IB 

Union Calendar No. 226

108TH CONGRESS 

1ST SESSION H. R. 2896

[Report No. 108–393] 

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 

NOVEMBER 21, 2003

Reported with an amendment, committed to the Committee of the Whole 

House on the State of the Union, and ordered to be printed 

[Strike out all after the enacting clause and insert the part printed in italic] 

[For text of introduced bill, see copy of bill as introduced on July 25, 2003] 

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,
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1 SECTION 1. SHORT TITLE; ETC. 

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

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

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

5 expressly provided, whenever in this Act an amendment or 

6 repeal is expressed in terms of an amendment to, or repeal 

7 of, a section or other provision, the reference shall be consid8 ered to be made to a section or other provision of the Inter9 nal Revenue Code of 1986. 

10 (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 domestic production activities 

income. 

Sec. 1002. Reduced corporate income tax rate for small corporations. 

Subtitle B—Small Business Expensing 

Sec. 1011. 2-year extension of increased expensing for small business. 

Subtitle C—Depreciation 

Sec. 1021. Recovery period for depreciation of certain leasehold improvements 

and restaurant property. 

Subtitle D—Alternative Minimum Tax Relief 

Sec. 1031. Net operating losses and foreign tax credit under alternative minimum 

tax. 

Sec. 1032. Expansion of exemption from alternative minimum tax for small corporations. 

Sec. 1033. Income averaging for farmers not to increase alternative minimum 

tax. 

Subtitle E—S Corporation Reform and Simplification 

Sec. 1041. Members of family treated as 1 shareholder. 

Sec. 1042. Increase in number of eligible shareholders to 100. 

Sec. 1043. Expansion of bank S corporation eligible shareholders to include IRAs. 

Sec. 1044. Disregard of unexercised powers of appointment in determining potential current beneficiaries of ESBT. 

Sec. 1045. Transfer of suspended losses incident to divorce, etc. 
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Sec. 1046. Use of passive activity loss and at-risk amounts by qualified subchapter S trust income beneficiaries. 

Sec. 1047. Exclusion of investment securities income from passive income test for 

bank S corporations. 

Sec. 1048. Treatment of bank director shares. 

Sec. 1049. Relief from inadvertently invalid qualified subchapter S subsidiary 

elections and terminations. 

Sec. 1050. Information returns for qualified subchapter S subsidiaries. 

Sec. 1051. Repayment of loans for qualifying employer securities. 

Subtitle F—Protecting Employee Benefits 

Sec. 1061. Treatment of nonqualified deferred compensation plans. 

Sec. 1062. Exclusion of incentive stock options and employee stock purchase plan 

stock options from wages. 

Sec. 1063. Extension of transfers of excess pension assets to retiree health accounts. 

Subtitle G—Treatment of Active Income 

Sec. 1071. Member states of the European Union treated as a single country for 

certain purposes 

Sec. 1072. Look-thru treatment of payments between related controlled foreign 

corporations under foreign personal holding company income 

rules. 

Sec. 1073. Look-thru treatment for sales of partnership interests. 

Sec. 1074. Repeal of foreign personal holding company rules and foreign investment company rules. 

Sec. 1075. Clarification of treatment of pipeline transportation income. 

Sec. 1076. Determination of foreign personal holding company income with respect to transactions in commodities. 

Sec. 1077. Repeal of CFC rules on foreign base company shipping income. 

Sec. 1078. Modification of subpart F exemption for active financing. 

Sec. 1079. Partial exclusion for income attributable to films used outside the 

United States. 

Subtitle H—Reduction of Double Taxation of Earnings 

Sec. 1081. Interest expense allocation rules. 

Sec. 1082. Recharacterization of overall domestic loss. 

Sec. 1083. Reduction to 2 foreign tax credit baskets. 

Sec. 1084. Look-thru rules to apply to dividends from noncontrolled section 902 

corporations. 

Sec. 1085. Attribution of stock ownership through partnerships to apply in determining section 902 and 960 credits. 

Sec. 1086. Clarification of treatment of certain transfers of intangible property. 

Sec. 1087. United States property not to include certain assets acquired by dealers in ordinary course of trade or business. 

Sec. 1088. Election not to use average exchange rate for foreign tax paid other 

than in functional currency. 

Sec. 1089. Repeal of withholding tax on dividends from certain foreign corporations. 

Sec. 1090. Provide equal treatment for interest paid by foreign partnerships and 

foreign corporations. 

Sec. 1091. Treatment of certain dividends of regulated investment companies. 
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Subtitle I—Other Provisions 

Sec. 1101. Special rules for livestock sold on account of weather-related conditions. 

Sec. 1102. Payment of dividends on stock of cooperatives without reducing patronage dividends. 

Sec. 1103. Vaccine tax to apply to Hepatitis A vaccine. 

Sec. 1104. Expansion of human clinical trials qualifying for orphan drug credit. 

Sec. 1105. Distributions from publicly traded partnerships treated as qualifying 

income of regulated investment companies. 

Sec. 1106. Improvements related to real estate investment trusts. 

Sec. 1107. Simplification of excise tax imposed on bows and arrows. 

Sec. 1108. Repeal of excise tax on fishing tackle boxes. 

Sec. 1109. Income tax credit to distilled spirits wholesalers for cost of carrying 

Federal excise taxes on bottled distilled spirits. 

Sec. 1110. Capital gain treatment under section 631(b) to apply to outright sales 

by landowners. 

Sec. 1111. Sonar devices suitable for finding fish. 

Sec. 1112. Taxation of certain settlement funds. 

Sec. 1113. Suspension of occupational taxes relating to distilled spirits, wine, and 

beer. 

TITLE II—PROVISIONS TO REDUCE TAX AVOIDANCE THROUGH 

CORPORATE EARNINGS STRIPPING AND EXPATRIATION 

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.
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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. Disallowance of certain partnership loss transfers. 

Sec. 3024. No reduction of basis under section 734 in stock held by partnership 

in corporate partner. 

Sec. 3025. Repeal of special rules for FASITS. 

Sec. 3026. Limitation on transfer of built-in losses on REMIC residuals. 

Sec. 3027. Clarification of banking business for purposes of determining investment of earnings in United States property. 

Sec. 3028. Modifications related to certain small insurance companies. 

Sec. 3029. Definition of insurance company for section 831. 

Sec. 3030. Denial of deduction for interest on underpayments attributable to nondisclosed reportable transactions. 

Sec. 3031. Clarification of rules for payment of estimated tax for certain deemed 

asset sales. 

Sec. 3032. Recognition of gain from the sale of a principal residence acquired in 

a like-kind exchange within 5 years of sale. 

Sec. 3033. Prevention of mismatching of interest and original issue discount deductions and income inclusions in transactions with related foreign persons. 

Sec. 3034. Exclusion from gross income for interest on overpayments of income 

tax by individuals. 

Sec. 3035. Deposits made to suspend running of interest on potential underpayments. 

Sec. 3036. Partial payment of tax liability in installment agreements. 

Sec. 3037. Extension of IRS user fees. 

TITLE IV—TRADE ENHANCEMENT AND COMPLIANCE PROVISIONS 

Sec. 4001. Repeal of exclusion for extraterritorial income. 

Sec. 4002. COBRA fees.

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 DOMESTIC PRODUCTION ACTIVITIES INCOME. 

7 (a) LIMITATION ON TAX ON QUALIFIED PRODUCTION

8 ACTIVITIES INCOME.—Section 11 is amended by redesig-
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1 nating subsections (c) and (d) as subsections (d) and (e), 

2 respectively, and by inserting after subsection (b) the fol3 lowing new subsection: 

4 ‘‘(c) LIMITATION ON TAX ON QUALIFIED PRODUCTION

5 ACTIVITIES INCOME.—

6 ‘‘(1) IN GENERAL.—If a corporation has quali7 fied production activities income for any taxable 

8 year, the tax imposed by this section shall not exceed 

9 the sum of—

10 ‘‘(A) a tax computed at the rates and in the 

11 manner as if this subsection had not been en12 acted on the taxable income reduced by the 

13 amount of qualified production activities income, 

14 plus 

15 ‘‘(B) a tax equal to 32 percent (34 percent 

16 in the case of taxable years beginning before 

17 January 1, 2007) of the qualified production ac18 tivities income (or, if less, taxable income). 

19 ‘‘(2) QUALIFIED PRODUCTION ACTIVITIES IN20 COME.—

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

22 production activities income’ for any taxable 

23 year means an amount equal to the excess (if 

24 any) of—
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1 ‘‘(i) the taxpayer’s domestic production 

2 gross receipts for such taxable year, over 

3 ‘‘(ii) the sum of— 

4 ‘‘(I) the cost of goods sold that are 

5 allocable to such receipts, 

6 ‘‘(II) other deductions, expenses, 

7 or losses directly allocable to such re8 ceipts, and 

9 ‘‘(III) a ratable portion of other 

10 deductions, expenses, and losses that 

11 are not directly allocable to such re12 ceipts or another class of income. 

13 ‘‘(B) ALLOCATION METHOD.—The Secretary 

14 shall prescribe rules for the proper allocation of 

15 items of income, deduction, expense, and loss for 

16 purposes of determining income attributable to 

17 domestic production activities. 

18 ‘‘(3) DOMESTIC PRODUCTION GROSS RECEIPTS.—

19 For purposes of this subsection, the term ‘domestic 

20 production gross receipts’ means the gross receipts of 

21 the taxpayer which are derived from—

22 ‘‘(A) any lease, rental, license, sale, ex23 change, or other disposition of—

24 ‘‘(i) qualifying production property 

25 which was manufactured, produced, grown, 
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1 or extracted in whole or in significant part 

2 by the taxpayer within the United States, 

3 or 

4 ‘‘(ii) any qualified film produced by 

5 the taxpayer, or 

6 ‘‘(B) construction, engineering, or architec7 tural services performed in the United States for 

8 construction projects in the United States. 

9 ‘‘(4) QUALIFYING PRODUCTION PROPERTY.—For 

10 purposes of this subsection, the term ‘qualifying pro11 duction property’ means—

12 ‘‘(A) tangible personal property, 

13 ‘‘(B) any computer software, and 

14 ‘‘(C) any property described in section 

15 168(f)(4). 

16 ‘‘(5) QUALIFIED FILM.—For purposes of this 

17 subsection—

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

19 film’ means any property described in section 

20 168(f)(3) if not less than 50 percent of the total 

21 compensation relating to the production of such 

22 property is compensation for services performed 

23 in the United States by actors, production per24 sonnel, directors, and producers. 
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1 ‘‘(B) EXCEPTION.—Such term does not in2 clude property with respect to which records are 

3 required to be maintained under section 2257 of 

4 title 18, United States Code. 

5 ‘‘(6) RELATED PERSONS.—For purposes of this 

6 subsection—

7 ‘‘(A) IN GENERAL.—The term ‘domestic pro8 duction gross receipts’ shall not include any 

9 gross receipts of the taxpayer derived from prop10 erty leased, licensed, or rented by the taxpayer 

11 for use by any related person. 

12 ‘‘(B) RELATED PERSON.—For purposes of 

13 subparagraph (A), a person shall be treated as 

14 related to another person if such persons are 

15 treated as a single employer under subsection (a) 

16 or (b) of section 52 or subsection (m) or (o) of 

17 section 414, except that determinations under 

18 subsections (a) and (b) of section 52 shall be 

19 made without regard to section 1563(b).’’. 

20 (b) SPECIAL RULE RELATING TO ELECTION TO TREAT

21 CUTTING OF TIMBER AS A SALE OR EXCHANGE.—In the 

22 case of a corporation, any election under section 631(a) of 

23 the Internal Revenue Code of 1986 made for a taxable year 

24 ending on or before the date of the enactment of this Act 

25 may be revoked by the taxpayer for any taxable year ending
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1 after such date. For purposes of determining whether such 

2 taxpayer may make a further election under such section, 

3 such election (and any revocation under this section) shall 

4 not be taken into account.

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

6 section shall apply to taxable years beginning after Decem7 ber 31, 2003. 

8 SEC. 1002. REDUCED CORPORATE INCOME TAX RATE FOR 

9 SMALL CORPORATIONS. 

10 (a) IN GENERAL.—Subsection (b) of section 11 (relat11 ing to tax imposed on corporations) is amended by redesig12 nating paragraph (2) as paragraph (6) and by striking 

13 paragraph (1) and inserting the following new paragraphs: 

14 ‘‘(1) FOR TAXABLE YEARS BEGINNING AFTER

15 2011.—In the case of taxable years beginning after 

16 2011, the amount of the tax imposed by subsection (a) 

17 shall be determined in accordance with the following 

18 table:

‘‘If taxable income is: The tax is: 

Not over $50,000 .............................. 15% of taxable income. 

Over $50,000 but not over $75,000 $7,500, plus 25% of the excess over 

$50,000. 

Over $75,000 but not over 

$20,000,000.

$13,750, plus 32% of the excess over 

$75,000. 

Over $20,000,000 .............................. $6,389,750, plus 35% of the excess over 

$20,000,000.

19 ‘‘(2) FOR TAXABLE YEARS BEGINNING IN 2009, 

20 2010, OR 2011.—In the case of taxable years beginning 

21 in 2009, 2010, or 2011, the amount of the tax im-
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1 posed by subsection (a) shall be determined in accord2 ance with the following table:

‘‘If taxable income is: The tax is: 

Not over $50,000 .............................. 15% of taxable income. 

Over $50,000 but not over $75,000 $7,500, plus 25% of the excess over 

$50,000. 

Over $75,000 but not over 

$5,000,000.

$13,750, plus 32% of the excess over 

$75,000. 

Over $5,000,000 but not over 

$10,000,000.

$1,589,750, plus 34% of the excess over 

$5,000,000. 

Over $10,000,000 .............................. $3,289,750, plus 35% of the excess over 

$10,000,000.

3 ‘‘(3) FOR TAXABLE YEARS BEGINNING IN 2007 OR

4 2008.—In the case of taxable years beginning in 2007 

5 or 2008, the amount of the tax imposed by subsection 

6 (a) shall be determined in accordance with the fol7 lowing table:

‘‘If taxable income is: The tax is: 

Not over $50,000 .............................. 15% of taxable income. 

Over $50,000 but not over $75,000 $7,500, plus 25% of the excess over 

$50,000. 

Over $75,000 but not over 

$1,000,000.

$13,750, plus 32% of the excess over 

$75,000. 

Over $1,000,000 but not over 

$10,000,000.

$309,750, plus 34% of the excess over 

$1,000,000. 

Over $10,000,000 .............................. $3,369,750, plus 35% of the excess over 

$10,000,000.

8 ‘‘(4) FOR TAXABLE YEARS BEGINNING IN 2004, 

9 2005, OR 2006.—In the case of taxable years beginning 

10 in 2004, 2005, or 2006, the amount of the tax im11 posed by subsection (a) shall be determined in accord12 ance with the following table:

‘‘If taxable income is: The tax is: 

Not over $50,000 .............................. 15% of taxable income. 

Over $50,000 but not over $75,000 $7,500, plus 25% of the excess over 

$50,000. 

Over $75,000 but not over 

$1,000,000.

$13,750, plus 33% of the excess over 

$75,000. 
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‘‘If taxable income is: The tax is: 

Over $1,000,000 but not over 

$10,000,000.

$319,000, plus 34% of the excess over 

$1,000,000. 

Over $10,000,000 .............................. $3,379,000, plus 35% of the excess over 

$10,000,000.

1 ‘‘(5) PHASEOUT OF LOWER RATES FOR CERTAIN

2 TAXPAYERS.—

3 ‘‘(A) GENERAL RULE FOR YEARS BEFORE

4 2012.—

5 ‘‘(i) IN GENERAL.—In the case of tax6 able years beginning before 2012 with re7 spect to a corporation which has taxable in8 come in excess of the applicable amount for 

9 any taxable year, the amount of tax deter10 mined under paragraph (1), (2), (3) or (4) 

11 for such taxable year shall be increased by 

12 the lesser of (I) 5 percent of such excess, or 

13 (II) the maximum increase amount. 

14 ‘‘(ii) MAXIMUM INCREASE AMOUNT.—

15 For purposes of clause (i)—

‘‘In the case of any taxable year

beginning during: 

The applicable 

amount is: 

The maximum 

increase 

amount is: 

2004, 2005, or 2006 ................................... $1,000,000 $21,000

2007 or 2008 ............................................... $1,000,000 $30,250

2009, 2010, or 2011 ................................... $5,000,000 $110,250. 

16 ‘‘(B) HIGHER INCOME CORPORATIONS.—In 

17 the case of a corporation which has taxable in18 come in excess of $20,000,000 ($15,000,000 in 

19 the case of taxable years beginning before 2012), 
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1 the amount of the tax determined under the fore2 going provisions of this subsection shall be in3 creased by an additional amount equal to the 

4 lesser of (i) 3 percent of such excess, or (ii) 

5 $610,250 ($100,000 in the case of taxable years 

6 beginning before 2012).’’. 

7 (b) CONFORMING AMENDMENTS.—

8 (1) Section 904(b)(3)(D)(ii) is amended to read 

9 as follows: 

10 ‘‘(ii) in the case of a corporation, sec11 tion 1201(a) applies to such taxable year.’’. 

12 (2) Section 1201(a) is amended by striking ‘‘the 

13 last 2 sentences of section 11(b)(1)’’ and inserting 

14 ‘‘section 11(b)(5)’’. 

15 (3) Section 1561(a) is amended—

16 (A) by striking ‘‘the last 2 sentences of sec17 tion 11(b)(1)’’ and inserting ‘‘section 11(b)(5)’’, 

18 and 

19 (B) by striking ‘‘such last 2 sentences’’ and 

20 inserting ‘‘section 11(b)(5)’’.

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

22 section shall apply to taxable years beginning after Decem23 ber 31, 2003. 
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1 Subtitle B—Small Business 

2 Expensing 

3 SEC. 1011. 2-YEAR EXTENSION OF INCREASED EXPENSING 

4 FOR SMALL BUSINESS. 

5 Subsections (b), (c), and (d) of section 179 (as amend6 ed by the Jobs and Growth Tax Relief Reconciliation Act 

7 of 2003) are each amended by striking ‘‘2006’’ each place 

8 it appears and inserting ‘‘2008’’.

9 Subtitle C—Depreciation 

10 SEC. 1021. RECOVERY PERIOD FOR DEPRECIATION OF CER11 TAIN LEASEHOLD IMPROVEMENTS AND RES12 TAURANT PROPERTY. 

13 (a) 15-YEAR RECOVERY PERIOD.—Subparagraph (E) 

14 of section 168(e)(3) (relating to classification of certain 

15 property) is amended by striking ‘‘and’’ at the end of clause 

16 (ii), by striking the period at the end of clause (iii) and 

17 inserting a comma, and by adding at the end the following 

18 new clauses: 

19 ‘‘(iv) any qualified leasehold improve20 ment property placed in service before Jan21 uary 1, 2006, and

22 ‘‘(v) any qualified restaurant property 

23 placed in service before January 1, 2006.’’
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1 (b) QUALIFIED LEASEHOLD IMPROVEMENT PROP2 ERTY.—Subsection (e) of section 168 is amended by adding 

3 at the end the following new paragraph: 

4 ‘‘(6) QUALIFIED LEASEHOLD IMPROVEMENT

5 PROPERTY.—The term ‘qualified leasehold improve6 ment property’ has the meaning given such term in 

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

8 rules shall apply: 

9 ‘‘(A) IMPROVEMENTS MADE BY LESSOR.—In 

10 the case of an improvement made by the person 

11 who was the lessor of such improvement when 

12 such improvement was placed in service, such 

13 improvement shall be qualified leasehold im14 provement property (if at all) only so long as 

15 such improvement is held by such person. 

16 ‘‘(B) EXCEPTION FOR CHANGES IN FORM OF

17 BUSINESS.—Property shall not cease to be quali18 fied leasehold improvement property under sub19 paragraph (A) by reason of—

20 ‘‘(i) death, 

21 ‘‘(ii) a transaction to which section 

22 381(a) applies, 

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

24 conducting the trade or business so long as 

25 the property is retained in such trade or 
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1 business as qualified leasehold improvement 

2 property and the taxpayer retains a sub3 stantial interest in such trade or business, 

4 ‘‘(iv) the acquisition of such property 

5 in an exchange described in section 1031, 

6 1033, or 1038 to the extent that the basis of 

7 such property includes an amount rep8 resenting the adjusted basis of other prop9 erty owned by the taxpayer or a related 

10 person, or 

11 ‘‘(v) the acquisition of such property 

12 by the taxpayer in a transaction described 

13 in section 332, 351, 361, 721, or 731 (or the 

14 acquisition of such property by the taxpayer 

15 from the transferee or acquiring corporation 

16 in a transaction described in such section), 

17 to the extent that the basis of the property 

18 in the hands of the taxpayer is determined 

19 by reference to its basis in the hands of the 

20 transferor or distributor.’’. 

21 (c) QUALIFIED RESTAURANT PROPERTY.—Subsection 

22 (e) of section 168 (as amended by subsection (b)) is further 

23 amended by adding at the end the following new paragraph: 

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

25 term ‘qualified restaurant property’ means any sec-
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1 tion 1250 property which is an improvement to a 

2 building if—

3 ‘‘(A) such improvement is placed in service 

4 more than 3 years after the date such building 

5 was first placed in service, and 

6 ‘‘(B) more than 50 percent of the building’s 

7 square footage is devoted to preparation of, and 

8 seating for on-premises consumption of, prepared 

9 meals.’’. 

10 (d) REQUIREMENT TO USE STRAIGHT LINE METH11 OD.—

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

13 by adding at the end the following new subpara14 graphs: 

15 ‘‘(G) Qualified leasehold improvement prop16 erty described in subsection (e)(6). 

17 ‘‘(H) Qualified restaurant property de18 scribed in subsection (e)(7).’’. 

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

20 amended by inserting before the comma ‘‘not referred 

21 to in paragraph (3)’’. 

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

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

24 following new items:

‘‘(E)(iv) ....................................................................... 39

‘‘(E)(v) ........................................................................ 39’’.
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1 (f) EFFECTIVE DATE.—The amendments made by this 

2 section shall apply to property placed in service after the 

3 date of the enactment of this Act.

4 Subtitle D—Alternative Minimum 

5 Tax Relief 

6 SEC. 1031. NET OPERATING LOSSES AND FOREIGN TAX 

7 CREDIT UNDER ALTERNATIVE MINIMUM TAX. 

8 (a) NET OPERATING LOSSES.—

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

10 56(d)(1) is amended to read as follows: 

11 ‘‘(A) the amount of such deduction shall not 

12 exceed the applicable percentage (determined 

13 under paragraph (3)) of the alternative min14 imum taxable income determined without regard 

15 to such deduction, and’’. 

16 (2) APPLICABLE PERCENTAGE.—Subsection (d) 

17 of section 56 is amended by adding at the end the fol18 lowing new paragraph: 

19 ‘‘(3) APPLICABLE PERCENTAGE.—For purposes 

20 of paragraph (1)(A)—

‘‘For taxable years beginning The applicable 

in calendar year— percentage is—

2005, 2006, or 2007 ................................................................... 92

2008 or 2009 .............................................................................. 94

2010 ............................................................................................ 96

2011 ............................................................................................ 98

2012 or thereafter ...................................................................... 100.’’

21 (b) FOREIGN TAX CREDIT.—
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1 (1) Subsection (a) of section 59 is amended by 

2 striking paragraph (2) and by redesignating para3 graphs (3) and (4) as paragraphs (2) and (3), respec4 tively. 

5 (2) Section 53(d)(1)(B)(i)(II) is amended by 

6 striking ‘‘and if section 59(a)(2) did not apply’’. 

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

8 section shall apply to taxable years beginning after Decem9 ber 31, 2004. 

10 SEC. 1032. EXPANSION OF EXEMPTION FROM ALTERNATIVE 

11 MINIMUM TAX FOR SMALL CORPORATIONS. 

12 (a) IN GENERAL.—Subparagraphs (A) and (B) of sec13 tion 55(e)(1) are each amended by striking ‘‘$7,500,000’’ 

14 each place it appears and inserting ‘‘$20,000,000’’. 

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

16 section shall apply to taxable years beginning after Decem17 ber 31, 2004.

18 SEC. 1033. INCOME AVERAGING FOR FARMERS NOT TO IN19 CREASE ALTERNATIVE MINIMUM TAX. 

20 (a) IN GENERAL.—Subsection (c) of section 55 (defin21 ing regular tax) is amended by redesignating paragraph 

22 (2) as paragraph (3) and by inserting after paragraph (1) 

23 the following new paragraph: 

24 ‘‘(2) COORDINATION WITH INCOME AVERAGING

25 FOR FARMERS.—Solely for purposes of this section, 
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1 section 1301 (relating to averaging of farm income) 

2 shall not apply in computing the regular tax liabil3 ity.’’. 

4 (b) EFFECTIVE DATE.—The amendment made by sub5 section (a) shall apply to taxable years beginning after De6 cember 31, 2002. 

7 Subtitle E—S Corporation Reform 

8 and Simplification 

9 SEC. 1041. MEMBERS OF FAMILY TREATED AS 1 SHARE10 HOLDER. 

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

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

13 amended to read as follows: 

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

15 SHAREHOLDER.—

16 ‘‘(A) IN GENERAL.—For purpose of sub17 section (b)(1)(A)—

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

19 a husband and wife (and their estates) shall 

20 be treated as 1 shareholder, and 

21 ‘‘(ii) in the case of a family with re22 spect to which an election is in effect under 

23 subparagraph (D), all members of the fam24 ily shall be treated as 1 shareholder. 
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1 ‘‘(B) MEMBERS OF THE FAMILY.—For pur2 pose of subparagraph (A)(ii)—

3 ‘‘(i) IN GENERAL.—The term ‘members 

4 of the family’ means the common ancestor, 

5 lineal descendants of the common ancestor, 

6 and the spouses (or former spouses) of such 

7 lineal descendants or common ancestor. 

8 ‘‘(ii) COMMON ANCESTOR.—For pur9 poses of this paragraph, an individual shall 

10 not be considered a common ancestor if, as 

11 of the later of the effective date of this para12 graph or the time the election under section 

13 1362(a) is made, the individual is more 

14 than 3 generations removed from the young15 est generation of shareholders who would 

16 (but for this clause) be members of the fam17 ily. For purposes of the preceding sentence, 

18 a spouse (or former spouse) shall be treated 

19 as being of the same generation as the indi20 vidual to which such spouse is (or was) 

21 married. 

22 ‘‘(C) EFFECT OF ADOPTION, ETC.—In deter23 mining whether any relationship specified in 

24 subparagraph (B) exists, the rules of section 

25 152(b)(2) shall apply. 
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1 ‘‘(D) ELECTION.—An election under sub2 paragraph (A)(ii)—

3 ‘‘(i) may, except as otherwise provided 

4 in regulations prescribed by the Secretary, 

5 be made by any member of the family, and 

6 ‘‘(ii) shall remain in effect until termi7 nated as provided in regulations prescribed 

8 by the Secretary.’’. 

9 (b) RELIEF FROM INADVERTENT INVALID ELECTION

10 OR TERMINATION.—Section 1362(f) (relating to inadvertent 

11 invalid elections or terminations), as amended by section 

12 1049, is amended—

13 (1) by inserting ‘‘or section 1361(c)(1)(A)(ii)’’ 

14 after ‘‘section 1361(b)(3)(B)(ii),’’ in paragraph (1), 

15 and 

16 (2) by inserting ‘‘or section 1361(c)(1)(D)(iii)’’ 

17 after ‘‘section 1361(b)(3)(C),’’ in paragraph (1)(B). 

18 (c) EFFECTIVE DATES.—

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

20 subsection (a) shall apply to taxable years beginning 

21 after December 31, 2003. 

22 (2) SUBSECTION (b).—The amendments made by 

23 subsection (b) shall apply to elections and termi24 nations made after December 31, 2003. 
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1 SEC. 1042. INCREASE IN NUMBER OF ELIGIBLE SHARE2 HOLDERS TO 100. 

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

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

5 and inserting ‘‘100’’. 

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

7 section shall apply to taxable years beginning after Decem8 ber 31, 2003. 

9 SEC. 1043. EXPANSION OF BANK S CORPORATION ELIGIBLE 

10 SHAREHOLDERS TO INCLUDE IRAS. 

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

12 certain trusts permitted as shareholders) is amended by in13 serting after clause (v) the following new clause: 

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

15 which is a bank (as defined in section 581), 

16 a trust which constitutes an individual re17 tirement account under section 408(a), in18 cluding one designated as a Roth IRA 

19 under section 408A, but only to the extent 

20 of the stock held by such trust in such bank 

21 as of the date of the enactment of this 

22 clause.’’. 

23 (b) TREATMENT AS SHAREHOLDER.—Section 

24 1361(c)(2)(B) (relating to treatment as shareholders) is 

25 amended by adding at the end the following new clause: 
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•HR 2896 RH 

1 ‘‘(vi) In the case of a trust described in 

2 clause (vi) of subparagraph (A), the indi3 vidual for whose benefit the trust was cre4 ated shall be treated as a shareholder.’’. 

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

6 CORPORATION ELECTION EXEMPT FROM PROHIBITED

7 TRANSACTION RULES.—Section 4975(d) (relating to ex8 emptions) is amended by striking ‘‘or’’ at the end of para9 graph (14), by striking the period at the end of paragraph 

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

11 following new paragraph: 

12 ‘‘(16) a sale of stock held by a trust which con13 stitutes an individual retirement account under sec14 tion 408(a) to the individual for whose benefit such 

15 account is established if—

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

17 section 581), 

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

19 the date of the enactment of this paragraph,

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

21 under section 1362(a) by such bank,

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

23 the time of sale (as established by an inde24 pendent appraiser) and the terms of the sale are 

25 otherwise at least as favorable to such trust as 
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1 the terms that would apply on a sale to an unre2 lated party, 

3 ‘‘(E) such trust does not pay any commis4 sions, costs, or other expenses in connection with 

5 the sale, and 

6 ‘‘(F) the stock is sold in a single transaction 

7 for cash not later than 120 days after the S cor8 poration election is made.’’. 

9 (d) CONFORMING AMENDMENT.—Section 512(e)(1) is 

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

11 ‘‘1361(c)(6)’’. 

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

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

14 Act. 

15 SEC. 1044. DISREGARD OF UNEXERCISED POWERS OF AP16 POINTMENT IN DETERMINING POTENTIAL 

17 CURRENT BENEFICIARIES OF ESBT. 

18 (a) IN GENERAL.—Section 1361(e)(2) (defining poten19 tial current beneficiary) is amended—

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

21 any power of appointment to the extent such power 

22 remains unexercised at the end of such period)’’ after 

23 ‘‘of the trust’’ in the first sentence, and 

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

25 and inserting ‘‘1-year’’. 
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1 (b) EFFECTIVE DATE.—The amendments made by this 

2 section shall apply to taxable years beginning after Decem3 ber 31, 2003. 

4 SEC. 1045. TRANSFER OF SUSPENDED LOSSES INCIDENT TO 

5 DIVORCE, ETC. 

6 (a) IN GENERAL.—Section 1366(d)(2) (relating to in7 definite carryover of disallowed losses and deductions) is 

8 amended to read as follows: 

9 ‘‘(2) INDEFINITE CARRYOVER OF DISALLOWED

10 LOSSES AND DEDUCTIONS.—

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

12 subparagraph (B), any loss or deduction which 

13 is disallowed for any taxable year by reason of 

14 paragraph (1) shall be treated as incurred by the 

15 corporation in the succeeding taxable year with 

16 respect to that shareholder. 

17 ‘‘(B) TRANSFERS OF STOCK BETWEEN

18 SPOUSES OR INCIDENT TO DIVORCE.—In the case 

19 of any transfer described in section 1041(a) of 

20 stock of an S corporation, any loss or deduction 

21 described in subparagraph (A) with respect such 

22 stock shall be treated as incurred by the corpora23 tion in the succeeding taxable year with respect 

24 to the transferee.’’
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1 (b) EFFECTIVE DATE.—The amendment made by this 

2 section shall apply to taxable years beginning after Decem3 ber 31, 2003. 

4 SEC. 1046. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK 

5 AMOUNTS BY QUALIFIED SUBCHAPTER S 

6 TRUST INCOME BENEFICIARIES. 

7 (a) IN GENERAL.—Section 1361(d)(1) (relating to spe8 cial rule for qualified subchapter S trust) is amended—

9 (1) by striking ‘‘and’’ at the end of subpara10 graph (A), 

11 (2) by striking the period at the end of subpara12 graph (B) and inserting ‘‘, and’’, and 

13 (3) by adding at the end the following new sub14 paragraph: 

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

16 and 469 to the beneficiary of the trust, the dis17 position of the S corporation stock by the trust 

18 shall be treated as a disposition by such bene19 ficiary.’’. 

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

21 section shall apply to transfers made after December 31, 

22 2003. 
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1 SEC. 1047. 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 gross 

6 receipts for 3 consecutive taxable years and corporation has 

7 accumulated earnings and profits) is amended by adding 

8 at the end the following new subparagraph: 

9 ‘‘(F) EXCEPTION FOR BANKS; ETC.—In the 

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

11 bank holding company (within the meaning of 

12 section 2(a) of the Bank Holding Company Act 

13 of 1956 (12 U.S.C. 1841(a))), or a financial 

14 holding company (within the meaning of section 

15 2(p) of such Act), the term ‘passive investment 

16 income’ shall not include—

17 ‘‘(i) interest income earned by such 

18 bank or company, or 

19 ‘‘(ii) dividends on assets required to be 

20 held by such bank or company, including 

21 stock in the Federal Reserve Bank, the Fed22 eral Home Loan Bank, or the Federal Agri23 cultural Mortgage Bank or participation 

24 certificates issued by a Federal Intermediate 

25 Credit Bank.’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by this 

2 section shall apply to taxable years beginning after Decem3 ber 31, 2003. 

4 SEC. 1048. TREATMENT OF BANK DIRECTOR SHARES. 

5 (a) IN GENERAL.—Section 1361 (defining S corpora6 tion) is amended by adding at the end the following new 

7 subsection: 

8 ‘‘(f) RESTRICTED BANK DIRECTOR STOCK.—

9 ‘‘(1) IN GENERAL.—Restricted bank director 

10 stock shall not be taken into account as outstanding 

11 stock of the S corporation in applying this subchapter 

12 (other than section 1368(f)). 

13 ‘‘(2) RESTRICTED BANK DIRECTOR STOCK.—For 

14 purposes of this subsection, the term ‘restricted bank 

15 director stock’ means stock in a bank (as defined in 

16 section 581), a bank holding company (within the 

17 meaning of section 2(a) of the Bank Holding Com18 pany Act of 1956 (12 U.S.C. 1841(a))), or a financial 

19 holding company (within the meaning of section 2(p) 

20 of such Act), registered with the Federal Reserve Sys21 tem if such stock—

22 ‘‘(A) is required to be held by an individual 

23 under applicable Federal or State law in order 

24 to permit such individual to serve as a director, 

25 and 
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1 ‘‘(B) is subject to an agreement with such 

2 bank or company (or a corporation which con3 trols (within the meaning of section 368(c)) such 

4 bank or company) pursuant to which the holder 

5 is required to sell back such stock (at the same 

6 price as the individual acquired such stock) upon 

7 ceasing to hold the office of director. 

8 ‘‘(3) CROSS REFERENCE.—

‘‘For treatment of certain distributions with respect to restricted bank director stock, see section 

1368(f).’’.

9 (b) DISTRIBUTIONS.—Section 1368 (relating to dis10 tributions) is amended by adding at the end the following 

11 new subsection: 

12 ‘‘(f) RESTRICTED BANK DIRECTOR STOCK.—If a di13 rector receives a distribution (not in part or full payment 

14 in exchange for stock) from an S corporation with respect 

15 to any restricted bank director stock (as defined in section 

16 1361(f)), the amount of such distribution—

17 ‘‘(1) shall be includible in gross income of the di18 rector, and 

19 ‘‘(2) shall be deductible by the corporation for the 

20 taxable year of such corporation in which or with 

21 which ends the taxable year in which such amount in 

22 included in the gross income of the director.’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by this 

2 section shall apply to taxable years beginning after Decem3 ber 31, 2003. 

4 SEC. 1049. RELIEF FROM INADVERTENTLY INVALID QUALI5 FIED SUBCHAPTER S SUBSIDIARY ELECTIONS 

6 AND TERMINATIONS. 

7 (a) IN GENERAL.—Section 1362(f) (relating to inad8 vertent invalid elections or terminations) is amended—

9 (1) by inserting ‘‘, section 1361(b)(3)(B)(ii),’’ 

10 after ‘‘subsection (a)’’ in paragraph (1), 

11 (2) by inserting ‘‘, section 1361(b)(3)(C),’’ after 

12 ‘‘subsection (d)’’ in paragraph (1)(B), 

13 (3) by amending paragraph (3)(A) to read as 

14 follows: 

15 ‘‘(A) so that the corporation for which the 

16 election was made is a small business corpora17 tion or a qualified subchapter S subsidiary, as 

18 the case may be, or’’, 

19 (4) by amending paragraph (4) to read as fol20 lows: 

21 ‘‘(4) the corporation for which the election was 

22 made, and each person who was a shareholder in such 

23 corporation at any time during the period specified 

24 pursuant to this subsection, agrees to make such ad25 justments (consistent with the treatment of such cor-
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•HR 2896 RH 

1 poration as an S corporation or a qualified sub2 chapter S subsidiary, as the case may be) as may be 

3 required by the Secretary with respect to such pe4 riod,’’, and 

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

6 subsidiary, as the case may be’’ after ‘‘S corporation’’ 

7 in the matter following paragraph (4). 

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

9 section shall apply to taxable years beginning after Decem10 ber 31, 2003. 

11 SEC. 1050. INFORMATION RETURNS FOR QUALIFIED SUB12 CHAPTER S SUBSIDIARIES. 

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

14 treatment of certain wholly owned subsidiaries) is amended 

15 by inserting ‘‘and in the case of information returns re16 quired under part III of subchapter A of chapter 61’’ after 

17 ‘‘Secretary’’. 

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

19 section shall apply to taxable years beginning after Decem20 ber 31, 2003.

21 SEC. 1051. REPAYMENT OF LOANS FOR QUALIFYING EM22 PLOYER SECURITIES. 

23 (a) IN GENERAL.—Subsection (f) of section 4975 (re24 lating to other definitions and special rules) is amended 

25 by adding at the end the following new paragraph: 
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•HR 2896 RH 

1 ‘‘(7) S CORPORATION REPAYMENT OF LOANS FOR

2 QUALIFYING EMPLOYER SECURITIES.—A plan shall 

3 not be treated as violating the requirements of section 

4 401 or 409 or subsection (e)(7), or as engaging in a 

5 prohibited transaction for purposes of subsection 

6 (d)(3), merely by reason of any distribution (as de7 scribed in section 1368(a)) with respect to S corpora8 tion stock that constitutes qualifying employer securi9 ties, which in accordance with the plan provisions is 

10 used to make payments on a loan described in sub11 section (d)(3) the proceeds of which were used to ac12 quire such qualifying employer securities (whether or 

13 not allocated to participants). The preceding sentence 

14 shall not apply in the case of a distribution which is 

15 paid with respect to any employer security which is 

16 allocated to a participant unless the plan provides 

17 that employer securities with a fair market value of 

18 not less than the amount of such distribution are allo19 cated to such participant for the year which (but for 

20 the preceding sentence) such distribution would have 

21 been allocated to such participant.’’. 

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

23 section shall apply to distributions with respect to S cor24 poration stock made after December 31, 2003. 
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1 Subtitle F—Protecting Employee 

2 Benefits

3 SEC. 1061. TREATMENT OF NONQUALIFIED DEFERRED COM4 PENSATION PLANS. 

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

6 D of chapter 1 is amended by adding at the end the fol7 lowing new section: 

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

9 COMPENSATION UNDER NONQUALIFIED DE10 FERRED COMPENSATION PLANS. 

11 ‘‘(a) RULES RELATING TO CONSTRUCTIVE RECEIPT.—

12 ‘‘(1) IN GENERAL.—

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

14 case of a nonqualified deferred compensation 

15 plan, all compensation deferred under the plan 

16 for all taxable years (to the extent not subject to 

17 a substantial risk of forfeiture and not pre18 viously included in gross income) shall be in19 cludible in gross income for the taxable year un20 less at all times during the taxable year the plan 

21 meets the requirements of paragraphs (2), (3),

22 and (4) and is operated in accordance with such 

23 requirements. 
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1 ‘‘(B) INTEREST ON TAX LIABILITY PAYABLE

2 WITH RESPECT TO PREVIOUSLY DEFERRED COM3 PENSATION.—

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

5 required to be included in gross income 

6 under subparagraph (A) for a taxable year, 

7 the tax imposed by this chapter for such 

8 taxable year shall be increased by the 

9 amount of interest determined under clause 

10 (ii). 

11 ‘‘(ii) INTEREST.—For purposes of 

12 clause (i), the interest determined under 

13 this clause for any taxable year is the 

14 amount of interest at the underpayment 

15 rate plus 1 percentage point on the under16 payments that would have occurred had the 

17 deferred compensation been includible in 

18 gross income for the taxable year in which 

19 first deferred or, if later, the first taxable 

20 year in which such deferred compensation is 

21 not subject to a substantial risk of for22 feiture. 

23 ‘‘(2) DISTRIBUTIONS.—

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

25 this paragraph are met if the plan provides that 
36

•HR 2896 RH 

1 compensation deferred under the plan may not 

2 be distributed earlier than—

3 ‘‘(i) separation from service as deter4 mined by the Secretary (except as provided 

5 in subparagraph (B)(i)), 

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

7 223(d) of the Social Security Act), 

8 ‘‘(iii) death, 

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

10 a fixed schedule) specified under the plan at 

11 the date of the deferral of such compensa12 tion, 

13 ‘‘(v) to the extent provided by the Sec14 retary, a change in the ownership or effec15 tive control of the corporation, or in the 

16 ownership of a substantial portion of the as17 sets of the corporation, or 

18 ‘‘(vi) the occurrence of an unforeseeable 

19 emergency. 

20 ‘‘(B) SPECIAL RULES.—

21 ‘‘(i) SPECIFIED EMPLOYEES.—In the 

22 case of specified employees, the requirement 

23 of subparagraph (A)(i) is met only if dis24 tributions may not be made earlier than 6 

25 months after the date of separation from 
37

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1 service. For purposes of the preceding sen2 tence, a specified employee is a key em3 ployee (as defined in section 416(i)) of a 

4 corporation the stock in which is publicly 

5 traded on an established securities market 

6 or otherwise. 

7 ‘‘(ii) UNFORESEEABLE EMERGENCY.—

8 For purposes of subparagraph (A)(vi)—

9 ‘‘(I) IN GENERAL.—The term ‘un10 foreseeable emergency’ means a severe 

11 financial hardship to the participant 

12 resulting from a sudden and unex13 pected illness or accident of the partici14 pant, the participant’s spouse, or a de15 pendent (as defined in section 152(a)) 

16 of the participant, loss of the partici17 pant’s property due to casualty, or 

18 other similar extraordinary and un19 foreseeable circumstances arising as a 

20 result of events beyond the control of 

21 the participant. 

22 ‘‘(II) LIMITATION ON DISTRIBU23 TIONS.—The requirement of subpara24 graph (A)(vi) is met only if, as deter25 mined under regulations of the Sec-
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•HR 2896 RH 

1 retary, the amounts distributed with 

2 respect to an emergency do not exceed 

3 the amounts necessary to satisfy such 

4 emergency plus amounts necessary to 

5 pay taxes reasonably anticipated as a 

6 result of the distribution, after taking 

7 into account the extent to which such 

8 hardship is or may be relieved through 

9 reimbursement or compensation by in10 surance or otherwise or by liquidation 

11 of the participant’s assets (to the extent 

12 the liquidation of such assets would not 

13 itself cause severe financial hardship). 

14 ‘‘(3) ACCELERATION OF BENEFITS.—The require15 ments of this paragraph are met if the plan does not 

16 permit the acceleration of the time or schedule of any 

17 payment under the plan, except as provided in regu18 lations by the Secretary. 

19 ‘‘(4) ELECTIONS.—

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

21 this paragraph are met if the requirements of 

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

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

24 requirements of this subparagraph are met if the 

25 plan provides that compensation for services per-
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•HR 2896 RH 

1 formed during a taxable year may be deferred at 

2 the participant’s election only if the election to 

3 defer such compensation is made during the pre4 ceding taxable year or at such other time as pro5 vided in regulations. In the case of the first year 

6 in which a participant becomes eligible to par7 ticipate in the plan, such election may be made 

8 with respect to services to be performed subse9 quent to the election within 30 days after the 

10 date the participant becomes eligible to partici11 pate in such plan. 

12 ‘‘(C) CHANGES IN TIME AND FORM OF DIS13 TRIBUTION.—The requirements of this subpara14 graph are met if, in the case of a plan which 

15 permits under a subsequent election a delay in 

16 a payment or a change in the form of pay17 ment—

18 ‘‘(i) the plan requires that such election 

19 may not take effect until at least 12 months 

20 after the date on which the election is made, 

21 ‘‘(ii) in the case an election related to 

22 a payment not described in clause (ii), (iii), 

23 or (vi) of paragraph (2)(A), the plan re24 quires that the first payment with respect to 

25 which such election is made be deferred for 
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1 a period of not less than 5 years from the 

2 date such payment would otherwise have 

3 been made, and 

4 ‘‘(iii) the plan requires that any elec5 tion related to a payment described in 

6 paragraph (2)(A)(iv) may not be made less 

7 than 12 months prior to the date of the first 

8 scheduled payment under such paragraph. 

9 ‘‘(b) RULES RELATING TO FUNDING.—

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

11 case of assets held in a trust or set aside (directly or 

12 indirectly) in another arrangement, as determined by 

13 the Secretary, for purposes of paying deferred com14 pensation under a nonqualified deferred compensation 

15 plan, for purposes of section 83 such assets shall be 

16 treated as property transferred in connection with the 

17 performance of services whether or not such assets are 

18 available to satisfy claims of general creditors—

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

20 located outside of the United States, or

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

22 are subsequently transferred outside of the 

23 United States. 

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

25 case of a nonqualified deferred compensation plan, 
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1 there is a transfer of property within the meaning of 

2 section 83 as of the earlier of—

3 ‘‘(A) the date on which the plan first pro4 vides that assets will become restricted to the 

5 provision of benefits under the plan in connec6 tion with a change in the employer’s financial 

7 health, or 

8 ‘‘(B) the date on which assets are so re9 stricted. 

10 ‘‘(3) INCOME INCLUSION FOR OFFSHORE TRUSTS

11 AND EMPLOYER’S FINANCIAL HEALTH.—For each tax12 able year that assets treated as transferred under this 

13 subsection remain set aside in a trust or other ar14 rangement subject to paragraph (1) or (2), any in15 crease in value in, or earnings with respect to, such 

16 assets shall be treated as an additional transfer of 

17 property under this subsection (to the extent not pre18 viously included in income). 

19 ‘‘(4) INTEREST ON TAX LIABILITY PAYABLE WITH

20 RESPECT TO TRANSFERRED PROPERTY.—

21 ‘‘(A) IN GENERAL.—If amounts are re22 quired to be included in gross income by reason 

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

24 tax imposed by this chapter for such taxable year 
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1 shall be increased by the amount of interest de2 termined under subparagraph (B). 

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

4 under this subparagraph for any taxable year is 

5 the amount of interest at the underpayment rate 

6 plus 1 percentage point on the underpayments 

7 that would have occurred had the amounts so re8 quired to be included in gross income by para9 graph (1) or (2) been includible in gross income 

10 for the taxable year in which such assets were 

11 first set aside (directly or indirectly) in a trust 

12 (or other arrangement determined by the Sec13 retary) for purposes of the nonqualified deferred 

14 compensation plan. 

15 ‘‘(c) NO INFERENCE ON EARLIER INCOME INCLUSION

16 OR REQUIREMENT OF LATER INCLUSION.—Nothing in this 

17 section shall be construed to prevent the inclusion of 

18 amounts in gross income under any other provision of this 

19 chapter or any other rule of law earlier than the time pro20 vided in this section. Any amount included in gross income 

21 under this section shall not be required to be included in 

22 gross income under any other provision of this chapter or 

23 any other rule of law later than the time provided in this 

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

2 purposes of this section—

3 ‘‘(1) NONQUALIFIED DEFERRED COMPENSATION

4 PLAN.—The term ‘nonqualified deferred compensation 

5 plan’ means any plan that provides for the deferral 

6 of compensation, other than—

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

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

9 leave, compensatory time, disability pay, or 

10 death benefit plan. 

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

12 ‘qualified employer plan’ means—

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

14 or trust described in subparagraph (A) or (B) of 

15 section 219(g)(5), and 

16 ‘‘(B) any eligible deferred compensation 

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

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

19 ‘‘(3) PLAN INCLUDES ARRANGEMENTS, ETC.—The 

20 term ‘plan’ includes any agreement or arrangement, 

21 including an agreement or arrangement that includes 

22 one person. 

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

24 rights of a person to compensation are subject to a 

25 substantial risk of forfeiture if such person’s rights to 
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1 such compensation are conditioned upon the future 

2 performance of substantial services by any individual. 

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 amounts 

12 of deferral in the case of a nonqualified deferred com13 pensation plan which is a defined benefit plan, 

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

15 control of a corporation or assets of a corporation for 

16 purposes of subsection (a)(2)(A)(v), 

17 ‘‘(3) exempting arrangements from the applica18 tion of subsection (b) if such arrangements will not 

19 result in an improper deferral of United States tax 

20 and will not result in assets being effectively beyond 

21 the reach of creditors, 

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

23 subsection (b)(2), and 
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•HR 2896 RH 

1 ‘‘(5) disregarding a substantial risk of forfeiture 

2 in cases where necessary to carry out the purposes of 

3 this section.’’. 

4 (b) W–2 FORMS.—

5 (1) IN GENERAL.—Subsection (a) of section 6051 

6 (relating to receipts for employees) is amended by 

7 striking ‘‘and’’ at the end of paragraph (10), by strik8 ing the period at the end of paragraph (11) and in9 serting ‘‘, and’’, and by inserting after paragraph 

10 (11) the following new paragraph: 

11 ‘‘(12) the total amount of deferrals under a non12 qualified deferred compensation plan (within the 

13 meaning of section 409A(d)).’’. 

14 (2) THRESHOLD.—Subsection (a) of section 6051 

15 is amended by adding at the end the following: ‘‘In 

16 the case of the amounts required to be shown by para17 graph (12), the Secretary (by regulation) may estab18 lish a minimum amount of deferrals below which 

19 paragraph (12) does not apply and may provide that 

20 paragraph (12) does not apply with respect to 

21 amounts of deferrals which are not reasonably ascer22 tainable.’’. 

23 (c) CONFORMING AND CLERICAL AMENDMENTS.—

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

25 ‘‘409A,’’ after ‘‘408(p),’’. 
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1 (2) Section 414(c) is amended by inserting 

2 ‘‘409A,’’ after ‘‘408(p),’’. 

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

4 part I of subchapter D of chapter 1 is amended by 

5 adding at the end the following new item:

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

under nonqualified deferred compensation plans.’’.

6 (d) EFFECTIVE DATE.—

7 (1) IN GENERAL.—Except as otherwise provided 

8 in this subsection, the amendments made by this sec9 tion shall apply to amounts deferred in taxable years 

10 beginning after December 31, 2003. 

11 (2) AMOUNTS DEFERRED IN 2004 UNDER CERTAIN

12 IRREVOCABLE ELECTIONS AND BINDING ARRANGE13 MENTS.—The amendments made by this section shall 

14 not apply to amounts deferred in taxable years begin15 ning after December 31, 2003, and before January 1, 

16 2005, pursuant to an irrevocable election or binding 

17 arrangement made before October 24, 2003. 

18 (3) EARNINGS ATTRIBUTABLE TO AMOUNT PRE19 VIOUSLY DEFERRED.—The amendments made by this 

20 section shall apply to earnings on deferred compensa21 tion only to the extent that such amendments apply 

22 to such compensation. 

23 (e) GUIDANCE RELATING TO CHANGE OF OWNERSHIP

24 OR CONTROL.—Not later than 90 days after the date of the 
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1 enactment of this Act, the Secretary of the Treasury shall 

2 issue guidance on what constitutes a change in ownership 

3 or effective control for purposes of section 409A of the Inter4 nal Revenue Code of 1986, as added by this section. 

5 (f) GUIDANCE RELATING TO TERMINATION OF CER6 TAIN EXISTING ARRANGEMENTS.—Not later than 90 days 

7 after the date of the enactment of this Act, the Secretary 

8 of the Treasury shall issue guidance providing a limited 

9 period during which an individual participating in a non10 qualified deferred compensation plan adopted on or before 

11 December 31, 2003, may, without violating the require12 ments of paragraphs (2), (3), and (4) of section 409A(a)(2) 

13 of the Internal Revenue Code of 1986 (as added by this sec14 tion), terminate participation or cancel an outstanding de15 ferral election with regard to amounts earned after Decem16 ber 31, 2003, if such amounts are includible in income as 

17 earned. 

18 SEC. 1062. EXCLUSION OF INCENTIVE STOCK OPTIONS AND 

19 EMPLOYEE STOCK PURCHASE PLAN STOCK 

20 OPTIONS FROM WAGES. 

21 (a) EXCLUSION FROM EMPLOYMENT TAXES.—

22 (1) SOCIAL SECURITY TAXES.—

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

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

25 of paragraph (20), by striking the period at the 
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1 end of paragraph (21) and inserting ‘‘; or’’, and 

2 by inserting after paragraph (21) the following 

3 new paragraph: 

4 ‘‘(22) remuneration on account of—

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

6 individual pursuant to an exercise of an incen7 tive stock option (as defined in section 422(b)) or 

8 under an employee stock purchase plan (as de9 fined in section 423(b)), or 

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

11 such stock.’’. 

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

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

14 paragraph (17), by striking the period at the end 

15 of paragraph (18) and inserting ‘‘; or’’, and by 

16 inserting after paragraph (18) the following new 

17 paragraph: 

18 ‘‘(19) 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) of 

22 the Internal Revenue Code of 1986) or under an 

23 employee stock purchase plan (as defined in sec24 tion 423(b) of such Code), or 
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1 ‘‘(B) any disposition by the individual of 

2 such stock.’’. 

3 (2) RAILROAD RETIREMENT TAXES.—Subsection 

4 (e) of section 3231 is amended by adding at the end 

5 the following new paragraph: 

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

7 ‘compensation’ shall not include any remuneration on 

8 account of—

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

10 individual pursuant to an exercise of an incen11 tive stock option (as defined in section 422(b)) or 

12 under an employee stock purchase plan (as de13 fined in section 423(b)), or 

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

15 such stock.’’. 

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

17 (relating to definition of wages) is amended by strik18 ing ‘‘or’’ at the end of paragraph (16), by striking the 

19 period at the end of paragraph (17) and inserting ‘‘; 

20 or’’, and by inserting after paragraph (17) the fol21 lowing new paragraph: 

22 ‘‘(18) remuneration on account of—

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

24 individual pursuant to an exercise of an incen25 tive stock option (as defined in section 422(b)) or 
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1 under an employee stock purchase plan (as de2 fined in section 423(b)), or 

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

4 such stock.’’. 

5 (b) WAGE WITHHOLDING NOT REQUIRED ON DIS6 QUALIFYING DISPOSITIONS.—Section 421(b) (relating to ef7 fect of disqualifying dispositions) is amended by adding at 

8 the end the following new sentence: ‘‘No amount shall be 

9 required to be deducted and withheld under chapter 24 with 

10 respect to any increase in income attributable to a disposi11 tion described in the preceding sentence.’’. 

12 (c) WAGE WITHHOLDING NOT REQUIRED ON COM13 PENSATION WHERE OPTION PRICE IS BETWEEN 85 PER14 CENT AND 100 PERCENT OF VALUE OF STOCK.—Section 

15 423(c) (relating to special rule where option price is be16 tween 85 percent and 100 percent of value of stock) is 

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

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

19 under chapter 24 with respect to any amount treated as 

20 compensation under this subsection.’’.

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

22 section shall apply to stock acquired pursuant to options 

23 exercised after the date of the enactment of this Act. 
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1 SEC. 1063. EXTENSION OF TRANSFERS OF EXCESS PENSION 

2 ASSETS TO RETIREE HEALTH ACCOUNTS. 

3 Paragraph (5) of section 420(b) (relating to expira4 tion) is amended by striking ‘‘December 31, 2005’’ and in5 serting ‘‘December 31, 2013’’. 

6 Subtitle G—Treatment of Active 

7 Income 

8 SEC. 1071. MEMBER STATES OF THE EUROPEAN UNION 

9 TREATED AS A SINGLE COUNTRY FOR CER10 TAIN PURPOSES. 

11 (a) IN GENERAL.—Subsection (d) of section 954 is 

12 amended by adding at the end the following new paragraph: 

13 ‘‘(5) TREATMENT OF MEMBER STATES OF THE

14 EUROPEAN UNION.—For purposes of this subsection 

15 and subsection (e), in the case of a controlled foreign 

16 corporation which is created or organized under the 

17 laws of a member state of the European Union, all 

18 member states of the European Union shall be treated 

19 as 1 country.’’. 

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

21 section shall apply to taxable years of foreign corporations 

22 beginning after December 31, 2008, and to taxable years 

23 of United States shareholders with or within which such 

24 taxable years of foreign corporations end. 
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1 SEC. 1072. LOOK-THRU TREATMENT OF PAYMENTS BE2 TWEEN RELATED CONTROLLED FOREIGN 

3 CORPORATIONS UNDER FOREIGN PERSONAL 

4 HOLDING COMPANY INCOME RULES. 

5 (a) IN GENERAL.—Subsection (c) of section 954 is 

6 amended by adding after paragraph (3) the following new 

7 paragraph: 

8 ‘‘(4) LOOK-THRU IN THE CASE OF RELATED CON9 TROLLED FOREIGN CORPORATIONS.—For purposes of 

10 this subsection, dividends, interest, rents, and royal11 ties received or accrued from a controlled foreign cor12 poration which is a related person (as defined in sub13 section (d)(3)) shall not be treated as foreign personal 

14 holding company income to the extent attributable or 

15 properly allocable (determined under rules similar to 

16 the rules of subparagraphs (C) and (D) of section 

17 904(d)(3)) to income of the related person which is 

18 not subpart F income (as defined in section 952). The 

19 Secretary shall prescribe such regulations as may be 

20 appropriate to prevent the abuse of the purposes of 

21 this paragraph.’’

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

23 section shall apply to taxable years of foreign corporations 

24 beginning after December 31, 2006, and to taxable years 

25 of United States shareholders with or within which such 

26 taxable years of foreign corporations end. 
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1 SEC. 1073. LOOK-THRU TREATMENT FOR SALES OF PART2 NERSHIP INTERESTS. 

3 (a) IN GENERAL.—Section 954(c) (defining foreign 

4 personal holding company income) is amended by adding 

5 after paragraph (4) the following new paragraph: 

6 ‘‘(5) LOOK-THRU RULE FOR CERTAIN PARTNER7 SHIP SALES.—

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

9 by a controlled foreign corporation of an interest 

10 in a partnership with respect to which such cor11 poration is a 25-percent owner, such corporation 

12 shall be treated for purposes of this subsection as 

13 selling the proportionate share of the assets of the 

14 partnership attributable to such interest. 

15 ‘‘(B) 25-PERCENT OWNER.—For purposes of 

16 this paragraph, the term ‘25-percent owner’ 

17 means a controlled foreign corporation which 

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

19 percent or more of the capital or profits interest 

20 in the partnership.’’

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

22 section shall apply to taxable years of foreign corporations 

23 beginning after December 31, 2006, and to taxable years 

24 of United States shareholders with or within which such 

25 taxable years of foreign corporations end. 
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1 SEC. 1074. REPEAL OF FOREIGN PERSONAL HOLDING COM2 PANY RULES AND FOREIGN INVESTMENT 

3 COMPANY RULES. 

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

5 hereby repealed: 

6 (1) Part III of subchapter G of chapter 1 (relat7 ing to foreign personal holding companies). 

8 (2) Section 1246 (relating to gain on foreign in9 vestment company stock).

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

11 investment companies to distribute income currently). 

12 (b) EXEMPTION OF FOREIGN CORPORATIONS FROM

13 PERSONAL HOLDING COMPANY RULES.—

14 (1) IN GENERAL.—Subsection (c) of section 542 

15 (relating to exceptions) is amended—

16 (A) by striking paragraph (5) and inserting 

17 the following: 

18 ‘‘(5) a foreign corporation,’’, 

19 (B) by striking paragraphs (7) and (10) 

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

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

22 (C) by inserting ‘‘and’’ at the end of para23 graph (7) (as so redesignated), and 

24 (D) by striking ‘‘; and’’ at the end of para25 graph (8) (as so redesignated) and inserting a 

26 period. 
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1 (2) TREATMENT OF INCOME FROM PERSONAL

2 SERVICE CONTRACTS.—Paragraph (1) of section 

3 954(c) is amended by adding at the end the following 

4 new subparagraph: 

5 ‘‘(H) PERSONAL SERVICE CONTRACTS.—

6 ‘‘(i) Amounts received under a contract 

7 under which the corporation is to furnish 

8 personal services if—

9 ‘‘(I) some person other than the 

10 corporation has the right to designate 

11 (by name or by description) the indi12 vidual who is to perform the services, 

13 or 

14 ‘‘(II) the individual who is to per15 form the services is designated (by 

16 name or by description) in the con17 tract, and 

18 ‘‘(ii) amounts received from the sale or 

19 other disposition of such a contract.

20 This subparagraph shall apply with respect to 

21 amounts received for services under a particular 

22 contract only if at some time during the taxable 

23 year 25 percent or more in value of the out24 standing stock of the corporation is owned, di25 rectly or indirectly, by or for the individual who 
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1 has performed, is to perform, or may be des2 ignated (by name or by description) as the one 

3 to perform, such services.’’

4 (c) CONFORMING AMENDMENTS.—

5 (1) Clause (iii) of section 1(h)(11)(C) is amended 

6 by striking ‘‘a foreign personal holding company (as 

7 defined in section 552), a foreign investment company 

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

9 (2) Paragraph (2) of section 171(c) is amend10 ed—

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

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

13 and 

14 (B) by striking ‘‘or foreign personal holding 

15 company’’. 

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

17 by striking ‘‘foreign personal holding company or’’. 

18 (4) Section 312 is amended by striking sub19 section (j). 

20 (5) Subsection (m) of section 312 is amended by 

21 striking ‘‘, a foreign investment company (within the 

22 meaning of section 1246(b)), or a foreign personal 

23 holding company (within the meaning of section 

24 552)’’. 
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1 (6) Subsection (e) of section 443 is amended by 

2 striking paragraph (3) and by redesignating para3 graphs (4) and (5) as paragraphs (3) and (4), respec4 tively. 

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

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

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

8 as clause (ii). 

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

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

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

12 and inserting a period, and by striking subparagraph 

13 (C). 

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

15 by striking ‘‘or a foreign personal holding company 

16 described in section 552’’. 

17 (10) Section 563 is amended—

18 (A) by striking subsection (c), 

19 (B) by redesignating subsection (d) as sub20 section (c), and 

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

22 in subsection (c) (as so redesignated) and insert23 ing ‘‘subsection (a) or (b)’’. 

24 (11) Subsection (d) of section 751 is amended by 

25 adding ‘‘and’’ at the end of paragraph (2), by strik-
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1 ing paragraph (3), by redesignating paragraph (4) as 

2 paragraph (3), and by striking ‘‘paragraph (1), (2), 

3 or (3)’’ in paragraph (3) (as so redesignated) and in4 serting ‘‘paragraph (1) or (2)’’. 

5 (12) Paragraph (2) of section 864(d) is amended 

6 by striking subparagraph (A) and by redesignating 

7 subparagraphs (B) and (C) as subparagraphs (A) 

8 and (B), respectively. 

9 (13)(A) Subparagraph (A) of section 898(b)(1) is 

10 amended to read as follows: 

11 ‘‘(A) which is treated as a controlled foreign 

12 corporation for any purpose under subpart F of 

13 part III of this subchapter, and’’. 

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

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

16 whichever are applicable,’’. 

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

18 to read as follows: 

19 ‘‘(3) UNITED STATES SHAREHOLDER.—The term 

20 ‘United States shareholder’ has the meaning given to 

21 such term by section 951(b), except that, in the case 

22 of a foreign corporation having related person insur23 ance income (as defined in section 953(c)(2)), the Sec24 retary may treat any person as a United States 

25 shareholder for purposes of this section if such person 
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1 is treated as a United States shareholder under sec2 tion 953(c)(1).’’

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

4 read as follows:

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

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

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

8 ‘‘(B) if there is no majority U.S. share9 holder year, the taxable year prescribed under 

10 regulations. 

11 ‘‘(2) 1-MONTH DEFERRAL ALLOWED.—A specified 

12 foreign corporation may elect, in lieu of the taxable 

13 year under paragraph (1)(A), a taxable year begin14 ning 1 month earlier than the majority U.S. share15 holder year. 

16 ‘‘(3) MAJORITY U.S. SHAREHOLDER YEAR.—

17 ‘‘(A) IN GENERAL.—For purposes of this 

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

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

20 each testing day, constituted the taxable year 

21 of—

22 ‘‘(i) each United States shareholder de23 scribed in subsection (b)(2)(A), and 

24 ‘‘(ii) each United States shareholder 

25 not described in clause (i) whose stock was 
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1 treated as owned under subsection (b)(2)(B) 

2 by any shareholder described in such clause. 

3 ‘‘(B) TESTING DAY.—The testing days shall 

4 be—

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

6 taxable year (determined without regard to 

7 this section), or 

8 ‘‘(ii) the days during such representa9 tive period as the Secretary may prescribe.’’ 

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

11 amended to read as follows: 

12 ‘‘(ii) CERTAIN AMOUNTS INCLUDED.—

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

14 ‘passive income’ includes, except as pro15 vided in subparagraph (E)(iii) or para16 graph (3)(I), any amount includible in 

17 gross income under section 1293 (relating to 

18 certain passive foreign investment compa19 nies).’’

20 (15)(A) Subparagraph (A) of section 904(g)(1) is 

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

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

23 as clause (ii). 
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1 (B) The paragraph heading of paragraph (2) of 

2 section 904(g) is amended by striking ‘‘FOREIGN PER3 SONAL HOLDING OR’’. 

4 (16) Section 951 is amended by striking sub5 sections (c) and (d) and by redesignating subsections 

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

7 (17) Paragraph (3) of section 989(b) is amended 

8 by striking ‘‘, 551(a),’’. 

9 (18) Paragraph (5) of section 1014(b) is amend10 ed by inserting ‘‘and before January 1, 2008,’’ after 

11 ‘‘August 26, 1937,’’. 

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

13 by striking paragraph (13). 

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

15 amended to read as follows: 

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

17 capital loss of a corporation shall not be carried back 

18 under paragraph (1)(A) to a taxable year—

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

20 company (as defined in section 851), or 

21 ‘‘(B) for which it is a real estate investment 

22 trust (as defined in section 856).’’

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

24 shall apply to taxable years beginning after December 

25 31, 2006. 
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1 (21) Section 1223 is amended by striking para2 graph (10) and by redesignating the following para3 graphs accordingly. 

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

5 by striking paragraph (5) and by redesignating para6 graphs (6) and (7) as paragraphs (5) and (6), respec7 tively. 

8 (23) Paragraph (2) of section 1260(c) is amend9 ed by striking subparagraphs (H) and (I) and by re10 designating subparagraph (J) as subparagraph (H). 

11 (24)(A) Subparagraph (F) of section 1291(b)(3) 

12 is amended by striking ‘‘551(d), 959(a),’’ and insert13 ing ‘‘959(a)’’. 

14 (B) Subsection (e) of section 1291 is amended by 

15 inserting ‘‘(as in effect on the day before the date of 

16 the enactment of the American Jobs Creation Act of 

17 2003)’’ after ‘‘section 1246’’. 

18 (25) Paragraph (2) of section 1294(a) is amend19 ed to read as follows: 

20 ‘‘(2) ELECTION NOT PERMITTED WHERE

21 AMOUNTS OTHERWISE INCLUDIBLE UNDER SECTION

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

23 paragraph (1) with respect to the undistributed PFIC 

24 earnings tax liability attributable to a qualified elect25 ing fund for the taxable year if any amount is in-
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1 cludible in the gross income of the taxpayer under sec2 tion 951 with respect to such fund for such taxable 

3 year.’’

4 (26) Section 6035 is hereby repealed. 

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

6 amended by striking clause (iv) and redesignating 

7 clauses (v) and (vi) as clauses (iv) and (v), respec8 tively. 

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

10 amended to read as follows: 

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

12 taxpayer omits from gross income an amount 

13 properly includible therein under section 951(a), 

14 the tax may be assessed, or a proceeding in court 

15 for the collection of such tax may be done with16 out assessing, at any time within 6 years after 

17 the return was filed.’’ 

18 (29) Subsection (a) of section 6679 is amended—

19 (A) by striking ‘‘6035, 6046, or 6046A’’ in 

20 paragraph (1) and inserting ‘‘6046 or 6046A’’, 

21 and 

22 (B) by striking paragraph (3). 

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

24 4948(c)(4) are each amended by striking ‘‘556(b)(2),’’ 

25 each place it appears.
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1 (31) The table of parts for subchapter G of chap2 ter 1 is amended by striking the item relating to part 

3 III. 

4 (32) The table of sections for part IV of sub5 chapter P of chapter 1 is amended by striking the 

6 items relating to sections 1246 and 1247. 

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

8 III of subchapter A of chapter 61 is amended by strik9 ing the item relating to section 6035. 

10 (34) Sections 163(e)(3)(B)(i) and 

11 267(a)(3)(B)(i) are each amended by—

12 (A) striking ‘‘a foreign personal holding 

13 company (as defined in section 552),’’, and 

14 (B) striking the comma after ‘‘(as defined 

15 in section 957)’’. 

16 (d) EFFECTIVE DATE.—Except as otherwise provided 

17 in this section, the amendments made by this section shall 

18 apply to taxable years of foreign corporations beginning 

19 after December 31, 2006, and to taxable years of United 

20 States shareholders with or within which such taxable years 

21 of foreign corporations end. 

22 SEC. 1075. CLARIFICATION OF TREATMENT OF PIPELINE 

23 TRANSPORTATION INCOME. 

24 (a) IN GENERAL.—Section 954(g)(1) (defining foreign 

25 base company oil related income) is amended by striking 
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1 ‘‘or’’ at the end of subparagraph (A), by striking the period 

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

3 by inserting after subparagraph (B) the following new sub4 paragraph: 

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

6 gas within such foreign country.’’

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

8 section shall apply to taxable years of foreign corporations 

9 beginning after December 31, 2004, and to taxable years 

10 of United States shareholders with or within which such 

11 taxable years of foreign corporations end. 

12 SEC. 1076. DETERMINATION OF FOREIGN PERSONAL HOLD13 ING COMPANY INCOME WITH RESPECT TO 

14 TRANSACTIONS IN COMMODITIES. 

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

16 954(c)(1)(C) (relating to commodity transactions) are 

17 amended to read as follows:

18 ‘‘(i) arise out of commodity hedging 

19 transactions (as defined in paragraph 

20 (6)(A)), 

21 ‘‘(ii) are active business gains or losses 

22 from the sale of commodities, but only if 

23 substantially all of the controlled foreign 

24 corporation’s commodities are property de-
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1 scribed in paragraph (1), (2), or (8) of sec2 tion 1221(a), or’’. 

3 (b) DEFINITION AND SPECIAL RULES.—Subsection (c) 

4 of section 954 is amended by adding after paragraph (5) 

5 the following new paragraph: 

6 ‘‘(6) DEFINITION AND SPECIAL RULES RELATING

7 TO COMMODITY TRANSACTIONS.—

8 ‘‘(A) COMMODITY HEDGING TRANS9 ACTIONS.—For purposes of paragraph (1)(C)(i), 

10 the term ‘commodity hedging transaction’ means 

11 any transaction with respect to a commodity if 

12 such transaction—

13 ‘‘(i) is a hedging transaction as de14 fined in section 1221(b)(2), determined—

15 ‘‘(I) without regard to subpara16 graph (A)(ii) thereof, 

17 ‘‘(II) by applying subparagraph 

18 (A)(i) thereof by substituting ‘ordinary 

19 property or property described in sec20 tion 1231(b)’ for ‘ordinary property’, 

21 and 

22 ‘‘(III) by substituting ‘controlled 

23 foreign corporation’ for ‘taxpayer’ each 

24 place it appears, and 
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1 ‘‘(ii) is clearly identified as such in ac2 cordance with section 1221(a)(7). 

3 ‘‘(B) REGULATIONS.—The Secretary shall 

4 prescribe such regulations as are appropriate to 

5 carry out the purposes of paragraph (1)(C) in 

6 the case of transactions involving related per7 sons.’’

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

9 section shall apply to transactions entered into after Decem10 ber 31, 2004. 

11 SEC. 1077. REPEAL OF CFC RULES ON FOREIGN BASE COM12 PANY SHIPPING INCOME. 

13 (a) ELIMINATION OF FOREIGN BASE COMPANY SHIP14 PING INCOME.—Section 954 (relating to foreign base com15 pany income) is amended—

16 (1) by striking paragraph (4) of subsection (a) 

17 (relating to foreign base company shipping income), 

18 and 

19 (2) by striking subsection (f) (relating to foreign 

20 base company shipping income). 

21 (b) SAFE HARBOR FOR CERTAIN LEASING ACTIVI22 TIES.—Subparagraph (A) of section 954(c)(2) is amended 

23 by adding at the end the following new sentence: ‘‘For pur24 poses of the preceding sentence, rents derived from leasing 

25 an aircraft or vessel in foreign commerce shall not fail to 
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1 be treated as derived in the active conduct of a trade or 

2 business if, as determined under regulations prescribed by 

3 the Secretary, the active leasing expenses are not less than 

4 10 percent of the profit on the lease.’’

5 (c) CONFORMING AMENDMENTS.—

6 (1) Section 952(c)(1)(B)(iii) is amended by 

7 striking subclause (I) and redesignating subclauses 

8 (II) through (VI) as subclauses (I) through (V), re9 spectively. 

10 (2) Subsection (b) of section 954 is amended—

11 (A) by striking ‘‘the foreign base company 

12 shipping income,’’ in paragraph (5), 

13 (B) by striking paragraphs (6) and (7), and 

14 (C) by redesignating paragraph (8) as 

15 paragraph (6). 

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

17 section shall apply to taxable years of foreign corporations 

18 beginning after December 31, 2004, and to taxable years 

19 of United States shareholders with or within which such 

20 taxable years of foreign corporations end. 

21 SEC. 1078. MODIFICATION OF SUBPART F EXEMPTION FOR 

22 ACTIVE FINANCING. 

23 (a) IN GENERAL.—Section 954(h)(3) is amended by 

24 adding at the end the following: 
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1 ‘‘(E) DIRECT CONDUCT OF ACTIVITIES.—

2 For purposes of subparagraph (A)(ii)(II), an ac3 tivity shall be treated as conducted directly by 

4 an eligible controlled foreign corporation or 

5 qualified business unit in its home country if the 

6 activity is performed by employees of a related 

7 person and—

8 ‘‘(i) the related person is an eligible 

9 controlled foreign corporation the home 

10 country of which is the same as the home 

11 country of the corporation or unit to which 

12 subparagraph (A)(ii)(II) is being applied, 

13 ‘‘(ii) the activity is performed in the 

14 home country of the related person, and 

15 ‘‘(iii) the related person is compensated 

16 on an arm’s-length basis for the perform17 ance of the activity by its employees and 

18 such compensation is treated as earned by 

19 such person in its home country for pur20 poses of the home country’s tax laws.’’. 

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

22 section shall apply to taxable years of foreign corporations 

23 beginning after December 31, 2004, and to taxable years 

24 of United States shareholders with or within which such 

25 taxable years of foreign corporations end.
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1 SEC. 1079. PARTIAL EXCLUSION FOR INCOME ATTRIB2 UTABLE TO FILMS USED OUTSIDE THE 

3 UNITED STATES. 

4 (a) IN GENERAL.—Part III of subchapter B of chapter 

5 1 (relating to items specifically excluded from gross income) 

6 is amended by inserting after section 139 the following new 

7 section: 

8 ‘‘SEC. 139A. INCOME ATTRIBUTABLE TO FILMS USED OUT9 SIDE THE UNITED STATES. 

10 ‘‘(a) EXCLUSION.—

11 ‘‘(1) IN GENERAL.—There shall be excluded from 

12 gross income an amount equal to the applicable per13 centage of qualified film income. 

14 ‘‘(2) APPLICABLE PERCENTAGE.—For purposes 

15 of paragraph (1), the applicable percentage shall be 

16 determined in accordance with the following table:

‘‘For taxable years ending The applicable 

in calendar year— percentage is—

2007 .................................................................................... 1

2008 .................................................................................... 2

2009 .................................................................................... 3

2010 .................................................................................... 5

2011 .................................................................................... 8

2012 .................................................................................... 9

2013 or thereafter .............................................................. 10.

17 ‘‘(b) QUALIFIED FILM INCOME.—For purposes of this 

18 section—

19 ‘‘(1) IN GENERAL.—The term ‘qualified film in20 come’ means gross income from a license of a quali21 fied film in the ordinary course of a trade or business 
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1 for the exploitation or direct use outside the United 

2 States less any associated film costs. 

3 ‘‘(2) EXCEPTIONS.—

4 ‘‘(A) CERTAIN USES.—Such term does not 

5 include exploitation of characters, soundtracks, 

6 designs, scripts, scores, or any other ancillary in7 tangibles associated with the qualified film. 

8 ‘‘(B) RELATED PERSON LICENSE.—

9 ‘‘(i) IN GENERAL.—Such term does not 

10 include any amount from the license of a 

11 qualified film to a related person. 

12 ‘‘(ii) EXCEPTION.—Clause (i) shall not 

13 apply if such film is held for license by such 

14 related person to an unrelated person for 

15 the direct use or exploitation by such unre16 lated person outside the United States. 

17 ‘‘(iii) RELATED PERSON.—For pur18 poses of this subparagraph, a person shall 

19 be related to another person if such persons

20 are treated as a single employer under sub21 section (a) or (b) of section 52 or subsection 

22 (m) or (o) of section 414, except that deter23 minations under subsections (a) and (b) of 

24 section 52 shall be made without regard to 

25 section 1563(b). 
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1 ‘‘(c) OTHER DEFINITIONS.—For purposes of this sec2 tion—

3 ‘‘(1) QUALIFIED FILM.—The term ‘qualified 

4 film’ means property described in section 168(f)(3) 

5 the original use of which commences after December 

6 31, 2006, if not less than 50 percent of the total com7 pensation relating to the production of such property 

8 is compensation for services performed in the United 

9 States by actors, production personnel, directors, and 

10 producers. Such term does not include property with 

11 respect to which records are required to be main12 tained under section 2257 of title 18, United States 

13 Code. 

14 ‘‘(2) ASSOCIATED FILM COSTS.—The term ‘asso15 ciated film costs’ means any expense properly appor16 tioned and allocated to income taken into account 

17 under subsection (b)(1), determined as provided under 

18 regulations prescribed by the Secretary. 

19 ‘‘(d) ELECTION.—The taxpayer may elect not to apply 

20 this section to a qualified film. Such election shall be made 

21 by the due date (including extensions of time) for filing the 

22 return for the taxable year in which such film is placed 

23 in service, and, once made for such film, such election shall 

24 be irrevocable. 

25 ‘‘(e) DENIAL OF FOREIGN TAX CREDIT.—
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1 ‘‘(1) IN GENERAL.—No credit shall be allowed 

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

3 treated as paid or accrued) with respect to the exclud4 able portion of any qualified film income. No deduc5 tion shall be allowed under this chapter for any tax 

6 for which credit is not allowable by reason of the pre7 ceding sentence. 

8 ‘‘(2) EXCLUDABLE PORTION.—For purposes of 

9 paragraph (1), the taxes paid or accrued (or treated 

10 as paid or accrued) with respect to the excludable por11 tion is the amount which bears the same ratio to the 

12 amount of taxes paid or accrued (or treated as paid 

13 or accrued) with respect to qualified film income as 

14 the amount excluded under subsection (a) for the tax15 able year bears to the qualified film income for such 

16 year.’’. 

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

18 part III of subchapter B of chapter 1 is amended by insert19 ing after the item relating to section 139 the following new 

20 item:

‘‘Sec. 139A. Income attributable to films used outside the United 

States.’’.

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

22 section shall apply to taxable years ending after December 

23 31, 2006. 
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1 Subtitle H—Reduction of Double 

2 Taxation of Earnings 

3 SEC. 1081. 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 domes21 tic members of a worldwide affiliated group from 

22 sources outside the United States shall be deter23 mined by allocating and apportioning the inter24 est expense of such domestic members to such in-
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1 come in an amount equal to the excess (if any) 

2 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 this 

15 subsection were applied to a group con16 sisting of all the foreign corporations in 

17 such worldwide affiliated group. 

18 ‘‘(C) WORLDWIDE AFFILIATED GROUP.—For 

19 purposes of this paragraph, the term ‘worldwide 

20 affiliated group’ means a group consisting of—

21 ‘‘(i) the includible members of an af22 filiated group (as defined in section 

23 1504(a), determined without regard to 

24 paragraphs (2) and (4) of section 1504(b)), 

25 and 
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1 ‘‘(ii) all controlled foreign corporations 

2 in which such members in the aggregate 

3 meet the ownership requirements of section 

4 1504(a)(2) either directly or indirectly 

5 through applying paragraph (2) of section 

6 958(a) or through applying rules similar to 

7 the rules of such paragraph to stock owned 

8 directly or indirectly by domestic partner9 ships, trusts, or estates. 

10 ‘‘(2) ALLOCATION AND APPORTIONMENT OF

11 OTHER EXPENSES.—Expenses other than interest 

12 which are not directly allocable or apportioned to any 

13 specific income producing activity shall be allocated 

14 and apportioned as if all members of the affiliated 

15 group were a single corporation. For purposes of the 

16 preceding sentence, the term ‘affiliated group’ has the

17 meaning given such term by section 1504 (determined 

18 without regard to paragraph (4) of section 1504(b)). 

19 ‘‘(3) TREATMENT OF TAX-EXEMPT ASSETS; BASIS

20 OF STOCK IN NONAFFILIATED 10-PERCENT OWNED

21 CORPORATIONS.—The rules of paragraphs (3) and (4) 

22 of subsection (e) shall apply for purposes of this sub23 section; except that paragraph (4) shall be applied on 

24 worldwide affiliated group basis. 
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1 ‘‘(4) TREATMENT OF CERTAIN FINANCIAL INSTI2 TUTIONS.—

3 ‘‘(A) IN GENERAL.—For purposes of para4 graph (1), any corporation described in subpara5 graph (B) shall be treated as an includible cor6 poration for purposes of section 1504 only for 

7 purposes of applying this subsection separately 

8 to corporations so described. 

9 ‘‘(B) DESCRIPTION.—A corporation is de10 scribed in this subparagraph if—

11 ‘‘(i) such corporation is a financial in12 stitution described in section 581 or 591, 

13 ‘‘(ii) the business of such financial in14 stitution is predominantly with persons 

15 other than related persons (within the 

16 meaning of subsection (d)(4)) or their cus17 tomers, and 

18 ‘‘(iii) such financial institution is re19 quired by State or Federal law to be oper20 ated separately from any other entity which 

21 is not such an institution. 

22 ‘‘(C) TREATMENT OF BANK HOLDING COM23 PANIES.—To the extent provided in regula24 tions—
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1 ‘‘(i) a bank holding company (within 

2 the meaning of section 2(a) of the Bank 

3 Holding Company Act of 1956 (12 U.S.C. 

4 1841(a))), 

5 ‘‘(ii) a financial holding company 

6 (within the meaning of section 2(p) of such 

7 Act), and 

8 ‘‘(iii) any subsidiary of a financial in9 stitution described in section 581 or 591, or 

10 any such bank or financial holding com11 pany, if such subsidiary is predominantly 

12 engaged (directly or indirectly) in the active 

13 conduct of a banking, financing, or similar 

14 business, 

15 shall be treated as a corporation described in 

16 subparagraph (B). 

17 ‘‘(5) ELECTION TO EXPAND FINANCIAL INSTITU18 TION GROUP OF WORLDWIDE GROUP.—

19 ‘‘(A) IN GENERAL.—If a worldwide affili20 ated group elects the application of this sub21 section, all financial corporations which—

22 ‘‘(i) are members of such worldwide af23 filiated group, but

24 ‘‘(ii) are not corporations described in 

25 paragraph (4)(B), 
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1 shall be treated as described in paragraph (4)(B) 

2 for purposes of applying paragraph (4)(A). This 

3 subsection (other than this paragraph) shall 

4 apply to any such group in the same manner as 

5 this subsection (other than this paragraph) ap6 plies to the pre-election worldwide affiliated 

7 group of which such group is a part. 

8 ‘‘(B) FINANCIAL CORPORATION.—For pur9 poses of this paragraph, the term ‘financial cor10 poration’ means any corporation if at least 80 

11 percent of its gross income is income described in 

12 section 904(d)(2)(D)(ii) and the regulations 

13 thereunder which is derived from transactions 

14 with persons who are not related (within the 

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

16 corporation. For purposes of the preceding sen17 tence, there shall be disregarded any item of in18 come or gain from a transaction or series of 

19 transactions a principal purpose of which is the 

20 qualification of any corporation as a financial 

21 corporation. 

22 ‘‘(C) ANTIABUSE RULES.—In the case of a 

23 corporation which is a member of an electing fi24 nancial institution group, to the extent that such 

25 corporation—
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1 ‘‘(i) distributes dividends or makes 

2 other distributions with respect to its stock 

3 after the date of the enactment of this para4 graph to any member of the pre-election 

5 worldwide affiliated group (other than to a 

6 member of the electing financial institution 

7 group) in excess of the greater of—

8 ‘‘(I) its average annual dividend 

9 (expressed as a percentage of current 

10 earnings and profits) during the 5-tax11 able-year period ending with the tax12 able year preceding the taxable year, or 

13 ‘‘(II) 25 percent of its average an14 nual earnings and profits for such 5-

15 taxable-year period, or 

16 ‘‘(ii) deals with any person in any 

17 manner not clearly reflecting the income of 

18 the corporation (as determined under prin19 ciples similar to the principles of section 

20 482), 

21 an amount of indebtedness of the electing finan22 cial institution group equal to the excess dis23 tribution or the understatement or overstatement 

24 of income, as the case may be, shall be re25 characterized (for the taxable year and subse-
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1 quent taxable years) for purposes of this para2 graph as indebtedness of the worldwide affiliated 

3 group (excluding the electing financial institu4 tion group). If a corporation has not been in ex5 istence for 5 taxable years, this subparagraph 

6 shall be applied with respect to the period it was 

7 in existence. 

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

9 paragraph with respect to any financial institu10 tion group may be made only by the common 

11 parent of the pre-election worldwide affiliated 

12 group and may be made only for the first taxable 

13 year beginning after December 31, 2008, in 

14 which such affiliated group includes 1 or more 

15 financial corporations. Such an election, once 

16 made, shall apply to all financial corporations 

17 which are members of the electing financial in18 stitution group for such taxable year and all

19 subsequent years unless revoked with the consent 

20 of the Secretary. 

21 ‘‘(E) DEFINITIONS RELATING TO GROUPS.—

22 For purposes of this paragraph—

23 ‘‘(i) PRE-ELECTION WORLDWIDE AF24 FILIATED GROUP.—The term ‘pre-election 

25 worldwide affiliated group’ means, with re-
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1 spect to a corporation, the worldwide affili2 ated group of which such corporation would 

3 (but for an election under this paragraph) 

4 be a member for purposes of applying para5 graph (1). 

6 ‘‘(ii) ELECTING FINANCIAL INSTITU7 TION GROUP.—The term ‘electing financial 

8 institution group’ means the group of cor9 porations to which this subsection applies 

10 separately by reason of the application of 

11 paragraph (4)(A) and which includes finan12 cial corporations by reason of an election 

13 under subparagraph (A). 

14 ‘‘(F) REGULATIONS.—The Secretary shall 

15 prescribe such regulations as may be appropriate 

16 to carry out this subsection, including regula17 tions—

18 ‘‘(i) providing for the direct allocation 

19 of interest expense in other circumstances 

20 where such allocation would be appropriate 

21 to carry out the purposes of this subsection, 

22 ‘‘(ii) preventing assets or interest ex23 pense from being taken into account more 

24 than once, and 
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1 ‘‘(iii) dealing with changes in members 

2 of any group (through acquisitions or other3 wise) treated under this paragraph as an 

4 affiliated group for purposes of this sub5 section. 

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 the 

9 domestic affiliated group referred to in paragraph 

10 (1)(C) and may be made only for the first taxable 

11 year beginning after December 31, 2008, in which a 

12 worldwide affiliated group exists which includes such 

13 affiliated group and at least one foreign corporation. 

14 Such an election, once made, shall apply to such com15 mon parent and all other corporations which are 

16 members of such worldwide affiliated group for such 

17 taxable year and all subsequent years unless revoked 

18 with the consent of the Secretary.’’. 

19 (b) EXPANSION OF REGULATORY AUTHORITY.—Para20 graph (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 where 

23 such allocation would be appropriate to carry out the 

24 purposes of this subsection’’, and 
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1 (2) by striking ‘‘and’’ at the end of subpara2 graph (E), by redesignating subparagraph (F) as sub3 paragraph (G), and by inserting after subparagraph 

4 (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 this 

9 section shall apply to taxable years beginning after Decem10 ber 31, 2008. 

11 SEC. 1082. 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 insert16 ing after subsection (f) the following new subsection:

17 ‘‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC

18 LOSS.—

19 ‘‘(1) GENERAL RULE.—For purposes of this sub20 part and section 936, in the case of any taxpayer who 

21 sustains an overall domestic loss for any taxable year 

22 beginning after December 31, 2005, that portion of 

23 the taxpayer’s taxable income from sources within the 

24 United States for each succeeding taxable year which 

25 is equal to the lesser of—
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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 for 

6 such succeeding taxable year, 

7 shall be treated as income from sources without the 

8 United States (and not as income from sources within 

9 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 extent 

14 such loss offsets taxable income from sources 

15 without the United States for the taxable year or 

16 for any preceding taxable year by reason of a 

17 carryback. For purposes of the preceding sen18 tence, the term ‘domestic loss’ means the amount 

19 by which the gross income for the taxable year 

20 from sources within the United States is exceeded 

21 by the sum of the deductions properly appor22 tioned or allocated thereto (determined without 

23 regard to any carryback from a subsequent tax24 able year). 
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1 ‘‘(B) TAXPAYER MUST HAVE ELECTED FOR2 EIGN TAX CREDIT FOR YEAR OF LOSS.—The term 

3 ‘overall domestic loss’ shall not include any loss 

4 for any taxable year unless the taxpayer chose 

5 the benefits of this subpart for such taxable year. 

6 ‘‘(3) CHARACTERIZATION OF SUBSEQUENT IN7 COME.—

8 ‘‘(A) IN GENERAL.—Any income from 

9 sources within the United States that is treated 

10 as income from sources without the United 

11 States under paragraph (1) shall be allocated 

12 among and increase the income categories in 

13 proportion to the loss from sources within the 

14 United States previously allocated to those in15 come categories.

16 ‘‘(B) INCOME CATEGORY.—For purposes of 

17 this paragraph, the term ‘income category’ has 

18 the meaning given such term by subsection 

19 (f)(5)(E)(i). 

20 ‘‘(4) COORDINATION WITH SUBSECTION (f).—The 

21 Secretary shall prescribe such regulations as may be 

22 necessary to coordinate the provisions of this sub23 section with the provisions of subsection (f).’’

24 (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 904(h)(6)’’. 

3 (2) Subparagraph (A) of section 936(a)(2) is 

4 amended by striking ‘‘section 904(f)’’ and inserting 

5 ‘‘subsections (f) and (g) of section 904’’. 

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

7 section shall apply to losses sustained for taxable years be8 ginning after December 31, 2005. 

9 SEC. 1083. REDUCTION TO 2 FOREIGN TAX CREDIT BAS10 KETS. 

11 (a) IN GENERAL.—Paragraph (1) of section 904(d) 

12 (relating to separate application of section with respect to 

13 certain categories of income) is amended to read as follows: 

14 ‘‘(1) IN GENERAL.—The provisions of subsections 

15 (a), (b), and (c) and sections 902, 907, and 960 shall 

16 be applied separately with respect to—

17 ‘‘(A) passive category income, and 

18 ‘‘(B) general category income.’’

19 (b) CATEGORIES.—Paragraph (2) of section 904(d) is 

20 amended by striking subparagraph (B), by redesignating

21 subparagraph (A) as subparagraph (B), and by inserting 

22 before subparagraph (B) (as so redesignated) the following 

23 new subparagraph: 

24 ‘‘(A) CATEGORIES.—
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1 ‘‘(i) PASSIVE CATEGORY INCOME.—The 

2 term ‘passive category income’ means pas3 sive income and specified passive category 

4 income. 

5 ‘‘(ii) GENERAL CATEGORY INCOME.—

6 The term ‘general category income’ means 

7 income other than passive category income.’’

8 (c) SPECIFIED PASSIVE CATEGORY INCOME.—Sub9 paragraph (B) of section 904(d)(2), as so redesignated, is 

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

11 ‘‘(v) SPECIFIED PASSIVE CATEGORY IN12 COME.—The term ‘specified passive category 

13 income’ means—

14 ‘‘(I) dividends from a DISC or 

15 former DISC (as defined in section 

16 992(a)) to the extent such dividends 

17 are treated as income from sources 

18 without the United States,

19 ‘‘(II) taxable income attributable 

20 to foreign trade income (within the 

21 meaning of section 923(b)), and 

22 ‘‘(III) distributions from a FSC 

23 (or a former FSC) out of earnings and 

24 profits attributable to foreign trade in25 come (within the meaning of section 
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1 923(b)) or interest or carrying charges 

2 (as defined in section 927(d)(1)) de3 rived from a transaction which results 

4 in foreign trade income (as defined in 

5 section 923(b)).’’

6 (d) TREATMENT OF FINANCIAL SERVICES.—Para7 graph (2) of section 904(d) is amended by striking subpara8 graph (D), by redesignating subparagraph (C) as subpara9 graph (D), and by inserting before subparagraph (D) (as 

10 so redesignated) the following new subparagraph: 

11 ‘‘(C) TREATMENT OF FINANCIAL SERVICES

12 INCOME AND COMPANIES.—

13 ‘‘(i) IN GENERAL.—Financial services 

14 income shall be treated as general category 

15 income in the case of—

16 ‘‘(I) a member of a financial serv17 ices group, and 

18 ‘‘(II) any other person if such per19 son is predominantly engaged in the 

20 active conduct of a banking, insurance, 

21 financing, or similar business. 

22 ‘‘(ii) FINANCIAL SERVICES GROUP.—

23 The term ‘financial services group’ means 

24 any affiliated group (as defined in section 

25 1504(a) without regard to paragraphs (2) 
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1 and (3) of section 1504(b)) which is pre2 dominantly engaged in the active conduct of 

3 a banking, insurance, financing, or similar 

4 business. In determining whether such a 

5 group is so engaged, there shall be taken 

6 into account only the income of members of 

7 the group that are—

8 ‘‘(I) United States corporations, 

9 or 

10 ‘‘(II) controlled foreign corpora11 tions in which such United States cor12 porations own, directly or indirectly, 

13 at least 80 percent of the total voting 

14 power and value of the stock. 

15 ‘‘(iii) PASS-THRU ENTITIES.—The Sec16 retary shall by regulation specify for pur17 poses of this subparagraph the treatment of 

18 financial services income received or ac19 crued by partnerships and by other pass20 thru entities which are not members of a fi21 nancial services group.’’

22 (e) CONFORMING AMENDMENTS.—

23 (1) Clause (iii) of section 904(d)(2)(B) (relating 

24 to exceptions from passive income), as so redesig25 nated, is amended by striking subclause (I) and by 
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1 redesignating subclauses (II) and (III) as subclauses 

2 (I) and (II), respectively. 

3 (2) Clause (i) of section 904(d)(2)(D) (defining 

4 financial services income), as so redesignated, is 

5 amended by adding ‘‘or’’ at the end of subclause (I) 

6 and by striking subclauses (II) and (III) and insert7 ing the following new subclause: 

8 ‘‘(II) passive income (determined 

9 without regard to subparagraph 

10 (B)(iii)(II)).’’

11 (3) Section 904(d)(2)(D) (defining financial 

12 services income), as so redesignated, is amended by 

13 striking clause (iii). 

14 (4) Paragraph (3) of section 904(d) is amended 

15 to read as follows: 

16 ‘‘(3) LOOK-THRU IN CASE OF CONTROLLED FOR17 EIGN CORPORATIONS.—

18 ‘‘(A) IN GENERAL.—Except as otherwise 

19 provided in this paragraph, dividends, interest, 

20 rents, and royalties received or accrued by the 

21 taxpayer from a controlled foreign corporation 

22 in which the taxpayer is a United States share23 holder shall not be treated as passive category in24 come. 
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1 ‘‘(B) SUBPART F INCLUSIONS.—Any 

2 amount included in gross income under section 

3 951(a)(1)(A) shall be treated as passive category 

4 income to the extent the amount so included is 

5 attributable to passive category income. 

6 ‘‘(C) INTEREST, RENTS, AND ROYALTIES.—

7 Any interest, rent, or royalty which is received 

8 or accrued from a controlled foreign corporation 

9 in which the taxpayer is a United States share10 holder shall be treated as passive category in11 come to the extent it is properly allocable (under 

12 regulations prescribed by the Secretary) to pas13 sive category income of the controlled foreign cor14 poration. 

15 ‘‘(D) DIVIDENDS.—Any dividend paid out 

16 of the earnings and profits of any controlled for17 eign corporation in which the taxpayer is a 

18 United States shareholder shall be treated as pas19 sive category income in proportion to the ratio 

20 of—

21 ‘‘(i) the portion of the earnings and 

22 profits attributable to passive category in23 come, to 

24 ‘‘(ii) the total amount of earnings and 

25 profits. 
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1 ‘‘(E) LOOK-THRU APPLIES ONLY WHERE

2 SUBPART F APPLIES.—If a controlled foreign cor3 poration meets the requirements of section 

4 954(b)(3)(A) (relating to de minimis rule) for 

5 any taxable year, for purposes of this paragraph, 

6 none of its foreign base company income (as de7 fined in section 954(a) without regard to section 

8 954(b)(5)) and none of its gross insurance in9 come (as defined in section 954(b)(3)(C)) for 

10 such taxable year shall be treated as passive cat11 egory income, except that this sentence shall not 

12 apply to any income which (without regard to 

13 this sentence) would be treated as financial serv14 ices income. Solely for purposes of applying sub15 paragraph (D), passive income of a controlled 

16 foreign corporation shall not be treated as pas17 sive category income if the requirements of sec18 tion 954(b)(4) are met with respect to such in19 come.

20 ‘‘(F) COORDINATION WITH HIGH-TAXED IN21 COME PROVISIONS.—

22 ‘‘(i) In determining whether any in23 come of a controlled foreign corporation is 

24 passive category income, subclause (II) of 

25 paragraph (2)(B)(iii) shall not apply. 
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1 ‘‘(ii) Any income of the taxpayer 

2 which is treated as passive category income 

3 under this paragraph shall be so treated 

4 notwithstanding any provision of para5 graph (2); except that the determination of 

6 whether any amount is high-taxed income 

7 shall be made after the application of this 

8 paragraph. 

9 ‘‘(G) DIVIDEND.—For purposes of this 

10 paragraph, the term ‘dividend’ includes any 

11 amount included in gross income in section 

12 951(a)(1)(B). Any amount included in gross in13 come under section 78 to the extent attributable 

14 to amounts included in gross income in section 

15 951(a)(1)(A) shall not be treated as a dividend 

16 but shall be treated as included in gross income 

17 under section 951(a)(1)(A). 

18 ‘‘(H) LOOK-THRU APPLIES TO PASSIVE FOR19 EIGN INVESTMENT COMPANY INCLUSION.—If—

20 ‘‘(i) a passive foreign investment com21 pany is a controlled foreign corporation, 

22 and 

23 ‘‘(ii) the taxpayer is a United States 

24 shareholder in such controlled foreign cor25 poration, 
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1 any amount included in gross income under sec2 tion 1293 shall be treated as income in a sepa3 rate category to the extent such amount is attrib4 utable to income in such category.’’

5 (5) TREATMENT OF INCOME TAX BASE DIF6 FERENCES.—Paragraph (2) of section 904(d) is 

7 amended by redesignating subparagraphs (H) and (I) 

8 as subparagraphs (I) and (J), respectively, and by in9 serting after subparagraph (G) the following new sub10 paragraph: 

11 ‘‘(H) TREATMENT OF INCOME TAX BASE

12 DIFFERENCES.—Tax imposed under the law of a 

13 foreign country or possession of the United 

14 States on an amount which does not constitute 

15 income under United States tax principles shall 

16 be treated as imposed on income described in 

17 paragraph (1)(B).’’

18 (6) Paragraph (2) of section 904(d) is amended 

19 by adding at the end the following new subparagraph: 

20 ‘‘(K) TRANSITIONAL RULES FOR 2005

21 CHANGES.—For purposes of paragraph (1)—

22 ‘‘(i) taxes carried from any taxable 

23 year beginning before January 1, 2005, to 

24 any taxable year beginning on or after such 

25 date, with respect to any item of income, 
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1 shall be treated as described in the subpara2 graph of paragraph (1) in which such in3 come would be described were such taxes 

4 paid or accrued in a taxable year beginning 

5 on or after such date, and 

6 ‘‘(ii) the Secretary may by regulations 

7 provide for the allocation of any carryback 

8 of taxes with respect to income to such a 

9 taxable year for purposes of allocating such 

10 income among the separate categories in ef11 fect for such taxable year.’’. 

12 (7) Section 904(j)(3)(A)(i) is amended by strik13 ing ‘‘subsection (d)(2)(A)’’ and inserting ‘‘subsection 

14 (d)(2)(B)’’. 

15 (f) EFFECTIVE DATE.—The amendments made by this 

16 section shall apply to taxable years beginning after Decem17 ber 31, 2004.

18 SEC. 1084. LOOK-THRU RULES TO APPLY TO DIVIDENDS 

19 FROM NONCONTROLLED SECTION 902 COR20 PORATIONS. 

21 (a) IN GENERAL.—Section 904(d)(4) (relating to look22 thru rules apply to dividends from noncontrolled section 

23 902 corporations) is amended to read as follows: 

24 ‘‘(4) LOOK-THRU APPLIES TO DIVIDENDS FROM

25 NONCONTROLLED SECTION 902 CORPORATIONS.—
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1 ‘‘(A) IN GENERAL.—For purposes of this 

2 subsection, any dividend from a noncontrolled 

3 section 902 corporation with respect to the tax4 payer shall be treated as income described in a 

5 subparagraph of paragraph (1) in proportion to 

6 the ratio of—

7 ‘‘(i) the portion of earnings and profits 

8 attributable to income described in such 

9 subparagraph, to 

10 ‘‘(ii) the total amount of earnings and 

11 profits. 

12 ‘‘(B) SPECIAL RULES.—For purposes of this 

13 paragraph—

14 ‘‘(i) EARNINGS AND PROFITS.—

15 ‘‘(I) IN GENERAL.—The rules of 

16 section 316 shall apply. 

17 ‘‘(II) REGULATIONS.—The Sec18 retary may prescribe regulations re19 garding the treatment of distributions 

20 out of earnings and profits for periods 

21 before the taxpayer’s acquisition of the 

22 stock to which the distributions relate. 

23 ‘‘(ii) INADEQUATE SUBSTANTIATION.—

24 If the Secretary determines that the proper 

25 subparagraph of paragraph (1) in which a 
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1 dividend is described has not been substan2 tiated, such dividend shall be treated as in3 come described in paragraph (1)(A). 

4 ‘‘(iii) LOOK-THRU WITH RESPECT TO

5 CARRYFORWARDS OF CREDIT.—Rules simi6 lar to subparagraph (A) also shall apply to 

7 any carryforward under subsection (c) from 

8 a taxable year beginning before January 1, 

9 2003, of tax allocable to a dividend from a 

10 noncontrolled section 902 corporation with 

11 respect to the taxpayer. The Secretary may 

12 by regulations provide for the allocation of 

13 any carryback of tax allocable to a dividend 

14 from a noncontrolled section 902 corpora15 tion to such a taxable year for purposes of 

16 allocating such dividend among the separate 

17 categories in effect for such taxable year.

18 ‘‘(iv) COORDINATION WITH HIGH19 TAXED INCOME PROVISIONS.—Rules similar 

20 to the rules of paragraph (3)(F) shall apply 

21 for purposes of this paragraph.’’. 

22 (b) CONFORMING AMENDMENTS.—

23 (1) Section 904(d)(2)(E) is amended—

24 (A) by inserting ‘‘or (4)’’ after ‘‘paragraph 

25 (3)’’ in clause (i), and 
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1 (B) by striking clauses (ii) and (iv) and by 

2 redesignating clause (iii) as clause (ii). 

3 (2) Clause (i) of section 864(d)(5)(A) is amended 

4 to read as follows: 

5 ‘‘(i) Subclause (I) of section 

6 904(d)(2)(B)(iii).’’

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

8 section shall apply to taxable years beginning after Decem9 ber 31, 2002. 

10 SEC. 1085. ATTRIBUTION OF STOCK OWNERSHIP THROUGH 

11 PARTNERSHIPS TO APPLY IN DETERMINING 

12 SECTION 902 AND 960 CREDITS. 

13 (a) IN GENERAL.—Subsection (c) of section 902 is 

14 amended by redesignating paragraph (7) as paragraph (8) 

15 and by inserting after paragraph (6) the following new 

16 paragraph: 

17 ‘‘(7) CONSTRUCTIVE OWNERSHIP THROUGH

18 PARTNERSHIPS.—Stock owned, directly or indirectly, 

19 by or for a partnership shall be considered as being 

20 owned proportionately by its partners. Stock consid21 ered to be owned by a person by reason of the pre22 ceding sentence shall, for purposes of applying such 

23 sentence, be treated as actually owned by such person. 

24 The Secretary may prescribe such regulations as may 

25 be necessary to carry out the purposes of this para-
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1 graph, including rules to account for special partner2 ship allocations of dividends, credits, and other inci3 dents of ownership of stock in determining propor4 tionate ownership.’’

5 (b) CLARIFICATION OF COMPARABLE ATTRIBUTION

6 UNDER SECTION 901(b)(5).—Paragraph (5) of section 

7 901(b) is amended by striking ‘‘any individual’’ and insert8 ing ‘‘any person’’. 

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

10 section shall apply to taxes of foreign corporations for tax11 able years of such corporations beginning after the date of 

12 the enactment of this Act. 

13 SEC. 1086. CLARIFICATION OF TREATMENT OF CERTAIN 

14 TRANSFERS OF INTANGIBLE PROPERTY. 

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

16 367(d)(2) is amended by adding at the end the following 

17 new sentence: ‘‘For purposes of applying section 904(d), 

18 any such amount shall be treated in the same manner as 

19 if such amount were a royalty.’’

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

21 section shall apply to amounts treated as received pursuant 

22 to section 367(d)(2) of the Internal Revenue Code of 1986 

23 on or after August 5, 1997. 
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1 SEC. 1087. UNITED STATES PROPERTY NOT TO INCLUDE 

2 CERTAIN ASSETS ACQUIRED BY DEALERS IN 

3 ORDINARY COURSE OF TRADE OR BUSINESS. 

4 (a) IN GENERAL.—Section 956(c)(2) (relating to ex5 ceptions from property treated as United States property) 

6 is amended by striking ‘‘and’’ at the end of subparagraph 

7 (J), by striking the period at the end of subparagraph (K) 

8 and inserting ‘‘; and’’, and by adding at the end the fol9 lowing new subparagraph: 

10 ‘‘(L) securities acquired and held by a con11 trolled foreign corporation in the ordinary course 

12 of its business as a dealer in securities if—

13 ‘‘(i) the dealer accounts for the securi14 ties as securities held primarily for sale to 

15 customers in the ordinary course of busi16 ness, and 

17 ‘‘(ii) the dealer disposes of the securi18 ties (or such securities mature while held by 

19 the dealer) within a period consistent with 

20 the holding of securities for sale to cus21 tomers in the ordinary course of business.’’

22 (b) CONFORMING AMENDMENT.—Section 956(c)(2) is 

23 amended by striking ‘‘and (K)’’ in the last sentence and 

24 inserting ‘‘, (K), and (L)’’. 

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

26 section shall apply to taxable years of foreign corporations 
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1 beginning after December 31, 2004, and to taxable years 

2 of United States shareholders with or within which such 

3 taxable years of foreign corporations end. 

4 SEC. 1088. ELECTION NOT TO USE AVERAGE EXCHANGE 

5 RATE FOR FOREIGN TAX PAID OTHER THAN 

6 IN FUNCTIONAL CURRENCY. 

7 (a) IN GENERAL.—Paragraph (1) of section 986(a) 

8 (relating to determination of foreign taxes and foreign cor9 poration’s earnings and profits) is amended by redesig10 nating subparagraph (D) as subparagraph (E) and by in11 serting after subparagraph (C) the following new subpara12 graph: 

13 ‘‘(D) ELECTIVE EXCEPTION FOR TAXES

14 PAID OTHER THAN IN FUNCTIONAL CURRENCY.—

15 ‘‘(i) IN GENERAL.—At the election of 

16 the taxpayer, subparagraph (A) shall not 

17 apply to any foreign income taxes the li18 ability for which is denominated in any 

19 currency other than in the taxpayer’s func20 tional currency. 

21 ‘‘(ii) APPLICATION TO QUALIFIED

22 BUSINESS UNITS.—An election under this 

23 subparagraph may apply to foreign income 

24 taxes attributable to a qualified business 
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1 unit in accordance with regulations pre2 scribed by the Secretary. 

3 ‘‘(iii) ELECTION.—Any such election 

4 shall apply to the taxable year for which 

5 made and all subsequent taxable years un6 less revoked with the consent of the Sec7 retary.’’

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

9 section shall apply to taxable years beginning after Decem10 ber 31, 2004. 

11 SEC. 1089. REPEAL OF WITHHOLDING TAX ON DIVIDENDS 

12 FROM CERTAIN FOREIGN CORPORATIONS. 

13 (a) IN GENERAL.—Paragraph (2) of section 871(i) (re14 lating to tax not to apply to certain interest and dividends) 

15 is amended by adding at the end the following new subpara16 graph: 

17 ‘‘(D) Dividends paid by a foreign corpora18 tion which are treated under section

19 861(a)(2)(B) as income from sources within the 

20 United States.’’. 

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

22 section shall apply to payments made after December 31, 

23 2004. 
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1 SEC. 1090. PROVIDE EQUAL TREATMENT FOR INTEREST 

2 PAID BY FOREIGN PARTNERSHIPS AND FOR3 EIGN CORPORATIONS. 

4 (a) IN GENERAL.—Paragraph (1) of section 861(a) is 

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

6 by striking the period at the end of subparagraph (B) and 

7 inserting ‘‘, and’’, and by adding at the end the following 

8 new subparagraph: 

9 ‘‘(C) in the case of a foreign partnership in 

10 which United States persons do not hold directly 

11 or indirectly 20 percent or more of either the 

12 capital or profits interests, any interest not paid 

13 by a trade or business engaged in by the partner14 ship in the United States and not allocable to 

15 income which is effectively connected (or treated 

16 as effectively connected) with the conduct of a 

17 trade or business in the United States.’’

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

19 section shall apply to taxable years beginning after Decem20 ber 31, 2003.

21 SEC. 1091. TREATMENT OF CERTAIN DIVIDENDS OF REGU22 LATED INVESTMENT COMPANIES. 

23 (a) TREATMENT OF CERTAIN DIVIDENDS.—

24 (1) NONRESIDENT ALIEN INDIVIDUALS.—Section 

25 871 (relating to tax on nonresident alien individuals) 

26 is amended by redesignating subsection (k) as sub-
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1 section (l) and by inserting after subsection (j) the fol2 lowing new subsection:

3 ‘‘(k) EXEMPTION FOR CERTAIN DIVIDENDS OF REGU4 LATED INVESTMENT COMPANIES.—

5 ‘‘(1) INTEREST-RELATED DIVIDENDS.—

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

7 subparagraph (B), no tax shall be imposed under 

8 paragraph (1)(A) of subsection (a) on any inter9 est-related dividend received from a regulated in10 vestment company. 

11 ‘‘(B) EXCEPTIONS.—Subparagraph (A) 

12 shall not apply—

13 ‘‘(i) to any interest-related dividend re14 ceived from a regulated investment com15 pany by a person to the extent such divi16 dend is attributable to interest (other than 

17 interest described in subparagraph (E) (i) 

18 or (iii)) received by such company on in19 debtedness issued by such person or by any 

20 corporation or partnership with respect to 

21 which such person is a 10-percent share22 holder, 

23 ‘‘(ii) to any interest-related dividend 

24 with respect to stock of a regulated invest25 ment company unless the person who would 
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1 otherwise be required to deduct and with2 hold tax from such dividend under chapter 

3 3 receives a statement (which meets require4 ments similar to the requirements of sub5 section (h)(5)) that the beneficial owner of 

6 such stock is not a United States person, 

7 and 

8 ‘‘(iii) to any interest-related dividend 

9 paid to any person within a foreign coun10 try (or any interest-related dividend pay11 ment addressed to, or for the account of, 

12 persons within such foreign country) during 

13 any period described in subsection (h)(6) 

14 with respect to such country. 

15 Clause (iii) shall not apply to any dividend with 

16 respect to any stock which was acquired on or 

17 before the date of the publication of the Sec18 retary’s determination under subsection (h)(6). 

19 ‘‘(C) INTEREST-RELATED DIVIDEND.—For 

20 purposes of this paragraph, an interest-related 

21 dividend is any dividend (or part thereof) which 

22 is designated by the regulated investment com23 pany as an interest-related dividend in a writ24 ten notice mailed to its shareholders not later 

25 than 60 days after the close of its taxable year. 
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1 If the aggregate amount so designated with re2 spect to a taxable year of the company (includ3 ing amounts so designated with respect to divi4 dends paid after the close of the taxable year de5 scribed in section 855) is greater than the quali6 fied net interest income of the company for such 

7 taxable year, the portion of each distribution 

8 which shall be an interest-related dividend shall 

9 be only that portion of the amounts so designated 

10 which such qualified net interest income bears to 

11 the aggregate amount so designated. 

12 ‘‘(D) QUALIFIED NET INTEREST INCOME.—

13 For purposes of subparagraph (C), the term 

14 ‘qualified net interest income’ means the quali15 fied interest income of the regulated investment 

16 company reduced by the deductions properly al17 locable to such income. 

18 ‘‘(E) QUALIFIED INTEREST INCOME.—For 

19 purposes of subparagraph (D), the term ‘quali20 fied interest income’ means the sum of the fol21 lowing amounts derived by the regulated invest22 ment company from sources within the United 

23 States: 

24 ‘‘(i) Any amount includible in gross 

25 income as original issue discount (within 
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1 the meaning of section 1273) on an obliga2 tion payable 183 days or less from the date 

3 of original issue (without regard to the pe4 riod held by the company). 

5 ‘‘(ii) Any interest includible in gross 

6 income (including amounts recognized as 

7 ordinary income in respect of original issue 

8 discount or market discount or acquisition 

9 discount under part V of subchapter P and 

10 such other amounts as regulations may pro11 vide) on an obligation which is in registered 

12 form; except that this clause shall not apply 

13 to—

14 ‘‘(I) any interest on an obligation 

15 issued by a corporation or partnership 

16 if the regulated investment company is 

17 a 10-percent shareholder in such cor18 poration or partnership, and 

19 ‘‘(II) any interest which is treated 

20 as not being portfolio interest under 

21 the rules of subsection (h)(4). 

22 ‘‘(iii) Any interest referred to in sub23 section (i)(2)(A) (without regard to the 

24 trade or business of the regulated investment 

25 company).
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1 ‘‘(iv) Any interest-related dividend in2 cludable in gross income with respect to 

3 stock of another regulated investment com4 pany. 

5 ‘‘(F) 10-PERCENT SHAREHOLDER.—For 

6 purposes of this paragraph, the term ‘10-percent 

7 shareholder’ has the meaning given such term by 

8 subsection (h)(3)(B).

9 ‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—

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

11 subparagraph (B), no tax shall be imposed under 

12 paragraph (1)(A) of subsection (a) on any short13 term capital gain dividend received from a regu14 lated investment company. 

15 ‘‘(B) EXCEPTION FOR ALIENS TAXABLE

16 UNDER SUBSECTION (a)(2).—Subparagraph (A) 

17 shall not apply in the case of any nonresident

18 alien individual subject to tax under subsection 

19 (a)(2).

20 ‘‘(C) SHORT-TERM CAPITAL GAIN DIVI21 DEND.—For purposes of this paragraph, a short22 term capital gain dividend is any dividend (or 

23 part thereof) which is designated by the regu24 lated investment company as a short-term cap25 ital gain dividend in a written notice mailed to 
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1 its shareholders not later than 60 days after the 

2 close of its taxable year. If the aggregate amount 

3 so designated with respect to a taxable year of 

4 the company (including amounts so designated 

5 with respect to dividends paid after the close of 

6 the taxable year described in section 855) is 

7 greater than the qualified short-term gain of the 

8 company for such taxable year, the portion of 

9 each distribution which shall be a short-term 

10 capital gain dividend shall be only that portion 

11 of the amounts so designated which such quali12 fied short-term gain bears to the aggregate 

13 amount so designated. 

14 ‘‘(D) QUALIFIED SHORT-TERM GAIN.—For 

15 purposes of subparagraph (C), the term ‘quali16 fied short-term gain’ means the excess of the net 

17 short-term capital gain of the regulated invest18 ment company for the taxable year over the net 

19 long-term capital loss (if any) of such company 

20 for such taxable year. For purposes of this sub21 paragraph—

22 ‘‘(i) the net short-term capital gain of 

23 the regulated investment company shall be 

24 computed by treating any short-term cap25 ital gain dividend includible in gross in-
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1 come with respect to stock of another regu2 lated investment company as a short-term 

3 capital gain, and 

4 ‘‘(ii) the excess of the net short-term 

5 capital gain for a taxable year over the net 

6 long-term capital loss for a taxable year (to 

7 which an election under section 4982(e)(4) 

8 does not apply) shall be determined without 

9 regard to any net capital loss or net short10 term capital loss attributable to trans11 actions after October 31 of such year, and 

12 any such net capital loss or net short-term 

13 capital loss shall be treated as arising on 

14 the 1st day of the next taxable year. 

15 To the extent provided in regulations, clause (ii) 

16 shall apply also for purposes of computing the 

17 taxable income of the regulated investment com18 pany.’’

19 (2) FOREIGN CORPORATIONS.—Section 881 (re20 lating to tax on income of foreign corporations not 

21 connected with United States business) is amended by 

22 redesignating subsection (e) as subsection (f) and by 

23 inserting after subsection (d) the following new sub24 section: 
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1 ‘‘(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS OF

2 REGULATED INVESTMENT COMPANIES.—

3 ‘‘(1) INTEREST-RELATED DIVIDENDS.—

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

5 subparagraph (B), no tax shall be imposed under 

6 paragraph (1) of subsection (a) on any interest7 related dividend (as defined in section 871(k)(1)) 

8 received from a regulated investment company. 

9 ‘‘(B) EXCEPTION.—Subparagraph (A) shall 

10 not apply—

11 ‘‘(i) to any dividend referred to in sec12 tion 871(k)(1)(B), and 

13 ‘‘(ii) to any interest-related dividend 

14 received by a controlled foreign corporation 

15 (within the meaning of section 957(a)) to 

16 the extent such dividend is attributable to 

17 interest received by the regulated investment 

18 company from a person who is a related 

19 person (within the meaning of section 

20 864(d)(4)) with respect to such controlled 

21 foreign corporation. 

22 ‘‘(C) TREATMENT OF DIVIDENDS RECEIVED

23 BY CONTROLLED FOREIGN CORPORATIONS.—The 

24 rules of subsection (c)(5)(A) shall apply to any 

25 interest-related dividend received by a controlled 
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1 foreign corporation (within the meaning of sec2 tion 957(a)) to the extent such dividend is attrib3 utable to interest received by the regulated in4 vestment company which is described in clause 

5 (ii) of section 871(k)(1)(E) (and not described in 

6 clause (i) or (iii) of such section). 

7 ‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—

8 No tax shall be imposed under paragraph (1) of sub9 section (a) on any short-term capital gain dividend 

10 (as defined in section 871(k)(2)) received from a regu11 lated investment company.’’

12 (3) WITHHOLDING TAXES.—

13 (A) Section 1441(c) (relating to exceptions) 

14 is amended by adding at the end the following 

15 new paragraph: 

16 ‘‘(12) CERTAIN DIVIDENDS RECEIVED FROM REG17 ULATED INVESTMENT COMPANIES.—

18 ‘‘(A) IN GENERAL.—No tax shall be re19 quired to be deducted and withheld under sub20 section (a) from any amount exempt from the 

21 tax imposed by section 871(a)(1)(A) by reason of 

22 section 871(k). 

23 ‘‘(B) SPECIAL RULE.—For purposes of sub24 paragraph (A), clause (i) of section 871(k)(1)(B) 

25 shall not apply to any dividend unless the regu-
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1 lated investment company knows that such divi2 dend is a dividend referred to in such clause. A 

3 similar rule shall apply with respect to the ex4 ception contained in section 871(k)(2)(B).’’ 

5 (B) Section 1442(a) (relating to with6 holding of tax on foreign corporations) is amend7 ed—

8 (i) by striking ‘‘and the reference in 

9 section 1441(c)(10)’’ and inserting ‘‘the ref10 erence in section 1441(c)(10)’’, and

11 (ii) by inserting before the period at 

12 the end the following: ‘‘, and the references 

13 in section 1441(c)(12) to sections 871(a) 

14 and 871(k) shall be treated as referring to 

15 sections 881(a) and 881(e) (except that for 

16 purposes of applying subparagraph (A) of 

17 section 1441(c)(12), as so modified, clause

18 (ii) of section 881(e)(1)(B) shall not apply 

19 to any dividend unless the regulated invest20 ment company knows that such dividend is 

21 a dividend referred to in such clause)’’. 

22 (b) ESTATE TAX TREATMENT OF INTEREST IN CER23 TAIN REGULATED INVESTMENT COMPANIES.—Section 2105 

24 (relating to property without the United States for estate 
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1 tax purposes) is amended by adding at the end the following 

2 new subsection: 

3 ‘‘(d) STOCK IN A RIC.—

4 ‘‘(1) IN GENERAL.—For purposes of this sub5 chapter, stock in a regulated investment company (as 

6 defined in section 851) owned by a nonresident not 

7 a citizen of the United States shall not be deemed 

8 property within the United States in the proportion 

9 that, at the end of the quarter of such investment 

10 company’s taxable year immediately preceding a de11 cedent’s date of death (or at such other time as the 

12 Secretary may designate in regulations), the assets of 

13 the investment company that were qualifying assets 

14 with respect to the decedent bore to the total assets of 

15 the investment company.

16 ‘‘(2) QUALIFYING ASSETS.—For purposes of this 

17 subsection, qualifying assets with respect to a dece18 dent are assets that, if owned directly by the decedent, 

19 would have been—

20 ‘‘(A) amounts, deposits, or debt obligations 

21 described in subsection (b) of this section, 

22 ‘‘(B) debt obligations described in the last 

23 sentence of section 2104(c), or 

24 ‘‘(C) other property not within the United 

25 States.’’
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1 (c) TREATMENT OF REGULATED INVESTMENT COMPA2 NIES UNDER SECTION 897.—

3 (1) Paragraph (1) of section 897(h) is amended 

4 by striking ‘‘REIT’’ each place it appears and insert5 ing ‘‘qualified investment entity’’. 

6 (2) Paragraphs (2) and (3) of section 897(h) are 

7 amended to read as follows:

8 ‘‘(2) SALE OF STOCK IN DOMESTICALLY CON9 TROLLED ENTITY NOT TAXED.—The term ‘United 

10 States real property interest’ does not include any in11 terest in a domestically controlled qualified invest12 ment entity. 

13 ‘‘(3) DISTRIBUTIONS BY DOMESTICALLY CON14 TROLLED QUALIFIED INVESTMENT ENTITIES.—In the 

15 case of a domestically controlled qualified investment 

16 entity, rules similar to the rules of subsection (d) 

17 shall apply to the foreign ownership percentage of any 

18 gain.’’

19 (3) Subparagraphs (A) and (B) of section 

20 897(h)(4) are amended to read as follows: 

21 ‘‘(A) QUALIFIED INVESTMENT ENTITY.—The 

22 term ‘qualified investment entity’ means any 

23 real estate investment trust and any regulated 

24 investment company. 
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1 ‘‘(B) DOMESTICALLY CONTROLLED.—The 

2 term ‘domestically controlled qualified invest3 ment entity’ means any qualified investment en4 tity in which at all times during the testing pe5 riod less than 50 percent in value of the stock 

6 was held directly or indirectly by foreign per7 sons.’’

8 (4) Subparagraphs (C) and (D) of section 

9 897(h)(4) are each amended by striking ‘‘REIT’’ and 

10 inserting ‘‘qualified investment entity’’. 

11 (5) The subsection heading for subsection (h) of 

12 section 897 is amended by striking ‘‘REITS’’ and in13 serting ‘‘CERTAIN INVESTMENT ENTITIES’’. 

14 (d) EFFECTIVE DATE.—

15 (1) IN GENERAL.—Except as otherwise provided 

16 in this subsection, the amendments made by this sec17 tion shall apply to dividends with respect to taxable 

18 years of regulated investment companies beginning 

19 after the date of the enactment of this Act. 

20 (2) ESTATE TAX TREATMENT.—The amendment 

21 made by subsection (b) shall apply to estates of dece22 dents dying after the date of the enactment of this 

23 Act. 

24 (3) CERTAIN OTHER PROVISIONS.—The amend25 ments made by subsection (c) (other than paragraph 
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1 (1) thereof) shall take effect on the date of the enact2 ment of this Act. 

3 Subtitle I—Other Provisions 

4 SEC. 1101. SPECIAL RULES FOR LIVESTOCK SOLD ON AC5 COUNT OF WEATHER-RELATED CONDITIONS. 

6 (a) RULES FOR REPLACEMENT OF INVOLUNTARILY

7 CONVERTED LIVESTOCK.—Subsection (e) of section 1033 

8 (relating to involuntary conversions) is amended—

9 (1) by striking ‘‘CONDITIONS.—For purposes’’ 

10 and inserting ‘‘CONDITIONS.—

11 ‘‘(1) IN GENERAL.—For purposes’’, and 

12 (2) by adding at the end the following new para13 graph: 

14 ‘‘(2) EXTENSION OF REPLACEMENT PERIOD.—

15 ‘‘(A) IN GENERAL.—In the case of drought, 

16 flood, or other weather-related conditions de17 scribed in paragraph (1) which result in the 

18 area being designated as eligible for assistance 

19 by the Federal Government, subsection (a)(2)(B) 

20 shall be applied with respect to any converted 

21 property by substituting ‘4 years’ for ‘2 years’. 

22 ‘‘(B) FURTHER EXTENSION BY SEC23 RETARY.—The Secretary may extend on a re24 gional basis the period for replacement under 

25 this section (after the application of subpara-
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1 graph (A)) for such additional time as the Sec2 retary determines appropriate if the weather-re3 lated conditions which resulted in such applica4 tion continue for more than 3 years.’’. 

5 (b) INCOME INCLUSION RULES.—Subsection (e) of sec6 tion 451 (relating to special rule for proceeds from livestock 

7 sold on account of drought, flood, or other weather-related 

8 conditions) is amended by adding at the end the following 

9 new paragraph: 

10 ‘‘(3) SPECIAL ELECTION RULES.—If section 

11 1033(e)(2) applies to a sale or exchange of livestock 

12 described in paragraph (1), the election under para13 graph (1) shall be deemed valid if made during the 

14 replacement period described in such section.’’. 

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

16 section shall apply to any taxable year with respect to

17 which the due date (without regard to extensions) for the 

18 return is after December 31, 2002. 

19 SEC. 1102. PAYMENT OF DIVIDENDS ON STOCK OF CO20 OPERATIVES WITHOUT REDUCING PATRON21 AGE DIVIDENDS. 

22 (a) IN GENERAL.—Subsection (a) of section 1388 (re23 lating to patronage dividend defined) is amended by adding 

24 at the end the following: ‘‘For purposes of paragraph (3), 

25 net earnings shall not be reduced by amounts paid during 
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1 the year as dividends on capital stock or other proprietary 

2 capital interests of the organization to the extent that the 

3 articles of incorporation or bylaws of such organization or 

4 other contract with patrons provide that such dividends are 

5 in addition to amounts otherwise payable to patrons which 

6 are derived from business done with or for patrons during 

7 the taxable year.’’. 

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

9 section shall apply to distributions in taxable years begin10 ning after the date of the enactment of this Act. 

11 SEC. 1103. VACCINE TAX TO APPLY TO HEPATITIS A VAC12 CINE. 

13 (a) IN GENERAL.—Paragraph (1) of section 4132(a) 

14 (defining taxable vaccine) is amended by redesignating sub15 paragraphs (I), (J), (K), and (L) as subparagraphs (J), 

16 (K), (L), and (M), respectively, and by inserting after sub17 paragraph (H) the following new subparagraph: 

18 ‘‘(I) Any vaccine against hepatitis A.’’

19 (b) EFFECTIVE DATE.—

20 (1) SALES, ETC.—The amendments made by sub21 section (a) shall apply to sales and uses on or after 

22 the first day of the first month which begins more 

23 than 4 weeks after the date of the enactment of this 

24 Act. 
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1 (2) DELIVERIES.—For purposes of paragraph 

2 (1) and section 4131 of the Internal Revenue Code of 

3 1986, in the case of sales on or before the effective date 

4 described in such paragraph for which delivery is 

5 made after such date, the delivery date shall be con6 sidered the sale date. 

7 SEC. 1104. EXPANSION OF HUMAN CLINICAL TRIALS QUALI8 FYING FOR ORPHAN DRUG CREDIT. 

9 (a) IN GENERAL.—Paragraph (2) of section 45C(b) 

10 (relating to qualified clinical testing expenses) is amended 

11 by adding at the end the following new subparagraph: 

12 ‘‘(C) TREATMENT OF CERTAIN EXPENSES

13 INCURRED BEFORE DESIGNATION.—For purposes 

14 of subparagraph (A)(ii)(I), if a drug is des15 ignated under section 526 of the Federal Food, 

16 Drug, and Cosmetic Act not later than the due 

17 date (including extensions) for filing the return 

18 of tax under this subtitle for the taxable year in 

19 which the application for such designation of 

20 such drug was filed, such drug shall be treated 

21 as having been designated on the date that such 

22 application was filed.’’. 

23 (b) EFFECTIVE DATE.—The amendment made by sub24 section (a) shall apply to expenses incurred after the date 

25 of the enactment of this Act. 
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1 SEC. 1105. DISTRIBUTIONS FROM PUBLICLY TRADED PART2 NERSHIPS TREATED AS QUALIFYING INCOME 

3 OF REGULATED INVESTMENT COMPANIES. 

4 (a) IN GENERAL.—Paragraph (2) of section 851(b) 

5 (defining regulated investment company) is amended to 

6 read as follows: 

7 ‘‘(2) at least 90 percent of its gross income is de8 rived from—

9 ‘‘(A) dividends, interest, payments with re10 spect to securities loans (as defined in section 

11 512(a)(5)), and gains from the sale or other dis12 position of stock or securities (as defined in sec13 tion 2(a)(36) of the Investment Company Act of 

14 1940, as amended) or foreign currencies, or other 

15 income (including but not limited to gains from 

16 options, futures or forward contracts) derived 

17 with respect to its business of investing in such 

18 stock, securities, or currencies, and 

19 ‘‘(B) distributions or other income derived 

20 from an interest in a qualified publicly traded 

21 partnership (as defined in subsection (h)); and’’. 

22 (b) SOURCE FLOW-THROUGH RULE NOT TO APPLY.—

23 The last sentence of section 851(b) is amended by inserting 

24 ‘‘(other than a qualified publicly traded partnership as de25 fined in subsection (h))’’ after ‘‘derived from a partner26 ship’’. 
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1 (c) LIMITATION ON OWNERSHIP.—Subsection (c) of 

2 section 851 is amended by redesignating paragraph (5) as 

3 paragraph (6) and inserting after paragraph (4) the fol4 lowing new paragraph: 

5 ‘‘(5) The term ‘outstanding voting securities of 

6 such issuer’ shall include the equity securities of a 

7 qualified publicly traded partnership (as defined in 

8 subsection (h)).’’. 

9 (d) DEFINITION OF QUALIFIED PUBLICLY TRADED

10 PARTNERSHIP.—Section 851 is amended by adding at the 

11 end the following new subsection: 

12 ‘‘(h) QUALIFIED PUBLICLY TRADED PARTNERSHIP.—

13 For purposes of this section, the term ‘qualified publicly 

14 traded partnership’ means a publicly traded partnership 

15 described in section 7704(b) other than a partnership which 

16 would satisfy the gross income requirements of section 

17 7704(c)(2) if qualifying income included only income de18 scribed in subsection (b)(2)(A).’’. 

19 (e) DEFINITION OF QUALIFYING INCOME.—Section 

20 7704(d)(4) is amended by striking ‘‘section 851(b)(2)’’ and 

21 inserting ‘‘section 851(b)(2)(A)’’. 

22 (f) LIMITATION ON COMPOSITION OF ASSETS.—Sub23 paragraph (B) of section 851(b)(3) is amended to read as 

24 follows: 
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1 ‘‘(B) not more than 25 percent of the value 

2 of its total assets is invested in—

3 ‘‘(i) the securities (other than Govern4 ment securities or the securities of other reg5 ulated investment companies) of any one 

6 issuer, 

7 ‘‘(ii) the securities (other than the secu8 rities of other regulated investment compa9 nies) of two or more issuers which the tax10 payer controls and which are determined, 

11 under regulations prescribed by the Sec12 retary, to be engaged in the same or similar 

13 trades or businesses or related trades or 

14 businesses, or

15 ‘‘(iii) the securities of one or more 

16 qualified publicly traded partnerships (as 

17 defined in subsection (h)).’’. 

18 (g) APPLICATION OF SPECIAL PASSIVE ACTIVITY RULE

19 TO REGULATED INVESTMENT COMPANIES.—Subsection (k) 

20 of section 469 (relating to separate application of section 

21 in case of publicly traded partnerships) is amended by add22 ing at the end the following new paragraph: 

23 ‘‘(4) APPLICATION TO REGULATED INVESTMENT

24 COMPANIES.—For purposes of this section, a regulated 

25 investment company (as defined in section 851) hold-
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1 ing an interest in a qualified publicly traded partner2 ship (as defined in section 851(h)) shall be treated as 

3 a taxpayer described in subsection (a)(2) with respect 

4 to items attributable to such interest.’’. 

5 (h) EFFECTIVE DATE.—The amendments made by this 

6 section shall apply to taxable years beginning after the date 

7 of the enactment of this Act. 

8 SEC. 1106. IMPROVEMENTS RELATED TO REAL ESTATE IN9 VESTMENT TRUSTS. 

10 (a) EXPANSION OF STRAIGHT DEBT SAFE HARBOR.—

11 Section 856 (defining real estate investment trust) is 

12 amended—

13 (1) in subsection (c) by striking paragraph (7), 

14 and 

15 (2) by adding at the end the following new sub16 section: 

17 ‘‘(m) SAFE HARBOR IN APPLYING SUBSECTION

18 (c)(4).—

19 ‘‘(1) IN GENERAL.—In applying subclause (III) 

20 of subsection (c)(4)(B)(iii), except as otherwise deter21 mined by the Secretary in regulations, the following 

22 shall not be considered securities held by the trust: 

23 ‘‘(A) Straight debt securities of an issuer 

24 which meet the requirements of paragraph (2). 
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1 ‘‘(B) Any loan to an individual or an es2 tate. 

3 ‘‘(C) Any section 467 rental agreement (as 

4 defined in section 467(d)), other than with a per5 son described in subsection (d)(2)(B). 

6 ‘‘(D) Any obligation to pay rents from real 

7 property (as defined in subsection (d)(1)). 

8 ‘‘(E) Any security issued by a State or any 

9 political subdivision thereof, the District of Co10 lumbia, a foreign government or any political 

11 subdivision thereof, or the Commonwealth of 

12 Puerto Rico, but only if the determination of 

13 any payment received or accrued under such se14 curity does not depend in whole or in part on 

15 the profits of any entity not described in this 

16 subparagraph or payments on any obligation 

17 issued by such an entity, 

18 ‘‘(F) Any security issued by a real estate 

19 investment trust. 

20 ‘‘(G) Any other arrangement as determined 

21 by the Secretary. 

22 ‘‘(2) SPECIAL RULES RELATING TO STRAIGHT

23 DEBT SECURITIES.—

24 ‘‘(A) IN GENERAL.—For purposes of para25 graph (1)(A), securities meet the requirements of 
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1 this paragraph if such securities are straight 

2 debt, as defined in section 1361(c)(5) (without 

3 regard to subparagraph (B)(iii) thereof). 

4 ‘‘(B) SPECIAL RULES RELATING TO CERTAIN

5 CONTINGENCIES.—For purposes of subparagraph 

6 (A), any interest or principal shall not be treat7 ed as failing to satisfy section 1361(c)(5)(B)(i) 

8 solely by reason of the fact that the time of pay9 ment of such interest or principal is subject to 

10 a contingency, but only if—

11 ‘‘(i) any such contingency does not 

12 have the effect of changing the effective yield 

13 to maturity, as determined under section 

14 1272, other than a change in the annual 

15 yield to maturity which either—

16 ‘‘(I) does not exceed the greater of 

1 17 ⁄4 of 1 percent or 5 percent of the an18 nual yield to maturity, or 

19 ‘‘(II) results solely from a default 

20 or the exercise of a prepayment right 

21 by the issuer of the debt, or 

22 ‘‘(ii) neither the aggregate issue price 

23 nor the aggregate face amount of the issuer’s 

24 debt instruments held by the trust exceeds 

25 $1,000,000 and not more than 12 months of 
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1 unaccrued interest can be required to be 

2 prepaid thereunder. 

3 ‘‘(C) SPECIAL RULES RELATING TO COR4 PORATE OR PARTNERSHIP ISSUERS.—In the case 

5 of an issuer which is a corporation or a partner6 ship, securities that otherwise would be described 

7 in paragraph (1)(A) shall be considered not to be 

8 so described if the trust holding such securities 

9 and any of its controlled taxable REIT subsidi10 aries (as defined in subsection (d)(8)(A)(iv)) 

11 hold any securities of the issuer which—

12 ‘‘(i) are not described in paragraph (1) 

13 (prior to the application of this subpara14 graph), and 

15 ‘‘(ii) have an aggregate value greater 

16 than 1 percent of the issuer’s outstanding 

17 securities determined without regard to 

18 paragraph (3)(A)(i). 

19 ‘‘(3) LOOK-THROUGH RULE FOR PARTNERSHIP

20 SECURITIES.—

21 ‘‘(A) IN GENERAL.—For purposes of apply22 ing subclause (III) of subsection (c)(4)(B)(iii)—

23 ‘‘(i) a trust’s interest as a partner in 

24 a partnership (as defined in section 
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1 7701(a)(2)) shall not be considered a secu2 rity, and 

3 ‘‘(ii) the trust shall be deemed to own 

4 its proportionate share of each of the assets 

5 of the partnership. 

6 ‘‘(B) DETERMINATION OF TRUST’S INTER7 EST IN PARTNERSHIP ASSETS.—For purposes of 

8 subparagraph (A), with respect to any taxable 

9 year beginning after the date of the enactment of 

10 this subparagraph—

11 ‘‘(i) the trust’s interest in the partner12 ship assets shall be the trust’s proportionate 

13 interest in any securities issued by the part14 nership (determined without regard to sub15 paragraph (A)(i) and paragraph (4), but

16 not including securities described in para17 graph (1)), and 

18 ‘‘(ii) the value of any debt instrument 

19 shall be the adjusted issue price thereof, as 

20 defined in section 1272(a)(4). 

21 ‘‘(4) CERTAIN PARTNERSHIP DEBT INSTRUMENTS

22 NOT TREATED AS A SECURITY.—For purposes of ap23 plying subclause (III) of subsection (c)(4)(B)(iii)—

24 ‘‘(A) any debt instrument issued by a part25 nership and not described in paragraph (1) shall 
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1 not be considered a security to the extent of the 

2 trust’s interest as a partner in the partnership, 

3 and 

4 ‘‘(B) any debt instrument issued by a part5 nership and not described in paragraph (1) shall 

6 not be considered a security if at least 75 percent 

7 of the partnership’s gross income (excluding 

8 gross income from prohibited transactions) is de9 rived from sources referred to in subsection 

10 (c)(3). 

11 ‘‘(5) SECRETARIAL GUIDANCE.—The Secretary is 

12 authorized to provide guidance (including through the 

13 issuance of a written determination, as defined in sec14 tion 6110(b)) that an arrangement shall not be con15 sidered a security held by the trust for purposes of ap16 plying subclause (III) of subsection (c)(4)(B)(iii) not17 withstanding that such arrangement otherwise could 

18 be considered a security under subparagraph (F) of 

19 subsection (c)(5).’’. 

20 (b) CLARIFICATION OF APPLICATION OF LIMITED

21 RENTAL EXCEPTION.—Subparagraph (A) of section 

22 856(d)(8) (relating to special rules for taxable REIT sub23 sidiaries) is amended to read as follows: 

24 ‘‘(A) LIMITED RENTAL EXCEPTION.—
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1 ‘‘(i) IN GENERAL.—The requirements 

2 of this subparagraph are met with respect 

3 to any property if at least 90 percent of the 

4 leased space of the property is rented to per5 sons other than taxable REIT subsidiaries 

6 of such trust and other than persons de7 scribed in paragraph (2)(B). 

8 ‘‘(ii) RENTS MUST BE SUBSTANTIALLY

9 COMPARABLE.—Clause (i) shall apply only 

10 to the extent that the amounts paid to the 

11 trust as rents from real property (as defined 

12 in paragraph (1) without regard to para13 graph (2)(B)) from such property are sub14 stantially comparable to such rents paid by 

15 the other tenants of the trust’s property for 

16 comparable space. 

17 ‘‘(iii) TIMES FOR TESTING RENT COM18 PARABILITY.—The substantial com19 parability requirement of clause (ii) shall be 

20 treated as met with respect to a lease to a 

21 taxable REIT subsidiary of the trust if such 

22 requirement is met under the terms of the 

23 lease—

24 ‘‘(I) at the time such lease is en25 tered into, 
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1 ‘‘(II) at the time of each extension 

2 of the lease, including a failure to exer3 cise a right to terminate, and 

4 ‘‘(III) at the time of any modi5 fication of the lease between the trust 

6 and the taxable REIT subsidiary if the 

7 rent under such lease is effectively in8 creased pursuant to such modification. 

9 With respect to subclause (III), if the tax10 able REIT subsidiary of the trust is a con11 trolled taxable REIT subsidiary of the trust, 

12 the term ‘rents from real property’ shall not 

13 in any event include rent under such lease 

14 to the extent of the increase in such rent on 

15 account of such modification. 

16 ‘‘(iv) CONTROLLED TAXABLE REIT

17 SUBSIDIARY.—For purposes of clause (iii), 

18 the term ‘controlled taxable REIT sub19 sidiary’ means, with respect to any real es20 tate investment trust, any taxable REIT 

21 subsidiary of such trust if such trust owns 

22 directly or indirectly—

23 ‘‘(I) stock possessing more than 50 

24 percent of the total voting power of the 
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1 outstanding stock of such subsidiary, 

2 or 

3 ‘‘(II) stock having a value of more 

4 than 50 percent of the total value of the 

5 outstanding stock of such subsidiary. 

6 ‘‘(v) CONTINUING QUALIFICATION

7 BASED ON THIRD PARTY ACTIONS.—If the 

8 requirements of clause (i) are met at a time 

9 referred to in clause (iii), such requirements 

10 shall continue to be treated as met so long 

11 as there is no increase in the space leased 

12 to any taxable REIT subsidiary of such 

13 trust or to any person described in para14 graph (2)(B). 

15 ‘‘(vi) CORRECTION PERIOD.—If there is 

16 an increase referred to in clause (v) during 

17 any calendar quarter with respect to any 

18 property, the requirements of clause (iii) 

19 shall be treated as met during the quarter 

20 and the succeeding quarter if such require21 ments are met at the close of such suc22 ceeding quarter.’’. 

23 (c) DELETION OF CUSTOMARY SERVICES EXCEP24 TION.—Subparagraph (B) of section 857(b)(7) (relating to 

25 redetermined rents) is amended by striking clause (ii) and 
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1 by redesignating clauses (iii), (iv), (v), (vi), and (vii) as 

2 clauses (ii), (iii), (iv), (v), and (vi), respectively. 

3 (d) CONFORMITY WITH GENERAL HEDGING DEFINI4 TION.—Subparagraph (G) of section 856(c)(5) (relating to 

5 treatment of certain hedging instruments) is amended to 

6 read as follows: 

7 ‘‘(G) TREATMENT OF CERTAIN HEDGING IN8 STRUMENTS.—Except to the extent provided by 

9 regulations, any income of a real estate invest10 ment trust from a hedging transaction (as de11 fined in clause (ii) or (iii) of section 

12 1221(b)(2)(A)) which is clearly identified pursu13 ant to section 1221(a)(7), including gain from 

14 the sale or disposition of such a transaction, 

15 shall not constitute gross income under para16 graph (2) to the extent that the transaction 

17 hedges any indebtedness incurred or to be in18 curred by the trust to acquire or carry real estate 

19 assets.’’. 

20 (e) CONFORMITY WITH REGULATED INVESTMENT

21 COMPANY RULES.—Clause (i) of section 857(b)(5)(A) (re22 lating to imposition of tax in case of failure to meet certain 

23 requirements) is amended by striking ‘‘90 percent’’ and in24 serting ‘‘95 percent’’. 

25 (f) EFFECTIVE DATES.—
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1 (1) IN GENERAL.—Except as provided in para2 graph (2), the amendments made by this section shall 

3 apply to taxable years beginning after December 31, 

4 2000. 

5 (2) SUBPARAGRAPHS (c) THROUGH (e).—The 

6 amendments made by subsections (c), (d), and (e) 

7 shall apply to taxable years beginning after the date 

8 of the enactment of this Act. 

9 SEC. 1107. SIMPLIFICATION OF EXCISE TAX IMPOSED ON 

10 BOWS AND ARROWS. 

11 (a) BOWS.—Paragraph (1) of section 4161(b) (relating 

12 to bows) is amended to read as follows: 

13 ‘‘(1) BOWS.—

14 ‘‘(A) IN GENERAL.—There is hereby im15 posed on the sale by the manufacturer, producer, 

16 or importer of any bow which has a peak draw

17 weight of 30 pounds or more, a tax equal to 11 

18 percent of the price for which so sold. 

19 ‘‘(B) ARCHERY EQUIPMENT.—There is here20 by imposed on the sale by the manufacturer, pro21 ducer, or importer—

22 ‘‘(i) of any part or accessory suitable 

23 for inclusion in or attachment to a bow de24 scribed in subparagraph (A), and 
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1 ‘‘(ii) of any quiver or broadhead suit2 able for use with an arrow described in 

3 paragraph (3), 

4 a tax equal to 11 percent of the price for which 

5 so sold.’’. 

6 (b) ARROWS.—Subsection (b) of section 4161 (relating 

7 to bows and arrows, etc.) is amended by redesignating para8 graph (3) as paragraph (4) and inserting after paragraph 

9 (2) the following: 

10 ‘‘(3) ARROWS.—

11 ‘‘(A) IN GENERAL.—There is hereby im12 posed on the sale by the manufacturer, producer, 

13 or importer of any arrow, a tax equal to 12 per14 cent of the price for which so sold. 

15 ‘‘(B) EXCEPTION.—The tax imposed by sub16 paragraph (A) on an arrow shall not apply if 

17 the arrow contains an arrow shaft with respect 

18 to which tax was paid under paragraph (2). 

19 ‘‘(C) ARROW.—For purposes of this para20 graph, the term ‘arrow’ means any shaft de21 scribed in paragraph (2) to which additional 

22 components are attached.’’. 

23 (c) CONFORMING AMENDMENTS.—(1) Section 

24 4161(b)(2) is amended by inserting ‘‘(other than a broad25 head)’’ after ‘‘point’’. 
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1 (2) The heading of section 4161(b)(2) is amended by 

2 striking ‘‘ARROWS.—’’ and inserting ‘‘ARROW COMPO3 NENTS.—’’. 

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

5 section shall apply to articles sold by the manufacturer, 

6 producer, or importer after December 31, 2003. 

7 SEC. 1108. REPEAL OF EXCISE TAX ON FISHING TACKLE 

8 BOXES. 

9 (a) REPEAL.—Paragraph (6) of section 4162(a) (de10 fining sport fishing equipment) is amended by striking sub11 paragraph (C) and by redesignating subparagraphs (D) 

12 through (J) as subparagraphs (C) through (I), respectively. 

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

14 section shall apply to articles sold by the manufacturer, 

15 producer, or importer after December 31, 2003. 

16 SEC. 1109. INCOME TAX CREDIT TO DISTILLED SPIRITS 

17 WHOLESALERS FOR COST OF CARRYING FED18 ERAL EXCISE TAXES ON BOTTLED DISTILLED 

19 SPIRITS. 

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

21 A of chapter 51 (relating to gallonage and occupational 

22 taxes) is amended by adding at the end the following new 

23 section: 
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1 ‘‘SEC. 5011. INCOME TAX CREDIT FOR WHOLESALER’S AVER2 AGE COST OF CARRYING EXCISE TAX. 

3 ‘‘(a) IN GENERAL.—For purposes of section 38, in the 

4 case of an eligible wholesaler, the amount of the distilled 

5 spirits wholesalers credit for any taxable year is the amount 

6 equal to the product of—

7 ‘‘(1) the number of cases of bottled distilled spir8 its—

9 ‘‘(A) which were bottled in the United 

10 States, and 

11 ‘‘(B) which are purchased by such whole12 saler during the taxable year directly from the 

13 bottler of such spirits, and 

14 ‘‘(2) the average tax-financing cost per case for 

15 the most recent calendar year ending before the begin16 ning of such taxable year. 

17 ‘‘(b) ELIGIBLE WHOLESALER.—For purposes of this 

18 section, the term ‘eligible wholesaler’ means any person who 

19 holds a permit under the Federal Alcohol Administration 

20 Act as a wholesaler of distilled spirits. 

21 ‘‘(c) AVERAGE TAX-FINANCING COST.—

22 ‘‘(1) IN GENERAL.—For purposes of this section, 

23 the average tax-financing cost per case for any cal24 endar year is the amount of interest which would ac25 crue at the deemed financing rate during a 60-day 
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1 period on an amount equal to the deemed Federal ex2 cise per case. 

3 ‘‘(2) DEEMED FINANCING RATE.—For purposes 

4 of paragraph (1), the deemed financing rate for any 

5 calendar year is the average of the corporate overpay6 ment rates under paragraph (1) of section 6621(a) 

7 (determined without regard to the last sentence of 

8 such paragraph) for calendar quarters of such year. 

9 ‘‘(3) DEEMED FEDERAL EXCISE TAX BASED ON

10 CASE OF 12 80-PROOF 750ML BOTTLES.—For purposes 

11 of paragraph (1), the deemed Federal excise tax per 

12 case is $22.83. 

13 ‘‘(4) NUMBER OF CASES IN LOT.—For purposes 

14 of this section, the number of cases in any lot of dis15 tilled spirits shall be determined by dividing the 

16 number of liters in such lot by 9.’’

17 (b) CONFORMING AMENDMENTS.—

18 (1) Subsection (b) of section 38 is amended by 

19 striking ‘‘plus’’ at the end of paragraph (14), by 

20 striking the period at the end of paragraph (15) and 

21 inserting ‘‘, plus’’, and by adding at the end the fol22 lowing new paragraph: 

23 ‘‘(16) in the case of an eligible wholesaler (as de24 fined in section 5011(b)), the distilled spirits whole25 saler credit determined under section 5011(a).’’
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1 (2) Subsection (d) of section 39 (relating to 

2 carryback and carryforward of unused credits) is 

3 amended by adding at the end the following new 

4 paragraph: 

5 ‘‘(11) NO CARRYBACK OF SECTION 5011 CREDIT

6 BEFORE JANUARY 1, 2004.—No portion of the unused 

7 business credit for any taxable year which is attrib8 utable to the credit determined under section 5011(a) 

9 may be carried back to a taxable year beginning be10 fore January 1, 2004.’’. 

11 (3) The table of sections for subpart A of part I 

12 of subchapter A of chapter 51 is amended by adding 

13 at the end the following new item:

‘‘Sec. 5011. Income tax credit for wholesaler’s average cost of carrying excise tax.’’.

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

15 section shall apply to taxable years beginning after Decem16 ber 31, 2003.

17 SEC. 1110. CAPITAL GAIN TREATMENT UNDER SECTION 

18 631(b) TO APPLY TO OUTRIGHT SALES BY 

19 LANDOWNERS. 

20 (a) IN GENERAL.—The first sentence of section 631(b) 

21 (relating to disposal of timber with a retained economic in22 terest) is amended by striking ‘‘retains an economic interest 

23 in such timber’’ and inserting ‘‘either retains an economic 
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1 interest in such timber or makes an outright sale of such 

2 timber’’. 

3 (b) CONFORMING AMENDMENTS.—

4 (1) The third sentence of section 631(b) is 

5 amended by striking ‘‘The date of disposal’’ and in6 serting ‘‘In the case of disposal of timber with a re7 tained economic interest, the date of disposal’’. 

8 (2) The heading for section 631(b) is amended by 

9 striking ‘‘WITH A RETAINED ECONOMIC INTEREST’’. 

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

11 section shall apply to sales after December 31, 2003.

12 SEC. 1111. SONAR DEVICES SUITABLE FOR FINDING FISH. 

13 (a) NOT TREATED AS SPORT FISHING EQUIPMENT.—

14 Subsection (a) of section 4162 (relating to sport fishing 

15 equipment defined) is amended by inserting ‘‘and’’ at the 

16 end of paragraph (8), by striking ‘‘, and’’ at the end of 

17 paragraph (9) and inserting a period, and by striking 

18 paragraph (10). 

19 (b) CONFORMING AMENDMENT.—Section 4162 is 

20 amended by striking subsection (b) and by redesignating 

21 subsection (c) as subsection (b). 

22 (c) EFFECTIVE DATE.—The amendments made this 

23 section shall apply to articles sold by the manufacturer, 

24 producer, or importer after December 31, 2003. 
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1 SEC. 1112. TAXATION OF CERTAIN SETTLEMENT FUNDS. 

2 (a) IN GENERAL.—Subsection (g) of section 468B (re3 lating to clarification of taxation of certain funds) is 

4 amended to read as follows: 

5 ‘‘(g) CLARIFICATION OF TAXATION OF CERTAIN

6 FUNDS.—

7 ‘‘(1) IN GENERAL.—Except as provided in para8 graph (2), nothing in any provision of law shall be 

9 construed as providing that an escrow account, settle10 ment fund, or similar fund is not subject to current 

11 income tax. The Secretary shall prescribe regulations 

12 providing for the taxation of any such account or 

13 fund whether as a grantor trust or otherwise. 

14 ‘‘(2) EXEMPTION FROM TAX FOR CERTAIN SET15 TLEMENT FUNDS.—An escrow account, settlement 

16 fund, or similar fund shall be treated as beneficially 

17 owned by the United States and shall be exempt from 

18 taxation under this subtitle if—

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

20 decree entered by a judge of a United States Dis21 trict Court, 

22 ‘‘(B) it is created for the receipt of settle23 ment payments as directed by a government en24 tity for the sole purpose of resolving or satisfying 

25 one or more claims asserting liability under the 
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1 Comprehensive Environmental Response, Com2 pensation, and Liability Act of 1980, 

3 ‘‘(C) the authority and control over the ex4 penditure of funds therein (including the expend5 iture of contributions thereto and any net earn6 ings thereon) is with such government entity, 

7 and 

8 ‘‘(D) upon termination, any remaining 

9 funds will be disbursed upon instructions by 

10 such government entity in accordance with ap11 plicable law. 

12 For purposes of this paragraph, the term ‘government 

13 entity’ means the United States, any State or polit14 ical subdivision thereof, the District of Columbia, any 

15 possession of the United States, and any agency or 

16 instrumentality of any of the foregoing.’’. 

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

18 section shall apply to taxable years beginning after Decem19 ber 31, 2003.

20 SEC. 1113. SUSPENSION OF OCCUPATIONAL TAXES RELAT21 ING TO DISTILLED SPIRITS, WINE, AND BEER. 

22 (a) IN GENERAL.—Subpart G of part II of subchapter 

23 A of chapter 51 is amended by redesignating section 5148 

24 as section 5149 and by inserting after section 5147 the fol25 lowing new section: 
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1 ‘‘SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX. 

2 ‘‘(a) IN GENERAL.—Notwithstanding sections 5081, 

3 5091, 5111, 5121, and 5131, the rate of tax imposed under 

4 such sections for the suspension period shall be zero. During 

5 such period, persons engaged in or carrying on a trade or 

6 business covered by such sections shall register under section 

7 5141 and shall comply with the recordkeeping requirements 

8 under this part. 

9 ‘‘(b) SUSPENSION PERIOD.—For purposes of sub10 section (a), the suspension period is the period beginning 

11 on July 1, 2004, and ending on June 30, 2007.’’. 

12 (b) CONFORMING AMENDMENT.—Section 5117 is 

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

14 ‘‘(d) SPECIAL RULE DURING SUSPENSION PERIOD.—

15 Except as provided by the Secretary, during the suspension 

16 period (as defined in section 5148) it shall be unlawful for 

17 any dealer to purchase distilled spirits for resale from any 

18 person other than a wholesale dealer in liquors who is re19 quired to keep records under section 5114.’’. 

20 (c) CLERICAL AMENDMENT.—The table of sections for 

21 subpart G of part II of subchapter A of chapter 51 is 

22 amended by striking the last item and inserting the fol23 lowing new items:

‘‘Sec. 5148. Suspension of occupational tax. 

‘‘Sec. 5149. Cross references.’’.
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1 (d) EFFECTIVE DATE.—The amendments made by this 

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

3 Act. 

4 TITLE II—PROVISIONS TO RE5 DUCE TAX AVOIDANCE 

6 THROUGH CORPORATE EARN7 INGS STRIPPING AND EXPA8 TRIATION 

9 SEC. 2001. REDUCTION IN POTENTIAL FOR EARNINGS 

10 STRIPPING BY FURTHER LIMITING DEDUC11 TION FOR INTEREST ON CERTAIN INDEBTED12 NESS. 

13 (a) REDUCTION IN POTENTIAL FOR EARNINGS STRIP14 PING.—

15 (1) IN GENERAL.—Section 163(j) is amended by 

16 striking paragraphs (1) and (2), by redesignating 

17 paragraphs (3) through (8) as paragraphs (4)

18 through (9), respectively, and by inserting before 

19 paragraph (4), as so redesignated, the following new 

20 paragraphs: 

21 ‘‘(1) LIMITATION.—

22 ‘‘(A) IN GENERAL.—In the case of a cor23 poration, no deduction shall be allowed under 

24 this chapter for disqualified interest paid or ac25 crued during the taxable year.
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1 ‘‘(B) MAXIMUM DISALLOWANCE.—The 

2 amount disallowed under subparagraph (A) shall 

3 not exceed the sum of—

4 ‘‘(i) the corporation’s excess interest ex5 pense 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 interest 

10 below the sum of the amount of interest includ11 ible in the gross income of the taxpayer for such 

12 taxable year and an amount equal to 25 percent 

13 of adjusted taxable income (35 percent in the 

14 case of the first taxable year beginning after De15 cember 31, 2003). 

16 ‘‘(C) DISALLOWED AMOUNT CARRIED TO

17 SUCCEEDING TAXABLE YEAR.—

18 ‘‘(i) IN GENERAL.—Any amount dis19 allowed under subparagraph (A) for any 

20 taxable year shall be treated as paid or ac21 crued in the succeeding taxable year and in 

22 the 2nd through 10th succeeding taxable 

23 years to the extent not previously taken into 

24 account under this subparagraph. 
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1 ‘‘(ii) LIMITATION ON AMOUNT CARRIED

2 TO YEAR.—A carryforward amount may 

3 not be taken into account for any such suc4 ceeding taxable year to the extent that such 

5 amount, when added to amounts carried to 

6 such succeeding taxable year from taxable 

7 years preceding the taxable year from which 

8 the amount is being carried forward, would 

9 result in (or increase) a disallowance under 

10 subparagraph (A). 

11 ‘‘(iii) CARRYOVER APPLIED SEPA12 RATELY TO CATEGORIES OF DISQUALIFIED

13 INTEREST.—Clauses (i) and (ii) shall be 

14 applied separately to disqualified interest 

15 described in paragraph (3)(A) and to dis16 qualified interest described in paragraph 

17 (3)(B). For purposes of this subparagraph, 

18 any amount disallowed under subparagraph 

19 (A) for any taxable year shall be treated as 

20 disqualified interest described in paragraph 

21 (3)(A) to the extent thereof and then as dis22 qualified interest described in paragraph 

23 (3)(B). 
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1 ‘‘(2) EXCESS INTEREST EXPENSE; EXCESS RE2 LATED PARTY INTEREST EXPENSE.—For purposes of 

3 this subsection—

4 ‘‘(A) EXCESS INTEREST EXPENSE.—The 

5 term ‘excess interest expense’ means the excess (if 

6 any) of—

7 ‘‘(i) the corporation’s net interest ex8 pense, over 

9 ‘‘(ii) 50 percent of the adjusted taxable 

10 income of the corporation. 

11 ‘‘(B) EXCESS RELATED PARTY INTEREST

12 EXPENSE.—The term ‘excess related party inter13 est expense’ means the excess (if any) of—

14 ‘‘(i) the lesser of—

15 ‘‘(I) the amount of disqualified 

16 interest described in paragraph (3)(A), 

17 or 

18 ‘‘(II) the corporation’s net interest 

19 expense, over 

20 ‘‘(ii) 25 percent (35 percent in the case 

21 of the first taxable year beginning after De22 cember 31, 2003) of the adjusted taxable in23 come of the corporation. 

24 ‘‘(3) ALTERNATIVE MAXIMUM DISALLOWANCE.—
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1 ‘‘(A) IN GENERAL.—In the case of a cor2 poration with respect to which an election is in 

3 effect under subparagraph (B), the amount dis4 allowed under paragraph (1)(A) shall not exceed 

5 the excess (if any) of—

6 ‘‘(i) the corporation’s net interest ex7 pense, over 

8 ‘‘(ii) 30 percent of the adjusted taxable 

9 income of the corporation. 

10 ‘‘(B) ELECTION.—A corporation may make 

11 a one-time irrevocable election to have the alter12 native maximum disallowance described in sub13 paragraph (A) apply for purposes of this sub14 section in lieu of paragraph (1)(B). An election 

15 under this subparagraph shall not apply with re16 spect to any taxable year beginning before Janu17 ary 1, 2005. 

18 ‘‘(C) LIMITATION.—Subparagraph (B) shall 

19 not apply with respect to any corporation which 

20 is— 

21 ‘‘(i) a surrogate foreign corporation (as 

22 defined in section 7874(a)(2)(B)), 

23 ‘‘(ii) a corporation which would be a 

24 surrogate foreign corporation (as so defined) 
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1 if ‘‘December 31, 1996’’ were substituted for 

2 ‘‘March 4, 2003’’ in section 7874(a), or 

3 ‘‘(iii) a corporation which is an expa4 triated entity (as defined in section 

5 7874(a)) with respect to a corporation de6 scribed in clause (i) or (ii).’’. 

7 (2) CONFORMING AMENDMENT.—Paragraph 

8 (5)(B)(ii) of section 163(j), as redesignated by para9 graph (1), is amended by striking ‘‘paragraph 

10 (5)(B)’’ and inserting ‘‘paragraph (6)(B)’’. 

11 (b) MAINTENANCE OF CURRENT LAW FOR INTEREST

12 PAID BY TAXABLE REIT SUBSIDIARIES TO REIT.—

13 (1) EXCEPTION FROM 163(j).—Paragraph (4) of 

14 section 163(j), as redesignated by subsection (a), is 

15 amended by inserting ‘‘and’’ at the end of subpara16 graph (A), by striking ‘‘, and’’ at the end of subpara17 graph (B) and inserting a period, and by striking 

18 subparagraph (C). 

19 (2) DISALLOWANCE.—Section 856 is amended by 

20 adding at the end the following new subsection: 

21 ‘‘(n) LIMITATION ON DEDUCTION FOR INTEREST ON

22 CERTAIN INDEBTEDNESS OF TAXABLE REIT SUB23 SIDIARY.—

24 ‘‘(1) LIMITATION.—
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1 ‘‘(A) IN GENERAL.—If this subsection ap2 plies to any taxable REIT subsidiary for any 

3 taxable year, no deduction shall be allowed under 

4 this chapter for disqualified interest paid or ac5 crued by such subsidiary during such taxable 

6 year. The amount disallowed under the preceding 

7 sentence shall not exceed the subsidiary’s excess 

8 interest expense for the taxable year. 

9 ‘‘(B) DISALLOWED AMOUNT CARRIED TO

10 SUCCEEDING TAXABLE YEAR.—Any amount dis11 allowed under subparagraph (A) for any taxable 

12 year shall be treated as disqualified interest paid 

13 or accrued in the succeeding taxable year (and 

14 clause (ii) of paragraph (2)(A) shall not apply 

15 for purposes of applying this subsection to the 

16 amount so treated). 

17 ‘‘(2) SUBSIDIARIES TO WHICH SUBSECTION AP18 PLIES.—

19 ‘‘(A) IN GENERAL.—This subsection shall 

20 apply to any taxable REIT subsidiary for any 

21 taxable year if—

22 ‘‘(i) such subsidiary has excess interest 

23 expense for such taxable year, and 

24 ‘‘(ii) the ratio of debt to equity of such 

25 subsidiary as of the close of such taxable 
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1 year (or on any other day during the tax2 able year as the Secretary may by regula3 tions prescribe) exceeds 1.5 to 1. 

4 ‘‘(B) EXCESS INTEREST EXPENSE.—

5 ‘‘(i) IN GENERAL.—For purposes of 

6 this subsection, the term ‘excess interest ex7 pense’ means the excess (if any) of—

8 ‘‘(I) the taxable REIT subsidi9 ary’s net interest expense, over 

10 ‘‘(II) the sum of 50 percent of the 

11 adjusted taxable income of the sub12 sidiary plus any excess limitation 

13 carryforward under clause (ii). 

14 ‘‘(ii) EXCESS LIMITATION

15 CARRYFORWARD.—If a taxable REIT sub16 sidiary has an excess limitation for any 

17 taxable year, the amount of such excess lim18 itation shall be an excess limitation 

19 carryforward to the 1st succeeding taxable 

20 year and to the 2nd and 3rd succeeding tax21 able years to the extent not previously taken 

22 into account under this clause. The amount 

23 of such a carryforward taken into account 

24 for any such succeeding taxable year shall 

25 not exceed the excess interest expense for 
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1 such succeeding taxable year (determined 

2 without regard to the carryforward from the 

3 taxable year of such excess limitation). 

4 ‘‘(iii) EXCESS LIMITATION.—For pur5 poses of clause (ii), the term ‘excess limita6 tion’ means the excess (if any) of—

7 ‘‘(I) 50 percent of the adjusted 

8 taxable income of the subsidiary, over 

9 ‘‘(II) the subsidiary’s net interest 

10 expense. 

11 ‘‘(C) RATIO OF DEBT TO EQUITY.—For pur12 poses of this paragraph, the term ‘ratio of debt 

13 to equity’ means the ratio which the total indebt14 edness of the subsidiary bears to the sum of its 

15 money and all other assets reduced (but not 

16 below zero) by such total indebtedness. The rules 

17 of section 163(j)(6)(E) shall apply for purposes 

18 of the preceding sentence. 

19 ‘‘(3) DISQUALIFIED INTEREST.—For purposes of 

20 this subsection, the term ‘disqualified interest’ means 

21 any interest paid or accrued (directly or indirectly) 

22 by a taxable REIT subsidiary of a real estate invest23 ment trust to such trust. 
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1 ‘‘(4) OTHER RULES TO APPLY.—Rules similar to 

2 the rules of paragraphs (7), (8), and (9) of section 

3 163(j) shall apply for purposes of this subsection.’’

4 (c) EFFECTIVE DATE.—

5 (1) IN GENERAL.—Except as otherwise provided 

6 in this subsection, the amendments made by this sec7 tion shall apply to taxable years beginning after De8 cember 31, 2003. 

9 (2) EARLIER EFFECTIVE DATE WITH RESPECT

10 TO EXPATRIATED CORPORATIONS, ETC.—The amend11 ments made by this section shall apply to taxable 

12 years ending after March 4, 2003, in the case of a 

13 taxpayer which is—

14 (A) a surrogate foreign corporation, as de15 fined in section 7874(a)(2)(B) of the Internal 

16 Revenue Code of 1986, as added by section 2002, 

17 (B) a corporation which would be a surro18 gate foreign corporation (as so defined) if ‘‘De19 cember 31, 1996’’ were substituted for ‘‘March 4, 

20 2003’’ in such section 7874(a), or 

21 (C) a corporation which is an expatriated 

22 entity (as defined in such section 7874(a)) with 

23 respect to a corporation described in subpara24 graph (A) or (B). 
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1 In applying such amendments to a taxpayer de2 scribed in the preceding sentence, subparagraph (B) 

3 of section 163(j)(2) of such Code, as amended by this 

4 section, shall be applied by substituting ‘‘25 percent’’ 

5 for ‘‘35 percent’’. 

6 (3) LIMITATION ON CARRYOVER OF DISALLOWED

7 INTEREST.—

8 (A) IN GENERAL.—Except in the case of a 

9 taxpayer described in paragraph (2), for pur10 poses of applying section 163(j)(1)(C) of the In11 ternal Revenue Code of 1986 (as added by this 

12 section), amounts carried from a taxable year be13 ginning before January 1, 2004, to any taxable 

14 year beginning after December 31, 2003, shall be 

15 treated as disqualified interest described in sec16 tion 163(j)(3)(B) of such Code which is dis17 allowed for the most recent taxable year begin18 ning before January 1, 2004. 

19 (B) EXPATRIATED CORPORATIONS.—In the 

20 case of a taxpayer described in paragraph (2), a 

21 rule similar to the rule of subparagraph (A) 

22 shall apply to amounts carried from a taxable 

23 year ending on or before March 5, 2003. 
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1 SEC. 2002. TAX TREATMENT OF EXPATRIATED ENTITIES 

2 AND THEIR FOREIGN PARENTS. 

3 (a) IN GENERAL.—Subchapter C of chapter 80 (relat4 ing to provisions affecting more than one subtitle) is 

5 amended by adding at the end the following new section: 

6 ‘‘SEC. 7874. RULES RELATING TO EXPATRIATED ENTITIES 

7 AND THEIR FOREIGN PARENTS. 

8 ‘‘(a) TAX ON INVERSION GAIN OF EXPATRIATED ENTI9 TIES.—

10 ‘‘(1) IN GENERAL.—The taxable income of an ex11 patriated entity for any taxable year which includes 

12 any portion of the applicable period shall in no event 

13 be less than the inversion gain of the entity for the 

14 taxable year. 

15 ‘‘(2) EXPATRIATED ENTITY.—For purposes of 

16 this subsection—

17 ‘‘(A) IN GENERAL.—The term ‘expatriated 

18 entity’ means—

19 ‘‘(i) the domestic corporation or part20 nership referred to in subparagraph (B)(i) 

21 with respect to which a foreign corporation 

22 is a surrogate foreign corporation, and 

23 ‘‘(ii) any United States person who is 

24 related (within the meaning of section 

25 267(b) or 707(b)(1)) to a domestic corpora26 tion or partnership described in clause (i).
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1 ‘‘(B) SURROGATE FOREIGN CORPORATION.—

2 A foreign corporation shall be treated as a surro3 gate foreign corporation if, pursuant to a plan 

4 (or a series of related transactions)—

5 ‘‘(i) the entity completes after March 4, 

6 2003, the direct or indirect acquisition of 

7 substantially all of the properties held di8 rectly or indirectly by a domestic corpora9 tion or substantially all of the properties 

10 constituting a trade or business of a domes11 tic partnership, 

12 ‘‘(ii) after the acquisition at least 60 

13 percent of the stock (by vote or value) of the 

14 entity is held—

15 ‘‘(I) in the case of an acquisition 

16 with respect to a domestic corporation, 

17 by former shareholders of the domestic 

18 corporation by reason of holding stock 

19 in the domestic corporation, or 

20 ‘‘(II) in the case of an acquisition 

21 with respect to a domestic partnership, 

22 by former partners of the domestic 

23 partnership by reason of holding a 

24 capital or profits interest in the domes25 tic partnership, and 
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1 ‘‘(iii) after the acquisition the ex2 panded affiliated group which includes the 

3 entity does not have substantial business ac4 tivities in the foreign country in which, or 

5 under the law of which, the entity is created 

6 or organized, when compared to the total 

7 business activities of such expanded affili8 ated group. 

9 An entity otherwise described in clause (i) with 

10 respect to any domestic corporation or partner11 ship trade or business shall be treated as not so 

12 described if, on or before March 4, 2003, such en13 tity acquired directly or indirectly more than 

14 half of the properties held directly or indirectly 

15 by such corporation or more than half of the 

16 properties constituting such partnership trade or 

17 business, as the case may be. 

18 ‘‘(b) DEFINITIONS AND SPECIAL RULES.—

19 ‘‘(1) EXPANDED AFFILIATED GROUP.—The term 

20 ‘expanded affiliated group’ means an affiliated group 

21 as defined in section 1504(a) but without regard to 

22 section 1504(b)(3), except that section 1504(a) shall 

23 be applied by substituting ‘more than 50 percent’ for 

24 ‘at least 80 percent’ each place it appears. 
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1 ‘‘(2) CERTAIN STOCK DISREGARDED.—There 

2 shall not be taken into account in determining owner3 ship under subsection (a)(2)(B)(ii)—

4 ‘‘(A) stock held by members of the expanded 

5 affiliated group which includes the foreign cor6 poration, or 

7 ‘‘(B) stock of such foreign corporation which 

8 is sold in a public offering related to the acquisi9 tion described in subsection (a)(2)(B)(i). 

10 ‘‘(3) PLAN DEEMED IN CERTAIN CASES.—If a 

11 foreign corporation acquires directly or indirectly 

12 substantially all of the properties of a domestic cor13 poration or partnership during the 4-year period be14 ginning on the date which is 2 years before the owner15 ship requirements of subsection (a)(2)(B)(ii) are met, 

16 such actions shall be treated as pursuant to a plan. 

17 ‘‘(4) CERTAIN TRANSFERS DISREGARDED.—The 

18 transfer of properties or liabilities (including by con19 tribution or distribution) shall be disregarded if such 

20 transfers are part of a plan a principal purpose of 

21 which is to avoid the purposes of this section. 

22 ‘‘(5) SPECIAL RULE FOR RELATED PARTNER23 SHIPS.—For purposes of applying subsection 

24 (a)(2)(B)(ii) to the acquisition of a trade or business 

25 of a domestic partnership, except as provided in regu-
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1 lations, all partnerships which are under common 

2 control (within the meaning of section 482) shall be 

3 treated as 1 partnership. 

4 ‘‘(6) REGULATIONS.—The Secretary shall pre5 scribe such regulations as may be appropriate to de6 termine whether a corporation is a surrogate foreign 

7 corporation, including regulations—

8 ‘‘(A) to treat warrants, options, contracts to 

9 acquire stock, convertible debt interests, and 

10 other similar interests as stock, and 

11 ‘‘(B) to treat stock as not stock. 

12 ‘‘(c) OTHER DEFINITIONS.—For purposes of this sec13 tion—

14 ‘‘(1) APPLICABLE PERIOD.—The term ‘applicable 

15 period’ means the period—

16 ‘‘(A) beginning on the first date properties 

17 are acquired as part of the acquisition described 

18 in subsection (a)(2)(B)(i), and 

19 ‘‘(B) ending on the date which is 10 years 

20 after the last date properties are acquired as 

21 part of such acquisition. 

22 ‘‘(2) INVERSION GAIN.—The term ‘inversion 

23 gain’ means the income or gain recognized by reason 

24 of the transfer during the applicable period of stock 

25 or other properties by an expatriated entity, and any 
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1 income received or accrued during the applicable pe2 riod by reason of a license of any property by an ex3 patriated entity—

4 ‘‘(A) as part of the acquisition described in 

5 subsection (a)(2)(B)(i), or 

6 ‘‘(B) after such acquisition if the transfer or 

7 license is to a foreign related person. 

8 Subparagraph (B) shall not apply to property de9 scribed in section 1221(a)(1) in the hands of the expa10 triated entity. 

11 ‘‘(3) FOREIGN RELATED PERSON.—The term ‘for12 eign related person’ means, with respect to any expa13 triated entity, a foreign person which—

14 ‘‘(A) is related (within the meaning of sec15 tion 267(b) or 707(b)(1)) to such entity, or 

16 ‘‘(B) is under the same common control 

17 (within the meaning of section 482) as such enti18 ty. 

19 ‘‘(d) SPECIAL RULES.—

20 ‘‘(1) CREDITS NOT ALLOWED AGAINST TAX ON IN21 VERSION GAIN.—Credits (other than the credit allowed 

22 by section 901) shall be allowed against the tax im23 posed by this chapter on an expatriated entity for 

24 any taxable year described in subsection (a) only to 

25 the extent such tax exceeds the product of—
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1 ‘‘(A) the amount of the inversion gain for 

2 the taxable year, and 

3 ‘‘(B) the highest rate of tax specified in sec4 tion 11(b)(1). 

5 For purposes of determining the credit allowed by sec6 tion 901, inversion gain shall be treated as from 

7 sources within the United States. 

8 ‘‘(2) SPECIAL RULES FOR PARTNERSHIPS.—In 

9 the case of an expatriated entity which is a partner10 ship—

11 ‘‘(A) subsection (a)(1) shall apply at the 

12 partner rather than the partnership level, 

13 ‘‘(B) the inversion gain of any partner for 

14 any taxable year shall be equal to the sum of—

15 ‘‘(i) the partner’s distributive share of 

16 inversion gain of the partnership for such 

17 taxable year, plus

18 ‘‘(ii) gain recognized for the taxable 

19 year by the partner by reason of the trans20 fer during the applicable period of any 

21 partnership interest of the partner in such 

22 partnership to the surrogate foreign cor23 poration, and 

24 ‘‘(C) the highest rate of tax specified in the 

25 rate schedule applicable to the partner under this 
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1 chapter shall be substituted for the rate of tax re2 ferred to in paragraph (1). 

3 ‘‘(3) COORDINATION WITH SECTION 172 AND MIN4 IMUM TAX.—Rules similar to the rules of paragraphs 

5 (3) and (4) of section 860E(a) shall apply for pur6 poses of subsection (a). 

7 ‘‘(4) STATUTE OF LIMITATIONS.—

8 ‘‘(A) IN GENERAL.—The statutory period 

9 for the assessment of any deficiency attributable 

10 to the inversion gain of any taxpayer for any 

11 pre-inversion year shall not expire before the ex12 piration of 3 years from the date the Secretary 

13 is notified by the taxpayer (in such manner as 

14 the Secretary may prescribe) of the acquisition 

15 described in subsection (a)(2)(B)(i) to which 

16 such gain relates and such deficiency may be as17 sessed before the expiration of such 3-year period 

18 notwithstanding the provisions of any other law 

19 or rule of law which would otherwise prevent 

20 such assessment. 

21 ‘‘(B) PRE-INVERSION YEAR.—For purposes 

22 of subparagraph (A), the term ‘pre-inversion 

23 year’ means any taxable year if—

24 ‘‘(i) any portion of the applicable pe25 riod is included in such taxable year, and 
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1 ‘‘(ii) such year ends before the taxable 

2 year in which the acquisition described in 

3 subsection (a)(2)(B)(i) is completed. 

4 ‘‘(e) SPECIAL RULE FOR TREATIES.—Nothing in sec5 tion 894 or 7852(d) or in any other provision of law shall 

6 be construed as permitting an exemption, by reason of any 

7 treaty obligation of the United States heretofore or hereafter 

8 entered into, from the provisions of this section. 

9 ‘‘(f) REGULATIONS.—The Secretary shall provide such 

10 regulations as are necessary to carry out this section, in11 cluding regulations providing for such adjustments to the 

12 application of this section as are necessary to prevent the 

13 avoidance of the purposes of this section, including the 

14 avoidance of such purposes through—

15 ‘‘(1) the use of related persons, pass-through or 

16 other noncorporate entities, or other intermediaries, 

17 or 

18 ‘‘(2) transactions designed to have persons cease 

19 to be (or not become) members of expanded affiliated 

20 groups or related persons.’’. 

21 (b) CONFORMING AMENDMENT.—The table of sections 

22 for subchapter C of chapter 80 is amended by adding at 

23 the end the following new item:

‘‘Sec. 7874. Rules relating to expatriated entities and their foreign 

parents.’’
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1 (c) EFFECTIVE DATE.—The amendments made by this 

2 section shall apply to taxable years ending after March 4, 

3 2003.

4 SEC. 2003. EXCISE TAX ON STOCK COMPENSATION OF IN5 SIDERS IN EXPATRIATED CORPORATIONS. 

6 (a) IN GENERAL.—Subtitle D is amended by inserting 

7 after chapter 44 end the following new chapter: 

8 ‘‘CHAPTER 45—PROVISIONS RELATING TO 

9 EXPATRIATED ENTITIES

‘‘Sec. 4985. Stock compensation of insiders in expatriated corporations.

10 ‘‘SEC. 4985. STOCK COMPENSATION OF INSIDERS IN EXPA11 TRIATED CORPORATIONS. 

12 ‘‘(a) IMPOSITION OF TAX.—In the case of an indi13 vidual who is a disqualified individual with respect to any 

14 expatriated corporation, there is hereby imposed on such 

15 person a tax equal to 15 percent of the value (determined 

16 under subsection (b)) of the specified stock compensation 

17 held (directly or indirectly) by or for the benefit of such 

18 individual or a member of such individual’s family (as de19 fined in section 267) at any time during the 12-month pe20 riod beginning on the date which is 6 months before the 

21 expatriation date. 

22 ‘‘(b) VALUE.—For purposes of subsection (a)—

23 ‘‘(1) IN GENERAL.—The value of specified stock 

24 compensation shall be—
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1 ‘‘(A) in the case of a stock option (or other 

2 similar right) or a stock appreciation right, the 

3 fair value of such option or right, and 

4 ‘‘(B) in any other case, the fair market 

5 value of such compensation. 

6 ‘‘(2) DATE FOR DETERMINING VALUE.—The de7 termination of value shall be made—

8 ‘‘(A) in the case of specified stock compensa9 tion held on the expatriation date, on such date, 

10 ‘‘(B) in the case of such compensation which 

11 is canceled during the 6 months before the expa12 triation date, on the day before such cancella13 tion, and 

14 ‘‘(C) in the case of such compensation which 

15 is granted after the expatriation date, on the 

16 date such compensation is granted. 

17 ‘‘(c) TAX TO APPLY ONLY IF SHAREHOLDER GAIN

18 RECOGNIZED.—Subsection (a) shall apply to any disquali19 fied individual with respect to an expatriated corporation 

20 only if gain (if any) on any stock in such corporation is 

21 recognized in whole or part by any shareholder by reason 

22 of the acquisition referred to in section 7874(a)(2)(B)(i) 

23 with respect to such corporation. 

24 ‘‘(d) EXCEPTION WHERE GAIN RECOGNIZED ON COM25 PENSATION.—Subsection (a) shall not apply to—
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1 ‘‘(1) any stock option which is exercised on the 

2 expatriation date or during the 6-month period before 

3 such date and to the stock acquired in such exercise, 

4 if income is recognized under section 83 on or before 

5 the expatriation date with respect to the stock ac6 quired pursuant to such exercise, and 

7 ‘‘(2) any other specified stock compensation 

8 which is exercised, sold, exchanged, distributed, 

9 cashed-out, or otherwise paid during such period in 

10 a transaction in which income, gain, or loss is recog11 nized in full. 

12 ‘‘(e) DEFINITIONS.—For purposes of this section—

13 ‘‘(1) DISQUALIFIED INDIVIDUAL.—The term ‘dis14 qualified individual’ means, with respect to a cor15 poration, any individual who, at any time during the 

16 12-month period beginning on the date which is 6 

17 months before the expatriation date—

18 ‘‘(A) is subject to the requirements of section 

19 16(a) of the Securities Exchange Act of 1934 

20 with respect to such corporation or any member 

21 of the expanded affiliated group which includes 

22 such corporation, or 

23 ‘‘(B) would be subject to such requirements 

24 if such corporation or member were an issuer of 

25 equity securities referred to in such section. 
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1 ‘‘(2) EXPATRIATED CORPORATION; EXPATRIATION

2 DATE.—

3 ‘‘(A) EXPATRIATED CORPORATION.—The 

4 term ‘expatriated corporation’ means any cor5 poration which is an expatriated entity (as de6 fined in section 7874(a)(2)). Such term includes 

7 any predecessor or successor of such a corpora8 tion. 

9 ‘‘(B) EXPATRIATION DATE.—The term ‘ex10 patriation date’ means, with respect to a cor11 poration, the date on which the corporation first 

12 becomes an expatriated corporation. 

13 ‘‘(3) SPECIFIED STOCK COMPENSATION.—

14 ‘‘(A) IN GENERAL.—The term ‘specified 

15 stock compensation’ means payment (or right to 

16 payment) granted by the expatriated corporation 

17 (or by any member of the expanded affiliated 

18 group which includes such corporation) to any 

19 person in connection with the performance of 

20 services by a disqualified individual for such cor21 poration or member if the value of such payment 

22 or right is based on (or determined by reference 

23 to) the value (or change in value) of stock in 

24 such corporation (or any such member). 
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1 ‘‘(B) EXCEPTIONS.—Such term shall not in2 clude—

3 ‘‘(i) any option to which part II of 

4 subchapter D of chapter 1 applies, or 

5 ‘‘(ii) any payment or right to payment 

6 from a plan referred to in section 

7 280G(b)(6). 

8 ‘‘(4) EXPANDED AFFILIATED GROUP.—The term 

9 ‘expanded affiliated group’ means an affiliated group 

10 (as defined in section 1504(a) without regard to sec11 tion 1504(b)(3)); except that section 1504(a) shall be 

12 applied by substituting ‘more than 50 percent’ for ‘at 

13 least 80 percent’ each place it appears. 

14 ‘‘(f) SPECIAL RULES.—For purposes of this section—

15 ‘‘(1) CANCELLATION OF RESTRICTION.—The can16 cellation of a restriction which by its terms will never 

17 lapse shall be treated as a grant. 

18 ‘‘(2) PAYMENT OR REIMBURSEMENT OF TAX BY

19 CORPORATION TREATED AS SPECIFIED STOCK COM20 PENSATION.—Any payment of the tax imposed by this 

21 section directly or indirectly by the expatriated cor22 poration or by any member of the expanded affiliated 

23 group which includes such corporation—

24 ‘‘(A) shall be treated as specified stock com25 pensation, and 
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1 ‘‘(B) shall not be allowed as a deduction 

2 under any provision of chapter 1. 

3 ‘‘(3) CERTAIN RESTRICTIONS IGNORED.—Wheth4 er there is specified stock compensation, and the value 

5 thereof, shall be determined without regard to any re6 striction other than a restriction which by its terms 

7 will never lapse. 

8 ‘‘(4) PROPERTY TRANSFERS.—Any transfer of 

9 property shall be treated as a payment and any right 

10 to a transfer of property shall be treated as a right 

11 to a payment. 

12 ‘‘(5) OTHER ADMINISTRATIVE PROVISIONS.—For 

13 purposes of subtitle F, any tax imposed by this sec14 tion shall be treated as a tax imposed by subtitle A. 

15 ‘‘(g) REGULATIONS.—The Secretary shall prescribe 

16 such regulations as may be necessary or appropriate to 

17 carry out the purposes of this section.’’

18 (b) DENIAL OF DEDUCTION.—

19 (1) IN GENERAL.—Paragraph (6) of section 

20 275(a) is amended by inserting ‘‘45,’’ before ‘‘46,’’. 

21 (2) $1,000,000 LIMIT ON DEDUCTIBLE COM22 PENSATION REDUCED BY PAYMENT OF EXCISE TAX ON

23 SPECIFIED STOCK COMPENSATION.—Paragraph (4) of 

24 section 162(m) is amended by adding at the end the 

25 following new subparagraph: 
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1 ‘‘(G) COORDINATION WITH EXCISE TAX ON

2 SPECIFIED STOCK COMPENSATION.—The dollar 

3 limitation contained in paragraph (1) with re4 spect to any covered employee shall be reduced 

5 (but not below zero) by the amount of any pay6 ment (with respect to such employee) of the tax 

7 imposed by section 4985 directly or indirectly by 

8 the expatriated corporation (as defined in such 

9 section) or by any member of the expanded affili10 ated group (as defined in such section) which in11 cludes such corporation.’’

12 (c) CONFORMING AMENDMENTS.—

13 (1) The last sentence of section 3121(v)(2)(A) is 

14 amended by inserting before the period ‘‘or to any 

15 specified stock compensation (as defined in section 

16 4985) on which tax is imposed by section 4985’’. 

17 (2) The table of chapters for subtitle D is amend18 ed by inserting after the item relating to chapter 44 

19 the following new item:

‘‘Chapter 45. Provisions relating to expatriated entities.’’

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

21 section shall take effect on March 4, 2003; except that peri22 ods before such date shall not be taken into account in ap23 plying the periods in subsections (a) and (e)(1) of section 

24 4985 of the Internal Revenue Code of 1986, as added by 

25 this section.
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1 SEC. 2004. REINSURANCE OF UNITED STATES RISKS IN FOR2 EIGN JURISDICTIONS. 

3 (a) IN GENERAL.—Section 845(a) (relating to alloca4 tion in case of reinsurance agreement involving tax avoid5 ance or evasion) is amended by striking ‘‘source and char6 acter’’ and inserting ‘‘amount, source, or character’’. 

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

8 section shall apply to any risk reinsured after the date of 

9 the enactment of this Act. 

10 SEC. 2005. REVISION OF TAX RULES ON EXPATRIATION OF 

11 INDIVIDUALS. 

12 (a) EXPATRIATION TO AVOID TAX.—

13 (1) IN GENERAL.—Subsection (a) of section 877 

14 (relating to treatment of expatriates) is amended to 

15 read as follows: 

16 ‘‘(a) TREATMENT OF EXPATRIATES.—

17 ‘‘(1) IN GENERAL.—Every nonresident alien in18 dividual to whom this section applies and who, with19 in the 10-year period immediately preceding the close 

20 of the taxable year, lost United States citizenship 

21 shall be taxable for such taxable year in the manner 

22 provided in subsection (b) if the tax imposed pursu23 ant to such subsection (after any reduction in such 

24 tax under the last sentence of such subsection) exceeds 

25 the tax which, without regard to this section, is im26 posed pursuant to section 871. 
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1 ‘‘(2) INDIVIDUALS SUBJECT TO THIS SECTION.—

2 This section shall apply to any individual if—

3 ‘‘(A) the average annual net income tax (as 

4 defined in section 38(c)(1)) of such individual 

5 for the period of 5 taxable years ending before 

6 the date of the loss of United States citizenship 

7 is greater than $122,000, 

8 ‘‘(B) the net worth of the individual as of 

9 such date is $2,000,000 or more, or 

10 ‘‘(C) such individual fails to certify under 

11 penalty of perjury that he has met the require12 ments of this title for the 5 preceding taxable 

13 years or fails to submit such evidence of such 

14 compliance as the Secretary may require. 

15 In the case of the loss of United States citizenship in 

16 any calendar year after 2003, such $122,000 amount 

17 shall be increased by an amount equal to such dollar 

18 amount multiplied by the cost-of-living adjustment 

19 determined under section 1(f)(3) for such calendar 

20 year by substituting ‘2002’ for ‘1992’ in subpara21 graph (B) thereof. Any increase under the preceding 

22 sentence shall be rounded to the nearest multiple of 

23 $1,000.’’. 

24 (2) REVISION OF EXCEPTIONS FROM ALTER25 NATIVE TAX.—Subsection (c) of section 877 (relating 
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1 to tax avoidance not presumed in certain cases) is 

2 amended to read as follows: 

3 ‘‘(c) EXCEPTIONS.—

4 ‘‘(1) IN GENERAL.—Subparagraphs (A) and (B) 

5 of subsection (a)(2) shall not apply to an individual 

6 described in paragraph (2) or (3). 

7 ‘‘(2) DUAL CITIZENS.—

8 ‘‘(A) IN GENERAL.—An individual is de9 scribed in this paragraph if—

10 ‘‘(i) the individual became at birth a 

11 citizen of the United States and a citizen of 

12 another country and continues to be a cit13 izen of such other country, and 

14 ‘‘(ii) the individual has had no sub15 stantial contacts with the United States. 

16 ‘‘(B) SUBSTANTIAL CONTACTS.—An indi17 vidual shall be treated as having no substantial 

18 contacts with the United States only if the indi19 vidual—

20 ‘‘(i) was never a resident of the United 

21 States (as defined in section 7701(b)), 

22 ‘‘(ii) has never held a United States 

23 passport, and 

24 ‘‘(iii) was not present in the United 

25 States for more than 30 days during any 
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1 calendar year which is 1 of the 10 calendar 

2 years preceding the individual’s loss of 

3 United States citizenship. 

4 ‘‘(3) CERTAIN MINORS.—An individual is de5 scribed in this paragraph if—

6 ‘‘(A) the individual became at birth a cit7 izen of the United States, 

8 ‘‘(B) neither parent of such individual was 

9 a citizen of the United States at the time of such 

10 birth, 

11 ‘‘(C) the individual’s loss of United States 

12 citizenship occurs before such individual attains 

age 181 13 ⁄2, and 

14 ‘‘(D) the individual was not present in the 

15 United States for more than 30 days during any 

16 calendar year which is 1 of the 10 calendar 

17 years preceding the individual’s loss of United 

18 States citizenship.’’. 

19 (3) CONFORMING AMENDMENT.—Section 2107(a) 

20 is amended to read as follows: 

21 ‘‘(a) TREATMENT OF EXPATRIATES.—A tax computed 

22 in accordance with the table contained in section 2001 is 

23 hereby imposed on the transfer of the taxable estate, deter24 mined as provided in section 2106, of every decedent non25 resident not a citizen of the United States if the date of
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1 death occurs during a taxable year with respect to which 

2 the decedent is subject to tax under section 877(b).’’. 

3 (b) SPECIAL RULES FOR DETERMINING WHEN AN IN4 DIVIDUAL IS NO LONGER A UNITED STATES CITIZEN OR

5 LONG-TERM RESIDENT.—Section 7701 (relating to defini6 tions) is amended by redesignating subsection (n) as sub7 section (o) and by inserting after subsection (m) the fol8 lowing new subsection: 

9 ‘‘(n) SPECIAL RULES FOR DETERMINING WHEN AN IN10 DIVIDUAL IS NO LONGER A UNITED STATES CITIZEN OR

11 LONG-TERM RESIDENT.—An individual who would (but 

12 for this subsection) cease to be treated as a citizen or resi13 dent of the United States shall continue to be treated as 

14 a citizen or resident of the United States, as the case may 

15 be, until such individual—

16 ‘‘(1) gives notice of an expatriating act or termi17 nation of residency (with the requisite intent to relin18 quish citizenship or terminate residency) to the Sec19 retary of State or the Secretary of Homeland Secu20 rity, and 

21 ‘‘(2) provides a statement in accordance with 

22 section 6039G.’’. 

23 (c) PHYSICAL PRESENCE IN THE UNITED STATES FOR

24 MORE THAN 30 DAYS.—Section 877 (relating to expatria-
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1 tion to avoid tax) is amended by adding at the end the 

2 following new subsection: 

3 ‘‘(g) PHYSICAL PRESENCE.—

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

5 to any individual to whom this section would other6 wise apply for any taxable year during the 10-year 

7 period referred to in subsection (a) in which such in8 dividual is physically present in the United States at 

9 any time on more than 30 days in the calendar year 

10 ending in such taxable year, and such individual 

11 shall be treated for purposes of this title as a citizen 

12 or resident of the United States, as the case may be, 

13 for such taxable year. 

14 ‘‘(2) EXCEPTION.—

15 ‘‘(A) IN GENERAL.—In the case of an indi16 vidual described in any of the following subpara17 graphs of this paragraph, a day of physical pres18 ence in the United States shall be disregarded if 

19 the individual is performing services in the 

20 United States on such day for an employer. The 

21 preceding sentence shall not apply if—

22 ‘‘(i) such employer is related (within 

23 the meaning of section 267 and 707) to such 

24 individual, or 
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1 ‘‘(ii) such employer fails to meet such 

2 requirements as the Secretary may prescribe 

3 by regulations to prevent the avoidance of 

4 the purposes of this paragraph. 

5 Not more than 30 days during any calendar 

6 year may be disregarded under this subpara7 graph. 

8 ‘‘(B) INDIVIDUALS WITH TIES TO OTHER

9 COUNTRIES.—An individual is described in this 

10 subparagraph if—

11 ‘‘(i) the individual becomes (not later 

12 than the close of a reasonable period after 

13 loss of United States citizenship or termi14 nation of residency) a citizen or resident of 

15 the country in which—

16 ‘‘(I) such individual was born, 

17 ‘‘(II) if such individual is mar18 ried, such individual’s spouse was 

19 born, or 

20 ‘‘(III) either of such individual’s 

21 parents were born, and 

22 ‘‘(ii) the individual becomes fully liable 

23 for income tax in such country. 

24 ‘‘(C) MINIMAL PRIOR PHYSICAL PRESENCE

25 IN THE UNITED STATES.—An individual is de-
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1 scribed in this subparagraph if, for each year in 

2 the 10-year period ending on the date of loss of 

3 United States citizenship or termination of resi4 dency, the individual was physically present in 

5 the United States for 30 days or less. The rule 

6 of section 7701(b)(3)(D)(ii) shall apply for pur7 poses of this subparagraph.’’. 

8 (d) TRANSFERS SUBJECT TO GIFT TAX.—

9 (1) IN GENERAL.—Subsection (a) of section 2501 

10 (relating to taxable transfers) is amended by striking 

11 paragraph (4), by redesignating paragraph (5) as 

12 paragraph (4), and by striking paragraph (3) and 

13 inserting the following new paragraph: 

14 ‘‘(3) EXCEPTION.—

15 ‘‘(A) CERTAIN INDIVIDUALS.—Paragraph 

16 (2) shall not apply in the case of a donor to 

17 whom section 877(b) applies for the taxable year 

18 which includes the date of the transfer. 

19 ‘‘(B) CREDIT FOR FOREIGN GIFT TAXES.—

20 The tax imposed by this section solely by reason 

21 of this paragraph shall be credited with the 

22 amount of any gift tax actually paid to any for23 eign country in respect of any gift which is tax24 able under this section solely by reason of this 

25 paragraph.’’
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1 (2) TRANSFERS OF CERTAIN STOCK.—Subsection 

2 (a) of section 2501 is amended by adding at the end 

3 the following new paragraph: 

4 ‘‘(5) TRANSFERS OF CERTAIN STOCK.—

5 ‘‘(A) IN GENERAL.—In the case of a trans6 fer of stock in a foreign corporation described in 

7 subparagraph (B) by a donor to whom section 

8 877(b) applies for the taxable year which in9 cludes the date of the transfer—

10 ‘‘(i) section 2511(a) shall be applied 

11 without regard to whether such stock is situ12 ated within the United States, and 

13 ‘‘(ii) the value of such stock for pur14 poses of this chapter shall be its U.S.-asset 

15 value determined under subparagraph (C). 

16 ‘‘(B) FOREIGN CORPORATION DESCRIBED.—

17 A foreign corporation is described in this sub18 paragraph with respect to a donor if—

19 ‘‘(i) the donor owned (within the 

20 meaning of section 958(a)) at the time of 

21 such transfer 10 percent or more of the total 

22 combined voting power of all classes of stock 

23 entitled to vote of the foreign corporation, 

24 and
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1 ‘‘(ii) such donor owned (within the 

2 meaning of section 958(a)), or is considered 

3 to have owned (by applying the ownership 

4 rules of section 958(b)), at the time of such 

5 transfer, more than 50 percent of—

6 ‘‘(I) the total combined voting 

7 power of all classes of stock entitled to 

8 vote of such corporation, or 

9 ‘‘(II) the total value of the stock of 

10 such corporation. 

11 ‘‘(C) U.S.-ASSET VALUE.—For purposes of 

12 subparagraph (A), the U.S.-asset value of stock 

13 shall be the amount which bears the same ratio 

14 to the fair market value of such stock at the time 

15 of transfer as—

16 ‘‘(i) the fair market value (at such 

17 time) of the assets owned by such foreign 

18 corporation and situated in the United 

19 States, bears to 

20 ‘‘(ii) the total fair market value (at 

21 such time) of all assets owned by such for22 eign corporation.’’ 

23 (e) ENHANCED INFORMATION REPORTING FROM INDI24 VIDUALS LOSING UNITED STATES CITIZENSHIP.—
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1 (1) IN GENERAL.—Subsection (a) of section 

2 6039G is amended to read as follows: 

3 ‘‘(a) IN GENERAL.—Notwithstanding any other provi4 sion of law, any individual to whom section 877(b) applies 

5 for any taxable year shall provide a statement for such tax6 able year which includes the information described in sub7 section (b).’’. 

8 (2) INFORMATION TO BE PROVIDED.—Subsection 

9 (b) of section 6039G is amended to read as follows: 

10 ‘‘(b) INFORMATION TO BE PROVIDED.—Information 

11 required under subsection (a) shall include—

12 ‘‘(1) the taxpayer’s TIN, 

13 ‘‘(2) the mailing address of such individual’s 

14 principal foreign residence, 

15 ‘‘(3) the foreign country in which such indi16 vidual is residing, 

17 ‘‘(4) the foreign country of which such individual 

18 is a citizen, 

19 ‘‘(5) information detailing the income, assets, 

20 and liabilities of such individual, 

21 ‘‘(6) the number of days during any portion of 

22 which that the individual was physically present in 

23 the United States during the taxable year, and 

24 ‘‘(7) such other information as the Secretary 

25 may prescribe.’’. 
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1 (3) INCREASE IN PENALTY.—Subsection (d) of 

2 section 6039G is amended to read as follows: 

3 ‘‘(d) PENALTY.—If—

4 ‘‘(1) an individual is required to file a statement 

5 under subsection (a) for any taxable year, and 

6 ‘‘(2) fails to file such a statement with the Sec7 retary on or before the date such statement is required 

8 to be filed or fails to include all the information re9 quired to be shown on the statement or includes incor10 rect information, 

11 such individual shall pay a penalty of $10,000 unless it 

12 is shown that such failure is due to reasonable cause and 

13 not to willful neglect.’’. 

14 (4) CONFORMING AMENDMENT.—Section 6039G 

15 is amended by striking subsections (c), (f), and (g) 

16 and by redesignating subsections (d) and (e) as sub17 section (c) and (d), respectively. 

18 (f) EFFECTIVE DATE.—The amendments made by this 

19 section shall apply to individuals who expatriate after Feb20 ruary 27, 2003. 

21 SEC. 2006. REPORTING OF TAXABLE MERGERS AND ACQUI22 SITIONS. 

23 (a) IN GENERAL.—Subpart B of part III of subchapter 

24 A of chapter 61 is amended by inserting after section 6043 

25 the following new section: 
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1 ‘‘SEC. 6043A. RETURNS RELATING TO TAXABLE MERGERS 

2 AND ACQUISITIONS. 

3 ‘‘(a) IN GENERAL.—According to the forms or regula4 tions prescribed by the Secretary, the acquiring corporation 

5 in any taxable acquisition shall make a return setting 

6 forth—

7 ‘‘(1) a description of the acquisition, 

8 ‘‘(2) the name and address of each shareholder of 

9 the acquired corporation who is required to recognize 

10 gain (if any) as a result of the acquisition, 

11 ‘‘(3) the amount of money and the fair market 

12 value of other property transferred to each such share13 holder as part of such acquisition, and 

14 ‘‘(4) such other information as the Secretary 

15 may prescribe. 

16 To the extent provided by the Secretary, the requirements 

17 of this section applicable to the acquiring corporation shall 

18 be applicable to the acquired corporation and not to the 

19 acquiring corporation. 

20 ‘‘(b) NOMINEES.—According to the forms or regula21 tions prescribed by the Secretary—

22 ‘‘(1) REPORTING.—Any person who holds stock 

23 as a nominee for another person shall furnish in the 

24 manner prescribed by the Secretary to such other per25 son the information provided by the corporation 

26 under subsection (d).
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1 ‘‘(2) REPORTING TO NOMINEES.—In the case of 

2 stock held by any person as a nominee, references in 

3 this section (other than in subsection (c)) to a share4 holder shall be treated as a reference to the nominee. 

5 ‘‘(c) TAXABLE ACQUISITION.—For purposes of this sec6 tion, the term ‘taxable acquisition’ means any acquisition 

7 by a corporation of stock in or property of another corpora8 tion if any shareholder of the acquired corporation is re9 quired to recognize gain (if any) as a result of such acquisi10 tion. 

11 ‘‘(d) STATEMENTS TO BE FURNISHED TO SHARE12 HOLDERS.—According to the forms or regulations pre13 scribed by the Secretary, every person required to make a 

14 return under subsection (a) shall furnish to each share15 holder whose name is required to be set forth in such return 

16 a written statement showing—

17 ‘‘(1) the name, address, and phone number of the 

18 information contact of the person required to make 

19 such return, 

20 ‘‘(2) the information required to be shown on 

21 such return with respect to such shareholder, and 

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

23 may prescribe. 

24 The written statement required under the preceding sen25 tence shall be furnished to the shareholder on or before Jan-
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1 uary 31 of the year following the calendar year during 

2 which the taxable acquisition occurred.’’

3 (b) ASSESSABLE PENALTIES.—

4 (1) Subparagraph (B) of section 6724(d)(1) (re5 lating to definitions) is amended by redesignating 

6 clauses (ii) through (xviii) as clauses (iii) through 

7 (xix), respectively, and by inserting after clause (i) 

8 the following new clause: 

9 ‘‘(ii) section 6043A(a) (relating to re10 turns relating to taxable mergers and acqui11 sitions),’’. 

12 (2) Paragraph (2) of section 6724(d) is amended 

13 by redesignating subparagraphs (F) through (BB) as 

14 subparagraphs (G) through (CC), respectively, and by 

15 inserting after subparagraph (E) the following new 

16 subparagraph: 

17 ‘‘(F) subsections (b) and (d) of section 

18 6043A (relating to returns relating to taxable 

19 mergers and acquisitions).’’. 

20 (c) CLERICAL AMENDMENT.—The table of sections for 

21 subpart B of part III of subchapter A of chapter 61 is 

22 amended by inserting after the item relating to section 6043 

23 the following new item:

‘‘Sec. 6043A. Returns relating to taxable mergers and acquisitions.’’.
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1 (d) EFFECTIVE DATE.—The amendments made by this 

2 section shall apply to acquisitions after the date of the en3 actment of this Act. 

4 SEC. 2007. STUDIES. 

5 (a) TRANSFER PRICING RULES.—The Secretary of the 

6 Treasury or the Secretary’s delegate shall conduct a study 

7 regarding the effectiveness of current transfer pricing rules 

8 and compliance efforts in ensuring that cross-border trans9 fers and other related-party transactions, particularly 

10 transactions involving intangible assets, service contracts, 

11 or leases cannot be used improperly to shift income out of 

12 the United States. The study shall include a review of the 

13 contemporaneous documentation and penalty rules under 

14 section 6662 of the Internal Revenue Code of 1986, a review 

15 of the regulatory and administrative guidance imple16 menting the principles of section 482 of such Code to trans17 actions involving intangible property and services and to 

18 cost-sharing arrangements, and an examination of whether 

19 increased disclosure of cross-border transactions should be 

20 required. The study shall set forth specific recommendations 

21 to address all abuses identified in the study. Not later than 

22 June 30, 2004, such Secretary or delegate shall submit to 

23 the Congress a report of such study. 

24 (b) INCOME TAX TREATIES.—The Secretary of the 

25 Treasury or the Secretary’s delegate shall conduct a study 
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1 of United States income tax treaties to identify any inap2 propriate reductions in United States withholding tax that 

3 provide opportunities for shifting income out of the United 

4 States, and to evaluate whether existing anti-abuse mecha5 nisms are operating properly. The study shall include spe6 cific recommendations to address all inappropriate uses of 

7 tax treaties. Not later than June 30, 2004, such Secretary 

8 or delegate shall submit to the Congress a report of such 

9 study. 

10 (c) IMPACT OF CORPORATE EXPATRIATION PROVI11 SIONS.—The Secretary of the Treasury or the Secretary’s 

12 delegate shall conduct a study of the impact of the provi13 sions of this title on earnings stripping and corporate expa14 triation. The study shall include such recommendations as 

15 such Secretary or delegate may have to improve the impact 

16 of such provisions in carrying out the purposes of this title. 

17 Not later than December 31, 2005, such Secretary or dele18 gate shall submit to the Congress a report of such study.
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1 TITLE III—PROVISIONS 

2 RELATING TO TAX SHELTERS

3 Subtitle A—Taxpayer-Related 

4 Provisions 

5 SEC. 3001. PENALTY FOR FAILING TO DISCLOSE REPORT6 ABLE TRANSACTIONS. 

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

8 68 (relating to assessable penalties) is amended by inserting 

9 after section 6707 the following new section: 

10 ‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORT11 ABLE TRANSACTION INFORMATION WITH RE12 TURN. 

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

14 to include on any return or statement any information with 

15 respect to a reportable transaction which is required under 

16 section 6011 to be included with such return or statement 

17 shall pay a penalty in the amount determined under sub18 section (b). 

19 ‘‘(b) AMOUNT OF PENALTY.—

20 ‘‘(1) IN GENERAL.—Except as provided in para21 graph (2), the amount of the penalty under subsection 

22 (a) shall be—

23 ‘‘(A) $10,000 in the case of a natural per24 son, and 

25 ‘‘(B) $50,000 in any other case.
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1 ‘‘(2) LISTED TRANSACTION.—The amount of the 

2 penalty under subsection (a) with respect to a listed 

3 transaction shall be—

4 ‘‘(A) $100,000 in the case of a natural per5 son, and 

6 ‘‘(B) $200,000 in any other case. 

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

8 ‘‘(1) REPORTABLE TRANSACTION.—The term ‘re9 portable transaction’ means any transaction with re10 spect to which information is required to be included 

11 with a return or statement because, as determined 

12 under regulations prescribed under section 6011, such 

13 transaction is of a type which the Secretary deter14 mines as having a potential for tax avoidance or eva15 sion. 

16 ‘‘(2) LISTED TRANSACTION.—The term ‘listed 

17 transaction’ means a reportable transaction which is 

18 the same as, or substantially similar to, a transaction 

19 specifically identified by the Secretary as a tax avoid20 ance transaction for purposes of section 6011. 

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

22 ‘‘(1) IN GENERAL.—The Commissioner of Inter23 nal Revenue may rescind all or any portion of any 

24 penalty imposed by this section with respect to any 

25 violation if—
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1 ‘‘(A) the violation is with respect to a re2 portable transaction other than a listed trans3 action, and 

4 ‘‘(B) rescinding the penalty would promote 

5 compliance with the requirements of this title 

6 and effective tax administration. 

7 ‘‘(2) NO JUDICIAL APPEAL.—Notwithstanding 

8 any other provision of law, any determination under 

9 this subsection may not be reviewed in any judicial 

10 proceeding. 

11 ‘‘(3) RECORDS.—If a penalty is rescinded under 

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

13 file in the Office of the Commissioner the opinion of 

14 the Commissioner or the head of the Office of Tax 

15 Shelter Analysis with respect to the determination, 

16 including—

17 ‘‘(A) a statement of the facts and cir18 cumstances relating to the violation, 

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

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

21 ‘‘(e) COORDINATION WITH OTHER PENALTIES.—The 

22 penalty imposed by this section shall be in addition to any 

23 other penalty imposed by this title.’’

24 (b) CONFORMING AMENDMENT.—The table of sections 

25 for part I of subchapter B of chapter 68 is amended by 
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1 inserting after the item relating to section 6707 the fol2 lowing:

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

information with return.’’

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

4 section shall apply to returns and statements the due date 

5 for which is after the date of the enactment of this Act. 

6 (d) REPORT.—The Commissioner of Internal Revenue 

7 shall annually report to the Committee on Ways and Means 

8 of the House of Representatives and the Committee on Fi9 nance of the Senate—

10 (1) a summary of the total number and aggre11 gate amount of penalties imposed, and rescinded, 

12 under section 6707A of the Internal Revenue Code of 

13 1986, and 

14 (2) a description of each penalty rescinded under 

15 section 6707(c) of such Code and the reasons therefor.

16 SEC. 3002. ACCURACY-RELATED PENALTY FOR LISTED 

17 TRANSACTIONS, OTHER REPORTABLE TRANS18 ACTIONS HAVING A SIGNIFICANT TAX AVOID19 ANCE PURPOSE, ETC. 

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

21 amended by inserting after section 6662 the following new 

22 section: 
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1 ‘‘SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY 

2 ON UNDERSTATEMENTS WITH RESPECT TO 

3 REPORTABLE TRANSACTIONS. 

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

5 reportable transaction understatement for any taxable year, 

6 there shall be added to the tax an amount equal to 20 per7 cent of the amount of such understatement. 

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

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

12 ‘‘(A) the product of—

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

14 in taxable income which results from a dif15 ference between the proper tax treatment of 

16 an item to which this section applies and 

17 the taxpayer’s treatment of such item (as 

18 shown on the taxpayer’s return of tax), and 

19 ‘‘(ii) the highest rate of tax imposed by 

20 section 1 (section 11 in the case of a tax21 payer which is a corporation), and 

22 ‘‘(B) the amount of the decrease (if any) in 

23 the aggregate amount of credits determined 

24 under subtitle A which results from a difference 

25 between the taxpayer’s treatment of an item to 

26 which this section applies (as shown on the tax-
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1 payer’s return of tax) and the proper tax treat2 ment of such item. 

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

4 the excess of deductions allowed for the taxable year 

5 over gross income for such year, and any reduction 

6 in the amount of capital losses which would (without 

7 regard to section 1211) be allowed for such year, shall 

8 be treated as an increase in taxable income. 

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

10 section shall apply to any item which is attributable 

11 to—

12 ‘‘(A) any listed transaction, and 

13 ‘‘(B) any reportable transaction (other than 

14 a listed transaction) if a significant purpose of 

15 such transaction is the avoidance or evasion of 

16 Federal income tax. 

17 ‘‘(c) HIGHER PENALTY FOR NONDISCLOSED TRANS18 ACTIONS.—Subsection (a) shall be applied by substituting 

19 ‘30 percent’ for ‘20 percent’ with respect to the portion of 

20 any reportable transaction understatement with respect to 

21 which the requirement of section 6664(d)(2)(A) is not met. 

22 ‘‘(d) DEFINITIONS OF REPORTABLE AND LISTED

23 TRANSACTIONS.—For purposes of this section, the terms ‘re24 portable transaction’ and ‘listed transaction’ have the re25 spective meanings given to such terms by section 6707A(c).
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1 ‘‘(e) SPECIAL RULES.—

2 ‘‘(1) COORDINATION WITH PENALTIES, ETC., ON

3 OTHER UNDERSTATEMENTS.—In the case of an under4 statement (as defined in section 6662(d)(2))—

5 ‘‘(A) the amount of such understatement 

6 (determined without regard to this paragraph) 

7 shall be increased by the aggregate amount of re8 portable transaction understatements for pur9 poses of determining whether such understate10 ment is a substantial understatement under sec11 tion 6662(d)(1), and 

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

13 6662(a) shall apply only to the excess of the 

14 amount of the substantial understatement (if 

15 any) after the application of subparagraph (A) 

16 over the aggregate amount of reportable trans17 action understatements. 

18 ‘‘(2) COORDINATION WITH OTHER PENALTIES.—

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 RETURNS.—

4 Except as provided in regulations, in no event shall 

5 any tax treatment included with an amendment or 

6 supplement to a return of tax be taken into account 

7 in determining the amount of any reportable trans8 action understatement if the amendment or supple9 ment is filed after the earlier of the date the taxpayer 

10 is first contacted by the Secretary regarding the ex11 amination of the return or such other date as is speci12 fied 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 sentence: 

16 ‘‘The excess under the preceding sentence shall be 

17 determined without regard to items to which sec18 tion 6662A applies.’’

19 (c) REASONABLE CAUSE EXCEPTION.—

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

21 adding at the end the following new subsection: 

22 ‘‘(d) REASONABLE CAUSE EXCEPTION FOR REPORT23 ABLE TRANSACTION UNDERSTATEMENTS.— 

24 ‘‘(1) IN GENERAL.—No penalty shall be imposed 

25 under section 6662A with respect to any portion of a 
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1 reportable transaction understatement if it is shown 

2 that there was a reasonable cause for such portion 

3 and that the taxpayer acted in good faith with respect 

4 to such portion. 

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

6 apply to any reportable transaction understatement 

7 unless—

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

9 treatment of the item are adequately disclosed in 

10 accordance with the regulations prescribed under 

11 section 6011, 

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

13 for such treatment, and 

14 ‘‘(C) the taxpayer reasonably believed that 

15 such treatment was more likely than not the 

16 proper treatment. 

17 A taxpayer failing to adequately disclose in accord18 ance with section 6011 shall be treated as meeting the 

19 requirements of subparagraph (A) if the penalty for 

20 such failure was rescinded under section 6707A(d). 

21 ‘‘(3) RULES RELATING TO REASONABLE BE22 LIEF.—For purposes of paragraph (2)(C)—

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

24 treated as having a reasonable belief with respect 
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1 to the tax treatment of an item only if such be2 lief—

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

4 exist at the time the return of tax which in5 cludes such tax treatment is filed, and 

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

7 chances of success on the merits of such 

8 treatment and does not take into account 

9 the possibility that a return will not be au10 dited, such treatment will not be raised on 

11 audit, or such treatment will be resolved 

12 through settlement if it is raised. 

13 ‘‘(B) CERTAIN OPINIONS MAY NOT BE RE14 LIED UPON.—

15 ‘‘(i) IN GENERAL.—An opinion of a 

16 tax advisor may not be relied upon to estab17 lish the reasonable belief of a taxpayer if—

18 ‘‘(I) the tax advisor is described 

19 in clause (ii), or 

20 ‘‘(II) the opinion is described in 

21 clause (iii). 

22 ‘‘(ii) DISQUALIFIED TAX ADVISORS.—A 

23 tax advisor is described in this clause if the 

24 tax advisor— 
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1 ‘‘(I) is a material advisor (within 

2 the meaning of section 6111(b)(1)) and 

3 participates in the organization, man4 agement, promotion, or sale of the 

5 transaction or is related (within the 

6 meaning of section 267(b) or 

7 707(b)(1)) to any person who so par8 ticipates, 

9 ‘‘(II) is compensated directly or 

10 indirectly by a material advisor with 

11 respect to the transaction, 

12 ‘‘(III) has a fee arrangement with 

13 respect to the transaction which is con14 tingent on all or part of the intended 

15 tax benefits from the transaction being 

16 sustained, or 

17 ‘‘(IV) as determined under regula18 tions prescribed by the Secretary, has a 

19 disqualifying financial interest with 

20 respect to the transaction.

21 ‘‘(iii) DISQUALIFIED OPINIONS.—For 

22 purposes of clause (i), an opinion is dis23 qualified if the opinion—
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1 ‘‘(I) is based on unreasonable fac2 tual or legal assumptions (including 

3 assumptions as to future events), 

4 ‘‘(II) unreasonably relies on rep5 resentations, statements, findings, or 

6 agreements of the taxpayer or any 

7 other person, 

8 ‘‘(III) does not identify and con9 sider all relevant facts, or 

10 ‘‘(IV) fails to meet any other re11 quirement as the Secretary may pre12 scribe.’’

13 (2) CONFORMING AMENDMENTS.—

14 (A) Paragraph (1) of section 6664(c) is 

15 amended by striking ‘‘this part’’ and inserting 

16 ‘‘section 6662 or 6663’’. 

17 (B) The heading for subsection (c) of section 

18 6664 is amended by inserting ‘‘FOR UNDERPAY19 MENTS’’ after ‘‘EXCEPTION’’. 

20 (d) REDUCTION IN PENALTY FOR SUBSTANTIAL UN21 DERSTATEMENT OF INCOME TAX NOT TO APPLY TO TAX

22 SHELTERS.—Subparagraph (C) of section 6662(d)(2) (re23 lating to substantial understatement of income tax) is 

24 amended to read as follows:
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1 ‘‘(C) REDUCTION NOT TO APPLY TO TAX

2 SHELTERS.—

3 ‘‘(i) IN GENERAL.—Subparagraph (B) 

4 shall not apply to any item attributable to 

5 a tax shelter. 

6 ‘‘(ii) TAX SHELTER.—For purposes of 

7 clause (i), the term ‘tax shelter’ means—

8 ‘‘(I) a partnership or other entity, 

9 ‘‘(II) any investment plan or ar10 rangement, or 

11 ‘‘(III) any other plan or arrange12 ment, 

13 if a significant purpose of such partnership, 

14 entity, plan, or arrangement is the avoid15 ance or evasion of Federal income tax.’’

16 (e) CONFORMING AMENDMENTS.—

17 (1) Sections 461(i)(3)(C), 1274(b)(3), and 

18 7525(b) are each amended by striking ‘‘section 

19 6662(d)(2)(C)(iii)’’ and inserting ‘‘section 

20 6662(d)(2)(C)(ii)’’. 

21 (2) The heading for section 6662 is amended to 

22 read as follows: 
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1 ‘‘SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY 

2 ON UNDERPAYMENTS.’’

3 (3) The table of sections for part II of subchapter 

4 A of chapter 68 is amended by striking the item relat5 ing to section 6662 and inserting the following new 

6 items:

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

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

7 (f) EFFECTIVE DATE.—The amendments made by this 

8 section shall apply to taxable years ending after the date 

9 of the enactment of this Act. 

10 SEC. 3003. TAX SHELTER EXCEPTION TO CONFIDENTIALITY 

11 PRIVILEGES RELATING TO TAXPAYER COM12 MUNICATIONS. 

13 (a) IN GENERAL.—Section 7525(b) (relating to section 

14 not to apply to communications regarding corporate tax 

15 shelters) is amended to read as follows: 

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

17 REGARDING TAX SHELTERS.—The privilege under sub18 section (a) shall not apply to any written communication 

19 which is—

20 ‘‘(1) between a federally authorized tax practi21 tioner and—

22 ‘‘(A) any person, 
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1 ‘‘(B) any director, officer, employee, agent, 

2 or representative of the person, or 

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

4 profits interest in the person, and 

5 ‘‘(2) in connection with the promotion of the di6 rect or indirect participation of the person in any tax 

7 shelter (as defined in section 6662(d)(2)(C)(ii)).’’

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

9 section shall apply to communications made on or after the 

10 date of the enactment of this Act. 

11 SEC. 3004. STATUTE OF LIMITATIONS FOR TAXABLE YEARS 

12 FOR WHICH REQUIRED LISTED TRANS13 ACTIONS NOT REPORTED. 

14 (a) IN GENERAL.—Section 6501(c) (relating to excep15 tions) is amended by adding at the end the following new 

16 paragraph: 

17 ‘‘(10) LISTED TRANSACTIONS.—If a taxpayer 

18 fails to include on any return or statement for any 

19 taxable year any information with respect to a listed 

20 transaction (as defined in section 6707A(c)(2)) which 

21 is required under section 6011 to be included with 

22 such return or statement, the time for assessment of 

23 any tax imposed by this title with respect to such 

24 transaction shall not expire before the date which is 

25 1 year after the earlier of—
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1 ‘‘(A) the date on which the Secretary is fur2 nished the information so required, or 

3 ‘‘(B) the date that a material advisor (as 

4 defined in section 6111) meets the requirements 

5 of section 6112 with respect to a request by the 

6 Secretary under section 6112(b) relating to such 

7 transaction with respect to such taxpayer.’’

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

9 section shall apply to taxable years with respect to which 

10 the period for assessing a deficiency did not expire before 

11 the date of the enactment of this Act. 

12 SEC. 3005. DISCLOSURE OF REPORTABLE TRANSACTIONS. 

13 (a) IN GENERAL.—Section 6111 (relating to registra14 tion of tax shelters) is amended to read as follows: 

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

16 ‘‘(a) IN GENERAL.—Each material advisor with re17 spect to any reportable transaction shall make a return (in 

18 such form as the Secretary may prescribe) setting forth—

19 ‘‘(1) information identifying and describing the 

20 transaction,

21 ‘‘(2) information describing any potential tax 

22 benefits expected to result from the transaction, and 

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

24 may prescribe. 
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1 Such return shall be filed not later than the date specified 

2 by the Secretary. 

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

4 ‘‘(1) MATERIAL ADVISOR.—

5 ‘‘(A) IN GENERAL.—The term ‘material ad6 visor’ means any person—

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

8 assistance, or advice with respect to orga9 nizing, managing, promoting, selling, im10 plementing, or carrying out any reportable 

11 transaction, and 

12 ‘‘(ii) who directly or indirectly derives 

13 gross income in excess of the threshold 

14 amount (or such other amount as may be 

15 prescribed by the Secretary) for such advice 

16 or assistance. 

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

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

19 ‘‘(i) $50,000 in the case of a reportable 

20 transaction substantially all of the tax bene21 fits from which are provided to natural per22 sons, and 

23 ‘‘(ii) $250,000 in any other case.
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1 ‘‘(2) REPORTABLE TRANSACTION.—The term ‘re2 portable transaction’ has the meaning given to such 

3 term by section 6707A(c). 

4 ‘‘(c) REGULATIONS.—The Secretary may prescribe reg5 ulations which provide—

6 ‘‘(1) that only 1 person shall be required to meet 

7 the requirements of subsection (a) in cases in which 

8 2 or more persons would otherwise be required to meet 

9 such requirements, 

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

11 section, and 

12 ‘‘(3) such rules as may be necessary or appro13 priate to carry out the purposes of this section.’’

14 (b) CONFORMING AMENDMENTS.—

15 (1) The item relating to section 6111 in the table 

16 of sections for subchapter B of chapter 61 is amended 

17 to read as follows:

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

18 (2) So much of section 6112 as precedes sub19 section (c) thereof is amended to read as follows: 

20 ‘‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANS21 ACTIONS MUST KEEP LISTS OF ADVISEES, 

22 ETC. 

23 ‘‘(a) IN GENERAL.—Each material advisor (as defined 

24 in section 6111) with respect to any reportable transaction 

25 (as defined in section 6707A(c)) shall (whether or not re-
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1 quired to file a return under section 6111 with respect to 

2 such transaction) maintain (in such manner as the Sec3 retary may by regulations prescribe) a list—

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

5 whom such advisor acted as a material advisor with 

6 respect to such transaction, and 

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

8 Secretary may by regulations require.’’

9 (3) Section 6112 is amended—

10 (A) by redesignating subsection (c) as sub11 section (b), 

12 (B) by inserting ‘‘written’’ before ‘‘request’’ 

13 in subsection (b)(1) (as so redesignated), and 

14 (C) by striking ‘‘shall prescribe’’ in sub15 section (b)(2) (as so redesignated) and inserting 

16 ‘‘may prescribe’’. 

17 (4) The item relating to section 6112 in the table 

18 of sections for subchapter B of chapter 61 is amended 

19 to read as follows:

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

lists of advisees, etc.’’

20 (5)(A) The heading for section 6708 is amended 

21 to read as follows: 
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1 ‘‘SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES 

2 WITH RESPECT TO REPORTABLE TRANS3 ACTIONS.’’

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

5 table of sections for part I of subchapter B of chapter 

6 68 is amended to read as follows:

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

7 (c) REQUIRED DISCLOSURE NOT SUBJECT TO CLAIM

8 OF CONFIDENTIALITY.—Paragraph (1) of section 6112(b), 

9 as redesignated by subsection (b), is amended by adding 

10 at the end the following new flush sentence: 

11 ‘‘For purposes of this section, the identity of any per12 son on such list shall not be privileged.’’. 

13 (d) EFFECTIVE DATE.—

14 (1) IN GENERAL.—Except as provided in para15 graph (2), the amendments made by this section shall 

16 apply to transactions with respect to which material 

17 aid, assistance, or advice referred to in section 

18 6111(b)(1)(A)(i) of the Internal Revenue Code of 1986 

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

20 of the enactment of this Act. 

21 (2) NO CLAIM OF CONFIDENTIALITY AGAINST DIS22 CLOSURE.—The amendment made by subsection (c) 

23 shall take effect as if included in the amendments 
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1 made by section 142 of the Deficit Reduction Act of 

2 1984. 

3 SEC. 3006. FAILURE TO FURNISH INFORMATION REGARD4 ING REPORTABLE TRANSACTIONS. 

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

6 furnish information regarding tax shelters) is amended to 

7 read as follows: 

8 ‘‘SEC. 6707. FAILURE TO FURNISH INFORMATION REGARD9 ING REPORTABLE TRANSACTIONS. 

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

11 a return under section 6111(a) with respect to any report12 able transaction—

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

14 prescribed therefor, or 

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

16 the Secretary with respect to such transaction, 

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

18 in the amount determined under subsection (b). 

19 ‘‘(b) AMOUNT OF PENALTY.—

20 ‘‘(1) IN GENERAL.—Except as provided in para21 graph (2), the penalty imposed under subsection (a) 

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

23 ‘‘(2) LISTED TRANSACTIONS.—The penalty im24 posed under subsection (a) with respect to any listed 
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1 transaction shall be an amount equal to the greater 

2 of—

3 ‘‘(A) $200,000, or 

4 ‘‘(B) 50 percent of the gross income derived 

5 by such person with respect to aid, assistance, or 

6 advice which is provided with respect to the list7 ed transaction before the date the return is filed 

8 under section 6111. 

9 Subparagraph (B) shall be applied by substituting 

10 ‘75 percent’ for ‘50 percent’ in the case of an inten11 tional failure or act described in subsection (a). 

12 ‘‘(c) RESCISSION AUTHORITY.—The provisions of sec13 tion 6707A(d) (relating to authority of Commissioner to re14 scind penalty) shall apply to any penalty imposed under 

15 this section. 

16 ‘‘(d) REPORTABLE AND LISTED TRANSACTIONS.—For 

17 purposes of this section, the terms ‘reportable transaction’ 

18 and ‘listed transaction’ have the respective meanings given 

19 to such terms by section 6707A(c).’’

20 (b) CLERICAL AMENDMENT.—The item relating to sec21 tion 6707 in the table of sections for part I of subchapter 

22 B of chapter 68 is amended by striking ‘‘tax shelters’’ and 

23 inserting ‘‘reportable transactions’’.
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1 (c) EFFECTIVE DATE.—The amendments made by this 

2 section shall apply to returns the due date for which is after 

3 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 request, 

14 such person shall pay a penalty of $10,000 for each 

15 day of such failure after such 20th day. 

16 ‘‘(2) REASONABLE CAUSE EXCEPTION.—No pen17 alty shall be imposed by paragraph (1) with respect 

18 to the failure on any day if such failure is due to rea19 sonable cause.’’. 

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

21 section shall apply to requests made after the date of the 

22 enactment of this Act. 

23 SEC. 3008. PENALTY ON PROMOTERS OF TAX SHELTERS. 

24 (a) PENALTY ON PROMOTING ABUSIVE TAX SHEL25 TERS.—Section 6700(a) is amended by adding at the end 
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1 the following new sentence: ‘‘Notwithstanding the first sen2 tence, if an activity with respect to which a penalty im3 posed under this subsection involves a statement described 

4 in paragraph (2)(A), the amount of the penalty shall be 

5 equal to 50 percent of the gross income derived (or to be 

6 derived) from such activity by the person on which the pen7 alty is imposed.’’

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

9 section shall apply to activities after the date of the enact10 ment of this Act. 

11 SEC. 3009. MODIFICATIONS OF SUBSTANTIAL UNDERSTATE12 MENT PENALTY FOR NONREPORTABLE 

13 TRANSACTIONS. 

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

16 corporations) is amended to read as follows: 

17 ‘‘(B) SPECIAL RULE FOR CORPORATIONS.—

18 In the case of a corporation other than an S cor19 poration or a personal holding company (as de20 fined in section 542), there is a substantial un21 derstatement of income tax for any taxable year 

22 if the amount of the understatement for the tax23 able year exceeds the lesser of—
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1 ‘‘(i) 10 percent of the tax required to 

2 be shown on the return for the taxable year 

3 (or, if greater, $10,000), or 

4 ‘‘(ii) $10,000,000.’’

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

6 section shall apply to taxable years beginning after the date 

7 of the enactment of this Act. 

8 SEC. 3010. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN 

9 CONDUCT RELATED TO TAX SHELTERS AND 

10 REPORTABLE TRANSACTIONS. 

11 (a) IN GENERAL.—Section 7408 (relating to action to 

12 enjoin promoters of abusive tax shelters, etc.) is amended 

13 by redesignating subsection (c) as subsection (d) and by 

14 striking subsections (a) and (b) and inserting the following 

15 new subsections: 

16 ‘‘(a) AUTHORITY TO SEEK INJUNCTION.—A civil ac17 tion in the name of the United States to enjoin any person 

18 from further engaging in specified conduct may be com19 menced at the request of the Secretary. Any action under 

20 this section shall be brought in the district court of the 

21 United States for the district in which such person resides, 

22 has his principal place of business, or has engaged in speci23 fied conduct. The court may exercise its jurisdiction over 

24 such action (as provided in section 7402(a)) separate and 
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1 apart from any other action brought by the United States 

2 against such person. 

3 ‘‘(b) ADJUDICATION AND DECREE.—In any action 

4 under subsection (a), if the court finds—

5 ‘‘(1) that the person has engaged in any specified 

6 conduct, and 

7 ‘‘(2) that injunctive relief is appropriate to pre8 vent recurrence of such conduct, 

9 the court may enjoin such person from engaging in such 

10 conduct or in any other activity subject to penalty under 

11 this title. 

12 ‘‘(c) SPECIFIED CONDUCT.—For purposes of this sec13 tion, the term ‘specified conduct’ means any action, or fail14 ure to take action, subject to penalty under section 6700, 

15 6701, 6707, or 6708.’’

16 (b) CONFORMING AMENDMENTS.—

17 (1) The heading for section 7408 is amended to 

18 read as follows:

19 ‘‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RE20 LATED TO TAX SHELTERS AND REPORTABLE 

21 TRANSACTIONS.’’

22 (2) The table of sections for subchapter A of 

23 chapter 76 is amended by striking the item relating 

24 to section 7408 and inserting the following new item:

‘‘Sec. 7408. Actions to enjoin specified conduct related to tax shelters and reportable transactions.’’
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1 (c) EFFECTIVE DATE.—The amendment made by this 

2 section shall take effect on the day after the date of the en3 actment of this Act. 

4 SEC. 3011. PENALTY ON FAILURE TO REPORT INTERESTS IN 

5 FOREIGN FINANCIAL ACCOUNTS. 

6 (a) IN GENERAL.—Section 5321(a)(5) of title 31, 

7 United States Code, is amended to read as follows: 

8 ‘‘(5) FOREIGN FINANCIAL AGENCY TRANSACTION

9 VIOLATION.—

10 ‘‘(A) PENALTY AUTHORIZED.—The Sec11 retary of the Treasury may impose a civil money 

12 penalty on any person who violates, or causes 

13 any violation of, any provision of section 5314. 

14 ‘‘(B) AMOUNT OF PENALTY.—

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

16 in subparagraph (C), the amount of any 

17 civil penalty imposed under subparagraph 

18 (A) shall not exceed $5,000. 

19 ‘‘(ii) REASONABLE CAUSE EXCEP20 TION.—No penalty shall be imposed under 

21 subparagraph (A) with respect to any viola22 tion if—

23 ‘‘(I) such violation was due to 

24 reasonable cause, and
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1 ‘‘(II) the amount of the trans2 action or the balance in the account at 

3 the time of the transaction was prop4 erly reported. 

5 ‘‘(C) WILLFUL VIOLATIONS.—In the case of 

6 any person willfully violating, or willfully caus7 ing any violation of, any provision of section 

8 5314—

9 ‘‘(i) the maximum penalty under sub10 paragraph (B)(i) shall be increased to the 

11 greater of—

12 ‘‘(I) $25,000, or 

13 ‘‘(II) the amount (not exceeding 

14 $100,000) determined under subpara15 graph (D), and 

16 ‘‘(ii) subparagraph (B)(ii) shall not 

17 apply. 

18 ‘‘(D) AMOUNT.—The amount determined 

19 under this subparagraph is—

20 ‘‘(i) in the case of a violation involving 

21 a transaction, the amount of the trans22 action, or 

23 ‘‘(ii) in the case of a violation involv24 ing a failure to report the existence of an 

25 account or any identifying information re-
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1 quired to be provided with respect to an ac2 count, the balance in the account at the 

3 time of the violation.’’

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

5 section shall apply to violations occurring after the date of 

6 the enactment of this Act. 

7 SEC. 3012. REGULATION OF INDIVIDUALS PRACTICING BE8 FORE THE DEPARTMENT OF THE TREASURY. 

9 (a) CENSURE; IMPOSITION OF PENALTY.—

10 (1) IN GENERAL.—Section 330(b) of title 31, 

11 United States Code, is amended—

12 (A) by inserting ‘‘, or censure,’’ after ‘‘De13 partment’’, and 

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

15 flush sentence: 

16 ‘‘The Secretary may impose a monetary penalty on any 

17 representative described in the preceding sentence. If the 

18 representative was acting on behalf of an employer or any 

19 firm or other entity in connection with the conduct giving 

20 rise to such penalty, the Secretary may impose a monetary 

21 penalty on such employer, firm, or entity if it knew, or 

22 reasonably should have known, of such conduct. Such pen23 alty shall not exceed the gross income derived (or to be de24 rived) from the conduct giving rise to the penalty. Any such 

25 penalty imposed on an individual may be in addition to, 
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1 or in lieu of, any suspension, disbarment, or censure of such 

2 individual.’’

3 (2) EFFECTIVE DATE.—The amendments made 

4 by this subsection shall apply to actions taken after 

5 the date of the enactment of this Act. 

6 (b) TAX SHELTER OPINIONS, ETC.—Section 330 of 

7 such title 31 is amended by adding at the end the following 

8 new subsection: 

9 ‘‘(d) Nothing in this section or in any other provision 

10 of law shall be construed to limit the authority of the Sec11 retary of the Treasury to impose standards applicable to 

12 the rendering of written advice with respect to any entity, 

13 transaction plan or arrangement, or other plan or arrange14 ment, which is of a type which the Secretary determines 

15 as having a potential for tax avoidance or evasion.’’

16 Subtitle B—Other Provisions 

17 SEC. 3021. TREATMENT OF STRIPPED INTERESTS IN BOND 

18 AND PREFERRED STOCK FUNDS, ETC. 

19 (a) IN GENERAL.—Section 1286 (relating to tax treat20 ment of stripped bonds) is amended by redesignating sub21 section (f) as subsection (g) and by inserting after sub22 section (e) the following new subsection: 

23 ‘‘(f) TREATMENT OF STRIPPED INTERESTS IN BOND

24 AND PREFERRED STOCK FUNDS, ETC.—In the case of an 

25 account or entity substantially all of the assets of which 
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1 consist of bonds, preferred stock, or a combination thereof, 

2 the Secretary may by regulations provide that rules similar 

3 to the rules of this section and 305(e), as appropriate, shall 

4 apply to interests in such account or entity to which (but 

5 for this subsection) this section or section 305(e), as the case 

6 may be, would not apply.’’

7 (b) CROSS REFERENCE.—Subsection (e) of section 305 

8 is amended by adding at the end the following new para9 graph: 

10 ‘‘(7) CROSS REFERENCE.—

‘‘For treatment of stripped interests in certain accounts or entities holding preferred stock, see section 

1286(f).’’

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

12 section shall apply to purchases and dispositions after the 

13 date of the enactment of this Act.

14 SEC. 3022. MINIMUM HOLDING PERIOD FOR FOREIGN TAX 

15 CREDIT ON WITHHOLDING TAXES ON INCOME 

16 OTHER THAN DIVIDENDS. 

17 (a) IN GENERAL.—Section 901 is amended by redesig18 nating subsection (l) as subsection (m) and by inserting 

19 after subsection (k) the following new subsection: 

20 ‘‘(l) MINIMUM HOLDING PERIOD FOR WITHHOLDING

21 TAXES ON GAIN AND INCOME OTHER THAN DIVIDENDS

22 ETC.—

23 ‘‘(1) IN GENERAL.—In no event shall a credit be 

24 allowed under subsection (a) for any withholding tax
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1 (as defined in subsection (k)) on any item of income 

2 or gain with respect to any property if—

3 ‘‘(A) such property is held by the recipient 

4 of the item for 15 days or less during the 30-day 

5 period beginning on the date which is 15 days 

6 before the date on which the right to receive pay7 ment of such item arises, or 

8 ‘‘(B) to the extent that the recipient of the 

9 item is under an obligation (whether pursuant to 

10 a short sale or otherwise) to make related pay11 ments with respect to positions in substantially 

12 similar or related property. 

13 This paragraph shall not apply to any dividend to 

14 which subsection (k) applies. 

15 ‘‘(2) EXCEPTION FOR TAXES PAID BY DEAL16 ERS.—

17 ‘‘(A) IN GENERAL.—Paragraph (1) shall 

18 not apply to any qualified tax with respect to 

19 any property held in the active conduct in a for20 eign country of a business as a dealer in such 

21 property. 

22 ‘‘(B) QUALIFIED TAX.—For purposes of sub23 paragraph (A), the term ‘qualified tax’ means a 

24 tax paid to a foreign country (other than the for-
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1 eign country referred to in subparagraph (A)) 

2 if— 

3 ‘‘(i) the item to which such tax is at4 tributable is subject to taxation on a net 

5 basis by the country referred to in subpara6 graph (A), and 

7 ‘‘(ii) such country allows a credit 

8 against its net basis tax for the full amount 

9 of the tax paid to such other foreign coun10 try. 

11 ‘‘(C) DEALER.—For purposes of subpara12 graph (A), the term ‘dealer’ means—

13 ‘‘(i) with respect to a security, any 

14 person to whom paragraphs (1) and (2) of 

15 subsection (k) would not apply by reason of 

16 paragraph (4) thereof if such security were 

17 stock, and 

18 ‘‘(ii) with respect to any other prop19 erty, any person with respect to whom such 

20 property is described in section 1221(a)(1). 

21 ‘‘(D) REGULATIONS.—The Secretary may 

22 prescribe such regulations as may be appropriate 

23 to carry out this paragraph, including regula24 tions to prevent the abuse of the exception pro-
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1 vided by this paragraph and to treat other taxes 

2 as qualified taxes. 

3 ‘‘(3) EXCEPTIONS.—The Secretary may by regu4 lation provide that paragraph (1) shall not apply to 

5 property where the Secretary determines that the ap6 plication of paragraph (1) to such property is not 

7 necessary to carry out the purposes of this subsection. 

8 ‘‘(4) CERTAIN RULES TO APPLY.—Rules similar 

9 to the rules of paragraphs (5), (6), and (7) of sub10 section (k) shall apply for purposes of this subsection. 

11 ‘‘(5) DETERMINATION OF HOLDING PERIOD.—

12 Holding periods shall be determined for purposes of 

13 this subsection without regard to section 1235 or any 

14 similar rule.’’

15 (b) CONFORMING AMENDMENT.—The heading of sub16 section (k) of section 901 is amended by inserting ‘‘ON DIVI17 DENDS’’ after ‘‘TAXES’’. 

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

19 section shall apply to amounts paid or accrued more than 

20 30 days after the date of the enactment of this Act. 

21 SEC. 3023. DISALLOWANCE OF CERTAIN PARTNERSHIP 

22 LOSS TRANSFERS. 

23 (a) TREATMENT OF CONTRIBUTED PROPERTY WITH

24 BUILT-IN LOSS.—Paragraph (1) of section 704(c) is 

25 amended by striking ‘‘and’’ at the end of subparagraph (A), 
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1 by striking the period at the end of subparagraph (B) and 

2 inserting ‘‘, and’’, and by adding at the end the following: 

3 ‘‘(C) if any property so contributed has a 

4 built-in loss—

5 ‘‘(i) such built-in loss shall be taken 

6 into account only in determining the 

7 amount of items allocated to the contrib8 uting partner, and 

9 ‘‘(ii) except as provided in regulations, 

10 in determining the amount of items allo11 cated to other partners, the basis of the con12 tributed property in the hands of the part13 nership shall be treated as being equal to its 

14 fair market value at the time of contribu15 tion. 

16 For purposes of subparagraph (C), the term ‘built-in 

17 loss’ means the excess of the adjusted basis of the 

18 property (determined without regard to subparagraph 

19 (C)(ii)) over its fair market value at the time of con20 tribution.’’

21 (b) ADJUSTMENT TO BASIS OF PARTNERSHIP PROP22 ERTY ON TRANSFER OF PARTNERSHIP INTEREST IF THERE

23 IS SUBSTANTIAL BUILT-IN LOSS.—

24 (1) ADJUSTMENT REQUIRED.—Subsection (a) of 

25 section 743 (relating to optional adjustment to basis 
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1 of partnership property) is amended by inserting be2 fore the period ‘‘or unless the partnership has a sub3 stantial built-in loss immediately after such transfer’’. 

4 (2) ADJUSTMENT.—Subsection (b) of section 743 

5 is amended by inserting ‘‘or with respect to which 

6 there is a substantial built-in loss immediately after 

7 such transfer’’ after ‘‘section 754 is in effect’’. 

8 (3) SUBSTANTIAL BUILT-IN LOSS.—Section 743 

9 is amended by adding at the end the following new 

10 subsection: 

11 ‘‘(d) SUBSTANTIAL BUILT-IN LOSS.—

12 ‘‘(1) IN GENERAL.—For purposes of this section, 

13 a partnership has a substantial built-in loss with re14 spect to a transfer of an interest in a partnership if 

15 the partnership’s adjusted basis in the partnership 

16 property exceeds by more than $250,000 the fair mar17 ket value of such property. 

18 ‘‘(2) REGULATIONS.—The Secretary shall pre19 scribe such regulations as may be appropriate to 

20 carry out the purposes of paragraph (1) and section 

21 734(d), including regulations aggregating related 

22 partnerships and disregarding property acquired by 

23 the partnership in an attempt to avoid such pur24 poses.’’

25 (4) CLERICAL AMENDMENTS.—
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1 (A) The section heading for section 743 is 

2 amended to read as follows: 

3 ‘‘SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROP4 ERTY WHERE SECTION 754 ELECTION OR SUB5 STANTIAL BUILT-IN LOSS.’’

6 (B) The table of sections for subpart C of 

7 part II of subchapter K of chapter 1 is amended 

8 by striking the item relating to section 743 and 

9 inserting the following new item:

‘‘Sec. 743. Adjustment to basis of partnership property where section 754 election or substantial built-in loss.’’

10 (c) ADJUSTMENT TO BASIS OF UNDISTRIBUTED PART11 NERSHIP PROPERTY IF THERE IS SUBSTANTIAL BASIS RE12 DUCTION.—

13 (1) ADJUSTMENT REQUIRED.—Subsection (a) of 

14 section 734 (relating to optional adjustment to basis 

15 of undistributed partnership property) is amended by 

16 inserting before the period ‘‘or unless there is a sub17 stantial basis reduction’’. 

18 (2) ADJUSTMENT.—Subsection (b) of section 734 

19 is amended by inserting ‘‘or unless there is a substan20 tial basis reduction’’ after ‘‘section 754 is in effect’’. 

21 (3) SUBSTANTIAL BASIS REDUCTION.—Section 

22 734 is amended by adding at the end the following 

23 new subsection: 

24 ‘‘(d) SUBSTANTIAL BASIS REDUCTION.—
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1 ‘‘(1) IN GENERAL.—For purposes of this section, 

2 there is a substantial basis reduction with respect to 

3 a distribution if the sum of the amounts described in 

4 subparagraphs (A) and (B) of subsection (b)(2) ex5 ceeds $250,000. 

6 ‘‘(2) REGULATIONS.—

‘‘For regulations to carry out this subsection, see 

section 743(d)(2).’’

7 (4) CLERICAL AMENDMENTS.—

8 (A) The section heading for section 734 is 

9 amended to read as follows: 

10 ‘‘SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED 

11 PARTNERSHIP PROPERTY WHERE SECTION 

12 754 ELECTION OR SUBSTANTIAL BASIS RE13 DUCTION.’’

14 (B) The table of sections for subpart B of 

15 part II of subchapter K of chapter 1 is amended 

16 by striking the item relating to section 734 and 

17 inserting the following new item:

‘‘Sec. 734. Adjustment to basis of undistributed partnership property where section 754 election or substantial basis 

reduction.’’

18 (d) EFFECTIVE DATES.—

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

20 subsection (a) shall apply to contributions made after 

21 the date of the enactment of this Act. 
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1 (2) SUBSECTION (b).—The amendments made by 

2 subsection (b) shall apply to transfers after the date 

3 of the enactment of this Act. 

4 (3) SUBSECTION (c).—The amendments made by 

5 subsection (c) shall apply to distributions after the 

6 date of the enactment of this Act. 

7 SEC. 3024. NO REDUCTION OF BASIS UNDER SECTION 734 IN 

8 STOCK HELD BY PARTNERSHIP IN COR9 PORATE PARTNER. 

10 (a) IN GENERAL.—Section 755 is amended by adding 

11 at the end the following new subsection: 

12 ‘‘(c) NO ALLOCATION OF BASIS DECREASE TO STOCK

13 OF CORPORATE PARTNER.—In making an allocation under 

14 subsection (a) of any decrease in the adjusted basis of part15 nership property under section 734(b)—

16 ‘‘(1) no allocation may be made to stock in a 

17 corporation (or any person related (within the mean18 ing of sections 267(b) and 707(b)(1)) to such corpora19 tion) which is a partner in the partnership, and 

20 ‘‘(2) any amount not allocable to stock by reason 

21 of paragraph (1) shall be allocated under subsection 

22 (a) to other partnership property. 

23 Gain shall be recognized to the partnership to the extent 

24 that the amount required to be allocated under paragraph 

25 (2) to other partnership property exceeds the aggregate ad-
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1 justed basis of such other property immediately before the 

2 allocation required by paragraph (2).’’

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

4 section shall apply to distributions after the date of the en5 actment of this Act. 

6 SEC. 3025. REPEAL OF SPECIAL RULES FOR FASITS. 

7 (a) IN GENERAL.—Part V of subchapter M of chapter 

8 1 (relating to financial asset securitization investment 

9 trusts) is hereby repealed. 

10 (b) CONFORMING AMENDMENTS.—

11 (1) Paragraph (6) of section 56(g) is amended by 

12 striking ‘‘REMIC, or FASIT’’ and inserting ‘‘or 

13 REMIC’’. 

14 (2) Clause (ii) of section 382(l)(4)(B) is amended 

15 by striking ‘‘a REMIC to which part IV of subchapter 

16 M applies, or a FASIT to which part V of subchapter 

17 M applies,’’ and inserting ‘‘or a REMIC to which 

18 part IV of subchapter M applies,’’. 

19 (3) Paragraph (1) of section 582(c) is amended 

20 by striking ‘‘, and any regular interest in a FASIT,’’. 

21 (4) Subparagraph (E) of section 856(c)(5) is 

22 amended by striking the last sentence. 

23 (5)(A) Section 860G(a)(1) is amended by adding 

24 at the end the following new sentence: ‘‘An interest 

25 shall not fail to qualify as a regular interest solely be-
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1 cause the specified principal amount of the regular 

2 interest (or the amount of interest accrued on the reg3 ular interest) can be reduced as a result of the non4 occurrence of 1 or more contingent payments with re5 spect to any reverse mortgage loan held by the 

6 REMIC if, on the startup day for the REMIC, the 

7 sponsor reasonably believes that all principal and in8 terest due under the regular interest will be paid at 

9 or prior to the liquidation of the REMIC.’’. 

10 (B) The last sentence of section 860G(a)(3) is 

11 amended by inserting ‘‘, and any reverse mortgage 

12 loan (and each balance increase on such loan meeting 

13 the requirements of subparagraph (A)(iii)) shall be 

14 treated as an obligation secured by an interest in real 

15 property’’ before the period at the end. 

16 (6) Paragraph (3) of section 860G(a) is amended 

17 by adding ‘‘and’’ at the end of subparagraph (B), by 

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

19 inserting a period, and by striking subparagraph (D). 

20 (7) Section 860G(a)(3) is amended by adding at 

21 the end the following new sentence: ‘‘For purposes of 

22 subparagraph (A), if more than 50 percent of the obli23 gations transferred to, or purchased by, the REMIC 

24 are originated by the United States or any State (or 

25 any political subdivision, agency, or instrumentality
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1 of the United States or any State) and are prin2 cipally secured by an interest in real property, then 

3 each obligation transferred to, or purchased by, the 

4 REMIC shall be treated as secured by an interest in 

5 real property.’’. 

6 (8)(A) Section 860G(a)(3)(A) is amended by 

7 striking ‘‘or’’ at the end of clause (i), by inserting 

8 ‘‘or’’ at the end of clause (ii), and by inserting after 

9 clause (ii) the following new clause: 

10 ‘‘(iii) represents an increase in the 

11 principal amount under the original terms 

12 of an obligation described in clause (i) or 

13 (ii) if— 

14 ‘‘(I) such increase in the balance 

15 is attributable to an advance made to 

16 the obligor pursuant to the original 

17 terms of the obligation, 

18 ‘‘(II) such increase in the balance 

19 occurs after the startup day, and 

20 ‘‘(III) such increase in the balance 

21 is purchased by the REMIC pursuant 

22 to a fixed price contract in effect on 

23 the startup day.’’. 

24 (B) Section 860G(a)(7)(B) is amended to read as 

25 follows: 
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1 ‘‘(B) QUALIFIED RESERVE FUND.—For pur2 poses of subparagraph (A), the term ‘qualified 

3 reserve fund’ means any reasonably required re4 serve to—

5 ‘‘(i) provide for full payment of ex6 penses of the REMIC or amounts due on 

7 regular interests in the event of defaults on 

8 qualified mortgages or lower than expected 

9 returns on cash flow investments, or 

10 ‘‘(ii) provide a source of funds for the 

11 purchase of obligations described in clause 

12 (ii) or (iii) of paragraph (3)(A). 

13 The aggregate fair market value of the assets held 

14 in any such reserve shall not exceed 50 percent 

15 of the aggregate fair market value of all of the 

16 assets of the REMIC on the startup day, and the 

17 amount of any such reserve shall be promptly 

18 and appropriately reduced to the extent the 

19 amount held in such reserve is no longer reason20 ably required for purposes specified in clause (i) 

21 or (ii) of paragraph (3)(A).’’. 

22 (9) Subparagraph (C) of section 1202(e)(4) is 

23 amended by striking ‘‘REMIC, or FASIT’’ and in24 serting ‘‘or REMIC’’. 
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1 (10) Section 1272(a)(6)(B) is amended by add2 ing at the end the following new flush sentence: 

3 ‘‘For purposes of clause (iii), the Secretary shall 

4 prescribe regulations permitting the use of a cur5 rent prepayment assumption, determined as of 

6 the close of the accrual period (or such other time 

7 as the Secretary may prescribe during the tax8 able year in which the accrual period ends).’’. 

9 (11) Subparagraph (C) of section 7701(a)(19) is 

10 amended by adding ‘‘and’’ at the end of clause (ix), 

11 by striking ‘‘, and’’ at the end of clause (x) and in12 serting a period, and by striking clause (xi). 

13 (12) The table of parts for subchapter M of chap14 ter 1 is amended by striking the item relating to part 

15 V. 

16 (c) EFFECTIVE DATE.—

17 (1) IN GENERAL.—Except as provided in para18 graph (2), the amendments made by this section shall 

19 apply to taxable years beginning after December 31, 

20 2003. 

21 (2) EXCEPTION FOR EXISTING FASITS.—

22 (A) IN GENERAL.—Paragraph (1) shall not 

23 apply to any FASIT in existence on the date of 

24 the enactment of this Act to the extent that reg25 ular interests issued by the FASIT before such 
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1 date continue to remain outstanding in accord2 ance with the original terms of issuance. 

3 (B) TRANSFER OF ADDITIONAL ASSETS NOT

4 PERMITTED.—Except as provided in regulations 

5 prescribed by the Secretary of the Treasury or 

6 the Secretary’s delegate, subparagraph (A) shall 

7 cease to apply as of the earliest date after the 

8 date of the enactment of this Act that any prop9 erty is transferred to the FASIT. 

10 SEC. 3026. LIMITATION ON TRANSFER OF BUILT-IN LOSSES 

11 ON REMIC RESIDUALS. 

12 (a) IN GENERAL.—Section 362 (relating to basis to 

13 corporations) is amended by adding at the end the following 

14 new subsection: 

15 ‘‘(e) LIMITATION ON TRANSFER OF BUILT-IN LOSSES

16 ON REMIC RESIDUALS IN SECTION 351 TRANSACTIONS.—

17 If—

18 ‘‘(1) a residual interest (as defined in section 

19 860G(a)(2)) in a REMIC is transferred in any trans20 action which is described in subsection (a), and 

21 ‘‘(2) the transferee’s adjusted basis in such resid22 ual interest would (but for this paragraph) exceed its 

23 fair market value immediately after such transaction, 

24 then, notwithstanding subsection (a), the transferee’s ad25 justed basis in such residual interest shall not exceed its 
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1 fair market value (whether or not greater than zero) imme2 diately after such transaction.’’ 

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

4 section shall apply to transactions after the date of the en5 actment of this Act.

6 SEC. 3027. CLARIFICATION OF BANKING BUSINESS FOR 

7 PURPOSES OF DETERMINING INVESTMENT 

8 OF EARNINGS IN UNITED STATES PROPERTY. 

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

10 956(c)(2) is amended to read as follows: 

11 ‘‘(A) obligations of the United States, 

12 money, or deposits with any corporation with re13 spect to which a bank holding company (within 

14 the meaning of section 2(a) of the Bank Holding 

15 Company Act of 1956 (12 U.S.C. 1841(a))) or fi16 nancial holding company (within the meaning of 

17 section 2(p) of such Act) owns directly or indi18 rectly more than 80 percent by vote or value of 

19 the stock of such corporation;’’. 

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

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

22 Act.
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1 SEC. 3028. MODIFICATIONS RELATED TO CERTAIN SMALL 

2 INSURANCE COMPANIES. 

3 (a) EXEMPTION FOR SMALL PROPERTY AND CASUALTY

4 INSURANCE COMPANIES.—

5 (1) IN GENERAL.—Section 501(c)(15)(A) is 

6 amended to read as follows: 

7 ‘‘(A) Insurance companies (as defined in 

8 section 816(a)) other than life (including inter9 insurers and reciprocal underwriters) if—

10 ‘‘(i) the gross receipts for the taxable 

11 year do not exceed $600,000, and 

12 ‘‘(ii) more than 50 percent of such 

13 gross receipts consist of premiums.’’. 

14 (2) CONTROLLED GROUP RULE.—Section 

15 501(c)(15)(C) is amended by inserting ‘‘, except that 

16 in applying section 1563 for purposes of section 

17 831(b)(2)(B)(ii), subparagraphs (B) and (C) of sec18 tion 1563(b)(2) shall be disregarded’’ before the period 

19 at the end. 

20 (3) CONFORMING AMENDMENT.—Clause (i) of 

21 section 831(b)(2)(A) is amended by striking ‘‘exceed 

22 $350,000 but’’. 

23 (b) ALTERNATIVE TAX FOR CERTAIN SMALL INSUR24 ANCE COMPANIES.—
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1 (1) INCREASED LIMITATION.—Clause (i) of sec2 tion 831(b)(2)(A) is amended by striking 

3 ‘‘$1,200,000’’ and inserting ‘‘$1,890,000’’. 

4 (2) INFLATION ADJUSTMENT.—Paragraph (2) of 

5 section 831(b) is amended by adding at the end the 

6 following new subparagraph: 

7 ‘‘(C) INFLATION ADJUSTMENT.—In the case 

8 of any taxable year beginning in a calendar year 

9 after 2004, the $1,890,000 amount in subpara10 graph (A) shall be increased by an amount equal 

11 to—

12 ‘‘(i) $1,890,000, multiplied by 

13 ‘‘(ii) the cost-of-living adjustment de14 termined under section 1(f)(3) for such cal15 endar year by substituting ‘calendar year 

16 2003’ for ‘calendar year 1992’ in subpara17 graph (B) thereof. 

18 If the amount as adjusted under the preceding 

19 sentence is not a multiple of $1,000, such 

20 amount shall be rounded to the next lowest mul21 tiple of $1,000.’’. 

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

23 section shall apply to taxable years beginning after Decem24 ber 31, 2003. 
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1 SEC. 3029. DEFINITION OF INSURANCE COMPANY FOR SEC2 TION 831. 

3 (a) IN GENERAL.—Section 831 is amended by redesig4 nating subsection (c) as subsection (d) and by inserting 

5 after subsection (b) the following new subsection: 

6 ‘‘(c) INSURANCE COMPANY DEFINED.—For purposes of 

7 this section, the term ‘insurance company’ has the meaning 

8 given to such term by section 816(a).’’

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

10 section shall apply to taxable years beginning after Decem11 ber 31, 2003. 

12 SEC. 3030. DENIAL OF DEDUCTION FOR INTEREST ON UN13 DERPAYMENTS ATTRIBUTABLE TO NONDIS14 CLOSED REPORTABLE TRANSACTIONS. 

15 (a) IN GENERAL.—Section 163 (relating to deduction 

16 for interest) is amended by redesignating subsection (m) as 

17 subsection (n) and by inserting after subsection (l) the fol18 lowing new subsection: 

19 ‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE TO

20 NONDISCLOSED REPORTABLE TRANSACTIONS.—No deduc21 tion shall be allowed under this chapter for any interest 

22 paid or accrued under section 6601 on any underpayment 

23 of tax which is attributable to the portion of any reportable 

24 transaction understatement (as defined in section 

25 6662A(b)) with respect to which the requirement of section 

26 6664(d)(2)(A) is not met.’’. 
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1 (b) EFFECTIVE DATE.—The amendments made by this 

2 section shall apply to transactions in taxable years begin3 ning after the date of the enactment of this Act. 

4 SEC. 3031. CLARIFICATION OF RULES FOR PAYMENT OF ES5 TIMATED TAX FOR CERTAIN DEEMED ASSET 

6 SALES. 

7 (a) IN GENERAL.—Paragraph (13) of section 338(h) 

8 (relating to tax on deemed sale not taken into account for 

9 estimated tax purposes) is amended by adding at the end 

10 the following: ‘‘The preceding sentence shall not apply with 

11 respect to a qualified stock purchase for which an election 

12 is made under paragraph (10).’’. 

13 (b) EFFECTIVE DATE.—The amendment made by sub14 section (a) shall apply to transactions occurring after the 

15 date of the enactment of this Act. 

16 SEC. 3032. RECOGNITION OF GAIN FROM THE SALE OF A 

17 PRINCIPAL RESIDENCE ACQUIRED IN A LIKE18 KIND EXCHANGE WITHIN 5 YEARS OF SALE. 

19 (a) IN GENERAL.—Section 121(d) (relating to special 

20 rules for exclusion of gain from sale of principal residence) 

21 is amended by adding at the end the following new para22 graph: 

23 ‘‘(10) PROPERTY ACQUIRED IN LIKE-KIND EX24 CHANGE.—If a taxpayer acquired property in an ex25 change to which section 1031 applied, subsection (a) 
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1 shall not apply to the sale or exchange of such prop2 erty if it occurs during the 5-year period beginning 

3 with the date of the acquisition of such property.’’. 

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

5 section shall apply to sales or exchanges after the date of 

6 the enactment of this Act. 

7 SEC. 3033. PREVENTION OF MISMATCHING OF INTEREST 

8 AND ORIGINAL ISSUE DISCOUNT DEDUC9 TIONS AND INCOME INCLUSIONS IN TRANS10 ACTIONS WITH RELATED FOREIGN PERSONS. 

11 (a) ORIGINAL ISSUE DISCOUNT.—Section 163(e)(3) 

12 (relating to special rule for original issue discount on obli13 gation held by related foreign person) is amended by redes14 ignating subparagraph (B) as subparagraph (C) and by in15 serting after subparagraph (A) the following new subpara16 graph: 

17 ‘‘(B) SPECIAL RULE FOR CERTAIN FOREIGN

18 ENTITIES.—

19 ‘‘(i) IN GENERAL.—In the case of any 

20 debt instrument having original issue dis21 count which is held by a related foreign per22 son which is a foreign personal holding 

23 company (as defined in section 552), a con24 trolled foreign corporation (as defined in 

25 section 957), or a passive foreign investment
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1 company (as defined in section 1297), a de2 duction shall be allowable to the issuer with 

3 respect to such original issue discount for 

4 any taxable year before the taxable year in 

5 which paid only to the extent such original 

6 issue discount is included during such prior 

7 taxable year in the gross income of a United 

8 States person who owns (within the mean9 ing of section 958(a)) stock in such corpora10 tion. 

11 ‘‘(ii) SECRETARIAL AUTHORITY.—The 

12 Secretary may by regulation exempt trans13 actions from the application of clause (i), 

14 including any transaction which is entered 

15 into by a payor in the ordinary course of 

16 a trade or business in which the payor is 

17 predominantly engaged.’’. 

18 (b) INTEREST AND OTHER DEDUCTIBLE AMOUNTS.—

19 Section 267(a)(3) is amended—

20 (1) by striking ‘‘The Secretary’’ and inserting: 

21 ‘‘(A) IN GENERAL.—The Secretary’’, and 

22 (2) by adding at the end the following new sub23 paragraph: 

24 ‘‘(B) SPECIAL RULE FOR CERTAIN FOREIGN

25 ENTITIES.—
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1 ‘‘(i) IN GENERAL.—Notwithstanding 

2 subparagraph (A), in the case of any 

3 amount payable to a foreign personal hold4 ing company (as defined in section 552), a 

5 controlled foreign corporation (as defined in 

6 section 957), or a passive foreign investment 

7 company (as defined in section 1297), a de8 duction shall be allowable to the payor with 

9 respect to such amount for any taxable year 

10 before the taxable year in which paid only 

11 to the extent such amount is included dur12 ing such prior taxable year in the gross in13 come of a United States person who owns 

14 (within the meaning of section 958(a)) stock 

15 in such corporation. 

16 ‘‘(ii) SECRETARIAL AUTHORITY.—The 

17 Secretary may by regulation exempt trans18 actions from the application of clause (i), 

19 including any transaction which is entered 

20 into by a payor in the ordinary course of 

21 a trade or business in which the payor is 

22 predominantly engaged and in which the 

23 payment of the accrued amounts occurs 

within 81 24 ⁄2 months after accrual or within 
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1 such other period as the Secretary may pre2 scribe.’’. 

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

4 section shall apply to payments accrued on or after the date 

5 of the enactment of this Act. 

6 SEC. 3034. EXCLUSION FROM GROSS INCOME FOR INTER7 EST ON OVERPAYMENTS OF INCOME TAX BY 

8 INDIVIDUALS. 

9 (a) IN GENERAL.—Part III of subchapter B of chapter 

10 1 (relating to items specifically excluded from gross income) 

11 is amended by inserting after section 139A the following 

12 new section: 

13 ‘‘SEC. 139B. EXCLUSION FROM GROSS INCOME FOR INTER14 EST ON OVERPAYMENTS OF INCOME TAX BY 

15 INDIVIDUALS. 

16 ‘‘(a) IN GENERAL.—In the case of an individual, gross 

17 income shall not include interest paid under section 6611 

18 on any overpayment of tax imposed by this subtitle. 

19 ‘‘(b) EXCEPTION.—Subsection (a) shall not apply in 

20 the case of a failure to claim items resulting in the overpay21 ment on the original return if the Secretary determines that 

22 the principal purpose of such failure is to take advantage 

23 of subsection (a). 

24 ‘‘(c) SPECIAL RULE FOR DETERMINING MODIFIED AD25 JUSTED GROSS INCOME.—For purposes of this title, interest 
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1 not included in gross income under subsection (a) shall not 

2 be treated as interest which is exempt from tax for purposes 

3 of sections 32(i)(2)(B) and 6012(d) or any computation in 

4 which interest exempt from tax under this title is added 

5 to adjusted gross income.’’.

6 (b) CLERICAL AMENDMENT.—The table of sections for 

7 part III of subchapter B of chapter 1 is amended by insert8 ing after the item relating to section 139A the following 

9 new item:

‘‘Sec. 139B. Exclusion from gross income for interest on overpayments of income tax by individuals.’’.

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

11 section shall apply to interest received in calendar years 

12 beginning after the date of the enactment of this Act. 

13 SEC. 3035. DEPOSITS MADE TO SUSPEND RUNNING OF IN14 TEREST ON POTENTIAL UNDERPAYMENTS. 

15 (a) IN GENERAL.—Subchapter A of chapter 67 (relat16 ing to interest on underpayments) is amended by adding 

17 at the end the following new section: 

18 ‘‘SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF IN19 TEREST ON POTENTIAL UNDERPAYMENTS, 

20 ETC. 

21 ‘‘(a) AUTHORITY TO MAKE DEPOSITS OTHER THAN

22 AS PAYMENT OF TAX.—A taxpayer may make a cash de23 posit with the Secretary which may be used by the Sec24 retary to pay any tax imposed under subtitle A or B or 
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1 chapter 41, 42, 43, or 44 which has not been assessed at 

2 the time of the deposit. Such a deposit shall be made in 

3 such manner as the Secretary shall prescribe. 

4 ‘‘(b) NO INTEREST IMPOSED.—To the extent that such 

5 deposit is used by the Secretary to pay tax, for purposes 

6 of section 6601 (relating to interest on underpayments), the 

7 tax shall be treated as paid when the deposit is made. 

8 ‘‘(c) RETURN OF DEPOSIT.—Except in a case where 

9 the Secretary determines that collection of tax is in jeop10 ardy, the Secretary shall return to the taxpayer any 

11 amount of the deposit (to the extent not used for a payment 

12 of tax) which the taxpayer requests in writing. 

13 ‘‘(d) PAYMENT OF INTEREST.—

14 ‘‘(1) IN GENERAL.—For purposes of section 6611 

15 (relating to interest on overpayments), a deposit 

16 which is returned to a taxpayer shall be treated as a 

17 payment of tax for any period to the extent (and only 

18 to the extent) attributable to a disputable tax for such 

19 period. Under regulations prescribed by the Secretary, 

20 rules similar to the rules of section 6611(b)(2) shall 

21 apply. 

22 ‘‘(2) DISPUTABLE TAX.—

23 ‘‘(A) IN GENERAL.—For purposes of this 

24 section, the term ‘disputable tax’ means the 

25 amount of tax specified at the time of the deposit
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1 as the taxpayer’s reasonable estimate of the max2 imum amount of any tax attributable to disput3 able items. 

4 ‘‘(B) SAFE HARBOR BASED ON 30-DAY LET5 TER.—In the case of a taxpayer who has been 

6 issued a 30-day letter, the maximum amount of 

7 tax under subparagraph (A) shall not be less 

8 than the amount of the proposed deficiency speci9 fied in such letter. 

10 ‘‘(3) OTHER DEFINITIONS.—For purposes of 

11 paragraph (2)—

12 ‘‘(A) DISPUTABLE ITEM.—The term ‘disput13 able item’ means any item of income, gain, loss, 

14 deduction, or credit if the taxpayer—

15 ‘‘(i) has a reasonable basis for its 

16 treatment of such item, and 

17 ‘‘(ii) reasonably believes that the Sec18 retary also has a reasonable basis for dis19 allowing the taxpayer’s treatment of such 

20 item. 

21 ‘‘(B) 30-DAY LETTER.—The term ‘30-day 

22 letter’ means the first letter of proposed defi23 ciency which allows the taxpayer an opportunity 

24 for administrative review in the Internal Rev25 enue Service Office of Appeals. 
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1 ‘‘(4) RATE OF INTEREST.—The rate of interest 

2 allowable under this subsection shall be the Federal 

3 short-term rate determined under section 6621(b), 

4 compounded daily. 

5 ‘‘(e) USE OF DEPOSITS.—

6 ‘‘(1) PAYMENT OF TAX.—Except as otherwise 

7 provided by the taxpayer, deposits shall be treated as 

8 used for the payment of tax in the order deposited. 

9 ‘‘(2) RETURNS OF DEPOSITS.—Deposits shall be 

10 treated as returned to the taxpayer on a last-in, first11 out basis.’’. 

12 (b) CLERICAL AMENDMENT.—The table of sections for 

13 subchapter A of chapter 67 is amended by adding at the 

14 end the following new item:

‘‘Sec. 6603. Deposits made to suspend running of interest on potential underpayments, etc.’’.

15 (c) EFFECTIVE DATE.—

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

17 this section shall apply to deposits made after the 

18 date of the enactment of this Act. 

19 (2) COORDINATION WITH DEPOSITS MADE UNDER

20 REVENUE PROCEDURE 84–58.—In the case of an 

21 amount held by the Secretary of the Treasury or his 

22 delegate on the date of the enactment of this Act as 

23 a deposit in the nature of a cash bond deposit pursu24 ant to Revenue Procedure 84–58, the date that the 
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1 taxpayer identifies such amount as a deposit made 

2 pursuant to section 6603 of the Internal Revenue 

3 Code (as added by this Act) shall be treated as the 

4 date such amount is deposited for purposes of such 

5 section 6603. 

6 SEC. 3036. PARTIAL PAYMENT OF TAX LIABILITY IN IN7 STALLMENT AGREEMENTS. 

8 (a) IN GENERAL.—

9 (1) Section 6159(a) (relating to authorization of 

10 agreements) is amended—

11 (A) by striking ‘‘satisfy liability for pay12 ment of’’ and inserting ‘‘make payment on’’, and 

13 (B) by inserting ‘‘full or partial’’ after ‘‘fa14 cilitate’’. 

15 (2) Section 6159(c) (relating to Secretary re16 quired to enter into installment agreements in certain 

17 cases) is amended in the matter preceding paragraph 

18 (1) by inserting ‘‘full’’ before ‘‘payment’’. 

19 (b) REQUIREMENT TO REVIEW PARTIAL PAYMENT

20 AGREEMENTS EVERY TWO YEARS.—Section 6159 is 

21 amended by redesignating subsections (d) and (e) as sub22 sections (e) and (f), respectively, and inserting after sub23 section (c) the following new subsection: 

24 ‘‘(d) SECRETARY REQUIRED TO REVIEW INSTALL25 MENT AGREEMENTS FOR PARTIAL COLLECTION EVERY TWO
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1 YEARS.—In the case of an agreement entered into by the 

2 Secretary under subsection (a) for partial collection of a 

3 tax liability, the Secretary shall review the agreement at 

4 least once every 2 years.’’. 

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

6 section shall apply to agreements entered into on or after 

7 the date of the enactment of this Act. 

8 SEC. 3037. EXTENSION OF IRS USER FEES. 

9 (a) IN GENERAL.—Section 7528(c) (relating to termi10 nation) is amended by striking ‘‘December 31, 2004’’ and 

11 inserting ‘‘September 30, 2013’’. 

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

13 section shall apply to requests after the date of the enact14 ment of this Act.

15 TITLE IV—TRADE ENHANCE16 MENT AND COMPLIANCE PRO17 VISIONS 

18 SEC. 4001. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL 

19 INCOME. 

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

21 (b) CONFORMING AMENDMENTS.—

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

23 chapter 1 (relating to qualifying foreign trade in24 come) is hereby repealed. 
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1 (2) The table of subparts for such part III is 

2 amended by striking the item relating to subpart E. 

3 (3) The table of sections for part III of sub4 chapter B of chapter 1 is amended by striking the 

5 item relating to section 114. 

6 (c) EFFECTIVE DATE.—Except as provided in sub7 section (d), the amendments made by this section shall 

8 apply to transactions after December 31, 2003. 

9 (d) TRANSITIONAL RULE FOR 2004, 2005, AND 2006.—

10 (1) IN GENERAL.—In the case of transactions 

11 during 2004, 2005, or 2006, the amount includible in 

12 gross income by reason of the amendments made by 

13 this section shall not exceed the applicable percentage 

14 of the amount which would have been so included but 

15 for this subsection. 

16 (2) APPLICABLE PERCENTAGE.—For purposes of 

17 paragraph (1), the applicable percentage shall be as 

18 follows: 

19 (A) For 2004, the applicable percentage 

20 shall be 20 percent. 

21 (B) For 2005, the applicable percentage 

22 shall be 20 percent. 

23 (C) For 2006, the applicable percentage 

24 shall be 40 percent.
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1 (e) REVOCATION OF ELECTION TO BE TREATED AS

2 DOMESTIC CORPORATION.—If, during the 1-year period be3 ginning on the date of the enactment of this Act, a corpora4 tion for which an election is in effect under section 943(e) 

5 of the Internal Revenue Code of 1986 revokes such election, 

6 no gain or loss shall be recognized with respect to property 

7 treated as transferred under clause (ii) of section 

8 943(e)(4)(B) of such Code to the extent such property—

9 (1) was treated as transferred under clause (i) 

10 thereof, or 

11 (2) was acquired during a taxable year to which 

12 such election applies and before May 1, 2003, in the 

13 ordinary course of its trade or business. 

14 The Secretary of the Treasury (or such Secretary’s delegate) 

15 may prescribe such regulations as may be necessary to pre16 vent the abuse of the purposes of this subsection. 

17 (f) BINDING CONTRACTS.—The amendments made by 

18 this section shall not apply to any transaction in the ordi19 nary course of a trade or business which occurs pursuant 

20 to a binding contract—

21 (1) which is between the taxpayer and a person 

22 who is not a related person (as defined in section 

23 943(b)(3) of such Code, as in effect on the day before 

24 the date of the enactment of this Act), and 
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1 (2) which is in effect on January 14, 2002, and 

2 at all times thereafter. 

3 For purposes of this subsection, a binding contract shall in4 clude a purchase option, renewal option, or replacement op5 tion which is included in such contract and which is en6 forceable against the seller or lessor. 

7 SEC. 4002. COBRA FEES. 

8 (a) USE OF MERCHANDISE PROCESSING FEE.—Sec9 tion 13031(f) of the Consolidated Omnibus Budget Rec10 onciliation Act of 1985 (19 U.S.C. 58c(f)) is amended—

11 (1) in paragraph (1), by aligning subparagraph 

12 (B) with subparagraph (A); and 

13 (2) in paragraph (2), by striking ‘‘commercial 

14 operations’’ and all that follows through ‘‘processing.’’ 

15 and inserting ‘‘customs revenue functions as defined 

16 in section 415 of the Homeland Security Act of 2002 

17 (other than functions performed by the Office of Inter18 national Affairs referred to in section 415(8) of that 

19 Act), and for automation (including the Automation 

20 Commercial Environment computer system), and for 

21 no other purpose. To the extent that funds in the Cus22 toms User Fee Account are insufficient to pay the 

23 costs of such customs revenue functions, customs du24 ties in an amount equal to the amount of such insuf25 ficiency shall be available, to the extent provided for 
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1 in appropriations Acts, to pay the costs of such cus2 toms revenue functions in the amount of such insuffi3 ciency, and shall be available for no other purpose. 

4 The provisions of the first and second sentences of this 

5 paragraph specifying the purposes for which amounts 

6 in the Customs User Fee Account may be made avail7 able shall not be superseded except by a provision of 

8 law which specifically modifies or supersedes such 

9 provisions.’’. 

10 (b) REIMBURSEMENT OF APPROPRIATIONS FROM

11 COBRA FEES.—Section 13031(f)(3) of the Consolidated 

12 Omnibus Budget Reconciliation Act of 1985 (19 U.S.C. 

13 58c(f)(3)) is amended by adding at the end the following: 

14 ‘‘(E) Nothing in this paragraph shall be construed to 

15 preclude the use of appropriated funds, from sources other 

16 than the fees collected under subsection (a), to pay the costs 

17 set forth in clauses (i), (ii), and (iii) of subparagraph (A).’’. 

18 (c) SENSE OF CONGRESS; EFFECTIVE PERIOD FOR

19 COLLECTING FEES; STANDARD FOR SETTING FEES.—

20 (1) SENSE OF CONGRESS.—The Congress finds 

21 that—

22 (A) the fees set forth in paragraphs (1) 

23 through (8) of subsection (a) of section 13031 of 

24 the Consolidated Omnibus Budget Reconciliation 

25 Act of 1985 have been reasonably related to the 
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1 costs of providing customs services in connection 

2 with the activities or items for which the fees 

3 have been charged under such paragraphs; and 

4 (B) the fees collected under such paragraphs 

5 have not exceeded, in the aggregate, the amounts 

6 paid for the costs described in subsection 

7 (f)(3)(A) incurred in providing customs services 

8 in connection with the activities or items for 

9 which the fees were charged under such para10 graphs. 

11 (2) EFFECTIVE PERIOD; STANDARD FOR SETTING

12 FEES.—Section 13031(j)(3) of the Consolidated Om13 nibus Budget Reconciliation Act of 1985 is amended 

14 to read as follows: 

15 ‘‘(3)(A) Fees may not be charged under paragraphs (9) 

16 and (10) of subsection (a) after September 30, 2013. 

17 ‘‘(B)(i) Subject to clause (ii), Fees may not be charged 

18 under paragraphs (1) through (8) of subsection (a) after 

19 September 30, 2013. 

20 ‘‘(ii) In fiscal year 2006 and in each succeeding fiscal 

21 year for which fees under paragraphs (1) through (8) of 

22 subsection (a) are authorized—

23 ‘‘(I) the Secretary of the Treasury shall charge 

24 fees under each such paragraph in amounts that are 

25 reasonably related to the costs of providing customs 
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1 services in connection with the activity or item for 

2 which the fee is charged under such paragraph, except 

3 that in no case may the fee charged under any such 

4 paragraph exceed by more than 10 percent the 

5 amount otherwise prescribed by such paragraph; 

6 ‘‘(II) the amount of fees collected under such 

7 paragraphs may not exceed, in the aggregate, the 

8 amounts paid in that fiscal year for the costs de9 scribed in subsection (f)(3)(A) incurred in providing 

10 customs services in connection with the activity or 

11 item for which the fees are charged under such para12 graphs; 

13 ‘‘(III) a fee may not be collected under any such 

14 paragraph except to the extent such fee will be ex15 pended to pay the costs described in subsection 

16 (f)(3)(A) incurred in providing customs services in 

17 connection with the activity or item for which the fee 

18 is charged under such paragraph; and 

19 ‘‘(IV) any fee collected under any such para20 graph shall be available for expenditure only to pay 

21 the costs described in subsection (f)(3)(A) incurred in 

22 providing customs services in connection with the ac23 tivity or item for which the fee is charged under such 

24 paragraph.’’. 
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1 (d) CLERICAL AMENDMENTS.—Section 13031 of the 

2 Consolidated Omnibus Budget Reconciliation Act of 1985 

3 is amended—

4 (1) in subsection (a)(5)(B), by striking ‘‘$1.75’’ 

5 and inserting ‘‘$1.75.’’; 

6 (2) in subsection (b)—

7 (A) in paragraph (1)(A), by aligning clause 

8 (iii) with clause (ii); 

9 (B) in paragraph (7), by striking ‘‘para10 graphs’’ and inserting ‘‘paragraph’’; and 

11 (C) in paragraph (9), by aligning subpara12 graph (B) with subparagraph (A); and 

13 (3) in subsection (e)(2), by aligning subpara14 graph (B) with subparagraph (A). 

15 (e) STUDY OF ALL FEES COLLECTED BY DEPARTMENT

16 OF HOMELAND SECURITY.—The Secretary of the Treasury 

17 shall conduct a study of all the fees collected by the Depart18 ment of Homeland Security, and shall submit to the Con19 gress, not later than September 30, 2005, a report con20 taining the recommendations of the Secretary on—

21 (1) what fees should be eliminated; 

22 (2) what the rate of fees retained should be; and 

23 (3) any other recommendations with respect to 

24 the fees that the Secretary considers appropriate.
Union Calendar No. 226

108TH CONGRESS 

1ST SESSION H. R. 2896

[Report No. 108–393] 

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. 

NOVEMBER 21, 2003

Reported with an amendment, committed to the Committee of the Whole House on the State of the Union, 

and ordered to be printed