate tax 

liability on a return due to a 

valuation misstatement are subject 

to a penalty of 20 percent of the 

underpayment in the case of a 

substantial valuation misstatement, 

The provision provides that if a 

taxpayer contributes a patent or 

other intellectual property (other 

than certain copyrights or 

inventory) to a charitable 

organization, the taxpayer’s initial 

charitable deduction is limited to 

the lesser of the taxpayer’s basis in 

the contributed property or the fair 

market value of the property. In 

addition, the taxpayer is permitted 

to deduct, as a charitable 

deduction, certain additional 

amounts in the year of contribution 

or in subsequent taxable years 

based on a specified percentage of 

the net income received or accrued 

by the charitable donee that 

properly is allocable to the 

contributed property itself (as 

opposed to the activity in which the 

contributed property is used). An 

additional charitable deduction is 

allowed only to the extent that the 

aggregate of the amounts that are 

calculated pursuant to the specified 

percentage exceed the amount of 

the deduction claimed upon the 

contribution of the patent or 

intellectual property. 

No charitable deduction is 

permitted with respect to any 

Similar to House bill, except that 

the taxpayer’s initial deduction is 

equal to: the lesser of the 

taxpayer’s basis in the contributed 

property or the fair market value of 

the property (as in the House bill) 

or, if greater, the lesser of 5 percent 

of the fair market value of the 

contributed property or $1 million. 

Additional charitable deductions 

are available as in the House bill, 

except that such additional 

deductions are not required to be 

offset by the initial deductible 

amount. 

The Senate amendment imposes a 

processing fee (credited to the 

Exempt Organizations unit with the 

IRS) equal to 1 percent of the 

claimed deductible amount for 

contributions of applicable 

intellectual property.

With respect to applicable 

intellectual property contributions, 

the Senate amendment increases 

the present law thresholds that 

trigger application of penalties for 

substantial and gross valuation 

misstatements. The substantial 

misstatement penalty applies if the 

taxpayer’s claimed value exceeds 
47

Provision Present Law House Bill Senate Amendment

and 40 percent of the 

underpayment in the case of a 

gross valuation misstatement. A 

substantial misstatement occurs if 

the taxpayer’s claimed value is 200 

percent or more of the correct 

amount. A gross misstatement 

occurs if the taxpayer’s claimed 

value is 400 percent or more of the 

correct amount.

revenues or income received or 

accrued by the charitable donee 

after the expiration of the legal life 

of the patent or intellectual 

property, or after the tenth 

anniversary of the date the 

contribution was made by the 

donor.

Effective date.−Contributions after 

June 3, 2004.

the correct amount by 50 percent or 

more; the gross misstatement 

penalty applies if the taxpayer’s 

claimed value exceeds the correct 

amount by 100 percent or more.

The Senate amendment requires 

that the Secretary shall prescribe 

guidance on appraisal standards for 

charitable contributions of 

intellectual property.

Effective date.−Contributions after 

the date of enactment.

3. Require increased reporting 

for noncash charitable 

contributions (sec. 683 of the 

House bill)

In general, if a taxpayer deducts 

more than $500 for a charitable 

contribution of non-cash property, 

the taxpayer must file Form 8283 

with the IRS. A qualified appraisal 

is required for donated property 

(other than money and publicly 

traded securities) worth more than 

$5,000. C corporations (other than 

personal service corporations and 

closely-held corporations) must file 

Form 8283 only if the deduction 

exceeds $5,000 and are not 

required to obtain a qualified 

appraisal. The qualified appraisal 

must accompany the taxpayer’s 

Extends to all C corporations the 

present-law requirement that the 

donor must obtain a qualified 

appraisal of the property if the 

deduction exceeds $5,000. If the 

value of contributed property other 

than cash, inventory, or publicly 

traded securities exceeds $500,000, 

the qualified appraisal must 

accompany the donor’s return. No 

deduction is allowed to a donor 

that fails to substantiate a 

contribution of property. 

Effective date.−Contributions after 

June 3, 2004.

No provision.
48

Provision Present Law House Bill Senate Amendment

return only for contributions of art 

work valued at more than $20,000.

4. Modify charitable contribution 

rules for donations of vehicles 

(sec. 684 of the House bill and 

sec. 731 of the Senate 

amendment)

For charitable contributions of 

personal property, such as an 

automobile, in which basis exceeds 

value, the amount of the deduction 

equals the value of the property on 

the date of the contribution. 

Taxpayers are required to obtain a 

qualified appraisal for donated 

property with a value of $5,000 or 

more.

A deduction is allowed for 

charitable contributions of vehicles 

(generally including automobiles, 

boats, and aircraft and not 

inventory property) for which the 

taxpayer claims a deduction of 

more than $250 only if the 

taxpayer obtains a qualified 

appraisal of the vehicle by the time 

the contribution is made. 

Effective date.−Contributions after 

June 3, 2004.

A deduction for charitable 

contributions of vehicles (generally 

including automobiles, boats, and 

airplanes and not inventory 

property) generally may not exceed 

the price for which the vehicle is 

sold by the donee. The donee must 

notify the donor and the IRS of the 

gross proceeds from the sale, and 

that the donor’s deduction may not 

exceed such gross proceeds. If the 

donee does not sell the vehicle, or 

sells the vehicle after a significant 

use or material improvement by the 

donee, the deduction may not 

exceed the value of the property at 

the time of the contribution. The 

donee must notify the taxpayer and 

the IRS of the donee’s intended 

use. Monetary penalties apply to 

fraudulent notices knowingly 

furnished by the donee.

Effective date.−Contributions after 

June 30, 2004.
49

Provision Present Law House Bill Senate Amendment

5. Extension of amortization of 

intangibles to sports franchises 

(sec. 685 of the House bill and

sec. 471 of the Senate 

amendment)

Intangible assets acquired in 

connection with the acquisition of a 

trade or business generally are 

recovered over 15 years. An 

exception exists for intangibles 

acquired in connection with a pro 

sports franchise. With respect to a 

sports franchise acquisition, basis 

allocated to assets with 

determinable useful lives (such as 

player contracts) is recovered over 

the assets’ respective useful lives. 

Basis allocated to the franchise or 

to other intangible assets acquired 

with the franchise may not be 

amortizable if these assets lack a 

determinable useful life. Present 

law also provides related special 

rules for sports franchises, 

including: (1) a limitation on the 

amount of basis which taxpayers 

may allocate to player contracts; 

(2) special rules for recapture on 

disposition of player contracts; and 

(3) an exception from section 1253, 

which treats gain on the sale of a 

franchise as ordinary income if the 

transferor retains significant power, 

right, or continuing interest with 

respect to the subject matter of the

franchise. 

Extends the 15-year recovery 

period for intangible assets to 

sports franchises and any 

intangible asset acquired in 

connection with the acquisition of 

such a franchise (including player 

contracts). Repeals other special 

rules for sports franchises relating 

to: (1) the basis limitation for 

player contracts; (2) the recapture 

of ordinary income on disposition 

of player contracts; and (3) the 

exception for sports franchises 

from the general rule of section 

1253. Thus, the same rules for 

amortization of intangibles that 

apply to other acquisitions under 

present law will apply to 

acquisitions of sports franchises. 

Effective date.–Property acquired 

after the date of enactment. 

Same as the House bill.
50

Provision Present Law House Bill Senate Amendment

6. Increase continuous levy for 

certain federal payments

(sec. 686 of the House bill and 

734 of the Senate amendment)

If any person is liable for any tax 

and does not pay it, the IRS may 

generally collect the tax by levy. A 

continuous levy of up to 15 percent 

is applicable to specified Federal 

payments.

Permits a levy of up to 100 percent 

of a Federal payment to a vendor of 

goods or services to the Federal 

Government.

Effective date.–Date of enactment.

Same as the House bill.

7. Modification of straddle rules 

(sec. 687 of the Hosue bill and

sec. 464 of the Senate 

amendment)

When a taxpayer realizes a loss 

with respect to a position in a 

straddle (i.e., offsetting positions 

with respect to actively traded 

personal property), the taxpayer 

may recognize that loss for any 

taxable year only to the extent that 

the loss exceeds any unrecognized 

gain with respect to offsetting 

positions in the straddle. Deferred 

losses are carried forward to the 

succeeding taxable year and are 

subject to the same limitation with 

respect to unrecognized gain in 

offsetting positions.

In limited cases, the straddle rules 

do not apply to positions in stock. 

Also, the straddle rules do not 

apply to offsetting positions that 

consist of stock and an option if the 

option is a “qualified covered call 

option” written by the taxpayer.

Modifies the straddle rules as 

follows: (1) permits taxpayers to 

identify offsetting positions of a 

straddle (including an unbalanced 

straddle) and provides for 

capitalization (rather than deferral) 

of losses attributable to such 

straddles; (2) clarifies the presentlaw treatment of certain physically 

settled positions of a straddle; (3) 

repeals the stock exception; and (4) 

excludes in-the-money qualified 

covered call options from 

exceptions to holding period tolling 

rules elsewhere in the Code.

Effective date.–Positions 

established on or after the date of 

enactment.

Same as the House bill, except also 

limits the present-law qualified 

covered call exception to options 

traded on national securities 

exchanges registered with the SEC.
51

Provision Present Law House Bill Senate Amendment

The Treasury Secretary is directed 

to provide regulations concerning 

straddles in which one position 

offsets only a portion of one or 

more other positions (“unbalanced 

straddles”). To date, no such 

regulations have been promulgated.

8. Add vaccines against Hepatitis 

A to the list of taxable vaccines 

(sec. 688 of the House bill and 

sec. 491 of the Senate 

amendment)

A manufacturer’s excise tax is 

imposed at the rate of 75 cents per 

dose on the following vaccines 

routinely recommended for 

administration to children: 

diphtheria, pertussis, tetanus, 

measles, mumps, rubella, polio, 

HIB (haemophilus influenza type 

B), hepatitis B, varicella (chicken 

pox), rotavirus gastroenteritis, and 

streptococcus pneumoniae. 

Amounts equal to net revenues 

from this excise tax are deposited 

in the Vaccine Injury 

Compensation Trust Fund to 

finance compensation awards 

under the Federal Vaccine Injury 

Compensation Program for 

individuals who suffer certain 

injuries following administration of 

the taxable vaccines. 

Adds any vaccine against hepatitis 

A to the list of taxable vaccines. 

Effective date.–Effective for 

vaccines sold beginning on the first 

day of the first month beginning 

more than four weeks after the date 

of enactment.

Similar to House bill. In addition 

to adding vaccines against hepatitis 

A to the list of taxable vaccines, 

the Senate amendment also 

modifies Vaccine Injury 

Compensation Trust Fund 

expenditure purposes.

Effective date.–Same as the House 

bill.
52

Provision Present Law House Bill Senate Amendment

9. Add vaccines against influenza 

to the list of taxable vaccines

(sec. 689 of the House bill and 

sec. 732 of the Senate 

amendment)

A manufacturer’s excise tax is 

imposed at the rate of 75 cents per 

dose on the following vaccines 

routinely recommended for 

administration to children: 

diphtheria, pertussis, tetanus, 

measles, mumps, rubella, polio, 

HIB (haemophilus influenza type 

B), hepatitis B, varicella (chicken 

pox), rotavirus gastroenteritis, and 

streptococcus pneumoniae. 

Amounts equal to net revenues 

from this excise tax are deposited 

in the Vaccine Injury 

Compensation Trust Fund to 

finance compensation awards 

under the Federal Vaccine Injury 

Compensation Program for 

individuals who suffer certain 

injuries following administration of 

the taxable vaccines. 

Adds any trivalent vaccine against 

influenza to the list of taxable 

vaccines.

Effective date.–Effective for 

vaccines sold or used beginning on 

the later of the first day of the first 

month beginning more than four 

weeks after the date of enactment 

or the date on which the Secretary 

of Health and Human Services lists 

any such vaccine for purpose of 

compensation for any vaccinerelated injury or death through the 

Vaccine Injury Compensation 

Trust Fund.

Same as the House bill.

10. Extension of IRS user fees 

(sec. 690 of the House bill and

sec. 482 of the Senate 

amendment)

The IRS generally charges a fee for 

requests for a letter ruling, 

determination letter, opinion letter, 

or other similar ruling or 

determination. These user fees are 

authorized by statute through 

December 31, 2004.

Extends the statutory authorization 

for these user fees through 

September 30, 2014.

Effective date.–Requests made 

after the date of enactment.

Same as the House bill, except 

extends the statutory authorization 

for these user fees through 

September 30, 2013.
53

Provision Present Law House Bill Senate Amendment

11. Extension of customs user 

fees (sec. 691 of the House bill 

and sec. 485 of the Senate 

amendment)

Section 13031 of the Consolidated 

Omnibus Budget Reconciliation 

Act of 1985 (COBRA), authorized 

the Secretary of the Treasury to 

collect certain service fees. 

Section 412 of the Homeland 

Security Act of 2002 authorized the 

Secretary of the Treasury to 

delegate such authority to the 

Secretary of Homeland Security. 

Pub. L. No. 108-121 extended 

authorization for the collection of 

these fees through March 1, 2005.

Extension of fees.–Extends the 

passenger and conveyance 

processing fees and the 

merchandise processing fees 

authorized under the Consolidated 

Omnibus Budget Reconciliation 

Act of 1985 through September 30, 

2014. For fiscal years after 

September 30, 2005, the Secretary 

is to charge fees in amount that are 

reasonably related to the costs of 

providing services.

Sense of Congress.–Includes a 

Sense of the Congress that the fees 

have been reasonably related to the 

costs of providing customs 

services. 

Study.–Provides that the Secretary 

conduct a study of all the fees 

collected by the Department of 

Homeland Security, and shall 

submit to the Congress, not later 

than September 30, 2005, a report 

containing the recommendations of 

the Secretary on what fees should 

be eliminated and what the rate of 

fees retained should be.

Effective date.–Date of enactment.

Extension of fees.–Extends fees 

through September 30, 2013. 

Sense of Congress.–No provision.

Study.–No provision.

Effective date.–Date of enactment.
54

Provision Present Law House Bill Senate Amendment

12. Prohibition on 

nonrecognition of gain through 

complete liquidation of holding 

company (sec. 452 of the Senate 

amendment)

A U.S. corporation owned by 

foreign persons is subject to U.S. 

income tax on its net income. In 

addition, when dividends are paid 

to the corporation’s shareholders, 

the earnings of the U.S. corporation 

are subject to a withholding tax at a 

rate of 30 percent (that may be 

reduced under an income tax 

treaty).

In general, U.S. withholding tax is 

not imposed with respect to a 

distribution of a U.S. corporation's 

earnings to a foreign corporation in 

complete liquidation of the 

subsidiary, because the distribution 

is treated as made in exchange for 

stock and not as a dividend.

Regulations under section 367(e) 

provide that the Commissioner 

may require a domestic liquidating 

corporation to recognize gain on 

distributions in liquidation made to 

a foreign corporation if a principal 

purpose of the liquidation is the 

avoidance of U.S. tax.

No provision. Treats as a dividend any 

distribution of earnings by a U.S. 

holding company to a foreign 

corporation in a complete 

liquidation, if the U.S. holding 

company was in existence for less 

than five years.

Effective date.–Distributions 

occurring on or after date of 

enactment.
55

Provision Present Law House Bill Senate Amendment

13. Effectively connected income 

to include certain foreign source 

income (sec. 454 of the Senate 

amendment)

Foreign persons are subject to U.S. 

tax on net income that is 

effectively connected with the 

conduct of a U.S. trade or business 

Effectively Connected Income 

(“ECI”). Foreign-source income is 

not generally treated as ECI unless 

the foreign person has an office or 

other fixed place of business within 

the United States to which such 

income is attributable, and if such 

income falls into one of three 

categories:

(1) rents or royalties for certain 

intangible properties that are 

derived in the active conduct of the 

U.S. trade or business;

(2) interest or dividends derived in 

the active conduct of a banking, 

financing, or similar business 

within the United States, or 

received by a corporation whose 

principal business is trading in 

stocks or securities for its own 

account; and

(3) income derived from the sale or 

exchange of inventory outside the 

United States through the foreign 

No provision. Each category of foreign-source 

income that is treated as ECI is 

expanded to include economic 

equivalents of such income (i.e., 

economic equivalents of certain 

foreign-source: (1) rents and 

royalties; (2) interest and 

dividends; and (3) income on sales 

or exchanges of inventory). Such 

economic equivalents are treated as 

ECI in the same circumstances that 

foreign-source rents, royalties, 

dividends, interest, or certain 

inventory sales are treated as ECI.

Effective date.–Taxable years 

beginning after the date of 

enactment.
56

Provision Present Law House Bill Senate Amendment

person’s U.S. office or other fixed 

place of business.

14. Recapture of overall foreign 

losses on sale of controlled 

foreign corporation stock

(sec. 455 of the Senate 

amendment)

Recapture rules apply in the case of 

overall foreign losses (“OFL”) for 

purposes of applying the foreign 

tax credit limitation. Under a

special OFL recapture rule, a 

disposition of property which was 

used in a trade or business 

predominantly outside the United 

States results in the recognition of 

foreign-source income (regardless 

of whether gain would otherwise 

be recognized upon disposition of 

the assets), in an amount equal to 

the lesser of the excess of the fair 

market value of such property over 

its adjusted basis, or the amount of 

unrecaptured OFL. Such 

foreign-source income is resourced 

as U.S.-source income.

No provision. The present-law OFL recapture 

rule that currently applies to 

dispositions of foreign trade or 

business assets is extended to the 

disposition of stock in a controlled 

foreign corporation controlled by 

the taxpayer, with exceptions for 

internal restructurings.

Effective date.–Dispositions after 

the date of enactment.

15. Application of earnings 

stripping rules to partnerships 

and S corporations (sec. 462 of 

the Senate amendment)

Special rules limit the ability of 

U.S. taxable subchapter C 

corporations to engage in earnings 

stripping transactions involving 

interest payments. The 

deductibility of interest paid to 

certain related parties is limited if 

the payor’s debt-equity ratio 

exceeds 1.5 to 1 and the payor’s 

No provision. Attributes partnership debt to a 

corporate partner for purposes of 

applying the earnings stripping 

rules to the corporation.

Effective date.–Taxable years 

beginning on or after the date of 

enactment.
57

Provision Present Law House Bill Senate Amendment

net interest expense exceeds 50 

percent of its adjusted taxable 

income. The present-law earnings 

stripping rules do not apply to 

partnerships or S corporations.

16. Recognition of cancellation of 

indebtedness income realized on 

satisfaction of debt with 

partnership interest (sec. 463 of 

the Senate amendment)

A corporation that transfers shares 

of its stock in satisfaction of its 

debt must recognize cancellation of 

indebtedness income in the amount 

that would be realized if the debt 

were satisfied with money equal to 

the fair market value of the stock.

In the case of a partnership that 

transfers to a creditor an interest in 

the partnership in satisfaction of its 

debt, it is unclear whether the 

partnership is required to recognize 

cancellation of indebtedness 

income. It also is unclear whether 

any requirement to recognize 

cancellation of indebtedness 

income is affected if the cancelled 

debt is nonrecourse indebtedness.

No provision. Provides that when a partnership 

transfers an interest in the 

partnership to a creditor in 

satisfaction of partnership debt, the 

partnership generally recognizes 

cancellation of indebtedness 

income in the amount that would 

be recognized if the debt were 

satisfied with money equal to the 

fair market value of the partnership 

interest. The provision applies 

without regard to whether the 

cancelled debt is recourse or 

nonrecourse indebtedness. 

Effective date.–Cancellations of 

indebtedness occurring on or after 

the date of enactment.

17. Denial of installment sale 

treatment for all readily 

tradeable debt (sec. 465 of the 

Senate amendment)

The installment method of 

accounting for gain recognition on 

certain deferred payment sales of 

property is not available if the 

taxpayer sells property in exchange 

for readily tradeable corporate or 

governmental debt. No similar 

provision prohibits the use of the 

No provision. Denies installment sale treatment 

with respect to all sales in which 

the taxpayer receives indebtedness 

that is readily tradeable, regardless 

of the nature of the issuer. Thus, 

for example, if the taxpayer 

receives readily tradeable debt of a 

partnership in a sale, the 
58

Provision Present Law House Bill Senate Amendment

installment sale method where the 

taxpayer sells property in exchange 

for readily tradable debt issued by 

a partnership or an individual.

partnership debt is treated as 

payment on the installment note, 

and the installment sale method is 

unavailable to the taxpayer.

Effective date.–Sales occurring on 

or after date of enactment.

18. Modification of treatment of 

transfers to creditors in divisive 

reorganizations (sec. 466 of the 

Senate amendment)

In a tax free spin off under section 

355 of the Code in which the 

distributing corporation contributes 

property to the distributed 

corporation, no gain or loss is 

recognized if the property is 

contributed solely in exchange for 

stock or securities of the transferee 

corporation which are distributed 

to the transferor’s shareholders. 

The transferor corporation also will 

not recognize gain if it receives 

money or other property that is 

distributed to its shareholders or 

creditors. The amount that may be 

distributed to creditors is unlimited. 

In addition, for divisive 

transactions under section 355, and 

for certain acquisitive 

reorganizations, the transferor 

corporation recognizes gain to the 

extent the liabilities assumed by the 

transferee exceed the basis of 

assets transferred. 

No provision. Limits the amount of money plus 

the fair market value of property 

that a distributing corporation can 

distribute to creditors without gain 

recognition to the amount of the 

basis of assets contributed to the 

distributed corporation. 

Acquisitive reorganizations are 

exempted from the rule that gain is 

recognized if the amount of 

liabilities assumed exceeds the 

basis of assets transferred. 

Effective date.–Transactions on or 

after the date of enactment.
59

Provision Present Law House Bill Senate Amendment

19. Clarification of definition of 

nonqualified preferred stock 

(sec. 5681 of the Senate 

amendment)

Stock that is “nonqualified 

preferred stock” is treated as 

taxable boot in transactions that 

otherwise allow nontaxable receipt 

of stock. For this purpose, 

preferred stock is stock that is 

“limited and preferred as to 

dividends and does not participate 

in corporate growth to any 

significant extent.” 

No provision. Clarifies that stock for which there 

is not a real and meaningful 

likelihood of actually participating 

in the earnings and profits of the 

corporation is treated as preferred 

for purposes of the provision. 

Effective date.–Transactions after 

May 14, 2003.

20. Modification of definition of 

controlled group of corporations 

(sec. 468 of the Senate 

amendment)

The members of a controlled group 

of corporations are limited to the 

benefits of one corporation for 

purposes of the graduated 

corporate rate brackets, the 

alternative minimum tax 

exemption, and the accumulated 

earnings credit.

For this purpose, a brother-sister 

controlled group is defined as two 

or more corporations if five or 

fewer persons who are individuals, 

estates or trusts own (after 

application of attribution rules): (1) 

at least 80 percent of the combined 

voting power and value of all 

classes of stock; and (2) more than 

50 percent of the total voting 

power or value of all stock, taking 

into account the stock ownership of 

No provision. Eliminates the 80-percent test from 

the brother-sister controlled group 

definition for purposes of 

determining the specified benefits. 

80-percent test continues to apply 

to other Code provisions using the 

controlled group definition by 

reference.

Effective date.–Taxable years 

beginning after date of enactment.
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Provision Present Law House Bill Senate Amendment

each person only to the extent the 

stock ownership is identical with 

respect to each corporation.

21. Class lives for utility grading 

costs (sec. 472 of the Senate 

amendment)

Under the modified accelerated 

cost recovery system, an asset for 

which no class life is provided is 

allowed a 7-year recovery period.

Assets used in the transmission and 

distribution of electricity for sale 

are provided a class life of 30 years 

and a recovery period of 20 years. 

The cost of initially clearing and 

grading land improvements are 

specifically excluded and no 

separate asset class is provided for 

such costs. A similar situation 

exists with regard to clearing and 

grading costs associated with gas 

utility trunk pipelines and related 

storage facilities. 

No provision. Assigns a class life to depreciable 

electric and gas utility clearing and 

grading costs incurred to locate 

transmission and distribution lines 

and pipelines. The provision 

includes these assets in the asset 

classes of the property to which the 

clearing and grading costs relate 

(giving these assets a recovery 

period of 20 years and 15 years, 

respectively).

Effective date.–Property placed in 

service after the date of enactment.

22. Expansion of limitation on 

depreciation of certain passenger 

automobiles (sec. 473 of the 

Senate amendment)

Passenger automobiles generally 

are recovered over five years. 

However, section 280F limits the 

annual depreciation deduction with 

respect to certain passenger 

automobiles. For purposes of the 

depreciation limitation, passenger 

automobiles are defined broadly to 

include any 4-wheeled vehicles 

No provision. Limits the ability of taxpayers to 

claim deductions under section 179 

for certain vehicles not subject to 

section 280F to $25,000. The 

provision applies to sport utility 

vehicles rated at 14,000 pounds 

gross vehicle weight or less (in 

place of the present law 6,000 

pound rating). For this purpose, a 
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Provision Present Law House Bill Senate Amendment

that are manufactured primarily for 

use on public streets, roads, and 

highways and which are rated at 

6,000 pounds unloaded gross 

vehicle weight or less. In the case 

of a truck or a van, the depreciation 

limitation applies to vehicles that 

are rated at 6,000 pounds gross 

vehicle weight or less. Sports 

utility vehicles are treated as a 

truck for the purpose of applying 

the section 280F limitation. 

In lieu of depreciation, a taxpayer 

with a sufficiently small amount of 

annual investment may elect to 

expense such investment, up to a 

limit of $100,000 per year. 

Passenger automobiles subject to 

section 280F are eligible for 

section 179 expensing only to the 

extent of the applicable limits 

contained in section 280F. 

sport utility vehicle is defined to 

exclude any vehicle that: (1) is 

designed for more than nine 

individuals in seating rearward of 

the driver’s seat; (2) is equipped 

with an open cargo area, or a 

covered box not readily accessible 

from the passenger compartment, 

of at least six feet in interior length; 

or (3) has an integral enclosure, 

fully enclosing the driver 

compartment and load carrying 

device, does not have seating 

rearward of the driver’s seat, and 

has no body section protruding 

more than 30 inches ahead of the 

leading edge of the windshield.

Effective date.–Property acquired 

after the date of enactment.

23. Consistent amortization of 

periods for intangibles (sec. 474 

of the Senate amendment)

At the election of the taxpayer, 

start-up expenditures and 

organizational expenditures may be 

amortized over a period of not less 

than 60 months. 

Section 197 requires most acquired 

intangible assets (such as goodwill, 

trademarks, franchises, and 

No provision. Provides taxpayers an election to 

deduct up to $5,000 each of startup and organizational expenditures 

in the taxable year in which the 

trade or business begins. However, 

each $5,000 amount is reduced (but 

not below zero) by the amount by 

which the cumulative cost of startup or organizational expenditures 
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Provision Present Law House Bill Senate Amendment

patents) that are held in connection 

with the conduct of a trade or 

business or an activity for the 

production of income to be 

amortized over 15 years.

exceeds $50,000, respectively. 

Start-up and organizational 

expenditures that are not deductible 

in the year in which the trade or 

business begins would be 

amortized over a 15-year period 

consistent with the amortization 

period for section 197 intangibles.

Effective date.–Amounts incurred 

after date of enactment. 

24. Doubling of certain penalties, 

fines, and interest on 

underpayments related to certain 

offshore financial arrangements 

(sec. 483 of the Senate 

amendment)

The Code contains numerous civil 

penalties, such as the delinquency, 

accuracy-related and fraud 

penalties. These civil penalties are 

in addition to any interest that may 

be due.

In January 2003, Treasury 

announced the Offshore Voluntary 

Compliance Initiative (“OVCI”) 

running through April 15, 2003, to 

encourage the voluntary disclosure 

of previously unreported income 

placed by taxpayers in offshore 

accounts and accessed through 

credit card or other financial 

arrangements. The taxpayer will 

pay back taxes, interest and certain 

accuracy-related and delinquency 

penalties.

No provision. Increases by a factor of two the

total amount of civil penalties, 

interest and fines applicable for 

taxpayers who would have been 

eligible to participate in either the 

OVCI or the Treasury 

Department’s voluntary disclosure 

initiative but did not participate in 

either program.

Effective date.–Taxpayers’ open 

tax years on or after date of 

enactment.
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Provision Present Law House Bill Senate Amendment

A taxpayer’s timely, voluntary 

disclosure of a substantial 

unreported tax liability has long 

been an important factor in 

deciding whether the taxpayer’s 

case should ultimately be referred 

for criminal prosecution. The 

voluntary disclosure must be 

truthful, timely, and complete. A 

voluntary disclosure does not 

guarantee immunity from 

prosecution.

25. Whistleblower reforms

(sec. 488 of the Senate 

amendment)

Under section 7623, the IRS is 

authorized to pay such sums as 

deemed necessary for: “(1) 

detecting underpayments of tax; 

and (2) detecting and bringing to 

trial and punishment persons guilty 

of violating the internal revenue 

laws or conniving at the same.” 

Amounts are paid based on a 

percentage of tax, fines, and 

penalties (but not interest) actually 

collected based on the information 

provided. For specific information 

that caused the investigation and 

resulted in recovery, the IRS 

administratively has set the reward 

in an amount not to exceed 15 

percent of the amounts recovered. 

For information, although not 

specific, that nonetheless caused 

No provision. Creates a reward program for 

actions in which the tax, penalties, 

interest, additions to tax, and 

additional amounts in dispute 

exceed $20,000, and, if the 

taxpayer is an individual, the 

individual’s gross income exceeds 

$200,000 for any taxable year.

Generally, establishes a reward 

floor of 15 percent of the collected 

proceeds (including penalties, 

interest, additions to tax and 

additional amounts) if the IRS 

proceeds with an administrative or 

judicial action based on 

information brought to the IRS’s 

attention by an individual. Permits 

awards of lesser amounts (but no 

less than 10 percent) if the action 
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Provision Present Law House Bill Senate Amendment

the investigation and was of value 

in the determination of tax 

liabilities, the reward is not to 

exceed 10 percent of the amount 

recovered. For information that 

caused the investigation, but had 

no direct relationship to the 

determination of tax liabilities, the 

reward is not to exceed one percent 

of the amount recovered. The 

reward ceiling is $10 million (for 

payments made after 11/7/2002), 

and the reward floor is $100. No 

reward will be paid if the recovery 

was so small as to call for payment 

of less than $100 under the above 

formulas. Both the ceiling and 

percentages can be increased with a 

Special Agreement. The Code 

permits the IRS to disclose return 

information pursuant to a contract 

for tax administration services (sec. 

6103(n)).

was based principally on 

allegations (other than information 

provided by the individual) 

resulting from a judicial or 

administrative hearing, government 

report, hearing, audit, investigation, 

or from the news media. Caps the 

available reward at 30 percent of 

the collected proceeds. Any 

determination regarding a reward 

may be appealed to the U.S. Tax 

Court.

Creates a Whistleblower Office 

within the IRS to administer this 

reward program. The 

Whistleblower Office is funded 

with amounts equal to rewards 

made. The Whistleblower Office 

may seek the assistance from the 

individual providing information or 

from his legal representative, and 

may reimburse the costs incurred 

by any legal representative out of 

the funds of the Whistleblower 

Office. To the extent the 

disclosure of returns or return 

information is required to render 

such assistance, the disclosure must 

be pursuant to an IRS tax 

administration contract. 
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Provision Present Law House Bill Senate Amendment

Effective date.−Information 

provided on or after the date of 

enactment.

26. Increase in age of minor 

children whose unearned income 

is taxed as if parent’s income 

(sec. 495 of the Senate 

amendment)

Certain unearned income of a child 

under age 14 is taxed at the 

parent’s tax rate and by adding the 

child’s net unearned income to the 

parent’s taxable income. In limited 

circumstances a parent may elect to 

include the child’s income on the 

parent’s return, rather than file a 

separate return for the child. 

No provision. Increases the age at which income 

of a minor child is taxed as if it is 

income of the child’s parent, from 

under 14 to under 18.

Effective date.−Taxable years 

beginning after December 31, 

2003.

27. Holding period for preferred 

stock (sec. 496 of Senate 

amendment)

For taxable years beginning before 

January 1, 2009, dividends 

received by an individual 

shareholder from domestic 

corporations and certain foreign 

corporations generally are taxed at 

the same rates that apply to net 

capital gain (i.e., 5 percent (zero 

percent for taxable years beginning 

after 2007) and 15 percent). To 

qualify, the shareholder must hold 

the dividend-paying stock for more 

than 60 days during the 120-day 

period beginning 60 days before 

the ex-dividend date (in the case of 

preferred stock, for more than 90 

days during the 180-day period 

No provision. For preferred stock, extends the 

holding period requirement to 

require that the shareholder hold 

the dividend-paying stock for more 

than 120 days during the 240-day 

period beginning 120 days before 

the ex-dividend date (i.e., double 

the present-law required holding 

period for common stock).

Effective date.–Taxable years 

beginning after the date of 

enactment.
66

Provision Present Law House Bill Senate Amendment

beginning 90 days before the exdividend date).

28. Grant Treasury regulatory 

authority to address foreign tax 

credit transactions involving 

inappropriate separation of 

foreign taxes from related 

foreign income (sec. 661A of the 

Senate amendment)

The United States provides a credit 

for foreign income taxes paid or 

accrued. For foreign tax credit 

purposes, the taxpayer “is the 

person on whom foreign law 

imposes legal liability for such 

tax.” Treas. Reg. sec. 1.901-

2(f)(1). 

Thus, if a U.S. corporation owns a 

foreign entity that is a partnership 

for foreign tax purposes, the U.S. 

corporation can claim foreign tax 

credits for the tax that is imposed 

on it as a partner in the foreign 

entity. This is true even if the U.S. 

corporation elects to treat the 

foreign entity as a corporation for 

U.S. tax purposes. If the foreign 

entity does not generate subpart F 

income, or if the foreign entity 

does not meet the definition of a 

CFC, the income generated by the 

foreign entity may never be 

reported on a U.S. return, despite 

the fact that the U.S. corporation 

can claim credits for taxes imposed 

on that income.

No provision. Expands existing regulatory 

authority to provide Treasury and 

the IRS additional mechanisms to 

address the second class of 

transactions described in Notice 

98-5 as well as other abusive 

foreign tax credit schemes that 

involve the inappropriate 

separation of foreign taxes from the 

related foreign income in cases 

where foreign taxes are imposed on 

any person with respect to income 

of an entity.

The regulations may provide for: 

(1) the disallowance of a credit for 

all or a portion of the foreign taxes; 

or (2) for the allocation of the 

foreign taxes among the 

participants in the transaction in a 

manner that is more consistent with 

the underlying economics of the 

transaction. 

Effective date.–The provision is 

effective for transactions entered 

into after the date of enactment.
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Provision Present Law House Bill Senate Amendment

29. Freeze of provision 

regarding suspension of interest 

where Secretary fails to contact 

taxpayer (sec. 662B of the Senate 

amendment)

In general, interest and penalties 

accrue during periods for which 

taxes were unpaid without regard 

to whether the taxpayer was aware 

that there was tax due. The Code 

suspends the accrual of certain 

penalties and interest for 

individuals after one year if the 

IRS has not sent the taxpayer a 

notice specifically stating the 

taxpayer’s liability and the basis 

for the liability within the specified 

period. With respect to taxable 

years beginning before January 1, 

2004, the one-year period is 

increased to 18 months. 

No provision. Makes the 18-month rule the 

permanent rule. Adds gross 

misstatements and listed and 

reportable transactions to the list of 

provisions to which the suspension 

of interest rules do not apply.

Effective date.–Taxable years 

beginning after December 31, 

2003, except addition of listed and 

reportable transactions applies to 

interest accruing after May 5, 2004. 

30. Increase in withholding for 

supplemental wage payments in 

excess of $1 million (sec. 673 of 

the Senate amendment)

An employer must withhold 

income taxes from wages paid to 

employees. There are several 

possible methods for determining 

the amount of income tax to be 

withheld. The IRS publishes tables 

to be used in determining the 

amount of income tax to be 

withheld. In some cases, 

“supplemental” wage payments 

(e.g., bonuses or commissions) 

may be subject to withholding at a 

flat rate, based on the third lowest 

income tax rate under the Code (25 

percent for 2004).

No provision. Once annual supplemental wage 

payments to an employee exceed 

$1 million, any additional 

supplemental wage payments to the 

employee in that year are subject to 

withholding at the highest income 

tax rate (35 percent for 2004), 

regardless of any other withholding 

rules and regardless of the 

employee’s Form W-4.

Effective date.–Payments made 

after December 31, 2003.
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Provision Present Law House Bill Senate Amendment

31. Treatment of sale of stock 

acquired pursuant to exercise of 

stock options to comply with 

conflict-of-interest requirements 

(sec. 674 of the Senate 

amendment)

If an employee disposes of stock 

acquired upon the exercise of a 

statutory stock option, the 

employee is taxed at capital gains 

rates with respect to the excess of 

the fair market value of the stock 

on the date of disposition over the 

option price unless the employee 

fails to meet the holding period 

requirement (two years after the 

date the option is granted or one 

year after the date the option is 

exercised). The gain upon a 

disposition that occurs prior to the 

expiration of the applicable holding 

period does not qualify for capital 

gains treatment. 

No provision. An eligible person who, in order to 

comply with Federal conflict of 

interest requirements, is required to 

sell shares of stock acquired 

pursuant to the exercise of a 

statutory stock option is treated as 

satisfying the statutory holding 

period requirements, regardless of 

how long the stock was actually 

held.

Effective date.–Sales after the date 

of enactment.

32. Application of basis rules to 

employer and employee 

contributions on behalf of 

nonresident aliens (sec. 675 of the 

Senate amendment)

Basis in distributions from 

retirement plans includes amounts 

contributed by the participant on an 

after-tax basis, together with 

certain amounts contributed by the 

employer, minus the aggregate 

amount (if any) previously 

distributed to the extent that such 

amount was excludable from gross 

income. Amounts contributed by 

the employer are included in the 

calculation of the participant’s 

basis only to the extent that such 

amounts were includible in the 

gross income of the participant, or 

No provision. Employee or employer 

contributions are not included in 

basis if: (1) the employee was a 

nonresident alien at the time the 

services were performed with 

respect to which the contribution 

was made; (2) the contribution is 

with respect to compensation for 

labor or personal services from 

sources without the United States; 

and (3) the contribution was not 

subject to income tax under the 

laws of the United States or any 

foreign country. 
69

Provision Present Law House Bill Senate Amendment

to the extent that such amounts 

would have been excludable from 

the participant’s gross income if 

they had been paid directly to the 

participant at the time they were 

contributed.

Employer contributions to 

retirement plans and other 

payments for labor or personal 

services performed outside the 

United States by nonresident aliens 

generally are not treated as U.S. 

source income. Such 

contributions, therefore, generally 

would not be includible in the 

nonresident alien’s gross income if 

they had been paid directly to the 

nonresident alien at the time they 

were contributed. Thus, the

amounts of such contributions 

generally are includible in the 

employee’s basis and are not taxed 

by the United States if a 

distribution is made when the 

employee is a U.S. citizen or 

resident

Effective date.–Distributions on or 

after date of enactment.
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Provision Present Law House Bill Senate Amendment

33. Substantial presence test 

required to determine bona fide 

residence in United States 

possession (sec. 497 of the Senate 

amendment)

An alien is considered a resident of 

the United States if the individual: 

(1) has entered the United States as 

a lawful permanent resident and is 

such a resident at any time during 

the calendar year; (2) is present in 

the United States for a substantial 

period of time (the so-called 

“substantial presence test”); or (3) 

makes an election to be treated as a 

resident of the United States (sec. 

7701(b)). An alien who does not 

meet the definition of a “resident 

alien” is considered to be a nonresident alien for U.S. income tax 

purposes.

Under the substantial presence test, 

an alien individual is generally 

treated as a resident alien if he or 

she is present in the United States 

for 31 days during the taxable year 

and the sum of the number of days 

on which such individual was 

present in the United States (when 

multiplied by the applicable 

multiplier) during the current year 

and the preceding two calendar 

years equals or exceeds 183 days. 

The applicable multiplier for: the 

current year is one, for the first 

No provision. Amends the current rules 

governing when an U.S. citizen or 

resident is treated as a bona fide 

resident of the Virgin Islands, 

Puerto Rico, Guam, Northern 

Mariana Islands, or American 

Samoa. U.S. citizens would only 

be treated as bona fide residents of 

these U.S. possessions for U.S. 

income tax purposes if they satisfy 

an objective, day counting test 

based on the substantial presence 

test.

Provision also requires bona fide 

residents of the Virgin Islands to 

file an informational income tax 

return with the United States, and 

imposes a penalty for the failure to 

file such a return. 

Effective date.–The provision is 

effective for taxable years ending 

after the date of enactment.
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Provision Present Law House Bill Senate Amendment

preceding year is 1/3, and for the 

second preceding year is 1/6. 

Special income tax rules apply with 

respect to bona fide residents of 

certain U.S. possessions, including 

Virgin Islands, Puerto Rico, Guam, 

Northern Mariana Islands, and 

American Samoa. Generally, for 

U.S. citizens and residents, bona 

fide residence in a possession is 

determined using the principles of 

a subjective, facts-andcircumstances test set forth in 

regulations under section 871. 

However, for aliens, bona fide 

residence in a possession, which 

has a mirror code, is determined 

under the principles used to 

determine U.S. residence 

(discussed above). 

34. Include employer provided 

housing under foreign earned 

income exclusion cap (sec. 632(c) 

of the Senate amendment)

U.S. citizens living abroad may be 

eligible to exclude from their 

income for U.S. tax purposes:

1) foreign earned income; and 

2) foreign housing costs.

The combined earned income 

exclusion and housing cost 

exclusion may not exceed the 

No provision. Applies the annual foreign earned 

income exclusion cap ($80,000 for 

2004) to the combined value of 

foreign earned income and 

employer-provided housing 

amounts. 

The present-law provision 

providing indexation for inflation 

for tax years beginning after 2007 

would remain unchanged. 
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Provision Present Law House Bill Senate Amendment

taxpayer’s total foreign earned 

income for the taxable year. 

The exclusion for foreign earned 

income generally applies to income 

earned from sources outside the 

United States as compensation for 

personal services actually rendered 

by the taxpayer and the maximum 

exclusion for a taxable year is 

$80,000. For taxable years 

beginning after 2007, the 

maximum exclusion amount is 

indexed for inflation.

The exclusion for housing costs 

applies to reasonable expenses paid 

or incurred by or on behalf of the 

taxpayer for housing. The 

exclusion amount for housing costs 

is equal to the excess of such 

housing costs over a base housing 

amount for the taxable year. 

The present-law provision 

imposing an additional foreign 

earned income cap on exclusions 

and deductions would also remain 

unchanged.

Effective date.–Taxable years 

beginning after December 31, 

2003.

35. Limit deduction for certain 

entertainment expenses 

(including company-provided 

aircraft) for covered employees 

(sec. 103(b) of the Senate 

amendment)

No deduction is allowed with 

respect to (1) an activity generally 

considered to be entertainment, 

amusement or recreation, unless 

the taxpayer establishes that the 

item was directly related to (or, in 

certain cases, associated with) the 

active conduct of the taxpayer’s 

trade or business, or (2) a facility 

No provision. In the case of covered employees 

(as defined in Code section 

162(m)(3)), the exception to the 

general entertainment expense 

disallowance rule for expenses 

treated as compensation or 

includible in income applies only 

to the extent of the amount of 
73

Provision Present Law House Bill Senate Amendment

used in connection with such 

activity. The deduction 

disallowance rule does not apply to 

expenses for goods, services, and 

facilities to the extent that the 

expenses are reported by the 

taxpayer as compensation and 

wages to an employee. In the 

context of an employer providing 

an aircraft to employees for 

nonbusiness (e.g., vacation) flights, 

this exception has been interpreted 

as not limiting the company’s 

deduction for operation of the 

aircraft to the amount of 

compensation reportable to its 

employees. Sutherland LumberSouthwest, Inc. v. Comm., 114 T.C. 

197 (2000), aff’d, 255 F.3d 495 

(8th Cir. 2001).

expenses treated as compensation 

and wages.

Effective date.–Expenses incurred 

after the date of enactment and 

before January 1, 2006. 

36. Treatment of contingent 

payment convertible debt 

instruments (sec. 733 of the 

Senate amendment)

Taxpayers generally deduct interest 

paid or accrued within the taxable 

year on indebtedness issued by the 

taxpayer. In the case of original 

issue discount (“OID”), the issuer 

of a debt instrument generally 

accrues and deducts, as interest, the 

OID over the life of the obligation, 

even though the amount of the OID 

may not be paid until the maturity 

of the instrument. Treasury 

regulations provide special rules 

for determining the amount of OID 

No provision. Provides that, in the case of a 

contingent convertible debt 

instrument, any Treasury 

regulations which require OID to 

be determined by reference to the 

comparable yield of a 

noncontingent fixed-rate debt 

instrument shall be applied as 

requiring that such comparable 

yield be determined by reference to 

a noncontingent fixed-rate debt 

instrument which is convertible

into stock. Also provides that the 
74

Provision Present Law House Bill Senate Amendment

allocated to a period with respect to 

certain debt instruments that 

provide for one or more contingent 

payments of principal or interest.

With respect to certain debt 

instruments that are convertible 

into stock of the issuer and that 

also provide for contingent 

payments (“contingent convertible” 

debt instruments), the IRS has 

stated that the special rules for 

contingent payment debt 

instruments apply in computing the 

accrual of OID on the debt 

instrument, and that the 

comparable yield for a contingent 

convertible debt instrument is 

determined by reference to a 

comparable fixed-rate 

nonconvertible debt instrument.

comparable yield shall be 

determined without taking into 

account the yield resulting from the 

conversion of a debt instrument 

into stock. Thus, the Treasury 

regulations shall be applied in a 

manner such that the comparable 

yield for contingent convertible 

debt instruments shall be 

determined by reference to 

comparable noncontingent fixedrate convertible (rather than 

nonconvertible) debt instruments.

Effective date.–Debt instruments 

issued after the date of enactment.