I 

108TH CONGRESS 

1ST SESSION H. R. 2896

To amend the Internal Revenue Code of 1986 to remove impediments in 

such Code and make our manufacturing, service, and high-technology 

businesses and workers more competitive and productive both at home 

and abroad. 

IN THE HOUSE OF REPRESENTATIVES 

JULY 25, 2003

Mr. THOMAS introduced the following bill; which was referred to the 

Committee on Ways and Means 

A BILL

To amend the Internal Revenue Code of 1986 to remove 

impediments in such Code and make our manufacturing, 

service, and high-technology businesses and workers more 

competitive and productive both at home and abroad.

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

3 SECTION 1. SHORT TITLE; ETC. 

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

5 ‘‘American Jobs Creation Act of 2003’’. 

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment 
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1 to, or repeal of, a section or other provision, the reference 

2 shall be considered to be made to a section or other provi3 sion of the Internal Revenue Code of 1986. 

4 (c) TABLE OF CONTENTS.—

Sec. 1. Short title; etc. 

TITLE I—CORPORATE REFORM AND GROWTH INCENTIVES 

Subtitle A—Reduction in Corporate Income Tax Rates 

Sec. 1001. Reduced corporate income tax rate for small corporations. 

Subtitle B—Extension and Modification of Research Credit 

Sec. 1011. Extension and modification of research credit. 

Subtitle C—Incentives to Reinvest Foreign Earnings in United States 

Sec. 1021. Temporary deduction by United States shareholders for dividends 

received from controlled foreign corporations. 

Subtitle D—Small Business Expensing 

Sec. 1031. 2-year extension of increased expensing for small business. 

Subtitle E—Depreciation 

Sec. 1041. 1-year extension of bonus depreciation. 

Sec. 1042. Recovery period for depreciation of certain leasehold improvements 

and restaurant property. 

Sec. 1043. Shorter recovery periods for manufacturing property. 

Subtitle F—5-Year Carryback of Certain Net Operating Losses 

Sec. 1051. 5-year carryback of certain net operating losses. 

Subtitle G—Alternative Minimum Tax Relief 

Sec. 1061. Net operating losses and foreign tax credit under alternative minimum tax. 

Sec. 1062. Expansion of exemption from alternative minimum tax for small 

corporations. 

Sec. 1063. Reduction in amount of depreciation subject to alternative minimum 

tax. 

Subtitle H—S Corporation Reform and Simplification 

Sec. 1071. Members of family treated as 1 shareholder. 

Sec. 1072. Increase in number of eligible shareholders to 100. 

Sec. 1073. Expansion of bank S corporation eligible shareholders to include 

IRAs. 

Sec. 1074. Disregard of unexercised powers of appointment in determining potential current beneficiaries of ESBT. 

Sec. 1075. Transfer of suspended losses incident to divorce, etc. 
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Sec. 1076. Use of passive activity loss and at-risk amounts by qualified subchapter S trust income beneficiaries. 

Sec. 1077. Exclusion of investment securities income from passive income test 

for bank S corporations. 

Sec. 1078. Treatment of qualifying director shares. 

Sec. 1079. Relief from inadvertently invalid qualified subchapter S subsidiary 

elections and terminations. 

Sec. 1080. Information returns for qualified subchapter S subsidiaries. 

Subtitle I—Protecting Employee Benefits 

Sec. 1091. Treatment of nonqualified deferred compensation plans. 

Sec. 1092. Exclusion of incentive stock options and employee stock purchase 

plan stock options from wages. 

Sec. 1093. Extension of transfers of excess pension assets to retiree health accounts. 

Subtitle J—Treatment of Active Income 

Sec. 1101. Repeal of CFC rules on foreign base company sales and services income. 

Sec. 1102. Extension of exception of active financing income from foreign personal holding company income. 

Sec. 1103. Look-thru treatment of payments between related controlled foreign 

corporations under foreign personal holding company income 

rules. 

Sec. 1104. Look-thru treatment for sales of partnership interests. 

Sec. 1105. Repeal of foreign personal holding company rules and foreign investment company rules. 

Sec. 1106. Clarification of treatment of pipeline transportation income. 

Sec. 1107. Determination of foreign personal holding company income with respect to transactions in commodities. 

Sec. 1108. Repeal of CFC rules on foreign base company shipping income. 

Sec. 1109. Effective date. 

Subtitle K—Reduction of Double Taxation of Corporate Earnings 

Sec. 1111. Interest expense allocation rules. 

Sec. 1112. Recharacterization of overall domestic loss. 

Sec. 1113. Reduction to 2 foreign tax credit baskets. 

Sec. 1114. 10-year foreign tax credit carryforward. 

Sec. 1115. Look-thru rules to apply to dividends from noncontrolled section 

902 corporations. 

Sec. 1116. Attribution of stock ownership through partnerships to apply in determining section 902 and 960 credits. 

Sec. 1117. Clarification of treatment of certain transfers of intangible property. 

Sec. 1118. Application of uniform capitalization rules to foreign persons. 

Sec. 1119. United States property not to include certain assets acquired by 

dealers in ordinary course of trade or business. 

Sec. 1120. Treatment of certain dividends of regulated investment companies. 

Sec. 1121. Election not to use average exchange rate for foreign tax paid other 

than in functional currency. 

Sec. 1122. Repeal of withholding tax on dividends from certain foreign corporations. 

TITLE II—PROVISIONS TO REDUCE TAX AVOIDANCE THROUGH 

CORPORATE EARNINGS STRIPPING AND EXPATRIATION 
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Sec. 2001. Reduction in potential for earnings stripping by further limiting deduction for interest on certain indebtedness. 

Sec. 2002. Tax treatment of expatriated entities and their foreign parents. 

Sec. 2003. Excise tax on stock compensation of insiders in expatriated corporations. 

Sec. 2004. Reinsurance of United States risks in foreign jurisdictions. 

Sec. 2005. Revision of tax rules on expatriation of individuals. 

Sec. 2006. Reporting of taxable mergers and acquisitions. 

Sec. 2007. Studies. 

TITLE III—PROVISIONS RELATING TO TAX SHELTERS 

Subtitle A—Taxpayer-Related Provisions 

Sec. 3001. Penalty for failing to disclose reportable transactions. 

Sec. 3002. Accuracy-related penalty for listed transactions, other reportable 

transactions having a significant tax avoidance purpose, etc. 

Sec. 3003. Tax shelter exception to confidentiality privileges relating to taxpayer communications. 

Sec. 3004. Statute of limitations for taxable years for which required listed 

transactions not reported. 

Sec. 3005. Disclosure of reportable transactions. 

Sec. 3006. Failure to furnish information regarding reportable transactions. 

Sec. 3007. Modification of penalty for failure to maintain lists of investors. 

Sec. 3008. Penalty on promoters of tax shelters. 

Sec. 3009. Modifications of substantial understatement penalty for nonreportable transactions. 

Sec. 3010. Modification of actions to enjoin certain conduct related to tax shelters and reportable transactions. 

Sec. 3011. Penalty on failure to report interests in foreign financial accounts. 

Sec. 3012. Regulation of individuals practicing before the department of the 

treasury. 

Subtitle B—Other Provisions 

Sec. 3021. Treatment of stripped interests in bond and preferred stock funds, 

etc. 

Sec. 3022. Minimum holding period for foreign tax credit on withholding taxes 

on income other than dividends. 

Sec. 3023. Affirmation of consolidated return regulation authority. 

Sec. 3024. Disallowance of certain partnership loss transfers. 

Sec. 3025. No reduction of basis under section 734 in stock held by partnership 

in corporate partner. 

Sec. 3026. Repeal of special rules for FASITs. 

Sec. 3027. Limitation on transfer of built-in losses on REMIC residuals. 

Sec. 3028. Clarification of banking business for purposes of determining investment of earnings in United States property. 

Sec. 3029. Clarification of exemption from tax for small property and casualty 

insurance companies. 

Sec. 3030. Definition of insurance company for section 831. 

Sec. 3031. Qualified tax collection contracts. 

TITLE IV—TRADE ENHANCEMENT AND COMPLIANCE PROVISIONS 

Sec. 4001. Repeal of exclusion for extraterritorial income. 

Sec. 4002. COBRA fees.
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1 TITLE I—CORPORATE REFORM 

2 AND GROWTH INCENTIVES 

3 Subtitle A—Reduction in Corporate 

4 Income Tax Rates 

5 SEC. 1001. REDUCED CORPORATE INCOME TAX RATE FOR 

6 SMALL CORPORATIONS. 

7 (a) IN GENERAL.—Subsection (b) of section 11 (re8 lating to tax imposed on corporations) is amended by re9 designating paragraph (2) as paragraph (4) and by strik10 ing paragraph (1) and inserting the following new para11 graphs: 

12 ‘‘(1) IN GENERAL.—The amount of the tax im13 posed by subsection (a) shall be the sum of—

14 ‘‘(A) 15 percent of so much of the taxable 

15 income as does not exceed $50,000, 

16 ‘‘(B) 25 percent of so much of the taxable 

17 income as exceeds $50,000 but does not exceed 

18 $75,000, 

19 ‘‘(C) 33 percent (32 percent for taxable 

20 years beginning after December 31, 2009) of so 

21 much of the taxable income as exceeds $75,000 

22 but does not exceed the applicable amount,

23 ‘‘(D) in the case of taxable years beginning 

24 before January 1, 2012, 34 percent of so much 
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1 of the taxable income as exceeds the applicable 

2 amount but does not exceed $10,000,000, and 

3 ‘‘(E) 35 percent of so much of the taxable 

4 income as exceeds $10,000,000. 

5 ‘‘(2) PHASEOUT OF LOWER RATES FOR CER6 TAIN TAXPAYERS.—

7 ‘‘(A) IN GENERAL.—In the case of a corpora8 tion which has taxable income in excess of the appli9 cable amount for any taxable year, the amount of 

10 tax determined under paragraph (1) for such taxable 

11 year shall be increased by the lesser of (i) 5 percent 

12 of such excess, or (ii) maximum increase amount. 

13 ‘‘(B) HIGHER INCOME CORPORATIONS.—In the 

14 case of a corporation which has taxable income in 

15 excess of $10,000,000, the amount of the tax deter16 mined under the foregoing provisions of this para17 graph shall be increased by an additional amount 

18 equal to the lesser of (i) 3 percent of such excess, 

19 or (ii) $100,000. 

20 ‘‘(3) DEFINITIONS.—For purposes of this sub21 section—

22

‘‘In the case of any taxable year

beginning during: 

The applicable 

amount is: 

The maximum 

increase amount 

is: 

2005, 2006, 2007, or 2008 ................ $1,000,000 $21,000

2009 .................................................... $2,000,000 $31,000

2010 and 2011 ................................... $5,000,000 $110,250
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‘‘In the case of any taxable year

beginning during: 

The applicable 

amount is: 

The maximum 

increase amount 

is: 

2012 and thereafter ........................... $10,000,000 $210,250.’’

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

2 this section shall apply to taxable years beginning after 

3 December 31, 2004. 

4 Subtitle B—Extension and 

5 Modification of Research Credit 

6 SEC. 1011. EXTENSION AND MODIFICATION OF RESEARCH 

7 CREDIT. 

8 (a) EXTENSION OF RESEARCH CREDIT.—

9 (1) IN GENERAL.—Subparagraph (B) of section 

10 41(h)(1) (relating to credit for increasing research 

11 activities) is amended by striking ‘‘June 30, 2004’’ 

12 and inserting ‘‘December 31, 2007’’. 

13 (2) CONFORMING AMENDMENT.—Subparagraph 

14 (D) of section 45C(b)(1) is amended by striking 

15 ‘‘June 30, 2004’’ and inserting ‘‘December 31, 

16 2007’’. 

17 (3) EFFECTIVE DATE.—The amendments made 

18 by this subsection shall apply to amounts paid or in19 curred after the date of the enactment of this Act. 

20 (b) ALTERNATIVE SIMPLIFIED CREDIT FOR QUALI21 FIED RESEARCH EXPENSES.—

22 (1) IN GENERAL.—Subsection (c) of section 41 

23 (relating to base amount) is amended by redesig-
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1 nating paragraphs (5) and (6) as paragraphs (6) 

2 and (7), respectively, and by inserting after para3 graph (4) the following new paragraph: 

4 ‘‘(5) ELECTION OF ALTERNATIVE SIMPLIFIED

5 CREDIT.—

6 ‘‘(A) IN GENERAL.—At the election of the 

7 taxpayer, the credit determined under sub8 section (a)(1) shall be equal to 12 percent of so 

9 much of the qualified research expenses for the 

10 taxable year as exceeds 60 percent of the aver11 age qualified research expenses for the base pe12 riod years. 

13 ‘‘(B) SPECIAL RULE IN CASE OF NO

14 QUALIFIED RESEARCH EXPENSES IN AT LEAST

15 1 BASE PERIOD YEAR.—

16 ‘‘(i) TAXPAYERS TO WHICH SUBPARA17 GRAPH APPLIES.—The credit under this 

18 paragraph shall be determined under this 

19 subparagraph if the taxpayer has no quali20 fied research expenses in any one of the 

21 base period years. 

22 ‘‘(ii) CREDIT RATE.—The credit de23 termined under this subparagraph shall be 

24 equal to 6 percent of the qualified research 

25 expenses for the taxable year. 
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1 ‘‘(C) BASE PERIOD YEARS.—The base pe2 riod years with respect to a taxable year for 

3 which the credit under this paragraph is being 

4 determined are the 3 taxable years—

5 ‘‘(i) which are among the 5 most re6 cent taxable years ending before such tax7 able year, and 

8 ‘‘(ii) which are determined by dis9 regarding—

10 ‘‘(I) 1 taxable year for which the 

11 qualified research expenses are the 

12 largest, and 

13 ‘‘(II) 1 taxable year for which 

14 such expenses are the smallest. 

15 Rules similar to the rules of subparagraphs (A) 

16 and (B) of section 41(f)(3) shall apply for pur17 poses of this subparagraph. 

18 ‘‘(D) ELECTION.—An election under this 

19 paragraph shall apply to the taxable year for 

20 which made and all succeeding taxable years 

21 unless revoked with the consent of the Sec22 retary. An election under this paragraph may 

23 not be made for any taxable year to which an 

24 election under paragraph (4) applies. 
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1 ‘‘(E) APPLICATION OF PARAGRAPH.—An 

2 election under this paragraph may be in effect 

3 only for taxable years beginning after June 30, 

4 2004, and before January 1, 2007.’’. 

5 (2) COORDINATION WITH ELECTION OF ALTER6 NATIVE INCREMENTAL CREDIT.—

7 (1) IN GENERAL.—Section 41(c)(4)(B) (relat8 ing to election) is amended by adding at the end the 

9 following: ‘‘An election under this paragraph may 

10 not be made for any taxable year to which an elec11 tion under paragraph (5) applies.’’. 

12 (2) TRANSITION RULE.—In the case of an elec13 tion under section 41(c)(4) of the Internal Revenue 

14 Code of 1986 which applies to the taxable year 

15 which includes the date of the enactment of this Act, 

16 such election shall be treated as revoked with the 

17 consent of the Secretary of the Treasury if the tax18 payer makes an election under section 41(c)(5) of 

19 such Code (as added by subsection (a)) for such 

20 year. 

21 (3) EFFECTIVE DATE.—The amendments made 

22 by this subsection shall apply to taxable years begin23 ning after June 30, 2004.
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1 Subtitle C—Incentives to Reinvest 

2 Foreign Earnings in United States 

3 SEC. 1021. TEMPORARY DEDUCTION BY UNITED STATES 

4 SHAREHOLDERS FOR DIVIDENDS RECEIVED 

5 FROM CONTROLLED FOREIGN CORPORA6 TIONS. 

7 (a) IN GENERAL.—Subpart F of part III of sub8 chapter N of chapter 1 (relating to controlled foreign cor9 porations) is amended by adding at the end the following 

10 new section: 

11 ‘‘SEC. 965. TEMPORARY DIVIDENDS RECEIVED DEDUCTION. 

12 ‘‘(a) DEDUCTION.—

13 ‘‘(1) IN GENERAL.—In the case of a corpora14 tion which is a United States shareholder, there 

15 shall be allowed as a deduction an amount equal to 

16 80 percent of the dividends—

17 ‘‘(A) which are received by such share18 holder from controlled foreign corporations dur19 ing the election period, and 

20 ‘‘(B) which are includible in gross income 

21 for the taxable year which includes such period. 

22 ‘‘(2) DIVIDENDS PAID INDIRECTLY FROM CON23 TROLLED FOREIGN CORPORATIONS.—If, within the 

24 election period, a United States shareholder receives 

25 a dividend from a controlled foreign corporation 
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1 which is excluded from gross income under section 

2 959(a), such dividend shall be treated for purposes 

3 of this section as meeting the requirements of para4 graph (1)(B) to the extent of any amount included 

5 in income by such United States shareholder under 

6 section 951(a)(1)(A) as a result of any dividend paid 

7 during the election period to—

8 ‘‘(A) such controlled foreign corporation 

9 from another controlled foreign corporation that 

10 is in a chain of ownership described in section 

11 958(a), or 

12 ‘‘(B) any other controlled foreign corpora13 tion in such chain of ownership, but only to the 

14 extent of distributions described in section 

15 959(b) which are made during the election pe16 riod to the controlled foreign corporation from 

17 which such United States shareholder received 

18 such dividend. 

19 ‘‘(b) LIMITATIONS.—

20 ‘‘(1) LIMITATION TO EARNINGS OTHERWISE

21 PERMANENTLY REINVESTED OUTSIDE THE UNITED

22 STATES.—The amount of dividends taken into ac23 count under subsection (a) shall not exceed the 

24 amount shown on the applicable financial statement 

25 as earnings permanently reinvested outside the 
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1 United States. If there is no such statement or such 

2 statement fails to show a specific amount of such 

3 earnings, such amount shall be treated as being 

4 zero. 

5 ‘‘(2) DIVIDENDS MUST BE EXTRAORDINARY.—

6 The amount of dividends taken into account under 

7 subsection (a) shall not exceed the excess (if any) 

8 of—

9 ‘‘(A) the dividends received during the tax10 able year by such shareholder from controlled 

11 foreign corporations, over 

12 ‘‘(B) the annual average for the base pe13 riod years of—

14 ‘‘(i) the dividends received during 

15 each base period year by such shareholder 

16 from such corporations, and 

17 ‘‘(ii) the amounts includible in such 

18 shareholder’s gross income for each base 

19 period year under section 951(a)(1)(B) (or 

20 which would have been included but for 

21 section 959(a)(2)) with respect to such 

22 corporations. 

23 The amount taken into account under clause (i) 

24 for any base period year shall not include any 

25 dividend which is not includible in gross income 
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1 by reason of an amount described in clause (ii) 

2 with respect to a prior taxable year. 

3 ‘‘(3) REQUIREMENT TO INVEST IN UNITED

4 STATES.—Subsection (a) shall not apply to any divi5 dend received by a United States shareholder unless 

6 the amount of the dividend is invested in the United 

7 States pursuant to a plan describing the expendi8 tures to be made with such amount—

9 ‘‘(A) which, before the dividend is received, 

10 is approved by the president or chief executive 

11 officer of such shareholder, and 

12 ‘‘(B) which is approved by the Board of 

13 Directors (or management committee) of such 

14 shareholder no later than its first meeting on or 

15 after the date the dividend is received. 

16 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur17 poses of this section—

18 ‘‘(1) ELECTION PERIOD.—The term ‘election 

19 period’ means—

20 ‘‘(A) if this section applies to the tax21 payer’s last taxable year beginning before the 

22 date of the enactment of this section, any 6-

23 month or shorter period during such year which 

24 is after the date of the enactment of this sec25 tion and which is selected by the taxpayer, and 
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1 ‘‘(B) if this section applies to the tax2 payer’s first taxable year beginning on or after 

3 such date, the 1st 6 months of such taxable 

4 year. 

5 ‘‘(2) APPLICABLE FINANCIAL STATEMENT.—

6 The term ‘applicable financial statement’ means the 

7 most recently audited financial statement (including 

8 notes and other documents which accompany such 

9 statement)—

10 ‘‘(A) which is certified on or before March 

11 31, 2003, as being prepared in accordance with 

12 generally accepted accounting principles, and 

13 ‘‘(B) which is used for the purposes of a 

14 statement or report—

15 ‘‘(i) to creditors, 

16 ‘‘(ii) to shareholders, or 

17 ‘‘(iii) for any other substantial nontax 

18 purpose. 

19 In the case of a corporation required to file a finan20 cial statement with the Securities and Exchange 

21 Commission, such term means the most recent such 

22 statement filed on or before March 31, 2003. 

23 ‘‘(3) BASE PERIOD YEARS.—The base period 

24 years are the 3 taxable years—
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1 ‘‘(A) which are among the 5 most recent 

2 taxable years ending on or before March 31, 

3 2003, and 

4 ‘‘(B) which are determined by dis5 regarding—

6 ‘‘(i) 1 taxable year for which the sum 

7 of the amounts described in clauses (i) and 

8 (ii) of subsection (b)(2)(B) is the largest, 

9 and 

10 ‘‘(ii) 1 taxable year for which such 

11 sum is the smallest. 

12 Rules similar to the rules of subparagraphs (A) and 

13 (B) of section 41(f)(3) shall apply for purposes of 

14 this paragraph. 

15 ‘‘(d) DENIAL OF FOREIGN TAX CREDIT.—

16 ‘‘(1) IN GENERAL.—No credit shall be allowed 

17 under section 901 for any taxes paid or accrued (or 

18 treated as paid or accrued) with respect to the de19 ductible portion of any dividend received during the 

20 election period or of any amount described in sub21 section (a)(2). No deduction shall be allowed under 

22 this chapter for any tax for which credit is not al23 lowable by reason of the preceding sentence. 

24 ‘‘(2) DEDUCTIBLE PORTION.—For purposes of 

25 paragraph (1), unless the taxpayer otherwise speci-
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1 fies, the deductible portion of any dividend is the 

2 amount which bears the same ratio to the amount 

3 of such dividend as the amount allowed as a deduc4 tion under subsection (a) for the taxable year bears 

5 to the amount described in subsection (b)(2)(A) for 

6 such year. 

7 ‘‘(e) INCREASE IN TAX ON INCLUDED AMOUNTS NOT

8 REDUCED BY CREDITS, ETC.—

9 ‘‘(1) IN GENERAL.—Any tax under this chapter 

10 by reason of nondeductible CFC dividends shall not 

11 be treated as tax imposed by this chapter for pur12 poses of determining—

13 ‘‘(A) the amount of any credit allowable 

14 under this chapter, or 

15 ‘‘(B) the amount of the tax imposed by 

16 section 55. 

17 Subparagraph (A) shall not apply to the credit 

18 under section 53 or to the credit under section 27(a) 

19 with respect to taxes attributable to such dividends. 

20 ‘‘(2) INCLUSIONS MAY NOT BE OFFSET BY NET

21 OPERATING LOSSES.—

22 ‘‘(A) IN GENERAL.—The taxable income of 

23 any United States shareholder for any taxable 

24 year shall in no event be less than the amount 
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1 of nondeductible CFC dividends received during 

2 such year. 

3 ‘‘(B) COORDINATION WITH SECTION 172.—

4 The nondeductible CFC dividends for any tax5 able year shall not be taken into account—

6 ‘‘(i) in determining under section 172 

7 the amount of any net operating loss for 

8 such taxable year, and 

9 ‘‘(ii) in determining taxable income 

10 for such taxable year for purposes of the 

11 2nd sentence of section 172(b)(2). 

12 ‘‘(3) NONDEDUCTIBLE CFC DIVIDENDS.—For 

13 purposes of this subsection, the term ‘nondeductible 

14 CFC dividends’ means the excess of the amount of 

15 dividends taken into account under subsection (a) 

16 over the deduction allowed under subsection (a) for 

17 such dividends. 

18 ‘‘(f) FAILURE TO MAINTAIN AVERAGE PAYOUT

19 RATE.—

20 ‘‘(1) IN GENERAL.—If, during any of the 10 

21 taxable years beginning after the taxable year for 

22 which a deduction is allowed under this section, the 

23 average described in subsection (b)(2)(B) for the 

24 base period years exceeds the amount described in 

25 subsection (b)(2)(A) for the taxable year, the tax im-
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1 posed by this chapter for the taxable year of such 

2 excess shall be increased by an amount equal to the 

3 sum of—

4 ‘‘(A) the increase in tax which would result 

5 if such deduction (as reduced by any previous 

6 reductions under this subsection) were reduced 

7 (but not below zero) by 80 percent of such ex8 cess, and 

9 ‘‘(B) interest at the underpayment rate, 

10 determined as if the amount described in para11 graph (1) were an underpayment for the tax12 able year for which the deduction was allowed. 

13 ‘‘(2) CARRYOVER OF EXCESS DIVIDENDS.—If, 

14 for any of such 10 taxable years, the amount de15 scribed in subsection (b)(2)(A) for such taxable year 

16 exceeds the average described in subsection 

17 (b)(2)(B) for the base period years, such excess shall 

18 be treated for purposes of this subsection as a divi19 dend received during the following taxable year. 

20 ‘‘(g) ELECTION.—This section shall apply for the tax21 payer’s first taxable year beginning on or after the date 

22 of the enactment of this section if the taxpayer elects its 

23 application for such taxable year. The taxpayer may elect 

24 to apply this section to the taxpayer’s last taxable year 
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1 beginning before the date of the enactment of this section 

2 in lieu of such first taxable year.’’

3 (b) ALTERNATIVE MINIMUM TAX.—Subparagraph 

4 (C) of section 56(g)(4) is amended by adding at the end 

5 the following new clause: 

6 ‘‘(v) SPECIAL RULE FOR CERTAIN DIS7 TRIBUTIONS FROM CONTROLLED FOREIGN

8 CORPORATIONS.—Clause (i) shall not apply 

9 to any deduction allowable under section 

10 965.’’. 

11 (c) CLERICAL AMENDMENT.—The table of sections 

12 for subpart F of part III of subchapter N of chapter 1 

13 is amended by adding at the end the following new item:

‘‘Sec. 965. Temporary dividends received deduction.’’.

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

15 this section shall apply to taxable years ending on or after 

16 the date of the enactment of this Act. 

17 Subtitle D—Small Business 

18 Expensing 

19 SEC. 1031. 2-YEAR EXTENSION OF INCREASED EXPENSING 

20 FOR SMALL BUSINESS. 

21 Subsections (b), (c), and (d) of section 179 (as 

22 amended by the Jobs and Growth Tax Relief Reconcili23 ation Act of 2003) are each amended by striking ‘‘2006’’ 

24 each place it appears and inserting ‘‘2008’’.
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1 Subtitle E—Depreciation 

2 SEC. 1041. 1-YEAR EXTENSION OF BONUS DEPRECIATION. 

3 (a) 50-PERCENT BONUS DEPRECIATION.—Section 

4 168(k)(4) (as amended by the Jobs and Growth Tax Relief 

5 Reconciliation Act of 2003) is amended—

6 (1) by striking ‘‘January 1, 2005’’ each place 

7 it appears and inserting ‘‘January 1, 2006’’, and 

8 (2) by striking ‘‘January 1, 2006’’ in subpara9 graph (B)(iii) (as in effect before the amendment 

10 made by paragraph (1)) and inserting ‘‘January 1, 

11 2007’’. 

12 (b) 30-PERCENT BONUS DEPRECIATION.—Section 

13 168(k)(2) (as so amended) is amended—

14 (1) by striking ‘‘January 1, 2005’’ each place 

15 it appears and inserting ‘‘January 1, 2006’’, and 

16 (2) by striking ‘‘January 1, 2006’’ in subpara17 graph (A)(iv) (as in effect before the amendment 

18 made by paragraph (1)) and inserting ‘‘January 1, 

19 2007’’. 

20 (c) CONFORMING AMENDMENT.—The subsection 

21 heading for section 168(k) (as so amended) is amended 

22 by striking ‘‘JANUARY 1, 2005’’ and inserting ‘‘JANUARY

23 1, 2006’’. 
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1 SEC. 1042. RECOVERY PERIOD FOR DEPRECIATION OF CER2 TAIN LEASEHOLD IMPROVEMENTS AND RES3 TAURANT PROPERTY. 

4 (a) 20-YEAR RECOVERY PERIOD.—Paragraph (3) of 

5 section 168(e) (relating to classification of certain prop6 erty) is amended by adding after subparagraph (E) the 

7 following new subparagraph: 

8 ‘‘(F) 20-YEAR PROPERTY.—The term ‘20-

9 year property’ includes—

10 ‘‘(i) any qualified leasehold improvement 

11 property placed in service, and 

12 ‘‘(ii) any qualified restaurant property 

13 placed in service. 

14 (b) QUALIFIED LEASEHOLD IMPROVEMENT PROP15 ERTY.—Subsection (e) of section 168 is amended by add16 ing at the end the following new paragraph: 

17 ‘‘(6) QUALIFIED LEASEHOLD IMPROVEMENT

18 PROPERTY.—The term ‘qualified leasehold improve19 ment property’ has the meaning given such term in 

20 section 168(k)(3) except that the following special 

21 rules shall apply: 

22 ‘‘(A) IMPROVEMENTS MADE BY LESSOR.—

23 In the case of an improvement made by the per24 son who was the lessor of such improvement 

25 when such improvement was placed in service, 

26 such improvement shall be qualified leasehold 
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1 improvement property (if at all) only so long as 

2 such improvement is held by such person. 

3 ‘‘(B) EXCEPTION FOR CHANGES IN FORM

4 OF BUSINESS.—Property shall not cease to be 

5 qualified leasehold improvement property under 

6 subparagraph (A) by reason of—

7 ‘‘(i) death, 

8 ‘‘(ii) a transaction to which section 

9 381(a) applies, 

10 ‘‘(iii) a mere change in the form of 

11 conducting the trade or business so long as 

12 the property is retained in such trade or 

13 business as qualified leasehold improve14 ment property and the taxpayer retains a 

15 substantial interest in such trade or busi16 ness, 

17 ‘‘(iv) the acquisition of such property 

18 in an exchange described in section 1031, 

19 1033, 1038, or 1039 to the extent that the 

20 basis of such property includes an amount 

21 representing the adjusted basis of other 

22 property owned by the taxpayer or a re23 lated person, or 

24 ‘‘(v) the acquisition of such property 

25 by the taxpayer in a transaction described 
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•HR 2896 IH 

1 in section 332, 351, 361, 721, or 731 (or 

2 the acquisition of such property by the tax3 payer from the transferee or acquiring cor4 poration in a transaction described in such 

5 section), to the extent that the basis of the 

6 property in the hands of the taxpayer is 

7 determined by reference to its basis in the 

8 hands of the transferor or distributor. 

9 ‘‘(C) RELATED PERSON.—For purposes of 

10 this paragraph, a person (hereafter in this sub11 paragraph referred to as the ‘related person’) is 

12 related to any person if the related person bears 

13 a relationship to such person specified in sec14 tion 267(b) or 707(b)(1), or the related person 

15 and such person are engaged in trades or busi16 nesses under common control (within the mean17 ing of subsections (a) and (b) of section 52).’’. 

18 (c) QUALIFIED RESTAURANT PROPERTY.—Sub19 section (e) of section 168 (as amended by subsection (b)) 

20 is further amended by adding at the end the following new 

21 paragraph: 

22 ‘‘(7) QUALIFIED RESTAURANT PROPERTY.—The 

23 term ‘qualified restaurant property’ means any sec24 tion 1250 property which is a building (or any addi25 tion or improvement to such building) if more than 
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•HR 2896 IH 

1 50 percent of the building’s square footage is de2 voted to preparation of, and seating for on-premises 

3 consumption of, prepared meals.’’. 

4 (d) REQUIREMENT TO USE STRAIGHT LINE METH5 OD.—

6 (1) Paragraph (3) of section 168(b) is amended 

7 by adding at the end the following new subpara8 graphs: 

9 ‘‘(G) Qualified leasehold improvement 

10 property described in subsection (e)(6). 

11 ‘‘(H) Qualified restaurant property de12 scribed in subsection (e)(7).’’. 

13 (2) Subparagraph (A) of section 168(b)(2) is 

14 amended by inserting before the comma ‘‘not re15 ferred to in paragraph (3)’’. 

16 (e) ALTERNATIVE SYSTEM.—The table contained in 

17 section 168(g)(3)(B) is amended by adding at the end the 

18 following new items:

‘‘(F)(i) ................................................................... 39

‘‘(F)(ii) .................................................................. 39’’.

19 (f) EFFECTIVE DATE.—The amendments made by 

20 this section shall apply to property placed in service after 

21 the date of the enactment of this Act.
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•HR 2896 IH 

1 SEC. 1043. SHORTER RECOVERY PERIODS FOR MANUFAC2 TURING PROPERTY. 

3 (a) IN GENERAL.—Paragraph (3) of section 168(e), 

4 as amended by section 1042, is amended by adding after 

5 subparagraph (F) the following new subparagraph: 

6 ‘‘(G) MANUFACTURING PROPERTY.—

7 ‘‘(i) IN GENERAL.—

8 ‘‘(I) Manufacturing property 

9 which would (but for this subpara10 graph) be 10-year property shall be 

11 treated as 7-year property. 

12 ‘‘(II) Manufacturing property 

13 which would (but for this subpara14 graph) be 7-year property shall be 

15 treated as 5-year property. 

16 ‘‘(III) Manufacturing property 

17 which would (but for this subpara18 graph) be 5-year property shall be 

19 treated as 3-year property. 

20 ‘‘(ii) MANUFACTURING PROPERTY.—

21 For purposes of this subparagraph, the 

22 term ‘manufacturing property’ means—

23 ‘‘(I) property used in an activity 

24 which is manufacturing within the 

25 meaning of codes 31–33 of the North 
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•HR 2896 IH 

1 American Industry Classification Sys2 tem (2002), and 

3 ‘‘(II) property treated as manu4 facturing property by regulations pre5 scribed by the Secretary.’’

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

7 this section shall apply to property placed in service after 

8 the date of the enactment of this Act. 

9 Subtitle F—5-Year Carryback of 

10 Certain Net Operating Losses 

11 SEC. 1051. 5-YEAR CARRYBACK OF CERTAIN NET OPER12 ATING LOSSES. 

13 (a) IN GENERAL.—Subparagraph (H) of section 

14 172(b)(1) is amended—

15 (1) by inserting ‘‘5-YEAR CARRYBACK OF CER16 TAIN LOSSES.—’’ after ‘‘(H)’’, and 

17 (2) by striking ‘‘or 2002’’ and inserting ‘‘, 

18 2002, or 2003’’. 

19 (b) TEMPORARY SUSPENSION OF LIMITATION ON AL20 TERNATIVE MINIMUM TAXABLE INCOME FOR CERTAIN

21 NOL CARRYBACKS.—Subclause (I) of section 

22 56(d)(1)(A)(ii) is amended—

23 (1) by striking ‘‘or 2002’’ and inserting ‘‘, 

24 2002, or 2003’’, and 
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•HR 2896 IH 

1 (2) by striking ‘‘and 2002’’ and inserting ‘‘, 

2 2002, or 2003’’. 

3 (c) TECHNICAL CORRECTIONS.—

4 (1) Subparagraph (H) of section 172(b)(1) is 

5 amended by striking ‘‘a taxpayer which has’’. 

6 (2) Section 102(c)(2) of the Job Creation and 

7 Worker Assistance Act of 2002 (Public Law 107–

8 147) is amended by striking ‘‘before January 1, 

9 2003’’ and inserting ‘‘after December 31, 1990’’. 

10 (3)(A) Subclause (I) of section 56(d)(1)(A)(i) is 

11 amended by striking ‘‘attributable to carryovers’’. 

12 (B) Subclause (I) of section 56(d)(1)(A)(ii) is 

13 amended—

14 (i) by striking ‘‘for taxable years’’ and in15 serting ‘‘from taxable years’’, and 

16 (ii) by striking ‘‘carryforwards’’ and insert17 ing ‘‘carryovers’’. 

18 (d) EFFECTIVE DATES.—

19 (1) IN GENERAL.—Except as provided in para20 graph (2), the amendments made by this section 

21 shall apply to net operating losses for taxable years 

22 ending after December 31, 2002. 

23 (2) TECHNICAL CORRECTIONS.—The amend24 ments made by subsection (c) shall take effect as if 

25 included in the amendments made by section 102 of 
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•HR 2896 IH 

1 the Job Creation and Worker Assistance Act of 

2 2002. 

3 (3) ELECTION.—In the case of a net operating 

4 loss for a taxable year ending during 2003—

5 (A) any election made under section 

6 172(b)(3) of such Code may (notwithstanding 

7 such section) be revoked before November 1, 

8 2003, and 

9 (B) any election made under section 172(j) 

10 of such Code shall (notwithstanding such sec11 tion) be treated as timely made if made before 

12 November 1, 2003. 

13 Subtitle G—Alternative Minimum 

14 Tax Relief 

15 SEC. 1061. NET OPERATING LOSSES AND FOREIGN TAX 

16 CREDIT UNDER ALTERNATIVE MINIMUM TAX. 

17 (a) NET OPERATING LOSSES.—Subparagraph (A) of 

18 section 56(d)(1) is amended to read as follows: 

19 ‘‘(A) the amount of such deduction shall 

20 not exceed the alternative minimum taxable in21 come determined without regard to such deduc22 tion, and’’. 

23 (b) FOREIGN TAX CREDIT.—

24 (1) Subsection (a) of section 59 is amended by 

25 striking paragraph (2) and by redesignating para-
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•HR 2896 IH 

1 graphs (3) and (4) as paragraphs (2) and (3), re2 spectively. 

3 (2) Section 53(d)(1)(B)(i)(II) of such Code is 

4 amended by striking ‘‘and if section 59(a)(2) did not 

5 apply’’. 

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

7 this section shall apply to taxable years beginning after 

8 December 31, 2003. 

9 SEC. 1062. EXPANSION OF EXEMPTION FROM ALTERNATIVE 

10 MINIMUM TAX FOR SMALL CORPORATIONS. 

11 (a) IN GENERAL.—Subparagraphs (A) and (B) of 

12 section 55(e)(1) are each amended by striking 

13 ‘‘$7,500,000’’ each place it appears and inserting 

14 ‘‘$15,000,000’’. 

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

16 this section shall apply to taxable years beginning after 

17 December 31, 2003. 

18 SEC. 1063. REDUCTION IN AMOUNT OF DEPRECIATION SUB19 JECT TO ALTERNATIVE MINIMUM TAX. 

20 (a) IN GENERAL.—Clause (ii) of section 56(a)(1)(A) 

21 is amended—

22 (1) by striking ‘‘150-PERCENT’’ in the heading 

23 and inserting ‘‘175-PERCENT’’, and 

24 (2) by striking ‘‘150 percent’’ in the text and 

25 inserting ‘‘175 percent’’.
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•HR 2896 IH 

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

2 this section shall apply to property placed in service after 

3 December 31, 2005. 

4 Subtitle H—S Corporation Reform 

5 and Simplification 

6 SEC. 1071. MEMBERS OF FAMILY TREATED AS 1 SHARE7 HOLDER. 

8 (a) IN GENERAL.—Paragraph (1) of section 1361(c) 

9 (relating to special rules for applying subsection (b)) is 

10 amended to read as follows: 

11 ‘‘(1) MEMBERS OF FAMILY TREATED AS 1

12 SHAREHOLDER.—

13 ‘‘(A) IN GENERAL.—For purpose of sub14 section (b)(1)(A)—

15 ‘‘(i) except as provided in clause (ii), 

16 a husband and wife (and their estates) 

17 shall be treated as 1 shareholder, and 

18 ‘‘(ii) in the case of a family with re19 spect to which an election is in effect 

20 under subparagraph (E), all members of 

21 the family shall be treated as 1 share22 holder. 

23 ‘‘(B) MEMBERS OF THE FAMILY.—For 

24 purpose of subparagraph (A)(ii), the term 

25 ‘members of the family’ means the common an-
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•HR 2896 IH 

1 cestor, lineal descendants of the common ances2 tor and the spouses (or former spouses) of such 

3 lineal descendants or common ancestor. 

4 ‘‘(C) COMMON ANCESTOR.—For purposes 

5 of this paragraph, an individual shall not be 

6 considered a common ancestor if, as of the later 

7 of the effective date of this paragraph or the 

8 time the election under section 1362(a) is 

9 made, the individual is more than 3 generations 

10 removed from the youngest generation of share11 holders. 

12 ‘‘(D) EFFECT OF ADOPTION, ETC.—In de13 termining whether any relationship specified in 

14 subparagraph (B) or (C) exists, the rules of 

15 section 152(b)(2) shall apply. 

16 ‘‘(E) ELECTION.—An election under sub17 paragraph (A)(ii)—

18 ‘‘(i) must be made with the consent of 

19 shareholders (including those that are fam20 ily members) holding in the aggregate 

21 more than one-half of the shares of stock 

22 in the corporation on the day the election 

23 is made, 

24 ‘‘(ii) in the case of—
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•HR 2896 IH 

1 ‘‘(I) an electing small business 

2 trust, shall be made by the trustee of 

3 the trust, and 

4 ‘‘(II) a qualified subchapter S 

5 trust, shall be made by the beneficiary 

6 of the trust, 

7 ‘‘(iii) under regulations, shall remain 

8 in effect until terminated, and 

9 ‘‘(iv) shall apply only with respect to 

10 1 family in any corporation.’’. 

11 (b) RELIEF FROM INADVERTENT INVALID ELECTION

12 OR TERMINATION.—Section 1362(f) (relating to inad13 vertent invalid elections or terminations), as amended by 

14 section 1079, is amended—

15 (1) by inserting ‘‘or under section 

16 1361(c)(1)(A)(ii)’’ after ‘‘section 1361(b)(3)(B)(ii)’’ 

17 in paragraph (1), and 

18 (2) by inserting ‘‘or under section 

19 1361(c)(1)(E)(iii)’’ after ‘‘section 1361(b)(3)(C)’’ in 

20 paragraph (1)(B). 

21 (c) EFFECTIVE DATES.—

22 (1) SUBSECTION (a).—The amendment made by 

23 subsection (a) shall apply to taxable years beginning 

24 after December 31, 2003. 
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1 (2) SUBSECTION (b).—The amendments made 

2 by subsection (b) shall apply to elections and termi3 nations made after December 31, 2003. 

4 SEC. 1072. INCREASE IN NUMBER OF ELIGIBLE SHARE5 HOLDERS TO 100. 

6 (a) IN GENERAL.—Section 1361(b)(1)(A) (defining 

7 small business corporation) is amended by striking ‘‘75’’ 

8 and inserting ‘‘100’’. 

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

10 this section shall apply to taxable years beginning after 

11 December 31, 2003. 

12 SEC. 1073. EXPANSION OF BANK S CORPORATION ELIGIBLE 

13 SHAREHOLDERS TO INCLUDE IRAS. 

14 (a) IN GENERAL.—Section 1361(c)(2)(A) (relating to 

15 certain trusts permitted as shareholders) is amended by 

16 inserting after clause (v) the following new clause: 

17 ‘‘(vi) In the case of a corporation 

18 which is a bank (as defined in section 

19 581), a trust which constitutes an indi20 vidual retirement account under section 

21 408(a), including one designated as a Roth 

22 IRA under section 408A, but only to the 

23 extent of the stock held by such trust in 

24 such bank as of the date of the enactment 

25 of this clause.’’. 
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•HR 2896 IH 

1 (b) TREATMENT AS SHAREHOLDER.—Section 

2 1361(c)(2)(B) (relating to treatment as shareholders) is 

3 amended by adding at the end the following new clause: 

4 ‘‘(vi) In the case of a trust described 

5 in clause (vi) of subparagraph (A), the in6 dividual for whose benefit the trust was 

7 created shall be treated as a shareholder.’’. 

8 (c) SALE OF BANK STOCK IN IRA RELATING TO S 

9 CORPORATION ELECTION EXEMPT FROM PROHIBITED

10 TRANSACTION RULES.—Section 4975(d) (relating to ex11 emptions) is amended by striking ‘‘or’’ at the end of para12 graph (14), by striking the period at the end of paragraph 

13 (15) and inserting ‘‘; or’’, and by adding at the end the 

14 following new paragraph: 

15 ‘‘(16) a sale of stock held by a trust which con16 stitutes an individual retirement account under sec17 tion 408(a) to the individual for whose benefit such 

18 account is established if—

19 ‘‘(A) such stock is in a bank (as defined in 

20 section 581), 

21 ‘‘(B) such stock is held by such trust as of 

22 the date of the enactment of this paragraph, 

23 ‘‘(C) such sale is pursuant to an election 

24 under section 1362(a) by such bank,
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•HR 2896 IH 

1 ‘‘(D) such sale is for fair market value at 

2 the time of sale (as established by an inde3 pendent appraiser) and the terms of the sale 

4 are otherwise at least as favorable to such trust 

5 as the terms that would apply on a sale to an 

6 unrelated party, 

7 ‘‘(E) such trust does not pay any commis8 sions, costs, or other expenses in connection 

9 with the sale, and 

10 ‘‘(F) the stock is sold in a single trans11 action for cash not later than 120 days after 

12 the S corporation election is made.’’. 

13 (d) CONFORMING AMENDMENT.—Section 512(e)(1) 

14 is amended by inserting ‘‘1361(c)(2)(A)(vi) or’’ before 

15 ‘‘1361(c)(6)’’. 

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

17 this section shall take effect on the date of the enactment 

18 of this Act. 

19 SEC. 1074. DISREGARD OF UNEXERCISED POWERS OF AP20 POINTMENT IN DETERMINING POTENTIAL 

21 CURRENT BENEFICIARIES OF ESBT. 

22 (a) IN GENERAL.—Section 1361(e)(2) (defining po23 tential current beneficiary) is amended—

24 (1) by inserting ‘‘(determined without regard to 

25 any power of appointment to the extent such power 
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•HR 2896 IH 

1 is not exercised during such period)’’ after ‘‘of the 

2 trust’’ in the first sentence, and 

3 (2) by striking ‘‘60-day’’ in the second sentence 

4 and inserting ‘‘1-year’’. 

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

6 this section shall apply to taxable years beginning after 

7 December 31, 2003. 

8 SEC. 1075. TRANSFER OF SUSPENDED LOSSES INCIDENT TO 

9 DIVORCE, ETC. 

10 (a) IN GENERAL.—Section 1366(d)(2) (relating to 

11 indefinite carryover of disallowed losses and deductions) 

12 is amended to read as follows: 

13 ‘‘(2) INDEFINITE CARRYOVER OF DISALLOWED

14 LOSSES AND DEDUCTIONS.—

15 ‘‘(A) IN GENERAL.—Except as provided in 

16 subparagraph (B), any loss or deduction which 

17 is disallowed for any taxable year by reason of 

18 paragraph (1) shall be treated as incurred by 

19 the corporation in the succeeding taxable year 

20 with respect to that shareholder. 

21 ‘‘(B) TRANSFERS OF STOCK BETWEEN

22 SPOUSES OR INCIDENT TO DIVORCE.—In the 

23 case of any transfer described in section 1041 

24 of stock of an S corporation, any loss or deduc25 tion described in subparagraph (A) with respect 
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•HR 2896 IH 

1 such stock shall be treated as incurred by the 

2 corporation in the succeeding taxable year with 

3 respect to the transferee.’’

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

5 this section shall apply to taxable years beginning after 

6 December 31, 2003. 

7 SEC. 1076. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK 

8 AMOUNTS BY QUALIFIED SUBCHAPTER S 

9 TRUST INCOME BENEFICIARIES. 

10 (a) IN GENERAL.—Section 1361(d)(1) (relating to 

11 special rule for qualified subchapter S trust) is amended—

12 (1) by striking ‘‘and’’ at the end of subpara13 graph (A), 

14 (2) by striking the period at the end of sub15 paragraph (B) and inserting ‘‘, and’’, and 

16 (3) by adding at the end the following new sub17 paragraph: 

18 ‘‘(C) for purposes of applying sections 465 

19 and 469 to the beneficiary of the trust, the dis20 position of the S corporation stock by the trust 

21 shall be treated as a disposition by such bene22 ficiary.’’. 

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

24 this section shall apply to transfers made after December 

25 31, 2003. 
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1 SEC. 1077. EXCLUSION OF INVESTMENT SECURITIES IN2 COME FROM PASSIVE INCOME TEST FOR 

3 BANK S CORPORATIONS. 

4 (a) IN GENERAL.—Section 1362(d)(3) (relating to 

5 where passive investment income exceeds 25 percent of 

6 gross receipts for 3 consecutive taxable years and corpora7 tion has accumulated earnings and profits) is amended by 

8 adding at the end the following new subparagraph: 

9 ‘‘(F) EXCEPTION FOR BANKS; ETC.—In 

10 the case of a bank (as defined in section 581) 

11 or a bank holding company (as defined in sec12 tion 246A(c)(3)(B)(ii)), the term ‘passive in13 vestment income’ shall not include—

14 ‘‘(i) interest income earned by such 

15 bank or bank holding company, or 

16 ‘‘(ii) dividends on assets required to 

17 be held by such bank or bank holding com18 pany, including stock in the Federal Re19 serve Bank, the Federal Home Loan Bank, 

20 or the Federal Agricultural Mortgage 

21 Bank or participation certificates issued by 

22 a Federal Intermediate Credit Bank.’’. 

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

24 this section shall apply to taxable years beginning after 

25 December 31, 2003. 
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1 SEC. 1078. TREATMENT OF QUALIFYING DIRECTOR 

2 SHARES. 

3 (a) IN GENERAL.—Section 1361 (defining S corpora4 tion) is amended by adding at the end the following new 

5 subsection: 

6 ‘‘(f) TREATMENT OF QUALIFYING DIRECTOR

7 SHARES.—

8 ‘‘(1) IN GENERAL.—For purposes of this sub9 chapter—

10 ‘‘(A) qualifying director shares shall not be 

11 treated as a second class of stock, and 

12 ‘‘(B) no person shall be treated as a share13 holder of the corporation by reason of holding 

14 qualifying director shares. 

15 ‘‘(2) QUALIFYING DIRECTOR SHARES DE16 FINED.—For purposes of this subsection, the term 

17 ‘qualifying director shares’ means any shares of 

18 stock in a bank (as defined in section 581) or in a 

19 bank holding company registered as such with the 

20 Federal Reserve System—

21 ‘‘(A) which are required to be held by an 

22 individual under applicable Federal or State law

23 in order to permit such individual to serve as 

24 a director, and 

25 ‘‘(B) which are subject to an agreement 

26 pursuant to which the holder is required to dis-
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•HR 2896 IH 

1 pose of the shares of stock upon termination of 

2 the holder’s status as a director at the same 

3 price as the individual acquired such shares of 

4 stock. 

5 ‘‘(3) DISTRIBUTIONS.—A distribution (not in 

6 part or full payment in exchange for stock) made by 

7 the corporation with respect to qualifying director 

8 shares shall be includible as ordinary income of the 

9 holder and deductible to the corporation as an ex10 pense in computing taxable income under section 

11 1363(b) in the year such distribution is received.’’. 

12 (b) CONFORMING AMENDMENT.—Section 1366(a) is 

13 amended by adding at the end the following new para14 graph: 

15 ‘‘(3) ALLOCATION WITH RESPECT TO QUALI16 FYING DIRECTOR SHARES.—The holders of quali17 fying director shares (as defined in section 1361(f)) 

18 shall not, with respect to such shares of stock, be al19 located any of the items described in paragraph 

20 (1).’’. 

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

22 this section shall apply to taxable years beginning after 

23 December 31, 2003. 
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1 SEC. 1079. RELIEF FROM INADVERTENTLY INVALID QUALI2 FIED SUBCHAPTER S SUBSIDIARY ELECTIONS 

3 AND TERMINATIONS. 

4 (a) IN GENERAL.—Section 1362(f) (relating to inad5 vertent invalid elections or terminations) is amended—

6 (1) by inserting ‘‘or under section 

7 1361(b)(3)(B)(ii)’’ after ‘‘subsection (a)’’ in para8 graph (1), 

9 (2) by inserting ‘‘or under section 

10 1361(b)(3)(C)’’ after ‘‘subsection (d)’’ in paragraph 

11 (1)(B), 

12 (3) by inserting ‘‘or a qualified subchapter S 

13 subsidiary, as the case may be’’ after ‘‘small busi14 ness corporation’’ in paragraph (3)(A), 

15 (4) by inserting ‘‘or a qualified subchapter S 

16 subsidiary, as the case may be’’ after ‘‘S corpora17 tion’’ in paragraph (4), and 

18 (5) by inserting ‘‘or a qualified subchapter S 

19 subsidiary, as the case may be’’ after ‘‘S corpora20 tion’’ in the matter following paragraph (4). 

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

22 this section shall apply to taxable years beginning after 

23 December 31, 2003. 
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•HR 2896 IH 

1 SEC. 1080. INFORMATION RETURNS FOR QUALIFIED SUB2 CHAPTER S SUBSIDIARIES. 

3 (a) IN GENERAL.—Section 1361(b)(3)(A) (relating 

4 to treatment of certain wholly owned subsidiaries) is 

5 amended by inserting ‘‘and in the case of information re6 turns required under part III of subchapter A of chapter 

7 61’’ after ‘‘Secretary’’. 

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

9 this section shall apply to taxable years beginning after 

10 December 31, 2003. 

11 Subtitle I—Protecting Employee 

12 Benefits 

13 SEC. 1091. TREATMENT OF NONQUALIFIED DEFERRED 

14 COMPENSATION PLANS. 

15 (a) IN GENERAL.—Subpart A of part I of subchapter 

16 D of chapter 1 is amended by adding at the end the fol17 lowing new section: 

18 ‘‘SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED 

19 COMPENSATION UNDER NONQUALIFIED DE20 FERRED COMPENSATION PLANS. 

21 ‘‘(a) RULES RELATING TO CONSTRUCTIVE RE22 CEIPT.—

23 ‘‘(1) IN GENERAL.—

24 ‘‘(A) GROSS INCOME INCLUSION.—In the 

25 case of a nonqualified deferred compensation 

26 plan, all compensation deferred under the plan 
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•HR 2896 IH 

1 for all taxable years (to the extent not subject 

2 to a substantial risk of forfeiture and not pre3 viously included in gross income) shall be in4 cludible in gross income for the taxable year 

5 unless at all times during the taxable year the 

6 plan meets the requirements of paragraphs (2), 

7 (3), and (4) and is operated in accordance with 

8 such requirements. 

9 ‘‘(B) INTEREST ON TAX LIABILITY PAY10 ABLE WITH RESPECT TO PREVIOUSLY DE11 FERRED COMPENSATION.—

12 ‘‘(i) IN GENERAL.—If compensation is 

13 required to be included in gross income 

14 under subparagraph (A) for a taxable year, 

15 the tax imposed by this chapter for such 

16 taxable year shall be increased by the 

17 amount of interest determined under 

18 clause (ii). 

19 ‘‘(ii) INTEREST.—For purposes of 

20 clause (i), the interest determined under 

21 this clause for any taxable year is the

22 amount of interest at the underpayment 

23 rate plus 1 percentage point on the under24 payments that would have occurred had 

25 the deferred compensation been includible 
45

•HR 2896 IH 

1 in gross income for the taxable year in 

2 which first deferred or, if later, the first 

3 taxable in which such deferred compensa4 tion is not subject to a substantial risk of 

5 forfeiture. 

6 ‘‘(2) DISTRIBUTIONS.—

7 ‘‘(A) IN GENERAL.—The requirements of 

8 this paragraph are met if the plan provides that 

9 compensation deferred under the plan may not 

10 be distributed earlier than—

11 ‘‘(i) separation from service (except as 

12 provided in subparagraph (B)(i)), 

13 ‘‘(ii) disability (as defined by section 

14 223(d) of the Social Security Act), 

15 ‘‘(iii) death, 

16 ‘‘(iv) a specified time (or pursuant to 

17 a fixed schedule) specified under the plan 

18 as of the date of the deferral of such com19 pensation, 

20 ‘‘(v) to the extent provided by the 

21 Secretary, a change in the ownership or ef22 fective control of the corporation, or in the 

23 ownership of a substantial portion of the 

24 assets of the corporation, or 
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•HR 2896 IH 

1 ‘‘(vi) the occurrence of an unforesee2 able emergency. 

3 ‘‘(B) SPECIAL RULES.—

4 ‘‘(i) SPECIFIED EMPLOYEES.—In the 

5 case of specified employees, the require6 ment of subparagraph (A)(i) is met only if 

7 distributions may not be made earlier than 

8 6 months after the date of separation from 

9 service. For purposes of the preceding sen10 tence, a specified employee is a key em11 ployee (as defined in section 416(i)) of a 

12 corporation the stock in which is publicly 

13 traded on an established securities market 

14 or otherwise. 

15 ‘‘(ii) UNFORESEEABLE EMER16 GENCY.—For purposes of subparagraph 

17 (A)(vi)—

18 ‘‘(I) IN GENERAL.—The term 

19 ‘unforeseeable emergency’ means a se20 vere financial hardship to the partici21 pant resulting from a sudden and un22 expected illness or accident of the par23 ticipant or of a dependent (as defined 

24 in section 152(a)) of the participant, 

25 loss of the participant’s property due 
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•HR 2896 IH 

1 to casualty, or other similar extraor2 dinary and unforeseeable cir3 cumstances arising as a result of 

4 events beyond the control of the par5 ticipant. 

6 ‘‘(II) LIMITATION ON DISTRIBU7 TIONS.—The requirement of subpara8 graph (A)(vi) is met only if, as deter9 mined under regulations of the Sec10 retary, the amounts distributed with 

11 respect to an emergency do not exceed 

12 the amounts necessary to satisfy such 

13 emergency plus amounts necessary to 

14 pay taxes reasonably anticipated as a 

15 result of the distribution, after taking 

16 into account the extent to which such 

17 hardship is or may be relieved 

18 through reimbursement or compensa19 tion by insurance or otherwise or by 

20 liquidation of the participant’s assets 

21 (to the extent the liquidation of such 

22 assets would not itself cause severe fi23 nancial hardship). 

24 ‘‘(3) ACCELERATION OF BENEFITS.—The re25 quirements of this paragraph are met if the plan 
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1 does not permit the acceleration of the time or 

2 schedule under paragraph (2)(A)(iv). 

3 ‘‘(4) ELECTIONS.—

4 ‘‘(A) IN GENERAL.—The requirements of 

5 this paragraph are met if the requirements of 

6 subparagraphs (B) and (C) are met. 

7 ‘‘(B) INITIAL DEFERRAL DECISION.—The 

8 requirements of this subparagraph are met if 

9 the plan provides that compensation earned 

10 during a taxable year may be deferred at the 

11 employee’s election only if the election to defer 

12 such compensation is made during the pre13 ceding taxable year or at such other time as 

14 provided in regulations. In the case of the first 

15 year in which an employee becomes eligible to 

16 participate in the plan, such election may be 

17 made with respect to services to be performed 

18 subsequent to the election within 30 days after 

19 the date the employee becomes eligible to par20 ticipate in such plan. 

21 ‘‘(C) CHANGES IN TIME AND FORM OF DIS22 TRIBUTION.—The requirements of this subpara23 graph are met if, in the case of a plan which 

24 permits under a subsequent election a delay in 

25 a payment distributable under paragraph 
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•HR 2896 IH 

1 (2)(A)(iv) or a change in the form of pay2 ment—

3 ‘‘(i) such election may not be made 

4 less than 12 months prior to the date of 

5 the first scheduled payment under para6 graph (2)(A)(iv), and 

7 ‘‘(ii) the plan requires that payments 

8 with respect to which such election is made 

9 be deferred for a period of not less than 5 

10 years from the date of such election. 

11 ‘‘(b) RULES RELATING TO FUNDING.—

12 ‘‘(1) OFFSHORE PROPERTY IN A TRUST.—In 

13 the case of assets set aside (directly or indirectly) in 

14 a trust (or other arrangement determined by the 

15 Secretary) for purposes of paying deferred com16 pensation under a nonqualified deferred compensa17 tion plan, for purposes of section 83 such assets 

18 shall be treated as property transferred in connec19 tion with the performance of services whether or not

20 such assets are available to satisfy claims of general 

21 creditors—

22 ‘‘(A) at the time set aside if such assets 

23 are located outside of the United States, or 
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•HR 2896 IH 

1 ‘‘(B) at the time transferred if such assets 

2 are subsequently transferred outside of the 

3 United States. 

4 ‘‘(2) EMPLOYER’S FINANCIAL HEALTH.—In the 

5 case of a nonqualified deferred compensation plan, 

6 there is a transfer of property within the meaning 

7 of section 83 as of the earlier of—

8 ‘‘(A) the date on which the plan first pro9 vides that assets will become restricted to the 

10 provision of benefits under the plan in connec11 tion with a change in the employer’s financial 

12 health, or 

13 ‘‘(B) the date on which assets are so re14 stricted. 

15 ‘‘(3) INCOME INCLUSION FOR OFFSHORE

16 TRUSTS AND EMPLOYER’S FINANCIAL HEALTH.—For 

17 each taxable year that assets treated as transferred 

18 under this subsection remain set aside in a trust or 

19 other arrangement subject to paragraph (1) or (2), 

20 any increase in value in, or earnings with respect to, 

21 such assets shall be treated as an additional transfer 

22 of property under this subsection (to the extent not 

23 previously included in income). 

24 ‘‘(4) INTEREST ON TAX LIABILITY PAYABLE

25 WITH RESPECT TO TRANSFERRED PROPERTY.—
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•HR 2896 IH 

1 ‘‘(A) IN GENERAL.—If amounts are re2 quired to be included in gross income by reason 

3 of paragraph (1) or (2) for a taxable year, the 

4 tax imposed by this chapter for such taxable 

5 year shall be increased by the amount of inter6 est determined under subparagraph (B). 

7 ‘‘(B) INTEREST.—The interest determined 

8 under this subparagraph for any taxable year is 

9 the amount of interest at the underpayment 

10 rate plus 1 percentage point on the underpay11 ments that would have occurred had the 

12 amounts so required to be included in gross in13 come by paragraph (1) or (2) been includible in 

14 gross income for the taxable year in which such 

15 assets were first set aside (directly or indi16 rectly) in a trust (or other arrangement deter17 mined by the Secretary) for purposes of the 

18 nonqualified deferred compensation plan. 

19 ‘‘(c) NO INFERENCE ON EARLIER INCOME INCLU20 SION.—Nothing in this section shall be construed to pre21 vent the inclusion of amounts in gross income under any 

22 other provision of this chapter or any other rule of law 

23 earlier than the time provided in this section. 

24 ‘‘(d) OTHER DEFINITIONS AND SPECIAL RULES.—

25 For purposes of this section—
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•HR 2896 IH 

1 ‘‘(1) NONQUALIFIED DEFERRED COMPENSA2 TION PLAN.—The term ‘nonqualified deferred com3 pensation plan’ means any plan that provides for the 

4 deferral of compensation, other than—

5 ‘‘(A) a qualified employer plan, and 

6 ‘‘(B) any bona fide vacation leave, sick 

7 leave, compensatory time, disability pay, or 

8 death benefit plan. 

9 ‘‘(2) QUALIFIED EMPLOYER PLAN.—The term 

10 ‘qualified employer plan’ means—

11 ‘‘(A) any plan, contract, pension, account, 

12 or trust described in subparagraph (A) or (B) 

13 of section 219(g)(5), and 

14 ‘‘(B) any eligible deferred compensation 

15 plan (within the meaning of section 457(b)) of 

16 an employer described in section 457(e)(1)(A). 

17 ‘‘(3) PLAN INCLUDES ARRANGEMENTS, ETC.—

18 The term ‘plan’ includes any agreement or arrange19 ment, including an agreement or arrangement that 

20 includes one person. 

21 ‘‘(4) SUBSTANTIAL RISK OF FORFEITURE.—The 

22 rights of a person to compensation are subject to a 

23 substantial risk of forfeiture if such person’s rights 

24 to such compensation are conditioned upon the fu-
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•HR 2896 IH 

1 ture performance of substantial services by any indi2 vidual. 

3 ‘‘(5) TREATMENT OF EARNINGS.—References to 

4 deferred compensation shall be treated as including 

5 references to income (whether actual or notional) at6 tributable to such compensation or such income. 

7 ‘‘(e) REGULATIONS.—The Secretary shall prescribe 

8 such regulations as may be necessary or appropriate to 

9 carry out the purposes of this section, including regula10 tions—

11 ‘‘(1) providing for the determination of 

12 amounts of deferral in the case of a nonqualified de13 ferred compensation plan which is a defined benefit 

14 plan, 

15 ‘‘(2) relating to changes in the ownership and 

16 control of a corporation or assets of a corporation 

17 for purposes of subsection (a)(2)(A)(v), 

18 ‘‘(3) exempting arrangements from the applica19 tion of subsection (b) if such arrangements will not 

20 result in an improper deferral of United States tax 

21 and will not result in assets being effectively beyond 

22 the reach of creditors, 

23 ‘‘(4) defining financial health for purposes of 

24 subsection (b)(2), and 
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•HR 2896 IH 

1 ‘‘(5) disregarding a substantial risk of for2 feiture in cases where necessary to carry out the 

3 purposes of this section.’’. 

4 (b) W–2 FORMS.—

5 (1) IN GENERAL.—Subsection (a) of section 

6 6051 (relating to receipts for employees) is amended 

7 by striking ‘‘and’’, by striking the period at the end 

8 of paragraph (11) and inserting ‘‘, and’’, and by in9 serting after paragraph (11) the following new para10 graph: 

11 ‘‘(12) the total amount of deferrals under a 

12 nonqualified deferred compensation plan (within the 

13 meaning of section 409A(d)).’’. 

14 (2) THRESHOLD.—Subsection (a) of section 

15 6051 is amended by adding at the end the following: 

16 ‘‘In the case of the amounts required to be shown 

17 by paragraph (12), the Secretary may (by regula18 tion) establish a minimum amount of deferrals below 

19 which paragraph (12) does not apply.’’. 

20 (c) CONFORMING AND CLERICAL AMENDMENTS.—

21 (1) Section 414(b) is amended by inserting 

22 ‘‘409A,’’ after ‘‘408(p),’’. 

23 (2) Section 414(c) is amended by inserting 

24 ‘‘409A,’’ after ‘‘408(p),’’. 
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•HR 2896 IH 

1 (3) The table of sections for such subpart A is 

2 amended by adding at the end the following new 

3 item:

‘‘Sec. 409A. Inclusion in gross income of deferred compensation 

under nonqualified deferred compensation plans.’’.

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

5 this section shall apply to amounts deferred in taxable 

6 years beginning after December 31, 2003. 

7 SEC. 1092. EXCLUSION OF INCENTIVE STOCK OPTIONS AND 

8 EMPLOYEE STOCK PURCHASE PLAN STOCK 

9 OPTIONS FROM WAGES. 

10 (a) EXCLUSION FROM EMPLOYMENT TAXES.—

11 (1) SOCIAL SECURITY TAXES.—

12 (A) Section 3121(a) (relating to definition 

13 of wages) is amended by striking ‘‘or’’ at the 

14 end of paragraph (20), by striking the period at 

15 the end of paragraph (21) and inserting ‘‘; or’’, 

16 and by inserting after paragraph (21) the fol17 lowing new paragraph: 

18 ‘‘(22) remuneration on account of—

19 ‘‘(A) a transfer of a share of stock to any 

20 individual pursuant to an exercise of an incen21 tive stock option (as defined in section 422(b)) 

22 or under an employee stock purchase plan (as 

23 defined in section 423(b)), or 
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•HR 2896 IH 

1 ‘‘(B) any disposition by the individual of 

2 such stock.’’. 

3 (B) Section 209(a) of the Social Security 

4 Act is amended by striking ‘‘or’’ at the end of 

5 paragraph (17), by striking the period at the 

6 end of paragraph (18) and inserting ‘‘; or’’, and 

7 by inserting after paragraph (18) the following 

8 new paragraph: 

9 ‘‘(19) Remuneration on account of—

10 ‘‘(A) a transfer of a share of stock to any 

11 individual pursuant to an exercise of an incen12 tive stock option (as defined in section 422(b) 

13 of the Internal Revenue Code of 1986) or under 

14 an employee stock purchase plan (as defined in 

15 section 423(b) of such Code), or 

16 ‘‘(B) any disposition by the individual of 

17 such stock.’’. 

18 (2) RAILROAD RETIREMENT TAXES.—Sub19 section (e) of section 3231 is amended by adding at 

20 the end the following new paragraph: 

21 ‘‘(11) QUALIFIED STOCK OPTIONS.—The term 

22 ‘compensation’ shall not include any remuneration 

23 on account of—

24 ‘‘(A) a transfer of a share of stock to any 

25 individual pursuant to an exercise of an incen-
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•HR 2896 IH 

1 tive stock option (as defined in section 422(b)) 

2 or under an employee stock purchase plan (as 

3 defined in section 423(b)), or 

4 ‘‘(B) any disposition by the individual of 

5 such stock.’’. 

6 (3) UNEMPLOYMENT TAXES.—Section 3306(b) 

7 (relating to definition of wages) is amended by strik8 ing ‘‘or’’ at the end of paragraph (16), by striking 

9 the period at the end of paragraph (17) and insert10 ing ‘‘; or’’, and by inserting after paragraph (17) the 

11 following new paragraph: 

12 ‘‘(18) remuneration on account of—

13 ‘‘(A) a transfer of a share of stock to any 

14 individual pursuant to an exercise of an incen15 tive stock option (as defined in section 422(b)) 

16 or under an employee stock purchase plan (as 

17 defined in section 423(b)), or 

18 ‘‘(B) any disposition by the individual of 

19 such stock.’’. 

20 (b) WAGE WITHHOLDING NOT REQUIRED ON DIS21 QUALIFYING DISPOSITIONS.—Section 421(b) (relating to 

22 effect of disqualifying dispositions) is amended by adding 

23 at the end the following new sentence: ‘‘No amount shall 

24 be required to be deducted and withheld under chapter 
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•HR 2896 IH 

1 24 with respect to any increase in income attributable to 

2 a disposition described in the preceding sentence.’’. 

3 (c) WAGE WITHHOLDING NOT REQUIRED ON COM4 PENSATION WHERE OPTION PRICE IS BETWEEN 85 PER5 CENT AND 100 PERCENT OF VALUE OF STOCK.—Section 

6 423(c) (relating to special rule where option price is be7 tween 85 percent and 100 percent of value of stock) is 

8 amended by adding at the end the following new sentence: 

9 ‘‘No amount shall be required to be deducted and withheld 

10 under chapter 24 with respect to any amount treated as 

11 compensation under this subsection.’’. 

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

13 this section shall apply to stock acquired pursuant to op14 tions exercised after the date of the enactment of this Act. 

15 SEC. 1093. EXTENSION OF TRANSFERS OF EXCESS PENSION 

16 ASSETS TO RETIREE HEALTH ACCOUNTS. 

17 Paragraph (5) of section 420(b) (relating to expira18 tion) is amended by striking ‘‘December 31, 2005’’ and 

19 inserting ‘‘December 31, 2013’’. 

20 Subtitle J—Treatment of Active 

21 Income 

22 SEC. 1101. REPEAL OF CFC RULES ON FOREIGN BASE COM23 PANY SALES AND SERVICES INCOME. 

24 (a) IN GENERAL.—Subsection (a) of section 954 (re25 lating to foreign base company income) is amended by 
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•HR 2896 IH 

1 striking paragraphs (2) and (3) and by redesignating 

2 paragraphs (4) and (5) as paragraphs (2) and (3), respec3 tively. 

4 (b) CERTAIN SALES.—Paragraph (1) of section 

5 954(c) is amended by adding at the end the following new 

6 subparagraph: 

7 ‘‘(H) CERTAIN SALES.—Income (whether 

8 in the form of profits, commissions, fees, or 

9 otherwise) derived in connection with the pur10 chase of personal property from a related per11 son and its sale to any person, the sale of per12 sonal property to any person on behalf of a re13 lated person, the purchase of personal property 

14 from any person and its sale to a related per15 son, or the purchase of personal property from 

16 any person on behalf of a related person if—

17 ‘‘(i) the property which is purchased 

18 (or in the case of property sold on behalf 

19 of a related person, the property which is

20 sold) is manufactured, produced, grown, or 

21 extracted in the United States, and 

22 ‘‘(ii) the property is sold for use, con23 sumption, or disposition in the United 

24 States, or, in the case of property pur25 chased on behalf of a related person, is 
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1 purchased for use, consumption, or disposi2 tion in the United States.’’

3 (c) CONFORMING AMENDMENTS.—

4 (1) Clause (iii) of section 952(c)(1)(B) is 

5 amended by striking subclauses (III) and (IV) and 

6 by redesignating subclauses (V) and (VI) as sub7 clauses (III) and (IV), respectively. 

8 (2) Section 953(c)(6)(A) is amended by striking 

9 ‘‘section 954(d)(3)’’ and inserting ‘‘section 

10 954(b)(9)’’. 

11 (3) Subsection (b) of section 954 is amended by 

12 adding at the end the following new paragraph: 

13 ‘‘(9) RELATED PERSON DEFINED.—For pur14 poses of this subsection, a person is a related person 

15 with respect to a controlled foreign corporation if—

16 ‘‘(A) such person is an individual, corpora17 tion, partnership, trust, or estate which con18 trols, or is controlled by, the controlled foreign 

19 corporation, or 

20 ‘‘(B) such person is a corporation, partner21 ship, trust, or estate which is controlled by the 

22 same person or persons which control the con23 trolled foreign corporation. 

24 For purposes of the preceding sentence, control 

25 means, with respect to a corporation, the ownership, 
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1 directly or indirectly, of stock possessing more than 

2 50 percent of the total voting power of all classes of 

3 stock entitled to vote or of the total value of stock 

4 of such corporation. In the case of a partnership, 

5 trust, or estate, control means the ownership, di6 rectly or indirectly, of more than 50 percent (by 

7 value) of the beneficial interests in such partnership, 

8 trust, or estate. For purposes of this paragraph, 

9 rules similar to the rules of section 958 shall apply.’’

10 (4) Paragraph (5) of section 954(b) is amended 

11 by striking ‘‘the foreign base company sales income, 

12 the foreign base company services income,’’. 

13 (5) Section 954 is amended by striking sub14 sections (d) and (e). 

15 (6) Sections 552(c)(2), 861(c)(2)(B), 

16 904(d)(2)(H), 953(e), 955(b), 958(b), 971(f), 

17 988(e)(3)(C), 1297(b)(2), 1298(d)(3), and 

18 1298(e)(2)(B) are each amended by striking 

19 ‘‘954(d)(3)’’ each place it appears and inserting 

20 ‘‘954(b)(9)’’. 

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

22 this section shall apply to taxable years of foreign corpora23 tions beginning after December 31, 2005, and to taxable 

24 years of United States shareholders with or within which 

25 such taxable years of foreign corporations end. 
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1 SEC. 1102. EXTENSION OF EXCEPTION OF ACTIVE FINANC2 ING INCOME FROM FOREIGN PERSONAL 

3 HOLDING COMPANY INCOME. 

4 (a) INSURANCE INCOME.—Section 953(e)(10) is 

5 amended—

6 (1) by striking ‘‘January 1, 2007’’ and insert7 ing ‘‘January 1, 2008’’, and 

8 (2) by striking ‘‘December 31, 2006’’ and in9 serting ‘‘December 31, 2007’’. 

10 (b) ACTIVE CONDUCT OF BANKING, FINANCING, OR

11 SIMILAR BUSINESSES.—Paragraph (9) of section 954(h) 

12 (relating to special rule for income derived in the active 

13 conduct of banking, financing, or similar business) is 

14 amended by striking ‘‘January 1, 2007’’ and inserting 

15 ‘‘January 1, 2008’’. 

16 SEC. 1103. LOOK-THRU TREATMENT OF PAYMENTS BE17 TWEEN RELATED CONTROLLED FOREIGN 

18 CORPORATIONS UNDER FOREIGN PERSONAL 

19 HOLDING COMPANY INCOME RULES. 

20 Subsection (c) of section 954 is amended by adding 

21 after paragraph (3) the following new paragraph: 

22 ‘‘(4) LOOK-THRU IN THE CASE OF RELATED

23 CONTROLLED FOREIGN CORPORATIONS.—For pur24 poses of this subsection, dividends, interest, rents, 

25 and royalties received or accrued from a controlled 

26 foreign corporation which is a related person (as de-
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•HR 2896 IH 

1 fined in subsection (b)(9)) shall not be treated as 

2 foreign personal holding company income to the ex3 tent attributable or properly allocable (determined 

4 under rules similar to the rules of subparagraphs 

5 (C) and (D) of section 904(d)(3)) to income of the 

6 related person which is not subpart F income (as de7 fined in section 952). The Secretary shall prescribe 

8 such regulations as may be appropriate to prevent 

9 the abuse of the purposes of this paragraph.’’

10 SEC. 1104. LOOK-THRU TREATMENT FOR SALES OF PART11 NERSHIP INTERESTS. 

12 Section 954(c) (defining foreign personal holding 

13 company income) is amended by adding after paragraph 

14 (4) the following new paragraph: 

15 ‘‘(5) LOOK-THRU RULE FOR CERTAIN PARTNER16 SHIP SALES.—

17 ‘‘(A) IN GENERAL.—In the case of any 

18 sale by a controlled foreign corporation of an 

19 interest in a partnership with respect to which 

20 such corporation is a 25-percent owner, such 

21 corporation shall be treated for purposes of this 

22 subsection as selling the proportionate share of 

23 the assets of the partnership attributable to 

24 such interest. 
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1 ‘‘(B) 25-PERCENT OWNER.—For purposes 

2 of this paragraph, the term ‘25-percent owner’ 

3 means a controlled foreign corporation which 

4 owns (within the meaning of section 958(a)) 25 

5 percent or more of the capital or profits interest 

6 in the partnership.’’

7 SEC. 1105. REPEAL OF FOREIGN PERSONAL HOLDING COM8 PANY RULES AND FOREIGN INVESTMENT 

9 COMPANY RULES. 

10 (a) GENERAL RULE.—The following provisions are 

11 hereby repealed: 

12 (1) Part III of subchapter G of chapter 1 (re13 lating to foreign personal holding companies). 

14 (2) Section 1246 (relating to gain on foreign in15 vestment company stock).

16 (3) Section 1247 (relating to election by foreign 

17 investment companies to distribute income cur18 rently). 

19 (b) EXEMPTION OF FOREIGN CORPORATIONS FROM

20 PERSONAL HOLDING COMPANY RULES.—

21 (1) IN GENERAL.—Subsection (c) of section 

22 542 (relating to exceptions) is amended—

23 (A) by striking paragraph (5) and insert24 ing the following: 

25 ‘‘(5) a foreign corporation,’’, 
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1 (B) by striking paragraphs (7) and (10) 

2 and by redesignating paragraphs (8) and (9) as 

3 paragraphs (7) and (8), respectively, 

4 (C) by inserting ‘‘and’’ at the end of para5 graph (7) (as so redesignated), and 

6 (D) by striking ‘‘; and’’ at the end of para7 graph (8) (as so redesignated) and inserting a 

8 period. 

9 (2) TREATMENT OF INCOME FROM PERSONAL

10 SERVICE CONTRACTS.—Paragraph (1) of section 

11 954(c) is amended by adding at the end the fol12 lowing new subparagraph: 

13 ‘‘(I) PERSONAL SERVICE CONTRACTS.—

14 ‘‘(i) Amounts received under a con15 tract under which the corporation is to fur16 nish personal services if—

17 ‘‘(I) some person other than the 

18 corporation has the right to designate 

19 (by name or by description) the indi20 vidual who is to perform the services, 

21 or 

22 ‘‘(II) the individual who is to per23 form the services is designated (by 

24 name or by description) in the con25 tract, and 
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•HR 2896 IH 

1 ‘‘(ii) amounts received from the sale 

2 or other disposition of such a contract. 

3 This subparagraph shall apply with respect to 

4 amounts received for services under a particular 

5 contract only if at some time during the taxable 

6 year 25 percent or more in value of the out7 standing stock of the corporation is owned, di8 rectly or indirectly, by or for the individual who 

9 has performed, is to perform, or may be des10 ignated (by name or by description) as the one 

11 to perform, such services.’’

12 (c) CONFORMING AMENDMENTS.—

13 (1) Clause (iii) of section 1(h)(11)(C) is amend14 ed by striking ‘‘a foreign personal holding company 

15 (as defined in section 552), a foreign investment 

16 company (as defined in section 1246(b)), or’’. 

17 (2) Paragraph (2) of section 171(c) is amend18 ed—

19 (A) by striking ‘‘, or by a foreign personal 

20 holding company, as defined in section 552’’, 

21 and 

22 (B) by striking ‘‘, or foreign personal hold23 ing company’’. 

24 (3) Paragraph (2) of section 245(a) is amended 

25 by striking ‘‘foreign personal holding company or’’. 
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•HR 2896 IH 

1 (4) Section 312 is amended by striking sub2 section (j). 

3 (5) Subsection (m) of section 312 is amended 

4 by striking ‘‘, a foreign investment company (within 

5 the meaning of section 1246(b)), or a foreign per6 sonal holding company (within the meaning of sec7 tion 552)’’. 

8 (6) Subsection (e) of section 443 is amended by 

9 striking paragraph (3) and by redesignating para10 graphs (4) and (5) as paragraphs (3) and (4), re11 spectively. 

12 (7) Subparagraph (B) of section 465(c)(7) is 

13 amended by adding ‘‘or’’ at the end of clause (i), by 

14 striking clause (ii), and by redesignating clause (iii) 

15 as clause (ii). 

16 (8) Paragraph (1) of section 543(b) is amended 

17 by inserting ‘‘and’’ at the end of subparagraph (A), 

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

19 and inserting a period, and by striking subparagraph 

20 (C). 

21 (9) Paragraph (1) of section 562(b) is amended 

22 by striking ‘‘or a foreign personal holding company 

23 described in section 552’’. 

24 (10) Section 563 is amended—

25 (A) by striking subsection (c), 
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•HR 2896 IH 

1 (B) by redesignating subsection (d) as sub2 section (c), and 

3 (C) by striking ‘‘subsection (a), (b), or (c)’’ 

4 in subsection (c) (as so redesignated) and in5 serting ‘‘subsection (a) or (b)’’. 

6 (11) Subsection (d) of section 751 is amended 

7 by adding ‘‘and’’ at the end of paragraph (2), by 

8 striking paragraph (3), by redesignating paragraph 

9 (4) as paragraph (3), and by striking ‘‘paragraph 

10 (1), (2), or (3)’’ in paragraph (3) (as so redesig11 nated) and inserting ‘‘paragraph (1) or (2)’’. 

12 (12) Paragraph (2) of section 864(d) is amend13 ed by striking subparagraph (A) and by redesig14 nating subparagraphs (B) and (C) as subparagraphs 

15 (A) and (B), respectively. 

16 (13)(A) Subparagraph (A) of section 898(b)(1) 

17 is amended to read as follows: 

18 ‘‘(A) which is treated as a controlled for19 eign corporation for any purpose under subpart 

20 F of part III of this subchapter, and’’. 

21 (B) Subparagraph (B) of section 898(b)(2) is 

22 amended by striking ‘‘and sections 551(f) and 554, 

23 whichever are applicable,’’. 

24 (C) Paragraph (3) of section 898(b) is amended 

25 to read as follows: 
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•HR 2896 IH 

1 ‘‘(3) UNITED STATES SHAREHOLDER.—The 

2 term ‘United States shareholder’ has the meaning 

3 given to such term by section 951(b), except that, in 

4 the case of a foreign corporation having related per5 son insurance income (as defined in section 

6 953(c)(2)), the Secretary may treat any person as a 

7 United States shareholder for purposes of this sec8 tion if such person is treated as a United States 

9 shareholder under section 953(c)(1).’’

10 (D) Subsection (c) of section 898 is amended to 

11 read as follows:

12 ‘‘(c) DETERMINATION OF REQUIRED YEAR.—

13 ‘‘(1) IN GENERAL.—The required year is—

14 ‘‘(A) the majority U.S. shareholder year, 

15 or 

16 ‘‘(B) if there is no majority U.S. share17 holder year, the taxable year prescribed under 

18 regulations. 

19 ‘‘(2) 1-MONTH DEFERRAL ALLOWED.—A speci20 fied foreign corporation may elect, in lieu of the tax21 able year under paragraph (1)(A), a taxable year be22 ginning 1 month earlier than the majority U.S. 

23 shareholder year. 

24 ‘‘(3) MAJORITY U.S. SHAREHOLDER YEAR.—
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1 ‘‘(A) IN GENERAL.—For purposes of this 

2 subsection, the term ‘majority U.S. shareholder 

3 year’ means the taxable year (if any) which, on 

4 each testing day, constituted the taxable year 

5 of—

6 ‘‘(i) each United States shareholder 

7 described in subsection (b)(2)(A), and 

8 ‘‘(ii) each United States shareholder 

9 not described in clause (i) whose stock was 

10 treated as owned under subsection 

11 (b)(2)(B) by any shareholder described in 

12 such clause. 

13 ‘‘(B) TESTING DAY.—The testing days 

14 shall be—

15 ‘‘(i) the first day of the corporation’s 

16 taxable year (determined without regard to 

17 this section), or 

18 ‘‘(ii) the days during such representa19 tive period as the Secretary may pre20 scribe.’’ 

21 (14) Clause (ii) of section 904(d)(2)(A) is 

22 amended to read as follows: 

23 ‘‘(ii) CERTAIN AMOUNTS INCLUDED.—

24 Except as provided in clause (iii), the term 

25 ‘passive income’ includes, except as pro-
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•HR 2896 IH 

1 vided in subparagraph (E)(iii) or para2 graph (3)(I), any amount includible in 

3 gross income under section 1293 (relating 

4 to certain passive foreign investment com5 panies).’’

6 (15)(A) Subparagraph (A) of section 904(g)(1) 

7 is amended by adding ‘‘or’’ at the end of clause (i), 

8 by striking clause (ii), and by redesignating clause 

9 (iii) as clause (ii). 

10 (B) The paragraph heading of paragraph (2) of 

11 section 904(g) is amended by striking ‘‘FOREIGN

12 PERSONAL HOLDING OR’’. 

13 (16) Section 951 is amended by striking sub14 sections (c) and (d) and by redesignating subsections 

15 (e) and (f) as subsections (c) and (d), respectively. 

16 (17) Paragraph (3) of section 989(b) is amend17 ed by striking ‘‘, 551(a),’’. 

18 (18) Paragraph (5) of section 1014(b) is 

19 amended by inserting ‘‘and before January 1, 

20 2004,’’ after ‘‘August 26, 1937,’’. 

21 (19) Subsection (a) of section 1016 is amended 

22 by striking paragraph (13). 

23 (20)(A) Paragraph (3) of section 1212(a) is 

24 amended to read as follows: 
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•HR 2896 IH 

1 ‘‘(3) SPECIAL RULES ON CARRYBACKS.—A net 

2 capital loss of a corporation shall not be carried 

3 back under paragraph (1)(A) to a taxable year—

4 ‘‘(A) for which it is a regulated investment 

5 company (as defined in section 851), or 

6 ‘‘(B) for which it is a real estate invest7 ment trust (as defined in section 856).’’

8 (B) The amendment made by subparagraph (A) 

9 shall apply to taxable years beginning after Decem10 ber 31, 2005. 

11 (21) Section 1223 is amended by striking para12 graph (10) and by redesignating the following para13 graphs accordingly. 

14 (22) Subsection (d) of section 1248 is amended 

15 by striking paragraph (5) and by redesignating 

16 paragraphs (6) and (7) as paragraphs (5) and (6), 

17 respectively. 

18 (23) Paragraph (2) of section 1260(c) is 

19 amended by striking subparagraphs (H) and (I) and 

20 by redesignating subparagraph (J) as subparagraph 

21 (H). 

22 (24)(A) Subparagraph (F) of section 

23 1291(b)(3) is amended by striking ‘‘551(d), 959(a),’’ 

24 and inserting ‘‘959(a)’’. 
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•HR 2896 IH 

1 (B) Subsection (e) of section 1291 is amended 

2 by inserting ‘‘(as in effect on the day before the date 

3 of the enactment of the American Jobs Creation Act 

4 of 2003)’’ after ‘‘section 1246’’. 

5 (25) Paragraph (2) of section 1294(a) is 

6 amended to read as follows: 

7 ‘‘(2) ELECTION NOT PERMITTED WHERE

8 AMOUNTS OTHERWISE INCLUDIBLE UNDER SECTION

9 951.—The taxpayer may not make an election under 

10 paragraph (1) with respect to the undistributed 

11 PFIC earnings tax liability attributable to a quali12 fied electing fund for the taxable year if any amount 

13 is includible in the gross income of the taxpayer 

14 under section 951 with respect to such fund for such 

15 taxable year.’’

16 (26) Section 6035 is hereby repealed. 

17 (27) Subparagraph (D) of section 6103(e)(1) is 

18 amended by striking clause (iv) and redesignating 

19 clauses (v) and (vi) as clauses (iv) and (v), respec20 tively. 

21 (28) Subparagraph (B) of section 6501(e)(1) is 

22 amended to read as follows: 

23 ‘‘(B) CONSTRUCTIVE DIVIDENDS.—If the 

24 taxpayer omits from gross income an amount 

25 properly includible therein under section 
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•HR 2896 IH 

1 951(a), the tax may be assessed, or a pro2 ceeding in court for the collection of such tax 

3 may be done without assessing, at any time 

4 within 6 years after the return was filed.’’ 

5 (29) Subsection (a) of section 6679 is amend6 ed—

7 (A) by striking ‘‘6035, 6046, and 6046A’’ 

8 in paragraph (1) and inserting ‘‘6046 and 

9 6046A’’, and 

10 (B) by striking paragraph (3). 

11 (30) Sections 170(f)(10)(A), 508(d), 4947, and 

12 4948(c)(4) are each amended by striking 

13 ‘‘556(b)(2),’’ each place it appears.

14 (31) The table of parts for subchapter G of 

15 chapter 1 is amended by striking the item relating 

16 to part III. 

17 (32) The table of sections for part IV of sub18 chapter P of chapter 1 is amended by striking the 

19 items relating to sections 1246 and 1247. 

20 (33) The table of sections for subpart A of part 

21 III of subchapter A of chapter 61 is amended by 

22 striking the item relating to section 6035. 
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•HR 2896 IH 

1 SEC. 1106. CLARIFICATION OF TREATMENT OF PIPELINE 

2 TRANSPORTATION INCOME. 

3 Section 954(g)(1) (defining foreign base company oil 

4 related income) is amended by striking ‘‘or’’ at the end 

5 of subparagraph (A), by striking the period at the end 

6 of subparagraph (B) and inserting ‘‘, or’’, and by inserting 

7 after subparagraph (B) the following new subparagraph: 

8 ‘‘(C) the pipeline transportation of oil or 

9 gas within such foreign country.’’

10 SEC. 1107. DETERMINATION OF FOREIGN PERSONAL HOLD11 ING COMPANY INCOME WITH RESPECT TO 

12 TRANSACTIONS IN COMMODITIES. 

13 (a) IN GENERAL.—Clauses (i) and (ii) of section 

14 954(c)(1)(C) (relating to commodity transactions) are 

15 amended to read as follows:

16 ‘‘(i) arise out of commodity hedging 

17 transactions (as defined in paragraph 

18 (6)(A)), 

19 ‘‘(ii) are active business gains or 

20 losses from the sale of commodities, but 

21 only if substantially all of the controlled 

22 foreign corporation’s commodities are 

23 property described in paragraph (1), (2), 

24 or (8) of section 1221(a), or’’. 
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1 (b) DEFINITION AND SPECIAL RULES.—Subsection 

2 (c) of section 954 is amended by adding after paragraph 

3 (5) the following new paragraph: 

4 ‘‘(6) DEFINITION AND SPECIAL RULES RELAT5 ING TO COMMODITY TRANSACTIONS.—

6 ‘‘(A) COMMODITY HEDGING TRANS7 ACTIONS.—For purposes of paragraph 

8 (1)(C)(i), the term ‘commodity hedging trans9 action’ means any transaction with respect to a 

10 commodity if such transaction—

11 ‘‘(i) is a hedging transaction as de12 fined in section 1221(b)(2), determined—

13 ‘‘(I) without regard to subpara14 graph (A)(ii) thereof, 

15 ‘‘(II) by applying subparagraph 

16 (A)(i) thereof by substituting ‘ordi17 nary property or property described in 

18 section 1231(b)’ for ‘ordinary prop19 erty’, and 

20 ‘‘(III) by substituting ‘controlled 

21 foreign corporation’ for ‘taxpayer’ 

22 each place it appears, and 

23 ‘‘(ii) is clearly identified as such in ac24 cordance with section 1221(a)(7). 
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•HR 2896 IH 

1 ‘‘(B) REGULATIONS.—The Secretary shall 

2 prescribe such regulations as are appropriate to 

3 carry out the purposes of paragraph (1)(C) in 

4 the case of transactions involving related par5 ties.’’

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

7 this section shall apply to transactions entered into after 

8 December 31, 2004. 

9 SEC. 1108. REPEAL OF CFC RULES ON FOREIGN BASE COM10 PANY SHIPPING INCOME. 

11 (a) ELIMINATION OF FOREIGN BASE COMPANY SHIP12 PING INCOME.—Section 954 (relating to foreign base com13 pany income), as amended by section 1101, is amended—

14 (1) by striking paragraph (2) of subsection (a) 

15 (relating to foreign base company shipping income), 

16 and 

17 (2) by striking subsection (f) (relating to for18 eign base company shipping income). 

19 (b) SAFE HARBOR FOR CERTAIN LEASING ACTIVI20 TIES.—Subparagraph (A) of section 954(c)(2) is amended 

21 by adding at the end the following new sentence: ‘‘For 

22 purposes of the preceding sentence, rents derived from 

23 leasing an aircraft or vessel in foreign commerce shall not 

24 fail to be treated as derived in the active conduct of a 

25 trade or business if, as determined under regulations pre-
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•HR 2896 IH 

1 scribed by the Secretary, the active leasing expenses are 

2 not less than 10 percent of the profit on the lease.’’

3 (c) CONFORMING AMENDMENTS.—

4 (1) Section 952(c)(1)(B)(iii) is amended by 

5 striking subclause (I) and redesignating subclauses 

6 (II) through (VI) as subclauses (I) through (V), re7 spectively. 

8 (2) Subsection (b) of section 954 is amended—

9 (A) by striking ‘‘the foreign base shipping 

10 income,’’ in paragraph (5), 

11 (B) by striking paragraphs (6) and (7), 

12 and 

13 (C) by redesignating paragraph (8) as 

14 paragraph (6). 

15 SEC. 1109. EFFECTIVE DATE. 

16 Except as otherwise provided in this subtitle, the 

17 amendments made by this subtitle shall apply to taxable 

18 years of foreign corporations beginning after December 

19 31, 2004, and to taxable years of United States share20 holders with or within which such taxable years of foreign 

21 corporations end. 
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•HR 2896 IH 

1 Subtitle K—Reduction of Double 

2 Taxation of Corporate Earnings 

3 SEC. 1111. INTEREST EXPENSE ALLOCATION RULES. 

4 (a) ELECTION TO ALLOCATE ON WORLDWIDE

5 BASIS.— Section 864 is amended by redesignating sub6 section (f) as subsection (g) and by inserting after sub7 section (e) the following new subsection: 

8 ‘‘(f) ELECTION TO ALLOCATE INTEREST, ETC. ON

9 WORLDWIDE BASIS.—For purposes of this subchapter, at 

10 the election of the worldwide affiliated group—

11 ‘‘(1) ALLOCATION AND APPORTIONMENT OF IN12 TEREST EXPENSE.—

13 ‘‘(A) IN GENERAL.—The taxable income of 

14 each domestic corporation which is a member of 

15 a worldwide affiliated group shall be determined 

16 by allocating and apportioning interest expense 

17 of each member as if all members of such group 

18 were a single corporation.

19 ‘‘(B) TREATMENT OF WORLDWIDE AFFILI20 ATED GROUP.—The taxable income of the do21 mestic members of a worldwide affiliated group 

22 from sources outside the United States shall be 

23 determined by allocating and apportioning the 

24 interest expense of such domestic members to 
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•HR 2896 IH 

1 such income in an amount equal to the excess 

2 (if any) of—

3 ‘‘(i) the total interest expense of the 

4 worldwide affiliated group multiplied by 

5 the ratio which the foreign assets of the 

6 worldwide affiliated group bears to all the 

7 assets of the worldwide affiliated group, 

8 over 

9 ‘‘(ii) the interest expense of all foreign 

10 corporations which are members of the 

11 worldwide affiliated group to the extent 

12 such interest expense of such foreign cor13 porations would have been allocated and 

14 apportioned to foreign source income if 

15 this subsection were applied to a group 

16 consisting of all the foreign corporations in 

17 such worldwide affiliated group. 

18 ‘‘(C) WORLDWIDE AFFILIATED GROUP.—

19 For purposes of this paragraph, the term 

20 ‘worldwide affiliated group’ means a group con21 sisting of—

22 ‘‘(i) the includible members of an af23 filiated group (as defined in section 

24 1504(a), determined without regard to 
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•HR 2896 IH 

1 paragraphs (2) and (4) of section 

2 1504(b)), and 

3 ‘‘(ii) all controlled foreign corpora4 tions in which such members in the aggre5 gate meet the ownership requirements of 

6 section 1504(a)(2) either directly or indi7 rectly through applying paragraph (2) of 

8 section 958(a) or through applying rules 

9 similar to the rules of such paragraph to 

10 stock owned directly or indirectly by do11 mestic partnerships, trusts, or estates. 

12 ‘‘(2) ALLOCATION AND APPORTIONMENT OF

13 OTHER EXPENSES.—Expenses other than interest 

14 which are not directly allocable or apportioned to 

15 any specific income producing activity shall be allo16 cated and apportioned as if all members of the affili17 ated group were a single corporation. For purposes 

18 of the preceding sentence, the term ‘affiliated group’ 

19 has the meaning given such term by section 1504 

20 (determined without regard to paragraph (4) of sec21 tion 1504(b)). 

22 ‘‘(3) TREATMENT OF TAX-EXEMPT ASSETS; 

23 BASIS OF STOCK IN NONAFFILIATED 10-PERCENT

24 OWNED CORPORATIONS.—The rules of paragraphs 

25 (3) and (4) of subsection (e) shall apply for purposes 
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1 of this subsection; except that paragraph (4) shall be 

2 applied on worldwide affiliated group basis. 

3 ‘‘(4) TREATMENT OF CERTAIN FINANCIAL IN4 STITUTIONS.—

5 ‘‘(A) IN GENERAL.—For purposes of para6 graph (1), any corporation described in sub7 paragraph (B) shall be treated as an includible 

8 corporation for purposes of section 1504 only 

9 for purposes of applying this subsection sepa10 rately to corporations so described. 

11 ‘‘(B) DESCRIPTION.—A corporation is de12 scribed in this subparagraph if—

13 ‘‘(i) such corporation is a financial in14 stitution described in section 581 or 591, 

15 ‘‘(ii) the business of such financial in16 stitution is predominantly with persons 

17 other than related persons (within the 

18 meaning of subsection (d)(4)) or their cus19 tomers, and 

20 ‘‘(iii) such financial institution is re21 quired by State or Federal law to be oper22 ated separately from any other entity 

23 which is not such an institution. 
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•HR 2896 IH 

1 ‘‘(C) TREATMENT OF BANK HOLDING COM2 PANIES.—To the extent provided in regula3 tions—

4 ‘‘(i) a bank holding company (within 

5 the meaning of section 2(a) of the Bank 

6 Holding Company Act of 1956), and 

7 ‘‘(ii) any subsidiary of a financial in8 stitution described in section 581 or 591 or 

9 of any bank holding company if such sub10 sidiary is predominantly engaged (directly 

11 or indirectly) in the active conduct of a 

12 banking, financing, or similar business, 

13 shall be treated as a corporation described in 

14 subparagraph (B). 

15 ‘‘(5) ELECTION TO EXPAND FINANCIAL INSTI16 TUTION GROUP OF WORLDWIDE GROUP.—

17 ‘‘(A) IN GENERAL.—If a worldwide affili18 ated group elects the application of this sub19 section, all financial corporations which—

20 ‘‘(i) are members of such worldwide 

21 affiliated group, but

22 ‘‘(ii) are not corporations described in 

23 paragraph (4)(B), 

24 shall be treated as described in paragraph 

25 (4)(B) for purposes of applying paragraph 
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•HR 2896 IH 

1 (4)(A). This subsection (other than this para2 graph) shall apply to any such group in the 

3 same manner as this subsection (other than this 

4 paragraph) applies to the pre-election worldwide 

5 affiliated group of which such group is a part. 

6 ‘‘(B) FINANCIAL CORPORATION.—For pur7 poses of this paragraph, the term ‘financial cor8 poration’ means any corporation if at least 80 

9 percent of its gross income is income described 

10 in section 904(d)(2)(D)(ii) and the regulations 

11 thereunder which is derived from transactions 

12 with persons who are not related (within the 

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

14 corporation. For purposes of the preceding sen15 tence, there shall be disregarded any item of in16 come or gain from a transaction or series of 

17 transactions a principal purpose of which is the 

18 qualification of any corporation as a financial 

19 corporation. 

20 ‘‘(C) ANTIABUSE RULES.—In the case of a 

21 corporation which is a member of an electing fi22 nancial institution group, to the extent that 

23 such corporation—

24 ‘‘(i) distributes dividends or makes 

25 other distributions with respect to its stock 
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•HR 2896 IH 

1 after the date of the enactment of this 

2 paragraph to any member of the pre-elec3 tion worldwide affiliated group (other than 

4 to a member of the electing financial insti5 tution group) in excess of the greater of—

6 ‘‘(I) its average annual dividend 

7 (expressed as a percentage of current 

8 earnings and profits) during the 5-

9 taxable-year period ending with the 

10 taxable year preceding the taxable 

11 year, or 

12 ‘‘(II) 25 percent of its average 

13 annual earnings and profits for such 

14 5-taxable-year period, or 

15 ‘‘(ii) deals with any person in any 

16 manner not clearly reflecting the income of 

17 the corporation (as determined under prin18 ciples similar to the principles of section 

19 482), 

20 an amount of indebtedness of the electing fi21 nancial institution group equal to the excess 

22 distribution or the understatement or overstate23 ment of income, as the case may be, shall be re24 characterized (for the taxable year and subse25 quent taxable years) for purposes of this para-
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•HR 2896 IH 

1 graph as indebtedness of the worldwide affili2 ated group (excluding the electing financial in3 stitution group). If a corporation has not been 

4 in existence for 5 taxable years, this subpara5 graph shall be applied with respect to the pe6 riod it was in existence. 

7 ‘‘(D) ELECTION.—An election under this 

8 paragraph with respect to any financial institu9 tion group may be made only by the common 

10 parent of the pre-election worldwide affiliated 

11 group and may be made only for the first tax12 able year beginning after December 31, 2005, 

13 in which such affiliated group includes 1 or 

14 more financial corporations. Such an election, 

15 once made, shall apply to all financial corpora16 tions which are members of the electing finan17 cial institution group for such taxable year and 

18 all subsequent years unless revoked with the 

19 consent of the Secretary. 

20 ‘‘(E) DEFINITIONS RELATING TO

21 GROUPS.—For purposes of this paragraph—

22 ‘‘(i) PRE-ELECTION WORLDWIDE AF23 FILIATED GROUP.—The term ‘pre-election 

24 worldwide affiliated group’ means, with re25 spect to a corporation, the worldwide affili-
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•HR 2896 IH 

1 ated group of which such corporation 

2 would (but for an election under this para3 graph) be a member for purposes of apply4 ing paragraph (1). 

5 ‘‘(ii) ELECTING FINANCIAL INSTITU6 TION GROUP.—The term ‘electing financial 

7 institution group’ means the group of cor8 porations to which this subsection applies 

9 separately by reason of the application of 

10 paragraph (4)(A) and which includes fi11 nancial corporations by reason of an elec12 tion under subparagraph (A). 

13 ‘‘(F) REGULATIONS.—The Secretary shall 

14 prescribe such regulations as may be appro15 priate to carry out this subsection, including 

16 regulations—

17 ‘‘(i) providing for the direct allocation 

18 of interest expense in other circumstances 

19 where such allocation would be appropriate 

20 to carry out the purposes of this sub21 section, 

22 ‘‘(ii) preventing assets or interest ex23 pense from being taken into account more 

24 than once, and 
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•HR 2896 IH 

1 ‘‘(iii) dealing with changes in mem2 bers of any group (through acquisitions or 

3 otherwise) treated under this paragraph as 

4 an affiliated group for purposes of this 

5 subsection. 

6 ‘‘(6) ELECTION.—An election to have this sub7 section apply with respect to any worldwide affiliated 

8 group may be made only by the common parent of 

9 the domestic affiliated group referred to in para10 graph (1)(C) and may be made only for the first 

11 taxable year beginning after December 31, 2005, in 

12 which a worldwide affiliated group exists which in13 cludes such affiliated group and at least one foreign 

14 corporation. Such an election, once made, shall apply 

15 to such common parent and all other corporations 

16 which are members of such worldwide affiliated 

17 group for such taxable year and all subsequent years 

18 unless revoked with the consent of the Secretary.’’. 

19 (b) EXPANSION OF REGULATORY AUTHORITY.—

20 Paragraph (7) of section 864(e) is amended—

21 (1) by inserting before the comma at the end of 

22 subparagraph (B) ‘‘and in other circumstances

23 where such allocation would be appropriate to carry 

24 out the purposes of this subsection’’, and 
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•HR 2896 IH 

1 (2) by striking ‘‘and’’ at the end of subpara2 graph (E), by redesignating subparagraph (F) as 

3 subparagraph (G), and by inserting after subpara4 graph (E) the following new subparagraph: 

5 ‘‘(F) preventing assets or interest expense 

6 from being taken into account more than once, 

7 and’’. 

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

9 this section shall apply to taxable years beginning after 

10 December 31, 2005. 

11 SEC. 1112. RECHARACTERIZATION OF OVERALL DOMESTIC 

12 LOSS. 

13 (a) GENERAL RULE.—Section 904 is amended by re14 designating subsections (g), (h), (i), (j), and (k) as sub15 sections (h), (i), (j), (k), and (l) respectively, and by in16 serting after subsection (f) the following new subsection:

17 ‘‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC

18 LOSS.—

19 ‘‘(1) GENERAL RULE.—For purposes of this 

20 subpart and section 936, in the case of any taxpayer 

21 who sustains an overall domestic loss for any taxable 

22 year beginning after December 31, 2004, that por23 tion of the taxpayer’s taxable income from sources 

24 within the United States for each succeeding taxable 

25 year which is equal to the lesser of—
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•HR 2896 IH 

1 ‘‘(A) the amount of such loss (to the extent 

2 not used under this paragraph in prior taxable 

3 years), or 

4 ‘‘(B) 50 percent of the taxpayer’s taxable 

5 income from sources within the United States 

6 for such succeeding taxable year, 

7 shall be treated as income from sources without the 

8 United States (and not as income from sources with9 in the United States). 

10 ‘‘(2) OVERALL DOMESTIC LOSS DEFINED.—For 

11 purposes of this subsection—

12 ‘‘(A) IN GENERAL.—The term ‘overall do13 mestic loss’ means any domestic loss to the ex14 tent such loss offsets taxable income from 

15 sources without the United States for the tax16 able year or for any preceding taxable year by 

17 reason of a carryback. For purposes of the pre18 ceding sentence, the term ‘domestic loss’ means 

19 the amount by which the gross income for the 

20 taxable year from sources within the United 

21 States is exceeded by the sum of the deductions 

22 properly apportioned or allocated thereto (deter23 mined without regard to any carryback from a 

24 subsequent taxable year). 
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1 ‘‘(B) TAXPAYER MUST HAVE ELECTED

2 FOREIGN TAX CREDIT FOR YEAR OF LOSS.—

3 The term ‘overall domestic loss’ shall not in4 clude any loss for any taxable year unless the 

5 taxpayer chose the benefits of this subpart for 

6 such taxable year. 

7 ‘‘(3) CHARACTERIZATION OF SUBSEQUENT IN8 COME.—

9 ‘‘(A) IN GENERAL.—Any income from 

10 sources within the United States that is treated 

11 as income from sources without the United 

12 States under paragraph (1) shall be allocated 

13 among and increase the income categories in 

14 proportion to the loss from sources within the 

15 United States previously allocated to those in16 come categories.

17 ‘‘(B) INCOME CATEGORY.—For purposes of 

18 this paragraph, the term ‘income category’ has 

19 the meaning given such term by subsection 

20 (f)(5)(E)(i). 

21 ‘‘(4) COORDINATION WITH SUBSECTION (f).—

22 The Secretary shall prescribe such regulations as 

23 may be necessary to coordinate the provisions of this 

24 subsection with the provisions of subsection (f).’’

25 (b) CONFORMING AMENDMENTS.—
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1 (1) Section 535(d)(2) is amended by striking 

2 ‘‘section 904(g)(6)’’ and inserting ‘‘section 

3 904(h)(6)’’. 

4 (2) Subparagraph (A) of section 936(a)(2) is 

5 amended by striking ‘‘section 904(f)’’ and inserting 

6 ‘‘subsections (f) and (g) of section 904’’. 

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

8 this section shall apply to losses for taxable years begin9 ning after December 31, 2004. 

10 SEC. 1113. REDUCTION TO 2 FOREIGN TAX CREDIT BAS11 KETS. 

12 (a) IN GENERAL.—Paragraph (1) of section 904(d) 

13 (relating to separate application of section with respect to 

14 certain categories of income) is amended to read as fol15 lows: 

16 ‘‘(1) IN GENERAL.—The provisions of sub17 sections (a), (b), and (c) and sections 902, 907, and 

18 960 shall be applied separately with respect to—

19 ‘‘(A) passive category income, and 

20 ‘‘(B) general category income.’’

21 (b) CATEGORIES.—Paragraph (2) of section 904(d) 

22 is amended by striking subparagraph (B), by redesig23 nating subparagraph (A) as subparagraph (B), and by in24 serting before subparagraph (B) (as so redesignated) the 

25 following new subparagraph: 
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•HR 2896 IH 

1 ‘‘(A) CATEGORIES.—

2 ‘‘(i) PASSIVE CATEGORY INCOME.—

3 The term ‘passive category income’ means 

4 passive income and specified passive cat5 egory income. 

6 ‘‘(ii) GENERAL CATEGORY INCOME.—

7 The term ‘general category income’ means 

8 income other than passive category in9 come.’’

10 (c) SPECIFIED PASSIVE CATEGORY INCOME.—Sub11 paragraph (B) of section 904(d)(2), as so redesignated, 

12 is amended by adding at the end the following new clause: 

13 ‘‘(v) SPECIFIED PASSIVE CATEGORY

14 INCOME.—The term ‘specified passive cat15 egory income’ means—

16 ‘‘(I) dividends from a DISC or 

17 former DISC (as defined in section 

18 992(a)) to the extent such dividends 

19 are treated as income from sources 

20 without the United States,

21 ‘‘(II) taxable income attributable 

22 to foreign trade income (within the 

23 meaning of section 923(b)), and 

24 ‘‘(III) distributions from a FSC 

25 (or a former FSC) out of earnings 
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1 and profits attributable to foreign 

2 trade income (within the meaning of 

3 section 923(b)) or interest or carrying 

4 charges (as defined in section 

5 927(d)(1)) derived from a transaction 

6 which results in foreign trade income 

7 (as defined in section 923(b)).’’

8 (d) TREATMENT OF FINANCIAL SERVICES.—Para9 graph (2) of section 904(d) is amended by striking sub10 paragraph (D), by redesignating subparagraph (C) as sub11 paragraph (D), and by inserting before subparagraph (D) 

12 (as so redesignated) the following new subparagraph: 

13 ‘‘(C) TREATMENT OF FINANCIAL SERVICES

14 INCOME AND COMPANIES.—

15 ‘‘(i) IN GENERAL.—Financial services 

16 income shall be treated as general category 

17 income in the case of—

18 ‘‘(I) a member of a financial 

19 services group, and 

20 ‘‘(II) any other person if such 

21 person is predominantly engaged in 

22 the active conduct of a banking, insur23 ance, financing, or similar business. 

24 ‘‘(ii) FINANCIAL SERVICES GROUP.—

25 The term ‘financial services group’ means 
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•HR 2896 IH 

1 any affiliated group (as defined in section 

2 1504(a) without regard to paragraphs (2) 

3 and (3) of section 1504(b)) which is pre4 dominantly engaged in the active conduct 

5 of a banking, insurance, financing, or simi6 lar business. In determining whether such 

7 a group is so engaged, there shall be taken 

8 into account only the income of members 

9 of the group that are—

10 ‘‘(I) United States corporations, 

11 or 

12 ‘‘(II) controlled foreign corpora13 tions in which such United States cor14 porations own, directly or indirectly, 

15 at least 80 percent of the total voting 

16 power and value of the stock. 

17 ‘‘(iii) PASS-THRU ENTITIES.—The 

18 Secretary shall by regulation specify for 

19 purposes of this subparagraph the treat20 ment of financial services income received 

21 or accrued by partnerships and by other 

22 pass-thru entities which are not members 

23 of a financial services group.’’

24 (e) CONFORMING AMENDMENTS.—
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1 (1) Clause (iii) of section 904(d)(2)(B) (relating 

2 to exceptions from passive income), as so redesig3 nated, is amended by striking subclause (I) and by 

4 redesignating subclauses (II) and (III) as subclauses 

5 (I) and (II), respectively. 

6 (2) Clause (i) of section 904(d)(2)(D) (defining 

7 financial services income), as so redesignated, is 

8 amended by adding ‘‘or’’ at the end of subclause (I) 

9 and by striking subclauses (II) and (III) and insert10 ing the following new subclause: 

11 ‘‘(II) passive income (determined 

12 without regard to subparagraph 

13 (B)(iii)(II)).’’

14 (3) Section 904(d)(2)(D) (defining financial 

15 services income), as so redesignated, is amended by 

16 striking clause (iii). 

17 (4) Paragraph (3) of section 904(d) is amended 

18 to read as follows: 

19 ‘‘(3) LOOK-THRU IN CASE OF CONTROLLED

20 FOREIGN CORPORATIONS.—

21 ‘‘(A) IN GENERAL.—Except as otherwise 

22 provided in this paragraph, dividends, interest, 

23 rents, and royalties received or accrued by the 

24 taxpayer from a controlled foreign corporation 

25 in which the taxpayer is a United States share-
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1 holder shall not be treated as passive category 

2 income. 

3 ‘‘(B) SUBPART F INCLUSIONS.—Any 

4 amount included in gross income under section 

5 951(a)(1)(A) shall be treated as passive cat6 egory income to the extent the amount so in7 cluded is attributable to passive category in8 come. 

9 ‘‘(C) INTEREST, RENTS, AND ROYAL10 TIES.—Any interest, rent, or royalty which is 

11 received or accrued from a controlled foreign 

12 corporation in which the taxpayer is a United 

13 States shareholder shall be treated as passive 

14 category income to the extent it is properly allo15 cable (under regulations prescribed by the Sec16 retary) to passive category income of the con17 trolled foreign corporation. 

18 ‘‘(D) DIVIDENDS.—Any dividend paid out 

19 of the earnings and profits of any controlled 

20 foreign corporation in which the taxpayer is a

21 United States shareholder shall be treated as 

22 passive category income in proportion to the 

23 ratio of—
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1 ‘‘(i) the portion of the earnings and 

2 profits attributable to passive category in3 come, to 

4 ‘‘(ii) the total amount of earnings and 

5 profits. 

6 ‘‘(E) LOOK-THRU APPLIES ONLY WHERE

7 SUBPART F APPLIES.—If a controlled foreign 

8 corporation meets the requirements of section 

9 954(b)(3)(A) (relating to de minimis rule) for 

10 any taxable year, for purposes of this para11 graph, none of its foreign base company income 

12 (as defined in section 954(a) without regard to 

13 section 954(b)(5)) and none of its gross insur14 ance income (as defined in section 

15 954(b)(3)(C)) for such taxable year shall be 

16 treated as passive category income, except that 

17 this sentence shall not apply to any income 

18 which (without regard to this sentence) would 

19 be treated as financial services income. Solely 

20 for purposes of applying subparagraph (D), 

21 passive income of a controlled foreign corpora22 tion shall not be treated as passive category in23 come if the requirements of section 954(b)(4) 

24 are met with respect to such income. 
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1 ‘‘(F) COORDINATION WITH HIGH-TAXED

2 INCOME PROVISIONS.—

3 ‘‘(i) In determining whether any in4 come of a controlled foreign corporation is 

5 passive category income, subclause (II) of 

6 paragraph (2)(B)(iii) shall not apply. 

7 ‘‘(ii) Any income of the taxpayer 

8 which is treated as passive category income 

9 under this paragraph shall be so treated 

10 notwithstanding any provision of para11 graph (2); except that the determination of 

12 whether any amount is high-taxed income 

13 shall be made after the application of this 

14 paragraph.’’

15 (5) TREATMENT OF INCOME TAX BASE DIF16 FERENCES.—Paragraph (2) of section 904(d) is 

17 amended by redesignating subparagraphs (H) and 

18 (I) as subparagraphs (I) and (J), respectively, and 

19 by inserting after subparagraph (G) the following 

20 new subparagraph: 

21 ‘‘(H) TREATMENT OF INCOME TAX BASE

22 DIFFERENCES.—Tax imposed under the law of 

23 a foreign country or possession of the United 

24 States on an amount which does not constitute 

25 income under United States tax principles shall 
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1 be treated as imposed on income described in 

2 paragraph (1)(B).’’

3 (6) Paragraph (3) of section 904(d) is amended 

4 by striking subparagraph (H) and by redesignating 

5 subparagraph (I) as subparagraph (H). 

6 (7) Paragraph (2) of section 904(d) is amended 

7 by adding at the end the following new subpara8 graph: 

9 ‘‘(K) TRANSITIONAL RULES FOR 2005

10 CHANGES.—For purposes of paragraph (1)—

11 ‘‘(i) taxes carried from any taxable 

12 year beginning before January 1, 2005, to 

13 any taxable year beginning on or after 

14 such date, with respect to any item of in15 come, shall be treated as described in the 

16 subparagraph of paragraph (1) in which 

17 such income would be described were such 

18 taxes paid or accrued in a taxable year be19 ginning on or after such date, and 

20 ‘‘(ii) the Secretary may by regulations 

21 provide for the allocation of any carryback 

22 of taxes with respect to income to such a 

23 taxable year for purposes of allocating such 

24 income among the separate categories in 

25 effect for such taxable year.’’. 
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1 (8) Section 904(j)(3)(A)(i) is amended by strik2 ing ‘‘subsection (d)(2)(A)’’ and inserting ‘‘subsection 

3 (d)(2)(B)’’. 

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

5 this section shall apply to taxable years beginning after 

6 December 31, 2004. 

7 SEC. 1114. 10-YEAR FOREIGN TAX CREDIT CARRYFORWARD. 

8 (a) GENERAL RULE.—Section 904(c) (relating to 

9 carryback and carryover of excess tax paid) is amended 

10 by striking ‘‘in the first, second, third, fourth, or fifth’’ 

11 and inserting ‘‘in any of the first 10’’. 

12 (b) EXCESS EXTRACTION TAXES.—Paragraph (1) of 

13 section 907(f) is amended by striking ‘‘in the first, second, 

14 third, fourth, or fifth’’ and inserting ‘‘in any of the first 

15 10’’. 

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

17 this section shall apply to excess foreign taxes which (with18 out regard to the amendments made by this section) may 

19 be carried to any taxable year beginning after December 

20 31, 2004.
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1 SEC. 1115. LOOK-THRU RULES TO APPLY TO DIVIDENDS 

2 FROM NONCONTROLLED SECTION 902 COR3 PORATIONS. 

4 (a) IN GENERAL.—Section 904(d)(4) (relating to 

5 look-thru rules apply to dividends from noncontrolled sec6 tion 902 corporations) is amended to read as follows: 

7 ‘‘(4) LOOK-THRU APPLIES TO DIVIDENDS FROM

8 NONCONTROLLED SECTION 902 CORPORATIONS.—

9 ‘‘(A) IN GENERAL.—For purposes of this 

10 subsection, any dividend from a noncontrolled 

11 section 902 corporation with respect to the tax12 payer shall be treated as income described in a 

13 subparagraph of paragraph (1) in proportion to 

14 the ratio of—

15 ‘‘(i) the portion of earnings and prof16 its attributable to income described in such 

17 subparagraph, to 

18 ‘‘(ii) the total amount of earnings and 

19 profits. 

20 ‘‘(B) SPECIAL RULES.—For purposes of 

21 this paragraph—

22 ‘‘(i) EARNINGS AND PROFITS.—

23 ‘‘(I) IN GENERAL.—The rules of 

24 section 316 shall apply. 

25 ‘‘(II) REGULATIONS.—The Sec26 retary may prescribe regulations re-
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1 garding the treatment of distributions 

2 out of earnings and profits for periods 

3 before the taxpayer’s acquisition of 

4 the stock to which the distributions 

5 relate. 

6 ‘‘(ii) INADEQUATE SUBSTAN7 TIATION.—If the Secretary determines that 

8 the proper subparagraph of paragraph (1) 

9 in which a dividend is described has not 

10 been substantiated, such dividend shall be 

11 treated as income described in paragraph 

12 (1)(A). 

13 ‘‘(iii) LOOK-THRU WITH RESPECT TO

14 CARRYFORWARDS OF CREDIT.—Rules simi15 lar to subparagraph (A) also shall apply to 

16 any carryforward under subsection (c) 

17 from a taxable year beginning before Janu18 ary 1, 2003, of tax allocable to a dividend 

19 from a noncontrolled section 902 corpora20 tion with respect to the taxpayer. The Sec21 retary may by regulations provide for the 

22 allocation of any carryback of tax allocable 

23 to a dividend from a noncontrolled section 

24 902 corporation to such a taxable year for 

25 purposes of allocating such dividend among 
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1 the separate categories in effect for such 

2 taxable year. 

3 ‘‘(iv) COORDINATION WITH HIGH4 TAXED INCOME PROVISIONS.—Rules simi5 lar to the rules of paragraph (3)(F) shall 

6 apply for purposes of this paragraph.’’. 

7 (b) CONFORMING AMENDMENTS.—

8 (1) Section 904(d)(2)(E) is amended—

9 (A) by inserting ‘‘or (4)’’ after ‘‘paragraph 

10 (3)’’ in clause (i), and 

11 (B) by striking clauses (ii) and (iv) and by 

12 redesignating clause (iii) as clause (ii). 

13 (2) Clause (i) of section 864(d)(5)(A) is amend14 ed to read as follows: 

15 ‘‘(i) Subclause (I) of section 

16 904(d)(2)(B)(iii).’’

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

18 this section shall apply to taxable years beginning after 

19 December 31, 2002. 

20 SEC. 1116. ATTRIBUTION OF STOCK OWNERSHIP THROUGH 

21 PARTNERSHIPS TO APPLY IN DETERMINING 

22 SECTION 902 AND 960 CREDITS. 

23 (a) IN GENERAL.—Subsection (c) of section 902 is 

24 amended by redesignating paragraph (7) as paragraph (8) 
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1 and by inserting after paragraph (6) the following new 

2 paragraph: 

3 ‘‘(7) CONSTRUCTIVE OWNERSHIP THROUGH

4 PARTNERSHIPS.—Stock owned, directly or indirectly, 

5 by or for a partnership shall be considered as being 

6 owned proportionately by its partners. Stock consid7 ered to be owned by a person by reason of the pre8 ceding sentence shall, for purposes of applying such 

9 sentence, be treated as actually owned by such per10 son. The Secretary may prescribe such regulations 

11 as may be necessary to carry out the purposes of 

12 this paragraph, including rules to account for special 

13 partnership allocations of dividends, credits, and 

14 other incidents of ownership of stock in determining 

15 proportionate ownership.’’

16 (b) CLARIFICATION OF COMPARABLE ATTRIBUTION

17 UNDER SECTION 901(b)(5).—Paragraph (5) of section 

18 901(b) is amended by striking ‘‘any individual’’ and in19 serting ‘‘any person’’. 

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

21 this section shall apply to taxes of foreign corporations 

22 for taxable years of such corporations beginning after the 

23 date of the enactment of this Act. 
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1 SEC. 1117. CLARIFICATION OF TREATMENT OF CERTAIN 

2 TRANSFERS OF INTANGIBLE PROPERTY. 

3 (a) IN GENERAL.—Subparagraph (C) of section 

4 367(d)(2) is amended by adding at the end the following 

5 new sentence: ‘‘For purposes of applying section 904(d), 

6 any such amount shall be treated in the same manner as 

7 if such amount were a royalty.’’

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

9 this section shall apply to amounts treated as received pur10 suant to section 367(d)(2) of the Internal Revenue Code 

11 of 1986 on or after August 5, 1997. 

12 SEC. 1118. APPLICATION OF UNIFORM CAPITALIZATION 

13 RULES TO FOREIGN PERSONS. 

14 (a) IN GENERAL.—Section 263A(c) (relating to ex15 ceptions) is amended by adding at the end the following 

16 new paragraph: 

17 ‘‘(7) FOREIGN PERSONS.—Except for purposes 

18 of applying sections 871(b)(1) and 882(a)(1), this 

19 section shall not apply to any taxpayer who is not 

20 a United States person if such taxpayer capitalizes 

21 costs of produced property or property acquired for 

22 resale by applying the method used to ascertain the 

23 income, profit, or loss for purposes of reports or 

24 statements to shareholders, partners, other propri25 etors, or beneficiaries, or for credit purposes.’’

26 (b) EFFECTIVE DATE.—
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1 (1) IN GENERAL.—The amendment made by 

2 subsection (a) shall apply to taxable years beginning 

3 after December 31, 2004. 

4 (2) CHANGE IN METHOD OF ACCOUNTING.—In 

5 the case of any taxpayer required by the amendment 

6 made by this section to change its method of ac7 counting for its first taxable year beginning after 

8 December 31, 2004—

9 (A) such change shall be treated as initi10 ated by the taxpayer, 

11 (B) such change shall be treated as made 

12 with the consent of the Secretary of the Treas13 ury, and 

14 (C) the net amount of the adjustments re15 quired to be taken into account by the taxpayer 

16 under section 481 of the Internal Revenue Code 

17 of 1986 shall be taken into account in such first 

18 year. 

19 SEC. 1119. UNITED STATES PROPERTY NOT TO INCLUDE 

20 CERTAIN ASSETS ACQUIRED BY DEALERS IN 

21 ORDINARY COURSE OF TRADE OR BUSINESS. 

22 (a) IN GENERAL.—Section 956(c)(2) (relating to ex23 ceptions from property treated as United States property) 

24 is amended by striking ‘‘and’’ at the end of subparagraph 

25 (J), by striking the period at the end of subparagraph (K) 
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1 and inserting ‘‘; and’’, and by adding at the end the fol2 lowing new subparagraph: 

3 ‘‘(L) securities acquired and held by a con4 trolled foreign corporation in the ordinary 

5 course of its business as a dealer in securities 

6 if—

7 ‘‘(i) the dealer accounts for the securi8 ties as securities held primarily for sale to 

9 customers in the ordinary course of busi10 ness, and 

11 ‘‘(ii) the dealer disposes of the securi12 ties (or such securities mature while held 

13 by the dealer) within a period consistent 

14 with the holding of securities for sale to 

15 customers in the ordinary course of busi16 ness.’’

17 (b) CONFORMING AMENDMENT.—Section 956(c)(2) 

18 is amended by striking ‘‘and (K)’’ in the last sentence and 

19 inserting ‘‘, (K), and (L)’’. 

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

21 this section shall apply to taxable years of foreign corpora22 tions beginning after December 31, 2004, and to taxable 

23 years of United States shareholders with or within which 

24 such taxable years of foreign corporations end. 
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•HR 2896 IH 

1 SEC. 1120. TREATMENT OF CERTAIN DIVIDENDS OF REGU2 LATED INVESTMENT COMPANIES. 

3 (a) TREATMENT OF CERTAIN DIVIDENDS.—

4 (1) NONRESIDENT ALIEN INDIVIDUALS.—Sec5 tion 871 (relating to tax on nonresident alien indi6 viduals) is amended by redesignating subsection (k) 

7 as subsection (l) and by inserting after subsection (j) 

8 the following new subsection:

9 ‘‘(k) EXEMPTION FOR CERTAIN DIVIDENDS OF REG10 ULATED INVESTMENT COMPANIES.—

11 ‘‘(1) INTEREST-RELATED DIVIDENDS.—

12 ‘‘(A) IN GENERAL.—Except as provided in 

13 subparagraph (B), no tax shall be imposed 

14 under paragraph (1)(A) of subsection (a) on 

15 any interest-related dividend received from a 

16 regulated investment company. 

17 ‘‘(B) EXCEPTIONS.—Subparagraph (A) 

18 shall not apply—

19 ‘‘(i) to any interest-related dividend 

20 received from a regulated investment com21 pany by a person to the extent such divi22 dend is attributable to interest (other than 

23 interest described in subparagraph (E) (i) 

24 or (iii)) received by such company on in25 debtedness issued by such person or by any 

26 corporation or partnership with respect to 
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1 which such person is a 10-percent share2 holder, 

3 ‘‘(ii) to any interest-related dividend 

4 with respect to stock of a regulated invest5 ment company unless the person who 

6 would otherwise be required to deduct and 

7 withhold tax from such dividend under 

8 chapter 3 receives a statement (which 

9 meets requirements similar to the require10 ments of subsection (h)(5)) that the bene11 ficial owner of such stock is not a United 

12 States person, and 

13 ‘‘(iii) to any interest-related dividend 

14 paid to any person within a foreign coun15 try (or any interest-related dividend pay16 ment addressed to, or for the account of, 

17 persons within such foreign country) dur18 ing any period described in subsection 

19 (h)(6) with respect to such country. 

20 Clause (iii) shall not apply to any dividend with 

21 respect to any stock which was acquired on or 

22 before the date of the publication of the Sec23 retary’s determination under subsection (h)(6). 

24 ‘‘(C) INTEREST-RELATED DIVIDEND.—For 

25 purposes of this paragraph, an interest-related
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1 dividend is any dividend (or part thereof) which 

2 is designated by the regulated investment com3 pany as an interest-related dividend in a writ4 ten notice mailed to its shareholders not later 

5 than 60 days after the close of its taxable year. 

6 If the aggregate amount so designated with re7 spect to a taxable year of the company (includ8 ing amounts so designated with respect to divi9 dends paid after the close of the taxable year 

10 described in section 855) is greater than the 

11 qualified net interest income of the company for 

12 such taxable year, the portion of each distribu13 tion which shall be an interest-related dividend 

14 shall be only that portion of the amounts so 

15 designated which such qualified net interest in16 come bears to the aggregate amount so des17 ignated. 

18 ‘‘(D) QUALIFIED NET INTEREST IN19 COME.—For purposes of subparagraph (C), the 

20 term ‘qualified net interest income’ means the 

21 qualified interest income of the regulated in22 vestment company reduced by the deductions 

23 properly allocable to such income. 

24 ‘‘(E) QUALIFIED INTEREST INCOME.—For 

25 purposes of subparagraph (D), the term ‘quali-
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1 fied interest income’ means the sum of the fol2 lowing amounts derived by the regulated invest3 ment company from sources within the United 

4 States: 

5 ‘‘(i) Any amount includible in gross 

6 income as original issue discount (within 

7 the meaning of section 1273) on an obliga8 tion payable 183 days or less from the date 

9 of original issue (without regard to the pe10 riod held by the company). 

11 ‘‘(ii) Any interest includible in gross 

12 income (including amounts recognized as 

13 ordinary income in respect of original issue 

14 discount or market discount or acquisition 

15 discount under part V of subchapter P and 

16 such other amounts as regulations may 

17 provide) on an obligation which is in reg18 istered form; except that this clause shall 

19 not apply to—

20 ‘‘(I) any interest on an obligation 

21 issued by a corporation or partnership 

22 if the regulated investment company 

23 is a 10-percent shareholder in such 

24 corporation or partnership, and 
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1 ‘‘(II) any interest which is treat2 ed as not being portfolio interest 

3 under the rules of subsection (h)(4). 

4 ‘‘(iii) Any interest referred to in sub5 section (i)(2)(A) (without regard to the 

6 trade or business of the regulated invest7 ment company).

8 ‘‘(iv) Any interest-related dividend in9 cludable in gross income with respect to 

10 stock of another regulated investment com11 pany. 

12 ‘‘(F) 10-PERCENT SHAREHOLDER.—For 

13 purposes of this paragraph, the term ‘10-per14 cent shareholder’ has the meaning given such 

15 term by subsection (h)(3)(B).

16 ‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—

17 ‘‘(A) IN GENERAL.—Except as provided in 

18 subparagraph (B), no tax shall be imposed 

19 under paragraph (1)(A) of subsection (a) on 

20 any short-term capital gain dividend received 

21 from a regulated investment company. 

22 ‘‘(B) EXCEPTION FOR ALIENS TAXABLE

23 UNDER SUBSECTION (a)(2).—Subparagraph (A) 

24 shall not apply in the case of any nonresident 
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1 alien individual subject to tax under subsection 

2 (a)(2).

3 ‘‘(C) SHORT-TERM CAPITAL GAIN DIVI4 DEND.—For purposes of this paragraph, a 

5 short-term capital gain dividend is any dividend 

6 (or part thereof) which is designated by the reg7 ulated investment company as a short-term cap8 ital gain dividend in a written notice mailed to 

9 its shareholders not later than 60 days after the 

10 close of its taxable year. If the aggregate 

11 amount so designated with respect to a taxable 

12 year of the company (including amounts so des13 ignated with respect to dividends paid after the 

14 close of the taxable year described in section 

15 855) is greater than the qualified short-term 

16 gain of the company for such taxable year, the 

17 portion of each distribution which shall be a 

18 short-term capital gain dividend shall be only 

19 that portion of the amounts so designated 

20 which such qualified short-term gain bears to 

21 the aggregate amount so designated. 

22 ‘‘(D) QUALIFIED SHORT-TERM GAIN.—For 

23 purposes of subparagraph (C), the term ‘quali24 fied short-term gain’ means the excess of the 

25 net short-term capital gain of the regulated in-
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1 vestment company for the taxable year over the 

2 net long-term capital loss (if any) of such com3 pany for such taxable year. For purposes of this 

4 subparagraph—

5 ‘‘(i) the net short-term capital gain of 

6 the regulated investment company shall be 

7 computed by treating any short-term cap8 ital gain dividend includible in gross in9 come with respect to stock of another regu10 lated investment company as a short-term 

11 capital gain, and 

12 ‘‘(ii) the excess of the net short-term 

13 capital gain for a taxable year over the net 

14 long-term capital loss for a taxable year (to 

15 which an election under section 4982(e)(4) 

16 does not apply) shall be determined with17 out regard to any net capital loss or net 

18 short-term capital loss attributable to 

19 transactions after October 31 of such year, 

20 and any such net capital loss or net short21 term capital loss shall be treated as arising 

22 on the 1st day of the next taxable year. 

23 To the extent provided in regulations, clause 

24 (ii) shall apply also for purposes of computing
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1 the taxable income of the regulated investment 

2 company.’’

3 (2) FOREIGN CORPORATIONS.—Section 881 (re4 lating to tax on income of foreign corporations not 

5 connected with United States business) is amended 

6 by redesignating subsection (e) as subsection (f) and 

7 by inserting after subsection (d) the following new 

8 subsection: 

9 ‘‘(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS

10 OF REGULATED INVESTMENT COMPANIES.—

11 ‘‘(1) INTEREST-RELATED DIVIDENDS.—

12 ‘‘(A) IN GENERAL.—Except as provided in 

13 subparagraph (B), no tax shall be imposed 

14 under paragraph (1) of subsection (a) on any 

15 interest-related dividend (as defined in section 

16 871(k)(1)) received from a regulated investment 

17 company. 

18 ‘‘(B) EXCEPTION.—Subparagraph (A) 

19 shall not apply—

20 ‘‘(i) to any dividend referred to in sec21 tion 871(k)(1)(B), and 

22 ‘‘(ii) to any interest-related dividend 

23 received by a controlled foreign corporation 

24 (within the meaning of section 957(a)) to 

25 the extent such dividend is attributable to 
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1 interest received by the regulated invest2 ment company from a person who is a re3 lated person (within the meaning of section 

4 864(d)(4)) with respect to such controlled 

5 foreign corporation. 

6 ‘‘(C) TREATMENT OF DIVIDENDS RE7 CEIVED BY CONTROLLED FOREIGN CORPORA8 TIONS.—The rules of subsection (c)(5)(A) shall 

9 apply to any interest-related dividend received 

10 by a controlled foreign corporation (within the 

11 meaning of section 957(a)) to the extent such 

12 dividend is attributable to interest received by 

13 the regulated investment company which is de14 scribed in clause (ii) of section 871(k)(1)(E) 

15 (and not described in clause (i) or (iii) of such 

16 section). 

17 ‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—

18 No tax shall be imposed under paragraph (1) of sub19 section (a) on any short-term capital gain dividend 

20 (as defined in section 871(k)(2)) received from a 

21 regulated investment company.’’

22 (3) WITHHOLDING TAXES.—

23 (A) Section 1441(c) (relating to excep24 tions) is amended by adding at the end the fol25 lowing new paragraph: 
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1 ‘‘(12) CERTAIN DIVIDENDS RECEIVED FROM

2 REGULATED INVESTMENT COMPANIES.—

3 ‘‘(A) IN GENERAL.—No tax shall be re4 quired to be deducted and withheld under sub5 section (a) from any amount exempt from the 

6 tax imposed by section 871(a)(1)(A) by reason 

7 of section 871(k). 

8 ‘‘(B) SPECIAL RULE.—For purposes of 

9 subparagraph (A), clause (i) of section 

10 871(k)(1)(B) shall not apply to any dividend 

11 unless the regulated investment company knows 

12 that such dividend is a dividend referred to in 

13 such clause. A similar rule shall apply with re14 spect to the exception contained in section 

15 871(k)(2)(B).’’ 

16 (B) Section 1442(a) (relating to with17 holding of tax on foreign corporations) is 

18 amended—

19 (i) by striking ‘‘and the reference in 

20 section 1441(c)(10)’’ and inserting ‘‘the 

21 reference in section 1441(c)(10)’’, and

22 (ii) by inserting before the period at 

23 the end the following: ‘‘, and the references 

24 in section 1441(c)(12) to sections 871(a) 

25 and 871(k) shall be treated as referring to 
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1 sections 881(a) and 881(e) (except that for 

2 purposes of applying subparagraph (A) of 

3 section 1441(c)(12), as so modified, clause 

4 (ii) of section 881(e)(1)(B) shall not apply 

5 to any dividend unless the regulated invest6 ment company knows that such dividend is 

7 a dividend referred to in such clause)’’. 

8 (b) ESTATE TAX TREATMENT OF INTEREST IN CER9 TAIN REGULATED INVESTMENT COMPANIES.—Section 

10 2105 (relating to property without the United States for 

11 estate tax purposes) is amended by adding at the end the 

12 following new subsection: 

13 ‘‘(d) STOCK IN A RIC.—

14 ‘‘(1) IN GENERAL.—For purposes of this sub15 chapter, stock in a regulated investment company 

16 (as defined in section 851) owned by a nonresident 

17 not a citizen of the United States shall not be 

18 deemed property within the United States in the 

19 proportion that, at the end of the quarter of such in20 vestment company’s taxable year immediately pre21 ceding a decedent’s date of death (or at such other 

22 time as the Secretary may designate in regulations), 

23 the assets of the investment company that were 

24 qualifying assets with respect to the decedent bore 

25 to the total assets of the investment company.
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1 ‘‘(2) QUALIFYING ASSETS.—For purposes of 

2 this subsection, qualifying assets with respect to a 

3 decedent are assets that, if owned directly by the de4 cedent, would have been—

5 ‘‘(A) amounts, deposits, or debt obligations 

6 described in subsection (b) of this section, 

7 ‘‘(B) debt obligations described in the last 

8 sentence of section 2104(c), or 

9 ‘‘(C) other property not within the United 

10 States.’’

11 (c) TREATMENT OF REGULATED INVESTMENT COM12 PANIES UNDER SECTION 897.—

13 (1) Paragraph (1) of section 897(h) is amended 

14 by striking ‘‘REIT’’ each place it appears and in15 serting ‘‘qualified investment entity’’. 

16 (2) Paragraphs (2) and (3) of section 897(h) 

17 are amended to read as follows:

18 ‘‘(2) SALE OF STOCK IN DOMESTICALLY CON19 TROLLED ENTITY NOT TAXED.—The term ‘United 

20 States real property interest’ does not include any 

21 interest in a domestically controlled qualified invest22 ment entity. 

23 ‘‘(3) DISTRIBUTIONS BY DOMESTICALLY CON24 TROLLED QUALIFIED INVESTMENT ENTITIES.—In 

25 the case of a domestically controlled qualified invest-
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1 ment entity, rules similar to the rules of subsection 

2 (d) shall apply to the foreign ownership percentage 

3 of any gain.’’

4 (3) Subparagraphs (A) and (B) of section 

5 897(h)(4) are amended to read as follows: 

6 ‘‘(A) QUALIFIED INVESTMENT ENTITY.—

7 The term ‘qualified investment entity’ means 

8 any real estate investment trust and any regu9 lated investment company. 

10 ‘‘(B) DOMESTICALLY CONTROLLED.—The 

11 term ‘domestically controlled qualified invest12 ment entity’ means any qualified investment en13 tity in which at all times during the testing pe14 riod less than 50 percent in value of the stock 

15 was held directly or indirectly by foreign per16 sons.’’

17 (4) Subparagraphs (C) and (D) of section 

18 897(h)(4) are each amended by striking ‘‘REIT’’ 

19 and inserting ‘‘qualified investment entity’’. 

20 (5) The subsection heading for subsection (h) of 

21 section 897 is amended by striking ‘‘REITS’’ and 

22 inserting ‘‘CERTAIN INVESTMENT ENTITIES’’. 

23 (d) EFFECTIVE DATE.—

24 (1) IN GENERAL.—Except as otherwise pro25 vided in this subsection, the amendments made by 
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1 this section shall apply to dividends with respect to 

2 taxable years of regulated investment companies be3 ginning after the date of the enactment of this Act. 

4 (2) ESTATE TAX TREATMENT.—The amend5 ment made by subsection (b) shall apply to estates 

6 of decedents dying after the date of the enactment 

7 of this Act. 

8 (3) CERTAIN OTHER PROVISIONS.—The amend9 ments made by subsection (c) (other than paragraph 

10 (1) thereof) shall take effect on the date of the en11 actment of this Act. 

12 SEC. 1121. ELECTION NOT TO USE AVERAGE EXCHANGE 

13 RATE FOR FOREIGN TAX PAID OTHER THAN 

14 IN FUNCTIONAL CURRENCY. 

15 (a) IN GENERAL.—Paragraph (1) of section 986(a) 

16 (relating to determination of foreign taxes and foreign cor17 poration’s earnings and profits) is amended by redesig18 nating subparagraph (D) as subparagraph (E) and by in19 serting after subparagraph (C) the following new subpara20 graph: 

21 ‘‘(D) ELECTIVE EXCEPTION FOR TAXES

22 PAID OTHER THAN IN FUNCTIONAL CUR23 RENCY.—

24 ‘‘(i) IN GENERAL.—At the election of 

25 the taxpayer, subparagraph (A) shall not 
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1 apply to any foreign income taxes the li2 ability for which is denominated in any 

3 currency other than in the taxpayer’s func4 tional currency. 

5 ‘‘(ii) APPLICATION TO QUALIFIED

6 BUSINESS UNITS.—An election under this 

7 subparagraph may apply to foreign income 

8 taxes attributable to a qualified business 

9 unit in accordance with regulations pre10 scribed by the Secretary. 

11 ‘‘(iii) ELECTION.—Any such election 

12 shall apply to the taxable year for which 

13 made and all subsequent taxable years un14 less revoked with the consent of the Sec15 retary.’’

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

17 this section shall apply to taxable years beginning after 

18 December 31, 2004. 

19 SEC. 1122. REPEAL OF WITHHOLDING TAX ON DIVIDENDS 

20 FROM CERTAIN FOREIGN CORPORATIONS. 

21 (a) IN GENERAL.—Paragraph (2) of section 871(i) 

22 (relating to tax not to apply to certain interest and divi23 dends) is amended by adding at the end the following new 

24 subparagraph: 
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1 ‘‘(D) Dividends paid by a foreign corpora2 tion which are treated under section 

3 861(a)(2)(B) as income from sources within the 

4 United States.’’. 

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

6 this section shall apply to payments made after December 

7 31, 2004. 

8 TITLE II—PROVISIONS TO RE9 DUCE TAX AVOIDANCE 

10 THROUGH CORPORATE EARN11 INGS STRIPPING AND EXPA12 TRIATION 

13 SEC. 2001. REDUCTION IN POTENTIAL FOR EARNINGS 

14 STRIPPING BY FURTHER LIMITING DEDUC15 TION FOR INTEREST ON CERTAIN INDEBTED16 NESS. 

17 (a) REDUCTION IN POTENTIAL FOR EARNINGS

18 STRIPPING.—Paragraphs (1) and (2) of section 163(j) are 

19 amended to read as follows: 

20 ‘‘(1) LIMITATION.—

21 ‘‘(A) IN GENERAL.—In the case of a cor22 poration, no deduction shall be allowed under 

23 this chapter for disqualified interest paid or ac24 crued during the taxable year.
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1 ‘‘(B) MAXIMUM DISALLOWANCE.—The 

2 amount disallowed under subparagraph (A) 

3 shall not exceed the sum of—

4 ‘‘(i) the corporation’s excess interest 

5 expense for the taxable year, and 

6 ‘‘(ii) the corporation’s excess related 

7 party interest expense for such year. 

8 In no event shall the disallowance under sub9 paragraph (A) reduce the deduction for dis10 qualified interest below an amount equal to 25 

11 percent of adjusted taxable income (35 percent 

12 in the case of the first taxable year beginning 

13 after December 31, 2003). 

14 ‘‘(C) DISALLOWED AMOUNT CARRIED TO

15 SUCCEEDING TAXABLE YEAR.—

16 ‘‘(i) IN GENERAL.—Any amount dis17 allowed under subparagraph (A) for any 

18 taxable year shall be treated as paid or ac19 crued in the succeeding taxable year and in 

20 the 2nd through 10th succeeding taxable 

21 years to the extent not previously taken 

22 into account under this subparagraph. 

23 ‘‘(ii) LIMITATION ON AMOUNT CAR24 RIED TO YEAR.—A carryforward amount 

25 may not be taken into account for any 
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1 such succeeding taxable year to the extent 

2 that such amount, when added to amounts 

3 carried to such succeeding taxable year 

4 from taxable years preceding the taxable 

5 year from which the amount is being car6 ried forward, would result in (or increase) 

7 a disallowance under subparagraph (A). 

8 ‘‘(iii) CARRYOVER APPLIED SEPA9 RATELY TO CATEGORIES OF DISQUALIFIED

10 INTEREST.—Clauses (i) and (ii) shall be 

11 applied separately to disqualified interest 

12 described in paragraph (3)(A) and to dis13 qualified interest described in paragraph 

14 (3)(B). For purposes of this subparagraph, 

15 any amount disallowed under subpara16 graph (A) for any taxable year shall be 

17 treated as disqualified interest described in 

18 paragraph (3)(A) to the extent thereof and 

19 then as disqualified interest described in 

20 paragraph (3)(B). 

21 ‘‘(2) EXCESS INTEREST EXPENSE; EXCESS RE22 LATED PARTY INTEREST EXPENSE.—For purposes 

23 of this subsection—
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1 ‘‘(A) EXCESS INTEREST EXPENSE.—The 

2 term ‘excess interest expense’ means the excess 

3 (if any) of—

4 ‘‘(i) the corporation’s net interest ex5 pense, over 

6 ‘‘(ii) 50 percent of the adjusted tax7 able income of the corporation. 

8 ‘‘(B) EXCESS RELATED PARTY INTEREST

9 EXPENSE.—The term ‘excess related party in10 terest expense’ means the excess (if any) of—

11 ‘‘(i) the lesser of—

12 ‘‘(I) the amount of disqualified 

13 interest described in paragraph 

14 (3)(A), or 

15 ‘‘(II) the corporation’s net inter16 est expense, over 

17 ‘‘(ii) 25 percent (35 percent in the 

18 case of the first taxable year beginning 

19 after December 31, 2003) of the adjusted 

20 taxable income of the corporation.’’

21 (b) MAINTENANCE OF CURRENT LAW FOR INTEREST

22 PAID BY TAXABLE REIT SUBSIDIARIES TO REIT.—

23 (1) EXCEPTION FROM 163(J).—Paragraph (3) of 

24 section 163(j) is amended by inserting ‘‘and’’ at the 

25 end of subparagraph (A), by striking ‘‘, and’’ at the 
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1 end of subparagraph (B) and inserting a period, and 

2 by striking subparagraph (C). 

3 (2) DISALLOWANCE.—Section 856 is amended 

4 by adding at the end the following new subsection: 

5 ‘‘(m) LIMITATION ON DEDUCTION FOR INTEREST ON

6 CERTAIN INDEBTEDNESS OF TAXABLE REIT SUB7 SIDIARY.—

8 ‘‘(1) LIMITATION.—

9 ‘‘(A) IN GENERAL.—If this subsection ap10 plies to any taxable REIT subsidiary for any 

11 taxable year, no deduction shall be allowed 

12 under this chapter for disqualified interest paid 

13 or accrued by such subsidiary during such tax14 able year. The amount disallowed under the 

15 preceding sentence shall not exceed the subsidi16 ary’s excess interest expense for the taxable 

17 year. 

18 ‘‘(B) DISALLOWED AMOUNT CARRIED TO

19 SUCCEEDING TAXABLE YEAR.—Any amount dis20 allowed under subparagraph (A) for any taxable 

21 year shall be treated as disqualified interest 

22 paid or accrued in the succeeding taxable year 

23 (and clause (ii) of paragraph (2)(A) shall not 

24 apply for purposes of applying this subsection 

25 to the amount so treated). 
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1 ‘‘(2) SUBSIDIARIES TO WHICH SUBSECTION AP2 PLIES.—

3 ‘‘(A) IN GENERAL.—This subsection shall 

4 apply to any taxable REIT subsidiary for any 

5 taxable year if—

6 ‘‘(i) such subsidiary has excess inter7 est expense for such taxable year, and 

8 ‘‘(ii) the ratio of debt to equity of 

9 such subsidiary as of the close of such tax10 able year (or on any other day during the 

11 taxable year as the Secretary may by regu12 lations prescribe) exceeds 1.5 to 1. 

13 ‘‘(B) EXCESS INTEREST EXPENSE.—

14 ‘‘(i) IN GENERAL.—For purposes of 

15 this subsection, the term ‘excess interest 

16 expense’ means the excess (if any) of—

17 ‘‘(I) the taxable REIT subsidi18 ary’s net interest expense, over 

19 ‘‘(II) the sum of 50 percent of 

20 the adjusted taxable income of the 

21 subsidiary plus any excess limitation 

22 carryforward under clause (ii). 

23 ‘‘(ii) EXCESS LIMITATION

24 CARRYFORWARD.—If a taxable REIT sub25 sidiary has an excess limitation for any
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1 taxable year, the amount of such excess 

2 limitation shall be an excess limitation 

3 carryforward to the 1st succeeding taxable 

4 year and to the 2nd and 3rd succeeding 

5 taxable years to the extent not previously 

6 taken into account under this clause. The 

7 amount of such a carryforward taken into 

8 account for any such succeeding taxable 

9 year shall not exceed the excess interest 

10 expense for such succeeding taxable year 

11 (determined without regard to the 

12 carryforward from the taxable year of such 

13 excess limitation). 

14 ‘‘(iii) EXCESS LIMITATION.—For pur15 poses of clause (ii), the term ‘excess limita16 tion’ means the excess (if any) of—

17 ‘‘(I) 50 percent of the adjusted 

18 taxable income of the subsidiary, over 

19 ‘‘(II) the subsidiary’s net interest 

20 expense. 

21 ‘‘(C) RATIO OF DEBT TO EQUITY.—For 

22 purposes of this paragraph, the term ‘ratio of 

23 debt to equity’ means the ratio which the total 

24 indebtedness of the subsidiary bears to the sum 

25 of its money and all other assets reduced (but 
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1 not below zero) by such total indebtedness. The 

2 rules of section 163(j)(6)(E) shall apply for 

3 purposes of the preceding sentence. 

4 ‘‘(3) DISQUALIFIED INTEREST.—For purposes 

5 of this subsection, the term ‘disqualified interest’ 

6 means any interest paid or accrued (directly or indi7 rectly) by a taxable REIT subsidiary of a real estate 

8 investment trust to such trust. 

9 ‘‘(4) OTHER RULES TO APPLY.—Rules similar 

10 to the rules of paragraphs (7), (8), and (9) of sec11 tion 163(j) shall apply for purposes of this sub12 section.’’

13 (c) EFFECTIVE DATE.—

14 (1) IN GENERAL.—Except as otherwise pro15 vided in this subsection, the amendments made by 

16 this section shall apply to taxable years beginning 

17 after December 31, 2003. 

18 (2) EARLIER EFFECTIVE DATE WITH RESPECT

19 TO EXPATRIATED CORPORATIONS, ETC.—The 

20 amendments made by this section shall apply to tax21 able years ending after March 4, 2003, in the case 

22 of a taxpayer which is—

23 (A) a surrogate foreign corporation, as de24 fined in section 7874(a)(2)(B) of the Internal 
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1 Revenue Code of 1986, as added by section 

2 2002, 

3 (B) a corporation which would be a surro4 gate foreign corporation (as so defined) if ‘‘De5 cember 31, 1996’’ were substituted for ‘‘March 

6 4, 2003’’ in such section 7874(a), and 

7 (C) any corporation which is an expatri8 ated entity (as defined in such section 7874(a)) 

9 with respect to a corporation described in sub10 paragraph (A) or (B). 

11 In applying such amendments to a taxpayer de12 scribed in the preceding sentence, subparagraph (B) 

13 of section 163(j)(2) of such Code, as amended by 

14 this section, shall be applied by substituting ‘‘25 

15 percent’’ for ‘‘35 percent’’. 

16 (3) LIMITATION ON CARRYOVER OF DIS17 ALLOWED INTEREST.—

18 (A) IN GENERAL.—Except in the case of a 

19 taxpayer described in paragraph (2), for pur20 poses of applying section 163(j)(1)(C) of the 

21 Internal Revenue Code of 1986 (as added by 

22 this section), amounts carried from a taxable 

23 year beginning before January 1, 2004, to any 

24 taxable year beginning after December 31, 

25 2003, shall be treated as disqualified interest 
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1 described in section 163(j)(3)(B) of such Code 

2 which is disallowed for the most recent taxable 

3 year beginning before January 1, 2004. 

4 (B) EXPATRIATED CORPORATIONS.—In the 

5 case of a taxpayer described in paragraph (2), 

6 a rule similar to the rule of subparagraph (A) 

7 shall apply to amounts carried from a taxable 

8 year beginning before March 5, 2003. 

9 SEC. 2002. TAX TREATMENT OF EXPATRIATED ENTITIES 

10 AND THEIR FOREIGN PARENTS. 

11 (a) IN GENERAL.—Subchapter C of chapter 80 (re12 lating to provisions affecting more than one subtitle) is 

13 amended by adding at the end the following new section: 

14 ‘‘SEC. 7874. RULES RELATING TO EXPATRIATED ENTITIES 

15 AND THEIR FOREIGN PARENTS. 

16 ‘‘(a) TAX ON INVERSION GAIN OF EXPATRIATED EN17 TITIES.—

18 ‘‘(1) IN GENERAL.—The taxable income of an 

19 expatriated entity for any taxable year which in20 cludes any portion of the applicable period shall in 

21 no event be less than the inversion gain of the entity 

22 for the taxable year. 

23 ‘‘(2) EXPATRIATED ENTITY.—For purposes of 

24 this subsection—
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1 ‘‘(A) IN GENERAL.—The term ‘expatriated 

2 entity’ means—

3 ‘‘(i) the domestic corporation or part4 nership referred to in subparagraph (B)(i) 

5 with respect to which a foreign corporation 

6 is a surrogate foreign corporation, and 

7 ‘‘(ii) any United States person who is 

8 related (within the meaning of section 

9 267(b) or 707(b)(1)) to a domestic cor10 poration or partnership described in clause 

11 (i). 

12 ‘‘(B) SURROGATE FOREIGN CORPORA13 TION.—A foreign corporation shall be treated 

14 as a surrogate foreign corporation if, pursuant 

15 to a plan (or a series of related transactions)—

16 ‘‘(i) the entity completes after March 

17 4, 2003, the direct or indirect acquisition 

18 of substantially all of the properties held 

19 directly or indirectly by a domestic cor20 poration or substantially all of the prop21 erties constituting a trade or business of a 

22 domestic partnership, and 

23 ‘‘(ii) after the acquisition at least 60 

24 percent of the stock (by vote or value) of 

25 the entity is held—
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1 ‘‘(I) in the case of an acquisition 

2 with respect to a domestic corpora3 tion, by former shareholders of the 

4 domestic corporation by reason of 

5 holding stock in the domestic corpora6 tion, or 

7 ‘‘(II) in the case of an acquisition 

8 with respect to a domestic partner9 ship, by former partners of the do10 mestic partnership by reason of hold11 ing a capital or profits interest in the 

12 domestic partnership. 

13 An entity otherwise described in clause (i) with 

14 respect to any domestic corporation or partner15 ship trade or business shall be treated as not so 

16 described if, on or before March 4, 2003, such 

17 entity acquired directly or indirectly more than 

18 half of the properties held directly or indirectly 

19 by such corporation or more than half of the 

20 properties constituting such partnership trade 

21 or business, as the case may be. 

22 ‘‘(b) DEFINITIONS AND SPECIAL RULES.—

23 ‘‘(1) EXPANDED AFFILIATED GROUP.—The 

24 term ‘expanded affiliated group’ means an affiliated 

25 group as defined in section 1504(a) but without re-
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1 gard to section 1504(b)(3), except that section 

2 1504(a) shall be applied by substituting ‘more than 

3 50 percent’ for ‘at least 80 percent’ each place it ap4 pears. 

5 ‘‘(2) CERTAIN STOCK DISREGARDED.—There 

6 shall not be taken into account in determining own7 ership under subsection (a)(2)(B)(ii)—

8 ‘‘(A) stock held by members of the ex9 panded affiliated group which includes the for10 eign corporation, or 

11 ‘‘(B) stock of such foreign corporation 

12 which is sold in a public offering related to the 

13 acquisition described in subsection (a)(2)(B)(i). 

14 ‘‘(4) PLAN DEEMED IN CERTAIN CASES.—If a 

15 foreign corporation acquires directly or indirectly 

16 substantially all of the properties of a domestic cor17 poration or partnership during the 4-year period be18 ginning on the date which is 2 years before the own19 ership requirements of subsection (a)(2)(B)(ii) are 

20 met, such actions shall be treated as pursuant to a 

21 plan. 

22 ‘‘(5) CERTAIN TRANSFERS DISREGARDED.—The 

23 transfer of properties or liabilities (including by con24 tribution or distribution) shall be disregarded if such 
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1 transfers are part of a plan a principal purpose of 

2 which is to avoid the purposes of this section. 

3 ‘‘(6) SPECIAL RULE FOR RELATED PARTNER4 SHIPS.—For purposes of applying subsection 

5 (a)(2)(B)(ii) to the acquisition of a trade or business 

6 of a domestic partnership, except as provided in reg7 ulations, all partnerships which are under common 

8 control (within the meaning of section 482) shall be 

9 treated as 1 partnership. 

10 ‘‘(7) REGULATIONS.—The Secretary shall pre11 scribe such regulations as may be appropriate to de12 termine whether a corporation is a surrogate foreign 

13 corporation, including regulations—

14 ‘‘(A) to treat warrants, options, contracts 

15 to acquire stock, convertible debt interests, and 

16 other similar interests as stock, and 

17 ‘‘(B) to treat stock as not stock. 

18 ‘‘(c) OTHER DEFINITIONS.—For purposes of this 

19 section—

20 ‘‘(1) APPLICABLE PERIOD.—The term ‘applica21 ble period’ means the period—

22 ‘‘(A) beginning on the first date properties 

23 are acquired as part of the acquisition described 

24 in subsection (a)(2)(B)(i), and 
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1 ‘‘(B) ending on the date which is 10 years 

2 after the last date properties are acquired as 

3 part of such acquisition. 

4 ‘‘(2) INVERSION GAIN.—The term ‘inversion 

5 gain’ means the income or gain recognized by reason 

6 of the transfer during the applicable period of stock 

7 or other properties by an expatriated entity, and any 

8 income received or accrued during the applicable pe9 riod by reason of a license of any property by an ex10 patriated entity —

11 ‘‘(A) as part of the acquisition described in 

12 subsection (a)(2)(B)(i), or 

13 ‘‘(B) after such acquisition if the transfer 

14 or license is to a foreign related person. 

15 Subparagraph (B) shall not apply to property de16 scribed in section 1221(a)(1) in the hands of the ex17 patriated entity. 

18 ‘‘(4) FOREIGN RELATED PERSON.—The term 

19 ‘foreign related person’ means, with respect to any 

20 expatriated entity, a foreign person which—

21 ‘‘(A) is related (within the meaning of sec22 tion 267(b) or 707(b)(1)) to such entity, or 

23 ‘‘(B) is under the same common control 

24 (within the meaning of section 482) as such en25 tity. 
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1 ‘‘(d) SPECIAL RULES.—

2 ‘‘(1) CREDITS NOT ALLOWED AGAINST TAX ON

3 INVERSION GAIN.—Credits (other than the credit al4 lowed by section 901) shall be allowed against the 

5 tax imposed by this chapter on an expatriated entity 

6 for any taxable year described in subsection (a) only 

7 to the extent such tax exceeds the product of—

8 ‘‘(A) the amount of the inversion gain for 

9 the taxable year, and 

10 ‘‘(B) the highest rate of tax specified in 

11 section 11(b)(1). 

12 For purposes of determining the credit allowed by 

13 section 901, inversion gain shall be treated as from 

14 sources within the United States. 

15 ‘‘(2) SPECIAL RULES FOR PARTNERSHIPS.—In 

16 the case of an expatriated entity which is a partner17 ship—

18 ‘‘(A) subsection (a)(1) shall apply at the 

19 partner rather than the partnership level, 

20 ‘‘(B) the inversion gain of any partner for 

21 any taxable year shall be equal to the sum of—

22 ‘‘(i) the partner’s distributive share of 

23 inversion gain of the partnership for such 

24 taxable year, plus
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1 ‘‘(ii) gain recognized for the taxable 

2 year by the partner by reason of the trans3 fer during the applicable period of any 

4 partnership interest of the partner in such 

5 partnership to the surrogate foreign cor6 poration, and 

7 ‘‘(C) the highest rate of tax specified in 

8 the rate schedule applicable to the partner 

9 under this chapter shall be substituted for the 

10 rate of tax referred to in paragraph (1). 

11 ‘‘(3) COORDINATION WITH SECTION 172 AND

12 MINIMUM TAX.—Rules similar to the rules of para13 graphs (3) and (4) of section 860E(a) shall apply 

14 for purposes of subsection (a). 

15 ‘‘(4) STATUTE OF LIMITATIONS.—

16 ‘‘(A) IN GENERAL.—The statutory period 

17 for the assessment of any deficiency attrib18 utable to the inversion gain of any taxpayer for 

19 any pre-inversion year shall not expire before 

20 the expiration of 3 years from the date the Sec21 retary is notified by the taxpayer (in such man22 ner as the Secretary may prescribe) of the ac23 quisition described in subsection (a)(2)(B)(i) to 

24 which such gain relates and such deficiency 

25 may be assessed before the expiration of such 
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1 3-year period notwithstanding the provisions of 

2 any other law or rule of law which would other3 wise prevent such assessment. 

4 ‘‘(B) PRE-INVERSION YEAR.—For purposes 

5 of subparagraph (A), the term ‘pre-inversion 

6 year’ means any taxable year if—

7 ‘‘(i) any portion of the applicable pe8 riod is included in such taxable year, and 

9 ‘‘(ii) such year ends before the taxable 

10 year in which the acquisition described in 

11 subsection (a)(2)(B)(i) is completed. 

12 ‘‘(f) SPECIAL RULE FOR TREATIES.—Nothing in sec13 tion 894 or 7852(d) or in any other provision of law shall 

14 be construed as permitting an exemption, by reason of any 

15 treaty obligation of the United States heretofore or here16 after entered into, from the provisions of this section. 

17 ‘‘(g) REGULATIONS.—The Secretary shall provide 

18 such regulations as are necessary to carry out this section, 

19 including regulations providing for such adjustments to 

20 the application of this section as are necessary to prevent 

21 the avoidance of the purposes of this section, including the 

22 avoidance of such purposes through—

23 ‘‘(1) the use of related persons, pass-through or 

24 other noncorporate entities, or other intermediaries, 

25 or 
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1 ‘‘(2) transactions designed to have persons 

2 cease to be (or not become) members of expanded 

3 affiliated groups or related persons.’’. 

4 (b) CONFORMING AMENDMENT.—The table of sec5 tions for subchapter C of chapter 80 is amended by adding 

6 at the end the following new item:

‘‘Sec. 7874. Rules relating to expatriated entities and their foreign parents.’’

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

8 this section shall apply to taxable years ending after 

9 March 4, 2003.

10 SEC. 2003. EXCISE TAX ON STOCK COMPENSATION OF IN11 SIDERS IN EXPATRIATED CORPORATIONS. 

12 (a) IN GENERAL.—Subtitle D is amended by insert13 ing after chapter 44 end the following new chapter: 

14 ‘‘CHAPTER 45—PROVISIONS RELATING TO 

15 EXPATRIATED ENTITIES

‘‘Sec. 4985. Stock compensation of insiders in expatriated corporations.

16 ‘‘SEC. 4985. STOCK COMPENSATION OF INSIDERS IN EXPA17 TRIATED CORPORATIONS. 

18 ‘‘(a) IMPOSITION OF TAX.—In the case of an indi19 vidual who is a disqualified individual with respect to any 

20 expatriated corporation, there is hereby imposed on such 

21 person a tax equal to 15 percent of the value (determined 

22 under subsection (b)) of the specified stock compensation 
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1 held (directly or indirectly) by or for the benefit of such 

2 individual or a member of such individual’s family (as de3 fined in section 267) at any time during the 12-month 

4 period beginning on the date which is 6 months before 

5 the expatriation date. 

6 ‘‘(b) VALUE.—For purposes of subsection (a)—

7 ‘‘(1) IN GENERAL.—The value of specified stock 

8 compensation shall be—

9 ‘‘(A) in the case of a stock option (or other 

10 similar right) or a stock appreciation right, the 

11 fair value of such option or right, and 

12 ‘‘(B) in any other case, the fair market 

13 value of such compensation. 

14 ‘‘(2) DATE FOR DETERMINING VALUE.—The 

15 determination of value shall be made—

16 ‘‘(A) in the case of specified stock com17 pensation held on the expatriation date, on such 

18 date, 

19 ‘‘(B) in the case of such compensation 

20 which is canceled during the 6 months before 

21 the expatriation date, on the day before such 

22 cancellation, and 

23 ‘‘(C) in the case of such compensation 

24 which is granted after the expatriation date, on 

25 the date such compensation is granted. 
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1 ‘‘(c) TAX TO APPLY ONLY IF SHAREHOLDER GAIN

2 RECOGNIZED.—Subsection (a) shall apply to any disquali3 fied individual with respect to an expatriated corporation 

4 only if gain (if any) on any stock in such corporation is 

5 recognized in whole or part by any shareholder by reason 

6 of the acquisition referred to in section 7874(a)(2)(B)(i) 

7 with respect to such corporation. 

8 ‘‘(d) EXCEPTION WHERE GAIN RECOGNIZED ON

9 COMPENSATION.—Subsection (a) shall not apply to—

10 ‘‘(1) any stock option which is exercised on the 

11 expatriation date or during the 6-month period be12 fore such date and to the stock acquired in such ex13 ercise, and 

14 ‘‘(2) any specified stock compensation which is 

15 sold, exchanged, distributed or cashed-out during 

16 such period in a transaction in which gain or loss is 

17 recognized in full. 

18 ‘‘(e) DEFINITIONS.—For purposes of this section—

19 ‘‘(1) DISQUALIFIED INDIVIDUAL.—The term 

20 ‘disqualified individual’ means, with respect to a cor21 poration, any individual who, at any time during the 

22 12-month period beginning on the date which is 6 

23 months before the expatriation date—

24 ‘‘(A) is subject to the requirements of sec25 tion 16(a) of the Securities Exchange Act of
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1 1934 with respect to such corporation or any 

2 member of the expanded affiliated group which 

3 includes such corporation, or 

4 ‘‘(B) would be subject to such require5 ments if such corporation or member were an 

6 issuer of equity securities referred to in such 

7 section. 

8 ‘‘(2) EXPATRIATED CORPORATION; EXPATRIA9 TION DATE.—

10 ‘‘(A) EXPATRIATED CORPORATION.—The 

11 term ‘expatriated corporation’ means any cor12 poration which is an expatriated entity (as de13 fined in section 7874(a)(2)). Such term in14 cludes any predecessor or successor of such a 

15 corporation. 

16 ‘‘(B) EXPATRIATION DATE.—The term ‘ex17 patriation date’ means, with respect to a cor18 poration, the date on which the corporation 

19 first becomes an expatriated corporation. 

20 ‘‘(3) SPECIFIED STOCK COMPENSATION.—

21 ‘‘(A) IN GENERAL.—The term ‘specified 

22 stock compensation’ means payment (or right 

23 to payment) granted by the expatriated cor24 poration (or by any member of the expanded af25 filiated group which includes such corporation) 
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1 to any person in connection with the perform2 ance of services by a disqualified individual for 

3 such corporation or member if the value of such 

4 payment or right is based on (or determined by 

5 reference to) the value (or change in value) of 

6 stock in such corporation (or any such mem7 ber). 

8 ‘‘(B) EXCEPTIONS.—Such term shall not 

9 include—

10 ‘‘(i) any option to which part II of 

11 subchapter D of chapter 1 applies, or 

12 ‘‘(ii) any payment or right to payment 

13 from a plan referred to in section 

14 280G(b)(6). 

15 ‘‘(4) EXPANDED AFFILIATED GROUP.—The 

16 term ‘expanded affiliated group’ means an affiliated 

17 group (as defined in section 1504(a) without regard 

18 to section 1504(b)(3)); except that section 1504(a) 

19 shall be applied by substituting ‘more than 50 per20 cent’ for ‘at least 80 percent’ each place it appears. 

21 ‘‘(f) SPECIAL RULES.—For purposes of this sec22 tion—

23 ‘‘(1) CANCELLATION OF RESTRICTION.—The 

24 cancellation of a restriction which by its terms will 

25 never lapse shall be treated as a grant. 
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1 ‘‘(2) PAYMENT OR REIMBURSEMENT OF TAX BY

2 CORPORATION TREATED AS SPECIFIED STOCK COM3 PENSATION.—Any payment of the tax imposed by 

4 this section directly or indirectly by the expatriated 

5 corporation or by any member of the expanded affili6 ated group which includes such corporation—

7 ‘‘(A) shall be treated as specified stock 

8 compensation, and 

9 ‘‘(B) shall not be allowed as a deduction 

10 under any provision of chapter 1. 

11 ‘‘(3) CERTAIN RESTRICTIONS IGNORED.—

12 Whether there is specified stock compensation, and 

13 the value thereof, shall be determined without regard 

14 to any restriction other than a restriction which by 

15 its terms will never lapse. 

16 ‘‘(4) PROPERTY TRANSFERS.—Any transfer of 

17 property shall be treated as a payment and any right 

18 to a transfer of property shall be treated as a right 

19 to a payment. 

20 ‘‘(5) OTHER ADMINISTRATIVE PROVISIONS.—

21 For purposes of subtitle F, any tax imposed by this 

22 section shall be treated as a tax imposed by subtitle 

23 A. 
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1 ‘‘(g) REGULATIONS.—The Secretary shall prescribe 

2 such regulations as may be necessary or appropriate to 

3 carry out the purposes of this section.’’

4 (b) DENIAL OF DEDUCTION.—

5 (1) IN GENERAL.—Paragraph (6) of section 

6 275(a) is amended by inserting ‘‘45,’’ before ‘‘46,’’. 

7 (2) $1,000,000 LIMIT ON DEDUCTIBLE COM8 PENSATION REDUCED BY PAYMENT OF EXCISE TAX

9 ON SPECIFIED STOCK COMPENSATION.—Paragraph 

10 (4) of section 162(m) is amended by adding at the 

11 end the following new subparagraph: 

12 ‘‘(G) COORDINATION WITH EXCISE TAX ON

13 SPECIFIED STOCK COMPENSATION.—The dollar 

14 limitation contained in paragraph (1) with re15 spect to any covered employee shall be reduced 

16 (but not below zero) by the amount of any pay17 ment (with respect to such employee) of the tax 

18 imposed by section 4985 directly or indirectly 

19 by the expatriated corporation (as defined in 

20 such section) or by any member of the ex21 panded affiliated group (as defined in such sec22 tion) which includes such corporation.’’

23 (c) CONFORMING AMENDMENTS.—

24 (1) The last sentence of section 3121(v)(2)(A) 

25 is amended by inserting before the period ‘‘or to any 
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1 specified stock compensation (as defined in section 

2 4985) on which tax is imposed by section 4985’’. 

3 (2) The table of chapters for subtitle D is 

4 amended by inserting after the item relating to 

5 chapter 44 the following new item:

‘‘Chapter 45. Provisions relating to expatriated entities.’’

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

7 this section shall take effect on March 4, 2003; except that 

8 periods before such date shall not be taken into account 

9 in applying the periods in subsections (a) and (e)(1) of 

10 section 4985 of the Internal Revenue Code of 1986, as 

11 added by this section. 

12 SEC. 2004. REINSURANCE OF UNITED STATES RISKS IN 

13 FOREIGN JURISDICTIONS. 

14 (a) IN GENERAL.—Section 845(a) (relating to alloca15 tion in case of reinsurance agreement involving tax avoid16 ance or evasion) is amended by striking ‘‘source and char17 acter’’ and inserting ‘‘amount, source, or character’’. 

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

19 this section shall apply to any risk reinsured after the date 

20 of the enactment of this Act.

21 SEC. 2005. REVISION OF TAX RULES ON EXPATRIATION OF 

22 INDIVIDUALS. 

23 (a) EXPATRIATION TO AVOID TAX.—
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1 (1) IN GENERAL.—Subsection (a) of section 

2 877 (relating to treatment of expatriates) is amend3 ed to read as follows: 

4 ‘‘(a) TREATMENT OF EXPATRIATES.—

5 ‘‘(1) IN GENERAL.—Every nonresident alien in6 dividual to whom this section applies and who, with7 in the 10-year period immediately preceding the 

8 close of the taxable year, lost United States citizen9 ship shall be taxable for such taxable year in the 

10 manner provided in subsection (b) if the tax imposed 

11 pursuant to such subsection (after any reduction in 

12 such tax under the last sentence of such subsection) 

13 exceeds the tax which, without regard to this section, 

14 is imposed pursuant to section 871. 

15 ‘‘(2) INDIVIDUALS SUBJECT TO THIS SEC16 TION.—This section shall apply to any individual 

17 if—

18 ‘‘(A) the average annual net income tax 

19 (as defined in section 38(c)(1)) of such indi20 vidual for the period of 5 taxable years ending 

21 before the date of the loss of United States citi22 zenship is greater than $122,000, 

23 ‘‘(B) the net worth of the individual as of 

24 such date is $2,000,000 or more, or 
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1 ‘‘(C) such individual fails to certify under 

2 penalty of perjury that he has met the require3 ments of this title for the 5 preceding taxable 

4 years or fails to submit such evidence of such 

5 compliance as the Secretary may require. 

6 In the case of the loss of United States citizenship 

7 in any calendar year after 2003, such $122,000 

8 amount shall be increased by an amount equal to 

9 such dollar amount multiplied by the cost-of-living 

10 adjustment determined under section 1(f)(3) for 

11 such calendar year by substituting ‘2002’ for ‘1992’ 

12 in subparagraph (B) thereof. Any increase under the 

13 preceding sentence shall be rounded to the nearest 

14 multiple of $1,000.’’. 

15 (2) REVISION OF EXCEPTIONS FROM ALTER16 NATIVE TAX.—Subsection (c) of section 877 (relat17 ing to tax avoidance not presumed in certain cases) 

18 is amended to read as follows: 

19 ‘‘(c) EXCEPTIONS.—

20 ‘‘(1) IN GENERAL.—Subparagraphs (A) and 

21 (B) of subsection (a)(2) shall not apply to an indi22 vidual described in paragraph (2) or (3). 

23 ‘‘(2) DUAL CITIZENS.—

24 ‘‘(A) IN GENERAL.—An individual is de25 scribed in this paragraph if—
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1 ‘‘(i) the individual became at birth a 

2 citizen of the United States and a citizen 

3 of another country and continues to be a 

4 citizen of such other country, and 

5 ‘‘(ii) the individual has had no sub6 stantial contacts with the United States. 

7 ‘‘(B) SUBSTANTIAL CONTACTS.—An indi8 vidual shall be treated as having no substantial 

9 contacts with the United States only if the indi10 vidual—

11 ‘‘(i) was never a resident of the 

12 United States (as defined in section 

13 7701(b)), 

14 ‘‘(ii) has never held a United States 

15 passport, and 

16 ‘‘(iii) was not present in the United 

17 States for more than 30 days during any 

18 calendar year which is 1 of the 10 calendar 

19 years preceding the individual’s loss of 

20 United States citizenship. 

21 ‘‘(3) CERTAIN MINORS.—An individual is de22 scribed in this paragraph if—

23 ‘‘(A) the individual became at birth a cit24 izen of the United States, 
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1 ‘‘(B) neither parent of such individual was 

2 a citizen of the United States at the time of 

3 such birth, 

4 ‘‘(C) the individual’s loss of United States 

5 citizenship occurs before such individual attains 

age 181 6 ⁄2, and 

7 ‘‘(D) the individual was not present in the 

8 United States for more than 30 days during 

9 any calendar year which is 1 of the 10 calendar 

10 years preceding the individual’s loss of United 

11 States citizenship.’’. 

12 (3) CONFORMING AMENDMENT.—Section 

13 2107(a) is amended to read as follows: 

14 ‘‘(a) TREATMENT OF EXPATRIATES.—A tax com15 puted in accordance with the table contained in section 

16 2001 is hereby imposed on the transfer of the taxable es17 tate, determined as provided in section 2106, of every de18 cedent nonresident not a citizen of the United States if 

19 the date of death occurs during a taxable year with respect 

20 to which the decedent is subject to tax under section 

21 877(b).’’. 

22 (b) SPECIAL RULES FOR DETERMINING WHEN AN

23 INDIVIDUAL IS NO LONGER A UNITED STATES CITIZEN

24 OR LONG-TERM RESIDENT.—Section 7701 (relating to 

25 definitions) is amended by redesignating subsection (n) as
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1 subsection (o) and by inserting after subsection (m) the 

2 following new subsection: 

3 ‘‘(n) SPECIAL RULES FOR DETERMINING WHEN AN

4 INDIVIDUAL IS NO LONGER A UNITED STATES CITIZEN

5 OR LONG-TERM RESIDENT.—An individual who would 

6 (but for this subsection) cease to be treated as a citizen 

7 or resident of the United States shall continue to be treat8 ed as a citizen or resident of the United States, as the 

9 case may be, until such individual—

10 ‘‘(1) gives notice of an expatriating act or ter11 mination of residency (with the requisite intent to 

12 relinquish citizenship or terminate residency) to the 

13 Secretary of State or the Secretary of Homeland Se14 curity, and 

15 ‘‘(2) provides a statement in accordance with 

16 section 6039G.’’. 

17 (c) PHYSICAL PRESENCE IN THE UNITED STATES

18 FOR MORE THAN 30 DAYS.—Section 877 (relating to ex19 patriation to avoid tax) is amended by adding at the end 

20 the following new subsection: 

21 ‘‘(g) PHYSICAL PRESENCE.—

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

23 to any individual to whom this section would other24 wise apply for any taxable year during the 10-year 

25 period referred to in subsection (a) in which such in-
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1 dividual is physically present in the United States at 

2 any time on more than 30 days in the calendar year 

3 ending in such taxable year, and such individual 

4 shall be treated for purposes of this title as a citizen 

5 or resident of the United States, as the case may be, 

6 for such taxable year. 

7 ‘‘(2) EXCEPTION.—

8 ‘‘(A) IN GENERAL.—In the case of an indi9 vidual described in any of the following sub10 paragraphs of this paragraph, a day of physical 

11 presence in the United States shall be dis12 regarded if the individual is performing services 

13 in the United States on such day for an em14 ployer. The preceding sentence shall not apply 

15 if—

16 ‘‘(i) such employer is related (within 

17 the meaning of section 267 and 707) to 

18 such individual, or 

19 ‘‘(ii) such employer fails to meet such 

20 requirements as the Secretary may pre21 scribe by regulations to prevent the avoid22 ance of the purposes of this paragraph. 

23 Not more than 30 days during any calendar 

24 year may be disregarded under this subpara25 graph. 
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1 ‘‘(B) INDIVIDUALS WITH TIES TO OTHER

2 COUNTRIES.—An individual is described in this 

3 subparagraph if—

4 ‘‘(i) the individual becomes (not later 

5 than the close of a reasonable period after 

6 loss of United States citizenship or termi7 nation of residency) a citizen or resident of 

8 the country in which—

9 ‘‘(I) such individual was born, 

10 ‘‘(II) if such individual is mar11 ried, such individual’s spouse was 

12 born, or 

13 ‘‘(III) either of such individual’s 

14 parents were born, and 

15 ‘‘(ii) the individual becomes fully lia16 ble for income tax in such country. 

17 ‘‘(C) MINIMAL PRIOR PHYSICAL PRESENCE

18 IN THE UNITED STATES.—An individual is de19 scribed in this subparagraph if, for each year in 

20 the 10-year period ending on the date of loss of 

21 United States citizenship or termination of resi22 dency, the individual was physically present in 

23 the United States for 30 days or less. The rule 

24 of section 7701(b)(3)(D)(ii) shall apply for pur25 poses of this subparagraph.’’. 
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1 (d) TRANSFERS SUBJECT TO GIFT TAX.—

2 (1) IN GENERAL.—Subsection (a) of section 

3 2501 (relating to taxable transfers) is amended by 

4 striking paragraph (4), by redesignating paragraph 

5 (5) as paragraph (4), and by striking paragraph (3) 

6 and inserting the following new paragraph: 

7 ‘‘(3) EXCEPTION.—

8 ‘‘(A) CERTAIN INDIVIDUALS.—Paragraph 

9 (2) shall not apply in the case of a donor to 

10 whom section 877(b) applies for the taxable 

11 year which includes the date of the transfer. 

12 ‘‘(B) CREDIT FOR FOREIGN GIFT TAXES.—

13 The tax imposed by this section solely by reason 

14 of this paragraph shall be credited with the 

15 amount of any gift tax actually paid to any for16 eign country in respect of any gift which is tax17 able under this section solely by reason of this 

18 paragraph.’’

19 (2) TRANSFERS OF CERTAIN STOCK.—Sub20 section (a) of section 2501 is amended by adding at 

21 the end the following new paragraph: 

22 ‘‘(5) TRANSFERS OF CERTAIN STOCK.—

23 ‘‘(A) IN GENERAL.—In the case of a trans24 fer of stock in a foreign corporation described 

25 in subparagraph (B) by a donor to whom sec-
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1 tion 877(b) applies for the taxable year which 

2 includes the date of the transfer—

3 ‘‘(i) section 2511(a) shall be applied 

4 without regard to whether such stock is 

5 situated within the United States, and 

6 ‘‘(ii) the value of such stock for pur7 poses of this chapter shall be its U.S.-asset 

8 value determined under subparagraph (C). 

9 ‘‘(B) FOREIGN CORPORATION DE10 SCRIBED.—A foreign corporation is described in 

11 this subparagraph with respect to a donor if—

12 ‘‘(i) the donor owned (within the 

13 meaning of section 958(a)) at the time of 

14 such transfer 10 percent or more of the 

15 total combined voting power of all classes 

16 of stock entitled to vote of the foreign cor17 poration, and 

18 ‘‘(ii) such donor owned (within the 

19 meaning of section 958(a)), or is consid20 ered to have owned (by applying the own21 ership rules of section 958(b)), at the time 

22 of such transfer, more than 50 percent 

23 of—
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1 ‘‘(I) the total combined voting 

2 power of all classes of stock entitled 

3 to vote of such corporation, or 

4 ‘‘(II) the total value of the stock 

5 of such corporation. 

6 ‘‘(C) U.S.-ASSET VALUE.—For purposes of 

7 subparagraph (A), the U.S.-asset value of stock 

8 shall be the amount which bears the same ratio 

9 to the fair market value of such stock at the 

10 time of transfer as—

11 ‘‘(i) the fair market value (at such 

12 time) of the assets owned by such foreign 

13 corporation and situated in the United 

14 States, bears to 

15 ‘‘(ii) the total fair market value (at 

16 such time) of all assets owned by such for17 eign corporation.’’ 

18 (e) ENHANCED INFORMATION REPORTING FROM IN19 DIVIDUALS LOSING UNITED STATES CITIZENSHIP.—

20 (1) IN GENERAL.—Subsection (a) of section 

21 6039G is amended to read as follows: 

22 ‘‘(a) IN GENERAL.—Notwithstanding any other pro23 vision of law, any individual to whom section 877(b) ap24 plies for any taxable year shall provide a statement for 
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1 such taxable year which includes the information described 

2 in subsection (b).’’. 

3 (2) INFORMATION TO BE PROVIDED.—Sub4 section (b) of section 6039G is amended to read as 

5 follows: 

6 ‘‘(b) INFORMATION TO BE PROVIDED.—Information 

7 required under subsection (a) shall include—

8 ‘‘(1) the taxpayer’s TIN, 

9 ‘‘(2) the mailing address of such individual’s 

10 principal foreign residence, 

11 ‘‘(3) the foreign country in which such indi12 vidual is residing, 

13 ‘‘(4) the foreign country of which such indi14 vidual is a citizen, 

15 ‘‘(5) information detailing the income, assets, 

16 and liabilities of such individual, 

17 ‘‘(6) the number of days during any portion of 

18 which that the individual was physically present in 

19 the United States during the taxable year, and 

20 ‘‘(7) such other information as the Secretary 

21 may prescribe.’’. 

22 (3) INCREASE IN PENALTY.—Subsection (d) of 

23 section 6039G is amended to read as follows: 

24 ‘‘(d) PENALTY.—If—
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1 ‘‘(1) an individual is required to file a state2 ment under subsection (a) for any taxable year, and 

3 ‘‘(2) fails to file such a statement with the Sec4 retary on or before the date such statement is re5 quired to be filed or fails to include all the informa6 tion required to be shown on the statement or in7 cludes incorrect information, 

8 such individual shall pay a penalty of $10,000 unless it 

9 is shown that such failure is due to reasonable cause and 

10 not to willful neglect.’’. 

11 (4) CONFORMING AMENDMENT.—Section 

12 6039G is amended by striking subsections (c), (f), 

13 and (g) and by redesignating subsections (d) and (e) 

14 as subsection (c) and (d), respectively. 

15 (f) EFFECTIVE DATE.—The amendments made by 

16 this section shall apply to individuals who expatriate after 

17 February 27, 2003. 

18 SEC. 2006. REPORTING OF TAXABLE MERGERS AND ACQUI19 SITIONS. 

20 (a) IN GENERAL.—Subpart B of part III of sub21 chapter A of chapter 61 is amended by inserting after sec22 tion 6043 the following new section: 

23 ‘‘SEC. 6043A. TAXABLE MERGERS AND ACQUISITIONS. 

24 ‘‘(a) IN GENERAL.—According to the forms or regu25 lations prescribed by the Secretary, the acquiring corpora-
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•HR 2896 IH 

1 tion in any taxable acquisition shall make a return setting 

2 forth—

3 ‘‘(1) a description of the acquisition, 

4 ‘‘(2) the name and address of each shareholder 

5 of the acquired corporation who is required to recog6 nize gain (if any) as a result of the acquisition, 

7 ‘‘(3) the amount of money and the fair market 

8 value of other property transferred to each such 

9 shareholder as part of such acquisition, and 

10 ‘‘(4) such other information as the Secretary 

11 may prescribe. 

12 To the extent provided by the Secretary, the requirements 

13 of this section applicable to the acquiring corporation shall 

14 be applicable to the acquired corporation and not to the 

15 acquiring corporation. 

16 ‘‘(b) NOMINEES.—According to the forms or regula17 tions prescribed by the Secretary—

18 ‘‘(1) REPORTING.—Any person who holds stock 

19 as a nominee for another person shall furnish in the 

20 manner prescribed by the Secretary to such other 

21 person the information provided by the corporation 

22 under subsection (d). 

23 ‘‘(2) REPORTING TO NOMINEES.—In the case of 

24 stock held by any person as a nominee, references in 

25 this section (other than in subsection (c)) to a share-
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1 holder shall be treated as a reference to the nomi2 nee. 

3 ‘‘(c) TAXABLE ACQUISITION.—For purposes of this 

4 section, the term ‘taxable acquisition’ means any acquisi5 tion by a corporation of stock in or property of another 

6 corporation if any shareholder of the acquired corporation 

7 is required to recognize gain (if any) as a result of such 

8 acquisition. 

9 ‘‘(d) STATEMENTS TO BE FURNISHED TO SHARE10 HOLDERS.—According to the forms or regulations pre11 scribed by the Secretary, every person required to make 

12 a return under subsection (a) shall furnish to each share13 holder whose name is required to be set forth in such re14 turn a written statement showing—

15 ‘‘(1) the name, address, and phone number of 

16 the information contact of the person required to 

17 make such return, 

18 ‘‘(2) the information required to be shown on 

19 such return with respect to such shareholder, and 

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

21 may prescribe. 

22 The written statement required under the preceding sen23 tence shall be furnished to the shareholder on or before 

24 January 31 of the year following the calendar year during 

25 which the taxable acquisition occurred.’’
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1 (b) ASSESSABLE PENALTIES.—

2 (1) Subparagraph (B) of section 6724(d)(1) 

3 (relating to definitions) is amended by redesignating 

4 clauses (ii) through (xvii) as clauses (iii) through 

5 (xviii), respectively, and by inserting after clause (i) 

6 the following new clause: 

7 ‘‘(ii) section 6043A(a) (relating to re8 turns relating to taxable mergers and ac9 quisitions),’’. 

10 (2) Paragraph (2) of section 6724(d) is amend11 ed by redesignating subparagraphs (F) through 

12 (AA) as subparagraphs (G) through (BB), respec13 tively, and by inserting after subparagraph (E) the 

14 following new subparagraph: 

15 ‘‘(F) subsections (b) and (d) of section 

16 6043A (relating to returns relating to taxable 

17 mergers and acquisitions).’’. 

18 (c) CLERICAL AMENDMENT.—The table of sections 

19 for subpart B of part III of subchapter A of chapter 61 

20 is amended by inserting after the item relating to section 

21 6043 the following new item:

‘‘Sec. 6043A. Returns relating to taxable mergers and acquisitions.’’.

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

23 this section shall apply to acquisitions after the date of 

24 the enactment of this Act. 
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1 SEC. 2007. STUDIES. 

2 (a) TRANSFER PRICING RULES.—The Secretary of 

3 the Treasury or the Secretary’s delegate shall conduct a 

4 study regarding the effectiveness of current transfer pric5 ing rules and compliance efforts in ensuring that cross6 border transfers and other related-party transactions, par7 ticularly transactions involving intangible assets, service 

8 contracts, or leases cannot be used improperly to shift in9 come out of the United States. The study shall include 

10 a review of the contemporaneous documentation and pen11 alty rules under section 6662 of the Internal Revenue 

12 Code of 1986, a review of the regulatory and administra13 tive guidance implementing the principles of section 482 

14 of such Code to transactions involving intangible property 

15 and services and to cost-sharing arrangements, and an ex16 amination of whether increased disclosure of cross-border 

17 transactions should be required. The study shall set forth 

18 specific recommendations to address all abuses identified 

19 in the study. Not later than June 30, 2004, such Sec20 retary or delegate shall submit to the Congress a report 

21 of such study. 

22 (b) INCOME TAX TREATIES.—The Secretary of the 

23 Treasury or the Secretary’s delegate shall conduct a study 

24 of United States income tax treaties to identify any inap25 propriate reductions in United States withholding tax that 

26 provide opportunities for shifting income out of the United 
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1 States, and to evaluate whether existing anti-abuse mecha2 nisms are operating properly. The study shall include spe3 cific recommendations to address all inappropriate uses of 

4 tax treaties. Not later than December 31, 2003, such Sec5 retary or delegate shall submit to the Congress a report 

6 of such study. 

7 (c) IMPACT OF CORPORATE EXPATRIATION PROVI8 SIONS.—The Secretary of the Treasury or the Secretary’s 

9 delegate shall conduct a study of the impact of the provi10 sions of this title on earnings stripping and corporate ex11 patriation. The study shall include such recommendations 

12 as such Secretary or delegate may have to improve the 

13 impact of such provisions in carrying out the purposes of 

14 this title. Not later than December 31, 2005, such Sec15 retary or delegate shall submit to the Congress a report 

16 of such study.

17 TITLE III—PROVISIONS 

18 RELATING TO TAX SHELTERS

19 Subtitle A—Taxpayer-Related 

20 Provisions 

21 SEC. 3001. PENALTY FOR FAILING TO DISCLOSE REPORT22 ABLE TRANSACTIONS. 

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

24 68 (relating to assessable penalties) is amended by insert25 ing after section 6707 the following new section: 
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1 ‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORT2 ABLE TRANSACTION INFORMATION WITH RE3 TURN. 

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

5 fails to include on any return or statement any informa6 tion with respect to a reportable transaction which is re7 quired under section 6011 to be included with such return 

8 or statement shall pay a penalty in the amount determined 

9 under subsection (b). 

10 ‘‘(b) AMOUNT OF PENALTY.—

11 ‘‘(1) IN GENERAL.—Except as provided in para12 graph (2), the amount of the penalty under sub13 section (a) shall be—

14 ‘‘(A) $10,000 in the case of a natural per15 son, and 

16 ‘‘(B) $50,000 in any other case. 

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

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

19 listed transaction shall be—

20 ‘‘(A) $100,000 in the case of a natural 

21 person, and 

22 ‘‘(B) $200,000 in any other case. 

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

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

25 ‘reportable transaction’ means any transaction with 

26 respect to which information is required to be in-
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1 cluded with a return or statement because, as deter2 mined under regulations prescribed under section 

3 6011, such transaction is of a type which the Sec4 retary determines as having a potential for tax 

5 avoidance or evasion. 

6 ‘‘(2) LISTED TRANSACTION.—The term ‘listed 

7 transaction’ means a reportable transaction which is 

8 the same as, or substantially similar to, a trans9 action specifically identified by the Secretary as a 

10 tax avoidance transaction for purposes of section 

11 6011. 

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

13 ‘‘(1) IN GENERAL.—The Commissioner of In14 ternal Revenue may rescind all or any portion of any 

15 penalty imposed by this section with respect to any 

16 violation if—

17 ‘‘(A) the violation is with respect to a re18 portable transaction other than a listed trans19 action, and 

20 ‘‘(B) rescinding the penalty would promote 

21 compliance with the requirements of this title 

22 and effective tax administration. 

23 ‘‘(2) NO JUDICIAL APPEAL.—Notwithstanding 

24 any other provision of law, any determination under
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1 this subsection may not be reviewed in any judicial 

2 proceeding. 

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

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

5 file in the Office of the Commissioner the opinion of 

6 the Commissioner or the head of the Office of Tax 

7 Shelter Analysis with respect to the determination, 

8 including—

9 ‘‘(A) a statement of the facts and cir10 cumstances relating to the violation, 

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

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

13 ‘‘(e) COORDINATION WITH OTHER PENALTIES.—The 

14 penalty imposed by this section shall be in addition to any 

15 other penalty imposed by this title.’’

16 (b) CONFORMING AMENDMENT.—The table of sec17 tions for part I of subchapter B of chapter 68 is amended 

18 by inserting after the item relating to section 6707 the 

19 following:

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

information with return.’’

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

21 this section shall apply to returns and statements the due 

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

23 Act. 
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1 (d) REPORT.—The Commissioner of Internal Rev2 enue shall annually report to the Committee on Ways and 

3 Means of the House of Representatives and the Committee 

4 on Finance of the Senate—

5 (1) a summary of the total number and aggre6 gate amount of penalties imposed, and rescinded, 

7 under section 6707A of the Internal Revenue Code 

8 of 1986, and 

9 (2) a description of each penalty rescinded 

10 under section 6707(c) of such Code and the reasons 

11 therefor.

12 SEC. 3002. ACCURACY-RELATED PENALTY FOR LISTED 

13 TRANSACTIONS, OTHER REPORTABLE TRANS14 ACTIONS HAVING A SIGNIFICANT TAX AVOID15 ANCE PURPOSE, ETC. 

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

17 amended by inserting after section 6662 the following new 

18 section: 

19 ‘‘SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PEN20 ALTY ON UNDERSTATEMENTS WITH RESPECT 

21 TO REPORTABLE TRANSACTIONS. 

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

23 reportable transaction understatement for any taxable 

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

25 20 percent of the amount of such understatement. 
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1 ‘‘(b) REPORTABLE TRANSACTION UNDERSTATE2 MENT.—For purposes of this section—

3 ‘‘(1) IN GENERAL.—The term ‘reportable trans4 action understatement’ means the sum of—

5 ‘‘(A) the product of—

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

7 any) in taxable income which results from 

8 a difference between the proper tax treat9 ment of an item to which this section ap10 plies and the taxpayer’s treatment of such 

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

12 tax), and 

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

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

15 taxpayer which is a corporation), and 

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

17 in the aggregate amount of credits determined 

18 under subtitle A which results from a difference 

19 between the taxpayer’s treatment of an item to 

20 which this section applies (as shown on the tax21 payer’s return of tax) and the proper tax treat22 ment of such item. 

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

24 the excess of deductions allowed for the taxable year 

25 over gross income for such year, and any reduction 
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1 in the amount of capital losses which would (without 

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

3 shall be treated as an increase in taxable income. 

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

5 section shall apply to any item which is attributable 

6 to—

7 ‘‘(A) any listed transaction, and 

8 ‘‘(B) any reportable transaction (other 

9 than a listed transaction) if a significant pur10 pose of such transaction is the avoidance or 

11 evasion of Federal income tax. 

12 ‘‘(c) HIGHER PENALTY FOR NONDISCLOSED TRANS13 ACTIONS.—Subsection (a) shall be applied by substituting 

14 ‘30 percent’ for ‘20 percent’ with respect to the portion 

15 of any reportable transaction understatement with respect 

16 to which the requirement of section 6664(d)(2)(A) is not 

17 met. 

18 ‘‘(d) DEFINITIONS OF REPORTABLE AND LISTED

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

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

21 respective meanings given to such terms by section 

22 6707A(c). 

23 ‘‘(e) SPECIAL RULES.—
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1 ‘‘(1) COORDINATION WITH PENALTIES, ETC., 

2 ON OTHER UNDERSTATEMENTS.—In the case of an 

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

4 ‘‘(A) the amount of such understatement 

5 (determined without regard to this paragraph) 

6 shall be increased by the aggregate amount of 

7 reportable transaction understatements for pur8 poses of determining whether such understate9 ment is a substantial understatement under 

10 section 6662(d)(1), and 

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

12 6662(a) shall apply only to the excess of the 

13 amount of the substantial understatement (if 

14 any) after the application of subparagraph (A) 

15 over the aggregate amount of reportable trans16 action understatements. 

17 ‘‘(2) COORDINATION WITH OTHER PEN18 ALTIES.—

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

20 References to an underpayment in section 6663 

21 shall be treated as including references to a re22 portable transaction understatement. 

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

24 shall not apply to any portion of an understate-
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1 ment on which a penalty is imposed under sec2 tion 6663.’’

3 ‘‘(3) SPECIAL RULE FOR AMENDED RE4 TURNS.—Except as provided in regulations, in no 

5 event shall any tax treatment included with an 

6 amendment or supplement to a return of tax be 

7 taken into account in determining the amount of any 

8 reportable transaction understatement if the amend9 ment or supplement is filed after the earlier of the 

10 date the taxpayer is first contacted by the Secretary 

11 regarding the examination of the return or such 

12 other date as is specified by the Secretary.’’

13 (b) DETERMINATION OF OTHER UNDERSTATE14 MENTS.—Subparagraph (A) of section 6662(d)(2) is 

15 amended by adding at the end the following flush sen16 tence: 

17 ‘‘The excess under the preceding sentence shall 

18 be determined without regard to items to which 

19 section 6662A applies.’’

20 (c) REASONABLE CAUSE EXCEPTION.—

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

22 adding at the end the following new subsection: 

23 ‘‘(d) REASONABLE CAUSE EXCEPTION FOR REPORT24 ABLE TRANSACTION UNDERSTATEMENTS.— 
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1 ‘‘(1) IN GENERAL.—No penalty shall be im2 posed under section 6662A with respect to any por3 tion of a reportable transaction understatement if it 

4 is shown that there was a reasonable cause for such 

5 portion and that the taxpayer acted in good faith 

6 with respect to such portion. 

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

8 apply to any reportable transaction understatement 

9 unless—

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

11 treatment of the item are adequately disclosed 

12 in accordance with the regulations prescribed 

13 under section 6011, 

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

15 for such treatment, and 

16 ‘‘(C) the taxpayer reasonably believed that 

17 such treatment was more likely than not the 

18 proper treatment. 

19 A taxpayer failing to adequately disclose in accord20 ance with section 6011 shall be treated as meeting 

21 the requirements of subparagraph (A) if the penalty 

22 for such failure was rescinded under section 

23 6707A(d). 

24 ‘‘(3) RULES RELATING TO REASONABLE BE25 LIEF.—For purposes of paragraph (2)(C)—
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1 ‘‘(A) IN GENERAL.—A taxpayer shall be 

2 treated as having a reasonable belief with re3 spect to the tax treatment of an item only if 

4 such belief—

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

6 exist at the time the return of tax which 

7 includes such tax treatment is filed, and 

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

9 chances of success on the merits of such 

10 treatment and does not take into account 

11 the possibility that a return will not be au12 dited, such treatment will not be raised on 

13 audit, or such treatment will be resolved 

14 through settlement if it is raised. 

15 ‘‘(B) CERTAIN OPINIONS MAY NOT BE RE16 LIED UPON.—

17 ‘‘(i) IN GENERAL.—An opinion of a 

18 tax advisor may not be relied upon to es19 tablish the reasonable belief of a taxpayer 

20 if—

21 ‘‘(I) the tax advisor is described 

22 in clause (ii), or 

23 ‘‘(II) the opinion is described in 

24 clause (iii). 
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1 ‘‘(ii) DISQUALIFIED TAX ADVISORS.—

2 A tax advisor is described in this clause if 

3 the tax advisor— 

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

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

6 and participates in the organization, 

7 management, promotion, or sale of 

8 the transaction or is related (within 

9 the meaning of section 267(b) or 

10 707(b)(1)) to any person who so par11 ticipates, 

12 ‘‘(II) is compensated directly or 

13 indirectly by a material advisor with 

14 respect to the transaction, 

15 ‘‘(III) has a fee arrangement 

16 with respect to the transaction which 

17 is contingent on all or part of the in18 tended tax benefits from the trans19 action being sustained, or 

20 ‘‘(IV) as determined under regu21 lations prescribed by the Secretary, 

22 has a disqualifying financial interest 

23 with respect to the transaction.
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1 ‘‘(iii) DISQUALIFIED OPINIONS.—For 

2 purposes of clause (i), an opinion is dis3 qualified if the opinion—

4 ‘‘(I) is based on unreasonable 

5 factual or legal assumptions (includ6 ing assumptions as to future events), 

7 ‘‘(II) unreasonably relies on rep8 resentations, statements, findings, or 

9 agreements of the taxpayer or any 

10 other person, 

11 ‘‘(III) does not identify and con12 sider all relevant facts, or 

13 ‘‘(IV) fails to meet any other re14 quirement as the Secretary may pre15 scribe.’’

16 (2) CONFORMING AMENDMENTS.—

17 (A) Paragraph (1) of section 6664(c) is 

18 amended by striking ‘‘this part’’ and inserting 

19 ‘‘section 6662 or 6663’’. 

20 (B) The heading for subsection (c) of sec21 tion 6664 is amended by inserting ‘‘FOR UN22 DERPAYMENTS’’ after ‘‘EXCEPTION’’. 

23 (d) REDUCTION IN PENALTY FOR SUBSTANTIAL UN24 DERSTATEMENT OF INCOME TAX NOT TO APPLY TO TAX

25 SHELTERS.—Subparagraph (C) of section 6662(d)(2) (re-
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1 lating to substantial understatement of income tax) is 

2 amended to read as follows: 

3 ‘‘(C) REDUCTION NOT TO APPLY TO TAX

4 SHELTERS.—

5 ‘‘(i) IN GENERAL.—Subparagraph (B) 

6 shall not apply to any item attributable to 

7 a tax shelter. 

8 ‘‘(ii) TAX SHELTER.—For purposes of 

9 clause (i), the term ‘tax shelter’ means—

10 ‘‘(I) a partnership or other enti11 ty, 

12 ‘‘(II) any investment plan or ar13 rangement, or 

14 ‘‘(III) any other plan or arrange15 ment, 

16 if a significant purpose of such partner17 ship, entity, plan, or arrangement is the 

18 avoidance or evasion of Federal income 

19 tax.’’

20 (e) CONFORMING AMENDMENTS.—

21 (1) Sections 461(i)(3)(C), 1274(b)(3), and 

22 7525(b) are each amended by striking ‘‘section 

23 6662(d)(2)(C)(iii)’’ and inserting ‘‘section 

24 6662(d)(2)(C)(ii)’’. 
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1 (2) The heading for section 6662 is amended to 

2 read as follows: 

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

4 ON UNDERPAYMENTS.’’

5 (3) The table of sections for part II of sub6 chapter A of chapter 68 is amended by striking the 

7 item relating to section 6662 and inserting the fol8 lowing new items:

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

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

9 (f) EFFECTIVE DATE.—The amendments made by 

10 this section shall apply to taxable years ending after the 

11 date of the enactment of this Act. 

12 SEC. 3003. TAX SHELTER EXCEPTION TO CONFIDENTIALITY 

13 PRIVILEGES RELATING TO TAXPAYER COM14 MUNICATIONS. 

15 (a) IN GENERAL.—Section 7525(b) (relating to sec16 tion not to apply to communications regarding corporate 

17 tax shelters) is amended to read as follows: 

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

19 REGARDING TAX SHELTERS.—The privilege under sub20 section (a) shall not apply to any written communication 

21 which is—

22 ‘‘(1) between a federally authorized tax practi23 tioner and—
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1 ‘‘(A) any person, 

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

3 or representative of the person, or 

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

5 profits interest in the person, and 

6 ‘‘(2) in connection with the promotion of the di7 rect or indirect participation of the person in any 

8 tax shelter (as defined in section 

9 6662(d)(2)(C)(ii)).’’

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

11 this section shall apply to communications made on or 

12 after the date of the enactment of this Act. 

13 SEC. 3004. STATUTE OF LIMITATIONS FOR TAXABLE YEARS 

14 FOR WHICH REQUIRED LISTED TRANS15 ACTIONS NOT REPORTED. 

16 (a) IN GENERAL.—Section 6501(c) (relating to ex17 ceptions) is amended by adding at the end the following 

18 new paragraph: 

19 ‘‘(10) LISTED TRANSACTIONS.—If a taxpayer 

20 fails to include on any return or statement for any 

21 taxable year any information with respect to a listed 

22 transaction (as defined in section 6707A(c)(2)) 

23 which is required under section 6011 to be included 

24 with such return or statement, the time for assess25 ment of any tax imposed by this title with respect 
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1 to such transaction shall not expire before the date 

2 which is 1 year after the earlier of—

3 ‘‘(A) the date on which the Secretary is 

4 furnished the information so required, or 

5 ‘‘(B) the date that a material advisor (as 

6 defined in section 6111) meets the requirements 

7 of section 6112 with respect to a request by the 

8 Secretary under section 6112(b) relating to 

9 such transaction with respect to such tax10 payer.’’

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

12 this section shall apply to taxable years with respect to 

13 which the period for assessing a deficiency did not expire 

14 before July 24, 2003. 

15 SEC. 3005. DISCLOSURE OF REPORTABLE TRANSACTIONS. 

16 (a) IN GENERAL.—Section 6111 (relating to registra17 tion of tax shelters) is amended to read as follows: 

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

19 ‘‘(a) IN GENERAL.—Each material advisor with re20 spect to any reportable transaction shall make a return 

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

22 forth—

23 ‘‘(1) information identifying and describing the 

24 transaction,
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•HR 2896 IH 

1 ‘‘(2) information describing any potential tax 

2 benefits expected to result from the transaction, and 

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

4 may prescribe. 

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

6 by the Secretary. 

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

8 ‘‘(1) MATERIAL ADVISOR.—

9 ‘‘(A) IN GENERAL.—The term ‘material 

10 advisor’ means any person—

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

12 assistance, or advice with respect to orga13 nizing, managing, promoting, selling, im14 plementing, or carrying out any reportable 

15 transaction, and 

16 ‘‘(ii) who directly or indirectly derives 

17 gross income in excess of the threshold 

18 amount (or such other amount as may be 

19 prescribed by the Secretary) for such ad20 vice or assistance. 

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

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

23 ‘‘(i) $50,000 in the case of a report24 able transaction substantially all of the tax 
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•HR 2896 IH 

1 benefits from which are provided to nat2 ural persons, and 

3 ‘‘(ii) $250,000 in any other case. 

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

5 ‘reportable transaction’ has the meaning given to 

6 such term by section 6707A(c). 

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

8 regulations which provide—

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

10 meet the requirements of subsection (a) in cases in 

11 which 2 or more persons would otherwise be re12 quired to meet such requirements, 

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

14 section, and 

15 ‘‘(3) such rules as may be necessary or appro16 priate to carry out the purposes of this section.’’

17 (b) CONFORMING AMENDMENTS.—

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

19 table of sections for subchapter B of chapter 61 is 

20 amended to read as follows:

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

21 (2) So much of section 6112 as precedes sub22 section (c) thereof is amended to read as follows: 
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1 ‘‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANS2 ACTIONS MUST KEEP LISTS OF ADVISEES, 

3 ETC. 

4 ‘‘(a) IN GENERAL.—Each material advisor (as de5 fined in section 6111) with respect to any reportable 

6 transaction (as defined in section 6707A(c)) shall (wheth7 er or not required to file a return under section 6111 with 

8 respect to such transaction) maintain (in such manner as 

9 the Secretary may by regulations prescribe) a list—

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

11 whom such advisor acted as a material advisor with 

12 respect to such transaction, and 

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

14 Secretary may by regulations require.’’

15 (3) Section 6112 is amended—

16 (A) by redesignating subsection (c) as sub17 section (b), 

18 (B) by inserting ‘‘written’’ before ‘‘re19 quest’’ in subsection (b)(1) (as so redesig20 nated), and 

21 (C) by striking ‘‘shall prescribe’’ in sub22 section (b)(2) (as so redesignated) and inserting 

23 ‘‘may prescribe’’. 

24 (4) The item relating to section 6112 in the 

25 table of sections for subchapter B of chapter 61 is 

26 amended to read as follows:
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•HR 2896 IH 

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

keep lists of advisees, etc.’’

1 (5)(A) The heading for section 6708 is amend2 ed to read as follows: 

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

4 WITH RESPECT TO REPORTABLE TRANS5 ACTIONS.’’

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

7 table of sections for part I of subchapter B of chap8 ter 68 is amended to read as follows:

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

reportable transactions.’’

9 (c) REQUIRED DISCLOSURE NOT SUBJECT TO CLAIM

10 OF CONFIDENTIALITY.—Paragraph (1) of section 

11 6112(b), as redesignated by subsection (b), is amended by 

12 adding at the end the following new flush sentence: 

13 ‘‘For purposes of this section, the identity of any 

14 person on such list shall not be privileged.’’. 

15 (d) EFFECTIVE DATE.—

16 (1) IN GENERAL.—Except as provided in para17 graph (2), the amendments made by this section 

18 shall apply to transactions with respect to which ma19 terial aid, assistance, or advice referred to in section 

20 6111(b)(1)(A)(i) of the Internal Revenue Code of 

21 1986 (as added by this section) is provided after the 

22 date of the enactment of this Act. 
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1 (2) NO CLAIM OF CONFIDENTIALITY AGAINST

2 DISCLOSURE.—The amendment made by subsection 

3 (c) shall take effect as if included in the amend4 ments made by section 142 of the Deficit Reduction 

5 Act of 1984. 

6 SEC. 3006. FAILURE TO FURNISH INFORMATION REGARD7 ING REPORTABLE TRANSACTIONS. 

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

9 to furnish information regarding tax shelters) is amended 

10 to read as follows: 

11 ‘‘SEC. 6707. FAILURE TO FURNISH INFORMATION REGARD12 ING REPORTABLE TRANSACTIONS. 

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

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

15 reportable transaction—

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

17 date prescribed therefor, or 

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

19 the Secretary with respect to such transaction, 

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

21 in the amount determined under subsection (b). 

22 ‘‘(b) AMOUNT OF PENALTY.—

23 ‘‘(1) IN GENERAL.—Except as provided in para24 graph (2), the penalty imposed under subsection (a) 

25 with respect to any failure shall be $50,000.
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•HR 2896 IH 

1 ‘‘(2) LISTED TRANSACTIONS.—The penalty im2 posed under subsection (a) with respect to any listed 

3 transaction shall be an amount equal to the greater 

4 of—

5 ‘‘(A) $200,000, or 

6 ‘‘(B) 50 percent of the gross income de7 rived by such person with respect to aid, assist8 ance, or advice which is provided with respect 

9 to the listed transaction before the date the re10 turn is filed under section 6111. 

11 Subparagraph (B) shall be applied by substituting 

12 ‘75 percent’ for ‘50 percent’ in the case of an inten13 tional failure or act described in subsection (a). 

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

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

16 to rescind penalty) shall apply to any penalty imposed 

17 under this section. 

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

19 For purposes of this section, the terms ‘reportable trans20 action’ and ‘listed transaction’ have the respective mean21 ings given to such terms by section 6707A(c).’’

22 (b) CLERICAL AMENDMENT.—The item relating to 

23 section 6707 in the table of sections for part I of sub24 chapter B of chapter 68 is amended by striking ‘‘tax shel25 ters’’ and inserting ‘‘reportable transactions’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to returns the due date for which 

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

4 SEC. 3007. MODIFICATION OF PENALTY FOR FAILURE TO 

5 MAINTAIN LISTS OF INVESTORS. 

6 (a) IN GENERAL.—Subsection (a) of section 6708 is 

7 amended to read as follows: 

8 ‘‘(a) IMPOSITION OF PENALTY.—

9 ‘‘(1) IN GENERAL.—If any person who is re10 quired to maintain a list under section 6112(a) fails 

11 to make such list available upon written request to 

12 the Secretary in accordance with section 6112(b) 

13 within 20 business days after the date of such re14 quest, such person shall pay a penalty of $10,000 

15 for each day of such failure after such 20th day. 

16 ‘‘(2) REASONABLE CAUSE EXCEPTION.—No 

17 penalty shall be imposed by paragraph (1) with re18 spect to the failure on any day if such failure is due 

19 to reasonable cause. 

20 ‘‘(3) LIMITATION ON AUTHORITY TO COM21 PROMISE PENALTY.—If the 1st letter of proposed 

22 deficiency which allows the taxpayer an opportunity 

23 for administrative review in the Internal Revenue 

24 Service Office of Appeals has been sent with respect 

25 to a penalty imposed by this section, only the Com-
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1 missioner of Internal Revenue may compromise all 

2 or any portion of such penalty.’’

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

4 this section shall apply to requests made after the date 

5 of the enactment of this Act. 

6 SEC. 3008. PENALTY ON PROMOTERS OF TAX SHELTERS. 

7 (a) PENALTY ON PROMOTING ABUSIVE TAX SHEL8 TERS.—Section 6700(a) is amended by adding at the end 

9 the following new sentence: ‘‘Notwithstanding the first 

10 sentence, if an activity with respect to which a penalty 

11 imposed under this subsection involves a statement de12 scribed in paragraph (2)(A), the amount of the penalty 

13 shall be equal to 50 percent of the gross income derived 

14 (or to be derived) from such activity by the person on 

15 which the penalty is imposed.’’

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

17 this section shall apply to activities after the date of the 

18 enactment of this Act. 

19 SEC. 3009. MODIFICATIONS OF SUBSTANTIAL UNDERSTATE20 MENT PENALTY FOR NONREPORTABLE 

21 TRANSACTIONS. 

22 (a) SUBSTANTIAL UNDERSTATEMENT OF CORPORA23 TIONS.—Section 6662(d)(1)(B) (relating to special rule 

24 for corporations) is amended to read as follows: 
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•HR 2896 IH 

1 ‘‘(B) SPECIAL RULE FOR CORPORA2 TIONS.—In the case of a corporation other than 

3 an S corporation or a personal holding company 

4 (as defined in section 542), there is a substan5 tial understatement of income tax for any tax6 able year if the amount of the understatement 

7 for the taxable year exceeds the lesser of—

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

9 be shown on the return for the taxable 

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

11 ‘‘(ii) $10,000,000.’’

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

13 this section shall apply to taxable years beginning after 

14 the date of the enactment of this Act. 

15 SEC. 3010. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN 

16 CONDUCT RELATED TO TAX SHELTERS AND 

17 REPORTABLE TRANSACTIONS. 

18 (a) IN GENERAL.—Section 7408 (relating to action 

19 to enjoin promoters of abusive tax shelters, etc.) is amend20 ed by redesignating subsection (c) as subsection (d) and 

21 by striking subsections (a) and (b) and inserting the fol22 lowing new subsections: 

23 ‘‘(a) AUTHORITY TO SEEK INJUNCTION.—A civil ac24 tion in the name of the United States to enjoin any person 

25 from further engaging in specified conduct may be com-
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•HR 2896 IH 

1 menced at the request of the Secretary. Any action under 

2 this section shall be brought in the district court of the 

3 United States for the district in which such person resides, 

4 has his principal place of business, or has engaged in spec5 ified conduct. The court may exercise its jurisdiction over 

6 such action (as provided in section 7402(a)) separate and 

7 apart from any other action brought by the United States 

8 against such person. 

9 ‘‘(b) ADJUDICATION AND DECREE.—In any action 

10 under subsection (a), if the court finds—

11 ‘‘(1) that the person has engaged in any speci12 fied conduct, and 

13 ‘‘(2) that injunctive relief is appropriate to pre14 vent recurrence of such conduct, 

15 the court may enjoin such person from engaging in such 

16 conduct or in any other activity subject to penalty under 

17 this title. 

18 ‘‘(c) SPECIFIED CONDUCT.—For purposes of this 

19 section, the term ‘specified conduct’ means any action, or 

20 failure to take action, subject to penalty under section 

21 6700, 6701, 6707, or 6708.’’

22 (b) CONFORMING AMENDMENTS.—

23 (1) The heading for section 7408 is amended to 

24 read as follows:
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•HR 2896 IH 

1 ‘‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RE2 LATED TO TAX SHELTERS AND REPORTABLE 

3 TRANSACTIONS.’’

4 (2) The table of sections for subchapter A of 

5 chapter 67 is amended by striking the item relating 

6 to section 7408 and inserting the following new 

7 item:

‘‘Sec. 7408. Actions to enjoin specified conduct related to tax shelters and 

reportable transactions.’’

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

9 this section shall take effect on the day after the date of 

10 the enactment of this Act. 

11 SEC. 3011. PENALTY ON FAILURE TO REPORT INTERESTS 

12 IN FOREIGN FINANCIAL ACCOUNTS. 

13 (a) IN GENERAL.—Section 5321(a)(5) of title 31, 

14 United States Code, is amended to read as follows: 

15 ‘‘(5) FOREIGN FINANCIAL AGENCY TRANS16 ACTION VIOLATION.—

17 ‘‘(A) PENALTY AUTHORIZED.—The Sec18 retary of the Treasury may impose a civil 

19 money penalty on any person who violates, or 

20 causes any violation of, any provision of section 

21 5314. 

22 ‘‘(B) AMOUNT OF PENALTY.—

23 ‘‘(i) IN GENERAL.—Except as pro24 vided in subparagraph (C), the amount of 
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•HR 2896 IH 

1 any civil penalty imposed under subpara2 graph (A) shall not exceed $5,000. 

3 ‘‘(ii) REASONABLE CAUSE EXCEP4 TION.—No penalty shall be imposed under 

5 subparagraph (A) with respect to any vio6 lation if—

7 ‘‘(I) such violation was due to 

8 reasonable cause, and 

9 ‘‘(II) the amount of the trans10 action or the balance in the account 

11 at the time of the transaction was 

12 properly reported. 

13 ‘‘(C) WILLFUL VIOLATIONS.—In the case 

14 of any person willfully violating, or willfully 

15 causing any violation of, any provision of sec16 tion 5314—

17 ‘‘(i) the maximum penalty under sub18 paragraph (B)(i) shall be increased to the 

19 greater of—

20 ‘‘(I) $25,000, or 

21 ‘‘(II) the amount (not exceeding 

22 $100,000) determined under subpara23 graph (D), and 

24 ‘‘(ii) subparagraph (B)(ii) shall not 

25 apply. 
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1 ‘‘(D) AMOUNT.—The amount determined 

2 under this subparagraph is—

3 ‘‘(i) in the case of a violation involving 

4 a transaction, the amount of the trans5 action, or 

6 ‘‘(ii) in the case of a violation involv7 ing a failure to report the existence of an 

8 account or any identifying information re9 quired to be provided with respect to an 

10 account, the balance in the account at the 

11 time of the violation.’’

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

13 this section shall apply to violations occurring after the 

14 date of the enactment of this Act. 

15 SEC. 3012. REGULATION OF INDIVIDUALS PRACTICING BE16 FORE THE DEPARTMENT OF THE TREASURY. 

17 (a) CENSURE; IMPOSITION OF PENALTY.—

18 (1) IN GENERAL.—Section 330(b) of title 31, 

19 United States Code, is amended—

20 (A) by inserting ‘‘, or censure,’’ after ‘‘De21 partment’’, and 

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

23 flush sentence: 

24 ‘‘The Secretary may impose a monetary penalty on any 

25 representative described in the preceding sentence. If the 
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•HR 2896 IH 

1 representative was acting on behalf of an employer or any 

2 firm or other entity in connection with the conduct giving 

3 rise to such penalty, the Secretary may impose a monetary 

4 penalty on such employer, firm, or entity if it knew, or 

5 reasonably should have known, of such conduct. Such pen6 alty shall not exceed the gross income derived (or to be 

7 derived) from the conduct giving rise to the penalty. Any 

8 such penalty imposed on an individual may be in addition 

9 to, or in lieu of, any suspension, disbarment, or censure 

10 of such indivdiual.’’

11 (2) EFFECTIVE DATE.—The amendments made 

12 by this subsection shall apply to actions taken after 

13 the date of the enactment of this Act. 

14 (b) TAX SHELTER OPINIONS, ETC.—Section 330 of 

15 such title 31 is amended by adding at the end the fol16 lowing new subsection: 

17 ‘‘(d) Nothing in this section or in any other provision 

18 of law shall be construed to limit the authority of the Sec19 retary of the Treasury to impose standards applicable to 

20 the rendering of written advice with respect to any entity, 

21 transaction plan or arrangement, or other plan or arrange22 ment, which is of a type which the Secretary determines 

23 as having a potential for tax avoidance or evasion.’’
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1 Subtitle B—Other Provisions 

2 SEC. 3021. TREATMENT OF STRIPPED INTERESTS IN BOND 

3 AND PREFERRED STOCK FUNDS, ETC. 

4 (a) IN GENERAL.—Section 1286 (relating to tax 

5 treatment of stripped bonds) is amended by redesignating 

6 subsection (f) as subsection (g) and by inserting after sub7 section (e) the following new subsection: 

8 ‘‘(f) TREATMENT OF STRIPPED INTERESTS IN BOND

9 AND PREFERRED STOCK FUNDS, ETC.—In the case of an 

10 account or entity substantially all of the assets of which 

11 consist of bonds, preferred stock, or a combination thereof, 

12 the Secretary may by regulations provide that rules simi13 lar to the rules of this section and 305(e), as appropriate, 

14 shall apply to interests in such account or entity to which 

15 (but for this subsection) this section or section 305(e), as 

16 the case may be, would not apply.’’

17 (b) CROSS REFERENCE.—Subsection (e) of section 

18 305 is amended by adding at the end the following new 

19 paragraph: 

20 ‘‘(7) CROSS REFERENCE.—

‘‘For treatment of stripped interests in certain accounts or entities holding preferred stock, see section 1286(f).’’

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

22 this section shall apply to purchases and dispositions after 

23 the date of the enactment of this Act.
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1 SEC. 3022. MINIMUM HOLDING PERIOD FOR FOREIGN TAX 

2 CREDIT ON WITHHOLDING TAXES ON INCOME 

3 OTHER THAN DIVIDENDS. 

4 (a) IN GENERAL.—Section 901 is amended by redes5 ignating subsection (l) as subsection (m) and by inserting 

6 after subsection (k) the following new subsection: 

7 ‘‘(l) MINIMUM HOLDING PERIOD FOR WITHHOLDING

8 TAXES ON GAIN AND INCOME OTHER THAN DIVIDENDS

9 ETC.—

10 ‘‘(1) IN GENERAL.—In no event shall a credit 

11 be allowed under subsection (a) for any withholding 

12 tax (as defined in subsection (k)) on any item of in13 come or gain with respect to any property if—

14 ‘‘(A) such property is held by the recipient 

15 of the item for 15 days or less during the 30-

16 day period beginning on the date which is 15 

17 days before the date on which the right to re18 ceive payment of such item arises, or 

19 ‘‘(B) to the extent that the recipient of the 

20 item is under an obligation (whether pursuant 

21 to a short sale or otherwise) to make related 

22 payments with respect to positions in substan23 tially similar or related property. 

24 This paragraph shall not apply to any dividend to 

25 which subsection (k) applies. 
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1 ‘‘(2) EXCEPTION FOR TAXES PAID BY DEAL2 ERS.—

3 ‘‘(A) IN GENERAL.—Paragraph (1) shall 

4 not apply to any qualified tax with respect to 

5 any property held in the active conduct in a for6 eign country of a business as a dealer in such 

7 property. 

8 ‘‘(B) QUALIFIED TAX.—For purposes of 

9 subparagraph (A), the term ‘qualified tax’ 

10 means a tax paid to a foreign country (other 

11 than the foreign country referred to in subpara12 graph (A)) if— 

13 ‘‘(i) the item to which such tax is at14 tributable is subject to taxation on a net 

15 basis by the country referred to in sub16 paragraph (A), and 

17 ‘‘(ii) such country allows a credit 

18 against its net basis tax for the full 

19 amount of the tax paid to such other for20 eign country. 

21 ‘‘(C) DEALER.—For purposes of subpara22 graph (A), the term ‘dealer’ means—

23 ‘‘(i) with respect to a security, any 

24 person to whom paragraphs (1) and (2) of 

25 subsection (k) would not apply by reason 
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1 of paragraph (4) thereof if such security 

2 were stock, and 

3 ‘‘(ii) with respect to any other prop4 erty, any person with respect to whom 

5 such property is described in section 

6 1221(a)(1). 

7 ‘‘(D) REGULATIONS.—The Secretary may 

8 prescribe such regulations as may be appro9 priate to carry out this paragraph, including 

10 regulations to prevent the abuse of the excep11 tion provided by this paragraph and to treat 

12 other taxes as qualified taxes. 

13 ‘‘(3) EXCEPTIONS.—The Secretary may by reg14 ulation provide that paragraph (1) shall not apply to 

15 property where the Secretary determines that the 

16 application of paragraph (1) to such property is not 

17 necessary to carry out the purposes of this sub18 section. 

19 ‘‘(4) CERTAIN RULES TO APPLY.—Rules similar 

20 to the rules of paragraphs (5), (6), and (7) of sub21 section (k) shall apply for purposes of this sub22 section. 

23 ‘‘(5) DETERMINATION OF HOLDING PERIOD.—

24 Holding periods shall be determined for purposes of 
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1 this subsection without regard to section 1235 or 

2 any similar rule.’’

3 (b) CONFORMING AMENDMENT.—The heading of 

4 subsection (k) of section 901 is amended by inserting ‘‘ON

5 DIVIDENDS’’ after ‘‘TAXES’’. 

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

7 this section shall apply to amounts paid or accrued more 

8 than 30 days after the date of the enactment of this Act. 

9 SEC. 3023. AFFIRMATION OF CONSOLIDATED RETURN REG10 ULATION AUTHORITY. 

11 (a) IN GENERAL.—Section 1502 is amended by add12 ing at the end the following new sentence: ‘‘In carrying 

13 out the preceding sentence, the Secretary may prescribe 

14 rules that are different from the provisions of chapter 1 

15 that would apply if such corporations filed separate re16 turns.’’. 

17 (b) RESULT NOT OVERTURNED.—Notwithstanding 

18 the amendment made by subsection (a), the Internal Rev19 enue Code of 1986 shall be construed by treating Treasury 

20 Regulation § 1.1502-20(c)(1)(iii) (as in effect on January 

21 1, 2001) as being inapplicable to the factual situation in 

22 Rite Aid Corporation and Subsidiary Corporations v. 

23 United States, 255 F.3d 1357 (Fed. Cir. 2001). 

24 (c) EFFECTIVE DATE.—This section, and the amend25 ment made by this section, shall apply to taxable years 
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1 beginning before, on, or after the date of the enactment 

2 of this Act. 

3 SEC. 3024. DISALLOWANCE OF CERTAIN PARTNERSHIP 

4 LOSS TRANSFERS. 

5 (a) TREATMENT OF CONTRIBUTED PROPERTY WITH

6 BUILT-IN LOSS.—Paragraph (1) of section 704(c) is 

7 amended by striking ‘‘and’’ at the end of subparagraph 

8 (A), by striking the period at the end of subparagraph 

9 (B) and inserting ‘‘, and’’, and by adding at the end the 

10 following: 

11 ‘‘(C) if any property so contributed has a 

12 built-in loss—

13 ‘‘(i) such built-in loss shall be taken 

14 into account only in determining the 

15 amount of items allocated to the contrib16 uting partner, and 

17 ‘‘(ii) except as provided in regulations, 

18 in determining the amount of items allo19 cated to other partners, the basis of the 

20 contributed property in the hands of the 

21 partnership shall be treated as being equal 

22 to its fair market value at the time of con23 tribution. 

24 For purposes of subparagraph (C), the term ‘built25 in loss’ means the excess of the adjusted basis of the
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1 property (determined without regard to subpara2 graph (C)(ii)) over its fair market value at the time 

3 of contribution.’’

4 (b) ADJUSTMENT TO BASIS OF PARTNERSHIP PROP5 ERTY ON TRANSFER OF PARTNERSHIP INTEREST IF

6 THERE IS SUBSTANTIAL BUILT-IN LOSS.—

7 (1) ADJUSTMENT REQUIRED.—Subsection (a) 

8 of section 743 (relating to optional adjustment to 

9 basis of partnership property) is amended by insert10 ing before the period ‘‘or unless the partnership has 

11 a substantial built-in loss immediately after such 

12 transfer’’. 

13 (2) ADJUSTMENT.—Subsection (b) of section 

14 743 is amended by inserting ‘‘or with respect to 

15 which there is a substantial built-in loss immediately 

16 after such transfer’’ after ‘‘section 754 is in effect’’. 

17 (3) SUBSTANTIAL BUILT-IN LOSS.—Section 743 

18 is amended by adding at the end the following new 

19 subsection: 

20 ‘‘(d) SUBSTANTIAL BUILT-IN LOSS.—

21 ‘‘(1) IN GENERAL.—For purposes of this sec22 tion, a partnership has a substantial built-in loss 

23 with respect to a transfer of an interest in a part24 nership if the partnership’s adjusted basis in the 
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1 partnership property exceeds by more than $250,000 

2 the fair market value of such property. 

3 ‘‘(2) REGULATIONS.—The Secretary shall pre4 scribe such regulations as may be appropriate to 

5 carry out the purposes of paragraph (1) and section 

6 734(d), including regulations aggregating related 

7 partnerships and disregarding property acquired by 

8 the partnership in an attempt to avoid such pur9 poses.’’

10 (4) CLERICAL AMENDMENTS.—

11 (A) The section heading for section 743 is 

12 amended to read as follows: 

13 ‘‘SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROP14 ERTY WHERE SECTION 754 ELECTION OR 

15 SUBSTANTIAL BUILT-IN LOSS.’’

16 (B) The table of sections for subpart C of 

17 part II of subchapter K of chapter 1 is amend18 ed by striking the item relating to section 743 

19 and inserting the following new item:

‘‘Sec. 743. Adjustment to basis of partnership property where section 754 election or substantial built-in loss.’’

20 (c) ADJUSTMENT TO BASIS OF UNDISTRIBUTED

21 PARTNERSHIP PROPERTY IF THERE IS SUBSTANTIAL

22 BASIS REDUCTION.—

23 (1) ADJUSTMENT REQUIRED.—Subsection (a) 

24 of section 734 (relating to optional adjustment to 
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1 basis of undistributed partnership property) is 

2 amended by inserting before the period ‘‘or unless 

3 there is a substantial basis reduction’’. 

4 (2) ADJUSTMENT.—Subsection (b) of section 

5 734 is amended by inserting ‘‘or unless there is a 

6 substantial basis reduction’’ after ‘‘section 754 is in 

7 effect’’. 

8 (3) SUBSTANTIAL BASIS REDUCTION.—Section 

9 734 is amended by adding at the end the following 

10 new subsection: 

11 ‘‘(d) SUBSTANTIAL BASIS REDUCTION.—

12 ‘‘(1) IN GENERAL.—For purposes of this sec13 tion, there is a substantial basis reduction with re14 spect to a distribution if the sum of the amounts de15 scribed in subparagraphs (A) and (B) of subsection 

16 (b)(2) exceeds $250,000. 

17 ‘‘(2) REGULATIONS.—

‘‘For regulations to carry out this subsection, see 

section 743(d)(2).’’

18 (4) CLERICAL AMENDMENTS.—

19 (A) The section heading for section 734 is 

20 amended to read as follows: 
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1 ‘‘SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED 

2 PARTNERSHIP PROPERTY WHERE SECTION 

3 754 ELECTION OR SUBSTANTIAL BASIS RE4 DUCTION.’’

5 (B) The table of sections for subpart B of 

6 part II of subchapter K of chapter 1 is amend7 ed by striking the item relating to section 734 

8 and inserting the following new item:

‘‘Sec. 734. Adjustment to basis of undistributed partnership property where section 754 election or substantial basis 

reduction.’’

9 (d) EFFECTIVE DATES.—

10 (1) SUBSECTION (a).—The amendment made 

11 by subsection (a) shall apply to contributions made 

12 after the date of the enactment of this Act. 

13 (2) SUBSECTION (b).—The amendments made 

14 by subsection (b) shall apply to transfers after the 

15 date of the enactment of this Act. 

16 (3) SUBSECTION (c).—The amendments made 

17 by subsection (c) shall apply to distributions after 

18 the date of the enactment of this Act. 

19 SEC. 3025. NO REDUCTION OF BASIS UNDER SECTION 734 IN 

20 STOCK HELD BY PARTNERSHIP IN COR21 PORATE PARTNER. 

22 (a) IN GENERAL.—Section 755 is amended by adding 

23 at the end the following new subsection: 
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1 ‘‘(c) NO ALLOCATION OF BASIS DECREASE TO

2 STOCK OF CORPORATE PARTNER.—In making an alloca3 tion under subsection (a) of any decrease in the adjusted 

4 basis of partnership property under section 734(b)—

5 ‘‘(1) no allocation may be made to stock in a 

6 corporation (or any person related (within the mean7 ing of sections 267(b) and 707(b)(1)) to such cor8 poration) which is a partner in the partnership, and 

9 ‘‘(2) any amount not allocable to stock by rea10 son of paragraph (1) shall be allocated under sub11 section (a) to other partnership property. 

12 Gain shall be recognized to the partnership to the extent 

13 that the amount required to be allocated under paragraph 

14 (2) to other partnership property exceeds the aggregate 

15 adjusted basis of such other property immediately before 

16 the allocation required by paragraph (2).’’

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

18 this section shall apply to distributions after the date of 

19 the enactment of this Act. 

20 SEC. 3026. REPEAL OF SPECIAL RULES FOR FASITS. 

21 (a) IN GENERAL.—Part V of subchapter M of chap22 ter 1 (relating to financial asset securitization investment 

23 trusts) is hereby repealed. 

24 (b) CONFORMING AMENDMENTS.—
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1 (1) Paragraph (6) of section 56(g) is amended 

2 by striking ‘‘REMIC, or FASIT’’ and inserting ‘‘or 

3 REMIC’’. 

4 (2) Clause (ii) of section 382(l)(4)(B) is amend5 ed by striking ‘‘a REMIC to which part IV of sub6 chapter M applies, or a FASIT to which part V of 

7 subchapter M applies,’’ and inserting ‘‘or a REMIC 

8 to which part IV of subchapter M applies,’’. 

9 (3) Paragraph (1) of section 582(c) is amended 

10 by striking ‘‘, and any regular interest in a 

11 FASIT,’’. 

12 (4) Subparagraph (E) of section 856(c)(5) is 

13 amended by striking the last sentence. 

14 (5) Paragraph (5) of section 860G(a) is amend15 ed by adding ‘‘and’’ at the end of subparagraph (B), 

16 by striking ‘‘, and’’ at the end of subparagraph (C) 

17 and inserting a period, and by striking subparagraph 

18 (D). 

19 (6) Subparagraph (C) of section 1202(e)(4) is 

20 amended by striking ‘‘REMIC, or FASIT’’ and in21 serting ‘‘or REMIC’’. 

22 (7) Subparagraph (C) of section 7701(a)(19) is 

23 amended by adding ‘‘and’’ at the end of clause (ix), 

24 by striking ‘‘, and’’ at the end of clause (x) and in25 serting a period, and by striking clause (xi). 
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1 (8) The table of parts for subchapter M of 

2 chapter 1 is amended by striking the item relating 

3 to part V. 

4 (c) EFFECTIVE DATE.—

5 (1) IN GENERAL.—Except as provided in para6 graph (2), the amendments made by this section 

7 shall apply to taxable years beginning after Decem8 ber 31, 2003. 

9 (2) EXCEPTION FOR EXISTING FASITS.—The 

10 amendments made by this section shall not apply to 

11 any FASIT in existence on the date of the enact12 ment of this Act to the extent that any regular in13 terest issued by the FASIT before such date con14 tinues to remain outstanding in accordance with the 

15 original terms of issuance of such interest. 

16 SEC. 3027. LIMITATION ON TRANSFER OF BUILT-IN LOSSES 

17 ON REMIC RESIDUALS. 

18 (a) IN GENERAL.—Section 362 (relating to basis to 

19 corporations) is amended by adding at the end the fol20 lowing new subsection: 

21 ‘‘(e) LIMITATION ON TRANSFER OF BUILT-IN

22 LOSSES ON REMIC RESIDUALS IN SECTION 351 TRANS23 ACTIONS.—If—
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1 ‘‘(1) a residual interest (as defined in section 

2 860G(a)(2)) in a REMIC is transferred in any 

3 transaction which is described in subsection (a), and 

4 ‘‘(2) the transferee’s adjusted basis in such re5 sidual interest would (but for this paragraph) exceed 

6 its fair market value immediately after such trans7 action, 

8 then, notwithstanding subsection (a), the transferee’s ad9 justed basis in such residual interest shall not exceed its 

10 fair market value (whether or not greater than zero) im11 mediately after such transaction.’’ 

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

13 this section shall apply to transactions after the date of 

14 the enactment of this Act. 

15 SEC. 3028. CLARIFICATION OF BANKING BUSINESS FOR 

16 PURPOSES OF DETERMINING INVESTMENT 

17 OF EARNINGS IN UNITED STATES PROPERTY. 

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

19 956(c)(2) is amended to read as follows: 

20 ‘‘(A) obligations of the United States, 

21 money, or deposits with banks (as defined by 

22 section 2(c) of the Bank Holding Company Act 

23 of 1956 (12 U.S.C. 1841(c));’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by 

2 this section shall take effect on the date of the enactment 

3 of this Act. 

4 SEC. 3029. CLARIFICATION OF EXEMPTION FROM TAX FOR 

5 SMALL PROPERTY AND CASUALTY INSUR6 ANCE COMPANIES. 

7 (a) IN GENERAL.—Section 501(c)(15)(A) is amended 

8 to read as follows: 

9 ‘‘(A) Insurance companies (as defined in 

10 section 816(a)) other than life (including inter11 insurers and reciprocal underwriters) if—

12 ‘‘(i) the gross receipts for the taxable 

13 year do not exceed $600,000, and 

14 ‘‘(ii) more than 50 percent of such 

15 gross receipts consist of premiums.’’. 

16 (b) CONTROLLED GROUP RULE.—Section 

17 501(c)(15)(C) is amended by inserting ‘‘, except that in 

18 applying section 1563 for purposes of section 

19 831(b)(2)(B)(ii), subparagraphs (B) and (C) of section 

20 1563(b)(2) shall be disregarded’’ before the period at the 

21 end. 

22 (c) CONFORMING AMENDMENT.—Clause (i) of sec23 tion 831(b)(2)(A) is amended by striking ‘‘exceed 

24 $350,000 but’’. 
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1 (d) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to taxable years beginning after 

3 December 31, 2003. 

4 SEC. 3030. DEFINITION OF INSURANCE COMPANY FOR SEC5 TION 831. 

6 (a) IN GENERAL.—Section 831 is amended by redes7 ignating subsection (c) as subsection (d) and by inserting 

8 after subsection (b) the following new subsection: 

9 ‘‘(c) INSURANCE COMPANY DEFINED.—For purposes 

10 of this section, the term ‘insurance company’ has the 

11 meaning given to such term by section 816(a)).’’

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

13 this section shall apply to taxable years beginning after 

14 December 31, 2003. 

15 SEC. 3031. QUALIFIED TAX COLLECTION CONTRACTS. 

16 (a) CONTRACT REQUIREMENTS.—

17 (1) IN GENERAL.—Subchapter A of chapter 64 

18 (relating to collection) is amended by adding at the 

19 end the following new section: 

20 ‘‘SEC. 6306. QUALIFIED TAX COLLECTION CONTRACTS. 

21 ‘‘(a) IN GENERAL.—Nothing in any provision of law 

22 shall be construed to prevent the Secretary from entering 

23 into a qualified tax collection contract.
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1 ‘‘(b) QUALIFIED TAX COLLECTION CONTRACT.—For 

2 purposes of this section, the term ‘qualified tax collection 

3 contract’ means any contract which—

4 ‘‘(1) is for the services of any person (other 

5 than an officer or employee of the Treasury Depart6 ment) to locate and contact any taxpayer specified 

7 by the Secretary, to request payment from such tax8 payer of an amount of Federal tax specified by the 

9 Secretary, and to obtain financial information speci10 fied by the Secretary with respect to such taxpayer, 

11 ‘‘(2) prohibits each person providing such serv12 ices under such contract from committing any act or 

13 omission which employees of the Internal Revenue 

14 Service are prohibited from committing in the per15 formance of similar services, 

16 ‘‘(3) prohibits subcontractors from—

17 ‘‘(A) having contacts with taxpayers, 

18 ‘‘(B) providing quality assurance services, 

19 and 

20 ‘‘(C) composing debt collection notices, and 

21 ‘‘(4) permits subcontracts to perform other 

22 services only with the approval of the Secretary. 

23 ‘‘(c) FEES.—The Secretary may retain and use an 

24 amount not in excess of 25 percent of the amount collected 

25 under any qualified tax collection contract for the costs 
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1 of services performed under such contract. The Secretary 

2 shall keep adequate records regarding amounts so retained 

3 and used. The amount credited as paid by any taxpayer 

4 shall be determined without regard to this subsection. 

5 ‘‘(d) NO FEDERAL LIABILITY.—The United States 

6 shall not be liable for any act or omission of any person 

7 performing services under a qualified tax collection con8 tract. 

9 ‘‘(e) APPLICATION OF FAIR DEBT COLLECTION

10 PRACTICES ACT.—The provisions of the Fair Debt Collec11 tion Practices Act (15 U.S.C. 1692 et seq.) shall apply 

12 to any qualified tax collection contract, except to the ex13 tent superseded by section 6304, section 7602(c), or by 

14 any other provision of this title. 

15 ‘‘(f) CROSS REFERENCES.—

16 ‘‘(1) For damages for certain unauthorized col17 lection actions by persons performing services under 

18 a qualified tax collection contract, see section 

19 7433A. 

20 ‘‘(2) For application of Taxpayer Assistance 

21 Orders to persons performing services under a quali22 fied tax collection contract, see section 7811(a)(4).’’. 

23 (2) CONFORMING AMENDMENTS.—

24 (A) Section 7809(a) is amended by insert25 ing ‘‘6306,’’ before ‘‘7651’’. 
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1 (B) The table of sections for subchapter A 

2 of chapter 64 is amended by adding at the end 

3 the following new item:

‘‘Sec. 6306. Qualified Tax Collection Contracts.’’.

4 (b) CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED

5 COLLECTION ACTIONS BY PERSONS PERFORMING SERV6 ICES UNDER QUALIFIED TAX COLLECTION CON7 TRACTS.—

8 (1) IN GENERAL.—Subchapter B of chapter 76 

9 (relating to proceedings by taxpayers and third par10 ties) is amended by inserting after section 7433 the 

11 following new section: 

12 ‘‘SEC. 7433A. CIVIL DAMAGES FOR CERTAIN UNAUTHOR13 IZED COLLECTION ACTIONS BY PERSONS 

14 PERFORMING SERVICES UNDER QUALIFIED 

15 TAX COLLECTION CONTRACTS. 

16 ‘‘(a) IN GENERAL.—Subject to the modifications pro17 vided by subsection (b), section 7433 shall apply to the 

18 acts and omissions of any person performing services 

19 under a qualified tax collection contract (as defined in sec20 tion 6306(b)) to the same extent and in the same manner 

21 as if such person were an employee of the Internal Rev22 enue Service. 

23 ‘‘(b) MODIFICATIONS.—For purposes of subsection 

24 (a)—
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1 ‘‘(1) Any civil action brought under section 

2 7433 by reason of this section shall be brought 

3 against the person who entered into the qualified tax 

4 collection contract with the Secretary and shall not 

5 be brought against the United States. 

6 ‘‘(2) Such person and not the United States 

7 shall be liable for any damages and costs determined 

8 in such civil action. 

9 ‘‘(3) Such civil action shall not be an exclusive 

10 remedy with respect to such person. 

11 ‘‘(4) Subsections (c), (d)(1), and (e) of section 

12 7433 shall not apply.’’. 

13 (2) CLERICAL AMENDMENT.—The table of sec14 tions for subchapter B of chapter 76 is amended by 

15 inserting after the item relating to section 7433 the 

16 following new item:

‘‘Sec. 7433A. Civil damages for certain unauthorized collection actions by persons performing services under a qualified tax collection contract.’’.

17 (c) APPLICATION OF TAXPAYER ASSISTANCE OR18 DERS TO PERSONS PERFORMING SERVICES UNDER A

19 QUALIFIED TAX COLLECTION CONTRACT.—Section 7811 

20 (relating to taxpayer assistance orders) is amended by 

21 adding at the end the following new subsection: 

22 ‘‘(g) APPLICATION TO PERSONS PERFORMING SERV23 ICES UNDER A QUALIFIED TAX COLLECTION CON24 TRACT.—Any order issued or action taken by the National 
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1 Taxpayer Advocate pursuant to this section shall apply to 

2 persons performing services under a qualified tax collec3 tion contract (as defined in section 6306(b)) to the same 

4 extent and in the same manner as such order or action 

5 applies to the Secretary.’’. 

6 (d) INELIGIBILITY OF INDIVIDUALS WHO COMMIT

7 MISCONDUCT TO PERFORM UNDER CONTRACT.—Section 

8 1203 of the Internal Revenue Service Restructuring Act 

9 of 1998 (relating to termination of employment for mis10 conduct) is amended by adding at the end the following 

11 new subsection: 

12 ‘‘(e) INDIVIDUALS PERFORMING SERVICES UNDER A

13 QUALIFIED TAX COLLECTION CONTRACT.— An individual 

14 shall cease to be permitted to perform any services under 

15 any qualified tax collection contract (as defined in section 

16 6306(b) of the Internal Revenue Code of 1986) if there 

17 is a final determination by the Secretary of the Treasury 

18 under such contract that such individual committed any 

19 act or omission described under subsection (b) in connec20 tion with the performance of such services.’’. 

21 (e) EFFECTIVE DATE.—The amendments made to 

22 this section shall take effect on the date of the enactment 

23 of this Act.
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1 TITLE IV—TRADE ENHANCE2 MENT AND COMPLIANCE PRO3 VISIONS 

4 SEC. 4001. REPEAL OF EXCLUSION FOR 

5 EXTRATERRITORIAL INCOME. 

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

7 (b) CONFORMING AMENDMENTS.—

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

9 chapter 1 (relating to qualifying foreign trade in10 come) is hereby repealed. 

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

12 amended by striking the item relating to subpart E. 

13 (3) The table of sections for part III of sub14 chapter B of chapter 1 is amended by striking the 

15 item relating to section 114. 

16 (c) EFFECTIVE DATE.—Except as provided in sub17 section (d), the amendments made by this section shall 

18 apply to transactions after December 31, 2003. 

19 (d) TRANSITIONAL RULE FOR 2004 AND 2005.—

20 (1) IN GENERAL.—In the case of transactions 

21 during 2004 and 2005, the amount includible in 

22 gross income by reason of the amendments made by 

23 this section shall not exceed the applicable percent24 age of the amount which would have been so in25 cluded but for this subsection. 
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1 (2) APPLICABLE PERCENTAGE.—For purposes 

2 of paragraph (1), the applicable percentage shall be 

3 as follows: 

4 (A) For 2004, the applicable percentage 

5 shall be 35 percent. 

6 (B) For 2005, the applicable percentage 

7 shall be 65 percent. 

8 (e) REVOCATION OF ELECTION TO BE TREATED AS

9 DOMESTIC CORPORATION.—If, during the 1-year period 

10 beginning on the date of the enactment of this Act, a cor11 poration for which an election is in effect under section 

12 943(e) of the Internal Revenue Code of 1986 revokes such 

13 election, no gain or loss shall be recognized with respect 

14 to property treated as transferred under clause (ii) of sec15 tion 943(e)(4)(B) of such Code to the extent such prop16 erty—

17 (1) was treated as transferred under clause (i) 

18 thereof, or 

19 (2) was acquired during a taxable year to which 

20 such election applies and before May 1, 2003, in the 

21 ordinary course of its trade or business. 

22 The Secretary of the Treasury (or such Secretary’s dele23 gate) may prescribe such regulations as may be necessary 

24 to prevent the abuse of the purposes of this subsection. 
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1 SEC. 4002. COBRA FEES. 

2 (a) USE OF MERCHANDISE PROCESSING FEE.—Sec3 tion 13031(f) of the Consolidated Omnibus Budget Rec4 onciliation Act of 1985 (19 U.S.C. 58c(f)) is amended—

5 (1) in paragraph (1), by aligning subparagraph 

6 (B) with subparagraph (A); and 

7 (2) in paragraph (2), by striking ‘‘commercial 

8 operations’’ and all that follows through ‘‘proc9 essing’’ and inserting ‘‘customs revenue functions as 

10 defined in section 415 of the Homeland Security Act 

11 of 2002 (other than functions performde by the Of12 fice of International Affairs referred to in section 

13 415(8) of that Act), and for automation (including 

14 the Automation Commercial Environment computer 

15 system), and for no other purpose. To the extent 

16 that funds in the Customs User Fee Account are in17 sufficient to pay the costs of such customs revenue 

18 functions, customs duties in an amount equal to the 

19 amount of such insufficiency shall be available, to 

20 the extent provided for in appropriations Acts, to 

21 pay the costs of such customs revenue functions in 

22 the amount of such insufficiency, and shall be avail23 able for no other purpose. The provisions of the first 

24 and second sentences of this paragraph specifying 

25 the purposes for which amounts in the Customs 

26 User Fee Account may be made available shall not 
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1 be superseded except by a provision of law which 

2 specifically modifies or supersedes such provisions.’’. 

3 (b) REIMBURSEMENT OF APPROPRIATIONS FROM

4 COBRA FEES.—Section 13031(f)(3) of the Consolidated 

5 Omnibus Budget Reconciliation Act of 1985 (19 U.S.C. 

6 58c(f)(3)) is amended by adding at the end the following: 

7 ‘‘(E) Nothing in this paragraph shall be construed 

8 to preclude the use of appropriated funds, from sources 

9 other than the fees collected under subsection (a), to pay 

10 the costs set forth in clauses (i), (ii), and (iii) of subpara11 graph (A).’’. 

12 (c) SENSE OF CONGRESS; EFFECTIVE PERIOD FOR

13 COLLECTING FEES; STANDARD FOR SETTING FEES.—

14 (1) SENSE OF CONGRESS.—The Congress finds 

15 that—

16 (A) the fees set forth in paragraphs (1) 

17 through (8) of subsection (a) of section 13031 

18 of the Consolidated Omnibus Budget Reconcili19 ation Act of 1985 have been reasonably related 

20 to the costs of providing customs services in 

21 connection with the activities or items for which 

22 the fees have been charged under such para23 graphs; and 

24 (B) the fees collected under such para25 graphs have not exceeded, in the aggregate, the
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1 amounts paid for the costs described in sub2 section (f)(3)(A) incurred in providing customs 

3 services in connection with the activities or 

4 items for which the fees were charged under 

5 such paragraphs. 

6 (2) EFFECTIVE PERIOD; STANDARD FOR SET7 TING FEES.—Section 13031(j)(3) of the Consoli8 dated Omnibus Budget Reconciliation Act of 1985 is 

9 amended to read as follows: 

10 ‘‘(3)(A) Fees may not be charged under paragraphs 

11 (9) and (10) of subsection (a) after September 30, 2013. 

12 ‘‘(B)(i) Subject to clause (ii), Fees may not be 

13 charged under paragraphs (1) through (8) of subsection 

14 (a) after September 30, 2006. 

15 ‘‘(ii) In fiscal year 2006 and in each succeeding fiscal 

16 year for which fees under paragraphs (1) through (8) of 

17 subsection (a) are authorized—

18 ‘‘(I) the Secretary of the Treasury shall charge 

19 fees under each such paragraph in amounts that are 

20 reasonably related to the costs of providing customs 

21 services in connection with the activity or item for 

22 which the fee is charged under such paragraph; 

23 ‘‘(II) the amount of fees collected under such 

24 paragraphs may not exceed, in the aggregate, the 

25 amounts paid in that fiscal year for the costs de-
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1 scribed in subsection (f)(3)(A) incurred in providing 

2 customs services in connection with the activity or 

3 item for which the fees are charged under such 

4 paragraphs; 

5 ‘‘(III) a fee may not be collected under any 

6 such paragraph except to the extent such fee will be 

7 expended to pay the costs described in subsection 

8 (f)(3)(A) incurred in providing customs services in 

9 connection with the activity or item for which the fee 

10 is charged under such paragraph; and 

11 ‘‘(IV) any fee collected under any such para12 graph shall be available for expenditure only to pay 

13 the costs described in subsection (f)(3)(A) incurred 

14 in providing customs services in connection with the 

15 activity or item for which the fee is charged under 

16 such paragraph.’’. 

17 (d) CLERICAL AMENDMENTS.—Section 13031 of the 

18 Consolidated Omnibus Budget Reconciliation Act of 1985 

19 is amended—

20 (1) in subsection (a)(5)(B), by striking ‘‘$1.75’’ 

21 and inserting ‘‘$1.75.’’; 

22 (2) in subsection (b)—

23 (A) in paragraph (1)(A), by aligning clause 

24 (iii) with clause (ii); 
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1 (B) in paragraph (7), by striking ‘‘para2 graphs’’ and inserting ‘‘paragraph’’; and 

3 (C) in paragraph (9), by aligning subpara4 graph (B) with subparagraph (A); and 

5 (3) in subsection (e)(2), by aligning subpara6 graph (B) with subparagraph (A). 

7 (e) STUDY OF ALL FEES COLLECTED BY DEPART8 MENT OF HOMELAND SECURITY.—The Secretary of the 

9 Treasury shall conduct a study of all the fees collected 

10 by the Department of Homeland Security, and shall sub11 mit to the Congress, not later than September 30, 2005, 

12 a report containing the recommendations of the Secretary 

13 on—

14 (1) what fees should be eliminated; 

15 (2) what the rate of fees retained should be; 

16 and 

17 (3) any other recommendations with respect to 

18 the fees that the Secretary considers appropriate.

Æ