In the Senate of the United States,

May 15, 2003.

Resolved, That the bill from the House of Representatives (H.R. 2) entitled ‘‘An Act to provide for reconciliation

pursuant to section 201 of the concurrent resolution on the

budget for fiscal year 2004.’’, do pass with the following

AMENDMENT:

Strike out all after the enacting clause and insert:

1 SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CON2 TENTS.

3 (a) SHORT TITLE.—This Act may be cited as the ‘‘Jobs

4 and Growth Tax Relief Reconciliation Act of 2003’’.
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1 (b) AMENDMENT OF 1986 CODE.—Except as otherwise

2 expressly provided, whenever in this Act an amendment or

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

4 of, a section or other provision, the reference shall be consid5 ered to be made to a section or other provision of the Inter6 nal Revenue Code of 1986.

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

8 Act is as follows:

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

TITLE I—ACCELERATION OF CERTAIN PREVIOUSLY ENACTED TAX

REDUCTIONS; INCREASED EXPENSING FOR SMALL BUSINESSES

Sec. 101. Acceleration of 10-percent individual income tax rate bracket expansion.

Sec. 102. Acceleration of reduction in individual income tax rates.

Sec. 103. Minimum tax relief to individuals.

Sec. 104. Acceleration of increase in standard deduction for married taxpayers

filing joint returns.

Sec. 105. Acceleration of 15-percent individual income tax rate bracket expansion

for married taxpayers filing joint returns.

Sec. 106. Acceleration of increase in, and refundability of, child tax credit.

Sec. 107. Increased expensing for small business.

Sec. 108. Application of EGTRRA sunset to this title.

TITLE II—PARTIAL EXCLUSION OF DIVIDENDS

Sec. 201. Partial exclusion of dividends received by individuals.

TITLE III—REVENUE PROVISIONS

Subtitle A—Provisions Designed To Curtail Tax Shelters

Sec. 301. Clarification of economic substance doctrine.

Sec. 302. Penalty for failing to disclose reportable transaction.

Sec. 303. Accuracy-related penalty for listed transactions and other reportable

transactions having a significant tax avoidance purpose.

Sec. 304. Penalty for understatements attributable to transactions lacking economic substance, etc.

Sec. 305. Modifications of substantial understatement penalty for nonreportable

transactions.

Sec. 306. Tax shelter exception to confidentiality privileges relating to taxpayer

communications.

Sec. 307. Disclosure of reportable transactions.

Sec. 308. Modifications to penalty for failure to register tax shelters.

Sec. 309. Modification of penalty for failure to maintain lists of investors.
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Sec. 310. Modification of actions to enjoin certain conduct related to tax shelters

and reportable transactions.

Sec. 311. Understatement of taxpayer’s liability by income tax return preparer.

Sec. 312. Penalty on failure to report interests in foreign financial accounts.

Sec. 313. Frivolous tax submissions.

Sec. 314. Penalty on promoters of tax shelters.

Sec. 315. Statute of limitations for taxable years for which listed transactions not

reported.

Sec. 316. Denial of deduction for interest on underpayments attributable to nondisclosed reportable and noneconomic substance transactions.

Subtitle B—Enron-Related Tax Shelter Provisions

Sec. 321. Limitation on transfer or importation of built-in losses.

Sec. 322. No reduction of basis under section 734 in stock held by partnership

in corporate partner.

Sec. 323. Repeal of special rules for FASITs.

Sec. 324. Expanded disallowance of deduction for interest on convertible debt.

Sec. 325. Expanded authority to disallow tax benefits under section 269.

Sec. 326. Modifications of certain rules relating to controlled foreign corporations.

Sec. 327. Controlled entities ineligible for REIT status.

Subtitle C—Other Corporate Governance Provisions

PART I—GENERAL PROVISIONS

Sec. 331. Affirmation of consolidated return regulation authority.

Sec. 332. Signing of corporate tax returns by chief executive officer.

Sec. 333. Denial of deduction for certain fines, penalties, and other amounts.

Sec. 334. Disallowance of deduction for punitive damages.

Sec. 335. Increase in criminal monetary penalty limitation for the underpayment

or overpayment of tax due to fraud.

PART II—EXECUTIVE COMPENSATION REFORM

Sec. 336. Treatment of nonqualified deferred compensation funded with assets located outside the United States.

Sec. 337. Inclusion in gross income of funded deferred compensation of corporate

insiders.

Sec. 338. Prohibition on deferral of gain from the exercise of stock options and

restricted stock gains through deferred compensation arrangements.

Sec. 339. Increase in withholding from supplemental wage payments in excess of

$1,000,000.

Subtitle D—International Provisions

PART I—PROVISIONS TO DISCOURAGE EXPATRIATION

Sec. 340. Revision of tax rules on expatriation.

Sec. 341. Tax treatment of inverted corporate entities.

Sec. 342. Excise tax on stock compensation of insiders in inverted corporations.

Sec. 343. Reinsurance of United States risks in foreign jurisdictions.

PART II—OTHER PROVISIONS

Sec. 344. Doubling of certain penalties, fines, and interest on underpayments related to certain offshore financial arrangement.
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Sec. 345. Effectively connected income to include certain foreign source income.

Sec. 346. Determination of basis of amounts paid from foreign pension plans.

Sec. 347. Recapture of overall foreign losses on sale of controlled foreign corporation.

Sec. 348. Prevention of mismatching of interest and original issue discount deductions and income inclusions in transactions with related foreign persons.

Sec. 349. Sale of gasoline and diesel fuel at duty-free sales enterprises.

Sec. 350. Repeal of earned income exclusion of citizens or residents living abroad.

Subtitle E—Other Revenue Provisions

Sec. 351. Extension of Internal Revenue Service user fees.

Sec. 352. Addition of vaccines against hepatitis A to list of taxable vaccines.

Sec. 353. Disallowance of certain partnership loss transfers.

Sec. 354. Treatment of stripped interests in bond and preferred stock funds, etc.

Sec. 355. Reporting of taxable mergers and acquisitions.

Sec. 356. Minimum holding period for foreign tax credit on withholding taxes on

income other than dividends.

Sec. 357. Qualified tax collection contracts.

Sec. 358. Extension of customs user fees.

Sec. 359. Clarification of exemption from tax for small property and casualty insurance companies.

Sec. 360. Partial payment of tax liability in installment agreements.

Sec. 361. Extension of amortization of intangibles to sports franchises.

Sec. 362. Deposits made to suspend running of interest on potential underpayments.

Sec. 363. Clarification of rules for payment of estimated tax for certain deemed

asset sales.

Sec. 364. Limitation on deduction for charitable contributions of patents and

similar property.

Sec. 365. Extension of transfers of excess pension assets to retiree health accounts.

Sec. 366. Proration rules for life insurance business of property and casualty insurance companies.

Sec. 367. Modification of treatment of transfers to creditors in divisive reorganizations.

Sec. 368. Increase in age of minor children whose unearned income is taxed as

if parent’s income.

Sec. 369. Consistent amortization of periods for intangibles.

Sec. 370. Clarification of definition of nonqualified preferred stock.

Sec. 371. Class lives for utility grading costs.

Sec. 372. Prohibition on nonrecognition of gain through complete liquidation of

holding company.

Sec. 373. Lease term to include certain service contracts.

Sec. 374. Recognition of gain from the sale of a principal residence acquired in

a like-kind exchange within 5 years of sale.

Subtitle F—Other Provisions

Sec. 381. Temporary State and local fiscal relief.

Sec. 382. Review of State agency blindness and disability determinations.

Sec. 383. Prohibition on use of SCHIP funds to provide coverage for childless

adults.

Sec. 384. Medicaid DSH allotments.
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TITLE IV—SMALL BUSINESS AND AGRICULTURAL PROVISIONS

Subtitle A—Small Business Provisions

Sec. 401. Exclusion of certain indebtedness of small business investment companies from acquisition indebtedness.

Sec. 402. Repeal of occupational taxes relating to distilled spirits, wine, and beer.

Sec. 403. Custom gunsmiths.

Sec. 404. Simplification of excise tax imposed on bows and arrows.

Subtitle B—Agricultural Provisions

Sec. 411. Capital gain treatment under section 631(b) to apply to outright sales

by landowners.

Sec. 412. Special rules for livestock sold on account of weather-related conditions.

Sec. 413. Exclusion for loan payments under national health service corps loan

repayment program.

Sec. 414. Payment of dividends on stock of cooperatives without reducing patronage dividends.

TITLE V—SIMPLIFICATION AND OTHER PROVISIONS

Subtitle A—Uniform Definition of Child

Sec. 501. Uniform definition of child, etc.

Sec. 502. Modifications of definition of head of household.

Sec. 503. Modifications of dependent care credit.

Sec. 504. Modifications of child tax credit.

Sec. 505. Modifications of earned income credit.

Sec. 506. Modifications of deduction for personal exemption for dependents.

Sec. 507. Technical and conforming amendments.

Sec. 508. Effective date.

Subtitle B—Simplification

Sec. 511. Consolidation of life and non-life company returns.

Sec. 512. Special rules for taxation of life insurance companies.

Sec. 513. Modification of active business definition under section 355.

Subtitle C—Other Provisions

Sec. 521. Civil rights tax relief.

Sec. 522. Increase in section 382 limitation for companies emerging from bankruptcy.

Sec. 523. Increase in historic rehabilitation credit for certain low-income housing

for the elderly.

Sec. 524. Modification of application of income forecast method of depreciation.

Sec. 525. Additional advance refundings of certain governmental bonds.

Sec. 526. Exclusion of income derived from certain wagers on horse races from

gross income of nonresident alien individuals.

Sec. 527. Federal reimbursement of emergency health services furnished to undocumented aliens.

Sec. 528. Premiums for mortgage insurance.

Sec. 529. Sense of the Senate on repealing the 1993 tax hike on social security

benefits section.

Sec. 530. Flat tax.

Sec. 531. Toll tax on excess qualified foreign distribution amount.

Sec. 532. Child support enforcement.
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Sec. 533. Low-income housing tax credit.

Sec. 534. Expensing of broadband internet access expenditures.

Sec. 535. Income tax credit for distilled spirits wholesalers and for distilled spirits in control state bailment warehouses for costs of carrying

Federal excise taxes on bottled distilled spirits.

Sec. 536. Clarification of contribution in aid of construction for water and sewerage disposal utilities.

Sec. 537. Restoration of deduction for travel expenses of spouse, etc. accompanying taxpayer on business travel.

Sec. 538. Certain sightseeing flights exempt from taxes on air transportation.

Sec. 539. Conforming the Internal Revenue Code of 1986 to requirements imposed

by the Women’s Health and Cancer Rights Act of 1998.

Sec. 540. Expansion of designated renewal community area based on 2000 census

data.

Sec. 541. Renewal community employers may qualify for employment credit by

employing residents of certain other renewal communities.

Sec. 542. Expansion of income tax exclusion for combat zone service.

Sec. 543. Availability of certain tax benefits for members of the armed forces performing services at Guantanamo Bay Naval Station, Cuba, and

on the island of Diego Garcia.

Sec. 544. Citrus canker tree relief.

Sec. 545. Exclusion of certain punitive damage awards.

Sec. 546. Reatment of certain imported recycled halons.

Sec. 547. Modification of involuntary conversion rules for businesses affected by

the September 11th terrorist attacks.

Subtitle D—Medicare Provisions.

Sec. 561. Equalizing urban and rural standardized payment amounts under the

medicare inpatient hospital prospective payment system.

Sec. 562. Fairness in the Medicare Disproportionate Share Hospital (DSH) adjustment for rural hospitals.

Sec. 563. Medicare inpatient hospital payment adjustment for low-volume hospitals.

Sec. 564. Adjustment to the medicare inpatient hospital PPS wage index to revise

the labor-related share of such index.

Sec. 565. One-year extension of hold harmless provisions for small rural hospitals

and temporary treatment of certain sole community hospitals to

limit decline in payment under the OPD PPS.

Sec. 566. Critical access hospital (CAH) improvements.

Sec. 567. Temporary increase for home health services furnished in a rural area.

Sec. 568. Temporary increase in payments for certain services furnished by small

rural hospitals under medicare prospective payment system for

hospital outpatient department services.

Sec. 569. Temporary increase for ground ambulance services furnished in a rural

area.

Sec. 570. Exclusion of certain rural health clinic and federally qualified health

center services from the medicare pps for skilled nursing facilities.

Sec. 571. Medicare incentive payment program improvements.

Sec. 572. Two-year treatment of certain clinical diagnostic laboratory tests furnished by a sole community hospital.

Sec. 573. Establishment of floor on geographic adjustments of payments for physicians’ services.
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Sec. 574. Freeze in payments for items of durable medical equipment and

orthotics and prosthetics.

Sec. 575. Application of coinsurance and deductible for clinical diagnostic laboratory tests.

Sec. 576. Revision in payments for covered outpatient drugs.

Sec. 577. Inapplicability of sunset.

Subtitle E—Provisions Relating To S Corporation Reform and Simplification

PART I—MAXIMUM NUMBER OF SHAREHOLDERS OF AN S CORPORATION

Sec. 581. Members of family treated as 1 shareholder.

Sec. 582. Increase in number of eligible shareholders to 100.

Sec. 583. Nonresident aliens allowed as beneficiaries of an electing small business

trust.

PART II—TERMINATION OF ELECTION AND ADDITIONS TO TAX DUE TO

PASSIVE INVESTMENT INCOME

Sec. 584. Modifications to passive income rules.

PART III—TREATMENT OF S CORPORATION SHAREHOLDERS

Sec. 585. Transfer of suspended losses incident to divorce.

Sec. 586. Use of passive activity loss and at-risk amounts by qualified subchapter

S trust income beneficiaries.

Sec. 587. Disregard of unexercised powers of appointment in determining potential current beneficiaries of ESBT.

Sec. 588. Clarification of electing small business trust distribution rules.

PART IV—PROVISIONS RELATING TO BANKS

Sec. 589. Sale of stock in IRA relating to S corporation election exempt from prohibited transaction rules.

Sec. 590. Exclusion of investment securities income from passive income test for

bank S corporations.

Sec. 591. Treatment of qualifying director shares.

PART V—QUALIFIED SUBCHAPTER S SUBSIDIARIES

Sec. 592. Relief from inadvertently invalid qualified subchapter S subsidiary elections and terminations.

Sec. 593. Information returns for qualified subchapter S subsidiaries.

PART VI—ADDITIONAL PROVISIONS

Sec. 594. Elimination of all earnings and profits attributable to pre-1983 years.

TITLE VI—BLUE RIBBON COMMISSION ON COMPREHENSIVE TAX

REFORM

Sec. 601. Short title.

Sec. 602. Establishmment of Commission.

Sec. 603. Duties of the Commission.

Sec. 604. Powers of the Commission.

Sec. 605. Commission personnel matters.

Sec. 606. Termination of the Commission.

Sec. 607. Authorization of appropriations.
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TITLE VII—REAL ESTATE INVESTMENT TRUSTS

Subtitle A—REIT Corrections

Sec. 701. Revisions to REIT asset test.

Sec. 702. Clarification of application of limited rental exception.

Sec. 703. Deletion of customary services exception.

Sec. 704. Conformity with general hedging definition.

Sec. 705. Conformity with regulated investment company rules.

Sec. 706. Prohibited transactions provisions.

Sec. 707. Effective dates.

Subtitle B—REIT Savings Provisions

Sec. 711. Revisions to REIT provisions.

TITLE VIII—EXTENSIONS OF CERTAIN EXPIRING PROVISIONS

Subtitle A—Extensions of Expiring Provisions

Sec. 801. Parity in the application of certain limits to mental health benefits.

Sec. 802. Allowance of nonrefundable personal credits against regular and minimum tax liability.

Sec. 803. Credit for electricity produced from certain renewable resources.

Sec. 804. Work opportunity credit.

Sec. 805. Welfare-to-work credit.

Sec. 806. Taxable income limit on percentage depletion for oil and natural gas

produced from marginal properties.

Sec. 807. Qualified zone academy bonds.

Sec. 808. Cover over of tax on distilled spirits.

Sec. 809. Deduction for corporate donations of computer technology.

Sec. 810. Credit for qualified electric vehicles.

Sec. 811. Deduction for clean-fuel vehicles and certain refueling property.

Sec. 812. Deduction for certain expenses of school teachers.

Sec. 813. Availability of medical savings accounts.

Sec. 814. Expensing of environmental remediation costs.

TITLE IX—IMPROVING TAX EQUITY FOR MILITARY PERSONNEL

Sec. 900. Short title.

Sec. 901. Exclusion of gain from sale of a principal residence by a member of

the uniformed services or the foreign service.

Sec. 902. Exclusion from gross income of certain death gratuity payments.

Sec. 903. Exclusion for amounts received under Department of Defense Homeowners Assistance Program.

Sec. 904. Expansion of combat zone filing rules to contingency operations.

Sec. 905. Modification of membership requirement for exemption from tax for certain veterans’ organizations.

Sec. 906. Clarification of the treatment of certain dependent care assistance programs.

Sec. 907. Clarification relating to exception from additional tax on certain distributions from qualified tuition programs, etc. on account of attendance at military academy.

Sec. 908. Suspension of tax-exempt status of terrorist organizations.

Sec. 909. Above-the-line deduction for overnight travel expenses of national guard

and reserve members.

Sec. 910. Tax relief and assistance for families of Space Shuttle Columbia heroes.
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TITLE X—SUNSET

Sec. 1001. Sunset.

1 TITLE I—ACCELERATION OF

2 CERTAIN PREVIOUSLY EN3 ACTED TAX REDUCTIONS; IN4 CREASED EXPENSING FOR

5 SMALL BUSINESSES

6 SEC. 101. ACCELERATION OF 10-PERCENT INDIVIDUAL IN7 COME TAX RATE BRACKET EXPANSION.

8 (a) IN GENERAL.—Clause (i) of section 1(i)(1)(B) (re9 lating to the initial bracket amount) is amended by striking

10 ‘‘($12,000 in the case of taxable years beginning before Jan11 uary 1, 2008)’’.

12 (b) INFLATION ADJUSTMENT BEGINNING IN 2004.—

13 Subparagraph (C) of section 1(i)(1) (relating to inflation

14 adjustment) is amended to read as follows:

15 ‘‘(C) INFLATION ADJUSTMENT.—In pre16 scribing the tables under subsection (f) which

17 apply with respect to taxable years beginning in

18 calendar years after 2003—

19 ‘‘(i) the cost-of-living adjustment used

20 in making adjustments to the initial bracket

21 amount shall be determined under sub22 section (f)(3) by substituting ‘2002’ for

23 ‘1992’ in subparagraph (B) thereof, and
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1 ‘‘(ii) such adjustment shall not apply

2 to the amount referred to in subparagraph

3 (B)(iii).

4 If any amount after adjustment under the pre5 ceding sentence is not a multiple of $50, such

6 amount shall be rounded to the next lowest mul7 tiple of $50.’’.

8 (c) EFFECTIVE DATES.—

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

10 subsection (a) shall apply to taxable years beginning

11 after December 31, 2002.

12 (2) SUBSECTION (b).—The amendment made by

13 subsection (b) shall apply to taxable years beginning

14 after December 31, 2003.

15 (3) TABLES FOR 2003.—The Secretary of the

16 Treasury shall modify each table which has been pre17 scribed for taxable years beginning in 2003 and

18 which relates to the amendment made by subsection

19 (a), section 102, or section 103 to reflect each such

20 amendment.

21 SEC. 102. ACCELERATION OF REDUCTION IN INDIVIDUAL

22 INCOME TAX RATES.

23 (a) IN GENERAL.—The table in paragraph (2) of sec24 tion 1(i) (relating to reductions in rates after June 30,

25 2001) is amended to read as follows:
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‘‘In the case of taxable years

beginning during calendar year:

The corresponding percentages

shall be substituted for

the following percentages:

28% 31% 36% 39.6%

2001 .................................................................................... 27.5% 30.5% 35.5% 39.1%

2002 .................................................................................... 27.0% 30.0% 35.0% 38.6%

2003 and thereafter ........................................................... 25.0% 28.0% 33.0% 35.0%’’.

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

2 section shall apply to taxable years beginning after Decem3 ber 31, 2002.

4 SEC. 103. MINIMUM TAX RELIEF TO INDIVIDUALS.

5 (a) IN GENERAL.—So much of paragraph (1) of sec6 tion 55(d) (relating to exemption amount for taxpayers

7 other than corporations) as precedes subparagraph (C)

8 thereof is amended to read as follows:

9 ‘‘(1) EXEMPTION AMOUNT FOR TAXPAYERS

10 OTHER THAN CORPORATIONS.—In the case of a tax11 payer other than a corporation, the term ‘exemption

12 amount’ means as follows:

13 ‘‘(A) JOINT RETURN AND SURVIVING

14 SPOUSE.—In the case of a joint return or a sur15 viving spouse, the amount under the following

16 table:

‘‘In the case of taxable years The exemption

beginning: amount is:

Before 2001 ......................................................................................... $45,000

In 2001 and 2002 .............................................................................. $49,000

In 2003 ............................................................................................... $60,500

In 2004 ............................................................................................... $60,500

In 2005 ............................................................................................... $60,500

After 2005 ........................................................................................... $45,000.

17 ‘‘(B) INDIVIDUAL NOT MARRIED AND NOT A

18 SURVIVING SPOUSE.—In the case of an indi-
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1 vidual who is not a married individual and is

2 not a surviving spouse, the amount under the fol3 lowing table:

‘‘In the case of taxable years The exemption

beginning: amount is:

Before 2001 ......................................................................................... $33,750

In 2001 and 2002 .............................................................................. $35,750

In 2003 ............................................................................................... $41,500

In 2004 ............................................................................................... $41,500

In 2005 ............................................................................................... $41,500

After 2005 ........................................................................................... $33,750.’’.

4 (b) CONFORMING AMENDMENTS.—

5 (1) Section 55(d)(1)(C) is amended—

6 (A) by striking ‘‘, and’’ and inserting a pe7 riod, and

8 (B) by striking ‘‘50 percent’’ and inserting

9 ‘‘MARRIED INDIVIDUAL FILING A SEPARATE RE10 TURN.—50 percent’’.

11 (2) Section 55(d)(1)(D) is amended by striking

12 ‘‘$22,500’’ and inserting ‘‘ESTATE AND TRUST.—

13 $22,500’’.

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

15 section shall apply to taxable years beginning after Decem16 ber 31, 2002.

17 SEC. 104. ACCELERATION OF INCREASE IN STANDARD DE18 DUCTION FOR MARRIED TAXPAYERS FILING

19 JOINT RETURNS.

20 (a) IN GENERAL.—Paragraph (7) of section 63(c) (re21 lating to standard deduction) is amended to read as follows:
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1 ‘‘(7) APPLICABLE PERCENTAGE.—For purposes

2 of paragraph (2), the applicable percentage shall be

3 determined in accordance with the following table:

‘‘For taxable years beginning The applicable

in calendar year— percentage is—

2003 .................................................................................... 195

2004 .................................................................................... 200

2005 .................................................................................... 174

2006 .................................................................................... 184

2007 .................................................................................... 187

2008 .................................................................................... 190

2009 and thereafter ........................................................... 200.’’.

4 (b) CONFORMING AMENDMENT.—Section 301(d) of the

5 Economic Growth and Tax Relief Reconciliation Act of

6 2001 is amended by striking ‘‘2004’’ and inserting ‘‘2002’’.

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

8 section shall apply to taxable years beginning after Decem9 ber 31, 2002.

10 SEC. 105. ACCELERATION OF 15-PERCENT INDIVIDUAL IN11 COME TAX RATE BRACKET EXPANSION FOR

12 MARRIED TAXPAYERS FILING JOINT RE13 TURNS.

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

15 1(f )(8) (relating to phaseout of marriage penalty in 15-

16 percent bracket) is amended to read as follows:

17 ‘‘(B) APPLICABLE PERCENTAGE.—For pur18 poses of subparagraph (A), the applicable per19 centage shall be determined in accordance with

20 the following table:
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‘‘For taxable years beginning The applicable

in calendar year— percentage is—

2003 .................................................................................... 195

2004 .................................................................................... 200

2005 .................................................................................... 180

2006 .................................................................................... 187

2007 .................................................................................... 193

2008 and thereafter ........................................................... 200.’’.

1 (b) CONFORMING AMENDMENT.—Section 302(c) of the

2 Economic Growth and Tax Relief Reconciliation Act of

3 2001 is amended by striking ‘‘2004’’ and inserting ‘‘2002’’.

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

5 section shall apply to taxable years beginning after Decem6 ber 31, 2002.

7 SEC. 106. ACCELERATION OF INCREASE IN, AND

8 REFUNDABILITY OF, CHILD TAX CREDIT.

9 (a) ACCELERATION OF INCREASE IN CREDIT.—Sub10 section (a) of section 24 (relating to child tax credit) is

11 amended to read as follows:

12 ‘‘(a) ALLOWANCE OF CREDIT.—There shall be allowed

13 as a credit against the tax imposed by this chapter for the

14 taxable year with respect to each qualifying child of the tax15 payer an amount equal to $1,000.’’.

16 (b) EXPANSION OF CREDIT REFUNDABILITY.—Section

17 24(d)(1)(B)(i) (relating to portion of credit refundable) is

18 amended by striking ‘‘(10 percent in the case of taxable

19 years beginning before January 1, 2005)’’.

20 (c) ADVANCE PAYMENT OF PORTION OF INCREASED

21 CREDIT IN 2003.—
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1 (1) IN GENERAL.—Subchapter B of chapter 65

2 (relating to abatements, credits, and refunds) is

3 amended by adding at the end the following new sec4 tion:

5 ‘‘SEC. 6429. ADVANCE PAYMENT OF PORTION OF IN6 CREASED CHILD CREDIT FOR 2003.

7 ‘‘(a) IN GENERAL.—Each taxpayer who claimed a

8 credit under section 24 on the return for the taxpayer’s first

9 taxable year beginning in 2002 shall be treated as having

10 made a payment against the tax imposed by chapter 1 for

11 such taxable year in an amount equal to the child tax credit

12 refund amount (if any) for such taxable year.

13 ‘‘(b) CHILD TAX CREDIT REFUND AMOUNT.—For pur14 poses of this section, the child tax credit refund amount is

15 the amount by which the aggregate credits allowed under

16 part IV of subchapter A of chapter 1 for such first taxable

17 year would have been increased if—

18 ‘‘(1) the per child amount under section 24(a)(2)

19 for such year were $1,000,

20 ‘‘(2) only qualifying children (as defined in sec21 tion 24(c)) of the taxpayer for such year who had not

22 attained age 17 as of December 31, 2003, were taken

23 into account, and

24 ‘‘(3) section 24(d)(1)(B)(ii) did not apply.
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1 ‘‘(c) TIMING OF PAYMENTS.—In the case of any over2 payment attributable to this section, the Secretary shall,

3 subject to the provisions of this title, refund or credit such

4 overpayment as rapidly as possible and, to the extent prac5 ticable, before October 1, 2003. No refund or credit shall

6 be made or allowed under this section after December 31,

7 2003.

8 ‘‘(d) COORDINATION WITH CHILD TAX CREDIT.—

9 ‘‘(1) IN GENERAL.—The amount of credit which

10 would (but for this subsection and section 26) be al11 lowed under section 24 for the taxpayer’s first taxable

12 year beginning in 2003 shall be reduced (but not

13 below zero) by the payments made to the taxpayer

14 under this section. Any failure to so reduce the credit

15 shall be treated as arising out of a mathematical or

16 clerical error and assessed according to section

17 6213(b)(1).

18 ‘‘(2) JOINT RETURNS.—In the case of a payment

19 under this section with respect to a joint return, half

20 of such payment shall be treated as having been made

21 to each individual filing such return.

22 ‘‘(e) NO INTEREST.—No interest shall be allowed on

23 any overpayment attributable to this section.’’.
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1 (2) CLERICAL AMENDMENT.—The table of sec2 tions for subchapter B of chapter 65 is amended by

3 adding at the end the following new item:

‘‘Sec. 6429. Advance payment of portion of increased child credit for 2003.’’.

4 (d) EFFECTIVE DATES.—

5 (1) IN GENERAL.—Except as provided in para6 graph (2), the amendments made by this section shall

7 apply to taxable years beginning after December 31,

8 2002.

9 (2) SUBSECTION (c).—The amendments made by

10 subsection (c) shall take effect on the date of the enact11 ment of this Act.

12 SEC. 107. INCREASED EXPENSING FOR SMALL BUSINESS.

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

14 (relating to dollar limitation) is amended to read as follows:

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

16 which may be taken into account under subsection (a)

17 for any taxable year shall not exceed $25,000

18 ($100,000 in the case of taxable years beginning after

19 2002 and before 2008).’’.

20 (b) INCREASE IN QUALIFYING INVESTMENT AT WHICH

21 PHASEOUT BEGINS.—Paragraph (2) of section 179(b) (re22 lating to reduction in limitation) is amended by inserting

23 ‘‘($400,000 in the case of taxable years beginning after 2002

24 and before 2008)’’ after ‘‘$200,000’’.
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1 (c) OFF-THE-SHELF COMPUTER SOFTWARE.—Para2 graph (1) of section 179(d) (defining section 179 property)

3 is amended to read as follows:

4 ‘‘(1) SECTION 179 PROPERTY.—For purposes of

5 this section, the term ‘section 179 property’ means

6 property—

7 ‘‘(A) which is—

8 ‘‘(i) tangible property (to which section

9 168 applies), or

10 ‘‘(ii) computer software (as defined in

11 section 197(e)(3)(B)) which is described in

12 section 197(e)(3)(A)(i), to which section 167

13 applies, and which is placed in service in a

14 taxable year beginning after 2002 and be15 fore 2008,

16 ‘‘(B) which is section 1245 property (as de17 fined in section 1245(a)(3)), and

18 ‘‘(C) which is acquired by purchase for use

19 in the active conduct of a trade or business.

20 Such term shall not include any property described in

21 section 50(b) and shall not include air conditioning

22 or heating units.’’.

23 (d) ADJUSTMENT OF DOLLAR LIMIT AND PHASEOUT

24 THRESHOLD FOR INFLATION.—Subsection (b) of section
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1 179 (relating to limitations) is amended by adding at the

2 end the following new paragraph:

3 ‘‘(5) INFLATION ADJUSTMENTS.—

4 ‘‘(A) IN GENERAL.—In the case of any tax5 able year beginning in a calendar year after

6 2003 and before 2008, the $100,000 and

7 $400,000 amounts in paragraphs (1) and (2)

8 shall each be increased by an amount equal to—

9 ‘‘(i) such dollar amount, multiplied by

10 ‘‘(ii) the cost-of-living adjustment de11 termined under section 1(f)(3) for the cal12 endar year in which the taxable year be13 gins, by substituting ‘calendar year 2002’

14 for ‘calendar year 1992’ in subparagraph

15 (B) thereof.

16 ‘‘(B) ROUNDING.—

17 ‘‘(i) DOLLAR LIMITATION.—If the

18 amount in paragraph (1) as increased

19 under subparagraph (A) is not a multiple

20 of $1,000, such amount shall be rounded to

21 the nearest multiple of $1,000.

22 ‘‘(ii) PHASEOUT AMOUNT.—If the

23 amount in paragraph (2) as increased

24 under subparagraph (A) is not a multiple
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1 of $10,000, such amount shall be rounded to

2 the nearest multiple of $10,000.’’.

3 (e) REVOCATION OF ELECTION.—Paragraph (2) of sec4 tion 179(c) (relating to election irrevocable) is amended to

5 read as follows:

6 ‘‘(2) REVOCATION OF ELECTION.—An election

7 under paragraph (1) with respect to any taxable year

8 beginning after 2002 and before 2008, and any speci9 fication contained in any such election, may be re10 voked by the taxpayer with respect to any property.

11 Such revocation, once made, shall be irrevocable.’’.

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

13 section shall apply to taxable years beginning after Decem14 ber 31, 2002.

15 SEC. 108. APPLICATION OF EGTRRA SUNSET TO THIS TITLE.

16 Each amendment made by this title (other than section

17 107) shall be subject to title IX of the Economic Growth

18 and Tax Relief Reconciliation Act of 2001 to the same ex19 tent and in the same manner as the provision of such Act

20 to which such amendment relates.
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1 TITLE II—PARTIAL EXCLUSION

2 OF DIVIDENDS

3 SEC. 201. PARTIAL EXCLUSION OF DIVIDENDS RECEIVED BY

4 INDIVIDUALS.

5 (a) GENERAL RULE.—Part III of subchapter B of

6 chapter 1 is amended by inserting after section 115 the fol7 lowing new section:

8 ‘‘SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS RECEIVED

9 BY INDIVIDUALS.

10 ‘‘(a) EXCLUSION FROM GROSS INCOME.—

11 ‘‘(1) IN GENERAL.—Gross income does not in12 clude the applicable percentage of qualified dividend

13 income received during the taxable year by an indi14 vidual.

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

16 of this subsection, the applicable percentage is—

17 ‘‘(A) 50 percent in the case of taxable years

18 beginning in 2003,

19 ‘‘(B) 100 percent in the case of taxable

20 years beginning in 2004, 2005, and 2006, and

21 ‘‘(C) zero percent in the case of any other

22 taxable year.

23 ‘‘(b) QUALIFIED DIVIDEND INCOME.—For purposes of

24 this subsection—
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1 ‘‘(1) IN GENERAL.—The term ‘qualified dividend

2 income’ means dividends received with respect to any

3 share of stock of—

4 ‘‘(A) any domestic corporation, or

5 ‘‘(B) any foreign corporation but only if

6 such share of stock is readily tradable on an es7 tablished securities market.

8 ‘‘(2) CERTAIN DIVIDENDS EXCLUDED.—Such

9 term shall not include—

10 ‘‘(A) any dividend from a corporation

11 which for the taxable year of the corporation in

12 which the distribution is made, or the preceding

13 taxable year, is a corporation exempt from tax

14 under section 501 or 521,

15 ‘‘(B) any amount allowed as a deduction

16 under section 591 (relating to deduction for divi17 dends paid by mutual savings banks, etc.), and

18 ‘‘(C) any dividend described in section

19 404(k).

20 ‘‘(3) EXCLUSION OF DIVIDENDS OF CERTAIN FOR21 EIGN CORPORATIONS.—Such term shall not include

22 any dividend from a foreign corporation which for

23 the taxable year of the corporation in which the dis24 tribution was made, or the preceding taxable year, is

25 a foreign personal holding company (as defined in
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1 section 552), a foreign investment company (as de2 fined in section 1246(b)), or a passive foreign invest3 ment company (as defined in section 1297).

4 ‘‘(4) COORDINATION WITH SECTION 246(C).—Such

5 term shall not include any dividend on any share of

6 stock—

7 ‘‘(A) with respect to which the holding pe8 riod requirements of section 246(c) are not met,

9 or

10 ‘‘(B) to the extent that the taxpayer is

11 under an obligation (whether pursuant to a short

12 sale or otherwise) to make related payments with

13 respect to positions in substantially similar or

14 related property.

15 ‘‘(c) SPECIAL RULES.—

16 ‘‘(1) AMOUNTS TAKEN INTO ACCOUNT AS INVEST17 MENT INCOME.—Qualified dividend income shall not

18 include any amount which the taxpayer takes into ac19 count as investment income under section

20 163(d)(4)(B).

21 ‘‘(2) COORDINATION WITH FOREIGN TAX CREDIT

22 AND DEDUCTION.—No credit shall be allowed under

23 section 901, and no deduction shall be allowed under

24 this chapter, for any taxes paid or accrued with re25 spect to any income excludable under this section.
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1 ‘‘(3) CERTAIN NONRESIDENT ALIENS INELIGIBLE

2 FOR EXCLUSION.—In the case of a nonresident alien

3 individual, subsection (a) shall apply only in deter4 mining the tax imposed for the taxable year by sec5 tions 871(b)(1) and 877(b).

6 ‘‘(4) EXCLUSION DISREGARDED IN DETERMINING

7 INCOME FOR CERTAIN PURPOSES.—Subsection (a)

8 shall not apply for purposes of determining amounts

9 of income under sections 32(i), 86(b), 135(b), 137(b),

10 219(g), 221(b), 222(b), 408A(c)(3), 469(i), and 530(c),

11 or subpart A of part IV of subchapter A.

12 ‘‘(5) TREATMENT OF DIVIDENDS FROM REGU13 LATED INVESTMENT COMPANIES AND REAL ESTATE

14 INVESTMENT TRUSTS.—A dividend from a regulated

15 investment company or real estate investment trust

16 shall be subject to the limitations prescribed in sec17 tions 854 and 857.’’.

18 (b) EXCLUSION OF DIVIDENDS FROM INVESTMENT IN19 COME.—Subparagraph (B) of section 163(d)(4) (defining

20 net investment income) is amended by adding at the end

21 the following flush sentence:

22 ‘‘Such term shall include qualified dividend in23 come (as defined in section 116(b)) only to the

24 extent the taxpayer elects to treat such income as
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1 investment income for purposes of this sub2 section.’’.

3 (c) TREATMENT OF DIVIDENDS FROM REGULATED IN4 VESTMENT COMPANIES.—

5 (1) Subsection (a) of section 854 (relating to

6 dividends received from regulated investment compa7 nies) is amended by inserting ‘‘section 116 (relating

8 to partial exclusion of dividends received by individ9 uals) and’’ after ‘‘For purposes of’’.

10 (2) Paragraph (1) of section 854(b) (relating to

11 other dividends) is amended by redesignating sub12 paragraph (B) as subparagraph (C) and by inserting

13 after subparagraph (A) the following new subpara14 graph:

15 ‘‘(B) EXCLUSION UNDER SECTION 116.—

16 ‘‘(i) IN GENERAL.—If the aggregate

17 dividends received by a regulated invest18 ment company during any taxable year are

19 less than 95 percent of its gross income,

20 then, in computing the exclusion under sec21 tion 116, rules similar to the rules of sub22 paragraph (A) shall apply.

23 ‘‘(ii) GROSS INCOME.—For purposes of

24 clause (i), in the case of 1 or more sales or

25 other dispositions of stock or securities, the
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1 term ‘gross income’ includes only the excess

2 of—

3 ‘‘(I) the net short-term capital

4 gain from such sales or dispositions,

5 over

6 ‘‘(II) the net long-term capital

7 loss from such sales or dispositions.’’.

8 (3) Subparagraph (C) of section 854(b)(1), as re9 designated by paragraph (2), is amended by striking

10 ‘‘subparagraph (A)’’ and inserting ‘‘subparagraph (A)

11 or (B)’’.

12 (4) Paragraph (2) of section 854(b) is amended

13 by inserting ‘‘the exclusion under section 116 and’’

14 after ‘‘for purposes of’’.

15 (5) Subsection (b) of section 854 is amended by

16 adding at the end the following new paragraph:

17 ‘‘(5) COORDINATION WITH SECTION 116.—For

18 purposes of paragraph (1)(B), an amount shall be

19 treated as a dividend only if the amount is qualified

20 dividend income (within the meaning of section

21 116(b)).’’.

22 (d) TREATMENT OF DIVIDENDS RECEIVED FROM REAL

23 ESTATE INVESTMENT TRUSTS.—Section 857(c) (relating to

24 restrictions applicable to dividends received from real estate

25 investment trusts) is amended to read as follows:
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1 ‘‘(c) RESTRICTIONS APPLICABLE TO DIVIDENDS RE2 CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—

3 ‘‘(1) SECTION 243.—For purposes of section 243

4 (relating to deductions for dividends received by cor5 porations), a dividend received from a real estate in6 vestment trust which meets the requirements of this

7 part shall not be considered a dividend.

8 ‘‘(2) SECTION 116.—For purposes of section 116

9 (relating to exclusion of dividends), rules similar to

10 the rules of section 854(b)(1)(B) shall apply to divi11 dends received from a real estate trust which meets

12 the requirements of this part.’’.

13 (e) CONFORMING AMENDMENTS.—

14 (1) Subsection (f) of section 301 is amended add15 ing at the end the following new paragraph:

16 ‘‘(4) For partial exclusion from gross income of

17 dividends received by individuals, see section 116.’’.

18 (2) Paragraph (1) of section 306(a) is amended

19 by adding at the end the following new subparagraph:

20 ‘‘(D) TREATMENT AS DIVIDEND.—For pur21 poses of section 116, any amount treated as ordi22 nary income under this paragraph shall be treat23 ed as a dividend received from the corporation.’’.
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1 (3)(A) Subpart C of part II of subchapter C of

2 chapter 1 (relating to collapsible corporations) is re3 pealed.

4 (B)(i) Section 338(h) is amended by striking

5 paragraph (14).

6 (ii) Sections 467(c)(5)(C), 1255(b)(2), and

7 1257(d) are each amended by striking ‘‘, 341(e)(12),’’.

8 (iii) The table of subparts for part II of sub9 chapter C of chapter 1 is amended by striking the

10 item related to subpart C.

11 (4) Section 531 is amended—

12 (A) by inserting ‘‘the taxable percentage of’’

13 after ‘‘equal to’’, and

14 (B) by adding at the end the following:

15 ‘‘For purposes of this section, the taxable per16 centage is 100 percent minus the applicable per17 centage (as defined in section 116(a)(2)).’’

18 (5) Section 541 is amended—

19 (A) by inserting ‘‘the taxable percentage of’’

20 after ‘‘equal to’’, and

21 (B) by adding at the end the following:

22 ‘‘For purposes of this section, the taxable per23 centage is 100 percent minus the applicable per24 centage (as defined in section 116(a)(2)).’’
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1 (6) Section 584(c) is amended by adding at the

2 end the following new flush sentence:

3 ‘‘The proportionate share of each participant in the amount

4 of dividends received by the common trust fund and to

5 which section 116 applies shall be considered for purposes

6 of such paragraph as having been received by such partici7 pant.’’.

8 (7) Section 643(a) is amended by redesignating

9 paragraph (7) as paragraph (8) and by inserting

10 after paragraph (6) the following new paragraph:

11 ‘‘(7) EXCLUDED DIVIDENDS.—There shall be in12 cluded the amount of any dividends excluded from

13 gross income under section 116 (relating to partial

14 exclusion of dividends).’’.

15 (8) Paragraph (5) of section 702(a) is amended

16 to read as follows:

17 ‘‘(5) dividends with respect to which section 116

18 or part VII of subchapter B applies,’’.

19 (9)(A) Section 1059(a) is amended by striking

20 ‘‘corporation’’ each place it appears and inserting

21 ‘‘taxpayer’’.

22 (B)(i) The heading for section 1059 is amended

23 by striking ‘‘CORPORATE’’.

24 (ii) The item relating to section 1059 in the table

25 of sections for part IV of subchapter O of chapter 1
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1 is amended by striking ‘‘Corporate shareholder’s’’ and

2 inserting ‘‘Shareholder’s’’.

3 (f) EFFECTIVE DATE.—The amendments made by this

4 section shall apply to taxable years beginning after Decem5 ber 31, 2002.

6 TITLE III—REVENUE

7 PROVISIONS

8 Subtitle A—Provisions Designed To

9 Curtail Tax Shelters

10 SEC. 301. CLARIFICATION OF ECONOMIC SUBSTANCE DOC11 TRINE.

12 (a) IN GENERAL.—Section 7701 is amended by redes13 ignating subsection (n) as subsection (o) and by inserting

14 after subsection (m) the following new subsection:

15 ‘‘(n) CLARIFICATION OF ECONOMIC SUBSTANCE DOC16 TRINE; ETC.—

17 ‘‘(1) GENERAL RULES.—

18 ‘‘(A) IN GENERAL.—In applying the eco19 nomic substance doctrine, the determination of

20 whether a transaction has economic substance

21 shall be made as provided in this paragraph.

22 ‘‘(B) DEFINITION OF ECONOMIC SUB23 STANCE.—For purposes of subparagraph (A)—

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

25 economic substance only if—
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1 ‘‘(I) the transaction changes in a

2 meaningful way (apart from Federal

3 tax effects) the taxpayer’s economic po4 sition, and

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

7 such transaction and the transaction is

8 a reasonable means of accomplishing

9 such purpose.

10 In applying subclause (II), a purpose of

11 achieving a financial accounting benefit

12 shall not be taken into account in deter13 mining whether a transaction has a sub14 stantial nontax purpose if the origin of such

15 financial accounting benefit is a reduction

16 of income tax.

17 ‘‘(ii) SPECIAL RULE WHERE TAXPAYER

18 RELIES ON PROFIT POTENTIAL.—A trans19 action shall not be treated as having eco20 nomic substance by reason of having a po21 tential for profit unless—

22 ‘‘(I) the present value of the rea23 sonably expected pre-tax profit from

24 the transaction is substantial in rela25 tion to the present value of the expected
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1 net tax benefits that would be allowed

2 if the transaction were respected, and

3 ‘‘(II) the reasonably expected pre4 tax profit from the transaction exceeds

5 a risk-free rate of return.

6 ‘‘(C) TREATMENT OF FEES AND FOREIGN

7 TAXES.—Fees and other transaction expenses

8 and foreign taxes shall be taken into account as

9 expenses in determining pre-tax profit under

10 subparagraph (B)(ii).

11 ‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH

12 TAX-INDIFFERENT PARTIES.—

13 ‘‘(A) SPECIAL RULES FOR FINANCING

14 TRANSACTIONS.—The form of a transaction

15 which is in substance the borrowing of money or

16 the acquisition of financial capital directly or

17 indirectly from a tax-indifferent party shall not

18 be respected if the present value of the deductions

19 to be claimed with respect to the transaction is

20 substantially in excess of the present value of the

21 anticipated economic returns of the person lend22 ing the money or providing the financial capital.

23 A public offering shall be treated as a borrowing,

24 or an acquisition of financial capital, from a

25 tax-indifferent party if it is reasonably expected
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1 that at least 50 percent of the offering will be

2 placed with tax-indifferent parties.

3 ‘‘(B) ARTIFICIAL INCOME SHIFTING AND

4 BASIS ADJUSTMENTS.—The form of a trans5 action with a tax-indifferent party shall not be

6 respected if—

7 ‘‘(i) it results in an allocation of in8 come or gain to the tax-indifferent party in

9 excess of such party’s economic income or

10 gain, or

11 ‘‘(ii) it results in a basis adjustment or

12 shifting of basis on account of overstating

13 the income or gain of the tax-indifferent

14 party.

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

16 purposes of this subsection—

17 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.—

18 The term ‘economic substance doctrine’ means

19 the common law doctrine under which tax bene20 fits under subtitle A with respect to a trans21 action are not allowable if the transaction does

22 not have economic substance or lacks a business

23 purpose.

24 ‘‘(B) TAX-INDIFFERENT PARTY.—The term

25 ‘tax-indifferent party’ means any person or enti-
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1 ty not subject to tax imposed by subtitle A. A

2 person shall be treated as a tax-indifferent party

3 with respect to a transaction if the items taken

4 into account with respect to the transaction have

5 no substantial impact on such person’s liability

6 under subtitle A.

7 ‘‘(C) EXCEPTION FOR PERSONAL TRANS8 ACTIONS OF INDIVIDUALS.—In the case of an in9 dividual, this subsection shall apply only to

10 transactions entered into in connection with a

11 trade or business or an activity engaged in for

12 the production of income.

13 ‘‘(D) TREATMENT OF LESSORS.—A lessor of

14 tangible property subject to a lease shall be treat15 ed as satisfying the requirements of paragraph

16 (1)(B)(ii) with respect to the leased property if

17 such lease satisfies such requirements as provided

18 by the Secretary.

19 ‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF20 FECTED.—Except as specifically provided in this sub21 section, the provisions of this subsection shall not be

22 construed as altering or supplanting any other rule of

23 law, and the requirements of this subsection shall be

24 construed as being in addition to any such other rule

25 of law.
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1 ‘‘(5) REGULATIONS.—The Secretary shall pre2 scribe such regulations as may be necessary or appro3 priate to carry out the purposes of this subsection.

4 Such regulations may include exemptions from the

5 application of this subsection.’’.

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

7 section shall apply to transactions entered into on or after

8 May 8, 2003.

9 SEC. 302. PENALTY FOR FAILING TO DISCLOSE REPORT10 ABLE TRANSACTION.

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

12 68 (relating to assessable penalties) is amended by inserting

13 after section 6707 the following new section:

14 ‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORT15 ABLE TRANSACTION INFORMATION WITH RE16 TURN OR STATEMENT.

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

18 to include on any return or statement any information with

19 respect to a reportable transaction which is required under

20 section 6011 to be included with such return or statement

21 shall pay a penalty in the amount determined under sub22 section (b).

23 ‘‘(b) AMOUNT OF PENALTY.—
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1 ‘‘(1) IN GENERAL.—Except as provided in para2 graphs (2) and (3), the amount of the penalty under

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

4 ‘‘(2) LISTED TRANSACTION.—The amount of the

5 penalty under subsection (a) with respect to a listed

6 transaction shall be $100,000.

7 ‘‘(3) INCREASE IN PENALTY FOR LARGE ENTITIES

8 AND HIGH NET WORTH INDIVIDUALS.—

9 ‘‘(A) IN GENERAL.—In the case of a failure

10 under subsection (a) by—

11 ‘‘(i) a large entity, or

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

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

14 twice the amount determined without regard to

15 this paragraph.

16 ‘‘(B) LARGE ENTITY.—For purposes of sub17 paragraph (A), the term ‘large entity’ means,

18 with respect to any taxable year, a person (other

19 than a natural person) with gross receipts in ex20 cess of $10,000,000 for the taxable year in which

21 the reportable transaction occurs or the pre22 ceding taxable year. Rules similar to the rules of

23 paragraph (2) and subparagraphs (B), (C), and

24 (D) of paragraph (3) of section 448(c) shall

25 apply for purposes of this subparagraph.
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1 ‘‘(C) HIGH NET WORTH INDIVIDUAL.—For

2 purposes of subparagraph (A), the term ‘high net

3 worth individual’ means, with respect to a re4 portable transaction, a natural person whose net

5 worth exceeds $2,000,000 immediately before the

6 transaction.

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.—Except as provided

17 in regulations, the term ‘listed transaction’ means a

18 reportable transaction which is the same as, or sub19 stantially similar to, a transaction specifically identi20 fied by the Secretary as a tax avoidance transaction

21 for purposes of section 6011.

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

23 ‘‘(1) IN GENERAL.—The Commissioner of Inter24 nal Revenue may rescind all or any portion of any
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1 penalty imposed by this section with respect to any

2 violation if—

3 ‘‘(A) the violation is with respect to a re4 portable transaction other than a listed trans5 action,

6 ‘‘(B) the person on whom the penalty is im7 posed has a history of complying with the re8 quirements of this title,

9 ‘‘(C) it is shown that the violation is due to

10 an unintentional mistake of fact;

11 ‘‘(D) imposing the penalty would be against

12 equity and good conscience, and

13 ‘‘(E) rescinding the penalty would promote

14 compliance with the requirements of this title

15 and effective tax administration.

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

17 under paragraph (1) shall be at the sole discretion of

18 the Commissioner and may be delegated only to the

19 head of the Office of Tax Shelter Analysis. The Com20 missioner, in the Commissioner’s sole discretion, may

21 establish a procedure to determine if a penalty should

22 be referred to the Commissioner or the head of such

23 Office for a determination under paragraph (1).

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

25 provision of law, any determination under this sub-
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1 section may not be reviewed in any administrative or

2 judicial proceeding.

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

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

5 file in the Office of the Commissioner the opinion of

6 the Commissioner or the head of the Office of Tax

7 Shelter Analysis with respect to the determination,

8 including—

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

10 transaction,

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

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

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

14 year report to the Committee on Ways and Means of

15 the House of Representatives and the Committee on

16 Finance of the Senate—

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

18 aggregate amount of penalties imposed, and re19 scinded, under this section, and

20 ‘‘(B) a description of each penalty rescinded

21 under this subsection and the reasons therefor.

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

23 person—

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

25 under section 13 or 15(d) of the Securities Exchange
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1 Act of 1934 or is required to be consolidated with an2 other person for purposes of such reports, and

3 ‘‘(2) which—

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

5 this section with respect to a listed transaction,

6 ‘‘(B) is required to pay a penalty under sec7 tion 6662A with respect to any reportable trans8 action at a rate prescribed under section

9 6662A(c), or

10 ‘‘(C) is required to pay a penalty under sec11 tion 6662B with respect to any noneconomic

12 substance transaction,

13 the requirement to pay such penalty shall be disclosed in

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

15 Secretary shall specify. Failure to make a disclosure in ac16 cordance with the preceding sentence shall be treated as a

17 failure to which the penalty under subsection (b)(2) applies.

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

19 penalty imposed by this section is in addition to any pen20 alty imposed under this title.’’.

21 (b) CONFORMING AMENDMENT.—The table of sections

22 for part I of subchapter B of chapter 68 is amended by

23 inserting after the item relating to section 6707 the fol24 lowing:

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

information with return or statement.’’.
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1 (c) EFFECTIVE DATE.—The amendments made by this

2 section shall apply to returns and statements the due date

3 for which is after the date of the enactment of this Act.

4 SEC. 303. ACCURACY-RELATED PENALTY FOR LISTED

5 TRANSACTIONS AND OTHER REPORTABLE

6 TRANSACTIONS HAVING A SIGNIFICANT TAX

7 AVOIDANCE PURPOSE.

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

9 amended by inserting after section 6662 the following new

10 section:

11 ‘‘SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY

12 ON UNDERSTATEMENTS WITH RESPECT TO

13 REPORTABLE TRANSACTIONS.

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

15 reportable transaction understatement for any taxable year,

16 there shall be added to the tax an amount equal to 20 per17 cent of the amount of such understatement.

18 ‘‘(b) REPORTABLE TRANSACTION UNDERSTATE19 MENT.—For purposes of this section—

20 ‘‘(1) IN GENERAL.—The term ‘reportable trans21 action understatement’ means the sum of—

22 ‘‘(A) the product of—

23 ‘‘(i) the amount of the increase (if any)

24 in taxable income which results from a dif25 ference between the proper tax treatment of
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1 an item to which this section applies and

2 the taxpayer’s treatment of such item (as

3 shown on the taxpayer’s return of tax), and

4 ‘‘(ii) the highest rate of tax imposed by

5 section 1 (section 11 in the case of a tax6 payer which is a corporation), and

7 ‘‘(B) the amount of the decrease (if any) in

8 the aggregate amount of credits determined

9 under subtitle A which results from a difference

10 between the taxpayer’s treatment of an item to

11 which this section applies (as shown on the tax12 payer’s return of tax) and the proper tax treat13 ment of such item.

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

15 the excess of deductions allowed for the taxable year

16 over gross income for such year, and any reduction

17 in the amount of capital losses which would (without

18 regard to section 1211) be allowed for such year, shall

19 be treated as an increase in taxable income.

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

21 section shall apply to any item which is attributable

22 to—

23 ‘‘(A) any listed transaction, and

24 ‘‘(B) any reportable transaction (other than

25 a listed transaction) if a significant purpose of
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1 such transaction is the avoidance or evasion of

2 Federal income tax.

3 ‘‘(c) HIGHER PENALTY FOR NONDISCLOSED LISTED

4 AND OTHER AVOIDANCE TRANSACTIONS.—

5 ‘‘(1) IN GENERAL.—Subsection (a) shall be ap6 plied by substituting ‘30 percent’ for ‘20 percent’ with

7 respect to the portion of any reportable transaction

8 understatement with respect to which the requirement

9 of section 6664(d)(2)(A) is not met.

10 ‘‘(2) RULES APPLICABLE TO COMPROMISE OF

11 PENALTY.—

12 ‘‘(A) IN GENERAL.—If the 1st letter of pro13 posed deficiency which allows the taxpayer an

14 opportunity for administrative review in the In15 ternal Revenue Service Office of Appeals has

16 been sent with respect to a penalty to which

17 paragraph (1) applies, only the Commissioner of

18 Internal Revenue may compromise all or any

19 portion of such penalty.

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

21 paragraphs (2), (3), (4), and (5) of section

22 6707A(d) shall apply for purposes of subpara23 graph (A).

24 ‘‘(d) DEFINITIONS OF REPORTABLE AND LISTED

25 TRANSACTIONS.—For purposes of this section, the terms ‘re-
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1 portable transaction’ and ‘listed transaction’ have the re2 spective meanings given to such terms by section 6707A(c).

3 ‘‘(e) SPECIAL RULES.—

4 ‘‘(1) COORDINATION WITH PENALTIES, ETC., ON

5 OTHER UNDERSTATEMENTS.—In the case of an under6 statement (as defined in section 6662(d)(2))—

7 ‘‘(A) the amount of such understatement

8 (determined without regard to this paragraph)

9 shall be increased by the aggregate amount of re10 portable transaction understatements and non11 economic substance transaction understatements

12 for purposes of determining whether such under13 statement is a substantial understatement under

14 section 6662(d)(1), and

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

16 6662(a) shall apply only to the excess of the

17 amount of the substantial understatement (if

18 any) after the application of subparagraph (A)

19 over the aggregate amount of reportable trans20 action understatements and noneconomic sub21 stance transaction understatements.

22 ‘‘(2) COORDINATION WITH OTHER PENALTIES.—

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

24 References to an underpayment in section 6663

25 shall be treated as including references to a re-
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1 portable transaction understatement and a non2 economic substance transaction understatement.

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

4 shall not apply to any portion of an understate5 ment on which a penalty is imposed under sec6 tion 6662B or 6663.

7 ‘‘(3) SPECIAL RULE FOR AMENDED RETURNS.—

8 Except as provided in regulations, in no event shall

9 any tax treatment included with an amendment or

10 supplement to a return of tax be taken into account

11 in determining the amount of any reportable trans12 action understatement or noneconomic substance

13 transaction understatement if the amendment or sup14 plement is filed after the earlier of the date the tax15 payer is first contacted by the Secretary regarding the

16 examination of the return or such other date as is

17 specified by the Secretary.

18 ‘‘(4) NONECONOMIC SUBSTANCE TRANS19 ACTION UNDERSTATEMENT.—For purposes of this

20 subsection, the term ‘noneconomic substance

21 transaction understatement’ has the meaning

22 given such term by section 6662B(c).
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1 ‘‘(5) CROSS REFERENCE.—

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

Securities and Exchange Commission, see section

6707A(e).’’.

2 (b) DETERMINATION OF OTHER UNDERSTATE3 MENTS.—Subparagraph (A) of section 6662(d)(2) is

4 amended by adding at the end the following flush sentence:

5 ‘‘The excess under the preceding sentence shall be

6 determined without regard to items to which sec7 tion 6662A applies and without regard to items

8 with respect to which a penalty is imposed by

9 section 6662B.’’.

10 (c) REASONABLE CAUSE EXCEPTION.—

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

12 adding at the end the following new subsection:

13 ‘‘(d) REASONABLE CAUSE EXCEPTION FOR REPORT14 ABLE TRANSACTION UNDERSTATEMENTS.—

15 ‘‘(1) IN GENERAL.—No penalty shall be imposed

16 under section 6662A with respect to any portion of a

17 reportable transaction understatement if it is shown

18 that there was a reasonable cause for such portion

19 and that the taxpayer acted in good faith with respect

20 to such portion.

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

22 apply to any reportable transaction understatement

23 unless—
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1 ‘‘(A) the relevant facts affecting the tax

2 treatment of the item are adequately disclosed in

3 accordance with the regulations prescribed under

4 section 6011,

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

6 for such treatment, and

7 ‘‘(C) the taxpayer reasonably believed that

8 such treatment was more likely than not the

9 proper treatment.

10 A taxpayer failing to adequately disclose in accord11 ance with section 6011 shall be treated as meeting the

12 requirements of subparagraph (A) if the penalty for

13 such failure was rescinded under section 6707A(d).

14 ‘‘(3) RULES RELATING TO REASONABLE BE15 LIEF.—For purposes of paragraph (2)(C)—

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

17 treated as having a reasonable belief with respect

18 to the tax treatment of an item only if such

19 belief—

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

21 exist at the time the return of tax which in22 cludes such tax treatment is filed, and

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

24 chances of success on the merits of such

25 treatment and does not take into account
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1 the possibility that a return will not be au2 dited, such treatment will not be raised on

3 audit, or such treatment will be resolved

4 through settlement if it is raised.

5 ‘‘(B) CERTAIN OPINIONS MAY NOT BE RE6 LIED UPON.—

7 ‘‘(i) IN GENERAL.—An opinion of a

8 tax advisor may not be relied upon to estab9 lish the reasonable belief of a taxpayer if—

10 ‘‘(I) the tax advisor is described

11 in clause (ii), or

12 ‘‘(II) the opinion is described in

13 clause (iii).

14 ‘‘(ii) DISQUALIFIED TAX ADVISORS.—A

15 tax advisor is described in this clause if the

16 tax advisor—

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

18 the meaning of section 6111(b)(1)) who

19 participates in the organization, man20 agement, promotion, or sale of the

21 transaction or who is related (within

22 the meaning of section 267(b) or

23 707(b)(1)) to any person who so par24 ticipates,
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1 ‘‘(II) is compensated directly or

2 indirectly by a material advisor with

3 respect to the transaction,

4 ‘‘(III) has a fee arrangement with

5 respect to the transaction which is con6 tingent on all or part of the intended

7 tax benefits from the transaction being

8 sustained, or

9 ‘‘(IV) as determined under regula10 tions prescribed by the Secretary, has a

11 continuing financial interest with re12 spect to the transaction.

13 ‘‘(iii) DISQUALIFIED OPINIONS.—For

14 purposes of clause (i), an opinion is dis15 qualified if the opinion—

16 ‘‘(I) is based on unreasonable fac17 tual or legal assumptions (including

18 assumptions as to future events),

19 ‘‘(II) unreasonably relies on rep20 resentations, statements, findings, or

21 agreements of the taxpayer or any

22 other person,

23 ‘‘(III) does not identify and con24 sider all relevant facts, or
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1 ‘‘(IV) fails to meet any other re2 quirement as the Secretary may pre3 scribe.’’.

4 (2) CONFORMING AMENDMENT.—The heading for

5 subsection (c) of section 6664 is amended by inserting

6 ‘‘FOR UNDERPAYMENTS’’ after ‘‘EXCEPTION’’.

7 (d) CONFORMING AMENDMENTS.—

8 (1) Subparagraph (C) of section 461(i)(3) is

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

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

11 (2) Paragraph (3) of section 1274(b) is

12 amended—

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

14 6662(d)(2)(C)(iii))’’ in subparagraph (B)(i), and

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

16 subparagraph:

17 ‘‘(C) TAX SHELTER.—For purposes of sub18 paragraph (B), the term ‘tax shelter’ means—

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

20 ‘‘(ii) any investment plan or arrange21 ment, or

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

23 if a significant purpose of such partnership, en24 tity, plan, or arrangement is the avoidance or

25 evasion of Federal income tax.’’.
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1 (3) Section 6662(d)(2) is amended by striking

2 subparagraphs (C) and (D).

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

4 ‘‘this part’’ and inserting ‘‘section 6662 or 6663’’.

5 (5) Subsection (b) of section 7525 is amended by

6 striking ‘‘section 6662(d)(2)(C)(iii)’’ and inserting

7 ‘‘section 1274(b)(3)(C)’’.

8 (6)(A) The heading for section 6662 is amended

9 to read as follows:

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

11 ON UNDERPAYMENTS.’’.

12 (B) The table of sections for part II of sub13 chapter A of chapter 68 is amended by striking the

14 item relating to section 6662 and inserting the fol15 lowing new items:

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

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

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

17 section shall apply to taxable years ending after the date

18 of the enactment of this Act.
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1 SEC. 304. PENALTY FOR UNDERSTATEMENTS ATTRIB2 UTABLE TO TRANSACTIONS LACKING ECO3 NOMIC SUBSTANCE, ETC.

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

5 amended by inserting after section 6662A the following new

6 section:

7 ‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB8 UTABLE TO TRANSACTIONS LACKING ECO9 NOMIC SUBSTANCE, ETC.

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

11 noneconomic substance transaction understatement for any

12 taxable year, there shall be added to the tax an amount

13 equal to 40 percent of the amount of such understatement.

14 ‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED TRANS15 ACTIONS.—Subsection (a) shall be applied by substituting

16 ‘20 percent’ for ‘40 percent’ with respect to the portion of

17 any noneconomic substance transaction understatement

18 with respect to which the relevant facts affecting the tax

19 treatment of the item are adequately disclosed in the return

20 or a statement attached to the return.

21 ‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UNDER22 STATEMENT.—For purposes of this section—

23 ‘‘(1) IN GENERAL.—The term ‘noneconomic sub24 stance transaction understatement’ means any

25 amount which would be an understatement under sec26 tion 6662A(b)(1) if section 6662A were applied by
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1 taking into account items attributable to noneconomic

2 substance transactions rather than items to which sec3 tion 6662A would apply without regard to this para4 graph.

5 ‘‘(2) NONECONOMIC SUBSTANCE TRANSACTION.—

6 The term ‘noneconomic substance transaction’ means

7 any transaction if—

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

9 (within the meaning of section 7701(n)(1)) for

10 the transaction giving rise to the claimed benefit

11 or the transaction was not respected under sec12 tion 7701(n)(2), or

13 ‘‘(B) the transaction fails to meet the re14 quirements of any similar rule of law.

15 ‘‘(d) RULES APPLICABLE TO COMPROMISE OF PEN16 ALTY.—

17 ‘‘(1) IN GENERAL.—If the 1st letter of proposed

18 deficiency which allows the taxpayer an opportunity

19 for administrative review in the Internal Revenue

20 Service Office of Appeals has been sent with respect

21 to a penalty to which this section applies, only the

22 Commissioner of Internal Revenue may compromise

23 all or any portion of such penalty.
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1 ‘‘(2) APPLICABLE RULES.—The rules of para2 graphs (2), (3), (4), and (5) of section 6707A(d) shall

3 apply for purposes of paragraph (1).

4 ‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex5 cept as otherwise provided in this part, the penalty imposed

6 by this section shall be in addition to any other penalty

7 imposed by this title.

8 ‘‘(f) CROSS REFERENCES.—

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

section 6662A(e).

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

section to the Securities and Exchange Commission,

see section 6707A(e).’’.

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

10 part II of subchapter A of chapter 68 is amended by insert11 ing after the item relating to section 6662A the following

12 new item:

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

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

14 section shall apply to transactions entered into on or after

15 May 8, 2003.

16 SEC. 305. MODIFICATIONS OF SUBSTANTIAL UNDERSTATE17 MENT PENALTY FOR NONREPORTABLE

18 TRANSACTIONS.

19 (a) SUBSTANTIAL UNDERSTATEMENT OF CORPORA20 TIONS.—Section 6662(d)(1)(B) (relating to special rule for

21 corporations) is amended to read as follows:
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1 ‘‘(B) SPECIAL RULE FOR CORPORATIONS.—

2 In the case of a corporation other than an S cor3 poration or a personal holding company (as de4 fined in section 542), there is a substantial un5 derstatement of income tax for any taxable year

6 if the amount of the understatement for the tax7 able year exceeds the lesser of—

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

9 be shown on the return for the taxable year

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

11 ‘‘(ii) $10,000,000.’’.

12 (b) REDUCTION FOR UNDERSTATEMENT OF TAXPAYER

13 DUE TO POSITION OF TAXPAYER OR DISCLOSED ITEM.—

14 (1) IN GENERAL.—Section 6662(d)(2)(B)(i) (re15 lating to substantial authority) is amended to read as

16 follows:

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

18 the taxpayer if the taxpayer had reasonable

19 belief that the tax treatment was more likely

20 than not the proper treatment, or’’.

21 (2) CONFORMING AMENDMENT.—Section 6662(d)

22 is amended by adding at the end the following new

23 paragraph:

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

25 subsection, section 6664(d)(2), and section 6694(a)(1),
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1 the Secretary may prescribe a list of positions for

2 which the Secretary believes there is not substantial

3 authority or there is no reasonable belief that the tax

4 treatment is more likely than not the proper tax

5 treatment. Such list (and any revisions thereof) shall

6 be published in the Federal Register or the Internal

7 Revenue Bulletin.’’.

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

9 section shall apply to taxable years beginning after the date

10 of the enactment of this Act.

11 SEC. 306. TAX SHELTER EXCEPTION TO CONFIDENTIALITY

12 PRIVILEGES RELATING TO TAXPAYER COM13 MUNICATIONS.

14 (a) IN GENERAL.—Section 7525(b) (relating to section

15 not to apply to communications regarding corporate tax

16 shelters) is amended to read as follows:

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

18 REGARDING TAX SHELTERS.—The privilege under sub19 section (a) shall not apply to any written communication

20 which is—

21 ‘‘(1) between a federally authorized tax practi22 tioner and—

23 ‘‘(A) any person,

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

25 or representative of the person, or
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1 ‘‘(C) any other person holding a capital or

2 profits interest in the person, and

3 ‘‘(2) in connection with the promotion of the di4 rect or indirect participation of the person in any tax

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

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

7 section shall apply to communications made on or after the

8 date of the enactment of this Act.

9 SEC. 307. DISCLOSURE OF REPORTABLE TRANSACTIONS.

10 (a) IN GENERAL.—Section 6111 (relating to registra11 tion of tax shelters) is amended to read as follows:

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

13 ‘‘(a) IN GENERAL.—Each material advisor with re14 spect to any reportable transaction shall make a return (in

15 such form as the Secretary may prescribe) setting forth—

16 ‘‘(1) information identifying and describing the

17 transaction,

18 ‘‘(2) information describing any potential tax

19 benefits expected to result from the transaction, and

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

21 may prescribe.

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

23 by the Secretary.

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

25 ‘‘(1) MATERIAL ADVISOR.—
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1 ‘‘(A) IN GENERAL.—The term ‘material ad2 visor’ means any person—

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

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

6 carrying out any reportable transaction,

7 and

8 ‘‘(ii) who directly or indirectly derives

9 gross income in excess of the threshold

10 amount for such aid, assistance, or advice.

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

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

13 ‘‘(i) $50,000 in the case of a reportable

14 transaction substantially all of the tax bene15 fits from which are provided to natural per16 sons, and

17 ‘‘(ii) $250,000 in any other case.

18 ‘‘(2) REPORTABLE TRANSACTION.—The term ‘re19 portable transaction’ has the meaning given to such

20 term by section 6707A(c).

21 ‘‘(c) REGULATIONS.—The Secretary may prescribe reg22 ulations which provide—

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

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

2 such requirements,

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

4 section, and

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

7 (b) CONFORMING AMENDMENTS.—

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

9 of sections for subchapter B of chapter 61 is amended

10 to read as follows:

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

11 (2)(A) So much of section 6112 as precedes sub12 section (c) thereof is amended to read as follows:

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

15 ‘‘(a) IN GENERAL.—Each material advisor (as defined

16 in section 6111) with respect to any reportable transaction

17 (as defined in section 6707A(c)) shall maintain, in such

18 manner as the Secretary may by regulations prescribe, a

19 list—

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

21 whom such advisor acted as such a material advisor

22 with respect to such transaction, and

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

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

3 with respect to such transaction.’’.

4 (B) Section 6112 is amended by redesignating

5 subsection (c) as subsection (b).

6 (C) Section 6112(b), as redesignated by subpara7 graph (B), is amended—

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

9 in paragraph (1)(A), and

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

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

13 table of sections for subchapter B of chapter 61 is

14 amended to read as follows:

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

lists of advisees.’’.

15 (3)(A) The heading for section 6708 is amended

16 to read as follows:

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

18 WITH RESPECT TO REPORTABLE TRANS19 ACTIONS.’’.

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

21 table of sections for part I of subchapter B of chapter

22 68 is amended to read as follows:

‘‘Sec. 6708. Failure to maintain lists of advisees with respect to reportable transactions.’’.
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1 (c) EFFECTIVE DATE.—The amendments made by this

2 section shall apply to transactions with respect to which

3 material aid, assistance, or advice referred to in section

4 6111(b)(1)(A)(i) of the Internal Revenue Code of 1986 (as

5 added by this section) is provided after the date of the enact6 ment of this Act.

7 SEC. 308. MODIFICATIONS TO PENALTY FOR FAILURE TO

8 REGISTER TAX SHELTERS.

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

10 furnish information regarding tax shelters) is amended to

11 read as follows:

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

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

15 a return under section 6111(a) with respect to any report16 able transaction—

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

18 prescribed therefor, or

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

20 the Secretary with respect to such transaction,

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

22 in the amount determined under subsection (b).

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

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

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

6 transaction shall be an amount equal to the greater

7 of—

8 ‘‘(A) $200,000, or

9 ‘‘(B) 50 percent of the gross income derived

10 by such person with respect to aid, assistance, or

11 advice which is provided with respect to the list12 ed transaction before the date the return includ13 ing the transaction is filed under section 6111.

14 Subparagraph (B) shall be applied by substituting

15 ‘75 percent’ for ‘50 percent’ in the case of an inten16 tional failure or act described in subsection (a).

17 ‘‘(c) RESCISSION AUTHORITY.—The provisions of sec18 tion 6707A(d) (relating to authority of Commissioner to re19 scind penalty) shall apply to any penalty imposed under

20 this section.

21 ‘‘(d) REPORTABLE AND LISTED TRANSACTIONS.—The

22 terms ‘reportable transaction’ and ‘listed transaction’ have

23 the respective meanings given to such terms by section

24 6707A(c).’’.
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1 (b) CLERICAL AMENDMENT.—The item relating to sec2 tion 6707 in the table of sections for part I of subchapter

3 B of chapter 68 is amended by striking ‘‘tax shelters’’ and

4 inserting ‘‘reportable transactions’’.

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

6 section shall apply to returns the due date for which is after

7 the date of the enactment of this Act.

8 SEC. 309. MODIFICATION OF PENALTY FOR FAILURE TO

9 MAINTAIN LISTS OF INVESTORS.

10 (a) IN GENERAL.—Subsection (a) of section 6708 is

11 amended to read as follows:

12 ‘‘(a) IMPOSITION OF PENALTY.—

13 ‘‘(1) IN GENERAL.—If any person who is re14 quired to maintain a list under section 6112(a) fails

15 to make such list available upon written request to

16 the Secretary in accordance with section

17 6112(b)(1)(A) within 20 business days after the date

18 of the Secretary’s request, such person shall pay a

19 penalty of $10,000 for each day of such failure after

20 such 20th day.

21 ‘‘(2) REASONABLE CAUSE EXCEPTION.—No pen22 alty shall be imposed by paragraph (1) with respect

23 to the failure on any day if such failure is due to rea24 sonable cause.’’.
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1 (b) EFFECTIVE DATE.—The amendment made by this

2 section shall apply to requests made after the date of the

3 enactment of this Act.

4 SEC. 310. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN

5 CONDUCT RELATED TO TAX SHELTERS AND

6 REPORTABLE TRANSACTIONS.

7 (a) IN GENERAL.—Section 7408 (relating to action to

8 enjoin promoters of abusive tax shelters, etc.) is amended

9 by redesignating subsection (c) as subsection (d) and by

10 striking subsections (a) and (b) and inserting the following

11 new subsections:

12 ‘‘(a) AUTHORITY TO SEEK INJUNCTION.—A civil ac13 tion in the name of the United States to enjoin any person

14 from further engaging in specified conduct may be com15 menced at the request of the Secretary. Any action under

16 this section shall be brought in the district court of the

17 United States for the district in which such person resides,

18 has his principal place of business, or has engaged in speci19 fied conduct. The court may exercise its jurisdiction over

20 such action (as provided in section 7402(a)) separate and

21 apart from any other action brought by the United States

22 against such person.

23 ‘‘(b) ADJUDICATION AND DECREE.—In any action

24 under subsection (a), if the court finds—
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1 ‘‘(1) that the person has engaged in any specified

2 conduct, and

3 ‘‘(2) that injunctive relief is appropriate to pre4 vent recurrence of such conduct,

5 the court may enjoin such person from engaging in such

6 conduct or in any other activity subject to penalty under

7 this title.

8 ‘‘(c) SPECIFIED CONDUCT.—For purposes of this sec9 tion, the term ‘specified conduct’ means any action, or fail10 ure to take action, subject to penalty under section 6700,

11 6701, 6707, or 6708.’’.

12 (b) CONFORMING AMENDMENTS.—

13 (1) The heading for section 7408 is amended to

14 read as follows:

15 ‘‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RE16 LATED TO TAX SHELTERS AND REPORTABLE

17 TRANSACTIONS.’’.

18 (2) The table of sections for subchapter A of

19 chapter 67 is amended by striking the item relating

20 to section 7408 and inserting the following new item:

‘‘Sec. 7408. Actions to enjoin specified conduct related to tax shelters and reportable transactions.’’.

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

22 section shall take effect on the day after the date of the en23 actment of this Act.
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1 SEC. 311. UNDERSTATEMENT OF TAXPAYER’S LIABILITY BY

2 INCOME TAX RETURN PREPARER.

3 (a) STANDARDS CONFORMED TO TAXPAYER STAND4 ARDS.—Section 6694(a) (relating to understatements due to

5 unrealistic positions) is amended—

6 (1) by striking ‘‘realistic possibility of being sus7 tained on its merits’’ in paragraph (1) and inserting

8 ‘‘reasonable belief that the tax treatment in such posi9 tion was more likely than not the proper treatment’’,

10 (2) by striking ‘‘or was frivolous’’ in paragraph

11 (3) and inserting ‘‘or there was no reasonable basis

12 for the tax treatment of such position’’, and

13 (3) by striking ‘‘UNREALISTIC’’ in the heading

14 and inserting ‘‘IMPROPER’’.

15 (b) AMOUNT OF PENALTY.—Section 6694 is

16 amended—

17 (1) by striking ‘‘$250’’ in subsection (a) and in18 serting ‘‘$1,000’’, and

19 (2) by striking ‘‘$1,000’’ in subsection (b) and

20 inserting ‘‘$5,000’’.

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

22 section shall apply to documents prepared after the date

23 of the enactment of this Act.
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1 SEC. 312. PENALTY ON FAILURE TO REPORT INTERESTS IN

2 FOREIGN FINANCIAL ACCOUNTS.

3 (a) IN GENERAL.—Section 5321(a)(5) of title 31,

4 United States Code, is amended to read as follows:

5 ‘‘(5) FOREIGN FINANCIAL AGENCY TRANSACTION

6 VIOLATION.—

7 ‘‘(A) PENALTY AUTHORIZED.—The Sec8 retary of the Treasury may impose a civil money

9 penalty on any person who violates, or causes

10 any violation of, any provision of section 5314.

11 ‘‘(B) AMOUNT OF PENALTY.—

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

13 in subparagraph (C), the amount of any

14 civil penalty imposed under subparagraph

15 (A) shall not exceed $5,000.

16 ‘‘(ii) REASONABLE CAUSE EXCEP17 TION.—No penalty shall be imposed under

18 subparagraph (A) with respect to any viola19 tion if—

20 ‘‘(I) such violation was due to

21 reasonable cause, and

22 ‘‘(II) the amount of the trans23 action or the balance in the account at

24 the time of the transaction was prop25 erly reported.
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1 ‘‘(C) WILLFUL VIOLATIONS.—In the case of

2 any person willfully violating, or willfully caus3 ing any violation of, any provision of section

4 5314—

5 ‘‘(i) the maximum penalty under sub6 paragraph (B)(i) shall be increased to the

7 greater of—

8 ‘‘(I) $25,000, or

9 ‘‘(II) the amount (not exceeding

10 $100,000) determined under subpara11 graph (D), and

12 ‘‘(ii) subparagraph (B)(ii) shall not

13 apply.

14 ‘‘(D) AMOUNT.—The amount determined

15 under this subparagraph is—

16 ‘‘(i) in the case of a violation involving

17 a transaction, the amount of the trans18 action, or

19 ‘‘(ii) in the case of a violation involv20 ing a failure to report the existence of an

21 account or any identifying information re22 quired to be provided with respect to an ac23 count, the balance in the account at the

24 time of the violation.’’.
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1 (b) EFFECTIVE DATE.—The amendment made by this

2 section shall apply to violations occurring after the date of

3 the enactment of this Act.

4 SEC. 313. FRIVOLOUS TAX SUBMISSIONS.

5 (a) CIVIL PENALTIES.—Section 6702 is amended to

6 read as follows:

7 ‘‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.

8 ‘‘(a) CIVIL PENALTY FOR FRIVOLOUS TAX RE9 TURNS.—A person shall pay a penalty of $5,000 if—

10 ‘‘(1) such person files what purports to be a re11 turn of a tax imposed by this title but which—

12 ‘‘(A) does not contain information on which

13 the substantial correctness of the self-assessment

14 may be judged, or

15 ‘‘(B) contains information that on its face

16 indicates that the self-assessment is substantially

17 incorrect; and

18 ‘‘(2) the conduct referred to in paragraph (1)—

19 ‘‘(A) is based on a position which the Sec20 retary has identified as frivolous under sub21 section (c), or

22 ‘‘(B) reflects a desire to delay or impede the

23 administration of Federal tax laws.

24 ‘‘(b) CIVIL PENALTY FOR SPECIFIED FRIVOLOUS SUB25 MISSIONS.—
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1 ‘‘(1) IMPOSITION OF PENALTY.—Except as pro2 vided in paragraph (3), any person who submits a

3 specified frivolous submission shall pay a penalty of

4 $5,000.

5 ‘‘(2) SPECIFIED FRIVOLOUS SUBMISSION.—For

6 purposes of this section—

7 ‘‘(A) SPECIFIED FRIVOLOUS SUBMISSION.—

8 The term ‘specified frivolous submission’ means

9 a specified submission if any portion of such

10 submission—

11 ‘‘(i) is based on a position which the

12 Secretary has identified as frivolous under

13 subsection (c), or

14 ‘‘(ii) reflects a desire to delay or im15 pede the administration of Federal tax

16 laws.

17 ‘‘(B) SPECIFIED SUBMISSION.—The term

18 ‘specified submission’ means—

19 ‘‘(i) a request for a hearing under—

20 ‘‘(I) section 6320 (relating to no21 tice and opportunity for hearing upon

22 filing of notice of lien), or

23 ‘‘(II) section 6330 (relating to no24 tice and opportunity for hearing before

25 levy), and
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1 ‘‘(ii) an application under—

2 ‘‘(I) section 6159 (relating to

3 agreements for payment of tax liability

4 in installments),

5 ‘‘(II) section 7122 (relating to

6 compromises), or

7 ‘‘(III) section 7811 (relating to

8 taxpayer assistance orders).

9 ‘‘(3) OPPORTUNITY TO WITHDRAW SUBMIS10 SION.—If the Secretary provides a person with notice

11 that a submission is a specified frivolous submission

12 and such person withdraws such submission within

13 30 days after such notice, the penalty imposed under

14 paragraph (1) shall not apply with respect to such

15 submission.

16 ‘‘(c) LISTING OF FRIVOLOUS POSITIONS.—The Sec17 retary shall prescribe (and periodically revise) a list of posi18 tions which the Secretary has identified as being frivolous

19 for purposes of this subsection. The Secretary shall not in20 clude in such list any position that the Secretary deter21 mines meets the requirement of section

22 6662(d)(2)(B)(ii)(II).

23 ‘‘(d) REDUCTION OF PENALTY.—The Secretary may

24 reduce the amount of any penalty imposed under this sec25 tion if the Secretary determines that such reduction would
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1 promote compliance with and administration of the Federal

2 tax laws.

3 ‘‘(e) PENALTIES IN ADDITION TO OTHER PEN4 ALTIES.—The penalties imposed by this section shall be in

5 addition to any other penalty provided by law.’’.

6 (b) TREATMENT OF FRIVOLOUS REQUESTS FOR HEAR7 INGS BEFORE LEVY.—

8 (1) FRIVOLOUS REQUESTS DISREGARDED.—Sec9 tion 6330 (relating to notice and opportunity for

10 hearing before levy) is amended by adding at the end

11 the following new subsection:

12 ‘‘(g) FRIVOLOUS REQUESTS FOR HEARING, ETC.—

13 Notwithstanding any other provision of this section, if the

14 Secretary determines that any portion of a request for a

15 hearing under this section or section 6320 meets the require16 ment of clause (i) or (ii) of section 6702(b)(2)(A), then the

17 Secretary may treat such portion as if it were never sub18 mitted and such portion shall not be subject to any further

19 administrative or judicial review.’’.

20 (2) PRECLUSION FROM RAISING FRIVOLOUS

21 ISSUES AT HEARING.—Section 6330(c)(4) is

22 amended—

23 (A) by striking ‘‘(A)’’ and inserting

24 ‘‘(A)(i)’’;

25 (B) by striking ‘‘(B)’’ and inserting ‘‘(ii)’’;
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1 (C) by striking the period at the end of the

2 first sentence and inserting ‘‘; or’’; and

3 (D) by inserting after subparagraph (A)(ii)

4 (as so redesignated) the following:

5 ‘‘(B) the issue meets the requirement of

6 clause (i) or (ii) of section 6702(b)(2)(A).’’.

7 (3) STATEMENT OF GROUNDS.—Section

8 6330(b)(1) is amended by striking ‘‘under subsection

9 (a)(3)(B)’’ and inserting ‘‘in writing under subsection

10 (a)(3)(B) and states the grounds for the requested

11 hearing’’.

12 (c) TREATMENT OF FRIVOLOUS REQUESTS FOR HEAR13 INGS UPON FILING OF NOTICE OF LIEN.—Section 6320 is

14 amended—

15 (1) in subsection (b)(1), by striking ‘‘under sub16 section (a)(3)(B)’’ and inserting ‘‘in writing under

17 subsection (a)(3)(B) and states the grounds for the re18 quested hearing’’, and

19 (2) in subsection (c), by striking ‘‘and (e)’’ and

20 inserting ‘‘(e), and (g)’’.

21 (d) TREATMENT OF FRIVOLOUS APPLICATIONS FOR

22 OFFERS-IN-COMPROMISE AND INSTALLMENT AGREE23 MENTS.—Section 7122 is amended by adding at the end

24 the following new subsection:
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1 ‘‘(e) FRIVOLOUS SUBMISSIONS, ETC.—Notwith2 standing any other provision of this section, if the Secretary

3 determines that any portion of an application for an offer4 in-compromise or installment agreement submitted under

5 this section or section 6159 meets the requirement of clause

6 (i) or (ii) of section 6702(b)(2)(A), then the Secretary may

7 treat such portion as if it were never submitted and such

8 portion shall not be subject to any further administrative

9 or judicial review.’’.

10 (e) CLERICAL AMENDMENT.—The table of sections for

11 part I of subchapter B of chapter 68 is amended by striking

12 the item relating to section 6702 and inserting the following

13 new item:

‘‘Sec. 6702. Frivolous tax submissions.’’.

14 (f) EFFECTIVE DATE.—The amendments made by this

15 section shall apply to submissions made and issues raised

16 after the date on which the Secretary first prescribes a list

17 under section 6702(c) of the Internal Revenue Code of 1986,

18 as amended by subsection (a).

19 SEC. 314. PENALTY ON PROMOTERS OF TAX SHELTERS.

20 (a) PENALTY ON PROMOTING ABUSIVE TAX SHEL21 TERS.—Section 6700(a) is amended by adding at the end

22 the following new sentence: ‘‘Notwithstanding the first sen23 tence, if an activity with respect to which a penalty im24 posed under this subsection involves a statement described

25 in paragraph (2)(A), the amount of the penalty shall be
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1 equal to 50 percent of the gross income derived (or to be

2 derived) from such activity by the person on which the pen3 alty is imposed.’’.

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

5 section shall apply to activities after the date of the enact6 ment of this Act.

7 SEC. 315. STATUTE OF LIMITATIONS FOR TAXABLE YEARS

8 FOR WHICH LISTED TRANSACTIONS NOT RE9 PORTED.

10 (a) IN GENERAL.—Section 6501(e)(1) (relating to sub11 stantial omission of items for income taxes) is amended by

12 adding at the end the following new subparagraph:

13 ‘‘(C) LISTED TRANSACTIONS.—If a taxpayer

14 fails to include on any return or statement for

15 any taxable year any information with respect

16 to a listed transaction (as defined in section

17 6707A(c)(2)) which is required under section

18 6011 to be included with such return or state19 ment, the tax for such taxable year may be as20 sessed, or a proceeding in court for collection of

21 such tax may be begun without assessment, at

22 any time within 6 years after the time the re23 turn is filed. This subparagraph shall not apply

24 to any taxable year if the time for assessment or

25 beginning the proceeding in court has expired be-
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1 fore the time a transaction is treated as a listed

2 transaction under section 6011.’’.

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

4 section shall apply to transactions in taxable years begin5 ning after the date of the enactment of this Act.

6 SEC. 316. DENIAL OF DEDUCTION FOR INTEREST ON UN7 DERPAYMENTS ATTRIBUTABLE TO NONDIS8 CLOSED REPORTABLE AND NONECONOMIC

9 SUBSTANCE TRANSACTIONS.

10 (a) IN GENERAL.—Section 163 (relating to deduction

11 for interest) is amended by redesignating subsection (m) as

12 subsection (n) and by inserting after subsection (l) the fol13 lowing new subsection:

14 ‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE TO

15 NONDISCLOSED REPORTABLE TRANSACTIONS AND NON16 ECONOMIC SUBSTANCE TRANSACTIONS.—No deduction shall

17 be allowed under this chapter for any interest paid or ac18 crued under section 6601 on any underpayment of tax

19 which is attributable to—

20 ‘‘(1) the portion of any reportable transaction

21 understatement (as defined in section 6662A(b)) with

22 respect to which the requirement of section

23 6664(d)(2)(A) is not met, or

24 ‘‘(2) any noneconomic substance transaction un25 derstatement (as defined in section 6662B(c)).’’.
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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 Subtitle B—Enron-Related Tax

5 Shelter Provisions

6 SEC. 321. LIMITATION ON TRANSFER OR IMPORTATION OF

7 BUILT-IN LOSSES.

8 (a) IN GENERAL.—Section 362 (relating to basis to

9 corporations) is amended by adding at the end the following

10 new subsection:

11 ‘‘(e) LIMITATIONS ON BUILT-IN LOSSES.—

12 ‘‘(1) LIMITATION ON IMPORTATION OF BUILT-IN

13 LOSSES.—

14 ‘‘(A) IN GENERAL.—If in any transaction

15 described in subsection (a) or (b) there would

16 (but for this subsection) be an importation of a

17 net built-in loss, the basis of each property de18 scribed in subparagraph (B) which is acquired

19 in such transaction shall (notwithstanding sub20 sections (a) and (b)) be its fair market value im21 mediately after such transaction.

22 ‘‘(B) PROPERTY DESCRIBED.—For purposes

23 of subparagraph (A), property is described in

24 this subparagraph if—
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1 ‘‘(i) gain or loss with respect to such

2 property is not subject to tax under this

3 subtitle in the hands of the transferor imme4 diately before the transfer, and

5 ‘‘(ii) gain or loss with respect to such

6 property is subject to such tax in the hands

7 of the transferee immediately after such

8 transfer.

9 In any case in which the transferor is a partner10 ship, the preceding sentence shall be applied by

11 treating each partner in such partnership as

12 holding such partner’s proportionate share of the

13 property of such partnership.

14 ‘‘(C) IMPORTATION OF NET BUILT-IN

15 LOSS.—For purposes of subparagraph (A), there

16 is an importation of a net built-in loss in a

17 transaction if the transferee’s aggregate adjusted

18 bases of property described in subparagraph (B)

19 which is transferred in such transaction would

20 (but for this paragraph) exceed the fair market

21 value of such property immediately after such

22 transaction.’’.

23 ‘‘(2) LIMITATION ON TRANSFER OF BUILT-IN

24 LOSSES IN SECTION 351 TRANSACTIONS.—

25 ‘‘(A) IN GENERAL.—If—
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1 ‘‘(i) property is transferred by a trans2 feror in any transaction which is described

3 in subsection (a) and which is not described

4 in paragraph (1) of this subsection, and

5 ‘‘(ii) the transferee’s aggregate adjusted

6 bases of such property so transferred would

7 (but for this paragraph) exceed the fair

8 market value of such property immediately

9 after such transaction,

10 then, notwithstanding subsection (a), the trans11 feree’s aggregate adjusted bases of the property so

12 transferred shall not exceed the fair market value

13 of such property immediately after such trans14 action.

15 ‘‘(B) ALLOCATION OF BASIS REDUCTION.—

16 The aggregate reduction in basis by reason of

17 subparagraph (A) shall be allocated among the

18 property so transferred in proportion to their re19 spective built-in losses immediately before the

20 transaction.

21 ‘‘(C) EXCEPTION FOR TRANSFERS WITHIN

22 AFFILIATED GROUP.—Subparagraph (A) shall

23 not apply to any transaction if the transferor

24 owns stock in the transferee meeting the require25 ments of section 1504(a)(2). In the case of prop-
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1 erty to which subparagraph (A) does not apply

2 by reason of the preceding sentence, the trans3 feror’s basis in the stock received for such prop4 erty shall not exceed its fair market value imme5 diately after the transfer.’’.

6 (b) COMPARABLE TREATMENT WHERE LIQUIDA7 TION.—Paragraph (1) of section 334(b) (relating to liquida8 tion of subsidiary) is amended to read as follows:

9 ‘‘(1) IN GENERAL.—If property is received by a

10 corporate distributee in a distribution in a complete

11 liquidation to which section 332 applies (or in a

12 transfer described in section 337(b)(1)), the basis of

13 such property in the hands of such distributee shall

14 be the same as it would be in the hands of the trans15 feror; except that the basis of such property in the

16 hands of such distributee shall be the fair market

17 value of the property at the time of the distribution—

18 ‘‘(A) in any case in which gain or loss is

19 recognized by the liquidating corporation with

20 respect to such property, or

21 ‘‘(B) in any case in which the liquidating

22 corporation is a foreign corporation, the cor23 porate distributee is a domestic corporation, and

24 the corporate distributee’s aggregate adjusted

25 bases of property described in section
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1 362(e)(1)(B) which is distributed in such liq2 uidation would (but for this subparagraph) ex3 ceed the fair market value of such property im4 mediately after such liquidation.’’.

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

6 section shall apply to transactions after February 13, 2003.

7 SEC. 322. 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 which is related (within

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

19 corporation) which is a partner in the partnership,

20 and

21 ‘‘(2) any amount not allocable to stock by reason

22 of paragraph (1) shall be allocated under subsection

23 (a) to other partnership property.

24 Gain shall be recognized to the partnership to the extent

25 that the amount required to be allocated under paragraph
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1 (2) to other partnership property exceeds the aggregate ad2 justed basis of such other property immediately before the

3 allocation required by paragraph (2).’’.

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

5 section shall apply to distributions after February 13, 2003.

6 SEC. 323. 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) Paragraph (5) of section 860G(a) is amended

24 by adding ‘‘and’’ at the end of subparagraph (B), by
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1 striking ‘‘, and’’ at the end of subparagraph (C) and

2 inserting a period, and by striking subparagraph (D).

3 (6) Subparagraph (C) of section 1202(e)(4) is

4 amended by striking ‘‘REMIC, or FASIT’’ and in5 serting ‘‘or REMIC’’.

6 (7) Subparagraph (C) of section 7701(a)(19) is

7 amended by adding ‘‘and’’ at the end of clause (ix),

8 by striking ‘‘, and’’ at the end of clause (x) and in9 serting a period, and by striking clause (xi).

10 (8) The table of parts for subchapter M of chap11 ter 1 is amended by striking the item relating to part

12 V.

13 (c) EFFECTIVE DATE.—

14 (1) IN GENERAL.—Except as provided in para15 graph (2), the amendments made by this section shall

16 take effect on February 14, 2003.

17 (2) EXCEPTION FOR EXISTING FASITS.—The

18 amendments made by this section shall not apply to

19 any FASIT in existence on the date of the enactment

20 of this Act to the extent that regular interests issued

21 by the FASIT before such date continue to remain

22 outstanding in accordance with the original terms of

23 issuance of such interests.
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1 SEC. 324. EXPANDED DISALLOWANCE OF DEDUCTION FOR

2 INTEREST ON CONVERTIBLE DEBT.

3 (a) IN GENERAL.—Paragraph (2) of section 163(l) is

4 amended by striking ‘‘or a related party’’ and inserting ‘‘or

5 equity held by the issuer (or any related party) in any other

6 person’’.

7 (b) EXCEPTION FOR CERTAIN INSTRUMENTS ISSUED

8 BY DEALERS IN SECURITIES.—Section 163(l) is amended

9 by redesignating paragraphs (4) and (5) as paragraphs (5)

10 and (6) and by inserting after paragraph (3) the following

11 new paragraph:

12 ‘‘(4) EXCEPTION FOR CERTAIN INSTRUMENTS

13 ISSUED BY DEALERS IN SECURITIES.—For purposes

14 of this subsection, the term ‘disqualified debt instru15 ment’ does not include indebtedness issued by a dealer

16 in securities (or a related party) which is payable in,

17 or by reference to, equity (other than equity of the

18 issuer or a related party) held by such dealer in its

19 capacity as a dealer in securities. For purposes of

20 this paragraph, the term ‘dealer in securities’ has the

21 meaning given such term by section 475.’’.

22 (c) CONFORMING AMENDMENT.—Paragraph (3) of sec23 tion 163(l) is amended by striking ‘‘or a related party’’ in

24 the material preceding subparagraph (A) and inserting ‘‘or

25 any other person’’.
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1 (d) EFFECTIVE DATE.—The amendments made by this

2 section shall apply to debt instruments issued after Feb3 ruary 13, 2003.

4 SEC. 325. EXPANDED AUTHORITY TO DISALLOW TAX BENE5 FITS UNDER SECTION 269.

6 (a) IN GENERAL.—Subsection (a) of section 269 (relat7 ing to acquisitions made to evade or avoid income tax) is

8 amended to read as follows:

9 ‘‘(a) IN GENERAL.—If—

10 ‘‘(1)(A) any person acquires stock in a corpora11 tion, or

12 ‘‘(B) any corporation acquires, directly or indi13 rectly, property of another corporation and the basis

14 of such property, in the hands of the acquiring cor15 poration, is determined by reference to the basis in

16 the hands of the transferor corporation, and

17 ‘‘(2) the principal purpose for which such acqui18 sition was made is evasion or avoidance of Federal

19 income tax by securing the benefit of a deduction,

20 credit, or other allowance,

21 then the Secretary may disallow such deduction, credit, or

22 other allowance.’’.

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

24 section shall apply to stock and property acquired after

25 February 13, 2003.
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1 SEC. 326. MODIFICATIONS OF CERTAIN RULES RELATING

2 TO CONTROLLED FOREIGN CORPORATIONS.

3 (a) LIMITATION ON EXCEPTION FROM PFIC RULES

4 FOR UNITED STATES SHAREHOLDERS OF CONTROLLED

5 FOREIGN CORPORATIONS.—Paragraph (2) of section

6 1297(e) (relating to passive investment company) is amend7 ed by adding at the end the following flush sentence:

8 ‘‘Such term shall not include any period if there is

9 only a remote likelihood of an inclusion in gross in10 come under section 951(a)(1)(A)(i) of subpart F in11 come of such corporation for such period.’’.

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

13 section shall apply to taxable years on controlled foreign

14 corporation beginning after February 13, 2003, and to tax15 able years of United States shareholder in which or with

16 which such taxable years of controlled foreign corporations

17 end.

18 SEC. 327. CONTROLLED ENTITIES INELIGIBLE FOR REIT

19 STATUS.

20 (a) IN GENERAL.—Subsection (a) of section 856 (relat21 ing to definition of real estate investment trust) is amended

22 by striking ‘‘and’’ at the end of paragraph (6), by redesig23 nating paragraph (7) as paragraph (8), and by inserting

24 after paragraph (6) the following new paragraph:

25 ‘‘(7) which is not a controlled entity (as defined

26 in subsection (l)); and’’.
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1 (b) CONTROLLED ENTITY.—Section 856 is amended by

2 adding at the end the following new subsection:

3 ‘‘(l) CONTROLLED ENTITY.—

4 ‘‘(1) IN GENERAL.—For purposes of subsection

5 (a)(7), an entity is a controlled entity if, at any time

6 during the taxable year, one person (other than a

7 qualified entity)—

8 ‘‘(A) in the case of a corporation, owns

9 stock—

10 ‘‘(i) possessing at least 50 percent of

11 the total voting power of the stock of such

12 corporation, or

13 ‘‘(ii) having a value equal to at least

14 50 percent of the total value of the stock of

15 such corporation, or

16 ‘‘(B) in the case of a trust, owns beneficial

17 interests in the trust which would meet the re18 quirements of subparagraph (A) if such interests

19 were stock.

20 ‘‘(2) QUALIFIED ENTITY.—For purposes of para21 graph (1), the term ‘qualified entity’ means—

22 ‘‘(A) any real estate investment trust, and

23 ‘‘(B) any partnership in which one real es24 tate investment trust owns at least 50 percent of
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1 the capital and profits interests in the partner2 ship.

3 ‘‘(3) ATTRIBUTION RULES.—For purposes of this

4 paragraphs (1) and (2)—

5 ‘‘(A) IN GENERAL.—Rules similar to the

6 rules of subsections (d)(5) and (h)(3) shall apply;

7 except that section 318(a)(3)(C) shall not be ap8 plied under such rules to treat stock owned by a

9 qualified entity as being owned by a person

10 which is not a qualified entity.

11 ‘‘(B) STAPLED ENTITIES.—A group of enti12 ties which are stapled entities (as defined in sec13 tion 269B(c)(2)) shall be treated as one person.

14 ‘‘(4) EXCEPTION FOR CERTAIN NEW REITS.—

15 ‘‘(A) IN GENERAL.—The term ‘controlled en16 tity’ shall not include an incubator REIT.

17 ‘‘(B) INCUBATOR REIT.—A corporation

18 shall be treated as an incubator REIT for any

19 taxable year during the eligibility period if it

20 meets all the following requirements for such

21 year:

22 ‘‘(i) The corporation elects to be treated

23 as an incubator REIT.

24 ‘‘(ii) The corporation has only voting

25 common stock outstanding.
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1 ‘‘(iii) Not more than 50 percent of the

2 corporation’s real estate assets consist of

3 mortgages.

4 ‘‘(iv) From not later than the begin5 ning of the last half of the second taxable

6 year, at least 10 percent of the corporation’s

7 capital is provided by lenders or equity in8 vestors who are unrelated to the corpora9 tion’s largest shareholder.

10 ‘‘(v) The corporation annually in11 creases the value of its real estate assets by

12 at least 10 percent.

13 ‘‘(vi) The directors of the corporation

14 adopt a resolution setting forth an intent to

15 engage in a going public transaction.

16 No election may be made with respect to any

17 REIT if an election under this subsection was in

18 effect for any predecessor of such REIT.

19 ‘‘(C) ELIGIBILITY PERIOD.—

20 ‘‘(i) IN GENERAL.—The eligibility pe21 riod (for which an incubator REIT election

22 can be made) begins with the REIT’s second

23 taxable year and ends at the close of the

24 REIT’s third taxable year, except that the

25 REIT may, subject to clauses (ii), (iii), and
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1 (iv), elect to extend such period for an addi2 tional 2 taxable years.

3 ‘‘(ii) GOING PUBLIC TRANSACTION.—A

4 REIT may not elect to extend the eligibility

5 period under clause (i) unless it enters into

6 an agreement with the Secretary that if it

7 does not engage in a going public trans8 action by the end of the extended eligibility

9 period, it shall pay Federal income taxes

10 for the 2 years of the extended eligibility pe11 riod as if it had not made an incubator

12 REIT election and had ceased to qualify as

13 a REIT for those 2 taxable years.

14 ‘‘(iii) RETURNS, INTEREST, AND NO15 TICE.—

16 ‘‘(I) RETURNS.—In the event the

17 corporation ceases to be treated as a

18 REIT by operation of clause (ii), the

19 corporation shall file any appropriate

20 amended returns reflecting the change

21 in status within 3 months of the close

22 of the extended eligibility period.

23 ‘‘(II) INTEREST.—Interest shall be

24 payable on any tax imposed by reason

25 of clause (ii) for any taxable year but,
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1 unless there was a finding under sub2 paragraph (D), no substantial under3 payment penalties shall be imposed.

4 ‘‘(III) NOTICE.—The corporation

5 shall, at the same time it files its re6 turns under subclause (I), notify its

7 shareholders and any other persons

8 whose tax position is, or may reason9 ably be expected to be, affected by the

10 change in status so they also may file

11 any appropriate amended returns to

12 conform their tax treatment consistent

13 with the corporation’s loss of REIT

14 status.

15 ‘‘(IV) REGULATIONS.—The Sec16 retary shall provide appropriate regu17 lations setting forth transferee liability

18 and other provisions to ensure collec19 tion of tax and the proper administra20 tion of this provision.

21 ‘‘(iv) Clauses (ii) and (iii) shall not

22 apply if the corporation allows its incu23 bator REIT status to lapse at the end of the

24 initial 2-year eligibility period without en25 gaging in a going public transaction if the
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1 corporation is not a controlled entity as of

2 the beginning of its fourth taxable year. In

3 such a case, the corporation’s directors may

4 still be liable for the penalties described in

5 subparagraph (D) during the eligibility pe6 riod.

7 ‘‘(D) SPECIAL PENALTIES.—If the Secretary

8 determines that an incubator REIT election was

9 filed for a principal purpose other than as part

10 of a reasonable plan to undertake a going public

11 transaction, an excise tax of $20,000 shall be im12 posed on each of the corporation’s directors for

13 each taxable year for which an election was in

14 effect.

15 ‘‘(E) GOING PUBLIC TRANSACTION.—For

16 purposes of this paragraph, a going public trans17 action means—

18 ‘‘(i) a public offering of shares of the

19 stock of the incubator REIT;

20 ‘‘(ii) a transaction, or series of trans21 actions, that results in the stock of the incu22 bator REIT being regularly traded on an

23 established securities market and that re24 sults in at least 50 percent of such stock

25 being held by shareholders who are unre-
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1 lated to persons who held such stock before

2 it began to be so regularly traded; or

3 ‘‘(iii) any transaction resulting in

4 ownership of the REIT by 200 or more per5 sons (excluding the largest single share6 holder) who in the aggregate own at least 50

7 percent of the stock of the REIT.

8 For the purposes of this subparagraph, the rules

9 of paragraph (3) shall apply in determining the

10 ownership of stock.

11 ‘‘(F) DEFINITIONS.—The term ‘established

12 securities market’ shall have the meaning set

13 forth in the regulations under section 897.’’.

14 (c) CONFORMING AMENDMENT.—Paragraph (2) of sec15 tion 856(h) is amended by striking ‘‘and (6)’’ each place

16 it appears and inserting ‘‘, (6), and (7)’’.

17 (d) EFFECTIVE DATE.—

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

19 this section shall apply to taxable years ending after

20 May 8, 2003.

21 (2) EXCEPTION FOR EXISTING CONTROLLED EN22 TITIES.—The amendments made by this section shall

23 not apply to any entity which is a controlled entity

24 (as defined in section 856(l) of the Internal Revenue

25 Code of 1986, as added by this section) as of May 8,
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1 2003, which is a real estate investment trust for the

2 taxable year which includes such date, and which has

3 significant business assets or activities as of such

4 date. For purposes of the preceding sentence, an enti5 ty shall be treated as such a controlled entity on May

6 8, 2003, if it becomes such an entity after such date

7 in a transaction—

8 (A) made pursuant to a written agreement

9 which was binding on such date and at all times

10 thereafter, or

11 (B) described on or before such date in a fil12 ing with the Securities and Exchange Commis13 sion required solely by reason of the transaction.

14 Subtitle C—Other Corporate

15 Governance Provisions

16 PART I—GENERAL PROVISIONS

17 SEC. 331. AFFIRMATION OF CONSOLIDATED RETURN REGU18 LATION AUTHORITY.

19 (a) IN GENERAL.—Section 1502 (relating to consoli20 dated return regulations) is amended by adding at the end

21 the following new sentence: ‘‘In prescribing such regula22 tions, the Secretary may prescribe rules applicable to cor23 porations filing consolidated returns under section 1501

24 that are different from other provisions of this title that

25 would apply if such corporations filed separate returns.’’.
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1 (b) RESULT NOT OVERTURNED.—Notwithstanding

2 subsection (a), the Internal Revenue Code of 1986 shall be

3 construed by treating Treasury regulation § 1.1502–

4 20(c)(1)(iii) (as in effect on January 1, 2001) as being in5 applicable to the type of factual situation in 255 F.3d 1357

6 (Fed. Cir. 2001).

7 (c) EFFECTIVE DATE.—The provisions of this section

8 shall apply to taxable years beginning before, on, or after

9 the date of the enactment of this Act.

10 SEC. 332. SIGNING OF CORPORATE TAX RETURNS BY CHIEF

11 EXECUTIVE OFFICER.

12 (a) IN GENERAL.—Section 6062 (relating to signing

13 of corporation returns) is amended by striking the first sen14 tence and inserting the following new sentence: ‘‘The return

15 of a corporation with respect to income shall be signed by

16 the chief executive officer of such corporation (or other such

17 officer of the corporation as the Secretary may designate

18 if the corporation does not have a chief executive officer).

19 The preceding sentence shall not apply to any return of a

20 regulated investment company (within the meaning of sec21 tion 851).’’.

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

23 section shall apply to returns filed after the date of the en24 actment of this Act.
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1 SEC. 333. DENIAL OF DEDUCTION FOR CERTAIN FINES, PEN2 ALTIES, AND OTHER AMOUNTS.

3 (a) IN GENERAL.—Subsection (f) of section 162 (relat4 ing to trade or business expenses) is amended to read as

5 follows:

6 ‘‘(f) FINES, PENALTIES, AND OTHER AMOUNTS.—

7 ‘‘(1) IN GENERAL.—Except as provided in para8 graph (2), no deduction otherwise allowable shall be

9 allowed under this chapter for any amount paid or

10 incurred (whether by suit, agreement, or otherwise)

11 to, or at the direction of, a government or entity de12 scribed in paragraph (3) in relation to the violation

13 of any law or the investigation or inquiry into the

14 potential violation of any law.

15 ‘‘(2) EXCEPTION FOR AMOUNTS CONSTITUTING

16 RESTITUTION.—Paragraph (1) shall not apply to any

17 amount which the taxpayer establishes constitutes res18 titution for damage or harm caused by the violation

19 of any law or the potential violation of any law. This

20 paragraph shall not apply to any amount paid or in21 curred as reimbursement to the government or entity

22 for the costs of any investigation or litigation.

23 ‘‘(3) CERTAIN NONGOVERNMENTAL REGULATORY

24 ENTITIES.—An entity is described in this paragraph

25 if it is—
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1 ‘‘(A) a nongovernmental entity which exer2 cises self-regulatory powers (including imposing

3 sanctions) in connection with a qualified board

4 or exchange (as defined in section 1256(g)(7)), or

5 ‘‘(B) to the extent provided in regulations,

6 a nongovernmental entity which exercises self7 regulatory powers (including imposing sanc8 tions) as part of performing an essential govern9 mental function.’’.

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

11 section shall apply to amounts paid or incurred after April

12 27, 2003, except that such amendment shall not apply to

13 amounts paid or incurred under any binding order or

14 agreement entered into on or before April 27, 2003. Such

15 exception shall not apply to an order or agreement requir16 ing court approval unless the approval was obtained on or

17 before April 27, 2003.

18 SEC. 334. DISALLOWANCE OF DEDUCTION FOR PUNITIVE

19 DAMAGES.

20 (a) DISALLOWANCE OF DEDUCTION.—

21 (1) IN GENERAL.—Section 162(g) (relating to

22 treble damage payments under the antitrust laws) is

23 amended by adding at the end the following new

24 paragraph:
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1 ‘‘(2) PUNITIVE DAMAGES.—No deduction shall be

2 allowed under this chapter for any amount paid or

3 incurred for punitive damages in connection with

4 any judgment in, or settlement of, any action. This

5 paragraph shall not apply to punitive damages de6 scribed in section 104(c).’’.

7 (2) CONFORMING AMENDMENTS.—

8 (A) Section 162(g) is amended—

9 (i) by striking ‘‘If’’ and inserting:

10 ‘‘(1) TREBLE DAMAGES.—If’’, and

11 (ii) by redesignating paragraphs (1)

12 and (2) as subparagraphs (A) and (B), re13 spectively.

14 (B) The heading for section 162(g) is

15 amended by inserting ‘‘OR PUNITIVE DAMAGES’’

16 after ‘‘LAWS’’.

17 (b) INCLUSION IN INCOME OF PUNITIVE DAMAGES

18 PAID BY INSURER OR OTHERWISE.—

19 (1) IN GENERAL.—Part II of subchapter B of

20 chapter 1 (relating to items specifically included in

21 gross income) is amended by adding at the end the

22 following new section:
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1 ‘‘SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSUR2 ANCE OR OTHERWISE.

3 ‘‘Gross income shall include any amount paid to or

4 on behalf of a taxpayer as insurance or otherwise by reason

5 of the taxpayer’s liability (or agreement) to pay punitive

6 damages.’’.

7 (2) REPORTING REQUIREMENTS.—Section 6041

8 (relating to information at source) is amended by

9 adding at the end the following new subsection:

10 ‘‘(f) SECTION TO APPLY TO PUNITIVE DAMAGES COM11 PENSATION.—This section shall apply to payments by a

12 person to or on behalf of another person as insurance or

13 otherwise by reason of the other person’s liability (or agree14 ment) to pay punitive damages.’’.

15 (3) CONFORMING AMENDMENT.—The table of sec16 tions for part II of subchapter B of chapter 1 is

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

‘‘Sec. 91. Punitive damages compensated by insurance or otherwise.’’.

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

19 section shall apply to damages paid or incurred on or after

20 the date of the enactment of this Act.

21 SEC. 335. INCREASE IN CRIMINAL MONETARY PENALTY LIM22 ITATION FOR THE UNDERPAYMENT OR OVER23 PAYMENT OF TAX DUE TO FRAUD.

24 (a) IN GENERAL.—Section 7206 (relating to fraud and

25 false statements) is amended—
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1 (1) by striking ‘‘Any person who—’’ and insert2 ing ‘‘(a) IN GENERAL.—Any person who—’’, and

3 (2) by adding at the end the following new sub4 section:

5 ‘‘(b) INCREASE IN MONETARY LIMITATION FOR UN6 DERPAYMENT OR OVERPAYMENT OF TAX DUE TO FRAUD.—

7 If any portion of any underpayment (as defined in section

8 6664(a)) or overpayment (as defined in section 6401(a)) of

9 tax required to be shown on a return is attributable to

10 fraudulent action described in subsection (a), the applicable

11 dollar amount under subsection (a) shall in no event be less

12 than an amount equal to such portion. A rule similar to

13 the rule under section 6663(b) shall apply for purposes of

14 determining the portion so attributable.’’.

15 (b) INCREASE IN PENALTIES.—

16 (1) ATTEMPT TO EVADE OR DEFEAT TAX.—Sec17 tion 7201 is amended—

18 (A) by striking ‘‘$100,000’’ and inserting

19 ‘‘$250,000’’,

20 (B) by striking ‘‘$500,000’’ and inserting

21 ‘‘$1,000,000’’, and

22 (C) by striking ‘‘5 years’’ and inserting ‘‘10

23 years’’.
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1 (2) WILLFUL FAILURE TO FILE RETURN, SUPPLY

2 INFORMATION, OR PAY TAX.—Section 7203 is

3 amended—

4 (A) in the first sentence—

5 (i) by striking ‘‘misdemeanor’’ and in6 serting ‘‘felony’’, and

7 (ii) by striking ‘‘1 year’’ and inserting

8 ‘‘10 years’’, and

9 (B) by striking the third sentence.

10 (3) FRAUD AND FALSE STATEMENTS.—Section

11 7206(a) (as redesignated by subsection (a)) is

12 amended—

13 (A) by striking ‘‘$100,000’’ and inserting

14 ‘‘$250,000’’,

15 (B) by striking ‘‘$500,000’’ and inserting

16 ‘‘$1,000,000’’, and

17 (C) by striking ‘‘3 years’’ and inserting ‘‘5

18 years’’.

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

20 section shall apply to underpayments and overpayments at21 tributable to actions occurring after the date of the enact22 ment of this Act.
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1 PART II—EXECUTIVE COMPENSATION REFORM

2 SEC. 336. TREATMENT OF NONQUALIFIED DEFERRED COM3 PENSATION FUNDED WITH ASSETS LOCATED

4 OUTSIDE THE UNITED STATES.

5 (a) IN GENERAL.—Section 83(c) (relating to special

6 rules for property transferred in connection with perform7 ance of services) is amended by adding at the end the fol8 lowing new paragraph:

9 ‘‘(4) FOREIGN ASSETS FUNDING NONQUALIFIED

10 DEFERRED COMPENSATION ARRANGEMENTS.—

11 ‘‘(A) IN GENERAL.—In determining whether

12 there is a transfer of property for purposes of

13 subsection (a), if assets are—

14 ‘‘(i) designated or otherwise available

15 for the payment of nonqualified deferred

16 compensation, and

17 ‘‘(ii) located outside the United States,

18 such assets shall not be treated as subject to the

19 claims of creditors.

20 ‘‘(B) COMPENSATION FOR SERVICES PER21 FORMED IN FOREIGN JURISDICTION.—Subpara22 graph (A) shall not apply to assets located in a

23 foreign jurisdiction if substantially all of the

24 services to which the nonqualified deferred com25 pensation relates are performed in such jurisdic26 tion.
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1 ‘‘(C) REGULATIONS.—The Secretary shall

2 prescribe such regulations as are necessary to

3 carry out the provisions of this paragraph, in4 cluding regulations to exempt arrangements from

5 the application of this paragraph if—

6 ‘‘(i) the arrangement will not result in

7 an improper deferral of United States tax,

8 and

9 ‘‘(ii) the assets involved in the arrange10 ment will be readily accessible in any insol11 vency or bankruptcy proceeding.’’.

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

13 section shall apply to amounts deferred in taxable years be14 ginning after December 31, 2003.

15 SEC. 337. INCLUSION IN GROSS INCOME OF FUNDED DE16 FERRED COMPENSATION OF CORPORATE IN17 SIDERS.

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

19 D of chapter 1 is amended by adding at the end the fol20 lowing new section:

21 ‘‘SEC. 409A. INCLUSION IN GROSS INCOME OF FUNDED DE22 FERRED COMPENSATION OF CORPORATE IN23 SIDERS.

24 ‘‘(a) IN GENERAL.—If an employer maintains a fund25 ed deferred compensation plan—
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1 ‘‘(1) compensation of any disqualified individual

2 which is deferred under such funded deferred com3 pensation plan shall be included in the gross income

4 of the disqualified individual or beneficiary for the

5 1st taxable year in which there is no substantial risk

6 of forfeiture of the rights to such compensation, and

7 ‘‘(2) the tax treatment of any amount made

8 available under the plan to a disqualified individual

9 or beneficiary shall be determined under section 72

10 (relating to annuities, etc.).

11 ‘‘(b) FUNDED DEFERRED COMPENSATION PLAN.—For

12 purposes of this section—

13 ‘‘(1) IN GENERAL.—The term ‘funded deferred

14 compensation plan’ means any plan providing for the

15 deferral of compensation unless—

16 ‘‘(A) the employee’s rights to the compensa17 tion deferred under the plan are no greater than

18 the rights of a general creditor of the employer,

19 and

20 ‘‘(B) all amounts set aside (directly or indi21 rectly) for purposes of paying the deferred com22 pensation, and all income attributable to such

23 amounts, remain (until made available to the

24 participant or other beneficiary) solely the prop-
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1 erty of the employer (without being restricted to

2 the provision of benefits under the plan),

3 ‘‘(C) the amounts referred to in subpara4 graph (B) are available to satisfy the claims of

5 the employer’s general creditors at all times (not

6 merely after bankruptcy or insolvency), and

7 ‘‘(D) the investment options which a partic8 ipant may elect under the plan are the same as

9 the investment options which a participant may

10 elect under the qualified employer plan of the

11 employer which has the fewest investment op12 tions.

13 Such term shall not include a qualified employer

14 plan.

15 ‘‘(2) SPECIAL RULES.—

16 ‘‘(A) EMPLOYEE’S RIGHTS.—A plan shall be

17 treated as failing to meet the requirements of

18 paragraph (1)(A) unless—

19 ‘‘(i) the compensation deferred under

20 the plan is payable only upon separation

21 from service, death, disability (within the

22 meaning of section 1614(a)(3) of the Social

23 Security Act (42 U.S.C. 1382c(a)(3))), or at

24 a specified time (or pursuant to a fixed

25 schedule), and
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1 ‘‘(ii) the plan does not permit the ac2 celeration of the time such deferred com3 pensation is payable by reason of any event.

4 If the employer and employee agree to a modi5 fication of the plan that accelerates the time for

6 payment of any deferred compensation, then all

7 compensation previously deferred under the plan

8 shall be includible in gross income for the taxable

9 year during which such modification takes effect

10 and the taxpayer shall pay interest at the under11 payment rate on the underpayments that would

12 have occurred had the deferred compensation

13 been includible in gross income on the earliest

14 date that there is no substantial risk of forfeiture

15 of the rights to such compensation.

16 ‘‘(B) CREDITOR’S RIGHTS.—A plan shall be

17 treated as failing to meet the requirements of

18 paragraph (1)(B) with respect to amounts set

19 aside in a trust unless—

20 ‘‘(i) the employee has no beneficial in21 terest in the trust,

22 ‘‘(ii) assets in the trust are available to

23 satisfy claims of general creditors at all

24 times (not merely after bankruptcy or insol25 vency), and
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1 ‘‘(iii) there is no factor that would

2 make it more difficult for general creditors

3 to reach the assets in the trust than it

4 would be if the trust assets were held di5 rectly by the employer in the United States.

6 Except as provided in regulations prescribed by

7 the Secretary, such a factor shall include the lo8 cation of the trust outside the United States un9 less substantially all of the services to which the

10 nonqualified deferred compensation relates are

11 performed outside the United States. Such regu12 lations may exempt any such trust if the trust

13 will not result in an improper deferral of United

14 States tax, and the assets involved in the trust

15 will be readily accessible in any insolvency or

16 bankruptcy proceeding.

17 ‘‘(c) DISQUALIFIED INDIVIDUAL.—For purposes of this

18 section, the term ‘disqualified individual’ means, with re19 spect to a corporation, any individual—

20 ‘‘(1) who is subject to the requirements of section

21 16(a) of the Securities Exchange Act of 1934 with re22 spect to such corporation, or

23 ‘‘(2) who would be subject to such requirements

24 if such corporation were an issuer of equity securities

25 referred to in such section.
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1 ‘‘(d) OTHER DEFINITIONS AND SPECIAL RULES.—For

2 purposes of this section—

3 ‘‘(1) QUALIFIED EMPLOYER PLAN.—The term

4 ‘qualified employer plan’ means—

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

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

7 section 219(g)(5), and

8 ‘‘(B) any other plan of an organization ex9 empt from tax under subtitle A.

10 ‘‘(2) PLAN INCLUDES ARRANGEMENTS, ETC.—The

11 term ‘plan’ includes any agreement or arrangement.

12 ‘‘(3) SUBSTANTIAL RISK OF FORFEITURE.—The

13 rights of a person to compensation are subject to a

14 substantial risk of forfeiture if such person’s rights to

15 such compensation are conditioned upon the future

16 performance of substantial services by any individual.

17 ‘‘(4) TREATMENT OF EARNINGS.—References to

18 deferred compensation shall be treated as including

19 references to income attributable to such compensation

20 or such income.’’.

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

22 such subpart A is amended by adding at the end the fol23 lowing new item:

‘‘Sec. 409A. Inclusion in gross income of funded deferred compensation of corporate insiders.’’.
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1 (c) EFFECTIVE DATE.—The amendments made by this

2 section shall apply to amounts deferred in taxable years be3 ginning after December 31, 2003.

4 SEC. 338. PROHIBITION ON DEFERRAL OF GAIN FROM THE

5 EXERCISE OF STOCK OPTIONS AND RE6 STRICTED STOCK GAINS THROUGH DE7 FERRED COMPENSATION ARRANGEMENTS.

8 (a) IN GENERAL.—Section 83 (relating to property

9 transferred in connection with performance of services) is

10 amending by adding at the end the following new sub11 section:

12 ‘‘(i) PROHIBITION ON ADDITIONAL DEFERRAL

13 THROUGH DEFERRED COMPENSATION ARRANGEMENTS.—

14 If a taxpayer elects to exchange an option to purchase em15 ployer securities—

16 ‘‘(1) to which subsection (a) applies, or

17 ‘‘(2) which is described in subsection (e)(3),

18 or any other compensation based on employer securities, for

19 a right to receive future payments, then, notwithstanding

20 any other provision of this title, there shall be included in

21 gross income for the taxable year of the exchange an amount

22 equal to the present value of such right (or such other

23 amount as the Secretary may by regulations specify). For

24 purposes of this subsection, the term ‘employer securities’

25 has the meaning given such term by section 409(l).’’.
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1 (b) EFFECTIVE DATE.—The amendment made by this

2 section shall apply to any exchange after December 31,

3 2003.

4 SEC. 339. INCREASE IN WITHHOLDING FROM SUPPLE5 MENTAL WAGE PAYMENTS IN EXCESS OF

6 $1,000,000.

7 (a) IN GENERAL.—If an employer elects under Treas8 ury Regulation 31.3402(g)–1 to determine the amount to

9 be deducted and withheld from any supplemental wage pay10 ment by using a flat percentage rate, the rate to be used

11 in determining the amount to be so deducted and withheld

12 shall not be less than 28 percent (or the corresponding rate

13 in effect under section 1(i)(2) of the Internal Revenue Code

14 of 1986 for taxable years beginning in the calendar year

15 in which the payment is made).

16 (b) SPECIAL RULE FOR LARGE PAYMENTS.—

17 (1) IN GENERAL.—Notwithstanding subsection

18 (a), if the supplemental wage payment, when added

19 to all such payments previously made by the employer

20 to the employee during the calendar year, exceeds

21 $1,000,000, the rate used with respect to such excess

22 shall be equal to the maximum rate of tax in effect

23 under section 1 of such Code for taxable years begin24 ning in such calendar year.
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1 (2) AGGREGATION.—All persons treated as a sin2 gle employer under subsection (a) or (b) of section 52

3 of the Internal Revenue Code of 1986 shall be treated

4 as a single employer for purposes of this subsection.

5 (c) CONFORMING AMENDMENT.—Section 13273 of the

6 Revenue Reconciliation Act of 1993 (Public Law 103–66)

7 is repealed.

8 (d) EFFECTIVE DATE.—The provisions of, and the

9 amendment made by, this section shall apply to payments

10 made after December 31, 2003.

11 Subtitle D—International

12 Provisions

13 PART I—PROVISIONS TO DISCOURAGE

14 EXPATRIATION

15 SEC. 340. REVISION OF TAX RULES ON EXPATRIATION.

16 (a) IN GENERAL.—Subpart A of part II of subchapter

17 N of chapter 1 is amended by inserting after section 877

18 the following new section:

19 ‘‘SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.

20 ‘‘(a) GENERAL RULES.—For purposes of this

21 subtitle—

22 ‘‘(1) MARK TO MARKET.—Except as provided in

23 subsections (d) and (f), all property of a covered expa24 triate to whom this section applies shall be treated as
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1 sold on the day before the expatriation date for its

2 fair market value.

3 ‘‘(2) RECOGNITION OF GAIN OR LOSS.—In the

4 case of any sale under paragraph (1)—

5 ‘‘(A) notwithstanding any other provision of

6 this title, any gain arising from such sale shall

7 be taken into account for the taxable year of the

8 sale, and

9 ‘‘(B) any loss arising from such sale shall

10 be taken into account for the taxable year of the

11 sale to the extent otherwise provided by this title,

12 except that section 1091 shall not apply to any

13 such loss.

14 Proper adjustment shall be made in the amount of

15 any gain or loss subsequently realized for gain or loss

16 taken into account under the preceding sentence.

17 ‘‘(3) EXCLUSION FOR CERTAIN GAIN.—

18 ‘‘(A) IN GENERAL.—The amount which, but

19 for this paragraph, would be includible in the

20 gross income of any individual by reason of this

21 section shall be reduced (but not below zero) by

22 $600,000. For purposes of this paragraph, allo23 cable expatriation gain taken into account under

24 subsection (f)(2) shall be treated in the same
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1 manner as an amount required to be includible

2 in gross income.

3 ‘‘(B) COST-OF-LIVING ADJUSTMENT.—

4 ‘‘(i) IN GENERAL.—In the case of an

5 expatriation date occurring in any calendar

6 year after 2003, the $600,000 amount under

7 subparagraph (A) shall be increased by an

8 amount equal to—

9 ‘‘(I) such dollar amount, multi10 plied by

11 ‘‘(II) the cost-of-living adjustment

12 determined under section 1(f)(3) for

13 such calendar year, determined by sub14 stituting ‘calendar year 2002’ for ‘cal15 endar year 1992’ in subparagraph (B)

16 thereof.

17 ‘‘(ii) ROUNDING RULES.—If any

18 amount after adjustment under clause (i) is

19 not a multiple of $1,000, such amount shall

20 be rounded to the next lower multiple of

21 $1,000.

22 ‘‘(4) ELECTION TO CONTINUE TO BE TAXED AS

23 UNITED STATES CITIZEN.—

24 ‘‘(A) IN GENERAL.—If a covered expatriate

25 elects the application of this paragraph—
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1 ‘‘(i) this section (other than this para2 graph and subsection (i)) shall not apply to

3 the expatriate, but

4 ‘‘(ii) in the case of property to which

5 this section would apply but for such elec6 tion, the expatriate shall be subject to tax

7 under this title in the same manner as if

8 the individual were a United States citizen.

9 ‘‘(B) REQUIREMENTS.—Subparagraph (A)

10 shall not apply to an individual unless the

11 individual—

12 ‘‘(i) provides security for payment of

13 tax in such form and manner, and in such

14 amount, as the Secretary may require,

15 ‘‘(ii) consents to the waiver of any

16 right of the individual under any treaty of

17 the United States which would preclude as18 sessment or collection of any tax which may

19 be imposed by reason of this paragraph,

20 and

21 ‘‘(iii) complies with such other require22 ments as the Secretary may prescribe.

23 ‘‘(C) ELECTION.—An election under sub24 paragraph (A) shall apply to all property to

25 which this section would apply but for the elec-
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1 tion and, once made, shall be irrevocable. Such

2 election shall also apply to property the basis of

3 which is determined in whole or in part by ref4 erence to the property with respect to which the

5 election was made.

6 ‘‘(b) ELECTION TO DEFER TAX.—

7 ‘‘(1) IN GENERAL.—If the taxpayer elects the ap8 plication of this subsection with respect to any prop9 erty treated as sold by reason of subsection (a), the

10 payment of the additional tax attributable to such

11 property shall be postponed until the due date of the

12 return for the taxable year in which such property is

13 disposed of (or, in the case of property disposed of in

14 a transaction in which gain is not recognized in

15 whole or in part, until such other date as the Sec16 retary may prescribe).

17 ‘‘(2) DETERMINATION OF TAX WITH RESPECT TO

18 PROPERTY.—For purposes of paragraph (1), the addi19 tional tax attributable to any property is an amount

20 which bears the same ratio to the additional tax im21 posed by this chapter for the taxable year solely by

22 reason of subsection (a) as the gain taken into ac23 count under subsection (a) with respect to such prop24 erty bears to the total gain taken into account under
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1 subsection (a) with respect to all property to which

2 subsection (a) applies.

3 ‘‘(3) TERMINATION OF POSTPONEMENT.—No tax

4 may be postponed under this subsection later than the

5 due date for the return of tax imposed by this chapter

6 for the taxable year which includes the date of death

7 of the expatriate (or, if earlier, the time that the secu8 rity provided with respect to the property fails to

9 meet the requirements of paragraph (4), unless the

10 taxpayer corrects such failure within the time speci11 fied by the Secretary).

12 ‘‘(4) SECURITY.—

13 ‘‘(A) IN GENERAL.—No election may be

14 made under paragraph (1) with respect to any

15 property unless adequate security is provided to

16 the Secretary with respect to such property.

17 ‘‘(B) ADEQUATE SECURITY.—For purposes

18 of subparagraph (A), security with respect to

19 any property shall be treated as adequate secu20 rity if—

21 ‘‘(i) it is a bond in an amount equal

22 to the deferred tax amount under paragraph

23 (2) for the property, or
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1 ‘‘(ii) the taxpayer otherwise establishes

2 to the satisfaction of the Secretary that the

3 security is adequate.

4 ‘‘(5) WAIVER OF CERTAIN RIGHTS.—No election

5 may be made under paragraph (1) unless the tax6 payer consents to the waiver of any right under any

7 treaty of the United States which would preclude as8 sessment or collection of any tax imposed by reason

9 of this section.

10 ‘‘(6) ELECTIONS.—An election under paragraph

11 (1) shall only apply to property described in the elec12 tion and, once made, is irrevocable. An election may

13 be made under paragraph (1) with respect to an in14 terest in a trust with respect to which gain is re15 quired to be recognized under subsection (f)(1).

16 ‘‘(7) INTEREST.—For purposes of section 6601—

17 ‘‘(A) the last date for the payment of tax

18 shall be determined without regard to the election

19 under this subsection, and

20 ‘‘(B) section 6621(a)(2) shall be applied by

21 substituting ‘5 percentage points’ for ‘3 percent22 age points’ in subparagraph (B) thereof.

23 ‘‘(c) COVERED EXPATRIATE.—For purposes of this

24 section—
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1 ‘‘(1) IN GENERAL.—Except as provided in para2 graph (2), the term ‘covered expatriate’ means an ex3 patriate.

4 ‘‘(2) EXCEPTIONS.—An individual shall not be

5 treated as a covered expatriate if—

6 ‘‘(A) the individual—

7 ‘‘(i) became at birth a citizen of the

8 United States and a citizen of another

9 country and, as of the expatriation date,

10 continues to be a citizen of, and is taxed as

11 a resident of, such other country, and

12 ‘‘(ii) has not been a resident of the

13 United States (as defined in section

14 7701(b)(1)(A)(ii)) during the 5 taxable

15 years ending with the taxable year during

16 which the expatriation date occurs, or

17 ‘‘(B)(i) the individual’s relinquishment of

18 United States citizenship occurs before such individual attains age 181 19 ⁄2, and

20 ‘‘(ii) the individual has been a resident of

21 the United States (as so defined) for not more

22 than 5 taxable years before the date of relin23 quishment.

24 ‘‘(d) EXEMPT PROPERTY; SPECIAL RULES FOR PEN25 SION PLANS.—
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1 ‘‘(1) EXEMPT PROPERTY.—This section shall not

2 apply to the following:

3 ‘‘(A) UNITED STATES REAL PROPERTY IN4 TERESTS.—Any United States real property in5 terest (as defined in section 897(c)(1)), other

6 than stock of a United States real property hold7 ing corporation which does not, on the day before

8 the expatriation date, meet the requirements of

9 section 897(c)(2).

10 ‘‘(B) SPECIFIED PROPERTY.—Any property

11 or interest in property not described in subpara12 graph (A) which the Secretary specifies in regu13 lations.

14 ‘‘(2) SPECIAL RULES FOR CERTAIN RETIREMENT

15 PLANS.—

16 ‘‘(A) IN GENERAL.—If a covered expatriate

17 holds on the day before the expatriation date any

18 interest in a retirement plan to which this para19 graph applies—

20 ‘‘(i) such interest shall not be treated

21 as sold for purposes of subsection (a)(1), but

22 ‘‘(ii) an amount equal to the present

23 value of the expatriate’s nonforfeitable ac24 crued benefit shall be treated as having been
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1 received by such individual on such date as

2 a distribution under the plan.

3 ‘‘(B) TREATMENT OF SUBSEQUENT DIS4 TRIBUTIONS.—In the case of any distribution on

5 or after the expatriation date to or on behalf of

6 the covered expatriate from a plan from which

7 the expatriate was treated as receiving a dis8 tribution under subparagraph (A), the amount

9 otherwise includible in gross income by reason of

10 the subsequent distribution shall be reduced by

11 the excess of the amount includible in gross in12 come under subparagraph (A) over any portion

13 of such amount to which this subparagraph pre14 viously applied.

15 ‘‘(C) TREATMENT OF SUBSEQUENT DIS16 TRIBUTIONS BY PLAN.—For purposes of this title,

17 a retirement plan to which this paragraph ap18 plies, and any person acting on the plan’s behalf,

19 shall treat any subsequent distribution described

20 in subparagraph (B) in the same manner as

21 such distribution would be treated without re22 gard to this paragraph.

23 ‘‘(D) APPLICABLE PLANS.—This paragraph

24 shall apply to—
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1 ‘‘(i) any qualified retirement plan (as

2 defined in section 4974(c)),

3 ‘‘(ii) an eligible deferred compensation

4 plan (as defined in section 457(b)) of an el5 igible employer described in section

6 457(e)(1)(A), and

7 ‘‘(iii) to the extent provided in regula8 tions, any foreign pension plan or similar

9 retirement arrangements or programs.

10 ‘‘(e) DEFINITIONS.—For purposes of this section—

11 ‘‘(1) EXPATRIATE.—The term ‘expatriate’

12 means—

13 ‘‘(A) any United States citizen who relin14 quishes citizenship, and

15 ‘‘(B) any long-term resident of the United

16 States who—

17 ‘‘(i) ceases to be a lawful permanent

18 resident of the United States (within the

19 meaning of section 7701(b)(6)), or

20 ‘‘(ii) commences to be treated as a resi21 dent of a foreign country under the provi22 sions of a tax treaty between the United

23 States and the foreign country and who

24 does not waive the benefits of such treaty
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1 applicable to residents of the foreign coun2 try.

3 ‘‘(2) EXPATRIATION DATE.—The term ‘expatria4 tion date’ means—

5 ‘‘(A) the date an individual relinquishes

6 United States citizenship, or

7 ‘‘(B) in the case of a long-term resident of

8 the United States, the date of the event described

9 in clause (i) or (ii) of paragraph (1)(B).

10 ‘‘(3) RELINQUISHMENT OF CITIZENSHIP.—A cit11 izen shall be treated as relinquishing United States

12 citizenship on the earliest of—

13 ‘‘(A) the date the individual renounces such

14 individual’s United States nationality before a

15 diplomatic or consular officer of the United

16 States pursuant to paragraph (5) of section

17 349(a) of the Immigration and Nationality Act

18 (8 U.S.C. 1481(a)(5)),

19 ‘‘(B) the date the individual furnishes to the

20 United States Department of State a signed

21 statement of voluntary relinquishment of United

22 States nationality confirming the performance of

23 an act of expatriation specified in paragraph

24 (1), (2), (3), or (4) of section 349(a) of the Im-
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1 migration and Nationality Act (8 U.S.C.

2 1481(a)(1)–(4)),

3 ‘‘(C) the date the United States Department

4 of State issues to the individual a certificate of

5 loss of nationality, or

6 ‘‘(D) the date a court of the United States

7 cancels a naturalized citizen’s certificate of natu8 ralization.

9 Subparagraph (A) or (B) shall not apply to any in10 dividual unless the renunciation or voluntary relin11 quishment is subsequently approved by the issuance to

12 the individual of a certificate of loss of nationality by

13 the United States Department of State.

14 ‘‘(4) LONG-TERM RESIDENT.—The term ‘long15 term resident’ has the meaning given to such term by

16 section 877(e)(2).

17 ‘‘(f) SPECIAL RULES APPLICABLE TO BENEFICIARIES’

18 INTERESTS IN TRUST.—

19 ‘‘(1) IN GENERAL.—Except as provided in para20 graph (2), if an individual is determined under para21 graph (3) to hold an interest in a trust on the day

22 before the expatriation date—

23 ‘‘(A) the individual shall not be treated as

24 having sold such interest,
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1 ‘‘(B) such interest shall be treated as a sep2 arate share in the trust, and

3 ‘‘(C)(i) such separate share shall be treated

4 as a separate trust consisting of the assets allo5 cable to such share,

6 ‘‘(ii) the separate trust shall be treated as

7 having sold its assets on the day before the expa8 triation date for their fair market value and as

9 having distributed all of its assets to the indi10 vidual as of such time, and

11 ‘‘(iii) the individual shall be treated as hav12 ing recontributed the assets to the separate trust.

13 Subsection (a)(2) shall apply to any income, gain, or

14 loss of the individual arising from a distribution de15 scribed in subparagraph (C)(ii). In determining the

16 amount of such distribution, proper adjustments shall

17 be made for liabilities of the trust allocable to an in18 dividual’s share in the trust.

19 ‘‘(2) SPECIAL RULES FOR INTERESTS IN QUALI20 FIED TRUSTS.—

21 ‘‘(A) IN GENERAL.—If the trust interest de22 scribed in paragraph (1) is an interest in a

23 qualified trust—

24 ‘‘(i) paragraph (1) and subsection (a)

25 shall not apply, and
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1 ‘‘(ii) in addition to any other tax im2 posed by this title, there is hereby imposed

3 on each distribution with respect to such in4 terest a tax in the amount determined

5 under subparagraph (B).

6 ‘‘(B) AMOUNT OF TAX.—The amount of tax

7 under subparagraph (A)(ii) shall be equal to the

8 lesser of—

9 ‘‘(i) the highest rate of tax imposed by

10 section 1(e) for the taxable year which in11 cludes the day before the expatriation date,

12 multiplied by the amount of the distribu13 tion, or

14 ‘‘(ii) the balance in the deferred tax ac15 count immediately before the distribution

16 determined without regard to any increases

17 under subparagraph (C)(ii) after the 30th

18 day preceding the distribution.

19 ‘‘(C) DEFERRED TAX ACCOUNT.—For pur20 poses of subparagraph (B)(ii)—

21 ‘‘(i) OPENING BALANCE.—The opening

22 balance in a deferred tax account with re23 spect to any trust interest is an amount

24 equal to the tax which would have been im25 posed on the allocable expatriation gain
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1 with respect to the trust interest if such

2 gain had been included in gross income

3 under subsection (a).

4 ‘‘(ii) INCREASE FOR INTEREST.—The

5 balance in the deferred tax account shall be

6 increased by the amount of interest deter7 mined (on the balance in the account at the

8 time the interest accrues), for periods after

9 the 90th day after the expatriation date, by

10 using the rates and method applicable

11 under section 6621 for underpayments of

12 tax for such periods, except that section

13 6621(a)(2) shall be applied by substituting

14 ‘5 percentage points’ for ‘3 percentage

15 points’ in subparagraph (B) thereof.

16 ‘‘(iii) DECREASE FOR TAXES PRE17 VIOUSLY PAID.—The balance in the tax de18 ferred account shall be reduced—

19 ‘‘(I) by the amount of taxes im20 posed by subparagraph (A) on any dis21 tribution to the person holding the

22 trust interest, and

23 ‘‘(II) in the case of a person hold24 ing a nonvested interest, to the extent

25 provided in regulations, by the amount
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1 of taxes imposed by subparagraph (A)

2 on distributions from the trust with re3 spect to nonvested interests not held by

4 such person.

5 ‘‘(D) ALLOCABLE EXPATRIATION GAIN.—For

6 purposes of this paragraph, the allocable expa7 triation gain with respect to any beneficiary’s

8 interest in a trust is the amount of gain which

9 would be allocable to such beneficiary’s vested

10 and nonvested interests in the trust if the bene11 ficiary held directly all assets allocable to such

12 interests.

13 ‘‘(E) TAX DEDUCTED AND WITHHELD.—

14 ‘‘(i) IN GENERAL.—The tax imposed by

15 subparagraph (A)(ii) shall be deducted and

16 withheld by the trustees from the distribu17 tion to which it relates.

18 ‘‘(ii) EXCEPTION WHERE FAILURE TO

19 WAIVE TREATY RIGHTS.—If an amount may

20 not be deducted and withheld under clause

21 (i) by reason of the distributee failing to

22 waive any treaty right with respect to such

23 distribution—

24 ‘‘(I) the tax imposed by subpara25 graph (A)(ii) shall be imposed on the
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1 trust and each trustee shall be person2 ally liable for the amount of such tax,

3 and

4 ‘‘(II) any other beneficiary of the

5 trust shall be entitled to recover from

6 the distributee the amount of such tax

7 imposed on the other beneficiary.

8 ‘‘(F) DISPOSITION.—If a trust ceases to be

9 a qualified trust at any time, a covered expa10 triate disposes of an interest in a qualified trust,

11 or a covered expatriate holding an interest in a

12 qualified trust dies, then, in lieu of the tax im13 posed by subparagraph (A)(ii), there is hereby

14 imposed a tax equal to the lesser of—

15 ‘‘(i) the tax determined under para16 graph (1) as if the day before the expatria17 tion date were the date of such cessation,

18 disposition, or death, whichever is applica19 ble, or

20 ‘‘(ii) the balance in the tax deferred ac21 count immediately before such date.

22 Such tax shall be imposed on the trust and each

23 trustee shall be personally liable for the amount

24 of such tax and any other beneficiary of the trust

25 shall be entitled to recover from the covered expa-
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1 triate or the estate the amount of such tax im2 posed on the other beneficiary.

3 ‘‘(G) DEFINITIONS AND SPECIAL RULES.—

4 For purposes of this paragraph—

5 ‘‘(i) QUALIFIED TRUST.—The term

6 ‘qualified trust’ means a trust which is de7 scribed in section 7701(a)(30)(E).

8 ‘‘(ii) VESTED INTEREST.—The term

9 ‘vested interest’ means any interest which,

10 as of the day before the expatriation date, is

11 vested in the beneficiary.

12 ‘‘(iii) NONVESTED INTEREST.—The

13 term ‘nonvested interest’ means, with re14 spect to any beneficiary, any interest in a

15 trust which is not a vested interest. Such

16 interest shall be determined by assuming the

17 maximum exercise of discretion in favor of

18 the beneficiary and the occurrence of all

19 contingencies in favor of the beneficiary.

20 ‘‘(iv) ADJUSTMENTS.—The Secretary

21 may provide for such adjustments to the

22 bases of assets in a trust or a deferred tax

23 account, and the timing of such adjust24 ments, in order to ensure that gain is taxed

25 only once.
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1 ‘‘(v) COORDINATION WITH RETIREMENT

2 PLAN RULES.—This subsection shall not

3 apply to an interest in a trust which is

4 part of a retirement plan to which sub5 section (d)(2) applies.

6 ‘‘(3) DETERMINATION OF BENEFICIARIES’ INTER7 EST IN TRUST.—

8 ‘‘(A) DETERMINATIONS UNDER PARAGRAPH

9 (1).—For purposes of paragraph (1), a bene10 ficiary’s interest in a trust shall be based upon

11 all relevant facts and circumstances, including

12 the terms of the trust instrument and any letter

13 of wishes or similar document, historical pat14 terns of trust distributions, and the existence of

15 and functions performed by a trust protector or

16 any similar adviser.

17 ‘‘(B) OTHER DETERMINATIONS.—For pur18 poses of this section—

19 ‘‘(i) CONSTRUCTIVE OWNERSHIP.—If a

20 beneficiary of a trust is a corporation, part21 nership, trust, or estate, the shareholders,

22 partners, or beneficiaries shall be deemed to

23 be the trust beneficiaries for purposes of this

24 section.
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1 ‘‘(ii) TAXPAYER RETURN POSITION.—A

2 taxpayer shall clearly indicate on its in3 come tax return—

4 ‘‘(I) the methodology used to de5 termine that taxpayer’s trust interest

6 under this section, and

7 ‘‘(II) if the taxpayer knows (or

8 has reason to know) that any other

9 beneficiary of such trust is using a dif10 ferent methodology to determine such

11 beneficiary’s trust interest under this

12 section.

13 ‘‘(g) TERMINATION OF DEFERRALS, ETC.—In the case

14 of any covered expatriate, notwithstanding any other provi15 sion of this title—

16 ‘‘(1) any period during which recognition of in17 come or gain is deferred shall terminate on the day

18 before the expatriation date, and

19 ‘‘(2) any extension of time for payment of tax

20 shall cease to apply on the day before the expatriation

21 date and the unpaid portion of such tax shall be due

22 and payable at the time and in the manner pre23 scribed by the Secretary.

24 ‘‘(h) IMPOSITION OF TENTATIVE TAX.—
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1 ‘‘(1) IN GENERAL.—If an individual is required

2 to include any amount in gross income under sub3 section (a) for any taxable year, there is hereby im4 posed, immediately before the expatriation date, a tax

5 in an amount equal to the amount of tax which

6 would be imposed if the taxable year were a short tax7 able year ending on the expatriation date.

8 ‘‘(2) DUE DATE.—The due date for any tax im9 posed by paragraph (1) shall be the 90th day after the

10 expatriation date.

11 ‘‘(3) TREATMENT OF TAX.—Any tax paid under

12 paragraph (1) shall be treated as a payment of the

13 tax imposed by this chapter for the taxable year to

14 which subsection (a) applies.

15 ‘‘(4) DEFERRAL OF TAX.—The provisions of sub16 section (b) shall apply to the tax imposed by this sub17 section to the extent attributable to gain includible in

18 gross income by reason of this section.

19 ‘‘(i) SPECIAL LIENS FOR DEFERRED TAX AMOUNTS.—

20 ‘‘(1) IMPOSITION OF LIEN.—

21 ‘‘(A) IN GENERAL.—If a covered expatriate

22 makes an election under subsection (a)(4) or (b)

23 which results in the deferral of any tax imposed

24 by reason of subsection (a), the deferred amount

25 (including any interest, additional amount, ad-
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1 dition to tax, assessable penalty, and costs at2 tributable to the deferred amount) shall be a lien

3 in favor of the United States on all property of

4 the expatriate located in the United States (with5 out regard to whether this section applies to the

6 property).

7 ‘‘(B) DEFERRED AMOUNT.—For purposes of

8 this subsection, the deferred amount is the

9 amount of the increase in the covered expatri10 ate’s income tax which, but for the election under

11 subsection (a)(4) or (b), would have occurred by

12 reason of this section for the taxable year includ13 ing the expatriation date.

14 ‘‘(2) PERIOD OF LIEN.—The lien imposed by this

15 subsection shall arise on the expatriation date and

16 continue until—

17 ‘‘(A) the liability for tax by reason of this

18 section is satisfied or has become unenforceable

19 by reason of lapse of time, or

20 ‘‘(B) it is established to the satisfaction of

21 the Secretary that no further tax liability may

22 arise by reason of this section.

23 ‘‘(3) CERTAIN RULES APPLY.—The rules set forth

24 in paragraphs (1), (3), and (4) of section 6324A(d)

25 shall apply with respect to the lien imposed by this
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1 subsection as if it were a lien imposed by section

2 6324A.

3 ‘‘(j) REGULATIONS.—The Secretary shall prescribe

4 such regulations as may be necessary or appropriate to

5 carry out the purposes of this section.’’.

6 (b) INCLUSION IN INCOME OF GIFTS AND BEQUESTS

7 RECEIVED BY UNITED STATES CITIZENS AND RESIDENTS

8 FROM EXPATRIATES.—Section 102 (relating to gifts, etc.

9 not included in gross income) is amended by adding at the

10 end the following new subsection:

11 ‘‘(d) GIFTS AND INHERITANCES FROM COVERED EX12 PATRIATES.—

13 ‘‘(1) IN GENERAL.—Subsection (a) shall not ex14 clude from gross income the value of any property ac15 quired by gift, bequest, devise, or inheritance from a

16 covered expatriate after the expatriation date. For

17 purposes of this subsection, any term used in this sub18 section which is also used in section 877A shall have

19 the same meaning as when used in section 877A.

20 ‘‘(2) EXCEPTIONS FOR TRANSFERS OTHERWISE

21 SUBJECT TO ESTATE OR GIFT TAX.—Paragraph (1)

22 shall not apply to any property if either—

23 ‘‘(A) the gift, bequest, devise, or inheritance

24 is—
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1 ‘‘(i) shown on a timely filed return of

2 tax imposed by chapter 12 as a taxable gift

3 by the covered expatriate, or

4 ‘‘(ii) included in the gross estate of the

5 covered expatriate for purposes of chapter

6 11 and shown on a timely filed return of

7 tax imposed by chapter 11 of the estate of

8 the covered expatriate, or

9 ‘‘(B) no such return was timely filed but no

10 such return would have been required to be filed

11 even if the covered expatriate were a citizen or

12 long-term resident of the United States.’’.

13 (c) DEFINITION OF TERMINATION OF UNITED STATES

14 CITIZENSHIP.—Section 7701(a) is amended by adding at

15 the end the following new paragraph:

16 ‘‘(48) TERMINATION OF UNITED STATES CITIZEN17 SHIP.—

18 ‘‘(A) IN GENERAL.—An individual shall not

19 cease to be treated as a United States citizen be20 fore the date on which the individual’s citizen21 ship is treated as relinquished under section

22 877A(e)(3).

23 ‘‘(B) DUAL CITIZENS.—Under regulations

24 prescribed by the Secretary, subparagraph (A)

25 shall not apply to an individual who became at
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1 birth a citizen of the United States and a citizen

2 of another country.’’.

3 (d) INELIGIBILITY FOR VISA OR ADMISSION TO

4 UNITED STATES.—

5 (1) IN GENERAL.—Section 212(a)(10)(E) of the

6 Immigration and Nationality Act (8 U.S.C.

7 1182(a)(10)(E)) is amended to read as follows:

8 ‘‘(E) FORMER CITIZENS NOT IN COMPLI9 ANCE WITH EXPATRIATION REVENUE PROVI10 SIONS.—Any alien who is a former citizen of the

11 United States who relinquishes United States

12 citizenship (within the meaning of section

13 877A(e)(3) of the Internal Revenue Code of 1986)

14 and who is not in compliance with section 877A

15 of such Code (relating to expatriation).’’.

16 (2) AVAILABILITY OF INFORMATION.—

17 (A) IN GENERAL.—Section 6103(l) (relating

18 to disclosure of returns and return information

19 for purposes other than tax administration) is

20 amended by adding at the end the following new

21 paragraph:

22 ‘‘(19) DISCLOSURE TO DENY VISA OR ADMISSION

23 TO CERTAIN EXPATRIATES.—Upon written request of

24 the Attorney General or the Attorney General’s dele25 gate, the Secretary shall disclose whether an indi-
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1 vidual is in compliance with section 877A (and if not

2 in compliance, any items of noncompliance) to offi3 cers and employees of the Federal agency responsible

4 for administering section 212(a)(10)(E) of the Immi5 gration and Nationality Act solely for the purpose of,

6 and to the extent necessary in, administering such

7 section 212(a)(10)(E).’’.

8 (B) SAFEGUARDS.—

9 (i) TECHNICAL AMENDMENTS.—Para10 graph (4) of section 6103(p) of the Internal

11 Revenue Code of 1986, as amended by sec12 tion 202(b)(2)(B) of the Trade Act of 2002

13 (Public Law 107–210; 116 Stat. 961), is

14 amended by striking ‘‘or (17)’’ after ‘‘any

15 other person described in subsection (l)(16)’’

16 each place it appears and inserting ‘‘or

17 (18)’’.

18 (ii) CONFORMING AMENDMENTS.—Sec19 tion 6103(p)(4) (relating to safeguards), as

20 amended by clause (i), is amended by strik21 ing ‘‘or (18)’’ after ‘‘any other person de22 scribed in subsection (l)(16)’’ each place it

23 appears and inserting ‘‘(18), or (19)’’.

24 (3) EFFECTIVE DATES.—
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1 (A) IN GENERAL.—Except as provided in

2 subparagraph (B), the amendments made by this

3 subsection shall apply to individuals who relin4 quish United States citizenship on or after the

5 date of the enactment of this Act.

6 (B) TECHNICAL AMENDMENTS.—The

7 amendments made by paragraph (2)(B)(i) shall

8 take effect as if included in the amendments

9 made by section 202(b)(2)(B) of the Trade Act of

10 2002 (Public Law 107–210; 116 Stat. 961).

11 (e) CONFORMING AMENDMENTS.—

12 (1) Section 877 is amended by adding at the end

13 the following new subsection:

14 ‘‘(g) APPLICATION.—This section shall not apply to an

15 expatriate (as defined in section 877A(e)) whose expatria16 tion date (as so defined) occurs on or after February 5,

17 2003.’’.

18 (2) Section 2107 is amended by adding at the

19 end the following new subsection:

20 ‘‘(f) APPLICATION.—This section shall not apply to

21 any expatriate subject to section 877A.’’.

22 (3) Section 2501(a)(3) is amended by adding at

23 the end the following new subparagraph:
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1 ‘‘(F) APPLICATION.—This paragraph shall

2 not apply to any expatriate subject to section

3 877A.’’.

4 (4)(A) Paragraph (1) of section 6039G(d) is

5 amended by inserting ‘‘or 877A’’ after ‘‘section 877’’.

6 (B) The second sentence of section 6039G(e) is

7 amended by inserting ‘‘or who relinquishes United

8 States citizenship (within the meaning of section

9 877A(e)(3))’’ after ‘‘877(a))’’.

10 (C) Section 6039G(f) is amended by inserting

11 ‘‘or 877A(e)(2)(B)’’ after ‘‘877(e)(1)’’.

12 (f) CLERICAL AMENDMENT.—The table of sections for

13 subpart A of part II of subchapter N of chapter 1 is amend14 ed by inserting after the item relating to section 877 the

15 following new item:

‘‘Sec. 877A. Tax responsibilities of expatriation.’’.

16 (g) EFFECTIVE DATE.—

17 (1) IN GENERAL.—Except as provided in this

18 subsection, the amendments made by this section shall

19 apply to expatriates (within the meaning of section

20 877A(e) of the Internal Revenue Code of 1986, as

21 added by this section) whose expatriation date (as so

22 defined) occurs on or after February 5, 2003.

23 (2) GIFTS AND BEQUESTS.—Section 102(d) of

24 the Internal Revenue Code of 1986 (as added by sub25 section (b)) shall apply to gifts and bequests received
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1 on or after February 5, 2003, from an individual or

2 the estate of an individual whose expatriation date

3 (as so defined) occurs after such date.

4 (3) DUE DATE FOR TENTATIVE TAX.—The due

5 date under section 877A(h)(2) of the Internal Revenue

6 Code of 1986, as added by this section, shall in no

7 event occur before the 90th day after the date of the

8 enactment of this Act.

9 SEC. 341. TAX TREATMENT OF INVERTED CORPORATE ENTI10 TIES.

11 (a) IN GENERAL.—Subchapter C of chapter 80 (relat12 ing to provisions affecting more than one subtitle) is

13 amended by adding at the end the following new section:

14 ‘‘SEC. 7874. RULES RELATING TO INVERTED CORPORATE

15 ENTITIES.

16 ‘‘(a) INVERTED CORPORATIONS TREATED AS DOMES17 TIC CORPORATIONS.—

18 ‘‘(1) IN GENERAL.—If a foreign incorporated en19 tity is treated as an inverted domestic corporation,

20 then, notwithstanding section 7701(a)(4), such entity

21 shall be treated for purposes of this title as a domestic

22 corporation.

23 ‘‘(2) INVERTED DOMESTIC CORPORATION.—For

24 purposes of this section, a foreign incorporated entity

25 shall be treated as an inverted domestic corporation
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1 if, pursuant to a plan (or a series of related trans2 actions)—

3 ‘‘(A) the entity completes after March 20,

4 2002, the direct or indirect acquisition of sub5 stantially all of the properties held directly or

6 indirectly by a domestic corporation or substan7 tially all of the properties constituting a trade or

8 business of a domestic partnership,

9 ‘‘(B) after the acquisition at least 80 per10 cent of the stock (by vote or value) of the entity

11 is held—

12 ‘‘(i) in the case of an acquisition with

13 respect to a domestic corporation, by former

14 shareholders of the domestic corporation by

15 reason of holding stock in the domestic cor16 poration, or

17 ‘‘(ii) in the case of an acquisition with

18 respect to a domestic partnership, by former

19 partners of the domestic partnership by rea20 son of holding a capital or profits interest

21 in the domestic partnership, and

22 ‘‘(C) the expanded affiliated group which

23 after the acquisition includes the entity does not

24 have substantial business activities in the foreign

25 country in which or under the law of which the
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1 entity is created or organized when compared to

2 the total business activities of such expanded af3 filiated group.

4 Except as provided in regulations, an acquisition of

5 properties of a domestic corporation shall not be

6 treated as described in subparagraph (A) if none of

7 the corporation’s stock was readily tradeable on an es8 tablished securities market at any time during the 4-

9 year period ending on the date of the acquisition.

10 ‘‘(b) PRESERVATION OF DOMESTIC TAX BASE IN CER11 TAIN INVERSION TRANSACTIONS TO WHICH SUBSECTION

12 (a) DOES NOT APPLY.—

13 ‘‘(1) IN GENERAL.—If a foreign incorporated en14 tity would be treated as an inverted domestic corpora15 tion with respect to an acquired entity if either—

16 ‘‘(A) subsection (a)(2)(A) were applied by

17 substituting ‘after December 31, 1996, and on or

18 before March 20, 2002’ for ‘after March 20, 2002’

19 and subsection (a)(2)(B) were applied by sub20 stituting ‘more than 50 percent’ for ‘at least 80

21 percent’, or

22 ‘‘(B) subsection (a)(2)(B) were applied by

23 substituting ‘more than 50 percent’ for ‘at least

24 80 percent’,
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1 then the rules of subsection (c) shall apply to any in2 version gain of the acquired entity during the appli3 cable period and the rules of subsection (d) shall

4 apply to any related party transaction of the ac5 quired entity during the applicable period. This sub6 section shall not apply for any taxable year if sub7 section (a) applies to such foreign incorporated entity

8 for such taxable year.

9 ‘‘(2) ACQUIRED ENTITY.—For purposes of this

10 section—

11 ‘‘(A) IN GENERAL.—The term ‘acquired en12 tity’ means the domestic corporation or partner13 ship substantially all of the properties of which

14 are directly or indirectly acquired in an acquisi15 tion described in subsection (a)(2)(A) to which

16 this subsection applies.

17 ‘‘(B) AGGREGATION RULES.—Any domestic

18 person bearing a relationship described in sec19 tion 267(b) or 707(b) to an acquired entity shall

20 be treated as an acquired entity with respect to

21 the acquisition described in subparagraph (A).

22 ‘‘(3) APPLICABLE PERIOD.—For purposes of this

23 section—

24 ‘‘(A) IN GENERAL.—The term ‘applicable

25 period’ means the period—
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1 ‘‘(i) beginning on the first date prop2 erties are acquired as part of the acquisi3 tion described in subsection (a)(2)(A) to

4 which this subsection applies, and

5 ‘‘(ii) ending on the date which is 10

6 years after the last date properties are ac7 quired as part of such acquisition.

8 ‘‘(B) SPECIAL RULE FOR INVERSIONS OC9 CURRING BEFORE MARCH 21, 2002.—In the case

10 of any acquired entity to which paragraph

11 (1)(A) applies, the applicable period shall be the

12 10-year period beginning on January 1, 2003.

13 ‘‘(c) TAX ON INVERSION GAINS MAY NOT BE OFF14 SET.—If subsection (b) applies—

15 ‘‘(1) IN GENERAL.—The taxable income of an ac16 quired entity (or any expanded affiliated group which

17 includes such entity) for any taxable year which in18 cludes any portion of the applicable period shall in

19 no event be less than the inversion gain of the entity

20 for the taxable year.

21 ‘‘(2) CREDITS NOT ALLOWED AGAINST TAX ON IN22 VERSION GAIN.—Credits shall be allowed against the

23 tax imposed by this chapter on an acquired entity for

24 any taxable year described in paragraph (1) 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 ‘‘(3) SPECIAL RULES FOR PARTNERSHIPS.—In

9 the case of an acquired entity which is a

10 partnership—

11 ‘‘(A) the limitations of this subsection shall

12 apply at the partner rather than the partnership

13 level,

14 ‘‘(B) the inversion gain of any partner for

15 any taxable year shall be equal to the sum of—

16 ‘‘(i) the partner’s distributive share of

17 inversion gain of the partnership for such

18 taxable year, plus

19 ‘‘(ii) income or gain required to be rec20 ognized for the taxable year by the partner

21 under section 367(a), 741, or 1001, or

22 under any other provision of chapter 1, by

23 reason of the transfer during the applicable

24 period of any partnership interest of the
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1 partner in such partnership to the foreign

2 incorporated entity, and

3 ‘‘(C) the highest rate of tax specified in the

4 rate schedule applicable to the partner under

5 chapter 1 shall be substituted for the rate of tax

6 under paragraph (2)(B).

7 ‘‘(4) INVERSION GAIN.—For purposes of this sec8 tion, the term ‘inversion gain’ means any income or

9 gain required to be recognized under section 304,

10 311(b), 367, 1001, or 1248, or under any other provi11 sion of chapter 1, by reason of the transfer during the

12 applicable period of stock or other properties by an

13 acquired entity—

14 ‘‘(A) as part of the acquisition described in

15 subsection (a)(2)(A) to which subsection (b) ap16 plies, or

17 ‘‘(B) after such acquisition to a foreign re18 lated person.

19 The Secretary may provide that income or gain from

20 the sale of inventories or other transactions in the or21 dinary course of a trade or business shall not be treat22 ed as inversion gain under subparagraph (B) to the

23 extent the Secretary determines such treatment would

24 not be inconsistent with the purposes of this section.
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1 ‘‘(5) COORDINATION WITH SECTION 172 AND MIN2 IMUM TAX.—Rules similar to the rules of paragraphs

3 (3) and (4) of section 860E(a) shall apply for pur4 poses of this section.

5 ‘‘(6) STATUTE OF LIMITATIONS.—

6 ‘‘(A) IN GENERAL.—The statutory period

7 for the assessment of any deficiency attributable

8 to the inversion gain of any taxpayer for any

9 pre-inversion year shall not expire before the ex10 piration of 3 years from the date the Secretary

11 is notified by the taxpayer (in such manner as

12 the Secretary may prescribe) of the acquisition

13 described in subsection (a)(2)(A) to which such

14 gain relates and such deficiency may be assessed

15 before the expiration of such 3-year period not16 withstanding the provisions of any other law or

17 rule of law which would otherwise prevent such

18 assessment.

19 ‘‘(B) PRE-INVERSION YEAR.—For purposes

20 of subparagraph (A), the term ‘pre-inversion

21 year’ means any taxable year if—

22 ‘‘(i) any portion of the applicable pe23 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)(A) is completed.

4 ‘‘(d) SPECIAL RULES APPLICABLE TO RELATED

5 PARTY TRANSACTIONS.—

6 ‘‘(1) ANNUAL APPLICATION FOR AGREEMENTS ON

7 RETURN POSITIONS.—

8 ‘‘(A) IN GENERAL.—Each acquired entity to

9 which subsection (b) applies shall file with the

10 Secretary an application for an approval agree11 ment under subparagraph (D) for each taxable

12 year which includes a portion of the applicable

13 period. Such application shall be filed at such

14 time and manner, and shall contain such infor15 mation, as the Secretary may prescribe.

16 ‘‘(B) SECRETARIAL ACTION.—Within 90

17 days of receipt of an application under subpara18 graph (A) (or such longer period as the Secretary

19 and entity may agree upon), the Secretary

20 shall—

21 ‘‘(i) enter into an agreement described

22 in subparagraph (D) for the taxable year

23 covered by the application,

24 ‘‘(ii) notify the entity that the Sec25 retary has determined that the application
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1 was filed in good faith and substantially

2 complies with the requirements for the ap3 plication under subparagraph (A), or

4 ‘‘(iii) notify the entity that the Sec5 retary has determined that the application

6 was not filed in good faith or does not sub7 stantially comply with such requirements.

8 If the Secretary fails to act within the time pre9 scribed under the preceding sentence, the entity

10 shall be treated for purposes of this paragraph as

11 having received notice under clause (ii).

12 ‘‘(C) FAILURES TO COMPLY.—If an ac13 quired entity fails to file an application under

14 subparagraph (A), or the acquired entity receives

15 a notice under subparagraph (B)(iii), for any

16 taxable year, then for such taxable year—

17 ‘‘(i) there shall not be allowed any de18 duction, or addition to basis or cost of goods

19 sold, for amounts paid or incurred, or losses

20 incurred, by reason of a transaction between

21 the acquired entity and a foreign related

22 person,

23 ‘‘(ii) any transfer or license of intan24 gible property (as defined in section

25 936(h)(3)(B)) between the acquired entity
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1 and a foreign related person shall be dis2 regarded, and

3 ‘‘(iii) any cost-sharing arrangement

4 between the acquired entity and a foreign

5 related person shall be disregarded.

6 ‘‘(D) APPROVAL AGREEMENT.—For pur7 poses of subparagraph (A), the term ‘approval

8 agreement’ means a prefiling, advance pricing,

9 or other agreement specified by the Secretary

10 which contains such provisions as the Secretary

11 determines necessary to ensure that the require12 ments of sections 163(j), 267(a)(3), 482, and 845,

13 and any other provision of this title applicable

14 to transactions between related persons and spec15 ified by the Secretary, are met.

16 ‘‘(E) TAX COURT REVIEW.—

17 ‘‘(i) IN GENERAL.—The Tax Court

18 shall have jurisdiction over any action

19 brought by an acquired entity receiving a

20 notice under subparagraph (B)(iii) to deter21 mine whether the issuance of the notice was

22 an abuse of discretion, but only if the action

23 is brought within 30 days after the date of

24 the mailing (determined under rules similar

25 to section 6213) of the notice.
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1 ‘‘(ii) COURT ACTION.—The Tax Court

2 shall issue its decision within 30 days after

3 the filing of the action under clause (i) and

4 may order the Secretary to issue a notice

5 described in subparagraph (B)(ii).

6 ‘‘(iii) REVIEW.—An order of the Tax

7 Court under this subparagraph shall be re8 viewable in the same manner as any other

9 decision of the Tax Court.

10 ‘‘(2) MODIFICATIONS OF LIMITATION ON INTER11 EST DEDUCTION.—In the case of an acquired entity

12 to which subsection (b) applies, section 163(j) shall be

13 applied—

14 ‘‘(A) without regard to paragraph (2)(A)(ii)

15 thereof, and

16 ‘‘(B) by substituting ‘25 percent’ for ‘50

17 percent’ each place it appears in paragraph

18 (2)(B) thereof.

19 ‘‘(e) OTHER DEFINITIONS AND SPECIAL RULES.—For

20 purposes of this section—

21 ‘‘(1) RULES FOR APPLICATION OF SUBSECTION

22 (a)(2).—In applying subsection (a)(2) for purposes of

23 subsections (a) and (b), the following rules shall

24 apply:
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1 ‘‘(A) CERTAIN STOCK DISREGARDED.—

2 There shall not be taken into account in deter3 mining ownership for purposes of subsection

4 (a)(2)(B)—

5 ‘‘(i) stock held by members of the ex6 panded affiliated group which includes the

7 foreign incorporated entity, or

8 ‘‘(ii) stock of such entity which is sold

9 in a public offering or private placement re10 lated to the acquisition described in sub11 section (a)(2)(A).

12 ‘‘(B) PLAN DEEMED IN CERTAIN CASES.—If

13 a foreign incorporated entity acquires directly or

14 indirectly substantially all of the properties of a

15 domestic corporation or partnership during the

16 4-year period beginning on the date which is 2

17 years before the ownership requirements of sub18 section (a)(2)(B) are met with respect to such do19 mestic corporation or partnership, such actions

20 shall be treated as pursuant to a plan.

21 ‘‘(C) CERTAIN TRANSFERS DISREGARDED.—

22 The transfer of properties or liabilities (includ23 ing by contribution or distribution) shall be dis24 regarded if such transfers are part of a plan a
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1 principal purpose of which is to avoid the pur2 poses of this section.

3 ‘‘(D) SPECIAL RULE FOR RELATED PART4 NERSHIPS.—For purposes of applying subsection

5 (a)(2) to the acquisition of a domestic partner6 ship, except as provided in regulations, all part7 nerships which are under common control (with8 in the meaning of section 482) shall be treated

9 as 1 partnership.

10 ‘‘(E) TREATMENT OF CERTAIN RIGHTS.—

11 The Secretary shall prescribe such regulations as

12 may be necessary—

13 ‘‘(i) to treat warrants, options, con14 tracts to acquire stock, convertible debt in15 struments, and other similar interests as

16 stock, and

17 ‘‘(ii) to treat stock as not stock.

18 ‘‘(2) EXPANDED AFFILIATED GROUP.—The term

19 ‘expanded affiliated group’ means an affiliated group

20 as defined in section 1504(a) but without regard to

21 section 1504(b)(3), except that section 1504(a) shall

22 be applied by substituting ‘more than 50 percent’ for

23 ‘at least 80 percent’ each place it appears.

24 ‘‘(3) FOREIGN INCORPORATED ENTITY.—The

25 term ‘foreign incorporated entity’ means any entity
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1 which is, or but for subsection (a)(1) would be, treated

2 as a foreign corporation for purposes of this title.

3 ‘‘(4) FOREIGN RELATED PERSON.—The term ‘for4 eign related person’ means, with respect to any ac5 quired entity, a foreign person which—

6 ‘‘(A) bears a relationship to such entity de7 scribed in section 267(b) or 707(b), or

8 ‘‘(B) is under the same common control

9 (within the meaning of section 482) as such enti10 ty.

11 ‘‘(5) SUBSEQUENT ACQUISITIONS BY UNRELATED

12 DOMESTIC CORPORATIONS.—

13 ‘‘(A) IN GENERAL.—Subject to such condi14 tions, limitations, and exceptions as the Sec15 retary may prescribe, if, after an acquisition de16 scribed in subsection (a)(2)(A) to which sub17 section (b) applies, a domestic corporation stock

18 of which is traded on an established securities

19 market acquires directly or indirectly any prop20 erties of one or more acquired entities in a

21 transaction with respect to which the require22 ments of subparagraph (B) are met, this section

23 shall cease to apply to any such acquired entity

24 with respect to which such requirements are met.
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1 ‘‘(B) REQUIREMENTS.—The requirements of

2 the subparagraph are met with respect to a

3 transaction involving any acquisition described

4 in subparagraph (A) if—

5 ‘‘(i) before such transaction the domes6 tic corporation did not have a relationship

7 described in section 267(b) or 707(b), and

8 was not under common control (within the

9 meaning of section 482), with the acquired

10 entity, or any member of an expanded af11 filiated group including such entity, and

12 ‘‘(ii) after such transaction, such ac13 quired entity—

14 ‘‘(I) is a member of the same ex15 panded affiliated group which includes

16 the domestic corporation or has such a

17 relationship or is under such common

18 control with any member of such

19 group, and

20 ‘‘(II) is not a member of, and does

21 not have such a relationship and is not

22 under such common control with any

23 member of, the expanded affiliated

24 group which before such acquisition in25 cluded such entity.
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1 ‘‘(f) REGULATIONS.—The Secretary shall provide such

2 regulations as are necessary to carry out this section, in3 cluding regulations providing for such adjustments to the

4 application of this section as are necessary to prevent the

5 avoidance of the purposes of this section, including the

6 avoidance of such purposes through—

7 ‘‘(1) the use of related persons, pass-through or

8 other noncorporate entities, or other intermediaries,

9 or

10 ‘‘(2) transactions designed to have persons cease

11 to be (or not become) members of expanded affiliated

12 groups or related persons.’’.

13 (b) TREATMENT OF AGREEMENTS.—

14 (1) CONFIDENTIALITY.—

15 (A) TREATMENT AS RETURN INFORMA16 TION.—Section 6103(b)(2) (relating to return in17 formation) is amended by striking ‘‘and’’ at the

18 end of subparagraph (C), by inserting ‘‘and’’ at

19 the end of subparagraph (D), and by inserting

20 after subparagraph (D) the following new sub21 paragraph:

22 ‘‘(E) any approval agreement under section

23 7874(d)(1) to which any preceding subparagraph

24 does not apply and any background information
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1 related to the agreement or any application for

2 the agreement,’’.

3 (B) EXCEPTION FROM PUBLIC INSPECTION

4 AS WRITTEN DETERMINATION.—Section

5 6110(b)(1)(B) is amended by striking ‘‘or (D)’’

6 and inserting ‘‘, (D), or (E)’’.

7 (2) REPORTING.—The Secretary of the Treasury

8 shall include with any report on advance pricing

9 agreements required to be submitted after the date of

10 the enactment of this Act under section 521(b) of the

11 Ticket to Work and Work Incentives Improvement Act

12 of 1999 (Public Law 106–170) a report regarding ap13 proval agreements under section 7874(d)(1) of the In14 ternal Revenue Code of 1986. Such report shall in15 clude information similar to the information required

16 with respect to advance pricing agreements and shall

17 be treated for confidentiality purposes in the same

18 manner as the reports on advance pricing agreements

19 are treated under section 521(b)(3) of such Act.

20 (c) INFORMATION REPORTING.—The Secretary of the

21 Treasury shall exercise the Secretary’s authority under the

22 Internal Revenue Code of 1986 to require entities involved

23 in transactions to which section 7874 of such Code (as

24 added by subsection (a)) applies to report to the Secretary,

25 shareholders, partners, and such other persons as the Sec-
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1 retary may prescribe such information as is necessary to

2 ensure the proper tax treatment of such transactions.

3 (d) CONFORMING AMENDMENT.—The table of sections

4 for subchapter C of chapter 80 is amended by adding at

5 the end the following new item:

‘‘Sec. 7874. Rules relating to inverted corporate entities.’’.

6 (e) TRANSITION RULE FOR CERTAIN REGULATED IN7 VESTMENT COMPANIES AND UNIT INVESTMENT TRUSTS.—

8 Notwithstanding section 7874 of the Internal Revenue Code

9 of 1986 (as added by subsection (a)), a regulated investment

10 company, or other pooled fund or trust specified by the Sec11 retary of the Treasury, may elect to recognize gain by rea12 son of section 367(a) of such Code with respect to a trans13 action under which a foreign incorporated entity is treated

14 as an inverted domestic corporation under section 7874(a)

15 of such Code by reason of an acquisition completed after

16 March 20, 2002, and before January 1, 2004.

17 SEC. 342. EXCISE TAX ON STOCK COMPENSATION OF INSID18 ERS IN INVERTED CORPORATIONS.

19 (a) IN GENERAL.—Subtitle D is amended by adding

20 at the end the following new chapter:

21 ‘‘CHAPTER 48—STOCK COMPENSATION OF

22 INSIDERS IN INVERTED CORPORATIONS

‘‘Sec. 5000A. Stock compensation of insiders in inverted corporations entities.
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1 ‘‘SEC. 5000A. STOCK COMPENSATION OF INSIDERS IN IN2 VERTED CORPORATIONS.

3 ‘‘(a) IMPOSITION OF TAX.—In the case of an indi4 vidual who is a disqualified individual with respect to any

5 inverted corporation, there is hereby imposed on such per6 son a tax equal to 20 percent of the value (determined under

7 subsection (b)) of the specified stock compensation held (di8 rectly or indirectly) by or for the benefit of such individual

9 or a member of such individual’s family (as defined in sec10 tion 267) at any time during the 12-month period begin11 ning on the date which is 6 months before the inversion

12 date.

13 ‘‘(b) VALUE.—For purposes of subsection (a)—

14 ‘‘(1) IN GENERAL.—The value of specified stock

15 compensation shall be—

16 ‘‘(A) in the case of a stock option (or other

17 similar right) or any stock appreciation right,

18 the fair value of such option or right, and

19 ‘‘(B) in any other case, the fair market

20 value of such compensation.

21 ‘‘(2) DATE FOR DETERMINING VALUE.—The de22 termination of value shall be made—

23 ‘‘(A) in the case of specified stock compensa24 tion held on the inversion date, on such date,

25 ‘‘(B) in the case of such compensation which

26 is canceled during the 6 months before the inver-
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1 sion date, on the day before such cancellation,

2 and

3 ‘‘(C) in the case of such compensation which

4 is granted after the inversion date, on the date

5 such compensation is granted.

6 ‘‘(c) TAX TO APPLY ONLY IF SHAREHOLDER GAIN

7 RECOGNIZED.—Subsection (a) shall apply to any disquali8 fied individual with respect to an inverted corporation only

9 if gain (if any) on any stock in such corporation is recog10 nized in whole or part by any shareholder by reason of the

11 acquisition referred to in section 7874(a)(2)(A) (determined

12 by substituting ‘July 10, 2002’ for ‘March 20, 2002’) with

13 respect to such corporation.

14 ‘‘(d) EXCEPTION WHERE GAIN RECOGNIZED ON COM15 PENSATION.—Subsection (a) shall not apply to—

16 ‘‘(1) any stock option which is exercised on the

17 inversion date or during the 6-month period before

18 such date and to the stock acquired in such exercise,

19 and

20 ‘‘(2) any specified stock compensation which is

21 sold, exchanged, or distributed during such period in

22 a transaction in which gain or loss is recognized in

23 full.

24 ‘‘(e) DEFINITIONS.—For purposes of this section—
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1 ‘‘(1) DISQUALIFIED INDIVIDUAL.—The term ‘dis2 qualified individual’ means, with respect to a cor3 poration, any individual who, at any time during the

4 12-month period beginning on the date which is 6

5 months before the inversion date—

6 ‘‘(A) is subject to the requirements of section

7 16(a) of the Securities Exchange Act of 1934

8 with respect to such corporation or any member

9 of the expanded affiliated group which includes

10 such corporation, or

11 ‘‘(B) would be subject to such requirements

12 if such corporation or member were an issuer of

13 equity securities referred to in such section.

14 ‘‘(2) INVERTED CORPORATION; INVERSION

15 DATE.—

16 ‘‘(A) INVERTED CORPORATION.—The term

17 ‘inverted corporation’ means any corporation to

18 which subsection (a) or (b) of section 7874 ap19 plies determined—

20 ‘‘(i) by substituting ‘July 10, 2002’ for

21 ‘March 20, 2002’ in section 7874(a)(2)(A),

22 and

23 ‘‘(ii) without regard to subsection

24 (b)(1)(A).
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1 Such term includes any predecessor or successor

2 of such a corporation.

3 ‘‘(B) INVERSION DATE.—The term ‘inver4 sion date’ means, with respect to a corporation,

5 the date on which the corporation first becomes

6 an inverted corporation.

7 ‘‘(3) SPECIFIED STOCK COMPENSATION.—

8 ‘‘(A) IN GENERAL.—The term ‘specified

9 stock compensation’ means payment (or right to

10 payment) granted by the inverted corporation

11 (or by any member of the expanded affiliated

12 group which includes such corporation) to any

13 person in connection with the performance of

14 services by a disqualified individual for such cor15 poration or member if the value of such payment

16 or right is based on (or determined by reference

17 to) the value (or change in value) of stock in

18 such corporation (or any such member).

19 ‘‘(B) EXCEPTIONS.—Such term shall not

20 include—

21 ‘‘(i) any option to which part II of

22 subchapter D of chapter 1 applies, or

23 ‘‘(ii) any payment or right to payment

24 from a plan referred to in section

25 280G(b)(6).
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1 ‘‘(4) EXPANDED AFFILIATED GROUP.—The term

2 ‘expanded affiliated group’ means an affiliated group

3 (as defined in section 1504(a) without regard to sec4 tion 1504(b)(3)); except that section 1504(a) shall be

5 applied by substituting ‘more than 50 percent’ for ‘at

6 least 80 percent’ each place it appears.

7 ‘‘(f) SPECIAL RULES.—For purposes of this section—

8 ‘‘(1) CANCELLATION OF RESTRICTION.—The can9 cellation of a restriction which by its terms will never

10 lapse shall be treated as a grant.

11 ‘‘(2) PAYMENT OR REIMBURSEMENT OF TAX BY

12 CORPORATION TREATED AS SPECIFIED STOCK COM13 PENSATION.—Any payment of the tax imposed by this

14 section directly or indirectly by the inverted corpora15 tion or by any member of the expanded affiliated

16 group which includes such corporation—

17 ‘‘(A) shall be treated as specified stock com18 pensation, and

19 ‘‘(B) shall not be allowed as a deduction

20 under any provision of chapter 1.

21 ‘‘(3) CERTAIN RESTRICTIONS IGNORED.—Wheth22 er there is specified stock compensation, and the value

23 thereof, shall be determined without regard to any re24 striction other than a restriction which by its terms

25 will never lapse.
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1 ‘‘(4) PROPERTY TRANSFERS.—Any transfer of

2 property shall be treated as a payment and any right

3 to a transfer of property shall be treated as a right

4 to a payment.

5 ‘‘(5) OTHER ADMINISTRATIVE PROVISIONS.—For

6 purposes of subtitle F, any tax imposed by this sec7 tion shall be treated as a tax imposed by subtitle A.

8 ‘‘(g) REGULATIONS.—The Secretary shall prescribe

9 such regulations as may be necessary or appropriate to

10 carry out the purposes of this section.’’.

11 (b) DENIAL OF DEDUCTION.—

12 (1) IN GENERAL.—Paragraph (6) of section

13 275(a) is amended by inserting ‘‘48,’’ after ‘‘46,’’.

14 (2) $1,000,000 LIMIT ON DEDUCTIBLE COM15 PENSATION REDUCED BY PAYMENT OF EXCISE TAX ON

16 SPECIFIED STOCK COMPENSATION.—Paragraph (4) of

17 section 162(m) is amended by adding at the end the

18 following new subparagraph:

19 ‘‘(G) COORDINATION WITH EXCISE TAX ON

20 SPECIFIED STOCK COMPENSATION.—The dollar

21 limitation contained in paragraph (1) with re22 spect to any covered employee shall be reduced

23 (but not below zero) by the amount of any pay24 ment (with respect to such employee) of the tax

25 imposed by section 5000A directly or indirectly
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1 by the inverted corporation (as defined in such

2 section) or by any member of the expanded affili3 ated group (as defined in such section) which in4 cludes such corporation.’’.

5 (c) CONFORMING AMENDMENTS.—

6 (1) The last sentence of section 3121(v)(2)(A) is

7 amended by inserting before the period ‘‘or to any

8 specified stock compensation (as defined in section

9 5000A) on which tax is imposed by section 5000A’’.

10 (2) The table of chapters for subtitle D is amend11 ed by adding at the end the following new item:

‘‘Chapter 48. Stock compensation of insiders in inverted corporations.’’.

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

13 section shall take effect on July 11, 2002; except that periods

14 before such date shall not be taken into account in applying

15 the periods in subsections (a) and (e)(1) of section 5000A

16 of the Internal Revenue Code of 1986, as added by this sec17 tion.

18 SEC. 343. REINSURANCE OF UNITED STATES RISKS IN FOR19 EIGN JURISDICTIONS.

20 (a) IN GENERAL.—Section 845(a) (relating to alloca21 tion in case of reinsurance agreement involving tax avoid22 ance or evasion) is amended by striking ‘‘source and char23 acter’’ and inserting ‘‘amount, source, or character’’.
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1 (b) EFFECTIVE DATE.—The amendments made by this

2 section shall apply to any risk reinsured after April 11,

3 2002.

4 PART II—OTHER PROVISIONS

5 SEC. 344. DOUBLING OF CERTAIN PENALTIES, FINES, AND

6 INTEREST ON UNDERPAYMENTS RELATED TO

7 CERTAIN OFFSHORE FINANCIAL ARRANGE8 MENT.

9 (a) GENERAL RULE.—If—

10 (1) a taxpayer eligible to participate in—

11 (A) the Department of the Treasury’s Off12 shore Voluntary Compliance Initiative, or

13 (B) the Department of the Treasury’s vol14 untary disclosure initiative which applies to the

15 taxpayer by reason of the taxpayer’s under16 reporting of United States income tax liability

17 through financial arrangements which rely on

18 the use of offshore arrangements which were the

19 subject of the initiative described in subpara20 graph (A), and

21 (2) any interest or applicable penalty is imposed

22 with respect to any arrangement to which any initia23 tive described in paragraph (1) applied or to any un24 derpayment of Federal income tax attributable to
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1 items arising in connection with any arrangement

2 described in paragraph (1),

3 then, notwithstanding any other provision of law, the

4 amount of such interest or penalty shall be equal to twice

5 that determined without regard to this section.

6 (b) DEFINITIONS AND RULES.—For purposes of this

7 section—

8 (1) APPLICABLE PENALTY.—The term ‘‘applica9 ble penalty’’ means any penalty, addition to tax, or

10 fine imposed under chapter 68 of the Internal Rev11 enue Code of 1986.

12 (2) VOLUNTARY OFFSHORE COMPLIANCE INITIA13 TIVE.—The term ‘‘Voluntary Offshore Compliance

14 Initiative’’ means the program established by the De15 partment of the Treasury in January of 2003 under

16 which any taxpayer was eligible to voluntarily dis17 close previously undisclosed income on assets placed

18 in offshore accounts and accessed through credit card

19 and other financial arrangements.

20 (3) PARTICIPATION.—A taxpayer shall be treated

21 as having participated in the Voluntary Offshore

22 Compliance Initiative if the taxpayer submitted the

23 request in a timely manner and all information re24 quested by the Secretary of the Treasury or his dele-
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1 gate within a reasonable period of time following the

2 request.

3 (c) EFFECTIVE DATE.—The provisions of this section

4 shall apply to interest penalties, additions to tax, and fines

5 with respect to any taxable year if as of May 8, 2003, the

6 assessment of any tax, penalty, or interest with respect to

7 such taxable year is not prevented by the operation of any

8 law or rule of law.

9 SEC. 345. EFFECTIVELY CONNECTED INCOME TO INCLUDE

10 CERTAIN FOREIGN SOURCE INCOME.

11 (a) IN GENERAL.—Section 864(c)(4)(B) (relating to

12 treatment of income from sources without the United States

13 as effectively connected income) is amended by adding at

14 the end the following new flush sentence:

15 ‘‘Any income or gain which is equivalent to any

16 item of income or gain described in clause (i),

17 (ii), or (iii) shall be treated in the same manner

18 as such item for purposes of this subparagraph.’’.

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

20 section shall apply to taxable years beginning after the date

21 of the enactment of this Act.

22 SEC. 346. DETERMINATION OF BASIS OF AMOUNTS PAID

23 FROM FOREIGN PENSION PLANS.

24 (a) IN GENERAL.—Section 72 (relating to annuities

25 and certain proceeds of endowment and life insurance con-
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1 tracts) is amended by redesignating subsection (w) as sub2 section (x) by inserting subsection (v) the following new

3 subsection:

4 ‘‘(w) DETERMINATION OF BASIS OF FOREIGN PENSION

5 PLANS.—Notwithstanding any other provision of this sec6 tion, for purposes of determining the portion of any dis7 tribution from a foreign pension plan which is includible

8 in gross income of the distributee, the investment in the con9 tract with respect to the plan shall not include employer

10 or employee contributions to the plan (or any earnings on

11 such contributions) unless such contributions or earnings

12 were subject to taxation by the United States or any foreign

13 government.’’.

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

15 section shall apply to distributions on or after the date of

16 the enactment of this Act.

17 SEC. 347. RECAPTURE OF OVERALL FOREIGN LOSSES ON

18 SALE OF CONTROLLED FOREIGN CORPORA19 TION.

20 (a) IN GENERAL.—Section 904(f)(3) (relating to dis21 positions) is amending by adding at the end the following

22 new subparagraph:

23 ‘‘(D) APPLICATION TO DISPOSITIONS OF

24 STOCK IN CONTROLLED FOREIGN CORPORA25 TIONS.—In the case of any disposition by a tax-
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1 payer of any share of stock in a controlled for2 eign corporation (as defined in section 957), this

3 paragraph shall apply to such disposition in the

4 same manner as if it were a disposition of prop5 erty described in subparagraph (A), except that

6 the exception contained in subparagraph (C)(i)

7 shall not apply.’’.

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

9 section shall apply to dispositions after the date of the en10 actment of this Act.

11 SEC. 348. PREVENTION OF MISMATCHING OF INTEREST

12 AND ORIGINAL ISSUE DISCOUNT DEDUC13 TIONS AND INCOME INCLUSIONS IN TRANS14 ACTIONS WITH RELATED FOREIGN PERSONS.

15 (a) ORIGINAL ISSUE DISCOUNT.—Section 163(e)(3)

16 (relating to special rule for original issue discount on obli17 gation held by related foreign person) is amended by redes18 ignating subparagraph (B) as subparagraph (C) and by in19 serting after subparagraph (A) the following new subpara20 graph:

21 ‘‘(B) SPECIAL RULE FOR CERTAIN FOREIGN

22 ENTITIES.—Notwithstanding subparagraph (A)

23 (and any regulations thereunder), in the case of

24 any debt instrument having original issue dis25 count which is held by a related foreign person
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1 which is a foreign personal holding company (as

2 defined in section 552), a controlled foreign cor3 poration (as defined in section 957), or a passive

4 foreign investment company (as defined in sec5 tion 1297), a deduction shall be allowable to the

6 issuer with respect to such original issue dis7 count for any taxable year only to the extent

8 such original issue discount is included during

9 such taxable year in the gross income of a

10 United States person who owns (within the

11 meaning of section 958(a)) stock in such cor12 poration. For purposes of this subparagraph, the

13 determination as to the proper allocation of the

14 original issue discount to shareholders shall be

15 made in such manner as the Secretary may pre16 scribe.’’.

17 (b) INTEREST AND OTHER DEDUCTIBLE AMOUNTS.—

18 Section 267(a)(3) is amended—

19 (1) by striking ‘‘The Secretary’’ and inserting:

20 ‘‘(A) IN GENERAL.—The Secretary’’, and

21 (2) by adding at the end the following new sub22 paragraph:

23 ‘‘(B) SPECIAL RULE FOR CERTAIN FOREIGN

24 ENTITIES.—Notwithstanding any regulations

25 issued under subparagraph (A), in the case of
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1 any amount payable to a foreign personal hold2 ing company (as defined in section 552), a con3 trolled foreign corporation (as defined in section

4 957), or a passive foreign investment company

5 (as defined in section 1297), a deduction shall be

6 allowable to the payor with respect to such

7 amount for any taxable year only to the extent

8 such amount is included during such taxable

9 year in the gross income of a United States per10 son who owns (within the meaning of section

11 958(a)) stock in such corporation. For purposes

12 of this subparagraph, the determination as to the

13 proper allocation of such amount to shareholders

14 shall be made in such manner as the Secretary

15 may prescribe.’’.

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

17 section shall apply to payments accrued on or after May

18 8, 2003.

19 SEC. 349. SALE OF GASOLINE AND DIESEL FUEL AT DUTY20 FREE SALES ENTERPRISES.

21 (a) PROHIBITION.—Section 555(b) of the Tariff Act of

22 1930 (19 U.S.C. 1555(b)) is amended—

23 (1) by redesignating paragraphs (6) through (8)

24 as paragraphs (7) through (9), respectively; and
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1 (2) by inserting after paragraph (5) the fol2 lowing:

3 ‘‘(6) Any gasoline or diesel fuel sold at a duty4 free sales enterprise shall be considered to be entered

5 for consumption into the customs territory of the

6 United States.’’.

7 (b) CONSTRUCTION.—The amendments made by this

8 section shall not be construed to create any inference with

9 respect to the interpretation of any provision of law as such

10 provision was in effect on the day before the date of enact11 ment of this Act.

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

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

14 SEC. 350. REPEAL OF EARNED INCOME EXCLUSION OF CITI15 ZENS OR RESIDENTS LIVING ABROAD.

16 (a) REPEAL.—Section 911 (relating to citizens or resi17 dents living abroad) is amended by adding at the end the

18 following new subsection:

19 ‘‘(g) TERMINATION.—This section shall not apply to

20 any taxable year beginning after December 31, 2003.’’.

21 (b) 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 E—Other Revenue

2 Provisions

3 SEC. 351. EXTENSION OF INTERNAL REVENUE SERVICE

4 USER FEES.

5 (a) IN GENERAL.—Chapter 77 (relating to miscella6 neous provisions) is amended by adding at the end the fol7 lowing new section:

8 ‘‘SEC. 7528. INTERNAL REVENUE SERVICE USER FEES.

9 ‘‘(a) GENERAL RULE.—The Secretary shall establish

10 a program requiring the payment of user fees for—

11 ‘‘(1) requests to the Internal Revenue Service for

12 ruling letters, opinion letters, and determination let13 ters, and

14 ‘‘(2) other similar requests.

15 ‘‘(b) PROGRAM CRITERIA.—

16 ‘‘(1) IN GENERAL.—The fees charged under the

17 program required by subsection (a)—

18 ‘‘(A) shall vary according to categories (or

19 subcategories) established by the Secretary,

20 ‘‘(B) shall be determined after taking into

21 account the average time for (and difficulty of)

22 complying with requests in each category (and

23 subcategory), and

24 ‘‘(C) shall be payable in advance.

25 ‘‘(2) EXEMPTIONS, ETC.—
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1 ‘‘(A) IN GENERAL.—The Secretary shall

2 provide for such exemptions (and reduced fees)

3 under such program as the Secretary determines

4 to be appropriate.

5 ‘‘(B) EXEMPTION FOR CERTAIN REQUESTS

6 REGARDING PENSION PLANS.—The Secretary

7 shall not require payment of user fees under such

8 program for requests for determination letters

9 with respect to the qualified status of a pension

10 benefit plan maintained solely by 1 or more eli11 gible employers or any trust which is part of the

12 plan. The preceding sentence shall not apply to

13 any request—

14 ‘‘(i) made after the later of—

15 ‘‘(I) the fifth plan year the pen16 sion benefit plan is in existence, or

17 ‘‘(II) the end of any remedial

18 amendment period with respect to the

19 plan beginning within the first 5 plan

20 years, or

21 ‘‘(ii) made by the sponsor of any proto22 type or similar plan which the sponsor in23 tends to market to participating employers.

24 ‘‘(C) DEFINITIONS AND SPECIAL RULES.—

25 For purposes of subparagraph (B)—
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1 ‘‘(i) PENSION BENEFIT PLAN.—The

2 term ‘pension benefit plan’ means a pen3 sion, profit-sharing, stock bonus, annuity,

4 or employee stock ownership plan.

5 ‘‘(ii) ELIGIBLE EMPLOYER.—The term

6 ‘eligible employer’ means an eligible em7 ployer (as defined in section

8 408(p)(2)(C)(i)(I)) which has at least 1 em9 ployee who is not a highly compensated em10 ployee (as defined in section 414(q)) and is

11 participating in the plan. The determina12 tion of whether an employer is an eligible

13 employer under subparagraph (B) shall be

14 made as of the date of the request described

15 in such subparagraph.

16 ‘‘(iii) DETERMINATION OF AVERAGE

17 FEES CHARGED.—For purposes of any de18 termination of average fees charged, any re19 quest to which subparagraph (B) applies

20 shall not be taken into account.

21 ‘‘(3) AVERAGE FEE REQUIREMENT.—The average

22 fee charged under the program required by subsection

23 (a) shall not be less than the amount determined

24 under the following table:

Average

‘‘Category Fee

Employee plan ruling and opinion .............................................. $250
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Average

‘‘Category Fee

Exempt organization ruling ......................................................... $350

Employee plan determination ...................................................... $300

Exempt organization determination ............................................ $275

Chief counsel ruling ....................................................................... $200.

1 ‘‘(c) TERMINATION.—No fee shall be imposed under

2 this section with respect to requests made after September

3 30, 2013.’’.

4 (b) CONFORMING AMENDMENTS.—

5 (1) The table of sections for chapter 77 is amend6 ed by adding at the end the following new item:

‘‘Sec. 7528. Internal Revenue Service user fees.’’.

7 (2) Section 10511 of the Revenue Act of 1987 is

8 repealed.

9 (3) Section 620 of the Economic Growth and

10 Tax Relief Reconciliation Act of 2001 is repealed.

11 (c) LIMITATIONS.—Notwithstanding any other provi12 sion of law, any fees collected pursuant to section 7528 of

13 the Internal Revenue Code of 1986, as added by subsection

14 (a), shall not be expended by the Internal Revenue Service

15 unless provided by an appropriations Act.

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

17 section shall apply to requests made after the date of the

18 enactment of this Act.
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1 SEC. 352. ADDITION OF VACCINES AGAINST HEPATITIS A TO

2 LIST OF TAXABLE VACCINES.

3 (a) IN GENERAL.—Section 4132(a)(1) (defining tax4 able vaccine) is amended by redesignating subparagraphs

5 (I), (J), (K), and (L) as subparagraphs (J), (K), (L), and

6 (M), respectively, and by inserting after subparagraph (H)

7 the following new subparagraph:

8 ‘‘(I) Any vaccine against hepatitis A.’’.

9 (b) CONFORMING AMENDMENT.—Section

10 9510(c)(1)(A) is amended by striking ‘‘October 18, 2000’’

11 and inserting ‘‘May 8, 2003’’.

12 (c) EFFECTIVE DATE.—

13 (1) SALES, ETC.—The amendments made by this

14 section shall apply to sales and uses on or after the

15 first day of the first month which begins more than

16 4 weeks after the date of the enactment of this Act.

17 (2) DELIVERIES.—For purposes of paragraph

18 (1) and section 4131 of the Internal Revenue Code of

19 1986, in the case of sales on or before the effective date

20 described in such paragraph for which delivery is

21 made after such date, the delivery date shall be con22 sidered the sale date.

23 SEC. 353. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS

24 TRANSFERS.

25 (a) TREATMENT OF CONTRIBUTED PROPERTY WITH

26 BUILT-IN LOSS.—Paragraph (1) of section 704(c) is
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1 amended by striking ‘‘and’’ at the end of subparagraph (A),

2 by striking the period at the end of subparagraph (B) and

3 inserting ‘‘, and’’, and by adding at the end the following:

4 ‘‘(C) if any property so contributed has a

5 built-in loss—

6 ‘‘(i) such built-in loss shall be taken

7 into account only in determining the

8 amount of items allocated to the contrib9 uting partner, and

10 ‘‘(ii) except as provided in regulations,

11 in determining the amount of items allo12 cated to other partners, the basis of the con13 tributed property in the hands of the part14 nership shall be treated as being equal to its

15 fair market value immediately after the

16 contribution.

17 For purposes of subparagraph (C), the term ‘built-in

18 loss’ means the excess of the adjusted basis of the

19 property (determined without regard to subparagraph

20 (C)(ii)) over its fair market value immediately after

21 the contribution.’’.

22 (b) ADJUSTMENT TO BASIS OF PARTNERSHIP PROP23 ERTY ON TRANSFER OF PARTNERSHIP INTEREST IF THERE

24 IS SUBSTANTIAL BUILT-IN LOSS.—
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1 (1) ADJUSTMENT REQUIRED.—Subsection (a) of

2 section 743 (relating to optional adjustment to basis

3 of partnership property) is amended by inserting be4 fore the period ‘‘or unless the partnership has a sub5 stantial built-in loss immediately after such transfer’’.

6 (2) ADJUSTMENT.—Subsection (b) of section 743

7 is amended by inserting ‘‘or with respect to which

8 there is a substantial built-in loss immediately after

9 such transfer’’ after ‘‘section 754 is in effect’’.

10 (3) SUBSTANTIAL BUILT-IN LOSS.—Section 743

11 is amended by adding at the end the following new

12 subsection:

13 ‘‘(d) SUBSTANTIAL BUILT-IN LOSS.—

14 ‘‘(1) IN GENERAL.—For purposes of this section,

15 a partnership has a substantial built-in loss with re16 spect to a transfer of an interest in a partnership if

17 the transferee partner’s proportionate share of the ad18 justed basis of the partnership property exceeds by

19 more than $250,000 the basis of such partner’s inter20 est in the partnership.

21 ‘‘(2) REGULATIONS.—The Secretary shall pre22 scribe such regulations as may be appropriate to

23 carry out the purposes of paragraph (1) and section

24 734(d), including regulations aggregating related

25 partnerships and disregarding property acquired by
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1 the partnership in an attempt to avoid such pur2 poses.’’.

3 (4) CLERICAL AMENDMENTS.—

4 (A) The section heading for section 743 is

5 amended to read as follows:

6 ‘‘SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROP7 ERTY WHERE SECTION 754 ELECTION OR SUB8 STANTIAL BUILT-IN LOSS.’’.

9 (B) The table of sections for subpart C of

10 part II of subchapter K of chapter 1 is amended

11 by striking the item relating to section 743 and

12 inserting the following new item:

‘‘Sec. 743. Adjustment to basis of partnership property where section 754 election or substantial built-in loss.’’.

13 (c) ADJUSTMENT TO BASIS OF UNDISTRIBUTED PART14 NERSHIP PROPERTY IF THERE IS SUBSTANTIAL BASIS RE15 DUCTION.—

16 (1) ADJUSTMENT REQUIRED.—Subsection (a) of

17 section 734 (relating to optional adjustment to basis

18 of undistributed partnership property) is amended by

19 inserting before the period ‘‘or unless there is a sub20 stantial basis reduction’’.

21 (2) ADJUSTMENT.—Subsection (b) of section 734

22 is amended by inserting ‘‘or unless there is a substan23 tial basis reduction’’ after ‘‘section 754 is in effect’’.
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1 (3) SUBSTANTIAL BASIS REDUCTION.—Section

2 734 is amended by adding at the end the following

3 new subsection:

4 ‘‘(d) SUBSTANTIAL BASIS REDUCTION.—

5 ‘‘(1) IN GENERAL.—For purposes of this section,

6 there is a substantial basis reduction with respect to

7 a distribution if the sum of the amounts described in

8 subparagraphs (A) and (B) of subsection (b)(2) ex9 ceeds $250,000.

10 ‘‘(2) REGULATIONS.—

‘‘For regulations to carry out this subsection, see

section 743(d)(2).’’.

11 (4) CLERICAL AMENDMENTS.—

12 (A) The section heading for section 734 is

13 amended to read as follows:

14 ‘‘SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED

15 PARTNERSHIP PROPERTY WHERE SECTION

16 754 ELECTION OR SUBSTANTIAL BASIS RE17 DUCTION.’’.

18 (B) The table of sections for subpart B of

19 part II of subchapter K of chapter 1 is amended

20 by striking the item relating to section 734 and

21 inserting the following new item:

‘‘Sec. 734. Adjustment to basis of undistributed partnership property where section 754 election or substantial basis

reduction.’’.

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

2 subsection (a) shall apply to contributions made after

3 the date of the enactment of this Act.

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

5 subsection (b) shall apply to transfers after the date

6 of the enactment of this Act.

7 (3) SUBSECTION (c).—The amendments made by

8 subsection (c) shall apply to distributions after the

9 date of the enactment of this Act.

10 SEC. 354. TREATMENT OF STRIPPED INTERESTS IN BOND

11 AND PREFERRED STOCK FUNDS, ETC.

12 (a) IN GENERAL.—Section 1286 (relating to tax treat13 ment of stripped bonds) is amended by redesignating sub14 section (f) as subsection (g) and by inserting after sub15 section (e) the following new subsection:

16 ‘‘(f) TREATMENT OF STRIPPED INTERESTS IN BOND

17 AND PREFERRED STOCK FUNDS, ETC.—In the case of an

18 account or entity substantially all of the assets of which

19 consist of bonds, preferred stock, or a combination thereof,

20 the Secretary may by regulations provide that rules similar

21 to the rules of this section and 305(e), as appropriate, shall

22 apply to interests in such account or entity to which (but

23 for this subsection) this section or section 305(e), as the case

24 may be, would not apply.’’.
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1 (b) CROSS REFERENCE.—Subsection (e) of section 305

2 is amended by adding at the end the following new para3 graph:

4 ‘‘(7) CROSS REFERENCE.—

‘‘For treatment of stripped interests in certain accounts or entities holding preferred stock, see section

1286(f).’’.

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

6 section shall apply to purchases and dispositions after the

7 date of the enactment of this Act.

8 SEC. 355. REPORTING OF TAXABLE MERGERS AND ACQUISI9 TIONS.

10 (a) IN GENERAL.—Subpart B of part III of subchapter

11 A of chapter 61 is amended by inserting after section 6043

12 the following new section:

13 ‘‘SEC. 6043A. TAXABLE MERGERS AND ACQUISITIONS.

14 ‘‘(a) IN GENERAL.—The acquiring corporation in any

15 taxable acquisition shall make a return (according to the

16 forms or regulations prescribed by the Secretary) setting

17 forth—

18 ‘‘(1) a description of the acquisition,

19 ‘‘(2) the name and address of each shareholder of

20 the acquired corporation who is required to recognize

21 gain (if any) as a result of the acquisition,

22 ‘‘(3) the amount of money and the fair market

23 value of other property transferred to each such share24 holder as part of such acquisition, and
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1 ‘‘(4) such other information as the Secretary

2 may prescribe.

3 To the extent provided by the Secretary, the requirements

4 of this section applicable to the acquiring corporation shall

5 be applicable to the acquired corporation and not to the

6 acquiring corporation.

7 ‘‘(b) NOMINEE REPORTING.—Any person who holds

8 stock as a nominee for another person shall furnish in the

9 manner prescribed by the Secretary to such other person

10 the information provided by the corporation under sub11 section (d).

12 ‘‘(c) TAXABLE ACQUISITION.—For purposes of this sec13 tion, the term ‘taxable acquisition’ means any acquisition

14 by a corporation of stock in or property of another corpora15 tion if any shareholder of the acquired corporation is re16 quired to recognize gain (if any) as a result of such acquisi17 tion.

18 ‘‘(d) STATEMENTS TO BE FURNISHED TO SHARE19 HOLDERS.—Every person required to make a return under

20 subsection (a) shall furnish to each shareholder whose name

21 is required to be set forth in such return a written statement

22 showing—

23 ‘‘(1) the name, address, and phone number of the

24 information contact of the person required to make

25 such return,
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1 ‘‘(2) the information required to be shown on

2 such return with respect to such shareholder, and

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

4 may prescribe.

5 The written statement required under the preceding sen6 tence shall be furnished to the shareholder on or before Jan7 uary 31 of the year following the calendar year during

8 which the taxable acquisition occurred.’’.

9 (b) ASSESSABLE PENALTIES.—

10 (1) Subparagraph (B) of section 6724(d)(1) (re11 lating to definitions) is amended by redesignating

12 clauses (ii) through (xvii) as clauses (iii) through

13 (xviii), respectively, and by inserting after clause (i)

14 the following new clause:

15 ‘‘(ii) section 6043A(a) (relating to re16 turns relating to taxable mergers and acqui17 sitions),’’.

18 (2) Paragraph (2) of section 6724(d) is amended

19 by redesignating subparagraphs (F) through (AA) as

20 subparagraphs (G) through (BB), respectively, and by

21 inserting after subparagraph (E) the following new

22 subparagraph:

23 ‘‘(F) subsections (b) and (d) of section

24 6043A (relating to returns relating to taxable

25 mergers and acquisitions).’’.
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1 (c) CLERICAL AMENDMENT.—The table of sections for

2 subpart B of part III of subchapter A of chapter 61 is

3 amended by inserting after the item relating to section 6043

4 the following new item:

‘‘Sec. 6043A. Returns relating to taxable mergers and acquisitions.’’.

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

6 section shall apply to acquisitions after the date of the en7 actment of this Act.

8 SEC. 356. MINIMUM HOLDING PERIOD FOR FOREIGN TAX

9 CREDIT ON WITHHOLDING TAXES ON INCOME

10 OTHER THAN DIVIDENDS.

11 (a) IN GENERAL.—Section 901 is amended by redesig12 nating subsection (l) as subsection (m) and by inserting

13 after subsection (k) the following new subsection:

14 ‘‘(l) MINIMUM HOLDING PERIOD FOR WITHHOLDING

15 TAXES ON GAIN AND INCOME OTHER THAN DIVIDENDS

16 ETC.—

17 ‘‘(1) IN GENERAL.—In no event shall a credit be

18 allowed under subsection (a) for any withholding tax

19 (as defined in subsection (k)) on any item of income

20 or gain with respect to any property if—

21 ‘‘(A) such property is held by the recipient

22 of the item for 15 days or less during the 30-day

23 period beginning on the date which is 15 days
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1 before the date on which the right to receive pay2 ment of such item arises, or

3 ‘‘(B) to the extent that the recipient of the

4 item is under an obligation (whether pursuant to

5 a short sale or otherwise) to make related pay6 ments with respect to positions in substantially

7 similar or related property.

8 This paragraph shall not apply to any dividend to

9 which subsection (k) applies.

10 ‘‘(2) EXCEPTION FOR TAXES PAID BY DEAL11 ERS.—

12 ‘‘(A) IN GENERAL.—Paragraph (1) shall

13 not apply to any qualified tax with respect to

14 any property held in the active conduct in a for15 eign country of a business as a dealer in such

16 property.

17 ‘‘(B) QUALIFIED TAX.—For purposes of sub18 paragraph (A), the term ‘qualified tax’ means a

19 tax paid to a foreign country (other than the for20 eign country referred to in subparagraph (A))

21 if—

22 ‘‘(i) the item to which such tax is at23 tributable is subject to taxation on a net

24 basis by the country referred to in subpara25 graph (A), and
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1 ‘‘(ii) such country allows a credit

2 against its net basis tax for the full amount

3 of the tax paid to such other foreign coun4 try.

5 ‘‘(C) DEALER.—For purposes of subpara6 graph (A), the term ‘dealer’ means—

7 ‘‘(i) with respect to a security, any

8 person to whom paragraphs (1) and (2) of

9 subsection (k) would not apply by reason of

10 paragraph (4) thereof if such security were

11 stock, and

12 ‘‘(ii) with respect to any other prop13 erty, any person with respect to whom such

14 property is described in section 1221(a)(1).

15 ‘‘(D) REGULATIONS.—The Secretary may

16 prescribe such regulations as may be appropriate

17 to carry out this paragraph, including regula18 tions to prevent the abuse of the exception pro19 vided by this paragraph and to treat other taxes

20 as qualified taxes.

21 ‘‘(3) EXCEPTIONS.—The Secretary may by regu22 lation provide that paragraph (1) shall not apply to

23 property where the Secretary determines that the ap24 plication of paragraph (1) to such property is not

25 necessary to carry out the purposes of this subsection.
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1 ‘‘(4) CERTAIN RULES TO APPLY.—Rules similar

2 to the rules of paragraphs (5), (6), and (7) of sub3 section (k) shall apply for purposes of this subsection.

4 ‘‘(5) DETERMINATION OF HOLDING PERIOD.—

5 Holding periods shall be determined for purposes of

6 this subsection without regard to section 1235 or any

7 similar rule.’’.

8 (b) CONFORMING AMENDMENT.—The heading of sub9 section (k) of section 901 is amended by inserting ‘‘ON DIVI10 DENDS’’ after ‘‘TAXES’’.

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

12 section shall apply to amounts paid or accrued more than

13 30 days after the date of the enactment of this Act.

14 SEC. 357. QUALIFIED TAX COLLECTION CONTRACTS.

15 (a) CONTRACT REQUIREMENTS.—

16 (1) IN GENERAL.—Subchapter A of chapter 64

17 (relating to collection) is amended by adding at the

18 end the following new section:

19 ‘‘SEC. 6306. QUALIFIED TAX COLLECTION CONTRACTS.

20 ‘‘(a) IN GENERAL.—Nothing in any provision of law

21 shall be construed to prevent the Secretary from entering

22 into a qualified tax collection contract.

23 ‘‘(b) QUALIFIED TAX COLLECTION CONTRACT.—For

24 purposes of this section, the term ‘qualified tax collection

25 contract’ means any contract which—
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1 ‘‘(1) is for the services of any person (other than

2 an officer or employee of the Treasury Department)

3 to locate and contact any taxpayer specified by the

4 Secretary, to request payment from such taxpayer of

5 an amount of Federal tax specified by the Secretary,

6 and to obtain financial information specified by the

7 Secretary with respect to such taxpayer, and

8 ‘‘(2) prohibits each person providing such serv9 ices under such contract from committing any act or

10 omission which employees of the Internal Revenue

11 Service are prohibited from committing in the per12 formance of similar services.

13 ‘‘(c) FEES.—The Secretary may retain and use an

14 amount not in excess of 25 percent of the amount collected

15 under any qualified tax collection contract for the costs of

16 services performed under such contract. The Secretary shall

17 keep adequate records regarding amounts so retained and

18 used. The amount credited as paid by any taxpayer shall

19 be determined without regard to this subsection.

20 ‘‘(d) NO FEDERAL LIABILITY.—The United States

21 shall not be liable for any act or omission of any person

22 performing services under a qualified tax collection con23 tract.

24 ‘‘(e) APPLICATION OF FAIR DEBT COLLECTION PRAC25 TICES ACT.—The provisions of the Fair Debt Collection
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1 Practices Act (15 U.S.C. 1692 et seq.) shall apply to any

2 qualified tax collection contract, except to the extent super3 seded by any provision of this title.

4 ‘‘(f) CROSS REFERENCES.—

5 ‘‘(1) For damages for certain unauthorized col6 lection actions by persons performing services under

7 a qualified tax collection contract, see section 7433A.

8 ‘‘(2) For application of Taxpayer Assistance Or9 ders to persons performing services under a qualified

10 tax collection contract, see section 7811(a)(4).’’.

11 (2) CONFORMING AMENDMENTS.—

12 (A) Section 7809(a) is amended by insert13 ing ‘‘6306,’’ before ‘‘7651’’.

14 (B) The table of sections for subchapter A of

15 chapter 64 is amended by adding at the end the

16 following new item:

‘‘Sec. 6306. Qualified Tax Collection Contracts.’’.

17 (b) CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED

18 COLLECTION ACTIONS BY PERSONS PERFORMING SERVICES

19 UNDER QUALIFIED TAX COLLECTION CONTRACTS.—

20 (1) IN GENERAL.—Subchapter B of chapter 76

21 (relating to proceedings by taxpayers and third par22 ties) is amended by inserting after section 7433 the

23 following new section:
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1 ‘‘SEC. 7433A. CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED

2 COLLECTION ACTIONS BY PERSONS PER3 FORMING SERVICES UNDER QUALIFIED TAX

4 COLLECTION CONTRACTS.

5 ‘‘(a) IN GENERAL.—Subject to the modifications pro6 vided by subsection (b), section 7433 shall apply to the acts

7 and omissions of any person performing services under a

8 qualified tax collection contract (as defined in section

9 6306(b)) to the same extent and in the same manner as

10 if such person were an employee of the Internal Revenue

11 Service.

12 ‘‘(b) MODIFICATIONS.—For purposes of subsection

13 (a)—

14 ‘‘(1) Any civil action brought under section 7433

15 by reason of this section shall be brought against the

16 person who entered into the qualified tax collection

17 contract with the Secretary and shall not be brought

18 against the United States.

19 ‘‘(2) Such person and not the United States shall

20 be liable for any damages and costs determined in

21 such civil action.

22 ‘‘(3) Such civil action shall not be an exclusive

23 remedy with respect to such person.

24 ‘‘(4) Subsections (c) and (d)(1) of section 7433

25 shall not apply.’’.
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1 (2) CLERICAL AMENDMENT.—The table of sec2 tions for subchapter B of chapter 76 is amended by

3 inserting after the item relating to section 7433 the

4 following new item:

‘‘Sec. 7433A. Civil damages for certain unauthorized collection actions by persons performing services under a qualified tax collection contract.’’.

5 (c) APPLICATION OF TAXPAYER ASSISTANCE ORDERS

6 TO PERSONS PERFORMING SERVICES UNDER A QUALIFIED

7 TAX COLLECTION CONTRACT.—Section 7811 (relating to

8 taxpayer assistance orders) is amended by adding at the

9 end the following new subsection:

10 ‘‘(g) APPLICATION TO PERSONS PERFORMING SERV11 ICES UNDER A QUALIFIED TAX COLLECTION CONTRACT.—

12 Any order issued or action taken by the National Taxpayer

13 Advocate pursuant to this section shall apply to persons

14 performing services under a qualified tax collection contract

15 (as defined in section 6306(b)) to the same extent and in

16 the same manner as such order or action applies to the Sec17 retary.’’.

18 (d) INELIGIBILITY OF INDIVIDUALS WHO COMMIT MIS19 CONDUCT TO PERFORM UNDER CONTRACT.—Section 1203

20 of the Internal Revenue Service Restructuring Act of 1998

21 (relating to termination of employment for misconduct) is

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

23 ‘‘(e) INDIVIDUALS PERFORMING SERVICES UNDER A

24 QUALIFIED TAX COLLECTION CONTRACT.— An individual
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1 shall cease to be permitted to perform any services under

2 any qualified tax collection contract (as defined in section

3 6306(b) of the Internal Revenue Code of 1986) if there is

4 a final determination by the Secretary of the Treasury

5 under such contract that such individual committed any

6 act or omission described under subsection (b) in connection

7 with the performance of such services.’’.

8 (e) EFFECTIVE DATE.—The amendments made to this

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

10 Act.

11 SEC. 358. EXTENSION OF CUSTOMS USER FEES.

12 Section 13031(j)(3) of the Consolidated Omnibus

13 Budget Reconciliation Act of 1985 (19 U.S.C. 58c(j)(3)) is

14 amended by striking ‘‘September 30, 2003’’ and inserting

15 ‘‘September 30, 2013’’.

16 SEC. 359. CLARIFICATION OF EXEMPTION FROM TAX FOR

17 SMALL PROPERTY AND CASUALTY INSUR18 ANCE COMPANIES.

19 (a) IN GENERAL.—Section 501(c)(15)(A) is amended

20 to read as follows:

21 ‘‘(A) Insurance companies or associations

22 other than life (including interinsurers and re23 ciprocal underwriters) if—

24 ‘‘(i) the gross receipts for the taxable

25 year do not exceed $600,000, and
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1 ‘‘(ii) more than 50 percent of such

2 gross receipts consist of premiums.’’.

3 (b) CONTROLLED GROUP RULE.—Section

4 501(c)(15)(C) is amended by inserting ‘‘, except that in ap5 plying section 1563 for purposes of section 831(b)(2)(B)(ii),

6 subparagraphs (B) and (C) of section 1563(b)(2) shall be

7 disregarded’’ before the period at the end.

8 (c) CONFORMING AMENDMENT.—Clause (i) of section

9 831(b)(2)(A) is amended by striking ‘‘exceed $350,000 but’’.

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

11 section shall apply to taxable years beginning after Decem12 ber 31, 2003.

13 SEC. 360. PARTIAL PAYMENT OF TAX LIABILITY IN INSTALL14 MENT AGREEMENTS.

15 (a) IN GENERAL.—

16 (1) Section 6159(a) (relating to authorization of

17 agreements) is amended—

18 (A) by striking ‘‘satisfy liability for pay19 ment of’’ and inserting ‘‘make payment on’’, and

20 (B) by inserting ‘‘full or partial’’ after ‘‘fa21 cilitate’’.

22 (2) Section 6159(c) (relating to Secretary re23 quired to enter into installment agreements in certain

24 cases) is amended in the matter preceding paragraph

25 (1) by inserting ‘‘full’’ before ‘‘payment’’.
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1 (b) REQUIREMENT TO REVIEW PARTIAL PAYMENT

2 AGREEMENTS EVERY TWO YEARS.—Section 6159 is

3 amended by redesignating subsections (d) and (e) as sub4 sections (e) and (f), respectively, and inserting after sub5 section (c) the following new subsection:

6 ‘‘(d) SECRETARY REQUIRED TO REVIEW INSTALL7 MENT AGREEMENTS FOR PARTIAL COLLECTION EVERY TWO

8 YEARS.—In the case of an agreement entered into by the

9 Secretary under subsection (a) for partial collection of a

10 tax liability, the Secretary shall review the agreement at

11 least once every 2 years.’’.

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

13 section shall apply to agreements entered into on or after

14 the date of the enactment of this Act.

15 SEC. 361. EXTENSION OF AMORTIZATION OF INTANGIBLES

16 TO SPORTS FRANCHISES.

17 (a) IN GENERAL.—Section 197(e) (relating to excep18 tions to definition of section 197 intangible) is amended

19 by striking paragraph (6) and by redesignating paragraphs

20 (7) and (8) as paragraphs (6) and (7), respectively.

21 (b) CONFORMING AMENDMENTS.—

22 (1)(A) Section 1056 (relating to basis limitation

23 for player contracts transferred in connection with

24 the sale of a franchise) is repealed.
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1 (B) The table of sections for part IV of sub2 chapter O of chapter 1 is amended by striking the

3 item relating to section 1056.

4 (2) Section 1253 (relating to transfers of fran5 chises, trademarks, and trade names) is amended by

6 striking subsection (e).

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

8 section shall apply to property acquired after the date of

9 the enactment of this Act.

10 SEC. 362. DEPOSITS MADE TO SUSPEND RUNNING OF IN11 TEREST ON POTENTIAL UNDERPAYMENTS.

12 (a) IN GENERAL.—Subchapter A of chapter 67 (relat13 ing to interest on underpayments) is amended by adding

14 at the end the following new section:

15 ‘‘SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF IN16 TEREST ON POTENTIAL UNDERPAYMENTS,

17 ETC.

18 ‘‘(a) AUTHORITY TO MAKE DEPOSITS OTHER THAN

19 AS PAYMENT OF TAX.—A taxpayer may make a cash de20 posit with the Secretary which may be used by the Sec21 retary to pay any tax imposed under subtitle A or B or

22 chapter 41, 42, 43, or 44 which has not been assessed at

23 the time of the deposit. Such a deposit shall be made in

24 such manner as the Secretary shall prescribe.
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1 ‘‘(b) NO INTEREST IMPOSED.—To the extent that such

2 deposit is used by the Secretary to pay tax, for purposes

3 of section 6601 (relating to interest on underpayments), the

4 tax shall be treated as paid when the deposit is made.

5 ‘‘(c) RETURN OF DEPOSIT.—Except in a case where

6 the Secretary determines that collection of tax is in jeop7 ardy, the Secretary shall return to the taxpayer any

8 amount of the deposit (to the extent not used for a payment

9 of tax) which the taxpayer requests in writing.

10 ‘‘(d) PAYMENT OF INTEREST.—

11 ‘‘(1) IN GENERAL.—For purposes of section 6611

12 (relating to interest on overpayments), a deposit

13 which is returned to a taxpayer shall be treated as a

14 payment of tax for any period to the extent (and only

15 to the extent) attributable to a disputable tax for such

16 period. Under regulations prescribed by the Secretary,

17 rules similar to the rules of section 6611(b)(2) shall

18 apply.

19 ‘‘(2) DISPUTABLE TAX.—

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

21 section, the term ‘disputable tax’ means the

22 amount of tax specified at the time of the deposit

23 as the taxpayer’s reasonable estimate of the max24 imum amount of any tax attributable to disput25 able items.
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1 ‘‘(B) SAFE HARBOR BASED ON 30-DAY LET2 TER.—In the case of a taxpayer who has been

3 issued a 30-day letter, the maximum amount of

4 tax under subparagraph (A) shall not be less

5 than the amount of the proposed deficiency speci6 fied in such letter.

7 ‘‘(3) OTHER DEFINITIONS.—For purposes of

8 paragraph (2)—

9 ‘‘(A) DISPUTABLE ITEM.—The term ‘disput10 able item’ means any item of income, gain, loss,

11 deduction, or credit if the taxpayer—

12 ‘‘(i) has a reasonable basis for its

13 treatment of such item, and

14 ‘‘(ii) reasonably believes that the Sec15 retary also has a reasonable basis for dis16 allowing the taxpayer’s treatment of such

17 item.

18 ‘‘(B) 30-DAY LETTER.—The term ‘30-day

19 letter’ means the first letter of proposed defi20 ciency which allows the taxpayer an opportunity

21 for administrative review in the Internal Rev22 enue Service Office of Appeals.

23 ‘‘(4) RATE OF INTEREST.—The rate of interest

24 allowable under this subsection shall be the Federal
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1 short-term rate determined under section 6621(b),

2 compounded daily.

3 ‘‘(e) USE OF DEPOSITS.—

4 ‘‘(1) PAYMENT OF TAX.—Except as otherwise

5 provided by the taxpayer, deposits shall be treated as

6 used for the payment of tax in the order deposited.

7 ‘‘(2) RETURNS OF DEPOSITS.—Deposits shall be

8 treated as returned to the taxpayer on a last-in, first9 out basis.’’.

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

11 subchapter A of chapter 67 is amended by adding at the

12 end the following new item:

‘‘Sec. 6603. Deposits made to suspend running of interest on potential underpayments, etc.’’.

13 (c) EFFECTIVE DATE.—

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

15 this section shall apply to deposits made after the

16 date of the enactment of this Act.

17 (2) COORDINATION WITH DEPOSITS MADE UNDER

18 REVENUE PROCEDURE 84–58.—In the case of an

19 amount held by the Secretary of the Treasury or his

20 delegate on the date of the enactment of this Act as

21 a deposit in the nature of a cash bond deposit pursu22 ant to Revenue Procedure 84–58, the date that the

23 taxpayer identifies such amount as a deposit made

24 pursuant to section 6603 of the Internal Revenue
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1 Code (as added by this Act) shall be treated as the

2 date such amount is deposited for purposes of such

3 section 6603.

4 SEC. 363. CLARIFICATION OF RULES FOR PAYMENT OF ESTI5 MATED 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. 364. LIMITATION OF DEDUCTION FOR CHARITABLE

17 CONTRIBUTIONS OF PATENTS AND SIMILAR

18 PROPERTY.

19 (a) IN GENERAL.—Section 170(e)(1)(B) (relating to

20 certain contributions of ordinary income and capital gain

21 property) is amended by striking ‘‘or’’ at the end of clause

22 (i), by adding ‘‘or’’ at the end of clause (ii), and by insert23 ing after clause (ii) the following new clause:

24 ‘‘(iii) of any patent, copyright, trade25 mark, trade name, trade secret, know-how,
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1 software, or similar property, or applica2 tions or registrations of such property,’’.

3 (b) ANTI-ABUSE RULES.—The Secretary of the Treas4 ury may prescribe such regulations or other administrative

5 guidance as may be necessary or appropriate to prevent the

6 avoidance of the purposes of section 170(e)(1)(B)(iii) of the

7 Internal Revenue Code of 1986 (as added by subsection (a)),

8 including preventing—

9 (1) the circumvention of the reduction of the

10 charitable deduction by embedding or bundling the

11 patent or similar property as part of a charitable

12 contribution of property that includes the patent or

13 similar property,

14 (2) the manipulation of the basis of the property

15 to increase the amount of the charitable deduction

16 through the use of related persons, pass-thru entities,

17 or other intermediaries, or through the use of any

18 provision of law or regulation (including the consoli19 dated return regulations), and

20 (3) a donor from changing the form of the patent

21 or similar property to property of a form for which

22 different deduction rules would apply.

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

24 section shall apply to contributions made after May 7,

25 2003.
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1 SEC. 365. EXTENSION OF TRANSFERS OF EXCESS PENSION

2 ASSETS TO RETIREE HEALTH ACCOUNTS.

3 (a) AMENDMENT OF INTERNAL REVENUE CODE OF

4 1986.—Paragraph (5) of section 420(b) (relating to expira5 tion) is amended by striking ‘‘December 31, 2005’’ and in6 serting ‘‘December 31, 2013’’.

7 (b) AMENDMENTS OF ERISA.—

8 (1) Section 101(e)(3) of the Employee Retirement

9 Income Security Act of 1974 (29 U.S.C. 1021(e)(3))

10 is amended by striking ‘‘Tax Relief Extension Act of

11 1999’’ and inserting ‘‘Jobs and Growth Tax Relief

12 Reconciliation Act of 2003’’.

13 (2) Section 403(c)(1) of such Act (29 U.S.C.

14 1103(c)(1)) is amended by striking ‘‘Tax Relief Ex15 tension Act of 1999’’ and inserting ‘‘Jobs and Growth

16 Tax Relief Reconciliation Act of 2003’’.

17 (3) Paragraph (13) of section 408(b) of such Act

18 (29 U.S.C. 1108(b)(3)) is amended—

19 (A) by striking ‘‘January 1, 2006’’ and in20 serting ‘‘January 1, 2014’’, and

21 (B) by striking ‘‘Tax Relief Extension Act

22 of 1999’’ and inserting ‘‘Jobs and Growth Tax

23 Relief Reconciliation Act of 2003’’.
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1 SEC. 366. PRORATION RULES FOR LIFE INSURANCE BUSI2 NESS OF PROPERTY AND CASUALTY INSUR3 ANCE COMPANIES.

4 (a) IN GENERAL.—Section 832(b)(4) (defining pre5 miums earned) is amended—

6 (1) by inserting ‘‘, except that any deduction at7 tributable to such reserves shall be reduced in the

8 same manner as the deductions provided by sections

9 243, 244, and 245 for a life insurance company are

10 reduced under section 805(a)(4)’’ before the period at

11 the end of the first sentence following subparagraph

12 (C), and

13 (2) by adding at the end the following new sen14 tence: ‘‘In applying section 812(d) for purposes of the

15 reduction under the third preceding sentence, only

16 gross investment income attributable to the reserves

17 described in such sentence shall be taken into ac18 count.’’.

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

20 section shall apply to taxable years beginning after Decem21 ber 31, 2003.

22 SEC. 367. MODIFICATION OF TREATMENT OF TRANSFERS

23 TO CREDITORS IN DIVISIVE REORGANIZA24 TIONS.

25 (a) IN GENERAL.—Section 361(b)(3) (relating to treat26 ment of transfers to creditors) is amended by adding at the
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1 end the following new sentence: ‘‘In the case of a reorganiza2 tion described in section 368(a)(1)(D) with respect to which

3 stock or securities of the corporation to which the assets are

4 transferred are distributed in a transaction which qualifies

5 under section 355, this paragraph shall apply only to the

6 extent that the money or other property transferred to such

7 creditors does not exceed the adjusted bases of such assets

8 transferred.’’.

9 (b) LIABILITIES IN EXCESS OF BASIS.—Section

10 357(c)(1)(B) is amended by inserting ‘‘with respect to

11 which stock or securities of the corporation to which the as12 sets are transferred are distributed in a transaction which

13 qualifies under section 355’’ after ‘‘section 368(a)(1)(D)’’.

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

15 section shall apply to transfers of money or other property,

16 or liabilities assumed, in connection with a reorganization

17 occurring on or after the date of the enactment of this Act.

18 SEC. 368. INCREASE IN AGE OF MINOR CHILDREN WHOSE

19 UNEARNED INCOME IS TAXED AS IF PARENT’S

20 INCOME.

21 (a) IN GENERAL.—Section 1(g)(2)(A) (relating to

22 child to whom subsection applies) is amended by striking

23 ‘‘age 14’’ and inserting ‘‘age 18’’.
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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. 369. CONSISTENT AMORTIZATION OF PERIODS FOR IN5 TANGIBLES.

6 (a) START-UP EXPENDITURES.—

7 (1) ALLOWANCE OF DEDUCTION.—Paragraph (1)

8 of section 195(b) (relating to start-up expenditures) is

9 amended to read as follows:

10 ‘‘(1) ALLOWANCE OF DEDUCTION.—If a taxpayer

11 elects the application of this subsection with respect to

12 any start-up expenditures—

13 ‘‘(A) the taxpayer shall be allowed a deduc14 tion for the taxable year in which the active

15 trade or business begins in an amount equal to

16 the lesser of—

17 ‘‘(i) the amount of start-up expendi18 tures with respect to the active trade or

19 business, or

20 ‘‘(ii) $5,000, reduced (but not below

21 zero) by the amount by which such start-up

22 expenditures exceed $50,000, and

23 ‘‘(B) the remainder of such start-up expend24 itures shall be allowed as a deduction ratably

25 over the 180-month period beginning with the
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1 month in which the active trade or business be2 gins.’’.

3 (2) CONFORMING AMENDMENT.—Subsection (b)

4 of section 195 is amended by striking ‘‘AMORTIZE’’

5 and inserting ‘‘DEDUCT’’ in the heading.

6 (b) ORGANIZATIONAL EXPENDITURES.—Subsection (a)

7 of section 248 (relating to organizational expenditures) is

8 amended to read as follows:

9 ‘‘(a) ELECTION TO DEDUCT.—If a corporation elects

10 the application of this subsection (in accordance with regu11 lations prescribed by the Secretary) with respect to any or12 ganizational expenditures—

13 ‘‘(1) the corporation shall be allowed a deduction

14 for the taxable year in which the corporation begins

15 business in an amount equal to the lesser of—

16 ‘‘(A) the amount of organizational expendi17 tures with respect to the taxpayer, or

18 ‘‘(B) $5,000, reduced (but not below zero) by

19 the amount by which such organizational ex20 penditures exceed $50,000, and

21 ‘‘(2) the remainder of such organizational ex22 penditures shall be allowed as a deduction ratably

23 over the 180-month period beginning with the month

24 in which the corporation begins business.’’.
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1 (c) TREATMENT OF ORGANIZATIONAL AND SYNDICA2 TION FEES OR PARTNERSHIPS.—

3 (1) IN GENERAL.—Section 709(b) (relating to

4 amortization of organization fees) is amended by re5 designating paragraph (2) as paragraph (3) and by

6 amending paragraph (1) to read as follows:

7 ‘‘(1) ALLOWANCE OF DEDUCTION.—If a taxpayer

8 elects the application of this subsection (in accordance

9 with regulations prescribed by the Secretary) with re10 spect to any organizational expenses—

11 ‘‘(A) the taxpayer shall be allowed a deduc12 tion for the taxable year in which the partner13 ship begins business in an amount equal to the

14 lesser of—

15 ‘‘(i) the amount of organizational ex16 penses with respect to the partnership, or

17 ‘‘(ii) $5,000, reduced (but not below

18 zero) by the amount by which such organi19 zational expenses exceed $50,000, and

20 ‘‘(B) the remainder of such organizational

21 expenses shall be allowed as a deduction ratably

22 over the 180-month period beginning with the

23 month in which the partnership begins business.

24 ‘‘(2) DISPOSITIONS BEFORE CLOSE OF AMORTI25 ZATION PERIOD.—In any case in which a partnership
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1 is liquidated before the end of the period to which

2 paragraph (1)(B) applies, any deferred expenses at3 tributable to the partnership which were not allowed

4 as a deduction by reason of this section may be de5 ducted to the extent allowable under section 165.’’.

6 (2) CONFORMING AMENDMENT.—Subsection (b)

7 of section 709 is amended by striking ‘‘AMORTIZA8 TION’’ and inserting ‘‘DEDUCTION’’ in the heading.

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

10 section shall apply to amounts paid or incurred after the

11 date of the enactment of this Act.

12 SEC. 370. CLARIFICATION OF DEFINITION OF NON13 QUALIFIED PREFERRED STOCK.

14 (a) IN GENERAL.—Section 351(g)(3)(A) is amended

15 by adding at the end the following: ‘‘Stock shall not be treat16 ed as participating in corporate growth to any significant

17 extent unless there is a real and meaningful likelihood of

18 the shareholder actually participating in the earnings and

19 growth of the corporation.’’

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

21 section shall apply to transactions after May 14, 2003.

22 SEC. 371. CLASS LIVES FOR UTILITY GRADING COSTS.

23 (a) GAS UTILITY PROPERTY.—Section 168(e)(3)(E)

24 (defining 15-year property) is amended by striking ‘‘and’’

25 at the end of clause (ii), by striking the period at the end
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1 of clause (iii) and inserting ‘‘, and’’, and by adding at the

2 end the following new clause:

3 ‘‘(iv) initial clearing and grading land

4 improvements with respect to gas utility

5 property.’’

6 (b) ELECTRIC UTILITY PROPERTY.—Section 168(e)(3)

7 is amended by adding at the end the following new subpara8 graph:

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

10 year property’ means initial clearing and grad11 ing land improvements with respect to any elec12 tric utility transmission and distribution plant.’’

13 (c) CONFORMING AMENDMENTS.—The table contained

14 in section 168(g)(3)(B) is amended—

15 (1) by inserting ‘‘or (E)(iv)’’ after ‘‘(E)(iii)’’,

16 and

17 (2) by adding at the end the following new item:

‘‘(F) ................................................................................................. 25’’.

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

19 section shall apply to property placed in service after the

20 date of the enactment of this Act.

21 SEC. 372. PROHIBITION ON NONRECOGNITION OF GAIN

22 THROUGH COMPLETE LIQUIDATION OF

23 HOLDING COMPANY.

24 (a) IN GENERAL.—Section 332 is amended by adding

25 at the end the following new subsection:
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1 ‘‘(d) RECOGNITION OF GAIN ON LIQUIDATION OF CER2 TAIN HOLDING COMPANIES.—

3 ‘‘(1) IN GENERAL.—Subsection (a) and section

4 331 shall not apply to any distribution in complete

5 liquidation of an applicable holding company to the

6 extent of the earnings and profits of such company.

7 ‘‘(2) APPLICABLE HOLDING COMPANY.—For pur8 poses of this subsection—

9 ‘‘(A) IN GENERAL.—The term ‘applicable

10 holding company’ means any corporation—

11 ‘‘(i) which is a member of a chain of

12 includible corporations with a common par13 ent which is a foreign corporation,

14 ‘‘(ii) the stock of which is directly

15 owned by such common parent or another

16 foreign corporation,

17 ‘‘(iii) substantially all of the assets of

18 which consist of stock in other members of

19 such chain of corporations, and

20 ‘‘(iv) which has not been in existence

21 at least 5 years as of the date of the liquida22 tion.

23 ‘‘(B) INCLUDIBLE CORPORATION.—The term

24 ‘includible corporation’ has the meaning given
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1 such term under section 1504(b) (without regard

2 to paragraph (3) thereof).’’

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

4 section shall apply to distributions in complete liquidation

5 occurring after the date of the enactment of this Act.

6 SEC. 373. LEASE TERM TO INCLUDE CERTAIN SERVICE CON7 TRACTS.

8 (a) IN GENERAL.—Section 168(i)(3) (relating to lease

9 term) is amended by adding at the end the following new

10 subparagraph:

11 ‘‘(C) SPECIAL RULE FOR SERVICE CON12 TRACTS.—In determining a lease term, there

13 shall be taken into account any optional service

14 contract or other similar arrangement.’’

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

16 section shall apply to leases entered into after the date of

17 the enactment of this Act.

18 SEC. 374. RECOGNITION OF GAIN FROM THE SALE OF A

19 PRINCIPAL RESIDENCE ACQUIRED IN A LIKE20 KIND EXCHANGE WITHIN 5 YEARS OF SALE.

21 (a) IN GENERAL.—Section 121(d) (relating to special

22 rules for exclusion of gain from sale of principal residence)

23 is amended by adding at the end the following new para24 graph:
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1 ‘‘(10) PROPERTY ACQUIRED IN LIKE-KIND EX2 CHANGE.—If a taxpayer acquired property in an ex3 change to which section 1031 applied, subsection (a)

4 shall not apply to the sale or exchange of such prop5 erty if it occurs during the 5-year period beginning

6 with the exchange to which section 1031 applied.’’

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

8 section shall apply to sales or exchanges after the date of

9 the enactment of this Act.

10 Subtitle F—Other Provisions

11 SEC. 381. TEMPORARY STATE AND LOCAL FISCAL RELIEF.

12 (a) $10,000,000,000 FOR A TEMPORARY INCREASE OF

13 THE MEDICAID FMAP.—

14 (1) PERMITTING MAINTENANCE OF FISCAL YEAR

15 2002 FMAP FOR LAST 2 CALENDAR QUARTERS OF FIS16 CAL YEAR 2003.—Subject to paragraph (5), if the

17 FMAP determined without regard to this subsection

18 for a State for fiscal year 2003 is less than the FMAP

19 as so determined for fiscal year 2002, the FMAP for

20 the State for fiscal year 2002 shall be substituted for

21 the State’s FMAP for the third and fourth calendar

22 quarters of fiscal year 2003, before the application of

23 this subsection.

24 (2) PERMITTING MAINTENANCE OF FISCAL YEAR

25 2003 FMAP FOR FIRST 3 QUARTERS OF FISCAL YEAR
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1 2004.—Subject to paragraph (5), if the FMAP deter2 mined without regard to this subsection for a State

3 for fiscal year 2004 is less than the FMAP as so de4 termined for fiscal year 2003, the FMAP for the State

5 for fiscal year 2003 shall be substituted for the State’s

6 FMAP for the first, second, and third calendar quar7 ters of fiscal year 2004, before the application of this

8 subsection.

9 (3) GENERAL 2.95 PERCENTAGE POINTS IN10 CREASE FOR LAST 2 CALENDAR QUARTERS OF FISCAL

11 YEAR 2003 AND FIRST 3 CALENDAR QUARTERS OF FIS12 CAL YEAR 2004.—Subject to paragraphs (5), (6), and

13 (7), for each State for the third and fourth calendar

14 quarters of fiscal year 2003 and for the first, second,

15 and third calendar quarters of fiscal year 2004, the

16 FMAP (taking into account the application of para17 graphs (1) and (2)) shall be increased by 2.95 per18 centage points.

19 (4) INCREASE IN CAP ON MEDICAID PAYMENTS

20 TO TERRITORIES.—Subject to paragraphs (6) and (7),

21 with respect to the third and fourth calendar quarters

22 of fiscal year 2003 and the first, second, and third

23 calendar quarters of fiscal year 2004, the amounts

24 otherwise determined for Puerto Rico, the Virgin Is25 lands, Guam, the Northern Mariana Islands, and
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1 American Samoa under subsections (f) and (g) of sec2 tion 1108 of the Social Security Act (42 U.S.C. 1308)

3 shall each be increased by an amount equal to 5.90

4 percent of such amounts.

5 (5) SCOPE OF APPLICATION.—The increases in

6 the FMAP for a State under this subsection shall

7 apply only for purposes of title XIX of the Social Se8 curity Act and shall not apply with respect to—

9 (A) disproportionate share hospital pay10 ments described in section 1923 of such Act (42

11 U.S.C. 1396r–4);

12 (B) payments under title IV or XXI of such

13 Act (42 U.S.C. 601 et seq. and 1397aa et seq.);

14 or

15 (C) any payments under XIX of such Act

16 that are based on the enhanced FMAP described

17 in section 2105(b) of such Act (42 U.S.C.

18 1397ee(b)).

19 (6) STATE ELIGIBILITY.—

20 (A) IN GENERAL.—Subject to subparagraph

21 (B), a State is eligible for an increase in its

22 FMAP under paragraph (3) or an increase in a

23 cap amount under paragraph (4) only if the eli24 gibility under its State plan under title XIX of

25 the Social Security Act (including any waiver
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1 under such title or under section 1115 of such

2 Act (42 U.S.C. 1315)) is no more restrictive than

3 the eligibility under such plan (or waiver) as in

4 effect on September 2, 2003.

5 (B) STATE REINSTATEMENT OF ELIGIBILITY

6 PERMITTED.—A State that has restricted eligi7 bility under its State plan under title XIX of the

8 Social Security Act (including any waiver under

9 such title or under section 1115 of such Act (42

10 U.S.C. 1315)) after September 2, 2003, is eligible

11 for an increase in its FMAP under paragraph

12 (3) or an increase in a cap amount under para13 graph (4) in the first calendar quarter (and sub14 sequent calendar quarters) in which the State

15 has reinstated eligibility that is no more restric16 tive than the eligibility under such plan (or

17 waiver) as in effect on September 2, 2003.

18 (C) RULE OF CONSTRUCTION.—Nothing in

19 subparagraph (A) or (B) shall be construed as

20 affecting a State’s flexibility with respect to ben21 efits offered under the State medicaid program

22 under title XIX of the Social Security Act (42

23 U.S.C. 1396 et seq.) (including any waiver

24 under such title or under section 1115 of such

25 Act (42 U.S.C. 1315)).
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1 (7) REQUIREMENT FOR CERTAIN STATES.—In

2 the case of a State that requires political subdivisions

3 within the State to contribute toward the non-Federal

4 share of expenditures under the State medicaid plan

5 required under section 1902(a)(2) of the Social Secu6 rity Act (42 U.S.C. 1396a(a)(2)), the State shall not

7 require that such political subdivisions pay a greater

8 percentage of the non-Federal share of such expendi9 tures for the third and fourth calendar quarters of fis10 cal year 2003 and the first, second and third calendar

11 quarters of fiscal year 2004, than the percentage that

12 was required by the State under such plan on April

13 1, 2003, prior to application of this subsection.

14 (8) DEFINITIONS.—In this subsection:

15 (A) FMAP.—The term ‘‘FMAP’’ means the

16 Federal medical assistance percentage, as defined

17 in section 1905(b) of the Social Security Act (42

18 U.S.C. 1396d(b)).

19 (B) STATE.—The term ‘‘State’’ has the

20 meaning given such term for purposes of title

21 XIX of the Social Security Act (42 U.S.C. 1396

22 et seq.).

23 (9) REPEAL.—Effective as of October 1, 2004,

24 this subsection is repealed.
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1 (b) $10,000,000,000 FOR ASSISTANCE IN PROVIDING

2 GOVERNMENT SERVICES.—

3 (1) ESTABLISHMENT.—

4 (A) IN GENERAL.—Not later than 45 days

5 after the date of enactment of this Act, the Sec6 retary shall establish a program under which the

7 Secretary shall make a payment to each State in

8 accordance with paragraph (2) and each unit of

9 general local government which qualifies for a

10 payment under paragraph (3).

11 (B) REQUIREMENT.—In making payments

12 under this subsection, the Secretary shall ensure

13 that not more than 72.70 percent of the amount

14 appropriated under subparagraph (C) is paid in

15 fiscal year 2003.

16 (C) APPROPRIATION.—There is authorized

17 to be appropriated and is appropriated for mak18 ing payments under this subsection,

19 $10,000,000,000. Amounts appropriated under

20 this subparagraph shall remain available for ex21 penditure through September 30, 2004.

22 (2) $6,000,000,000 PAID TO STATES.—

23 (A) AMOUNT OF PAYMENT.—

24 (i) BASED ON POPULATION.—Subject

25 to clause (ii), $6,000,000,000 of the amount
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1 appropriated under paragraph (1)(C) shall

2 be used to pay each State an amount equal

3 to the relative population proportion

4 amount described in clause (iii).

5 (ii) MINIMUM PAYMENT.—

6 (I) IN GENERAL.—No State shall

7 receive a payment under this para8 graph that is less than—

9 (aa) in the case of any of the

10 several States or the District of

11 Columbia, $30,000,000; and

12 (bb) in the case of the Com13 monwealth of Puerto Rico, the

14 United States Virgin Islands,

15 Guam, the Commonwealth of the

16 Northern Mariana Islands, or

17 American Samoa, $6,000,000.

18 (II) PRO RATA ADJUSTMENTS.—

19 The Secretary shall adjust on a pro

20 rata basis the amount of the payments

21 to States determined under this sub22 paragraph to the extent necessary to

23 comply with the requirements of sub24 clause (I).
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1 (iii) RELATIVE POPULATION PROPOR2 TION AMOUNT.—The relative population

3 proportion amount described in this clause

4 is the product of—

5 (I) $6,000,000,000; and

6 (II) the relative State population

7 proportion (defined in clause (iv)).

8 (iv) RELATIVE STATE POPULATION

9 PROPORTION DEFINED.—For purposes of

10 clause (iii)(II), the term ‘‘relative State

11 population proportion’’ means, with respect

12 to a State, the amount equal to the quotient

13 of—

14 (I) the population of the State (as

15 reported in the most recent decennial

16 census); and

17 (II) the total population of all

18 States (as reported in the most recent

19 decennial census).

20 (B) USE OF PAYMENT.—

21 (i) IN GENERAL.—Subject to clause

22 (ii), a State shall use the funds provided

23 under a payment made under this para24 graph to fund 1 or more of the following ac25 tivities:
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1 (I) Education or job training.

2 (II) Health care or other social

3 services.

4 (III) Transportation or other in5 frastructure.

6 (IV) Law enforcement or public

7 safety.

8 (V) Essential government services.

9 (ii) LIMITATION.—A State may only

10 use funds provided under a payment made

11 under this paragraph for types of expendi12 tures permitted under the most recently ap13 proved budget for the State.

14 (C) CERTIFICATION.—In order to receive a

15 payment under this paragraph for a fiscal year,

16 the State shall provide the Secretary with a cer17 tification that the State’s proposed uses of the

18 funds are consistent with subparagraph (B).

19 (3) $4,000,000,000 PAID TO UNITS OF GENERAL

20 LOCAL GOVERNMENT.—

21 (A) ELIGIBILITY.—The Secretary shall, by

22 regulation, establish procedures under which

23 units of general local government may qualify

24 for the payments provided under this paragraph.

25 Such procedures shall include a requirement that
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1 no unit of general local government shall be eli2 gible for a payment under this paragraph unless

3 the unit provides the Secretary with a certifi4 cation that the unit’s proposed uses of the funds

5 are consistent with subparagraph (C).

6 (B) AMOUNT OF PAYMENT.—

7 (i) IN GENERAL.—Subject to clause

8 (ii), the Secretary shall pay each unit of

9 general local government that qualifies for a

10 payment under the regulation required

11 under subparagraph (A), an amount equal

12 to the same ratio to $4,000,000,000 as the

13 population of such unit of general local gov14 ernment (as reported in the most recent de15 cennial census) bears to the total population

16 of all such units that qualify for a payment

17 under this paragraph (as so reported).

18 (ii) ADJUSTMENTS.—The Secretary

19 may adjust the amount of the payment oth20 erwise determined for a unit of general local

21 government under this subparagraph to the

22 extent the Secretary determines necessary to

23 ensure that all such units that would qual24 ify for a payment under this paragraph re25 ceive a payment.
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1 (C) USE OF PAYMENT.—

2 (i) IN GENERAL.—Subject to clause

3 (ii), a unit of general local government shall

4 use the funds provided under a payment

5 made under this paragraph to fund 1 or

6 more of the following activities:

7 (I) Education or job training.

8 (II) Health care or other social

9 services.

10 (III) Transportation or other in11 frastructure.

12 (IV) Law enforcement or public

13 safety.

14 (V) Essential government services.

15 (ii) LIMITATION.—A unit of general

16 local government may only use funds pro17 vided under a payment made under this

18 paragraph for types of expenditures per19 mitted under the most recently approved

20 budget for the unit.

21 (4) DEFINITIONS.—In this subsection:

22 (A) SECRETARY.—The term ‘‘Secretary’’

23 means the Secretary of the Treasury.

24 (B) STATE.—The term ‘‘State’’ means the

25 50 States, the District of Columbia, the Com-
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1 monwealth of Puerto Rico, the United States

2 Virgin Islands, Guam, the Commonwealth of the

3 Northern Mariana Islands, and American

4 Samoa.

5 (C) UNIT OF GENERAL LOCAL GOVERN6 MENT.—

7 (i) IN GENERAL.—The term ‘‘unit of

8 general local government’’ means—

9 (I) a county, parish, township,

10 city, or political subdivision of a coun11 ty, parish, township, or city, that is a

12 unit of general local government as de13 termined by the Secretary of Commerce

14 for general statistical purposes; and

15 (II) the recognized governing body

16 of an Indian tribe or Alaskan native

17 village that carries out substantial gov18 ernmental duties and powers.

19 (ii) TREATMENT OF SUBSUMED

20 AREAS.—For purposes of determining a

21 unit of general local government under this

22 subsection, the rules under section 6720(c)

23 of title 31, United States Code, shall apply.

24 (5) REPEAL.—Effective as of October 1, 2004,

25 this subsection is repealed.
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1 SEC. 382. REVIEW OF STATE AGENCY BLINDNESS AND DIS2 ABILITY DETERMINATIONS.

3 Section 1633 of the Social Security Act (42 U.S.C.

4 1383b) is amended by adding at the end the following:

5 ‘‘(e)(1) The Commissioner of Social Security shall re6 view determinations, made by State agencies pursuant to

7 subsection (a) in connection with applications for benefits

8 under this title on the basis of blindness or disability, that

9 individuals who have attained 18 years of age are blind

10 or disabled as of a specified onset date. The Commissioner

11 of Social Security shall review such a determination before

12 any action is taken to implement the determination.

13 ‘‘(2)(A) In carrying out paragraph (1), the Commis14 sioner of Social Security shall review—

15 ‘‘(i) at least 25 percent of all determinations re16 ferred to in paragraph (1) that are made in fiscal

17 year 2004; and

18 ‘‘(ii) at least 50 percent of all such determina19 tions that are made in fiscal year 2005 or thereafter.

20 ‘‘(B) In carrying out subparagraph (A), the Commis21 sioner of Social Security shall, to the extent feasible, select

22 for review the determinations which the Commissioner of

23 Social Security identifies as being the most likely to be in24 correct.’’.
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1 SEC. 383. PROHIBITION ON USE OF SCHIP FUNDS TO PRO2 VIDE COVERAGE FOR CHILDLESS ADULTS.

3 (a) GENERAL LIMITATIONS ON PAYMENTS.—Section

4 2105(c)(1) of the Social Security Act (42 U.S.C.

5 1397ee(c)(1)) is amended by inserting before the period the

6 following: ‘‘and may not include coverage of a childless

7 adult unless the childless adult is a pregnant woman. For

8 purposes of the preceding sentence, a caretaker relative (as

9 such term is defined for purposes of carrying out section

10 1931) shall not be considered a childless adult.’’.

11 (b) LIMITATION ON WAIVER AUTHORITY.—Section

12 2107 of the Social Security Act (42 U.S.C. 1397gg) is

13 amended by adding at the end the following:

14 ‘‘(f) LIMITATION OF WAIVER AUTHORITY.—Notwith15 standing subsection (e)(2)(A) and section 1115(a), the Sec16 retary may not approve a waiver, experimental, pilot, or

17 demonstration project, or an amendment to such a project

18 that has been approved as of the date of enactment of this

19 subsection, that would allow funds made available under

20 this title to be used to provide child health assistance or

21 other health benefits coverage to a childless adult, other than

22 a childless adult who is a pregnant woman. For purposes

23 of the preceding sentence, a caretaker relative (as such term

24 is defined for purposes of carrying out section 1931) shall

25 not be considered a childless adult.’’.
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1 (c) EFFECTIVE DATE.—The amendments made by this

2 section take effect on the date of enactment of this Act and

3 apply to proposals to conduct a waiver, experimental, pilot,

4 or demonstration project affecting the State children’s

5 health insurance program under title XXI of such Act, and

6 to any proposals to amend such a project, that are approved

7 or extended on or after such date of enactment.

8 (d) RULE OF CONSTRUCTION.—Nothing in this section

9 or the amendments made by this section shall be construed

10 to—

11 (1) authorize the waiver of any provision of title

12 XXI of the Social Security Act (42 U.S.C. 1397aa et

13 seq.) that is not otherwise authorized to be waived

14 under such title or under title XI of such Act (42

15 U.S.C. 1301 et seq.) as of the date of enactment of this

16 Act; or

17 (2) imply congressional approval of any waiver,

18 experimental, pilot, or demonstration project affecting

19 the State children’s health insurance program under

20 title XXI of such Act that has been approved as of

21 such date of enactment.

22 SEC. 384. MEDICAID DSH ALLOTMENTS.

23 (a) TEMPORARY INCREASE IN FLOOR FOR TREATMENT

24 AS AN EXTREMELY LOW DSH STATE UNDER THE MED25 ICAID PROGRAM.—
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1 (1) IN GENERAL.—Section 1923(f)(5) of the So2 cial Security Act (42 U.S.C. 1396r–4(f)(5)) is

3 amended—

4 (A) by striking ‘‘In the case of’’ and insert5 ing the following:

6 ‘‘(A) IN GENERAL.—In the case of’’; and

7 (B) by adding at the end the following:

8 ‘‘(B) TEMPORARY INCREASE IN FLOOR FOR

9 FISCAL YEAR 2004.—During the period that be10 gins on October 1, 2003, and ends on September

11 30, 2004, subparagraph (A) shall be applied—

12 ‘‘(i) by substituting ‘fiscal year 2002’

13 for ‘fiscal year 1999’;

14 ‘‘(iii) by substituting ‘Centers for

15 Medicare & Medicaid Services’ for ‘Health

16 Care Financing Administration’;

17 ‘‘(ii) by substituting ‘August 31, 2003’

18 for ‘August 31, 2000’;

19 ‘‘(iv) by substituting ‘3 percent’ for ‘1

20 percent’ each place it appears;

21 ‘‘(v) by substituting ‘fiscal year 2004’

22 for ‘fiscal year 2001’; and

23 ‘‘(vi) without regard to the second sen24 tence.’’.
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1 (2) EFFECTIVE DATE.—The amendments made

2 by paragraph (1) take effect on October 1, 2003, and

3 apply to DSH allotments under title XIX of the So4 cial Security Act only with respect to fiscal year

5 2004.

6 (b) ALLOTMENT ADJUSTMENT FOR CERTAIN

7 STATES.—

8 (1) IN GENERAL.—Section 1923(f) of the Social

9 Security Act (42 U.S.C. 1396r–4(f)) is amended—

10 (A) by redesignating paragraph (6) as

11 paragraph (7); and

12 (B) by inserting after paragraph (5) the fol13 lowing:

14 ‘‘(6) ALLOTMENT ADJUSTMENT FOR CERTAIN

15 STATES.—

16 ‘‘(A) TENNESSEE.—Only with respect to fis17 cal year 2004, if the statewide waiver approved

18 under section 1115 for the State of Tennessee

19 with respect to the requirements of this title (as

20 in effect on the date of enactment of this para21 graph) is revoked or terminated, the Secretary

22 shall—

23 ‘‘(i) permit the State of Tennessee to

24 submit an amendment to its State plan that

25 would describe the methodology to be used
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1 by the State (after the effective date of such

2 revocation or termination) to identify and

3 make payments to disproportionate share

4 hospitals, including children’s hospitals and

5 institutions for mental diseases or other

6 mental health facilities (other than State7 owned institutions or facilities), on the

8 basis of the proportion of patients served by

9 such hospitals that are low-income patients

10 with special needs; and

11 ‘‘(ii) provide for purposes of this sub12 section for computation of an appropriate

13 DSH allotment for the State for fiscal year

14 2004 that provides for the maximum

15 amount (permitted consistent with para16 graph (3)(B)(ii)) that does not result in

17 greater expenditures under this title than

18 would have been made if such waiver had

19 not been revoked or terminated.

20 ‘‘(B) HAWAII.—The Secretary shall compute

21 a DSH allotment for the State of Hawaii for fis22 cal year 2004 in the same manner as DSH allot23 ments are determined with respect to those States

24 to which paragraph (5) applies (but without re25 gard to the requirement under such paragraph
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1 that total expenditures under the State plan for

2 disproportionate share hospital adjustments for

3 any fiscal year exceeds 0).’’.

4 (2) TREATMENT OF INSTITUTIONS FOR MENTAL

5 DISEASES.—Section 1923(h)(1) of the Social Security

6 Act (42 U.S.C. 1396r–4(h)(1)) is amended—

7 (A) in paragraph (1), in the matter pre8 ceding subparagraph (A), by striking ‘‘Payment’’

9 and inserting ‘‘Subject to paragraph (3), pay10 ment’’; and

11 (B) by adding at the end the following:

12 ‘‘(3) SPECIAL RULE.—The limitation of para13 graph (1) shall not apply in the case of Tennessee

14 with respect to fiscal year 2004 in the case of a rev15 ocation or termination of its statewide waiver de16 scribed in subsection (f)(6)(A).’’.

17 (3) EFFECTIVE DATE.—The amendments made

18 by this subsection shall take effect as if enacted on Oc19 tober 1, 2002.
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1 TITLE IV—SMALL BUSINESS AND

2 AGRICULTURAL PROVISIONS

3 Subtitle A—Small Business

4 Provisions

5 SEC. 401. EXCLUSION OF CERTAIN INDEBTEDNESS OF

6 SMALL BUSINESS INVESTMENT COMPANIES

7 FROM ACQUISITION INDEBTEDNESS.

8 (a) IN GENERAL.—Section 514(c) (relating to acquisi9 tion indebtedness) is amended by adding at the end the fol10 lowing new paragraph:

11 ‘‘(10) CERTAIN INDEBTEDNESS OF SMALL BUSI12 NESS INVESTMENT COMPANIES.—For purposes of this

13 section, the term ‘acquisition indebtedness’ does not

14 include any indebtedness incurred by a small business

15 investment company licensed under the Small Busi16 ness Investment Act of 1958 which is evidenced by a

17 debenture—

18 ‘‘(A) issued by such company under section

19 303(a) of such Act, or

20 ‘‘(B) held or guaranteed by the Small Busi21 ness Administration.’’.

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

23 section shall apply to any indebtedness incurred after De24 cember 31, 2002, by a small business investment company

25 described in section 514(c)(10) of the Internal Revenue Code
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1 of 1986 (as added by this section) with respect to property

2 acquired by such company after such date.

3 SEC. 402. REPEAL OF OCCUPATIONAL TAXES RELATING TO

4 DISTILLED SPIRITS, WINE, AND BEER.

5 (a) REPEAL OF OCCUPATIONAL TAXES.—

6 (1) IN GENERAL.—The following provisions of

7 part II of subchapter A of chapter 51 (relating to oc8 cupational taxes) are hereby repealed:

9 (A) Subpart A (relating to proprietors of

10 distilled spirits plants, bonded wine cellars, etc.).

11 (B) Subpart B (relating to brewer).

12 (C) Subpart D (relating to wholesale deal13 ers) (other than sections 5114 and 5116).

14 (D) Subpart E (relating to retail dealers)

15 (other than section 5124).

16 (E) Subpart G (relating to general provi17 sions) (other than sections 5142, 5143, 5145, and

18 5146).

19 (2) NONBEVERAGE DOMESTIC DRAWBACK.—Sec20 tion 5131 is amended by striking ‘‘, on payment of

21 a special tax per annum,’’.

22 (3) INDUSTRIAL USE OF DISTILLED SPIRITS.—

23 Section 5276 is hereby repealed.

24 (b) CONFORMING AMENDMENTS.—
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1 (1)(A) The heading for part II of subchapter A

2 of chapter 51 and the table of subparts for such part

3 are amended to read as follows:

4 ‘‘PART II—MISCELLANEOUS PROVISIONS

‘‘Subpart A. Manufacturers of stills.

‘‘Subpart B. Nonbeverage domestic drawback claimants.

‘‘Subpart C. Recordkeeping by dealers.

‘‘Subpart D. Other provisions.’’.

5 (B) The table of parts for such subchapter A is

6 amended by striking the item relating to part II and

7 inserting the following new item:

‘‘Part II. Miscellaneous provisions.’’.

8 (2) Subpart C of part II of such subchapter (re9 lating to manufacturers of stills) is redesignated as

10 subpart A.

11 (3)(A) Subpart F of such part II (relating to

12 nonbeverage domestic drawback claimants) is redesig13 nated as subpart B and sections 5131 through 5134

14 are redesignated as sections 5111 through 5114, re15 spectively.

16 (B) The table of sections for such subpart B, as

17 so redesignated, is amended—

18 (i) by redesignating the items relating to

19 sections 5131 through 5134 as relating to sec20 tions 5111 through 5114, respectively, and

21 (ii) by striking ‘‘and rate of tax’’ in the

22 item relating to section 5111, as so redesignated.
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1 (C) Section 5111, as redesignated by subpara2 graph (A), is amended—

3 (i) by striking ‘‘AND RATE OF TAX’’ in

4 the section heading,

5 (ii) by striking the subsection heading for

6 subsection (a), and

7 (iii) by striking subsection (b).

8 (4) Part II of subchapter A of chapter 51 is

9 amended by adding after subpart B, as redesignated

10 by paragraph (3), the following new subpart:

11 ‘‘Subpart C—Recordkeeping by Dealers

‘‘Sec. 5121. Recordkeeping by wholesale dealers.

‘‘Sec. 5122. Recordkeeping by retail dealers.

‘‘Sec. 5123. Preservation and inspection of records, and entry of

premises for inspection.’’.

12 (5)(A) Section 5114 (relating to records) is

13 moved to subpart C of such part II and inserted after

14 the table of sections for such subpart.

15 (B) Section 5114 is amended—

16 (i) by striking the section heading and in17 serting the following new heading:

18 ‘‘SEC. 5121. RECORDKEEPING BY WHOLESALE DEALERS.’’,

19 and

20 (ii) by redesignating subsection (c) as sub21 section (d) and by inserting after subsection (b)

22 the following new subsection:
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1 ‘‘(c) WHOLESALE DEALERS.—For purposes of this

2 part—

3 ‘‘(1) WHOLESALE DEALER IN LIQUORS.—The

4 term ‘wholesale dealer in liquors’ means any dealer

5 (other than a wholesale dealer in beer) who sells, or

6 offers for sale, distilled spirits, wines, or beer, to an7 other dealer.

8 ‘‘(2) WHOLESALE DEALER IN BEER.—The term

9 ‘wholesale dealer in beer’ means any dealer who sells,

10 or offers for sale, beer, but not distilled spirits or

11 wines, to another dealer.

12 ‘‘(3) DEALER.—The term ‘dealer’ means any

13 person who sells, or offers for sale, any distilled spir14 its, wines, or beer.

15 ‘‘(4) PRESUMPTION IN CASE OF SALE OF 20 WINE

16 GALLONS OR MORE.—The sale, or offer for sale, of dis17 tilled spirits, wines, or beer, in quantities of 20 wine

18 gallons or more to the same person at the same time,

19 shall be presumptive evidence that the person making

20 such sale, or offer for sale, is engaged in or carrying

21 on the business of a wholesale dealer in liquors or a

22 wholesale dealer in beer, as the case may be. Such

23 presumption may be overcome by evidence satisfac24 torily showing that such sale, or offer for sale, was

25 made to a person other than a dealer.’’.
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1 (C) Paragraph (3) of section 5121(d), as so re2 designated, is amended by striking ‘‘section 5146’’

3 and inserting ‘‘section 5123’’.

4 (6)(A) Section 5124 (relating to records) is

5 moved to subpart C of part II of subchapter A of

6 chapter 51 and inserted after section 5121.

7 (B) Section 5124 is amended—

8 (i) by striking the section heading and in9 serting the following new heading:

10 ‘‘SEC. 5122. RECORDKEEPING BY RETAIL DEALERS.’’,

11 (ii) by striking ‘‘section 5146’’ in subsection

12 (c) and inserting ‘‘section 5123’’, and

13 (iii) by redesignating subsection (c) as sub14 section (d) and inserting after subsection (b) the

15 following new subsection:

16 ‘‘(c) RETAIL DEALERS.—For purposes of this

17 section—

18 ‘‘(1) RETAIL DEALER IN LIQUORS.—The term

19 ‘retail dealer in liquors’ means any dealer (other than

20 a retail dealer in beer) who sells, or offers for sale,

21 distilled spirits, wines, or beer, to any person other

22 than a dealer.

23 ‘‘(2) RETAIL DEALER IN BEER.—The term ‘retail

24 dealer in beer’ means any dealer who sells, or offers
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1 for sale, beer, but not distilled spirits or wines, to any

2 person other than a dealer.

3 ‘‘(3) DEALER.—The term ‘dealer’ has the mean4 ing given such term by section 5121(c)(3).’’.

5 (7) Section 5146 is moved to subpart C of part

6 II of subchapter A of chapter 51, inserted after section

7 5122, and redesignated as section 5123.

8 (8) Part II of subchapter A of chapter 51 is

9 amended by inserting after subpart C the following

10 new subpart:

11 ‘‘Subpart D—Other Provisions

‘‘Sec. 5131. Packaging distilled spirits for industrial uses.

‘‘Sec. 5132. Prohibited purchases by dealers.’’.

12 (9) Section 5116 is moved to subpart D of part

13 II of subchapter A of chapter 51, inserted after the

14 table of sections, redesignated as section 5131, and

15 amended by inserting ‘‘(as defined in section

16 5121(c))’’ after ‘‘dealer’’ in subsection (a).

17 (10) Subpart D of part II of subchapter A of

18 chapter 51 is amended by adding at the end thereof

19 the following new section:

20 ‘‘SEC. 5132. PROHIBITED PURCHASES BY DEALERS.

21 ‘‘(a) IN GENERAL.—Except as provided in regulations

22 prescribed by the Secretary, it shall be unlawful for a dealer

23 to purchase distilled spirits for resale from any person other
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1 than a wholesale dealer in liquors who is required to keep

2 the records prescribed by section 5121.

3 ‘‘(b) PENALTY AND FORFEITURE.—

‘‘For penalty and forfeiture provisions applicable

to violations of subsection (a), see sections 5687 and

7302.’’.

4 (11) Subsection (b) of section 5002 is amended—

5 (A) by striking ‘‘section 5112(a)’’ and in6 serting ‘‘section 5121(c)(3)’’,

7 (B) by striking ‘‘section 5112’’ and insert8 ing ‘‘section 5121(c)’’,

9 (C) by striking ‘‘section 5122’’ and insert10 ing ‘‘section 5122(c)’’.

11 (12) Subparagraph (A) of section 5010(c)(2) is

12 amended by striking ‘‘section 5134’’ and inserting

13 ‘‘section 5114’’.

14 (13) Subsection (d) of section 5052 is amended

15 to read as follows:

16 ‘‘(d) BREWER.—For purposes of this chapter, the term

17 ‘brewer’ means any person who brews beer or produces beer

18 for sale. Such term shall not include any person who pro19 duces only beer exempt from tax under section 5053(e).’’.

20 (14) The text of section 5182 is amended to read

21 as follows:
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1 ‘‘For provisions requiring recordkeeping by

2 wholesale liquor dealers, see section 5121, and by re3 tail liquor dealers, see section 5122.’’.

4 (15) Subsection (b) of section 5402 is amended

5 by striking ‘‘section 5092’’ and inserting ‘‘section

6 5052(d)’’.

7 (16) Section 5671 is amended by striking ‘‘or

8 5091’’.

9 (17)(A) Part V of subchapter J of chapter 51 is

10 hereby repealed.

11 (B) The table of parts for such subchapter J is

12 amended by striking the item relating to part V.

13 (18)(A) Sections 5142, 5143, and 5145 are

14 moved to subchapter D of chapter 52, inserted after

15 section 5731, redesignated as sections 5732, 5733, and

16 5734, respectively, and amended by striking ‘‘this

17 part’’ each place it appears and inserting ‘‘this sub18 chapter’’.

19 (B) Section 5732, as redesignated by subpara20 graph (A), is amended by striking ‘‘(except the tax

21 imposed by section 5131)’’ each place it appears.

22 (C) Paragraph (2) of section 5733(c), as redesig23 nated by subparagraph (A), is amended by striking

24 ‘‘liquors’’ both places it appears and inserting ‘‘to25 bacco products and cigarette papers and tubes’’.
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1 (D) The table of sections for subchapter D of

2 chapter 52 is amended by adding at the end thereof

3 the following:

‘‘Sec. 5732. Payment of tax.

‘‘Sec. 5733. Provisions relating to liability for occupational taxes.

‘‘Sec. 5734. Application of State laws.’’.

4 (E) Section 5731 is amended by striking sub5 section (c) and by redesignating subsection (d) as sub6 section (c).

7 (19) Subsection (c) of section 6071 is amended

8 by striking ‘‘section 5142’’ and inserting ‘‘section

9 5732’’.

10 (20) Paragraph (1) of section 7652(g) is

11 amended—

12 (A) by striking ‘‘subpart F’’ and inserting

13 ‘‘subpart B’’, and

14 (B) by striking ‘‘section 5131(a)’’ and in15 serting ‘‘section 5111’’.

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

17 section shall take effect on July 1, 2003, but shall not apply

18 to taxes imposed for periods before such date.

19 SEC. 403. CUSTOM GUNSMITHS.

20 (a) SMALL MANUFACTURERS EXEMPT FROM FIRE21 ARMS EXCISE TAX.—Section 4182 (relating to exemptions)

22 is amended by redesignating subsection (c) as subsection (d)

23 and by inserting after subsection (b) the following new sub24 section:
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1 ‘‘(c) SMALL MANUFACTURERS, ETC.—

2 ‘‘(1) IN GENERAL.—The tax imposed by section

3 4181 shall not apply to any article described in such

4 section if manufactured, produced, or imported by a

5 person who manufactures, produces, and imports less

6 than 50 of such articles during the calendar year.

7 ‘‘(2) CONTROLLED GROUPS.—All persons treated

8 as a single employer for purposes of subsection (a) or

9 (b) of section 52 shall be treated as one person for

10 purposes of paragraph (1).’’.

11 (b) EFFECTIVE DATE.—

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

13 this section shall apply to articles sold by the manu14 facturer, producer, or importer on or after the date

15 which is the first day of the month beginning at least

16 2 weeks after the date of the enactment of this Act.

17 (2) NO INFERENCE.—Nothing in the amend18 ments made by this section shall be construed to cre19 ate any inference with respect to the proper tax treat20 ment of any sales before the effective date of such

21 amendments.

22 SEC. 404. SIMPLIFICATION OF EXCISE TAX IMPOSED ON

23 BOWS AND ARROWS.

24 (a) BOWS.—Section 4161(b)(1) (relating to bows) is

25 amended to read as follows:
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1 ‘‘(1) BOWS.—

2 ‘‘(A) IN GENERAL.—There is hereby im3 posed on the sale by the manufacturer, producer,

4 or importer of any bow which has a draw weight

5 of 30 pounds or more, a tax equal to 11 percent

6 of the price for which so sold.

7 ‘‘(B) ARCHERY EQUIPMENT.—There is here8 by imposed on the sale by the manufacturer, pro9 ducer, or importer—

10 ‘‘(i) of any part or accessory suitable

11 for inclusion in or attachment to a bow de12 scribed in subparagraph (A), and

13 ‘‘(ii) of any quiver or broadhead suit14 able for use with an arrow described in

15 paragraph (3),

16 a tax equal to 11 percent of the price for which

17 so sold.’’.

18 (b) ARROWS.—Section 4161(b) (relating to bows and

19 arrows, etc.) is amended by redesignating paragraph (3)

20 as paragraph (4) and inserting after paragraph (2) the fol21 lowing:

22 ‘‘(3) ARROWS.—

23 ‘‘(A) IN GENERAL.—There is hereby im24 posed on the sale by the manufacturer, producer,
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1 or importer of any arrow, a tax equal to 12 per2 cent of the price for which so sold.

3 ‘‘(B) EXCEPTION.—The tax imposed by sub4 paragraph (A) on an arrow shall not apply if

5 the arrow contains an arrow shaft subject to the

6 tax imposed by paragraph (2).

7 ‘‘(C) ARROW.—For purposes of this para8 graph, the term ‘arrow’ means any shaft de9 scribed in paragraph (2) to which additional

10 components are attached.’’.

11 (c) CONFORMING AMENDMENT.—The heading of sec12 tion 4161(b)(2) (relating to arrows) is amended by striking

13 ‘‘ARROWS.—’’ and inserting ‘‘ARROW COMPONENTS.—’’.

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

15 section shall apply to articles sold by the manufacturer,

16 producer, or importer after the date of the enactment of this

17 Act.

18 Subtitle B—Agricultural Provisions

19 SEC. 411. CAPITAL GAIN TREATMENT UNDER SECTION

20 631(b) TO APPLY TO OUTRIGHT SALES BY

21 LANDOWNERS.

22 (a) IN GENERAL.—The first sentence of section 631(b)

23 (relating to disposal of timber with a retained economic in24 terest) is amended by striking ‘‘retains an economic interest

25 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 AMENDMENT.—The third sentence of

4 section 631(b) is amended by striking ‘‘The date of dis5 posal’’ and inserting ‘‘In the case of disposal of timber with

6 a retained economic interest, the date of disposal’’.

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

8 section shall apply to sales after the date of the enactment

9 of this Act.

10 SEC. 412. SPECIAL RULES FOR LIVESTOCK SOLD ON AC11 COUNT OF WEATHER-RELATED CONDITIONS.

12 (a) RULES FOR REPLACEMENT OF INVOLUNTARILY

13 CONVERTED LIVESTOCK.—Subsection (e) of section 1033

14 (relating to involuntary conversions) is amended—

15 (1) by striking ‘‘CONDITIONS.—For purposes’’

16 and inserting ‘‘CONDITIONS.—

17 ‘‘(1) IN GENERAL.—For purposes’’, and

18 (2) by adding at the end the following new para19 graph:

20 ‘‘(2) EXTENSION OF REPLACEMENT PERIOD.—

21 ‘‘(A) IN GENERAL.—In the case of drought,

22 flood, or other weather-related conditions de23 scribed in paragraph (1) which result in the

24 area being designated as eligible for assistance

25 by the Federal Government, subsection (a)(2)(B)
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1 shall be applied with respect to any converted

2 property by substituting ‘4 years’ for ‘2 years’.

3 ‘‘(B) FURTHER EXTENSION BY SEC4 RETARY.—The Secretary may extend on a re5 gional basis the period for replacement under

6 this section (after the application of subpara7 graph (A)) for such additional time as the Sec8 retary determines appropriate if the weather-re9 lated conditions which resulted in such applica10 tion continue for more than 3 years.’’.

11 (b) INCOME INCLUSION RULES.—Section 451(e) (relat12 ing to special rule for proceeds from livestock sold on ac13 count of drought, flood, or other weather-related conditions)

14 is amended by adding at the end the following new para15 graph:

16 ‘‘(3) SPECIAL ELECTION RULES.—If section

17 1033(e)(2) applies to a sale or exchange of livestock

18 described in paragraph (1), the election under para19 graph (1) shall be deemed valid if made during the

20 replacement period described in such section.’’.

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

22 section shall apply to any taxable year with respect to

23 which the due date of the return is after December 31, 2002.
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1 SEC. 413. EXCLUSION FOR LOAN PAYMENTS UNDER NA2 TIONAL HEALTH SERVICE CORPS LOAN RE3 PAYMENT PROGRAM.

4 (a) IN GENERAL.—Section 108(f) (relating to student

5 loans) is amended by adding at the end the following new

6 paragraph:

7 ‘‘(4) LOAN PAYMENTS UNDER NATIONAL HEALTH

8 SERVICE CORPS LOAN REPAYMENT PROGRAM.—In the

9 case of an individual, gross income shall not include

10 any amount received under section 338B(g) of the

11 Public Health Service Act.’’.

12 (b) EFFECTIVE DATE.—The amendment made by sub13 section (a) shall apply to amounts received by an indi14 vidual in taxable years beginning after December 31, 2002.

15 SEC. 414. PAYMENT OF DIVIDENDS ON STOCK OF COOPERA16 TIVES WITHOUT REDUCING PATRONAGE DIVI17 DENDS.

18 (a) IN GENERAL.—Subsection (a) of section 1388 (re19 lating to patronage dividend defined) is amended by adding

20 at the end the following: ‘‘For purposes of paragraph (3),

21 net earnings shall not be reduced by amounts paid during

22 the year as dividends on capital stock or other proprietary

23 capital interests of the organization to the extent that the

24 articles of incorporation or bylaws of such organization or

25 other contract with patrons provide that such dividends are

26 in addition to amounts otherwise payable to patrons which
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1 are derived from business done with or for patrons during

2 the taxable year.’’.

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

4 section shall apply to distributions in taxable years ending

5 after the date of the enactment of this Act.

6 TITLE V—SIMPLIFICATION AND

7 OTHER PROVISIONS

8 Subtitle A—Uniform Definition of

9 Child

10 SEC. 501. UNIFORM DEFINITION OF CHILD, ETC.

11 Section 152 is amended to read as follows:

12 ‘‘SEC. 152. DEPENDENT DEFINED.

13 ‘‘(a) IN GENERAL.—For purposes of this subtitle, the

14 term ‘dependent’ means—

15 ‘‘(1) a qualifying child, or

16 ‘‘(2) a qualifying relative.

17 ‘‘(b) EXCEPTIONS.—For purposes of this section—

18 ‘‘(1) DEPENDENTS INELIGIBLE.—If an indi19 vidual is a dependent of a taxpayer for any taxable

20 year of such taxpayer beginning in a calendar year,

21 such individual shall be treated as having no depend22 ents for any taxable year of such individual begin23 ning in such calendar year.

24 ‘‘(2) MARRIED DEPENDENTS.—An individual

25 shall not be treated as a dependent of a taxpayer
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1 under subsection (a) if such individual has made a

2 joint return with the individual’s spouse under sec3 tion 6013 for the taxable year beginning in the cal4 endar year in which the taxable year of the taxpayer

5 begins.

6 ‘‘(3) CITIZENS OR NATIONALS OF OTHER COUN7 TRIES.—

8 ‘‘(A) IN GENERAL.—The term ‘dependent’

9 does not include an individual who is not a cit10 izen or national of the United States unless such

11 individual is a resident of the United States or

12 a country contiguous to the United States.

13 ‘‘(B) EXCEPTION FOR ADOPTED CHILD.—

14 Subparagraph (A) shall not exclude any child of

15 a taxpayer (within the meaning of subsection

16 (f)(1)(B)) from the definition of ‘dependent’ if—

17 ‘‘(i) for the taxable year of the tax18 payer, the child’s principal place of abode is

19 the home of the taxpayer, and

20 ‘‘(ii) the taxpayer is a citizen or na21 tional of the United States.

22 ‘‘(c) QUALIFYING CHILD.—For purposes of this

23 section—
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1 ‘‘(1) IN GENERAL.—The term ‘qualifying child’

2 means, with respect to any taxpayer for any taxable

3 year, an individual—

4 ‘‘(A) who bears a relationship to the tax5 payer described in paragraph (2),

6 ‘‘(B) who has the same principal place of

7 abode as the taxpayer for more than one-half of

8 such taxable year,

9 ‘‘(C) who meets the age requirements of

10 paragraph (3), and

11 ‘‘(D) who has not provided over one-half of

12 such individual’s own support for the calendar

13 year in which the taxable year of the taxpayer

14 begins.

15 ‘‘(2) RELATIONSHIP TEST.—For purposes of

16 paragraph (1)(A), an individual bears a relationship

17 to the taxpayer described in this paragraph if such

18 individual is—

19 ‘‘(A) a child of the taxpayer or a descendant

20 of such a child, or

21 ‘‘(B) a brother, sister, stepbrother, or step22 sister of the taxpayer or a descendant of any

23 such relative.

24 ‘‘(3) AGE REQUIREMENTS.—
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1 ‘‘(A) IN GENERAL.—For purposes of para2 graph (1)(C), an individual meets the require3 ments of this paragraph if such individual—

4 ‘‘(i) has not attained the age of 19 as

5 of the close of the calendar year in which

6 the taxable year of the taxpayer begins, or

7 ‘‘(ii) is a student who has not attained

8 the age of 24 as of the close of such calendar

9 year.

10 ‘‘(B) SPECIAL RULE FOR DISABLED.—In

11 the case of an individual who is permanently

12 and totally disabled (as defined in section

13 22(e)(3)) at any time during such calendar year,

14 the requirements of subparagraph (A) shall be

15 treated as met with respect to such individual.

16 ‘‘(4) SPECIAL RULE RELATING TO 2 OR MORE

17 CLAIMING QUALIFYING CHILD.—

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

19 subparagraph (B) and subsection (e), if (but for

20 this paragraph) an individual may be and is

21 claimed as a qualifying child by 2 or more tax22 payers for a taxable year beginning in the same

23 calendar year, such individual shall be treated as

24 the qualifying child of the taxpayer who is—

25 ‘‘(i) a parent of the individual, or
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1 ‘‘(ii) if clause (i) does not apply, the

2 taxpayer with the highest adjusted gross in3 come for such taxable year.

4 ‘‘(B) MORE THAN 1 PARENT CLAIMING

5 QUALIFYING CHILD.—If the parents claiming

6 any qualifying child do not file a joint return to7 gether, such child shall be treated as the quali8 fying child of—

9 ‘‘(i) the parent with whom the child re10 sided for the longest period of time during

11 the taxable year, or

12 ‘‘(ii) if the child resides with both par13 ents for the same amount of time during

14 such taxable year, the parent with the high15 est adjusted gross income.

16 ‘‘(d) QUALIFYING RELATIVE.—For purposes of this

17 section—

18 ‘‘(1) IN GENERAL.—The term ‘qualifying rel19 ative’ means, with respect to any taxpayer for any

20 taxable year, an individual—

21 ‘‘(A) who bears a relationship to the tax22 payer described in paragraph (2),

23 ‘‘(B) whose gross income for the calendar

24 year in which such taxable year begins is less
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1 than the exemption amount (as defined in sec2 tion 151(d)),

3 ‘‘(C) with respect to whom the taxpayer

4 provides over one-half of the individual’s support

5 for the calendar year in which such taxable year

6 begins, and

7 ‘‘(D) who is not a qualifying child of such

8 taxpayer or of any other taxpayer for any tax9 able year beginning in the calendar year in

10 which such taxable year begins.

11 ‘‘(2) RELATIONSHIP.—For purposes of para12 graph (1)(A), an individual bears a relationship to

13 the taxpayer described in this paragraph if the indi14 vidual is any of the following with respect to the tax15 payer:

16 ‘‘(A) A child or a descendant of a child.

17 ‘‘(B) A brother, sister, stepbrother, or step18 sister.

19 ‘‘(C) The father or mother, or an ancestor of

20 either.

21 ‘‘(D) A stepfather or stepmother.

22 ‘‘(E) A son or daughter of a brother or sis23 ter of the taxpayer.

24 ‘‘(F) A brother or sister of the father or

25 mother of the taxpayer.
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1 ‘‘(G) A son-in-law, daughter-in-law, father2 in-law, mother-in-law, brother-in-law, or sister3 in-law.

4 ‘‘(H) An individual (other than an indi5 vidual who at any time during the taxable year

6 was the spouse, determined without regard to

7 section 7703, of the taxpayer) who, for the tax8 able year of the taxpayer, has as such individ9 ual’s principal place of abode the home of the

10 taxpayer and is a member of the taxpayer’s

11 household.

12 ‘‘(3) SPECIAL RULE RELATING TO MULTIPLE

13 SUPPORT AGREEMENTS.—For purposes of paragraph

14 (1)(C), over one-half of the support of an individual

15 for a calendar year shall be treated as received from

16 the taxpayer if—

17 ‘‘(A) no one person contributed over one-half

18 of such support,

19 ‘‘(B) over one-half of such support was re20 ceived from 2 or more persons each of whom, but

21 for the fact that any such person alone did not

22 contribute over one-half of such support, would

23 have been entitled to claim such individual as a

24 dependent for a taxable year beginning in such

25 calendar year,
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1 ‘‘(C) the taxpayer contributed over 10 per2 cent of such support, and

3 ‘‘(D) each person described in subparagraph

4 (B) (other than the taxpayer) who contributed

5 over 10 percent of such support files a written

6 declaration (in such manner and form as the

7 Secretary may by regulations prescribe) that

8 such person will not claim such individual as a

9 dependent for any taxable year beginning in

10 such calendar year.

11 ‘‘(4) SPECIAL RULE RELATING TO INCOME OF

12 HANDICAPPED DEPENDENTS.—

13 ‘‘(A) IN GENERAL.—For purposes of para14 graph (1)(B), the gross income of an individual

15 who is permanently and totally disabled (as de16 fined in section 22(e)(3)) at any time during the

17 taxable year shall not include income attrib18 utable to services performed by the individual at

19 a sheltered workshop if—

20 ‘‘(i) the availability of medical care at

21 such workshop is the principal reason for

22 the individual’s presence there, and

23 ‘‘(ii) the income arises solely from ac24 tivities at such workshop which are incident

25 to such medical care.
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1 ‘‘(B) SHELTERED WORKSHOP DEFINED.—

2 For purposes of subparagraph (A), the term

3 ‘sheltered workshop’ means a school—

4 ‘‘(i) which provides special instruction

5 or training designed to alleviate the dis6 ability of the individual, and

7 ‘‘(ii) which is operated by an organiza8 tion described in section 501(c)(3) and ex9 empt from tax under section 501(a), or by

10 a State, a possession of the United States,

11 any political subdivision of any of the fore12 going, the United States, or the District of

13 Columbia.

14 ‘‘(5) SPECIAL SUPPORT TEST IN CASE OF STU15 DENTS.—For purposes of paragraph (1)(C), in the

16 case of an individual who is—

17 ‘‘(A) a child of the taxpayer, and

18 ‘‘(B) a student,

19 amounts received as scholarships for study at an edu20 cational organization described in section

21 170(b)(1)(A)(ii) shall not be taken into account in de22 termining whether such individual received more than

23 one-half of such individual’s support from the tax24 payer.
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1 ‘‘(6) SPECIAL RULES FOR SUPPORT.—For pur2 poses of this subsection—

3 ‘‘(A) payments to a spouse which are in4 cludible in the gross income of such spouse under

5 section 71 or 682 shall not be treated as a pay6 ment by the payor spouse for the support of any

7 dependent,

8 ‘‘(B) amounts expended for the support of a

9 child or children shall be treated as received from

10 the noncustodial parent (as defined in subsection

11 (e)(3)(B)) to the extent that such parent provided

12 amounts for such support, and

13 ‘‘(C) in the case of the remarriage of a par14 ent, support of a child received from the parent’s

15 spouse shall be treated as received from the par16 ent.

17 ‘‘(e) SPECIAL RULE FOR DIVORCED PARENTS.—

18 ‘‘(1) IN GENERAL.—Notwithstanding subsection

19 (c)(4) or (d)(1)(C), if—

20 ‘‘(A) a child receives over one-half of the

21 child’s support during the calendar year from

22 the child’s parents—

23 ‘‘(i) who are divorced or legally sepa24 rated under a decree of divorce or separate

25 maintenance,
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1 ‘‘(ii) who are separated under a writ2 ten separation agreement, or

3 ‘‘(iii) who live apart at all times dur4 ing the last 6 months of the calendar year,

5 and

6 ‘‘(B) such child is in the custody of 1 or

both of the child’s parents for more than 1 7 ⁄2 of

8 the calendar year,

9 such child shall be treated as being the qualifying

10 child or qualifying relative of the noncustodial parent

11 for a calendar year if the requirements described in

12 paragraph (2) are met.

13 ‘‘(2) REQUIREMENTS.—For purposes of para14 graph (1), the requirements described in this para15 graph are met if—

16 ‘‘(A) a decree of divorce or separate mainte17 nance or written agreement between the parents

18 applicable to the taxable year beginning in such

19 calendar year provides that—

20 ‘‘(i) the noncustodial parent shall be

21 entitled to any deduction allowable under

22 section 151 for such child, or

23 ‘‘(ii) the custodial parent will sign a

24 written declaration that such parent will
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1 not claim such child as a dependent for

2 such taxable year, and

3 ‘‘(B) in the case of such an agreement exe4 cuted before January 1, 1985, the noncustodial

5 parent provides at least $600 for the support of

6 such child during such calendar year.

7 ‘‘(3) CUSTODIAL PARENT AND NONCUSTODIAL

8 PARENT.—For purposes of this subsection—

9 ‘‘(A) CUSTODIAL PARENT.—The term ‘custo10 dial parent’ means the parent with whom a

11 child shared the same principal place of abode

12 for the greater portion of the calendar year.

13 ‘‘(B) NONCUSTODIAL PARENT.—The term

14 ‘noncustodial parent’ means the parent who is

15 not the custodial parent.

16 ‘‘(4) EXCEPTION FOR MULTIPLE-SUPPORT

17 AGREEMENTS.—This subsection shall not apply in

18 any case where over one-half of the support of the

19 child is treated as having been received from a tax20 payer under the provision of subsection (d)(3).

21 ‘‘(f) OTHER DEFINITIONS AND RULES.—For purposes

22 of this section—

23 ‘‘(1) CHILD DEFINED.—

24 ‘‘(A) IN GENERAL.—The term ‘child’ means

25 an individual who is—
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1 ‘‘(i) a son, daughter, stepson, or step2 daughter of the taxpayer, or

3 ‘‘(ii) an eligible foster child of the tax4 payer.

5 ‘‘(B) ADOPTED CHILD.—In determining

6 whether any of the relationships specified in sub7 paragraph (A)(i) or paragraph (4) exists, a le8 gally adopted individual of the taxpayer, or an

9 individual who is placed with the taxpayer by

10 an authorized placement agency for adoption by

11 the taxpayer, shall be treated as a child of such

12 individual by blood.

13 ‘‘(C) ELIGIBLE FOSTER CHILD.—For pur14 poses of subparagraph (A)(ii), the term ‘eligible

15 foster child’ means an individual who is placed

16 with the taxpayer by an authorized placement

17 agency or by judgment, decree, or other order of

18 any court of competent jurisdiction.

19 ‘‘(2) STUDENT DEFINED.—The term ‘student’

20 means an individual who during each of 5 calendar

21 months during the calendar year in which the taxable

22 year of the taxpayer begins—

23 ‘‘(A) is a full-time student at an edu24 cational organization described in section

25 170(b)(1)(A)(ii), or
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1 ‘‘(B) is pursuing a full-time course of insti2 tutional on-farm training under the supervision

3 of an accredited agent of an educational organi4 zation described in section 170(b)(1)(A)(ii) or of

5 a State or political subdivision of a State.

6 ‘‘(3) PLACE OF ABODE.—An individual shall not

7 be treated as having the same principal place of abode

8 of the taxpayer if at any time during the taxable year

9 of the taxpayer the relationship between the indi10 vidual and the taxpayer is in violation of local law.

11 ‘‘(4) BROTHER AND SISTER.—The terms ‘brother’

12 and ‘sister’ include a brother or sister by the half

13 blood.

14 ‘‘(5) TREATMENT OF MISSING CHILDREN.—

15 ‘‘(A) IN GENERAL.—Solely for the purposes

16 referred to in subparagraph (B), a child of the

17 taxpayer—

18 ‘‘(i) who is presumed by law enforce19 ment authorities to have been kidnapped by

20 someone who is not a member of the family

21 of such child or the taxpayer, and

22 ‘‘(ii) who had, for the taxable year in

23 which the kidnapping occurred, the same

24 principal place of abode as the taxpayer for
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1 more than one-half of the portion of such

2 year before the date of the kidnapping,

3 shall be treated as meeting the requirement of

4 subsection (c)(1)(B) with respect to a taxpayer

5 for all taxable years ending during the period

6 that the individual is kidnapped.

7 ‘‘(B) PURPOSES.—Subparagraph (A) shall

8 apply solely for purposes of determining—

9 ‘‘(i) the deduction under section 151(c),

10 ‘‘(ii) the credit under section 24 (relat11 ing to child tax credit),

12 ‘‘(iii) whether an individual is a sur13 viving spouse or a head of a household (as

14 such terms are defined in section 2), and

15 ‘‘(iv) the earned income credit under

16 section 32.

17 ‘‘(C) COMPARABLE TREATMENT OF CERTAIN

18 QUALIFYING RELATIVES.—For purposes of this

19 section, a child of the taxpayer—

20 ‘‘(i) who is presumed by law enforce21 ment authorities to have been kidnapped by

22 someone who is not a member of the family

23 of such child or the taxpayer, and

24 ‘‘(ii) who was (without regard to this

25 paragraph) a qualifying relative of the tax-
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1 payer for the portion of the taxable year be2 fore the date of the kidnapping,

3 shall be treated as a qualifying relative of the

4 taxpayer for all taxable years ending during the

5 period that the child is kidnapped.

6 ‘‘(D) TERMINATION OF TREATMENT.—Sub7 paragraphs (A) and (C) shall cease to apply as

8 of the first taxable year of the taxpayer begin9 ning after the calendar year in which there is a

10 determination that the child is dead (or, if ear11 lier, in which the child would have attained age

12 18).

13 ‘‘(6) CROSS REFERENCES.—

‘‘For provision treating child as dependent of both

parents for purposes of certain provisions, see sections 105(b), 132(h)(2)(B), and 213(d)(5).’’.

14 SEC. 502. MODIFICATIONS OF DEFINITION OF HEAD OF

15 HOUSEHOLD.

16 (a) HEAD OF HOUSEHOLD.—Clause (i) of section

17 2(b)(1)(A) is amended to read as follows:

18 ‘‘(i) a qualifying child of the indi19 vidual (as defined in section 152(c), deter20 mined without regard to section 152(e)), but

21 not if such child—

22 ‘‘(I) is married at the close of the

23 taxpayer’s taxable year, and
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1 ‘‘(II) is not a dependent of such

2 individual by reason of section

3 152(b)(2) or 152(b)3), or both, or’’.

4 (b) CONFORMING AMENDMENTS.—

5 (1) Section 2(b)(2) is amended by striking sub6 paragraph (A) and by redesignating subparagraphs

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

8 (C), respectively.

9 (2) Clauses (i) and (ii) of section 2(b)(3)(B) are

10 amended to read as follows:

11 ‘‘(i) subparagraph (H) of section

12 152(d)(2), or

13 ‘‘(ii) paragraph (3) of section 152(d).’’.

14 SEC. 503. MODIFICATIONS OF DEPENDENT CARE CREDIT.

15 (a) IN GENERAL.—Section 21(a)(1) is amended by

16 striking ‘‘In the case of an individual who maintains a

17 household which includes as a member one or more quali18 fying individuals (as defined in subsection (b)(1))’’ and in19 serting ‘‘In the case of an individual for which there are

20 1 or more qualifying individuals (as defined in subsection

21 (b)(1)) with respect to such individual’’.

22 (b) QUALIFYING INDIVIDUAL.—Paragraph (1) of sec23 tion 21(b) is amended to read as follows:

24 ‘‘(1) QUALIFYING INDIVIDUAL.—The term ‘quali25 fying individual’ means—
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1 ‘‘(A) a dependent of the taxpayer (as de2 fined in section 152(a)(1)) who has not attained

3 age 13,

4 ‘‘(B) a dependent of the taxpayer who is

5 physically or mentally incapable of caring for

6 himself or herself and who has the same prin7 cipal place of abode as the taxpayer for more

8 than one-half of such taxable year, or

9 ‘‘(C) the spouse of the taxpayer, if the

10 spouse is physically or mentally incapable of

11 caring for himself or herself and who has the

12 same principal place of abode as the taxpayer

13 for more than one-half of such taxable year.’’.

14 (c) CONFORMING AMENDMENT.—Paragraph (1) of sec15 tion 21(e) is amended to read as follows:

16 ‘‘(1) PLACE OF ABODE.—An individual shall not

17 be treated as having the same principal place of abode

18 of the taxpayer if at any time during the taxable year

19 of the taxpayer the relationship between the indi20 vidual and the taxpayer is in violation of local law.’’.

21 SEC. 504. MODIFICATIONS OF CHILD TAX CREDIT.

22 (a) IN GENERAL.—Paragraph (1) of section 24(c) is

23 amended to read as follows:
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1 ‘‘(1) IN GENERAL.—The term ‘qualifying child’

2 means a qualifying child of the taxpayer (as defined

3 in section 152(c)) who has not attained age 17.’’.

4 (b) CONFORMING AMENDMENT.—Section 24(c)(2) is

5 amended by striking ‘‘the first sentence of section 152(b)(3)’’

6 and inserting ‘‘subparagraph (A) of section 152(b)(3)’’.

7 SEC. 505. MODIFICATIONS OF EARNED INCOME CREDIT.

8 (a) QUALIFYING CHILD.—Paragraph (3) of section

9 32(c) is amended to read as follows:

10 ‘‘(3) QUALIFYING CHILD.—

11 ‘‘(A) IN GENERAL.—The term ‘qualifying

12 child’ means a qualifying child of the taxpayer

13 (as defined in section 152(c), determined without

14 regard to paragraph (1)(D) thereof and section

15 152(e)).

16 ‘‘(B) MARRIED INDIVIDUAL.—The term

17 ‘qualifying child’ shall not include an individual

18 who is married as of the close of the taxpayer’s

19 taxable year unless the taxpayer is entitled to a

20 deduction under section 151 for such taxable

21 year with respect to such individual (or would be

22 so entitled but for section 152(e)).

23 ‘‘(C) PLACE OF ABODE.—For purposes of

24 subparagraph (A), the requirements of section
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1 152(c)(1)(B) shall be met only if the principal

2 place of abode is in the United States.

3 ‘‘(D) IDENTIFICATION REQUIREMENTS.—

4 ‘‘(i) IN GENERAL.—A qualifying child

5 shall not be taken into account under sub6 section (b) unless the taxpayer includes the

7 name, age, and TIN of the qualifying child

8 on the return of tax for the taxable year.

9 ‘‘(ii) OTHER METHODS.—The Sec10 retary may prescribe other methods for pro11 viding the information described in clause

12 (i).’’.

13 (b) CONFORMING AMENDMENTS.—

14 (1) Section 32(c)(1) is amended by striking sub15 paragraph (C) and by redesignating subparagraphs

16 (D), (E), (F), and (G) as subparagraphs (C), (D),

17 (E), and (F), respectively.

18 (2) Section 32(c)(4) is amended by striking

19 ‘‘(3)(E)’’ and inserting ‘‘(3)(C)’’.

20 (3) Section 32(m) is amended by striking ‘‘sub21 sections (c)(1)(F)’’ and inserting ‘‘subsections

22 (c)(1)(E)’’.
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1 SEC. 506. MODIFICATIONS OF DEDUCTION FOR PERSONAL

2 EXEMPTION FOR DEPENDENTS.

3 Subsection (c) of section 151 is amended to read as

4 follows:

5 ‘‘(c) ADDITIONAL EXEMPTION FOR DEPENDENTS.—An

6 exemption of the exemption amount for each individual who

7 is a dependent (as defined in section 152) of the taxpayer

8 for the taxable year.’’.

9 SEC. 507. TECHNICAL AND CONFORMING AMENDMENTS.

10 (1) Section 21(e)(5) is amended—

11 (A) by striking ‘‘paragraph (2) or (4) of’’ in

12 subparagraph (A), and

13 (B) by striking ‘‘within the meaning of sec14 tion 152(e)(1)’’ and inserting ‘‘as defined in sec15 tion 152(e)(3)(A)’’.

16 (2) Section 21(e)(6)(B) is amended by striking

17 ‘‘section 151(c)(3)’’ and inserting ‘‘section 152(f)(1)’’.

18 (3) Section 25B(c)(2)(B) is amended by striking

19 ‘‘151(c)(4)’’ and inserting ‘‘152(f)(2)’’.

20 (4)(A) Subparagraphs (A) and (B) of section

21 51(i)(1) are each amended by striking ‘‘paragraphs

22 (1) through (8) of section 152(a)’’ both places it ap23 pears and inserting ‘‘subparagraphs (A) through (G)

24 of section 152(d)(2)’’.

25 (B) Section 51(i)(1)(C) is amended by striking

26 ‘‘152(a)(9)’’ and inserting ‘‘152(d)(2)(H)’’.
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1 (5) Section 72(t)(7)(A)(iii) is amended by strik2 ing ‘‘151(c)(3)’’ and inserting ‘‘152(f)(1)’’.

3 (6) Section 129(c)(2) is amended by striking

4 ‘‘151(c)(3)’’ and inserting ‘‘152(f)(1)’’.

5 (7) The first sentence of section 132(h)(2)(B) is

6 amended by striking ‘‘151(c)(3)’’ and inserting

7 ‘‘152(f)(1)’’.

8 (8) Section 153 is amended by striking para9 graph (1) and by redesignating paragraphs (2), (3),

10 and (4) as paragraphs (1), (2), and (3), respectively.

11 (9) Section 170(g)(3) is amended by striking

12 ‘‘paragraphs (1) through (8) of section 152(a)’’ and

13 inserting ‘‘subparagraphs (A) through (G) of section

14 152(d)(2)’’.

15 (10) The second sentence of section 213(d)(11) is

16 amended by striking ‘‘paragraphs (1) through (8) of

17 section 152(a)’’ and inserting ‘‘subparagraphs (A)

18 through (G) of section 152(d)(2)’’.

19 (11) Section 529(e)(2)(B) is amended by striking

20 ‘‘paragraphs (1) through (8) of section 152(a)’’ and

21 inserting ‘‘subparagraphs (A) through (G) of section

22 152(d)(2)’’.

23 (12) Section 2032A(c)(7)(D) is amended by

24 striking ‘‘section 151(c)(4)’’ and inserting ‘‘section

25 152(f)(2)’’.
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1 (13) Section 7701(a)(17) is amended by striking

2 ‘‘152(b)(4), 682,’’ and inserting ‘‘682’’.

3 (14) Section 7702B(f)(2)(C)(iii) is amended by

4 striking ‘‘paragraphs (1) through (8) of section

5 152(a)’’ and inserting ‘‘subparagraphs (A) through

6 (G) of section 152(d)(2)’’.

7 (15) Section 7703(b)(1) is amended—

8 (A) by striking ‘‘151(c)(3)’’ and inserting

9 ‘‘152(f)(1)’’, and

10 (B) by striking ‘‘paragraph (2) or (4) of’’.

11 SEC. 508. EFFECTIVE DATE.

12 The amendments made by this subtitle shall apply to

13 taxable years beginning after December 31, 2003.

14 Subtitle B—Simplification

15 SEC. 511. CONSOLIDATION OF LIFE AND NON-LIFE COM16 PANY RETURNS.

17 (a) IN GENERAL.—Section 1504 (relating to definition

18 of affiliated group) is amended by striking subsection (c)

19 and by redesignating subsections (d), (e), and (f) as sub20 sections (c), (d), and (e), respectively.

21 (b) CONFORMING AMENDMENTS.—

22 (1) Section 243(b)(2)(A) is amended by striking

23 ‘‘, 1504(b)(4), and 1504(c)’’ and inserting ‘‘and

24 1504(b)(4)’’.
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1 (2) Section 818(e)(1) is amended by striking ‘‘If

2 an election under section 1504(c)(2) is effect with re3 spect to an affiliated group for the taxable year’’ and

4 inserting ‘‘If an affiliated group includes members

5 which are, and which are not, life insurance compa6 nies for any taxable year’’.

7 (3) Section 1503(c)(1) is amended by striking

8 ‘‘an election under section 1504(c)(2) is in effect for

9 the taxable year’’.

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

11 section shall apply to taxable years beginning after Decem12 ber 31, 2009.

13 (d) WAIVER OF 5-YEAR WAITING PERIOD.—Under reg14 ulations prescribed by the Secretary of the Treasury or his

15 delegate, an automatic waiver from the 5-year waiting pe16 riod for reconsolidation provided in section 1504(a)(3) of

17 the Internal Revenue Code of 1986 shall be granted to any

18 corporation which was previously an includible corporation

19 but was subsequently deemed a nonincludible corporation

20 as a result of becoming a subsidiary of a corporation which

21 was not an includible corporation solely by operation of sec22 tion 1504(c)(2) of such Code (as in effect on the day before

23 the date of the enactment of this Act).
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1 (e) NONTERMINATION OF GROUP.—No affiliated group

2 shall terminate solely as a result of the amendments made

3 by this section.

4 SEC. 512. SPECIAL RULES FOR TAXATION OF LIFE INSUR5 ANCE COMPANIES.

6 (a) REDUCTION IN MUTUAL LIFE INSURANCE COM7 PANY DEDUCTIONS NOT TO APPLY.—

8 (1) IN GENERAL.—Section 809 (relating to re9 duction in certain deductions of material life insur10 ance companies) is amended by adding at the end the

11 following:

12 ‘‘(j) DIFFERENTIAL EARNINGS RATE TREATED AS

13 ZERO.—Notwithstanding subsection (c) or (f), the differen14 tial earnings rate shall be treated as zero for purposes of

15 computing both the differential earnings amount and the

16 recomputed differential earnings amount for any taxable

17 year of a mutual life insurance company beginning after

18 December 31, 2003, and before January 1, 2009.’’.

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

20 this section shall apply to taxable years beginning

21 after December 31, 2003.

22 (b) DISTRIBUTIONS TO SHAREHOLDERS FROM PRE23 1984 POLICYHOLDERS SURPLUS ACCOUNT.—

24 (1) IN GENERAL.—Section 815 (relating to dis25 tributions to shareholders from pre-1984 policyholders
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1 surplus account) is amended by adding at the end the

2 following:

3 ‘‘(g) SPECIAL RULES APPLICABLE DURING 2004

4 THROUGH 2008.—In the case of any taxable year of a stock

5 life insurance company beginning after December 31, 2003,

6 and before January 1, 2009—

7 ‘‘(1) the amount under subsection (a)(2) for such

8 taxable year shall be treated as zero, and

9 ‘‘(2) notwithstanding subsection (b), in deter10 mining any subtractions from an account under sub11 sections (c)(3) and (d)(3), any distribution to share12 holders during such taxable year shall be treated as

13 made first out of the policyholders surplus account,

14 then out of the shareholders surplus account, and fi15 nally out of other accounts.’’.

16 (2) EFFECTIVE DATE.—The amendment made by

17 this section shall apply to taxable years beginning

18 after December 31, 2003.

19 SEC. 513. MODIFICATION OF ACTIVE BUSINESS DEFINITION

20 UNDER SECTION 355.

21 (a) IN GENERAL.—Section 355(b) (defining active con22 duct of a trade or business) is amended by adding at the

23 end the following new paragraph:

24 ‘‘(3) SPECIAL RULES RELATING TO ACTIVE BUSI25 NESS REQUIREMENT.—
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1 ‘‘(A) IN GENERAL.—For purposes of deter2 mining whether a corporation meets the require3 ment of paragraph (2)(A), all members of such

4 corporation’s separate affiliated group shall be

5 treated as one corporation. For purposes of the

6 preceding sentence, a corporation’s separate af7 filiated group is the affiliated group which would

8 be determined under section 1504(a) if such cor9 poration were the common parent and section

10 1504(b) did not apply.

11 ‘‘(B) CONTROL.—For purposes of para12 graph (2)(D), all distributee corporations which

13 are members of the same affiliated group (as de14 fined in section 1504(a) without regard to sec15 tion 1504(b)) shall be treated as one distributee

16 corporation.’’.

17 (b) CONFORMING AMENDMENTS.—

18 (1) Subparagraph (A) of section 355(b)(2) is

19 amended to read as follows:

20 ‘‘(A) it is engaged in the active conduct of

21 a trade or business,’’.

22 (2) Section 355(b)(2) is amended by striking the

23 last sentence.

24 (c) EFFECTIVE DATE.—
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1 (1) IN GENERAL.—The amendments made by

2 this section shall apply—

3 (A) to distributions after the date of the en4 actment of this Act, and

5 (B) for purposes of determining the contin6 ued qualification under section 355(b)(2)(A) of

7 the Internal Revenue Code of 1986 (as amended

8 by subsection (b)(1)) of distributions made before

9 such date, as a result of an acquisition, disposi10 tion, or other restructuring after such date.

11 (2) TRANSITION RULE.—The amendments made

12 by this section shall not apply to any distribution

13 pursuant to a transaction which is—

14 (A) made pursuant to an agreement which

15 was binding on such date of enactment and at

16 all times thereafter,

17 (B) described in a ruling request submitted

18 to the Internal Revenue Service on or before such

19 date, or

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

21 public announcement or in a filing with the Se22 curities and Exchange Commission.

23 (3) ELECTION TO HAVE AMENDMENTS APPLY.—

24 Paragraph (2) shall not apply if the distributing cor25 poration elects not to have such paragraph apply to
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1 distributions of such corporation. Any such election,

2 once made, shall be irrevocable.

3 Subtitle C—Other Provisions

4 SEC. 521. CIVIL RIGHTS TAX RELIEF.

5 (a) DEDUCTION ALLOWED WHETHER OR NOT TAX6 PAYER ITEMIZES OTHER DEDUCTIONS.—Subsection (a) of

7 section 62 (defining adjusted gross income) is amended by

8 inserting after paragraph (18) the following new item:

9 ‘‘(19) COSTS INVOLVING DISCRIMINATION SUITS,

10 ETC.—Any deduction allowable under this chapter for

11 attorney fees and court costs paid by, or on behalf of,

12 the taxpayer in connection with any action involving

13 a claim of unlawful discrimination (as defined in

14 subsection (e)) or a claim of a violation of subchapter

15 III of chapter 37 of title 31, United States Code. The

16 preceding sentence shall not apply to any deduction

17 in excess of the amount includible in the taxpayer’s

18 gross income for the taxable year on account of a

19 judgment or settlement (whether by suit or agreement

20 and whether as lump sum or periodic payments) re21 sulting from such claim.’’.

22 (b) UNLAWFUL DISCRIMINATION DEFINED.—Section

23 62 is amended by adding at the end the following new sub24 section:
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1 ‘‘(e) UNLAWFUL DISCRIMINATION DEFINED.—For pur2 poses of subsection (a)(19), the term ‘unlawful discrimina3 tion’ means an act that is unlawful under any of the fol4 lowing:

5 ‘‘(1) Section 302 of the Civil Rights Act of 1991

6 (2 U.S.C. 1202).

7 ‘‘(2) Section 201, 202, 203, 204, 205, 206, or 207

8 of the Congressional Accountability Act of 1995 (2

9 U.S.C. 1311, 1312, 1313, 1314, 1315, 1316, or 1317).

10 ‘‘(3) The National Labor Relations Act (29

11 U.S.C. 151 et seq.).

12 ‘‘(4) The Fair Labor Standards Act of 1938 (29

13 U.S.C. 201 et seq.).

14 ‘‘(5) Section 4 or 15 of the Age Discrimination

15 in Employment Act of 1967 (29 U.S.C. 623 or 633a).

16 ‘‘(6) Section 501 or 504 of the Rehabilitation Act

17 of 1973 (29 U.S.C. 791 or 794).

18 ‘‘(7) Section 510 of the Employee Retirement In19 come Security Act of 1974 (29 U.S.C. 1140).

20 ‘‘(8) Title IX of the Education Amendments of

21 1972 (29 U.S.C. 1681 et seq.).

22 ‘‘(9) The Employee Polygraph Protection Act of

23 1988 (29 U.S.C. 201 et seq.).

24 ‘‘(10) The Worker Adjustment and Retraining

25 Notification Act (29 U.S.C. 2102 et seq.).
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1 ‘‘(11) Section 105 of the Family and Medical

2 Leave Act of 1993 (29 U.S.C. 2615).

3 ‘‘(12) Chapter 43 of title 38, United States Code

4 (relating to employment and reemployment rights of

5 members of the uniformed services).

6 ‘‘(13) Section 1977, 1979, or 1980 of the Revised

7 Statutes (42 U.S.C. 1981, 1983, or 1985).

8 ‘‘(14) Section 703, 704, or 717 of the Civil

9 Rights Act of 1964 (42 U.S.C. 2000e–2, 2000e–3, or

10 2000e–16).

11 ‘‘(15) Section 804, 805, 806, 808, or 818 of the

12 Fair Housing Act (42 U.S.C. 3604, 3605, 3606, 3608,

13 or 3617).

14 ‘‘(16) Section 102, 202, 302, or 503 of the Amer15 icans with Disabilities Act of 1990 (42 U.S.C. 12112,

16 12132, 12182, or 12203).

17 ‘‘(17) Any provision of Federal law (popularly

18 known as whistleblower protection provisions) prohib19 iting the discharge of an employee, the discrimination

20 against an employee, or any other form of retaliation

21 or reprisal against an employee for asserting rights or

22 taking other actions permitted under Federal law.

23 ‘‘(18) Any provision of State or local law, or

24 common law claims permitted under Federal, State,

25 or local law—
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1 ‘‘(i) providing for the enforcement of

2 civil rights, or

3 ‘‘(ii) regulating any aspect of the em4 ployment relationship, including prohib5 iting the discharge of an employee, the dis6 crimination against an employee, or any

7 other form of retaliation or reprisal against

8 an employee for asserting rights or taking

9 other actions permitted by law.’’.

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

11 section shall apply to fees and costs paid after the date of

12 the enactment of this Act with respect to any judgment or

13 settlement occurring after such date.

14 SEC. 522. INCREASE IN SECTION 382 LIMITATION FOR COM15 PANIES EMERGING FROM BANKRUPTCY.

16 (a) IN GENERAL.—Section 382(b) (relating to section

17 382 limitation) is amended by adding at the end the fol18 lowing new paragraph:

19 ‘‘(4) INCREASE IN SECTION 382 LIMITATION FOR

20 COMPANIES EMERGING FROM BANKRUPTCY.—In the

21 case of any new loss corporation which immediately

22 before any ownership change was an old loss corpora23 tion under the jurisdiction of the court in a title 11

24 or similar case (as defined in subsection (l)(5)(G)),

25 the section 382 limitation for any post-change year
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1 beginning in 2004 or 2005 shall be an amount equal

2 to 200 percent of the amount otherwise determined

3 under paragraph (1) for such year.’’.

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

5 section shall apply to ownership changes after December 31,

6 2002.

7 SEC. 523. INCREASE IN HISTORIC REHABILITATION CREDIT

8 FOR CERTAIN LOW-INCOME HOUSING FOR

9 THE ELDERLY.

10 (a) IN GENERAL.—Section 47 (relating to rehabilita11 tion credit) is amended by adding at the end the following

12 new subsection:

13 ‘‘(e) SPECIAL RULE REGARDING CERTAIN HISTORIC

14 STRUCTURES.—In the case of any qualified rehabilitation

15 expenditure with respect to any certified historic

16 structure—

17 ‘‘(1) which is placed in service after the date of

18 the enactment of this subsection,

19 ‘‘(2) which is part of a qualified low-income

20 building with respect to which a credit under section

21 42 is allowed, and

22 ‘‘(3) substantially all of the residential rental

23 units of which are used for tenants who have attained

24 the age of 65,
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1 subsection (a)(2) shall be applied by substituting ‘25 per2 cent’ for ‘20 percent’.’’.

3 (b) APPLICATION OF MACRS.—The Internal Revenue

4 Code of 1986 shall be applied and administered as if para5 graph (4)(X) of section 251(d) of the Tax Reform Act of

6 1986 as applied to the amendments made by section 201

7 of such Act had not been enacted with respect to any prop8 erty described in such paragraph and placed in service after

9 the date of the enactment of this Act.

10 (c) EFFECTIVE DATE.—The amendment made by sub11 section (a) shall apply to property placed in service after

12 the date of the enactment of this Act.

13 SEC. 524. MODIFICATION OF APPLICATION OF INCOME

14 FORECAST METHOD OF DEPRECIATION.

15 (a) IN GENERAL.—Section 167(g) (relating to depre16 ciation under income forecast method) is amended by add17 ing at the end the following new paragraph:

18 ‘‘(7) TREATMENT OF PARTICIPATIONS AND RE19 SIDUALS.—

20 ‘‘(A) IN GENERAL.—For purposes of deter21 mining the depreciation deduction allowable

22 with respect to a property under this subsection,

23 the taxpayer may include participations and re24 siduals with respect to such property in the ad25 justed basis of such property for the taxable year
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1 in which the property is placed in service, but

2 only to the extent that such participations and

3 residuals relate to income estimated (for pur4 poses of this subsection) to be earned in connec5 tion with the property before the close of the 10th

6 taxable year referred to in paragraph (1)(A).

7 ‘‘(B) PARTICIPATIONS AND RESIDUALS.—

8 For purposes of this paragraph, the term ‘par9 ticipations and residuals’ means, with respect to

10 any property, costs the amount of which by con11 tract varies with the amount of income earned in

12 connection with such property.

13 ‘‘(C) SPECIAL RULES RELATING TO RE14 COMPUTATION YEARS.—If the adjusted basis of

15 any property is determined under this para16 graph, paragraph (4) shall be applied by sub17 stituting ‘for each taxable year in such period’

18 for ‘for such period’.

19 ‘‘(D) COORDINATION WITH OTHER RULES.—

20 ‘‘(i) Notwithstanding subparagraph

21 (A), the taxpayer may exclude participa22 tions and residuals from the adjusted basis

23 of such property and deduct such participa24 tions and residuals in the taxable year that

25 such participations and residuals are paid.
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1 ‘‘(ii) Deductions computed in accord2 ance with this paragraph shall be allowable

3 notwithstanding paragraph (1)(B) or sec4 tions 263, 263A, 404, 419, or 461(h).

5 ‘‘(E) AUTHORITY TO MAKE ADJUST6 MENTS.—The Secretary shall prescribe appro7 priate adjustments to the basis of property and

8 to the look-back method for the additional

9 amounts allowable as a deduction solely by rea10 son of this paragraph.’’.

11 (b) DETERMINATION OF INCOME.—Section 167(g)(5)

12 (relating to special rules) is amended by redesignating sub13 paragraphs (E) and (F) as subparagraphs (F) and (G), re14 spectively, and inserting after subparagraph (D) the fol15 lowing new subparagraph:

16 ‘‘(E) TREATMENT OF DISTRIBUTION

17 COSTS.—For purposes of this subsection, the in18 come with respect to any property shall be the

19 taxpayer’s gross income from such property.’’.

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

21 section shall apply to property placed in service after the

22 date of the enactment of this Act.
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1 SEC. 525. ADDITIONAL ADVANCE REFUNDINGS OF CERTAIN

2 GOVERNMENTAL BONDS.

3 (a) IN GENERAL.—Section 149(d)(3)(A)(i) (relating to

4 advance refundings of other bonds) is amended—

5 (1) by striking ‘‘or’’ at the end of subclause (I),

6 (2) by adding ‘‘or’’ at the end of subclause (II),

7 and

8 (3) by inserting after subclause (II) the fol9 lowing:

10 ‘‘(III) the 2nd advance refunding

11 of the original bond if the original

12 bond was issued after 1985 or the 3rd

13 advance refunding of the original bond

14 if the original bond was issued before

15 1986, if, in either case, the refunding

16 bond is issued before the date which is

17 2 years after the date of the enactment

18 of this subclause and the original bond

19 was issued as part of an issue 90 per20 cent or more of the net proceeds of

21 which were used to finance a public el22 ementary or secondary school in any

23 State in which the State’s highest court

24 ruled by opinion issued on November

25 21, 2002, that the State school funding
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1 system violated the State constitution

2 and was constitutionally inadequate,’’.

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

4 section shall apply to refunding bonds issued on or after

5 the date of the enactment of this Act.

6 SEC. 526. EXCLUSION OF INCOME DERIVED FROM CERTAIN

7 WAGERS ON HORSE RACES FROM GROSS IN8 COME OF NONRESIDENT ALIEN INDIVIDUALS.

9 (a) IN GENERAL.—Subsection (b) of section 872 (relat10 ing to exclusions) is amended by redesignating paragraphs

11 (5), (6), and (7) as paragraphs (6), (7), and (8), respec12 tively, and inserting after paragraph (4) the following new

13 paragraph:

14 ‘‘(5) INCOME DERIVED FROM WAGERING TRANS15 ACTIONS IN CERTAIN PARIMUTUEL POOLS.—Gross in16 come derived by a nonresident alien individual from

17 a legal wagering transaction initiated outside the

18 United States in a parimutuel pool with respect to a

19 live horse race in the United States.’’.

20 (b) CONFORMING AMENDMENT.—Section 883(a)(4) is

21 amended by striking ‘‘(5), (6), and (7)’’ and inserting ‘‘(6),

22 (7), and (8)’’.

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

24 section shall apply to proceeds from wagering transactions

25 after September 30, 2003.
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1 SEC. 527. FEDERAL REIMBURSEMENT OF EMERGENCY

2 HEALTH SERVICES FURNISHED TO UNDOCU3 MENTED ALIENS.

4 (a) TOTAL AMOUNT AVAILABLE FOR ALLOTMENT.—

5 There is appropriated, out of any funds in the Treasury

6 not otherwise appropriated, $48,000,000 for fiscal year

7 2004, for the purpose of making allotments under this sec8 tion to States described in paragraph (1) or (2) of sub9 section (b). Funds appropriated under the preceding sen10 tence shall remain available until expended.

11 (b) STATE ALLOTMENTS.—

12 (1) BASED ON PERCENTAGE OF UNDOCUMENTED

13 ALIENS.—

14 (A) IN GENERAL.—Out of the amount ap15 propriated under subsection (a) for fiscal year

16 2004, the Secretary shall use $32,000,000 of such

17 amount to make allotments for such fiscal year

18 in accordance with subparagraph (B).

19 (B) FORMULA.—The amount of the allot20 ment for each State for fiscal year 2004 shall be

21 equal to the product of—

22 (i) the total amount available for allot23 ments under this paragraph for the fiscal

24 year; and

25 (ii) the percentage of undocumented

26 aliens residing in the State with respect to
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1 the total number of such aliens residing in

2 all States, as determined by the Statistics

3 Division of the Immigration and Natu4 ralization Service, as of January 2003,

5 based on the 2000 decennial census.

6 (2) BASED ON NUMBER OF UNDOCUMENTED

7 ALIEN APPREHENSION STATES.—

8 (A) IN GENERAL.—Out of the amount ap9 propriated under subsection (a) for fiscal year

10 2004, the Secretary shall use $16,000,000 of such

11 amount to make allotments for such fiscal year

12 for each of the 6 States with the highest number

13 of undocumented alien apprehensions for such

14 fiscal year.

15 (B) DETERMINATION OF ALLOTMENTS.—The

16 amount of the allotment for each State described

17 in subparagraph (A) for fiscal year 2004 shall

18 bear the same ratio to the total amount available

19 for allotments under this paragraph for the fiscal

20 year as the ratio of the number of undocumented

21 alien apprehensions in the State in that fiscal

22 year bears to the total of such numbers for all

23 such States for such fiscal year.

24 (C) DATA.—For purposes of this paragraph,

25 the highest number of undocumented alien ap-
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1 prehensions for fiscal year 2004 shall be based on

2 the 4 most recent quarterly apprehension rates

3 for undocumented aliens in such States, as re4 ported by the Immigration and Naturalization

5 Service.

6 (3) RULE OF CONSTRUCTION.—Nothing in this

7 section shall be construed as prohibiting a State that

8 is described in both of paragraphs (1) and (2) from

9 receiving an allotment under both paragraphs for fis10 cal year 2004.

11 (c) USE OF FUNDS.—

12 (1) AUTHORITY TO MAKE PAYMENTS.—From the

13 allotments made for a State under subsection (b) for

14 fiscal year 2004, the Secretary shall pay directly to

15 local governments, hospitals, or other providers lo16 cated in the State (including providers of services re17 ceived through an Indian Health Service facility

18 whether operated by the Indian Health Service or by

19 an Indian tribe or tribal organization) that provide

20 uncompensated emergency health services furnished to

21 undocumented aliens during that fiscal year, and to

22 the State, such amounts (subject to the total amount

23 available from such allotments) as the local govern24 ments, hospitals, providers, or State demonstrate were
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1 incurred for the provision of such services during that

2 fiscal year.

3 (2) LIMITATION ON STATE USE OF FUNDS.—

4 Funds paid to a State from allotments made under

5 subsection (b) for fiscal year 2004 may only be used

6 for making payments to local governments, hospitals,

7 or other providers for costs incurred in providing

8 emergency health services to undocumented aliens or

9 for State costs incurred with respect to the provision

10 of emergency health services to such aliens.

11 (3) INCLUSION OF COSTS INCURRED WITH RE12 SPECT TO CERTAIN ALIENS.—Uncompensated emer13 gency health services furnished to aliens who have

14 been allowed to enter the United States for the sole

15 purpose of receiving emergency health services may be

16 included in the determination of costs incurred by a

17 State, local government, hospital, or other provider

18 with respect to the provision of such services.

19 (d) APPLICATIONS; ADVANCE PAYMENTS.—

20 (1) DEADLINE FOR ESTABLISHMENT OF APPLICA21 TION PROCESS.—

22 (A) IN GENERAL.—Not later than Sep23 tember 1, 2003, the Secretary shall establish a

24 process under which States, local governments,

25 hospitals, or other providers located in the State
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1 may apply for payments from allotments made

2 under subsection (b) for fiscal year 2004 for un3 compensated emergency health services furnished

4 to undocumented aliens during that fiscal year.

5 (B) INCLUSION OF MEASURES TO COMBAT

6 FRAUD.—The Secretary shall include in the

7 process established under subparagraph (A)

8 measures to ensure that fraudulent payments are

9 not made from the allotments determined under

10 subsection (b).

11 (2) ADVANCE PAYMENT; RETROSPECTIVE AD12 JUSTMENT.—The process established under paragraph

13 (1) shall allow for making payments under this sec14 tion for each quarter of fiscal year 2004 on the basis

15 of advance estimates of expenditures submitted by ap16 plicants for such payments and such other investiga17 tion as the Secretary may find necessary, and for

18 making reductions or increases in the payments as

19 necessary to adjust for any overpayment or under20 payment for prior quarters of such fiscal year.

21 (e) DEFINITIONS.—In this section:

22 (1) HOSPITAL.—The term ‘‘hospital’’ has the

23 meaning given such term in section 1861(e) of the So24 cial Security Act (42 U.S.C. 1395x(e)).
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1 (2) INDIAN TRIBE; TRIBAL ORGANIZATION.—The

2 terms ‘‘Indian tribe’’ and ‘‘tribal organization’’ have

3 the meanings given such terms in section 4 of the In4 dian Health Care Improvement Act (25 U.S.C. 1603).

5 (3) PROVIDER.—The term ‘‘provider’’ includes a

6 physician, any other health care professional licensed

7 under State law, and any other entity that furnishes

8 emergency health services, including ambulance serv9 ices.

10 (4) SECRETARY.—The term ‘‘Secretary’’ means

11 the Secretary of Health and Human Services.

12 (5) STATE.—The term ‘‘State’’ means the 50

13 States and the District of Columbia.

14 (f) ENTITLEMENT.—This section constitutes budget au15 thority in advance of appropriations Acts and represents

16 the obligation of the Federal Government to provide for the

17 payment of amounts provided under this section.

18 SEC. 528. PREMIUMS FOR MORTGAGE INSURANCE.

19 (a) MORTGAGE INSURANCE PREMIUMS TREATED AS

20 INTEREST.—

21 (1) IN GENERAL.—Paragraph (3) of section

22 163(h) (relating to qualified residence interest) is

23 amended by adding after subparagraph (D) the fol24 lowing new subparagraph:
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1 ‘‘(E) MORTGAGE INSURANCE PREMIUMS

2 TREATED AS INTEREST.—

3 ‘‘(i) IN GENERAL.—Premiums paid or

4 accrued for qualified mortgage insurance by

5 a taxpayer during the taxable year in con6 nection with acquisition indebtedness with

7 respect to a qualified residence of the tax8 payer shall be treated for purposes of this

9 subsection as qualified residence interest.

10 ‘‘(ii) PHASEOUT.—The amount other11 wise allowable as a deduction under clause

12 (i) shall be reduced (but not below zero) by

13 10 percent of such amount for each $1,000

14 ($500 in the case of a married individual

15 filing a separate return) (or fraction there16 of) that the taxpayer’s adjusted gross in17 come for the taxable year exceeds $100,000

18 ($50,000 in the case of a married indi19 vidual filing a separate return).’’.

20 (2) DEFINITION AND SPECIAL RULES.—Para21 graph (4) of section 163(h) (relating to other defini22 tions and special rules) is amended by adding at the

23 end the following new subparagraphs:
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1 ‘‘(E) QUALIFIED MORTGAGE INSURANCE.—

2 The term ‘qualified mortgage insurance’

3 means—

4 ‘‘(i) mortgage insurance provided by

5 the Veterans Administration, the Federal

6 Housing Administration, or the Rural

7 Housing Administration, and

8 ‘‘(ii) private mortgage insurance (as

9 defined by section 2 of the Homeowners

10 Protection Act of 1998 (12 U.S.C. 4901), as

11 in effect on the date of the enactment of this

12 subparagraph).

13 ‘‘(F) SPECIAL RULES FOR PREPAID QUALI14 FIED MORTGAGE INSURANCE.—Any amount paid

15 by the taxpayer for qualified mortgage insurance

16 that is properly allocable to any mortgage the

17 payment of which extends to periods that are

18 after the close of the taxable year in which such

19 amount is paid shall be chargeable to capital ac20 count and shall be treated as paid in such peri21 ods to which so allocated. No deduction shall be

22 allowed for the unamortized balance of such ac23 count if such mortgage is satisfied before the end

24 of its term. The preceding sentences shall not

25 apply to amounts paid for qualified mortgage
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1 insurance provided by the Veterans Administra2 tion or the Rural Housing Administration.’’.

3 (b) INFORMATION RETURNS RELATING TO MORTGAGE

4 INSURANCE.—Section 6050H (relating to returns relating

5 to mortgage interest received in trade or business from indi6 viduals) is amended by adding at the end the following new

7 subsection:

8 ‘‘(h) RETURNS RELATING TO MORTGAGE INSURANCE

9 PREMIUMS.—

10 ‘‘(1) IN GENERAL.—The Secretary may pre11 scribe, by regulations, that any person who, in the

12 course of a trade or business, receives from any indi13 vidual premiums for mortgage insurance aggregating

14 $600 or more for any calendar year, shall make a re15 turn with respect to each such individual. Such re16 turn shall be in such form, shall be made at such

17 time, and shall contain such information as the Sec18 retary may prescribe.

19 ‘‘(2) STATEMENT TO BE FURNISHED TO INDIVID20 UALS WITH RESPECT TO WHOM INFORMATION IS RE21 QUIRED.—Every person required to make a return

22 under paragraph (1) shall furnish to each individual

23 with respect to whom a return is made a written

24 statement showing such information as the Secretary

25 may prescribe. Such written statement shall be fur-
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1 nished on or before January 31 of the year following

2 the calendar year for which the return under para3 graph (1) was required to be made.

4 ‘‘(3) SPECIAL RULES.—For purposes of this

5 subsection—

6 ‘‘(A) rules similar to the rules of subsection

7 (c) shall apply, and

8 ‘‘(B) the term ‘mortgage insurance’

9 means—

10 ‘‘(i) mortgage insurance provided by

11 the Veterans Administration, the Federal

12 Housing Administration, or the Rural

13 Housing Administration, and

14 ‘‘(ii) private mortgage insurance (as

15 defined by section 2 of the Homeowners

16 Protection Act of 1998 (12 U.S.C. 4901), as

17 in effect on the date of the enactment of this

18 subparagraph).’’.

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

20 section shall apply to amounts paid or accrued after the

21 date of enactment of this section in taxable years ending

22 after such date.
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1 SEC. 529. SENSE OF THE SENATE ON REPEALING THE 1993

2 TAX HIKE ON SOCIAL SECURITY BENEFITS

3 SECTION.

4 (a) FINDINGS.—(1) The 1993 tax on social security

5 benefits was imposed as part of President Clinton’s agenda

6 to raise taxes.

7 (2) The original 1993 tax hike on social security bene8 fits was to raise income taxes on social security retirees

9 with as little as $25,000 of income.

10 (3) Repeated efforts to repeal the 1993 tax hike on so11 cial security benefits have failed.

12 (4) Seniors rely on social security benefits as well as

13 dividend income to fund their retirement and they should

14 have taxes reduced on both sources of income.

15 (b) SENSE OF THE SENATE.—It is the sense of the Sen16 ate that the Senate Finance Committee should report out

17 the Social Security Benefits Tax Relief Act of 2003, S. 514,

18 to repeal the tax on seniors not later than July 31, 2003,

19 and the Senate shall consider such bill not later than Sep20 tember 30, 2003, in a manner consistent with the preserva21 tion of the Medicare Trust Fund.

22 SEC. 530. FLAT TAX.

23 (a) FINDINGS.—The Senate finds the following:

24 (1) The current Internal Revenue Code, with its

25 myriad deductions, credits and schedules, and over
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1 17,000 pages of rules and regulations, is long overdue

2 for an overhaul.

3 (2) The current Internal Revenue Code has over

4 6,900,000,000 words compared to the bible at

5 1,773,000 words, the Declaration of Independence at

6 1,300 words, The Gettysburg Address at 267 words,

7 and the Pledge of Allegiance at only 31 words.

8 (3) It is an unacceptable waste of our Nation’s

9 precious resources when Americans spend more than

10 5,800,000,000 hours every year compiling informa11 tion and filling out Internal Revenue Code tax forms.

12 In addition, taxpayers spend $194,000,000,000 each

13 year in tax code compliance. America’s resources

14 could be dedicated to far more productive pursuits.

15 (4) The primary goal of any tax reform is to

16 promote growth and remove the inefficiencies of the

17 current tax code. The flat tax will expand the econ18 omy by an estimated $2,000,000,000,000 over seven

19 years.

20 (5) Another important goal of the flat tax is to

21 achieve fairness, with a single low flat tax rate for all

22 individuals and businesses.

23 (6) Simplicity is another critically important

24 goal of the flat tax, and it is in the public interest
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1 to have a ten-lined tax form that fits on a postcard

2 and takes 10 minutes to fill out.

3 (7) A comprehensive analyses of our tax struc4 ture has concluded that a flat tax of 19 percent could

5 be imposed upon individuals and be revenue neutral.

6 (8) If the decision is made to include deduct7 ibility on items such as interest on home mortgages

8 and charitable contributions, the flat tax would be

9 raised from a 19 percent to a 20 percent rate to ac10 commodate the deductions and remain revenue neu11 tral.

12 (9) The flat tax would tax business at a 20 per13 cent rate on net profits and be revenue neutral and

14 lead to investment decisions being made on the basis

15 of productivity rather than for tax avoidance.

16 (10) The flat tax would lead to the elimination

17 of the capital gains tax. This would become a power18 ful incentive for savings and investment—which

19 translates into economic growth and expansion, more

20 and better jobs, and raising the standard of living for

21 all Americans.

22 (11) The flat tax would lower the cost of capital

23 by allowing businesses to write off the cost of capital

24 purchase in the same year the purchase was made as
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1 opposed to complying with complicated depreciation

2 schedules.

3 (12) By eliminating the double tax on dividends,

4 the flat tax eliminates the distortions in the tax code

5 favoring debt over equity financing by businesses.

6 (13) The flat tax would eliminate the estate and

7 gift tax. With the elimination of the estate and gift

8 tax, family-held businesses will be much more stable

9 under the flat tax system.

10 (14) As tax loopholes are eliminated and the tax

11 code is simplified, there will be far less opportunity

12 for tax avoidance and fraud, which now amounts to

13 over $120,000,000,000 in uncollected revenue annu14 ally.

15 (b) SENSE OF THE SENATE.—It is the sense of the Sen16 ate that the Senate Finance Committee and the Joint Eco17 nomic Committee should undertake a comprehensive anal18 ysis of simplification including flat tax proposals, includ19 ing appropriate hearings and consider legislation providing

20 for a flat tax.

21 SEC. 531. TOLL TAX ON EXCESS QUALIFIED FOREIGN DIS22 TRIBUTION AMOUNT.

23 (a) IN GENERAL.—Subpart F of part III of subchapter

24 N of chapter 1 is amended by adding at the end the fol25 lowing new section:
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1 ‘‘SEC. 965. TOLL TAX IMPOSED ON EXCESS QUALIFIED FOR2 EIGN DISTRIBUTION AMOUNT.

3 ‘‘(a) TOLL TAX IMPOSED ON EXCESS QUALIFIED FOR4 EIGN DISTRIBUTION AMOUNT.—If a corporation elects the

5 application of this section, a tax shall be imposed on the

6 taxpayer in an amount equal to 5.25 percent of—

7 ‘‘(1) the taxpayer’s excess qualified foreign dis8 tribution amount, and

9 ‘‘(2) the amount determined under section 78

10 which is attributable to such excess qualified foreign

11 distribution amount.

12 Such tax shall be imposed in lieu of the tax imposed under

13 section 11 or 55 on the amounts described in paragraphs

14 (1) and (2) for such taxable year.

15 ‘‘(b) EXCESS QUALIFIED FOREIGN DISTRIBUTION

16 AMOUNT.—For purposes of this section—

17 ‘‘(1) IN GENERAL.—The term ‘excess qualified

18 foreign distribution amount’ means the excess (if any)

19 of—

20 ‘‘(A) dividends received by the taxpayer

21 during the taxable year which are—

22 ‘‘(i) from 1 or more corporations which

23 are controlled foreign corporations in which

24 the taxpayer is a United States shareholder

25 on the date such dividends are paid, and
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1 ‘‘(ii) described in a domestic reinvest2 ment plan approved by the taxpayer’s presi3 dent, chief executive officer, or comparable

4 official before the payment of such dividends

5 and subsequently approved by the tax6 payer’s board of directors, management

7 committee, executive committee, or similar

8 body, which plan shall provide for the rein9 vestment of such dividends in the United

10 States, including as a source for the fund11 ing of worker hiring and training; infra12 structure; research and development; capital

13 investments; or the financial stabilization of

14 the corporation for the purposes of job reten15 tion or creation, over

16 ‘‘(B) the base dividend amount.

17 ‘‘(2) BASE DIVIDEND AMOUNT.—The term ‘base

18 dividend amount’ means an amount designated under

19 subsection (c)(7), but not less than the average

20 amount of dividends received during the fixed base

21 period from 1 or more corporations which are con22 trolled foreign corporations in which the taxpayer is

23 a United States shareholder on the date such divi24 dends are paid.

25 ‘‘(3) FIXED BASE PERIOD.—
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1 ‘‘(A) IN GENERAL.—The term ‘fixed base pe2 riod’ means each of 3 taxable years which are

3 among the 5 most recent taxable years of the tax4 payer ending on or before December 31, 2002,

5 determined by disregarding—

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

7 taxpayer had the highest amount of divi8 dends from 1 or more corporations which

9 are controlled foreign corporations relative

10 to the other 4 taxable years, and

11 ‘‘(ii) the 1 taxable year for which the

12 taxpayer had the lowest amount of divi13 dends from such corporations relative to the

14 other 4 taxable years.

15 ‘‘(B) SHORTER PERIOD.—If the taxpayer

16 has fewer than 5 taxable years ending on or be17 fore December 31, 2002, then in lieu of applying

18 subparagraph (A), the fixed base period shall

19 mean such shorter period representing all of the

20 taxable years of the taxpayer ending on or before

21 December 31, 2002.

22 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur23 poses of this section—

24 ‘‘(1) DIVIDENDS.—The term ‘dividend’ means a

25 dividend as defined in section 316, except that the
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1 term shall also include amounts described in section

2 951(a)(1)(B), and shall exclude amounts described in

3 sections 78 and 959.

4 ‘‘(2) CONTROLLED FOREIGN CORPORATIONS AND

5 UNITED STATES SHAREHOLDERS.—The term ‘con6 trolled foreign corporation’ shall have the same mean7 ing as under section 957(a) and the term ‘United

8 States shareholder’ shall have the same meaning as

9 under section 951(b).

10 ‘‘(3) FOREIGN TAX CREDITS.—The amount of

11 any income, war, profits, or excess profit taxes paid

12 (or deemed paid under sections 902 and 960) or ac13 crued by the taxpayer with respect to the excess quali14 fied foreign distribution amount for which a credit

15 would be allowable under section 901 in the absence

16 of this section, shall be reduced by 85 percent.

17 ‘‘(4) FOREIGN TAX CREDIT LIMITATION.—For all

18 purposes of section 904, there shall be disregarded 85

19 percent of—

20 ‘‘(A) the excess qualified foreign distribution

21 amount,

22 ‘‘(B) the amount determined under section

23 78 which is attributable to such excess qualified

24 foreign distribution amount, and
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1 ‘‘(C) the amounts (including assets, gross

2 income, and other relevant bases of apportion3 ment) which are attributable to the excess quali4 fied foreign distribution amount which would,

5 determined without regard to this section, be

6 used to apportion the expenses, losses, and deduc7 tions of the taxpayer under section 861 and 864

8 in determining its taxable income from sources

9 without the United States.

10 For purposes of applying subparagraph (C), the prin11 ciples of section 864(e)(3)(A) shall apply.

12 ‘‘(5) TREATMENT OF ACQUISITIONS AND DISPOSI13 TIONS.—Rules similar to the rules of section 41(f)(3)

14 shall apply in the case of acquisitions or dispositions

15 of controlled foreign corporations occurring on or

16 after the first day of the earliest taxable year taken

17 into account in determining the fixed base period.

18 ‘‘(6) TREATMENT OF CONSOLIDATED GROUPS.—

19 Members of an affiliated group of corporations filing

20 a consolidated return under section 1501 shall be

21 treated as a single taxpayer in applying the rules of

22 this section.

23 ‘‘(7) DESIGNATION OF DIVIDENDS.—Subject to

24 subsection (b)(2), the taxpayer shall designate the

25 particular dividends received during the taxable year
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1 from 1 or more corporations which are controlled for2 eign corporations in which it is a United States

3 shareholder which are dividends excluded from the ex4 cess qualified foreign distribution amount. The total

5 amount of such designated dividends shall equal the

6 base dividend amount.

7 ‘‘(8) TREATMENT OF EXPENSES, LOSSES, AND

8 DEDUCTIONS.—Any expenses, losses, or deductions of

9 the taxpayer allowable under subchapter B—

10 ‘‘(A) shall not be applied to reduce the

11 amounts described in subsection (a)(1), and

12 ‘‘(B) shall be applied to reduce other income

13 of the taxpayer (determined without regard to

14 the amounts described in subsection (a)(1)).

15 ‘‘(d) ELECTION.—

16 ‘‘(1) IN GENERAL.—An election under this sec17 tion shall be made on the taxpayer’s timely filed in18 come tax return for the taxable year (determined by

19 taking extensions into account) ending 120 days or

20 more after the date of the enactment of this section,

21 and, once made, may be revoked only with the consent

22 of the Secretary.

23 ‘‘(2) ALL CONTROLLED FOREIGN CORPORA24 TIONS.—The election shall apply to all corporations

25 which are controlled foreign corporations in which the
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1 taxpayer is a United States shareholder during the

2 taxable year.

3 ‘‘(3) CONSOLIDATED GROUPS.—If a taxpayer is

4 a member of an affiliated group of corporations filing

5 a consolidated return under section 1501 for the tax6 able year, an election under this section shall be made

7 by the common parent of the affiliated group which

8 includes the taxpayer, and shall apply to all members

9 of the affiliated group.

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

11 such regulations as may be necessary and appropriate to

12 carry out the purposes of this section, including regulations

13 under section 55 and regulations addressing corporations

14 which, during the fixed base period or thereafter, join or

15 leave an affiliated group of corporations filing a consoli16 dated return.’’.

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

18 for subpart F of part III of subchapter N of chapter 1 is

19 amended by adding at the end the following new item:

‘‘Sec. 965. Toll tax imposed on excess qualified foreign distribution

amount.’’.

20 (c) EFFECTIVE DATE.—Except as otherwise provided,

21 the amendments made by this section, other than the

22 amendment made by subsection (d), shall apply only to the

23 first taxable year of the electing taxpayer ending 120 days

24 or more after the date of the enactment of this Act.
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1 (d) TERMINATION OF REHABILITATION CREDIT FOR

2 BUILDINGS OTHER THAN CERTIFIED HISTORIC STRUC3 TURES.—Section 47 (relating to rehabilitation credit) is

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

5 ‘‘(e) TERMINATION OF CREDIT FOR BUILDINGS OTHER

6 THAN CERTIFIED HISTORIC STRUCTURES.—No credit shall

7 be allowed under subsection (a)(1) with respect to expendi8 tures incurred after December 31, 2003.’’.

9 SEC. 532. CHILD SUPPORT ENFORCEMENT.

10 (a) INCLUSION IN INCOME OF AMOUNT OF UNPAID

11 CHILD SUPPORT.—Section 108 (relating to discharge of in12 debtedness income) is amended by adding at the end the

13 following new subsection:

14 ‘‘(h) UNPAID CHILD SUPPORT.—

15 ‘‘(1) IN GENERAL.—For purposes of this chapter,

16 any unpaid child support of a delinquent debtor for

17 any taxable year shall be treated as amounts includ18 ible in gross income of the delinquent debtor for the

19 taxable year.

20 ‘‘(2) DEFINITIONS.—For the purposes of this

21 subsection—

22 ‘‘(A) CHILD SUPPORT.—The term ‘child

23 support’ means—

24 ‘‘(i) any periodic payment of a fixed

25 amount, or
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1 ‘‘(ii) any payment of a medical ex2 pense, education expense, insurance pre3 mium, or other similar item,

4 which is required to be paid to a custodial par5 ent by an individual under a support instru6 ment for the support of any qualifying child of

7 such individual. ‘Child support’ does not include

8 any amount which is described in section

9 408(a)(3) of the Social Security Act and which

10 has been assigned to a State.

11 ‘‘(B) CUSTODIAL PARENT.—The term ‘custo12 dial parent’ means an individual who is entitled

13 to receive child support and who has registered

14 with the appropriate State office of child support

15 enforcement charged with implementing section

16 454 of the Social Security Act.

17 ‘‘(C) DELINQUENT DEBTOR.—The term ‘de18 linquent debtor’ means a taxpayer who owes un19 paid child support to a custodial parent.

20 ‘‘(D) QUALIFYING CHILD.—The term ‘quali21 fying child’ means a child of a custodial parent

22 with respect to whom a dependent deduction is

23 allowable under section 151 for the taxable year

24 (or would be so allowable but for paragraph (2)

25 or (4) of section 152(e)).
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1 ‘‘(E) SUPPORT INSTRUMENT.—The term

2 ‘support instrument’ means—

3 ‘‘(i) a decree of divorce or separate

4 maintenance or a written instrument inci5 dent to such a decree,

6 ‘‘(ii) a written separation agreement,

7 or

8 ‘‘(iii) a decree (not described in clause

9 (i)) of a court or administrative agency re10 quiring a parent to make payments for the

11 support or maintenance of 1 or more chil12 dren of such parent.

13 ‘‘(F) UNPAID CHILD SUPPORT.—The term

14 ‘unpaid child support’ means child support that

15 is payable for months during a custodial par16 ent’s taxable year and unpaid as of the last day

17 of such taxable year, provided that such unpaid

18 amount as of such day equals or exceeds one-half

19 of the total amount of child support due to the

20 custodial parent for such year.

21 ‘‘(3) COORDINATION WITH OTHER LAWS.—

22 Amounts treated as income by paragraph (1) shall

23 not be treated as income by reason of paragraph (1)

24 for the purposes of any provision of law which is not

25 an internal revenue law.’’.
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1 (b) EFFECTIVE DATE; IMPLEMENTATION.—The

2 amendments made by is section shall apply to taxable years

3 beginning after December 31, 2002. The Secretary of the

4 Treasury shall publish Form 1099–CS (or such other form

5 that may be prescribed to comply with the amendment

6 made by subsection (b)(1)) and regulations, if any, that

7 may be deemed necessary to carry out the purposes of this

8 Act, not later than 90 days after the date of enactment of

9 this Act.

10 SEC. 533. LOW-INCOME HOUSING TAX CREDIT.

11 (a) FINDINGS.—The Senate finds the following:

12 (1) The low-income housing tax credit is the Na13 tion’s primary program for producing affordable

14 rental housing.

15 (2) Each year, the low-income housing tax credit

16 produces over 115,000 affordable apartments.

17 (3) Since Congress created the low-income hous18 ing tax credit in 1986, the credit has created

19 1,500,000 units of affordable housing for about

20 3,500,000 Americans.

21 (4) Analyses have found that certain approaches

22 to reducing or eliminating the taxation of dividends

23 have the potential to reduce the value of the low-in24 come housing tax credit and so reduce the amount of

25 affordable housing available.
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1 (5) As of 2001, over 7,000,000 American renter

2 families (1 in 5) suffer severe housing affordability

3 problems, meaning that the family spends more than

4 half of its income on rent or lives in substandard

5 housing.

6 (6) More than 150,000 apartments in the low7 cost rental housing inventory are lost each year due

8 to rent increases, abandonment, and deterioration.

9 (b) SENSE OF THE SENATE.—It is the sense of the Sen10 ate that any reduction or elimination of the taxation on

11 dividends should include provisions to preserve the success

12 of the low-income housing tax credit.

13 SEC. 534. EXPENSING OF BROADBAND INTERNET ACCESS

14 EXPENDITURES.

15 (a) IN GENERAL.—Part VI of subchapter B of chapter

16 1 (relating to itemized deductions for individuals and cor17 porations) is amended by inserting after section 190 the fol18 lowing new section:

19 ‘‘SEC. 191. BROADBAND EXPENDITURES.

20 ‘‘(a) TREATMENT OF EXPENDITURES.—

21 ‘‘(1) IN GENERAL.—A taxpayer may elect to

22 treat any qualified broadband expenditure which is

23 paid or incurred by the taxpayer as an expense which

24 is not chargeable to capital account. Any expenditure

25 which is so treated shall be allowed as a deduction.
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1 ‘‘(2) ELECTION.—An election under paragraph

2 (1) shall be made at such time and in such manner

3 as the Secretary may prescribe by regulation.

4 ‘‘(b) QUALIFIED BROADBAND EXPENDITURES.—For

5 purposes of this section—

6 ‘‘(1) IN GENERAL.—The term ‘qualified

7 broadband expenditure’ means, with respect to any

8 taxable year, any direct or indirect costs incurred

9 and properly taken into account with respect to the

10 purchase or installation of qualified equipment (in11 cluding any upgrades thereto), together with any di12 rect or indirect costs incurred and properly taken

13 into account with respect to the connection of such

14 qualified equipment to any qualified subscriber, but

15 only if such costs are incurred after December 31,

16 2003, and before January 1, 2005.

17 ‘‘(2) CERTAIN SATELLITE EXPENDITURES EX18 CLUDED.—Such term shall not include any costs in19 curred with respect to the launching of any satellite

20 equipment.

21 ‘‘(3) LEASED EQUIPMENT.—Such term shall in22 clude so much of the purchase price paid by the lessor

23 of equipment subject to a lease described in subsection

24 (c)(2)(B) as is attributable to expenditures incurred
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1 by the lessee which would otherwise be described in

2 paragraph (1).

3 ‘‘(4) LIMITATION WITH REGARD TO CURRENT

4 GENERATION BROADBAND SERVICES.—Only 50 per5 cent of the amounts taken into account under para6 graph (1) with respect to qualified equipment through

7 which current generation broadband services are pro8 vided shall be treated as qualified broadband expendi9 tures.

10 ‘‘(c) WHEN EXPENDITURES TAKEN INTO ACCOUNT.—

11 For purposes of this section—

12 ‘‘(1) IN GENERAL.—Qualified broadband expend13 itures with respect to qualified equipment shall be

14 taken into account with respect to the first taxable

15 year in which—

16 ‘‘(A) current generation broadband services

17 are provided through such equipment to qualified

18 subscribers, or

19 ‘‘(B) next generation broadband services are

20 provided through such equipment to qualified

21 subscribers.

22 ‘‘(2) LIMITATION.—

23 ‘‘(A) IN GENERAL.—Qualified expenditures

24 shall be taken into account under paragraph (1)

25 only with respect to qualified equipment—
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1 ‘‘(i) the original use of which com2 mences with the taxpayer, and

3 ‘‘(ii) which is placed in service,

4 after December 31, 2003.

5 ‘‘(B) SALE-LEASEBACKS.—For purposes of

6 subparagraph (A), if property—

7 ‘‘(i) is originally placed in service

8 after December 31, 2003, by any person,

9 and

10 ‘‘(ii) sold and leased back by such per11 son within 3 months after the date such

12 property was originally placed in service,

13 such property shall be treated as originally

14 placed in service not earlier than the date on

15 which such property is used under the leaseback

16 referred to in clause (ii).

17 ‘‘(d) SPECIAL ALLOCATION RULES.—

18 ‘‘(1) CURRENT GENERATION BROADBAND SERV19 ICES.—For purposes of determining the amount of

20 qualified broadband expenditures under subsection

21 (a)(1) with respect to qualified equipment through

22 which current generation broadband services are pro23 vided, if the qualified equipment is capable of serving

24 both qualified subscribers and other subscribers, the
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1 qualified broadband expenditures shall be multiplied

2 by a fraction—

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

4 the number of potential qualified subscribers

5 within the rural areas and the underserved areas

6 which the equipment is capable of serving with

7 current generation broadband services, and

8 ‘‘(B) the denominator of which is the total

9 potential subscriber population of the area which

10 the equipment is capable of serving with current

11 generation broadband services.

12 ‘‘(2) NEXT GENERATION BROADBAND SERV13 ICES.—For purposes of determining the amount of

14 qualified broadband expenditures under subsection

15 (a)(1) with respect to qualified equipment through

16 which next generation broadband services are pro17 vided, if the qualified equipment is capable of serving

18 both qualified subscribers and other subscribers, the

19 qualified expenditures shall be multiplied by a

20 fraction—

21 ‘‘(A) the numerator of which is the sum

22 of—

23 ‘‘(i) the number of potential qualified

24 subscribers within the rural areas and un25 derserved areas, plus
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1 ‘‘(ii) the number of potential qualified

2 subscribers within the area consisting only

3 of residential subscribers not described in

4 clause (i),

5 which the equipment is capable of serving with

6 next generation broadband services, and

7 ‘‘(B) the denominator of which is the total

8 potential subscriber population of the area which

9 the equipment is capable of serving with next

10 generation broadband services.

11 ‘‘(e) DEFINITIONS.—For purposes of this section—

12 ‘‘(1) ANTENNA.—The term ‘antenna’ means any

13 device used to transmit or receive signals through the

14 electromagnetic spectrum, including satellite equip15 ment.

16 ‘‘(2) CABLE OPERATOR.—The term ‘cable oper17 ator’ has the meaning given such term by section

18 602(5) of the Communications Act of 1934 (47 U.S.C.

19 522(5)).

20 ‘‘(3) COMMERCIAL MOBILE SERVICE CARRIER.—

21 The term ‘commercial mobile service carrier’ means

22 any person authorized to provide commercial mobile

23 radio service as defined in section 20.3 of title 47,

24 Code of Federal Regulations.
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1 ‘‘(4) CURRENT GENERATION BROADBAND SERV2 ICE.—The term ‘current generation broadband serv3 ice’ means the transmission of signals at a rate of at

4 least 1,000,000 bits per second to the subscriber and

5 at least 128,000 bits per second from the subscriber.

6 ‘‘(5) MULTIPLEXING OR DEMULTIPLEXING.—The

7 term ‘multiplexing’ means the transmission of 2 or

8 more signals over a single channel, and the term

9 ‘demultiplexing’ means the separation of 2 or more

10 signals previously combined by compatible multi11 plexing equipment.

12 ‘‘(6) NEXT GENERATION BROADBAND SERVICE.—

13 The term ‘next generation broadband service’ means

14 the transmission of signals at a rate of at least

15 22,000,000 bits per second to the subscriber and at

16 least 5,000,000 bits per second from the subscriber.

17 ‘‘(7) NONRESIDENTIAL SUBSCRIBER.—The term

18 ‘nonresidential subscriber’ means any person who

19 purchases broadband services which are delivered to

20 the permanent place of business of such person.

21 ‘‘(8) OPEN VIDEO SYSTEM OPERATOR.—The term

22 ‘open video system operator’ means any person au23 thorized to provide service under section 653 of the

24 Communications Act of 1934 (47 U.S.C. 573).
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1 ‘‘(9) OTHER WIRELESS CARRIER.—The term

2 ‘other wireless carrier’ means any person (other than

3 a telecommunications carrier, commercial mobile

4 service carrier, cable operator, open video system op5 erator, or satellite carrier) providing current genera6 tion broadband services or next generation broadband

7 service to subscribers through the radio transmission

8 of energy.

9 ‘‘(10) PACKET SWITCHING.—The term ‘packet

10 switching’ means controlling or routing the path of

11 any digitized transmission signal which is assembled

12 into packets or cells.

13 ‘‘(11) PROVIDER.—The term ‘provider’ means,

14 with respect to any qualified equipment—

15 ‘‘(A) a cable operator,

16 ‘‘(B) a commercial mobile service carrier,

17 ‘‘(C) an open video system operator,

18 ‘‘(D) a satellite carrier,

19 ‘‘(E) a telecommunications carrier, or

20 ‘‘(F) any other wireless carrier,

21 providing current generation broadband services or

22 next generation broadband services to subscribers

23 through such qualified equipment.
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1 ‘‘(12) PROVISION OF SERVICES.—A provider

2 shall be treated as providing services to 1 or more

3 subscribers if—

4 ‘‘(A) such a subscriber has been passed by

5 the provider’s equipment and can be connected to

6 such equipment for a standard connection fee,

7 ‘‘(B) the provider is physically able to de8 liver current generation broadband services or

9 next generation broadband services, as applica10 ble, to such a subscriber without making more

11 than an insignificant investment with respect to

12 such subscriber,

13 ‘‘(C) the provider has made reasonable ef14 forts to make such subscribers aware of the avail15 ability of such services,

16 ‘‘(D) such services have been purchased by

17 1 or more such subscribers, and

18 ‘‘(E) such services are made available to

19 such subscribers at average prices comparable to

20 those at which the provider makes available

21 similar services in any areas in which the pro22 vider makes available such services.

23 ‘‘(13) QUALIFIED EQUIPMENT.—

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

25 equipment’ means equipment which provides
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1 current generation broadband services or next

2 generation broadband services—

3 ‘‘(i) at least a majority of the time

4 during periods of maximum demand to

5 each subscriber who is utilizing such serv6 ices, and

7 ‘‘(ii) in a manner substantially the

8 same as such services are provided by the

9 provider to subscribers through equipment

10 with respect to which no deduction is al11 lowed under subsection (a)(1).

12 ‘‘(B) ONLY CERTAIN INVESTMENT TAKEN

13 INTO ACCOUNT.—Except as provided in subpara14 graph (C) or (D), equipment shall be taken into

15 account under subparagraph (A) only to the ex16 tent it—

17 ‘‘(i) extends from the last point of

18 switching to the outside of the unit, build19 ing, dwelling, or office owned or leased by

20 a subscriber in the case of a telecommuni21 cations carrier,

22 ‘‘(ii) extends from the customer side of

23 the mobile telephone switching office to a

24 transmission/receive antenna (including

25 such antenna) owned or leased by a sub-
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1 scriber in the case of a commercial mobile

2 service carrier,

3 ‘‘(iii) extends from the customer side of

4 the headend to the outside of the unit, build5 ing, dwelling, or office owned or leased by

6 a subscriber in the case of a cable operator

7 or open video system operator, or

8 ‘‘(iv) extends from a transmission/re9 ceive antenna (including such antenna)

10 which transmits and receives signals to or

11 from multiple subscribers, to a trans12 mission/receive antenna (including such an13 tenna) on the outside of the unit, building,

14 dwelling, or office owned or leased by a sub15 scriber in the case of a satellite carrier or

16 other wireless carrier, unless such other

17 wireless carrier is also a telecommuni18 cations carrier.

19 ‘‘(C) PACKET SWITCHING EQUIPMENT.—

20 Packet switching equipment, regardless of loca21 tion, shall be taken into account under subpara22 graph (A) only if it is deployed in connection

23 with equipment described in subparagraph (B)

24 and is uniquely designed to perform the function

25 of packet switching for current generation
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1 broadband services or next generation broadband

2 services, but only if such packet switching is the

3 last in a series of such functions performed in

4 the transmission of a signal to a subscriber or

5 the first in a series of such functions performed

6 in the transmission of a signal from a sub7 scriber.

8 ‘‘(D) MULTIPLEXING AND DEMULTIPLEXING

9 EQUIPMENT.—Multiplexing and demultiplexing

10 equipment shall be taken into account under sub11 paragraph (A) only to the extent it is deployed

12 in connection with equipment described in sub13 paragraph (B) and is uniquely designed to per14 form the function of multiplexing and

15 demultiplexing packets or cells of data and mak16 ing associated application adaptions, but only if

17 such multiplexing or demultiplexing equipment

18 is located between packet switching equipment

19 described in subparagraph (C) and the sub20 scriber’s premises.

21 ‘‘(14) QUALIFIED SUBSCRIBER.—The term

22 ‘qualified subscriber’ means—

23 ‘‘(A) with respect to the provision of current

24 generation broadband services—
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1 ‘‘(i) any nonresidential subscriber

2 maintaining a permanent place of business

3 in a rural area or underserved area, or

4 ‘‘(ii) any residential subscriber resid5 ing in a dwelling located in a rural area or

6 underserved area which is not a saturated

7 market, and

8 ‘‘(B) with respect to the provision of next

9 generation broadband services—

10 ‘‘(i) any nonresidential subscriber

11 maintaining a permanent place of business

12 in a rural area or underserved area, or

13 ‘‘(ii) any residential subscriber.

14 ‘‘(15) RESIDENTIAL SUBSCRIBER.—The term

15 ‘residential subscriber’ means any individual who

16 purchases broadband services which are delivered to

17 such individual’s dwelling.

18 ‘‘(16) RURAL AREA.—The term ‘rural area’

19 means any census tract which—

20 ‘‘(A) is not within 10 miles of any incor21 porated or census designated place containing

22 more than 25,000 people, and

23 ‘‘(B) is not within a county or county

24 equivalent which has an overall population den-
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1 sity of more than 500 people per square mile of

2 land.

3 ‘‘(17) RURAL SUBSCRIBER.—The term ‘rural

4 subscriber’ means any residential subscriber residing

5 in a dwelling located in a rural area or nonresiden6 tial subscriber maintaining a permanent place of

7 business located in a rural area.

8 ‘‘(18) SATELLITE CARRIER.—The term ‘satellite

9 carrier’ means any person using the facilities of a

10 satellite or satellite service licensed by the Federal

11 Communications Commission and operating in the

12 Fixed-Satellite Service under part 25 of title 47 of the

13 Code of Federal Regulations or the Direct Broadcast

14 Satellite Service under part 100 of title 47 of such

15 Code to establish and operate a channel of commu16 nications for distribution of signals, and owning or

17 leasing a capacity or service on a satellite in order

18 to provide such point-to-multipoint distribution.

19 ‘‘(19) SATURATED MARKET.—The term ‘satu20 rated market’ means any census tract in which, as of

21 the date of the enactment of this section—

22 ‘‘(A) current generation broadband services

23 have been provided by a single provider to 85

24 percent or more of the total number of potential
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1 residential subscribers residing in dwellings lo2 cated within such census tract, and

3 ‘‘(B) such services can be utilized—

4 ‘‘(i) at least a majority of the time

5 during periods of maximum demand by

6 each such subscriber who is utilizing such

7 services, and

8 ‘‘(ii) in a manner substantially the

9 same as such services are provided by the

10 provider to subscribers through equipment

11 with respect to which no deduction is al12 lowed under subsection (a)(1).

13 ‘‘(20) SUBSCRIBER.—The term ‘subscriber’

14 means any person who purchases current generation

15 broadband services or next generation broadband serv16 ices.

17 ‘‘(21) TELECOMMUNICATIONS CARRIER.—The

18 term ‘telecommunications carrier’ has the meaning

19 given such term by section 3(44) of the Communica20 tions Act of 1934 (47 U.S.C. 153(44)), but—

21 ‘‘(A) includes all members of an affiliated

22 group of which a telecommunications carrier is

23 a member, and

24 ‘‘(B) does not include a commercial mobile

25 service carrier.
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1 ‘‘(22) TOTAL POTENTIAL SUBSCRIBER POPU2 LATION.—The term ‘total potential subscriber popu3 lation’ means, with respect to any area and based on

4 the most recent census data, the total number of po5 tential residential subscribers residing in dwellings

6 located in such area and potential nonresidential sub7 scribers maintaining permanent places of business lo8 cated in such area.

9 ‘‘(23) UNDERSERVED AREA.—The term ‘under10 served area’ means any census tract which is located

11 in—

12 ‘‘(A) an empowerment zone or enterprise

13 community designated under section 1391,

14 ‘‘(B) the District of Columbia Enterprise

15 Zone established under section 1400,

16 ‘‘(C) a renewal community designated

17 under section 1400E, or

18 ‘‘(D) a low-income community designated

19 under section 45D.

20 ‘‘(24) UNDERSERVED SUBSCRIBER.—The term

21 ‘underserved subscriber’ means any residential sub22 scriber residing in a dwelling located in an under23 served area or nonresidential subscriber maintaining

24 a permanent place of business located in an under25 served area.
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1 ‘‘(f) SPECIAL RULES.—

2 ‘‘(1) PROPERTY USED OUTSIDE THE UNITED

3 STATES, ETC., NOT QUALIFIED.—No expenditures

4 shall be taken into account under subsection (a)(1)

5 with respect to the portion of the cost of any property

6 referred to in section 50(b) or with respect to the por7 tion of the cost of any property taken into account

8 under section 179.

9 ‘‘(2) BASIS REDUCTION.—

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

11 title, the basis of any property shall be reduced

12 by the portion of the cost of such property taken

13 into account under subsection (a)(1).

14 ‘‘(B) ORDINARY INCOME RECAPTURE.—For

15 purposes of section 1245, the amount of the de16 duction allowable under subsection (a)(1) with

17 respect to any property which is of a character

18 subject to the allowance for depreciation shall be

19 treated as a deduction allowed for depreciation

20 under section 167.

21 ‘‘(3) COORDINATION WITH SECTION 38.—No cred22 it shall be allowed under section 38 with respect to

23 any amount for which a deduction is allowed under

24 subsection (a)(1).’’.
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1 (b) SPECIAL RULE FOR MUTUAL OR COOPERATIVE

2 TELEPHONE COMPANIES.—Section 501(c)(12)(B) (relating

3 to list of exempt organizations) is amended by striking ‘‘or’’

4 at the end of clause (iii), by striking the period at the end

5 of clause (iv) and inserting ‘‘, or’’, and by adding at the

6 end the following:

7 ‘‘(v) from the sale of property subject to

8 a lease described in section 191(c)(2)(B),

9 but only to the extent such income does not

10 in any year exceed an amount equal to the

11 qualified broadband expenditures which

12 would be taken into account under section

13 191 for such year if the mutual or coopera14 tive telephone company was not exempt

15 from taxation and was treated as the owner

16 of the property subject to such lease.’’.

17 (c) CONFORMING AMENDMENTS.—

18 (1) Section 263(a)(1) (relating to capital ex19 penditures) is amended by striking ‘‘or’’ at the end of

20 subparagraph (G), by striking the period at the end

21 of subparagraph (H) and inserting ‘‘, or’’, and by

22 adding at the end the following new subparagraph:

23 ‘‘(I) expenditures for which a deduction is

24 allowed under section 191.’’.
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1 (2) Section 1016(a) of such Code is amended by

2 striking ‘‘and’’ at the end of paragraph (27), by strik3 ing the period at the end of paragraph (28) and in4 serting ‘‘, and’’, and by adding at the end the fol5 lowing new paragraph:

6 ‘‘(29) to the extent provided in section

7 191(f)(2).’’.

8 (3) The table of sections for part VI of sub9 chapter A of chapter 1 of such Code is amended by

10 inserting after the item relating to section 190 the fol11 lowing new item:

‘‘Sec. 191. Broadband expenditures.’’.

12 (d) DESIGNATION OF CENSUS TRACTS.—

13 (1) IN GENERAL.—The Secretary of the Treasury

14 shall, not later than 90 days after the date of the en15 actment of this Act, designate and publish those cen16 sus tracts meeting the criteria described in para17 graphs (16), (22), and (23) of section 191(e) of the In18 ternal Revenue Code of 1986 (as added by this sec19 tion). In making such designations, the Secretary of

20 the Treasury shall consult with such other depart21 ments and agencies as the Secretary determines ap22 propriate.

23 (2) SATURATED MARKET.—

24 (A) IN GENERAL.—For purposes of desig25 nating and publishing those census tracts meet-
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1 ing the criteria described in subsection (e)(19) of

2 such section 191—

3 (i) the Secretary of the Treasury shall

4 prescribe not later than 30 days after the

5 date of the enactment of this Act the form

6 upon which any provider which takes the

7 position that it meets such criteria with re8 spect to any census tract shall submit a list

9 of such census tracts (and any other infor10 mation required by the Secretary) not later

11 than 60 days after the date of the publica12 tion of such form, and

13 (ii) the Secretary of the Treasury shall

14 publish an aggregate list of such census

15 tracts and the applicable providers not later

16 than 30 days after the last date such sub17 missions are allowed under clause (i).

18 (B) NO SUBSEQUENT LISTS REQUIRED.—

19 The Secretary of the Treasury shall not be re20 quired to publish any list of census tracts meet21 ing such criteria subsequent to the list described

22 in subparagraph (A)(ii).

23 (C) AUTHORITY TO DISREGARD FALSE SUB24 MISSIONS.—In addition to imposing any other

25 applicable penalties, the Secretary of the Treas-
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1 ury shall have the discretion to disregard any

2 form described in subparagraph (A)(i) on which

3 a provider knowingly submitted false informa4 tion.

5 (e) OTHER REGULATORY MATTERS.—

6 (1) PROHIBITION.—No Federal or State agency

7 or instrumentality shall adopt regulations or rate8 making procedures that would have the effect of con9 fiscating any deduction or portion thereof allowed

10 under section 191 of the Internal Revenue Code of

11 1986 (as added by this section) or otherwise sub12 verting the purpose of this section.

13 (2) TREASURY REGULATORY AUTHORITY.—It is

14 the intent of Congress in providing the election to de15 duct qualified broadband expenditures under section

16 191 of the Internal Revenue Code of 1986 (as added

17 by this section) to provide incentives for the purchase,

18 installation, and connection of equipment and facili19 ties offering expanded broadband access to the Inter20 net for users in certain low income and rural areas

21 of the United States, as well as to residential users

22 nationwide, in a manner that maintains competitive

23 neutrality among the various classes of providers of

24 broadband services. Accordingly, the Secretary of the

25 Treasury shall prescribe such regulations as may be
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1 necessary or appropriate to carry out the purposes of

2 section 191 of such Code, including—

3 (A) regulations to determine how and when

4 a taxpayer that incurs qualified broadband ex5 penditures satisfies the requirements of section

6 191 of such Code to provide broadband services,

7 and

8 (B) regulations describing the information,

9 records, and data taxpayers are required to pro10 vide the Secretary to substantiate compliance

11 with the requirements of section 191 of such

12 Code.

13 (f) EFFECTIVE DATE.—The amendments made by this

14 section shall apply to expenditures incurred after December

15 31, 2003.

16 SEC. 535. INCOME TAX CREDIT FOR DISTILLED SPIRITS

17 WHOLESALERS AND FOR DISTILLED SPIRITS

18 IN CONTROL STATE BAILMENT WAREHOUSES

19 FOR COSTS OF CARRYING FEDERAL EXCISE

20 TAXES ON BOTTLED DISTILLED SPIRITS.

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

22 A of chapter 51 (relating to gallonage and occupational

23 taxes) is amended by adding at the end the following new

24 section:
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1 ‘‘SEC. 5011. INCOME TAX CREDIT FOR AVERAGE COST OF

2 CARRYING EXCISE TAX.

3 ‘‘(a) IN GENERAL.—For purposes of section 38, the

4 amount of the distilled spirits credit for any taxable year

5 is the amount equal to the product of—

6 ‘‘(1) in the case of—

7 ‘‘(A) any eligible wholesaler—

8 ‘‘(i) the number of cases of bottled dis9 tilled spirits—

10 ‘‘(I) which were bottled in the

11 United States, and

12 ‘‘(II) which are purchased by such

13 wholesaler during the taxable year di14 rectly from the bottler of such spirits,

15 or

16 ‘‘(B) any person which is subject to section

17 5005 and which is not an eligible wholesaler, the

18 number of cases of bottled distilled spirits which

19 are stored in a warehouse operated by, or on be20 half of, a State, or agency or political subdivi21 sion thereof, on which title has not passed on an

22 unconditional sale basis, and

23 ‘‘(2) the average tax-financing cost per case for

24 the most recent calendar year ending before the begin25 ning of such taxable year.
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1 ‘‘(b) ELIGIBLE WHOLESALER.—For purposes of this

2 section, the term ‘eligible wholesaler’ means any person

3 which holds a permit under the Federal Alcohol Adminis4 tration Act as a wholesaler of distilled spirits which is not

5 a State, or agency or political subdivision thereof.

6 ‘‘(c) AVERAGE TAX-FINANCING COST.—

7 ‘‘(1) IN GENERAL.—For purposes of this section,

8 the average tax-financing cost per case for any cal9 endar year is the amount of interest which would ac10 crue at the deemed financing rate during a 60-day

11 period on an amount equal to the deemed Federal ex12 cise tax per case.

13 ‘‘(2) DEEMED FINANCING RATE.—For purposes

14 of paragraph (1), the deemed financing rate for any

15 calendar year is the average of the corporate overpay16 ment rates under paragraph (1) of section 6621(a)

17 (determined without regard to the last sentence of

18 such paragraph) for calendar quarters of such year.

19 ‘‘(3) DEEMED FEDERAL EXCISE TAX PER

20 CASE.—For purposes of paragraph (1), the deemed

21 Federal excise tax per case is $25.68.

22 ‘‘(d) OTHER DEFINITIONS AND SPECIAL RULES.—For

23 purposes of this section—

24 ‘‘(1) CASE.—The term ‘case’ means 12 80-proof

25 750 milliliter bottles.
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1 ‘‘(2) NUMBER OF CASES IN LOT.—The number of

2 cases in any lot of distilled spirits shall be determined

3 by dividing the number of liters in such lot by 9.’’.

4 (b) CONFORMING AMENDMENTS.—

5 (1) Subsection (b) of section 38 is amended by

6 striking ‘‘plus’’ at the end of paragraph (14), by

7 striking the period at the end of paragraph (15) and

8 inserting ‘‘, plus’’, and by adding at the end the fol9 lowing new paragraph:

10 ‘‘(16) the distilled spirits credit determined

11 under section 5011(a).’’.

12 (2) Subsection (d) of section 39 (relating to

13 carryback and carryforward of unused credits) is

14 amended by adding at the end the following new

15 paragraph:

16 ‘‘(11) NO CARRYBACK OF SECTION 5011 CREDIT

17 BEFORE JANUARY 1, 2003.—No portion of the unused

18 business credit for any taxable year which is attrib19 utable to the credit determined under section 5011(a)

20 may be carried back to a taxable year beginning be21 fore January 1, 2003.’’.

22 (3) The table of sections for subpart A of part I

23 of subchapter A of chapter 51 is amended by adding

24 at the end the following new item:

‘‘Sec. 5011. Income tax credit for average cost of carrying excise

tax.’’.
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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, 2002.

4 SEC. 536. CLARIFICATION OF CONTRIBUTION IN AID OF

5 CONSTRUCTION FOR WATER AND SEWERAGE

6 DISPOSAL UTILITIES.

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

8 118(c)(3) (relating to definitions) is amended to read as

9 follows:

10 ‘‘(A) CONTRIBUTION IN AID OF CONSTRUC11 TION.—The term ‘contribution in aid of con12 struction’ shall be defined by regulations pre13 scribed by the Secretary, except that such term—

14 ‘‘(i) shall include amounts paid as cus15 tomer connection fees (including amounts

16 paid to connect the customer’s water service

17 line or sewer lateral line to the utility’s dis18 tribution or collection system or extend a

19 main water or sewer line to provide service

20 to a customer), and

21 ‘‘(ii) shall not include amounts paid as

22 service charges for starting or stopping serv23 ices.’’.
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1 (b) EFFECTIVE DATE.—The amendment made by sub2 section (a) shall apply to contributions made after the date

3 of the enactment of this Act.

4 SEC. 537. RESTORATION OF DEDUCTION FOR TRAVEL EX5 PENSES OF SPOUSE, ETC. ACCOMPANYING

6 TAXPAYER ON BUSINESS TRAVEL.

7 (a) IN GENERAL.—Subsection (m) of section 274 (re8 lating to additional limitations on travel expenses) is

9 amended by striking paragraph (3)(A).

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

11 section shall apply to amounts paid or incurred after the

12 date of the enactment of this Act, and on or before December

13 31, 2004.

14 SEC. 538. CERTAIN SIGHTSEEING FLIGHTS EXEMPT FROM

15 TAXES ON AIR TRANSPORTATION.

16 (a) IN GENERAL.—Section 4281 (relating to small air17 craft on nonestablished lines) is amended by adding at the

18 end the following new sentence: ‘‘For purposes of this sec19 tion, an aircraft shall not be considered as operated on an

20 established line if such aircraft is operated on a flight the

21 sole purpose of which is sightseeing.’’.

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

23 section shall apply with respect to transportation beginning

24 on or after the date of the enactment of this Act, but shall

25 not apply to any amount paid before such date.
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1 SEC. 539. CONFORMING THE INTERNAL REVENUE CODE OF

2 1986 TO REQUIREMENTS IMPOSED BY THE

3 WOMEN’S HEALTH AND CANCER RIGHTS ACT

4 OF 1998.

5 (a) IN GENERAL.—Subchapter B of chapter 100 (relat6 ing to other requirements) is amended by inserting after

7 section 9812 the following new section:

8 ‘‘SEC. 9813. REQUIRED COVERAGE FOR RECONSTRUCTIVE

9 SURGERY FOLLOWING MASTECTOMIES.

10 ‘‘(a) IN GENERAL.—A group health plan that provides

11 medical and surgical benefits with respect to a mastectomy

12 shall provide, in a case of a participant or beneficiary who

13 is receiving benefits in connection with a mastectomy and

14 who elects breast reconstruction in connection with such

15 mastectomy, coverage for—

16 ‘‘(1) all stages of reconstruction of the breast on

17 which the mastectomy has been performed,

18 ‘‘(2) surgery and reconstruction of the other

19 breast to produce a symmetrical appearance, and

20 ‘‘(3) prostheses and physical complications of

21 mastectomy, including lymphedemas,

22 in a manner determined in consultation with the attending

23 physician and the patient. Such coverage may be subject

24 to annual deductibles and coinsurance provisions as may

25 be deemed appropriate and as are consistent with those es26 tablished for other benefits under the plan. Written notice
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1 of the availability of such coverage shall be delivered to the

2 participant upon enrollment and annually thereafter.

3 ‘‘(b) PROHIBITIONS.—A group health plan may not—

4 ‘‘(1) deny to a patient eligibility, or continued

5 eligibility, to enroll or to renew coverage under the

6 terms of the plan, solely for the purpose of avoiding

7 the requirements of this section, and

8 ‘‘(2) penalize or otherwise reduce or limit the re9 imbursement of an attending provider, or provide in10 centives (monetary or otherwise) to an attending pro11 vider, to induce such provider to provide care to an

12 individual participant or beneficiary in a manner

13 inconsistent with this section.

14 ‘‘(c) RULE OF CONSTRUCTION.—Nothing in this sec15 tion shall be construed to prevent a group health plan from

16 negotiating the level and type of reimbursement with a pro17 vider for care provided in accordance with this section.’’

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

19 chapter 100 of such Code is amended inserting after the

20 item relating to section 9812 the following new item:

‘‘Sec. 9813. Required coverage for reconstructive surgery following

mastectomies.’’

21 (c) EFFECTIVE DATE.—

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

23 this section shall apply with respect to plan years be24 ginning on or after the date of enactment of this Act.
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1 (2) SPECIAL RULE FOR COLLECTIVE BARGAINING

2 AGREEMENTS.—In the case of a group health plan

3 maintained pursuant to 1 or more collective bar4 gaining agreements between employee representatives

5 and 1 or more employers, any plan amendment made

6 pursuant to a collective bargaining agreement relat7 ing to the plan which amends the plan solely to con8 form to any requirement added by this section shall

9 not be treated as a termination of such collective bar10 gaining agreement.

11 SEC. 540. EXPANSION OF DESIGNATED RENEWAL COMMU12 NITY AREA BASED ON 2000 CENSUS DATA.

13 (a) RENEWAL COMMUNITIES.—Section 1400E (relat14 ing to designation of renewal communities) is amended by

15 adding at the end the following new subsection:

16 ‘‘(g) EXPANSION OF DESIGNATED AREAS.—

17 ‘‘(1) EXPANSION BASED ON 2000 CENSUS.—At

18 the request of the nominating entity with respect to

19 a renewal community, the Secretary of Housing and

20 Urban Development may expand the area of a re21 newal community to include any census tract—

22 ‘‘(A) which, at the time such community

23 was nominated, met the requirements of this sec24 tion for inclusion in such community but for the

25 failure of such tract to meet 1 or more of the
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1 population and poverty rate requirements of this

2 section using 1990 census data, and

3 ‘‘(B) which meets all failed population and

4 poverty rate requirements of this section using

5 2000 census data.

6 ‘‘(2) EXPANSION TO CERTAIN AREAS WHICH DO

7 NOT MEET POPULATION REQUIREMENTS.—

8 ‘‘(A) IN GENERAL.—At the request of 1 or

9 more local governments and the State or States

10 in which an area described in subparagraph (B)

11 is located, the Secretary of Housing and Urban

12 Development may expand a designated area to

13 include such area.

14 ‘‘(B) AREA.—An area is described in this

15 subparagraph if—

16 ‘‘(i) the area is adjacent to at least 1

17 other area designated as a renewal commu18 nity,

19 ‘‘(ii) the area has a population less

20 than the population required under sub21 section (c)(2)(C), and

22 ‘‘(iii)(I) the area meets the require23 ments of subparagraphs (A) and (B) of sub24 section (c)(2) and subparagraph (A) of sub25 section (c)(3), or
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1 ‘‘(II) the area contains a population of

2 less than 100 people.

3 ‘‘(3) APPLICABILITY.—Any expansion of a re4 newal community under this section shall take effect

5 as provided in subsection (b).’’.

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

7 subsection shall take effect as if included in the amendments

8 made by section 101 of the Community Renewal Tax Relief

9 Act of 2000.

10 SEC. 541. RENEWAL COMMUNITY EMPLOYERS MAY QUALIFY

11 FOR EMPLOYMENT CREDIT BY EMPLOYING

12 RESIDENTS OF CERTAIN OTHER RENEWAL

13 COMMUNITIES.

14 (a) IN GENERAL.—Section 1400H(b)(2) (relating to

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

16 paragraph (1), by striking the period at the end of para17 graph (2) and inserting ‘‘, and’’, and by adding at the end

18 the following new paragraph:

19 ‘‘(3) subsection (d)(1)(B) thereof shall be applied

20 by substituting ‘such renewal community, an adjacent

21 renewal community within the same State as such re22 newal community, or a renewal community within

23 such State which is within 5 miles of any border of

24 such renewal community’ for ‘such empowerment

25 zone’.’’.
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1 (b) EFFECTIVE DATE.—The amendments made by sub2 section (a) shall take effect as if included in the amendment

3 made by section 101(a) of the Community Renewal Tax Re4 lief Act of 2000.

5 SEC. 542. EXPANSION OF INCOME TAX EXCLUSION FOR

6 COMBAT ZONE SERVICE.

7 (a) COMBAT ZONE SERVICE TO INCLUDE TRANSIT TO

8 ZONE.—Section 112(c)(3) of the Internal Revenue Code of

9 1986 (relating to definitions) is amended by adding at the

10 end the following new sentence: ‘‘Such service shall include

11 any period (not to exceed 14 days) of direct transit to the

12 combat zone.’’.

13 (b) REMOVAL OF LIMITATION ON EXCLUSION FOR

14 COMMISSIONED OFFICERS.—

15 (1) IN GENERAL.—Subsection (b) of section 112

16 of the Internal Revenue Code of 1986 (relating to cer17 tain combat zone compensation of members of the

18 Armed Forces) is repealed.

19 (2) CONFORMING AMENDMENTS.—

20 (A) Section 112(a) of such Code is

21 amended—

22 (i) by striking ‘‘below the grade of com23 missioned officer’’, and
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1 (ii) by striking ‘‘ENLISTED PER2 SONNEL’’ in the heading and inserting ‘‘IN

3 GENERAL’’.

4 (B) Section 112(c) of such Code is amended

5 by striking paragraphs (1) and (5) and by redes6 ignating paragraphs (2), (3), and (4) as para7 graphs (1), (2), and (3), respectively.

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

9 section shall apply to months beginning after December 31,

10 2002.

11 SEC. 543. AVAILABILITY OF CERTAIN TAX BENEFITS FOR

12 MEMBERS OF THE ARMED FORCES PER13 FORMING SERVICES AT GUANTANAMO BAY

14 NAVAL STATION, CUBA, AND ON THE ISLAND

15 OF DIEGO GARCIA.

16 (a) GENERAL RULE.—In the case of a member of the

17 Armed Forces of the United States who is entitled to special

18 pay under section 305 of title 37, United States Code (relat19 ing to special pay: hardship duty pay), for services per20 formed as a member of the Joint Task Force Guantanamo

21 at Guantanamo Bay Naval Station, Cuba, or for services

22 performed on the Island of Diego Garcia as part of Oper23 ation Iraqi Freedom, such member shall be treated in the

24 same manner as if such services were in a combat zone (as

25 determined under section 112 of the Internal Revenue Code
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1 of 1986) for purposes of the following provisions of such

2 Code:

3 (1) Section 2(a)(3) (relating to special rule

4 where deceased spouse was in missing status).

5 (2) Section 112 (relating to the exclusion of cer6 tain combat pay of members of the Armed Forces).

7 (3) Section 692 (relating to income taxes of

8 members of Armed Forces on death).

9 (4) Section 2201 (relating to members of the

10 Armed Forces dying in combat zone or by reason of

11 combat-zone-incurred wounds, etc.).

12 (5) Section 3401(a)(1) (defining wages relating

13 to combat pay for members of the Armed Forces).

14 (6) Section 4253(d) (relating to the taxation of

15 phone service originating from a combat zone from

16 members of the Armed Forces).

17 (7) Section 6013(f)(1) (relating to joint return

18 where individual is in missing status).

19 (8) Section 7508 (relating to time for performing

20 certain acts postponed by reason of service in combat

21 zone).

22 (b) EFFECTIVE DATES.—

23 (1) IN GENERAL.—Except as provided in para24 graph (2), this section shall take effect on January 1,

25 2003.
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1 (2) WITHHOLDING.—Subsection (a)(5) shall

2 apply to remuneration paid after December 31, 2002.

3 SEC. 544. CITRUS CANKER TREE RELIEF.

4 (a) RATABLE INCLUSION.—

5 (1) IN GENERAL.—Part I of subchapter Q of

6 chapter 1 (relating to income averaging) is amended

7 by inserting after section 1301 the following new sec8 tion:

9 ‘‘SEC. 1302. RATABLE INCOME INCLUSION FOR CITRUS CAN10 KER TREE PAYMENTS.

11 ‘‘(a) IN GENERAL.—At the election of the taxpayer,

12 any amount taken into account as income or gain by reason

13 of receiving a citrus canker tree payment shall be included

14 in the income of the taxpayer ratably over the 10-year pe15 riod beginning with the taxable year in which the payment

16 is received or accrued by the taxpayer. Such election shall

17 be made on the return of tax for such taxable year in such

18 manner as the Secretary prescribes, and, once made shall

19 be irrevocable.

20 ‘‘(b) CITRUS CANKER TREE PAYMENT.—For purposes

21 of subsection (a), the term ‘citrus canker tree payment’

22 means a payment made to an owner of a commercial citrus

23 grove to recover income that was lost as a result of the re24 moval of commercial citrus trees to control canker under

25 the amendments to the citrus canker regulations (7 C.F.R.
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1 301) made by the final rule published in the Federal Reg2 ister by the Secretary of Agriculture on June 18, 2001 (66

3 Fed. Reg. 32713, Docket No. 00–37–4).’’.

4 (2) CLERICAL AMENDMENT.—The table of sec5 tions for part I of subchapter Q of chapter 1 is

6 amended by inserting after the item relating to sec7 tion 1301 the following new item:

Sec. 1302. Ratable income inclusion for citrus canker tree payments.’’.

8 (b) EXPANSION OF PERIOD WITHIN WHICH CON9 VERTED CITRUS TREE PROPERTY MUST BE REPLACED.—

10 Section 1033 (relating to period within which property

11 must be replaced) is amended by redesignating subsection

12 (k) as subsection (l) and by inserting after subsection (j)

13 the following new subsection:

14 ‘‘(k) COMMERCIAL TREES DESTROYED BECAUSE OF

15 CITRUS TREE CANKER.—In the case of commercial citrus

16 trees which are compulsorily or involuntarily converted

17 under a public order as a result of the citrus tree canker,

18 clause (i) of subsection (a)(2)(B) shall be applied as if such

19 clause reads: ‘4 years after the close of the first taxable year

20 in which any part of the gain upon conversion is realized,

21 or such additional period after the close of such taxable year

22 as determined appropriate by the Secretary on a regional

23 basis if a State or Federal plant health authority deter24 mines with respect to such region that the land on which
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1 such trees grew is not free from the bacteria that causes

2 citrus tree canker’.’’.

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

4 section shall apply to taxable years beginning before, on,

5 or after the date of the enactment of this Act.

6 SEC. 545. EXCLUSION OF CERTAIN PUNITIVE DAMAGE

7 AWARDS.

8 (a) IN GENERAL.—Section 104 (relating to compensa9 tion for injuries or sickness) is amended by redesignating

10 subsection (d) as subsection (e), and by inserting after sub11 section (c) the following new subsection:

12 ‘‘(d) EXCLUSION OF PUNITIVE DAMAGES PAID TO A

13 STATE UNDER A SPLIT-AWARD STATUTE.—

14 ‘‘(1) IN GENERAL.—The phrase ‘(other than pu15 nitive damages)’ in subsection (a) shall not apply

16 to—

17 ‘‘(A) any portion of an award of punitive

18 damages in a civil action which is paid to a

19 State under a split-award statute, or

20 ‘‘(B) any attorneys’ fees or other costs in21 curred by the taxpayer in connection with ob22 taining an award of punitive damages to which

23 subparagraph (A) is applicable.

24 ‘‘(2) SPLIT-AWARD STATUTE.—For purposes of

25 this subsection, the term ‘split-award statute’ means
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1 a State law that requires a fixed portion of an award

2 of punitive damages in a civil action to be paid to

3 the State.’’.

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

5 section shall apply to awards made in taxable years ending

6 after the date of the enactment of this Act.

7 SEC. 546. TREATMENT OF CERTAIN IMPORTED RECYCLED

8 HALONS.

9 (a) IN GENERAL.—Section 1803(c) of the Small Busi10 ness Job Protection Act of 1986 (Public Law 104–188) is

11 amended by striking ‘‘1997’’ and ‘‘1998’’ and inserting

12 ‘‘1994’’.

13 (b) WAIVER OF LIMITATIONS.—If refund or credit of

14 any overpayment of tax resulting from the amendment

15 made by this section is prevented at any time before the

16 close of the 1-year period beginning on the date of the enact17 ment of this Act by the operation of any law or rule of

18 law (including res judicata), such refund or credit may nev19 ertheless be made or allowed if claim therefor is filed before

20 the close of such period.

21 SEC. 547. MODIFICATION OF INVOLUNTARY CONVERSION

22 RULES FOR BUSINESSES AFFECTED BY THE

23 SEPTEMBER 11TH TERRORIST ATTACKS.

24 (a) IN GENERAL.—Subsection (g) of section 1400L is

25 amended to read as follows:
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1 ‘‘(g) MODIFICATION OF RULES APPLICABLE TO NON2 RECOGNITION OF GAIN.—In the case of property which is

3 compulsorily or involuntarily converted as a result of the

4 terrorist attacks on September 11, 2001, in the New York

5 Liberty Zone—

6 ‘‘(1) which was held by a corporation which is

7 a member of an affiliated group filing a consolidated

8 return, such corporation shall be treated as satisfying

9 the purchase requirement of section 1033(a)(2) with

10 respect to such property to the extent such require11 ment is satisfied by another member of the group, and

12 ‘‘(2) notwithstanding subsections (g) and (h) of

13 section 1033, clause (i) of section 1033(a)(2)(B) shall

14 be applied by substituting ‘5 years’ for ‘2 years’ with

15 respect to property which is compulsorily or involun16 tarily converted as a result of the terrorist attacks on

17 September 11, 2001, in the New York Liberty Zone

18 but only if substantially all of the use of the replace19 ment property is in the City of New York, New

20 York.’’.

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

22 Act shall apply to involuntary conversions occurring on or

23 after September 11, 2001.
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1 Subtitle D—Medicare Provisions

2 SEC. 561. EQUALIZING URBAN AND RURAL STANDARDIZED

3 PAYMENT AMOUNTS UNDER THE MEDICARE

4 INPATIENT HOSPITAL PROSPECTIVE PAY5 MENT SYSTEM.

6 (a) IN GENERAL.—Section 1886(d)(3)(A)(iv) of the

7 Social Security Act (42 U.S.C. 1395ww(d)(3)(A)(iv)) is

8 amended—

9 (1) by striking ‘‘(iv) For discharges’’ and insert10 ing ‘‘(iv)(I) Subject to subclause (II), for discharges’’;

11 and

12 (2) by adding at the end the following new sub13 clause:

14 ‘‘(II) For discharges occurring in a fiscal year

15 beginning with fiscal year 2004, the Secretary shall

16 compute a standardized amount for hospitals located

17 in any area within the United States and within

18 each region equal to the standardized amount com19 puted for the previous fiscal year under this subpara20 graph for hospitals located in a large urban area (or,

21 beginning with fiscal year 2005, for hospitals located

22 in any area) increased by the applicable percentage

23 increase under subsection (b)(3)(B)(i) for the fiscal

24 year involved.’’.

25 (b) CONFORMING AMENDMENTS.—
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1 (1) COMPUTING DRG-SPECIFIC RATES.—Section

2 1886(d)(3)(D) of the Social Security Act (42 U.S.C.

3 1395ww(d)(3)(D)) is amended—

4 (A) in the heading, by striking ‘‘IN DIF5 FERENT AREAS’’;

6 (B) in the matter preceding clause (i), by

7 striking ‘‘, each of’’;

8 (C) in clause (i)—

9 (i) in the matter preceding subclause

10 (I), by inserting ‘‘for fiscal years before fis11 cal year 2004,’’ before ‘‘for hospitals’’; and

12 (ii) in subclause (II), by striking

13 ‘‘and’’ after the semicolon at the end;

14 (D) in clause (ii)—

15 (i) in the matter preceding subclause

16 (I), by inserting ‘‘for fiscal years before fis17 cal year 2004,’’ before ‘‘for hospitals’’; and

18 (ii) in subclause (II), by striking the

19 period at the end and inserting ‘‘; and’’;

20 and

21 (E) by adding at the end the following new

22 clause:

23 ‘‘(iii) for a fiscal year beginning after fiscal

24 year 2003, for hospitals located in all areas, to

25 the product of—
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1 ‘‘(I) the applicable standardized

2 amount (computed under subparagraph

3 (A)), reduced under subparagraph (B), and

4 adjusted or reduced under subparagraph (C)

5 for the fiscal year; and

6 ‘‘(II) the weighting factor (determined

7 under paragraph (4)(B)) for that diagnosis8 related group.’’.

9 (2) TECHNICAL CONFORMING SUNSET.—Section

10 1886(d)(3) of the Social Security Act (42 U.S.C.

11 1395ww(d)(3)) is amended—

12 (A) in the matter preceding subparagraph

13 (A), by inserting ‘‘, for fiscal years before fiscal

14 year 1997,’’ before ‘‘a regional adjusted DRG

15 prospective payment rate’’; and

16 (B) in subparagraph (D), in the matter

17 preceding clause (i), by inserting ‘‘, for fiscal

18 years before fiscal year 1997,’’ before ‘‘a regional

19 DRG prospective payment rate for each region,’’.

20 SEC. 562. FAIRNESS IN THE MEDICARE DISPROPORTIONATE

21 SHARE HOSPITAL (DSH) ADJUSTMENT FOR

22 RURAL HOSPITALS.

23 (a) EQUALIZING DSH PAYMENT AMOUNTS.—

24 (1) IN GENERAL.—Section 1886(d)(5)(F)(vii) of

25 the Social Security Act (42 U.S.C.
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1 1395ww(d)(5)(F)(vii)) is amended by inserting ‘‘,

2 and, after October 1, 2003, for any other hospital de3 scribed in clause (iv),’’ after ‘‘clause (iv)(I)’’ in the

4 matter preceding subclause (I).

5 (2) CONFORMING AMENDMENTS.—Section

6 1886(d)(5)(F) of the Social Security Act (42 U.S.C.

7 1395ww(d)(5)(F)) is amended—

8 (A) in clause (iv)—

9 (i) in subclause (II)—

10 (I) by inserting ‘‘and before Octo11 ber 1, 2003,’’ after ‘‘April 1, 2001,’’;

12 and

13 (II) by inserting ‘‘or, for dis14 charges occurring on or after October

15 1, 2003, is equal to the percent deter16 mined in accordance with the applica17 ble formula described in clause (vii)’’

18 after ‘‘clause (xiii)’’;

19 (ii) in subclause (III)—

20 (I) by inserting ‘‘and before Octo21 ber 1, 2003,’’ after ‘‘April 1, 2001,’’;

22 and

23 (II) by inserting ‘‘or, for dis24 charges occurring on or after October

25 1, 2003, is equal to the percent deter-
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1 mined in accordance with the applica2 ble formula described in clause (vii)’’

3 after ‘‘clause (xii)’’;

4 (iii) in subclause (IV)—

5 (I) by inserting ‘‘and before Octo6 ber 1, 2003,’’ after ‘‘April 1, 2001,’’;

7 and

8 (II) by inserting ‘‘or, for dis9 charges occurring on or after October

10 1, 2003, is equal to the percent deter11 mined in accordance with the applica12 ble formula described in clause (vii)’’

13 after ‘‘clause (x) or (xi)’’;

14 (iv) in subclause (V)—

15 (I) by inserting ‘‘and before Octo16 ber 1, 2003,’’ after ‘‘April 1, 2001,’’;

17 and

18 (II) by inserting ‘‘or, for dis19 charges occurring on or after October

20 1, 2003, is equal to the percent deter21 mined in accordance with the applica22 ble formula described in clause (vii)’’

23 after ‘‘clause (xi)’’; and

24 (v) in subclause (VI)—
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1 (I) by inserting ‘‘and before Octo2 ber 1, 2003,’’ after ‘‘April 1, 2001,’’;

3 and

4 (II) by inserting ‘‘or, for dis5 charges occurring on or after October

6 1, 2003, is equal to the percent deter7 mined in accordance with the applica8 ble formula described in clause (vii)’’

9 after ‘‘clause (x)’’;

10 (B) in clause (viii), by striking ‘‘The for11 mula’’ and inserting ‘‘For discharges occurring

12 before October 1, 2003, the formula’’; and

13 (C) in each of clauses (x), (xi), (xii), and

14 (xiii), by striking ‘‘For purposes’’ and inserting

15 ‘‘With respect to discharges occurring before Oc16 tober 1, 2003, for purposes’’.

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

18 section shall apply with respect to discharges occurring on

19 or after October 1, 2003.

20 SEC. 563. MEDICARE INPATIENT HOSPITAL PAYMENT AD21 JUSTMENT FOR LOW-VOLUME HOSPITALS.

22 Section 1886(d) of the Social Security Act (42 U.S.C.

23 1395ww(d)) is amended by adding at the end the following

24 new paragraph:
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1 ‘‘(12) PAYMENT ADJUSTMENT FOR LOW-VOLUME

2 HOSPITALS.—

3 ‘‘(A) PAYMENT ADJUSTMENT.—

4 ‘‘(i) IN GENERAL.—Notwithstanding

5 any other provision of this section, for each

6 cost reporting period (beginning with the

7 cost reporting period that begins in fiscal

8 year 2005), the Secretary shall provide for

9 an additional payment amount to each low10 volume hospital (as defined in clause (iii))

11 for discharges occurring during that cost re12 porting period to increase the amount paid

13 to such hospital under this section for such

14 discharges by the applicable percentage in15 crease determined under clause (ii).

16 ‘‘(ii) APPLICABLE PERCENTAGE IN17 CREASE.—The Secretary shall determine a

18 percentage increase applicable under this

19 paragraph that ensures that—

20 ‘‘(I) no percentage increase in

21 payments under this paragraph ex22 ceeds 25 percent of the amount of pay23 ment that would otherwise be made to

24 a low-volume hospital under this sec-
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1 tion for each discharge (but for this

2 paragraph);

3 ‘‘(II) low-volume hospitals that

4 have the lowest number of discharges

5 during a cost reporting period receive

6 the highest percentage increase in pay7 ments due to the application of this

8 paragraph; and

9 ‘‘(III) the percentage increase in

10 payments due to the application of this

11 paragraph is reduced as the number of

12 discharges per cost reporting period in13 creases.

14 ‘‘(iii) LOW-VOLUME HOSPITAL DE15 FINED.—For purposes of this paragraph,

16 the term ‘low-volume hospital’ means, for a

17 cost reporting period, a subsection (d) hos18 pital (as defined in paragraph (1)(B)) other

19 than a critical access hospital (as defined in

20 section 1861(mm)(1)) that—

21 ‘‘(I) the Secretary determines had

22 an average of less than 2,000 dis23 charges (determined with respect to all

24 patients and not just individuals re25 ceiving benefits under this title) during
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1 the 3 most recent cost reporting periods

2 for which data are available that pre3 cede the cost reporting period to which

4 this paragraph applies; and

5 ‘‘(II) is located at least 15 miles

6 from a similar hospital (or is deemed

7 by the Secretary to be so located by

8 reason of such factors as the Secretary

9 determines appropriate, including the

10 time required for an individual to

11 travel to the nearest alternative source

12 of appropriate inpatient care (taking

13 into account the location of such alter14 native source of inpatient care and

15 any weather or travel conditions that

16 may affect such travel time)).

17 ‘‘(B) PROHIBITING CERTAIN REDUCTIONS.—

18 Notwithstanding subsection (e), the Secretary

19 shall not reduce the payment amounts under this

20 section to offset the increase in payments result21 ing from the application of subparagraph (A).’’.
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1 SEC. 564. ADJUSTMENT TO THE MEDICARE INPATIENT HOS2 PITAL PPS WAGE INDEX TO REVISE THE

3 LABOR-RELATED SHARE OF SUCH INDEX.

4 (a) IN GENERAL.—Section 1886(d)(3)(E) of the Social

5 Security Act (42 U.S.C. 1395ww(d)(3)(E)) is amended—

6 (1) by striking ‘‘WAGE LEVELS.—The Secretary’’

7 and inserting ‘‘WAGE LEVELS.—

8 ‘‘(i) IN GENERAL.—Except as provided in

9 clause (ii), the Secretary’’; and

10 (2) by adding at the end the following new

11 clause:

12 ‘‘(ii) ALTERNATIVE PROPORTION TO BE AD13 JUSTED BEGINNING IN FISCAL YEAR 2004.—

14 ‘‘(I) IN GENERAL.—Except as provided

15 in subclause (II), for discharges occurring

16 on or after October 1, 2003, the Secretary

17 shall substitute ‘62 percent’ for the propor18 tion described in the first sentence of clause

19 (i).

20 ‘‘(II) HOLD HARMLESS FOR CERTAIN

21 HOSPITALS.—If the application of subclause

22 (I) would result in lower payments to a hos23 pital than would otherwise be made, then

24 this subparagraph shall be applied as if this

25 clause had not been enacted.’’.
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1 (b) WAIVING BUDGET NEUTRALITY.—Section

2 1886(d)(3)(E) of the Social Security Act (42 U.S.C.

3 1395ww(d)(3)(E)), as amended by subsection (a), is amend4 ed by adding at the end of clause (i) the following new sen5 tence: ‘‘The Secretary shall apply the previous sentence for

6 any period as if the amendments made by section 564(a)

7 of the Jobs and Growth Tax Relief Reconciliation Act of

8 2003 had not been enacted.’’.

9 SEC. 565. ONE-YEAR EXTENSION OF HOLD HARMLESS PRO10 VISIONS FOR SMALL RURAL HOSPITALS AND

11 TEMPORARY TREATMENT OF CERTAIN SOLE

12 COMMUNITY HOSPITALS TO LIMIT DECLINE

13 IN PAYMENT UNDER THE OPD PPS.

14 (a) HOLD HARMLESS PROVISIONS.—Section

15 1833(t)(7)(D)(i) of the Social Security Act (42 U.S.C.

16 1395l(t)(7)(D)(i)) is amended—

17 (1) in the heading, by striking ‘‘SMALL’’ and in18 serting ‘‘CERTAIN’’;

19 (2) by inserting ‘‘or a sole community hospital

20 (as defined in section 1886(d)(5)(D)(iii)) located in a

21 rural area’’ after ‘‘100 beds’’; and

22 (3) by striking ‘‘2004’’ and inserting ‘‘2005’’.

23 (b) EFFECTIVE DATE.—The amendment made by sub24 section (a)(2) shall apply with respect to payment for OPD

25 services furnished on and after January 1, 2004.
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1 SEC. 566. CRITICAL ACCESS HOSPITAL (CAH) IMPROVE2 MENTS.

3 (a) PERMITTING HOSPITALS TO ALLOCATE SWING

4 BEDS AND ACUTE CARE INPATIENT BEDS SUBJECT TO A

5 TOTAL LIMIT OF 25 BEDS.—

6 (1) IN GENERAL.—Section 1820(c)(2)(B)(iii) of

7 the Social Security Act (42 U.S.C. 1395i–

8 4(c)(2)(B)(iii)) is amended to read as follows:

9 ‘‘(iii) provides not more than a total of

10 25 extended care service beds (pursuant to

11 an agreement under subsection (f)) or acute

12 care inpatient beds (meeting such standards

13 as the Secretary may establish) for pro14 viding inpatient care for a period that does

15 not exceed, as determined on an annual, av16 erage basis, 96 hours per patient;’’.

17 (2) CONFORMING AMENDMENT.—Section 1820(f)

18 of the Social Security Act (42 U.S.C. 1395i–4(f)) is

19 amended by striking ‘‘and the number of beds used at

20 any time for acute care inpatient services does not ex21 ceed 15 beds’’.

22 (b) ELIMINATION OF THE ISOLATION TEST FOR COST23 BASED CAH AMBULANCE SERVICES.—

24 (1) IN GENERAL.—Section 1834(l)(8) of the So25 cial Security Act (42 U.S.C. 1395m(l)(8)), as added

26 by section 205(a) of the Medicare, Medicaid, and
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1 SCHIP Benefits Improvement and Protection Act of

2 2000 (114 Stat. 2763A–482), as enacted into law by

3 section 1(a)(6) of Public Law 106–554 (114 Stat.

4 2763), is amended by striking the comma at the end

5 of subparagraph (B) and all that follows and insert6 ing a period.

7 (2) TECHNICAL CORRECTION.—Section 1834(l) of

8 the Social Security Act (42 U.S.C. 1395m(l)) is

9 amended by redesignating paragraph (8), as added by

10 section 221(a) of the Medicare, Medicaid, and SCHIP

11 Benefits Improvement and Protection Act of 2000

12 (114 Stat. 2763A–486), as enacted into law by section

13 1(a)(6) of Public Law 106–554 (114 Stat. 2763), as

14 paragraph (9).

15 (c) COVERAGE OF COSTS FOR CERTAIN EMERGENCY

16 ROOM ON-CALL PROVIDERS.—

17 (1) IN GENERAL.—Section 1834(g)(5) of the So18 cial Security Act (42 U.S.C. 1395m(g)(5)) is

19 amended—

20 (A) in the heading—

21 (i) by inserting ‘‘CERTAIN’’ before

22 ‘‘EMERGENCY’’; and

23 (ii) by striking ‘‘PHYSICIANS’’ and in24 serting ‘‘PROVIDERS’’;
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1 (B) by striking ‘‘emergency room physicians

2 who are on-call (as defined by the Secretary)’’

3 and inserting ‘‘physicians, physician assistants,

4 nurse practitioners, and clinical nurse specialists

5 who are on-call (as defined by the Secretary) to

6 provide emergency services’’; and

7 (C) by striking ‘‘physicians’ services’’ and

8 inserting ‘‘services covered under this title’’.

9 (2) EFFECTIVE DATE.—The amendments made

10 by paragraph (1) shall apply with respect to costs in11 curred for services provided on or after January 1,

12 2004.

13 (d) AUTHORIZATION OF PERIODIC INTERIM PAYMENT

14 (PIP).—

15 (1) IN GENERAL.—Section 1815(e)(2) of the So16 cial Security Act (42 U.S.C. 1395g(e)(2)) is

17 amended—

18 (A) in subparagraph (C), by striking ‘‘and’’

19 after the semicolon at the end;

20 (B) in subparagraph (D), by adding ‘‘and’’

21 after the semicolon at the end; and

22 (C) by inserting after subparagraph (D) the

23 following new subparagraph:

24 ‘‘(E) inpatient critical access hospital services,’’.
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1 (2) EFFECTIVE DATE.—The amendments made

2 by paragraph (1) shall apply with respect to pay3 ments for inpatient critical access hospital services

4 furnished on or after January 1, 2004.

5 (e) EXCLUSION OF NEW CAHS FROM PPS HOSPITAL

6 WAGE INDEX CALCULATION.—Section 1886(d)(3)(E)(i) of

7 the Social Security Act (42 U.S.C. 1395ww(d)(3)(E)(i)), as

8 amended by section 564, is amended by inserting after the

9 first sentence the following new sentence: ‘‘In calculating

10 the hospital wage levels under the preceding sentence appli11 cable with respect to cost reporting periods beginning on

12 or after January 1, 2004, the Secretary shall exclude the

13 wage levels of any hospital that became a critical access

14 hospital prior to the cost reporting period for which such

15 hospital wage levels are calculated.’’.

16 SEC. 567. TEMPORARY INCREASE FOR HOME HEALTH SERV17 ICES FURNISHED IN A RURAL AREA.

18 (a) IN GENERAL.—In the case of home health services

19 furnished in a rural area (as defined in section

20 1886(d)(2)(D) of the Social Security Act (42 U.S.C.

21 1395ww(d)(2)(D))) on or after October 1, 2003, and before

22 October 1, 2005, the Secretary of Health and Human Serv23 ices shall increase the payment amount otherwise made

24 under section 1895 of such Act (42 U.S.C. 1395fff ) for such

25 services by 10 percent.
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1 (b) WAIVING BUDGET NEUTRALITY.—The Secretary of

2 Health and Human Services shall not reduce the standard

3 prospective payment amount (or amounts) under section

4 1895 of the Social Security Act (42 U.S.C. 1395fff ) appli5 cable to home health services furnished during a period to

6 offset the increase in payments resulting from the applica7 tion of subsection (a).

8 (c) NO EFFECT ON SUBSEQUENT PERIODS.—The pay9 ment increase provided under subsection (a) for a period

10 under such subsection, shall not apply to episodes and visits

11 ending after such period, and shall not be taken into ac12 count in calculating the payment amounts applicable for

13 episodes and visits occurring after such period.

14 SEC. 568. TEMPORARY INCREASE IN PAYMENTS FOR CER15 TAIN SERVICES FURNISHED BY SMALL RURAL

16 HOSPITALS UNDER MEDICARE PROSPECTIVE

17 PAYMENT SYSTEM FOR HOSPITAL OUT18 PATIENT DEPARTMENT SERVICES.

19 (a) INCREASE.—

20 (1) IN GENERAL.—In the case of an applicable

21 covered OPD service (as defined in paragraph (2))

22 that is furnished by a hospital described in para23 graph (7)(D)(i) of section 1833(t) of the Social Secu24 rity Act (42 U.S.C. 1395l(t)) on or after January 1,

25 2004, and before January 1, 2007, the Secretary of
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1 Health and Human Services (in this section referred

2 to as the ‘‘Secretary’’) shall increase the medicare

3 OPD fee schedule amount (as determined under para4 graph (4)(A) of such section) that is applicable for

5 such service in that year (determined without regard

6 to any increase under this section in a previous year)

7 by 5 percent.

8 (2) APPLICABLE COVERED OPD SERVICES DE9 FINED.—For purposes of this section, the term ‘‘appli10 cable covered OPD service’’ means a covered clinic or

11 emergency room visit that is classified within the

12 groups of covered OPD services (as defined in para13 graph (1)(B) of section 1833(t) of the Social Security

14 Act (42 U.S.C. 1395l(t))) established under paragraph

15 (2)(B) of such section.

16 (b) NO EFFECT ON COPAYMENT AMOUNT.—The Sec17 retary shall compute the copayment amount for applicable

18 covered OPD services under section 1833(t)(8)(A) of the So19 cial Security Act (42 U.S.C. 1395l(t)(8)(A)) as if this sec20 tion had not been enacted.

21 (c) NO EFFECT ON INCREASE UNDER HOLD HARM22 LESS OR OUTLIER PROVISIONS.—The Secretary shall apply

23 the temporary hold harmless provision under paragraph

24 (7)(D)(i) of section 1833(t) of the Social Security Act (42
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1 U.S.C. 1395l(t)) and the outlier provision under paragraph

2 (5) of such section as if this section had not been enacted.

3 (d) WAIVING BUDGET NEUTRALITY AND NO REVISION

4 OR ADJUSTMENTS.—The Secretary shall not make any revi5 sion or adjustment under subparagraph (A), (B), or (C)

6 of section 1833(t)(9) of the Social Security Act (42 U.S.C.

7 1395l(t)(9)) because of the application of subsection (a)(1).

8 (e) NO EFFECT ON PAYMENTS AFTER INCREASE PE9 RIOD ENDS.—The Secretary shall not take into account any

10 payment increase provided under subsection (a)(1) in deter11 mining payments for covered OPD services (as defined in

12 paragraph (1)(B) of section 1833(t) of the Social Security

13 Act (42 U.S.C. 1395l(t))) under such section that are fur14 nished after January 1, 2007.

15 (f) FINDINGS.—The Senate finds the following:

16 (1) The medicare program has a responsibility

17 to pay enough for beneficial new technologies in order

18 to ensure that medicare beneficiaries have access to

19 care; however, such program must also be a prudent

20 purchaser of health care items and services.

21 (2) The 2003 Medicare Hospital Outpatient Pro22 spective Payment System Regulation may have re23 sulted in limiting beneficiary access to care.

24 (3) A methodology should be developed under the

25 medicare outpatient prospective payment system
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1 under section 1833(t) of the Social Security Act (42

2 U.S.C. 1395l(t)) with appropriate resources and such

3 methodology should be implemented January 1, 2004.

4 This will ensure that all hospitals are appropriately

5 reimbursed for the drugs and biologics that are used

6 in the outpatient setting which in turn will ensure

7 patient access to new technologies.

8 (g) TECHNICAL AMENDMENT.—Section 1833(t)(2)(B)

9 (42 U.S.C. 1395l(t)(2)(B)) is amended by inserting ‘‘(and

10 periodically revise such groups pursuant to paragraph

11 (9)(A))’’ after ‘‘establish groups’’.

12 SEC. 569 TEMPORARY INCREASE FOR GROUND AMBULANCE

13 SERVICES FURNISHED IN A RURAL AREA.

14 Section 1834(l) of the Social Security Act (42 U.S.C.

15 1395m(l)), as amended by section 566(b)(2), is amended by

16 adding at the end the following new paragraph:

17 ‘‘(10) TEMPORARY INCREASE FOR GROUND AM18 BULANCE SERVICES FURNISHED IN A RURAL AREA.—

19 ‘‘(A) IN GENERAL.—Notwithstanding any

20 other provision of this subsection, in the case of

21 ground ambulance services furnished on or after

22 January 1, 2004, and before January 1, 2007,

23 for which the transportation originates in a

24 rural area described in paragraph (9) or in a

25 rural census tract described in such paragraph,
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1 the fee schedule established under this section

2 shall provide that the rate for the service other3 wise established, after application of any in4 crease under such paragraph, shall be increased

5 by 5 percent.

6 ‘‘(B) APPLICATION OF INCREASED PAY7 MENTS AFTER 2006.—The increased payments

8 under subparagraph (A) shall not be taken into

9 account in calculating payments for services fur10 nished on or after the period specified in such

11 subparagraph.’’.

12 SEC. 570. EXCLUSION OF CERTAIN RURAL HEALTH CLINIC

13 AND FEDERALLY QUALIFIED HEALTH CENTER

14 SERVICES FROM THE MEDICARE PPS FOR

15 SKILLED NURSING FACILITIES.

16 (a) IN GENERAL.—Section 1888(e) of the Social Secu17 rity Act (42 U.S.C. 1395yy(e)) is amended—

18 (1) in paragraph (2)(A)(i)(II), by striking

19 ‘‘clauses (ii) and (iii)’’ and inserting ‘‘clauses (ii),

20 (iii), and (iv)’’; and

21 (2) by adding at the end of paragraph (2)(A) the

22 following new clause:

23 ‘‘(iv) EXCLUSION OF CERTAIN RURAL

24 HEALTH CLINIC AND FEDERALLY QUALIFIED
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1 HEALTH CENTER SERVICES.—Services de2 scribed in this clause are—

3 ‘‘(I) rural health clinic services

4 (as defined in paragraph (1) of section

5 1861(aa)); and

6 ‘‘(II) Federally qualified health

7 center services (as defined in para8 graph (3) of such section);

9 that would be described in clause (ii) if such

10 services were furnished by a physician or

11 practitioner not affiliated with a rural

12 health clinic or a Federally qualified health

13 center.’’.

14 (b) EFFECTIVE DATE.—The amendments made by sub15 section (a) shall apply to services furnished on or after Jan16 uary 1, 2004.

17 SEC. 571. MEDICARE INCENTIVE PAYMENT PROGRAM IM18 PROVEMENTS.

19 (a) PROCEDURES FOR SECRETARY, AND NOT PHYSI20 CIANS, TO DETERMINE WHEN BONUS PAYMENTS UNDER

21 MEDICARE INCENTIVE PAYMENT PROGRAM SHOULD BE

22 MADE.—Section 1833(m) of the Social Security Act (42

23 U.S.C. 1395l(m)) is amended—

24 (1) by inserting ‘‘(1)’’ after ‘‘(m)’’; and
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1 (2) by adding at the end the following new para2 graph:

3 ‘‘(2) The Secretary shall establish procedures under

4 which the Secretary, and not the physician furnishing the

5 service, is responsible for determining when a payment is

6 required to be made under paragraph (1).’’.

7 (b) EDUCATIONAL PROGRAM REGARDING THE MEDI8 CARE INCENTIVE PAYMENT PROGRAM.—The Secretary shall

9 establish and implement an ongoing educational program

10 to provide education to physicians under the medicare pro11 gram on the medicare incentive payment program under

12 section 1833(m) of the Social Security Act (42 U.S.C.

13 1395l(m)).

14 (c) ONGOING STUDY AND ANNUAL REPORT ON THE

15 MEDICARE INCENTIVE PAYMENT PROGRAM.—

16 (1) ONGOING STUDY.—The Secretary shall con17 duct an ongoing study on the medicare incentive pay18 ment program under section 1833(m) of the Social

19 Security Act (42 U.S.C. 1395l(m)). Such study shall

20 focus on whether such program increases the access of

21 medicare beneficiaries who reside in an area that is

22 designated (under section 332(a)(1)(A) of the Public

23 Health Service Act (42 U.S.C. 254e(a)(1)(A))) as a

24 health professional shortage area to physicians’ serv25 ices under the medicare program.
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1 (2) ANNUAL REPORTS.—Not later than 1 year

2 after the date of enactment of this Act, and annually

3 thereafter, the Secretary shall submit to Congress a

4 report on the study conducted under paragraph (1),

5 together with recommendations for such legislation

6 and administrative action as the Secretary considers

7 appropriate.

8 SEC. 572. TWO-YEAR TREATMENT OF CERTAIN CLINICAL DI9 AGNOSTIC LABORATORY TESTS FURNISHED

10 BY A SOLE COMMUNITY HOSPITAL.

11 Notwithstanding subsections (a)(1)(D) and (h) of sec12 tion 1833 of the Social Security Act (42 U.S.C. 1395l) and

13 section 1834(d)(1) of such Act (42 U.S.C. 1395m(d)(1)), in

14 the case of a clinical diagnostic laboratory test covered

15 under part B of title XVIII of such Act that is furnished

16 in 2004 or 2005 by a sole community hospital (as defined

17 in section 1886(d)(5)(D)(iii) of such Act (42 U.S.C.

18 1395ww(d)(5)(D)(iii))) as part of services provided to pa19 tients of the hospital, the following rules shall apply:

20 (1) PAYMENT BASED ON REASONABLE COSTS.—

21 The amount of payment for such test shall be 100 per22 cent of the reasonable costs of the hospital in fur23 nishing such test.

24 (2) NO BENEFICIARY COST-SHARING.—No coin25 surance, deductible, copayment, or other cost-sharing
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1 otherwise applicable under such part B shall apply

2 with respect to such test.

3 SEC. 573. ESTABLISHMENT OF FLOOR ON GEOGRAPHIC AD4 JUSTMENTS OF PAYMENTS FOR PHYSICIANS’

5 SERVICES.

6 Section 1848(e)(1) of the Social Security Act (42

7 U.S.C. 1395w–4(e)(1)) is amended—

8 (1) in subparagraph (A), by striking ‘‘subpara9 graphs (B) and (C)’’ and inserting ‘‘subparagraphs

10 (B), (C), and (E)’’; and

11 (2) by adding at the end the following new sub12 paragraph:

13 ‘‘(E) FLOOR FOR PRACTICE EXPENSE, MAL14 PRACTICE, AND WORK GEOGRAPHIC INDICES.—

15 For purposes of payment for services furnished

16 on or after January 1, 2004, after calculating

17 the practice expense, malpractice, and work geo18 graphic indices in clauses (i), (ii), and (iii) of

19 subparagraph (A) and in subparagraph (B), the

20 Secretary shall increase any such index to 1.00

21 for any locality for which such index is less than

22 1.00.’’.
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1 SEC. 574. FREEZE IN PAYMENTS FOR ITEMS OF DURABLE

2 MEDICAL EQUIPMENT AND ORTHOTICS AND

3 PROSTHETICS.

4 (a) DME.—Section 1834(a)(14) of the Social Security

5 Act (42 U.S.C. 1395m(a)(14)) is amended—

6 (1) in subparagraph (E), by striking ‘‘and’’ at

7 the end;

8 (2) in subparagraph (F)—

9 (A) by striking ‘‘a subsequent year’’ and in10 serting ‘‘2003’’; and

11 (B) by striking ‘‘the previous year.’’ and in12 serting ‘‘2002;’’; and

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

15 ‘‘(G) for each of the years 2004 through

16 2013, 0 percentage points; and

17 ‘‘(H) for a subsequent year, the percentage

18 increase in the consumer price index for all

19 urban consumers (U.S. urban average) for the

20 12-month period ending with June of the pre21 vious year.’’.

22 (b) ORTHOTICS AND PROSTHETICS.—Section

23 1834(h)(4)(A) of the Social Security Act (42 U.S.C.

24 1395m(h)(4)(A)) is amended—

25 (1) in clause (vii), by striking ‘‘and’’ at the end;

26 (2) in clause (viii)—
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1 (A) by striking ‘‘a subsequent year’’ and in2 serting ‘‘2003’’; and

3 (B) by striking ‘‘the previous year’’ and in4 serting ‘‘2002’’; and

5 (3) by adding at the end the following new

6 clauses:

7 ‘‘(ix) for each of the years 2004

8 through 2013, 0 percent; and

9 ‘‘(x) for a subsequent year, the percent10 age increase in the consumer price index for

11 all urban consumers (U.S. urban average)

12 for the 12-month period ending with June

13 of the previous year;’’.

14 SEC. 575. APPLICATION OF COINSURANCE AND DEDUCT15 IBLE FOR CLINICAL DIAGNOSTIC LABORA16 TORY TESTS.

17 (a) COINSURANCE.—

18 (1) IN GENERAL.—Section 1833(a) of the Social

19 Security Act (42 U.S.C. 1395l(a)) is amended—

20 (A) in paragraph (1)(D)—

21 (i) in clause (i), by striking ‘‘(or 100

22 percent, in the case of such tests for which

23 payment is made on an assignment-related

24 basis)’’; and
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1 (ii) in clause (ii), by striking ‘‘100

2 percent’’ and inserting ‘‘80 percent’’; and

3 (B) in paragraph (2)(D)—

4 (i) in clause (i), by striking ‘‘(or 100

5 percent, in the case of such tests for which

6 payment is made on an assignment-related

7 basis or to a provider having an agreement

8 under section 1866)’’; and

9 (ii) in clause (ii), by striking ‘‘100

10 percent’’ and inserting ‘‘80 percent’’.

11 (2) CONFORMING AMENDMENT.—The third sen12 tence of section 1866(a)(2)(A) of the Social Security

13 Act (42 U.S.C. 1395cc(a)(2)(A) is amended by strik14 ing ‘‘and with respect to clinical diagnostic labora15 tory tests for which payment is made under part B’’.

16 (b) DEDUCTIBLE.—Section 1833(b) of the Social Secu17 rity Act (42 U.S.C. 1395l(b)) is amended—

18 (1) by striking paragraph (3); and

19 (2) by redesignating paragraphs (4), (5), and (6)

20 as paragraphs (3), (4), and (5), respectively.

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

22 section shall apply to tests furnished on or after January

23 1, 2004.
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1 SEC. 576. REVISION IN PAYMENTS FOR COVERED OUT2 PATIENT DRUGS.

3 Section 1842(o)(1) of the Social Security Act (42

4 U.S.C. 1395u(o)(1)) is amended by striking ‘‘equal to 95

5 percent of the average wholesale price.’’ and inserting

6 ‘‘equal to—

7 ‘‘(A) in the case of drugs furnished prior to Jan8 uary 1, 2004, 95 percent of the average wholesale

9 price; and

10 ‘‘(B) in the case of drugs furnished on or after

11 January 1, 2004, the lesser of—

12 ‘‘(i) 85 percent of the average wholesale

13 price; or

14 ‘‘(ii) the amount payable for the drug or bi15 ological during the last quarter of the previous

16 year (as determined under this subparagraph,

17 or, in the case of 2004, under subparagraph (A)

18 using the second quarter of 2003) increased by

19 the percentage increase in the consumer price

20 index for all urban consumers (U.S. urban aver21 age) for the 12-month period ending with June

22 of the previous year.’’.

23 SEC. 577. INAPPLICABILITY OF SUNSET.

24 The provisions of section 1001(a) of this Act shall not

25 apply to the provisions of, and amendments made by, this

26 subtitle.
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1 Subtitle E—Provisions Relating To

2 S Corporation Reform and Sim3 plification

4 PART I—MAXIMUM NUMBER OF SHAREHOLDERS

5 OF AN S CORPORATION

6 SEC. 581. MEMBERS OF FAMILY TREATED AS 1 SHARE7 HOLDER.

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

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

10 amended to read as follows:

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

12 SHAREHOLDER.—

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

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

16 a husband and wife (and their estates) shall

17 be treated as 1 shareholder, and

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

20 subparagraph (E), all members of the fam21 ily shall be treated as 1 shareholder.

22 ‘‘(B) MEMBERS OF THE FAMILY.—For pur23 pose of subparagraph (A)(ii), the term ‘members

24 of the family’ means the common ancestor, lineal

25 descendants of the common ancestor and the
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1 spouses of such lineal descendants or common

2 ancestor.

3 ‘‘(C) COMMON ANCESTOR.—For purposes of

4 this paragraph, an individual shall not be con5 sidered a common ancestor if, as of the later of

6 the effective date of this paragraph or the time

7 the election under section 1362(a) is made, the

8 individual is more than 6 generations removed

9 from the youngest generation of shareholders.

10 ‘‘(D) EFFECT OF ADOPTION, ETC.—In deter11 mining whether any relationship specified in

12 subparagraph (B) or (C) exists, the rules of sec13 tion 152(b)(2) shall apply.

14 ‘‘(E) ELECTION.—An election under sub15 paragraph (A)(ii)—

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

17 all persons who are shareholders (including

18 those that are family members) in the cor19 poration on the day the election is made,

20 ‘‘(ii) in the case of—

21 ‘‘(I) an electing small business

22 trust, shall be made by the trustee of

23 the trust, and
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1 ‘‘(II) a qualified subchapter S

2 trust, shall be made by the beneficiary

3 of the trust,

4 ‘‘(iii) under regulations, shall remain

5 in effect until terminated, and

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

7 1 family in any corporation.’’.

8 (b) RELIEF FROM INADVERTENT INVALID ELECTION

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

10 invalid elections or terminations), as amended by this Act,

11 is amended—

12 (1) by inserting ‘‘or under section

13 1361(c)(1)(A)(ii)’’ after ‘‘section 1361(b)(3)(B)(ii)’’ in

14 paragraph (1), and

15 (2) by inserting ‘‘or under section

16 1361(c)(1)(E)(iii)’’ after ‘‘section 1361(b)(3)(C)’’ in

17 paragraph (1)(B).

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

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

21 SEC. 582. INCREASE IN NUMBER OF ELIGIBLE SHARE22 HOLDERS TO 100.

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

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

25 and inserting ‘‘100’’.
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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. 583. NONRESIDENT ALIENS ALLOWED AS BENE5 FICIARIES OF AN ELECTING SMALL BUSINESS

6 TRUST.

7 (a) IN GENERAL.—Section 1361(e)(1)(A)(i)(I) is

8 amended by inserting ‘‘(including a nonresident alien indi9 vidual)’’ after ‘‘individual’’.

10 (b) CONFORMING AMENDMENT.—Clause (v) of section

11 1361(c)(2)(B) is amended by adding at the end the fol12 lowing new sentence: ‘‘This clause shall not apply for pur13 poses of subsection (b)(1)(C).’’.

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

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

16 Act.

17 PART II—TERMINATION OF ELECTION AND ADDI18 TIONS TO TAX DUE TO PASSIVE INVESTMENT

19 INCOME

20 SEC. 584. MODIFICATIONS TO PASSIVE INCOME RULES.

21 (a) INCREASED PERCENTAGE LIMIT.—

22 (1) IN GENERAL.—Subsection (a)(2) of section

23 1375 (relating to tax imposed when passive invest24 ment income of corporation having accumulated earn25 ings and profits exceeds 25 percent of gross receipts)
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1 is amended by striking ‘‘25 percent’’ and inserting

2 ‘‘60 percent’’.

3 (2) CONFORMING AMENDMENTS.—

4 (A) Section 26(b)(2)(J) is amended by

5 striking ‘‘25 percent’’ and inserting ‘‘60 per6 cent’’.

7 (B) Section 1362(d)(3)(A)(i)(II) is amended

8 by striking ‘‘25 percent’’ and inserting ‘‘60 per9 cent’’.

10 (C) The heading for paragraph (3) of sec11 tion 1362(d) is amended by striking ‘‘25 PER12 CENT’’ and inserting ‘‘60 PERCENT’’.

13 (D) Section 1375(b)(1)(A)(i) is amended by

14 striking ‘‘25 percent’’ and inserting ‘‘60 per15 cent’’.

16 (E) The heading for section 1375 is amend17 ed by striking ‘‘25 PERCENT’’ and inserting ‘‘60

18 PERCENT’’.

19 (F) The table of sections for part III of sub20 chapter S of chapter 1 is amended by striking

21 ‘‘25 percent’’ in the item relating to section 1375

22 and inserting ‘‘60 percent’’.

23 (b) CAPITAL GAIN NOT TREATED AS PASSIVE INVEST24 MENT INCOME.—Section 1362(d)(3) is amended—
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1 (1) by striking ‘‘annuities,’’ and all that follows

2 in subparagraph (C)(i) and inserting ‘‘and annu3 ities.’’, and

4 (2) by striking subparagraphs (C)(iv) and (D)

5 and by redesignating subparagraph (E) as subpara6 graph (D).

7 (c) CONFORMING AMENDMENTS.—Section 1375(d) is

8 amended by striking ‘‘subchapter C’’ both places it appears

9 and inserting ‘‘accumulated’’.

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

11 section shall apply to taxable years beginning after Decem12 ber 31, 2003.

13 PART III—TREATMENT OF S CORPORATION

14 SHAREHOLDERS

15 SEC. 585. TRANSFER OF SUSPENDED LOSSES INCIDENT TO

16 DIVORCE.

17 (a) IN GENERAL.—Section 1366(d) (relating to special

18 rules for losses and deductions) is amended by adding at

19 the end the following new paragraph:

20 ‘‘(4) TRANSFER OF SUSPENDED LOSSES AND DE21 DUCTIONS WHEN STOCK IS TRANSFERRED INCIDENT

22 TO DIVORCE.—For purposes of paragraph (2), the

23 transfer of any shareholder’s stock in an S corpora24 tion incident to a decree of divorce shall include any
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1 loss or deduction described in such paragraph attrib2 utable to such stock.’’.

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

4 section shall apply to transfers in taxable years beginning

5 after December 31, 2003.

6 SEC. 586. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK

7 AMOUNTS BY QUALIFIED SUBCHAPTER S

8 TRUST INCOME BENEFICIARIES.

9 (a) IN GENERAL.—Section 1361(d)(1) (relating to spe10 cial rule for qualified subchapter S trust) is amended—

11 (1) by striking ‘‘and’’ at the end of subpara12 graph (A),

13 (2) by striking the period at the end of subpara14 graph (B) and inserting ‘‘, and’’, and

15 (3) by adding at the end the following new sub16 paragraph:

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

18 and 469(g) to the beneficiary of the trust, the

19 disposition of the S corporation stock by the

20 trust shall be treated as a disposition by such

21 beneficiary.’’.

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

23 section shall apply to transfers in taxable years beginning

24 after December 31, 2003.
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1 SEC. 587. DISREGARD OF UNEXERCISED POWERS OF AP2 POINTMENT IN DETERMINING POTENTIAL

3 CURRENT BENEFICIARIES OF ESBT.

4 (a) IN GENERAL.—Section 1361(e)(2) (defining poten5 tial current beneficiary) is amended by inserting ‘‘(deter6 mined without regard to any unexercised (in whole or in

7 part) power of appointment during such period)’’ after ‘‘of

8 the trust’’ in the first sentence.

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

10 section shall apply to taxable years beginning after Decem11 ber 31, 2003.

12 SEC. 588. CLARIFICATION OF ELECTING SMALL BUSINESS

13 TRUST DISTRIBUTION RULES.

14 (a) IN GENERAL.—Section 641(c)(1) (relating to spe15 cial rules for taxation of electing small business trusts) is

16 amended—

17 (1) by striking ‘‘and’’ at the end of subpara18 graph (A),

19 (2) by redesignating subparagraph (B) as sub20 paragraph (C), and

21 (3) by inserting after subparagraph (A) the fol22 lowing new subparagraph:

23 ‘‘(B) any distribution attributable to the

24 portion treated as a separate trust shall be treat25 ed separately from any distribution attributable

26 to the portion not so treated, and’’.
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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 PART IV—PROVISIONS RELATING TO BANKS

5 SEC. 589. SALE OF STOCK IN IRA RELATING TO S CORPORA6 TION ELECTION EXEMPT FROM PROHIBITED

7 TRANSACTION RULES.

8 (a) IN GENERAL.—Section 4975(d) (relating to exemp9 tions) is amended by striking ‘‘or’’ at the end of paragraph

10 (14), by striking the period at the end of paragraph (15)

11 and inserting ‘‘; or’’, and by adding at the end the following

12 new paragraph:

13 ‘‘(16) a sale of stock held by a trust which con14 stitutes an individual retirement account under sec15 tion 408(a) to the individual for whose benefit such

16 account is established if such sale is pursuant to an

17 election under section 1362(a).’’.

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

19 section shall apply to sales of stock held by individual re20 tirement accounts on the date of the enactment of this Act.

21 SEC. 590. EXCLUSION OF INVESTMENT SECURITIES INCOME

22 FROM PASSIVE INCOME TEST FOR BANK S

23 CORPORATIONS.

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

25 where passive investment income exceeds certain percentage
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1 of gross receipts for 3 consecutive taxable years and corpora2 tion has accumulated earnings and profits), as amended by

3 this Act, is amended by adding at the end the following

4 new subparagraph:

5 ‘‘(E) EXCEPTION FOR BANKS; ETC.—In the

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

7 bank holding company (as defined in section

8 246A(c)(3)(B)(ii)), or a qualified subchapter S

9 subsidiary which is a bank, the term ‘passive in10 vestment income’ shall not include—

11 ‘‘(i) interest income earned by such

12 bank, bank holding company, or qualified

13 subchapter S subsidiary, or

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

15 held by such bank, bank holding company,

16 or qualified subchapter S subsidiary to con17 duct a banking business, including stock in

18 the Federal Reserve Bank, the Federal

19 Home Loan Bank, or the Federal Agricul20 tural Mortgage Bank or participation cer21 tificates issued by a Federal Intermediate

22 Credit Bank.’’.

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

24 section shall apply to taxable years beginning after Decem25 ber 31, 2003.
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1 SEC. 591. TREATMENT OF QUALIFYING DIRECTOR SHARES.

2 (a) IN GENERAL.—Section 1361 (defining S corpora3 tion) is amended by adding at the end the following new

4 subsection:

5 ‘‘(f) TREATMENT OF QUALIFYING DIRECTOR

6 SHARES.—

7 ‘‘(1) IN GENERAL.—For purposes of this

8 subchapter—

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

10 treated as a second class of stock, and

11 ‘‘(B) no person shall be treated as a share12 holder of the corporation by reason of holding

13 qualifying director shares.

14 ‘‘(2) QUALIFYING DIRECTOR SHARES DEFINED.—

15 For purposes of this subsection, the term ‘qualifying

16 director shares’ means any shares of stock in a bank

17 (as defined in section 581) or in a bank holding com18 pany registered as such with the Federal Reserve

19 System—

20 ‘‘(i) which are held by an individual

21 solely by reason of status as a director of

22 such bank or company or its controlled sub23 sidiary; and

24 ‘‘(ii) which are subject to an agreement

25 pursuant to which the holder is required to

26 dispose of the shares of stock upon termi-
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1 nation of the holder’s status as a director at

2 the same price as the individual acquired

3 such shares of stock.

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

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

6 the corporation with respect to qualifying director

7 shares shall be includible as ordinary income of the

8 holder and deductible to the corporation as an expense

9 in computing taxable income under section 1363(b) in

10 the year such distribution is received.’’.

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

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

13 ‘‘(3) ALLOCATION WITH RESPECT TO QUALIFYING

14 DIRECTOR SHARES.—The holders of qualifying direc15 tor shares (as defined in section 1361(f)) shall not,

16 with respect to such shares of stock, be allocated any

17 of the items described in paragraph (1).’’.

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

19 section shall apply to taxable years beginning after Decem20 ber 31, 2003.
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1 PART V—QUALIFIED SUBCHAPTER S

2 SUBSIDIARIES

3 SEC. 592. RELIEF FROM INADVERTENTLY INVALID QUALI4 FIED SUBCHAPTER S SUBSIDIARY ELECTIONS

5 AND TERMINATIONS.

6 (a) IN GENERAL.—Section 1362(f) (relating to inad7 vertent invalid elections or terminations) is amended—

8 (1) by inserting ‘‘or under section

9 1361(b)(3)(B)(ii)’’ after ‘‘subsection (a)’’in paragraph

10 (1),

11 (2) by inserting ‘‘or under section

12 1361(b)(3)(C)’’ after ‘‘subsection (d)’’ in paragraph

13 (1)(B),

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

15 subsidiary, as the case may be’’ after ‘‘small business

16 corporation’’ in paragraph (3)(A),

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

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

19 in paragraph (4), and

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

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

22 in the matter following paragraph (4).

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

24 section shall apply to taxable years beginning after Decem25 ber 31, 2003.
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1 SEC. 593. INFORMATION RETURNS FOR QUALIFIED SUB2 CHAPTER S SUBSIDIARIES.

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

4 treatment of certain wholly owned subsidiaries) is amended

5 by inserting ‘‘and in the case of information returns re6 quired under part III of subchapter A of chapter 61’’ after

7 ‘‘Secretary’’.

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

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

11 PART VI—ADDITIONAL PROVISIONS

12 SEC. 594. ELIMINATION OF ALL EARNINGS AND PROFITS AT13 TRIBUTABLE TO PRE-1983 YEARS.

14 (a) IN GENERAL.—Subsection (a) of section 1311 of

15 the Small Business Job Protection Act of 1996 is amended

16 to read as follows:

17 ‘‘(a) IN GENERAL.—If a corporation was an electing

18 small business corporation under subchapter S of chapter

19 1 of the Internal Revenue Code of 1986 for any taxable year

20 beginning before January 1, 1983, the amount of such cor21 poration’s accumulated earnings and profits (as of the be22 ginning of the first taxable year beginning after December

23 31, 2003) shall be reduced by an amount equal to the por24 tion (if any) of such accumulated earnings and profits

25 which were accumulated in any taxable year beginning be26 fore January 1, 1983, for which such corporation was an
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1 electing small business corporation under such subchapter

2 S.’’.

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

4 section shall apply to taxable years beginning after Decem5 ber 31, 2003.

6 TITLE VI—BLUE RIBBON COM7 MISSION ON COMPREHEN8 SIVE TAX REFORM

9 SEC. 601. SHORT TITLE.

10 This Act may be cited as the ‘‘Fundamental Tax Re11 form Commission Act of 2003’’.

12 SEC. 602. ESTABLISHMENT OF COMMISSION.

13 (a) ESTABLISHMENT.—There is established the ‘‘Blue

14 Ribbon Commission on Comprehensive Tax Reform’’ (in

15 this Act referred to as the ‘‘Commission’’).

16 (b) MEMBERSHIP.—

17 (1) COMPOSITION.—The Commission shall be

18 composed of 12 members of whom—

19 (A) 1 shall be the Chairman of the Board

20 of Governors of the Federal Reserve System;

21 (B) 2 shall be appointed by the majority

22 leader of the Senate;

23 (C) 2 shall be appointed by the minority

24 leader of the Senate;
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1 (D) 2 shall be appointed by the Speaker of

2 the House of Representatives;

3 (E) 2 shall be appointed by the minority

4 leader of the House of Representatives; and

5 (F) 3 shall be appointed by the President,

6 of which no more than 2 shall be of the same

7 party as the President.

8 (2) FEDERAL EMPLOYEES.—The members of the

9 Commission may be employees or former employees of

10 the Federal Government.

11 (3) DATE.—The appointments of the members of

12 the Commission shall be made not later than July 30,

13 2003.

14 (c) PERIOD OF APPOINTMENT; VACANCIES.—Members

15 shall be appointed for the life of the Commission. Any va16 cancy in the Commission shall not affect its powers, but

17 shall be filled in the same manner as the original appoint18 ment.

19 (d) INITIAL MEETING.—Not later than 30 days after

20 the date on which all members of the Commission have been

21 appointed, the Commission shall hold its first meeting.

22 (e) MEETINGS.—The Commission shall meet at the call

23 of the Chairman.
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1 (f) QUORUM.—A majority of the members of the Com2 mission shall constitute a quorum, but a lesser number of

3 members may hold hearings.

4 (g) CHAIRMAN AND VICE CHAIRMAN.—The President

5 shall select a Chairman and Vice Chairman from among

6 its members.

7 SEC. 603. DUTIES OF THE COMMISSION.

8 (a) STUDY.—The Commission shall conduct a thor9 ough study of all matters relating to a comprehensive re10 form of the Federal tax system, including the reform of the

11 Internal Revenue Code of 1986 and the implementation (if

12 appropriate) of other types of tax systems.

13 (b) RECOMMENDATIONS.—The Commission shall de14 velop recommendations on how to comprehensively reform

15 the Federal tax system in a manner that generates appro16 priate revenue for the Federal Government.

17 (c) REPORT.—Not later than 18 months after the date

18 on which all initial members of the commission have been

19 appointed pursuant to section 602(b), the Commission shall

20 submit a report to the President and Congress which shall

21 contain a detailed statement of the findings and conclusions

22 of the Commission, together with its recommendations for

23 such legislation and administrative actions as it considers

24 appropriate.
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1 SEC. 604. POWERS OF THE COMMISSION.

2 (a) HEARINGS.—The Commission may hold such hear3 ings, sit and act at such times and places, take such testi4 mony, and receive such evidence as the Commission con5 siders advisable to carry out this Act.

6 (b) INFORMATION FROM FEDERAL AGENCIES.—The

7 Commission may secure directly from any Federal depart8 ment or agency such information as the Commission con9 siders necessary to carry out this Act. Upon request of the

10 Chairman of the Commission, the head of such department

11 or agency shall furnish such information to the Commis12 sion.

13 (c) POSTAL SERVICES.—The Commission may use the

14 United States mails in the same manner and under the

15 same conditions as other departments and agencies of the

16 Federal Government.

17 (d) GIFTS.—The Commission may accept, use, and

18 dispose of gifts or donations of services or property.

19 SEC. 605. COMMISSION PERSONNEL MATTERS.

20 (a) COMPENSATION OF MEMBERS.—Each member of

21 the Commission who is not an officer or employee of the

22 Federal Government shall be compensated at a rate equal

23 to the daily equivalent of the annual rate of basic pay pre24 scribed for level IV of the Executive Schedule under section

25 5315 of title 5, United States Code, for each day (including

26 travel time) during which such member is engaged in the
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1 performance of the duties of the Commission. All members

2 of the Commission who are officers or employees of the

3 United States shall serve without compensation in addition

4 to that received for their services as officers or employees

5 of the United States.

6 (b) TRAVEL EXPENSES.—The members of the Commis7 sion shall be allowed travel expenses, including per diem

8 in lieu of subsistence, at rates authorized for employees of

9 agencies under subchapter I of chapter 57 of title 5, United

10 States Code, while away from their homes or regular places

11 of business in the performance of services for the Commis12 sion.

13 (c) STAFF.—

14 (1) IN GENERAL.—The Chairman of the Com15 mission may, without regard to the civil service laws

16 and regulations, appoint and terminate an executive

17 director and such other additional personnel as may

18 be necessary to enable the Commission to perform its

19 duties. The employment of an executive director shall

20 be subject to confirmation by the Commission.

21 (2) COMPENSATION.—The Chairman of the Com22 mission may fix the compensation of the executive di23 rector and other personnel without regard to chapter

24 51 and subchapter III of chapter 53 of title 5, United

25 States Code, relating to classification of positions and
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1 General Schedule pay rates, except that the rate of

2 pay for the executive director and other personnel

3 may not exceed the rate payable for level V of the Ex4 ecutive Schedule under section 5316 of such title.

5 (d) DETAIL OF GOVERNMENT EMPLOYEES.—Any Fed6 eral Government employee may be detailed to the Commis7 sion without reimbursement, and such detail shall be with8 out interruption or loss of civil service status or privilege.

9 (e) PROCUREMENT OF TEMPORARY AND INTERMIT10 TENT SERVICES.—The Chairman of the Commission may

11 procure temporary and intermittent services under section

12 3109(b) of title 5, United States Code, at rates for individ13 uals which do not exceed the daily equivalent of the annual

14 rate of basic pay prescribed for level V of the Executive

15 Schedule under section 5316 of such title.

16 SEC. 606. TERMINATION OF THE COMMISSION.

17 The Commission shall terminate 90 days after the date

18 on which the Commission submits its report under section

19 603.

20 SEC. 607. AUTHORIZATION OF APPROPRIATIONS.

21 There are authorized to be appropriated such sums as

22 are necessary to the Commission to carry out this Act.
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1 TITLE VII—REAL ESTATE

2 INVESTMENT TRUSTS

3 Subtitle A—REIT Corrections

4 SEC. 701. REVISIONS TO REIT ASSET TEST.

5 (a) EXPANSION OF STRAIGHT DEBT SAFE HARBOR.—

6 Section 856 (defining real estate investment trust) is

7 amended—

8 (1) in subsection (c) by striking paragraph (7),

9 and

10 (2) by adding at the end the following new sub11 section:

12 ‘‘(m) SAFE HARBOR IN APPLYING SUBSECTION

13 (c)(4).—

14 ‘‘(1) IN GENERAL.—In applying subclause (III)

15 of subsection (c)(4)(B)(iii), except as otherwise deter16 mined by the Secretary in regulations, the following

17 shall not be considered securities held by the trust:

18 ‘‘(A) Straight debt securities of an issuer

19 which meet the requirements of paragraph (2).

20 ‘‘(B) Any loan to an individual or an es21 tate.

22 ‘‘(C) Any section 467 rental agreement (as

23 defined in section 467(d)), other than with a per24 son described in subsection (d)(2)(B).
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1 ‘‘(D) Any obligation to pay rents from real

2 property (as defined in subsection (d)(1)).

3 ‘‘(E) Any security issued by a State or any

4 political subdivision thereof, the District of Co5 lumbia, a foreign government or any political

6 subdivision thereof, or the Commonwealth of

7 Puerto Rico, but only if the determination of

8 any payment received or accrued under such se9 curity does not depend in whole or in part on

10 the profits of any entity not described in this

11 subparagraph or payments on any obligation

12 issued by such an entity.

13 ‘‘(F) Any security issued by a real estate

14 investment trust.

15 ‘‘(G) Any other arrangement as determined

16 by the Secretary.

17 ‘‘(2) SPECIAL RULES RELATING TO STRAIGHT

18 DEBT SECURITIES.—

19 ‘‘(A) IN GENERAL.—For purposes of para20 graph (1)(A), securities meet the requirements of

21 this paragraph if such securities are straight

22 debt, as defined in section 1361(c)(5) (without

23 regard to subparagraph (B)(iii) thereof).

24 ‘‘(B) SPECIAL RULES RELATING TO CERTAIN

25 CONTINGENCIES.—For purposes of subparagraph
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1 (A), any interest or principal shall not be treat2 ed as failing to satisfy section 1361(c)(5)(B)(i)

3 solely by reason of the fact that the time of pay4 ment of such interest or principal is subject to

5 a contingency, but only if—

6 ‘‘(i) any such contingency does not

7 have the effect of changing the effective yield

8 to maturity, as determined under section

9 1272, other than a change in the annual

10 yield to maturity which either—

11 ‘‘(I) does not exceed the greater of

1 12 ⁄4 of 1 percent or 5 percent of the an13 nual yield to maturity, or

14 ‘‘(II) results solely from a default

15 or the exercise of a prepayment right

16 by the issuer of the debt, or

17 ‘‘(ii) neither the aggregate issue price

18 nor the aggregate face amount of the issuer’s

19 debt instruments held by the trust,

20 exceeds $1,000,000 and not more than 12 months

21 of unaccrued interest can be required to be pre22 paid thereunder.

23 ‘‘(C) SPECIAL RULES RELATING TO COR24 PORATE OR PARTNERSHIP ISSUERS.—In the case

25 of an issuer which is a corporation or a partner-
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1 ship, securities that otherwise would be described

2 in paragraph (1)(A) shall be considered not to be

3 so described if the trust holding such securities

4 and any of its controlled taxable REIT subsidi5 aries (as defined in subsection (d)(8)(A)(iv))

6 hold any securities of the issuer which—

7 ‘‘(i) are not described in paragraph (1)

8 (prior to the application of paragraph

9 (1)(C)), and

10 ‘‘(ii) have an aggregate value greater

11 than 1 percent of the issuer’s outstanding

12 securities.

13 ‘‘(3) LOOK-THROUGH RULE FOR PARTNERSHIP

14 SECURITIES.—

15 ‘‘(A) IN GENERAL.—For purposes of apply16 ing subclause (III) of subsection (c)(4)(B)(iii)—

17 ‘‘(i) a trust’s interest as a partner in

18 a partnership (as defined in section

19 7701(a)(2)) shall not be considered a secu20 rity, and

21 ‘‘(ii) the trust shall be deemed to own

22 its proportionate share of each of the assets

23 of the partnership.

24 ‘‘(B) DETERMINATION OF TRUST’S INTER25 EST IN PARTNERSHIP ASSETS.—For purposes of
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1 subparagraph (A), with respect to any taxable

2 year beginning after the date of the enactment of

3 this subparagraph—

4 ‘‘(i) the trust’s interest in the partner5 ship assets shall be the trust’s proportionate

6 interest in any securities issued by the part7 nership (determined without regard to sub8 paragraph (A)(i) and paragraph (4), but

9 not including securities described in para10 graph (1)), and

11 ‘‘(ii) the value of any debt instrument

12 shall be the adjusted issue price thereof, as

13 defined in section 1272(a)(4).

14 ‘‘(4) CERTAIN PARTNERSHIP DEBT INSTRUMENTS

15 NOT TREATED AS A SECURITY.—For purposes of ap16 plying subclause (III) of subsection (c)(4)(B)(iii)—

17 ‘‘(A) any debt instrument issued by a part18 nership and not described in paragraph (1) shall

19 not be considered a security to the extent of the

20 trust’s interest as a partner in the partnership,

21 and

22 ‘‘(B) any debt instrument issued by a part23 nership and not described in paragraph (1) shall

24 not be considered a security if at least 75 percent

25 of the partnership’s gross income (excluding
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1 gross income from prohibited transactions) is de2 rived from sources referred to in subsection

3 (c)(3).

4 ‘‘(5) SECRETARIAL GUIDANCE.—The Secretary is

5 authorized to provide guidance (including through the

6 issuance of a written determination, as defined in sec7 tion 6110(b)) that an arrangement shall not be con8 sidered a security held by the trust for purposes of ap9 plying subclause (III) of subsection (c)(4)(B)(iii) not10 withstanding that such arrangement otherwise could

11 be considered a security under subparagraph (F) of

12 subsection (c)(5).’’.

13 SEC. 702. CLARIFICATION OF APPLICATION OF LIMITED

14 RENTAL EXCEPTION.

15 Subparagraph (A) of section 856(d)(8) (relating to

16 special rules for taxable REIT subsidiaries) is amended to

17 read as follows:

18 ‘‘(A) LIMITED RENTAL EXCEPTION.—

19 ‘‘(i) IN GENERAL.—The requirements

20 of this subparagraph are met with respect

21 to any property if at least 90 percent of the

22 leased space of the property is rented to per23 sons other than taxable REIT subsidiaries

24 of such trust and other than persons de25 scribed in paragraph (2)(B).
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1 ‘‘(ii) RENTS MUST BE SUBSTANTIALLY

2 COMPARABLE.—Clause (i) shall apply only

3 to the extent that the amounts paid to the

4 trust as rents from real property (as defined

5 in paragraph (1) without regard to para6 graph (2)(B)) from such property are sub7 stantially comparable to such rents paid by

8 the other tenants of the trust’s property for

9 comparable space.

10 ‘‘(iii) TIMES FOR TESTING RENT COM11 PARABILITY.—The substantial com12 parability requirement of clause (ii) shall be

13 treated as met with respect to a lease to a

14 taxable REIT subsidiary of the trust if such

15 requirement is met under the terms of the

16 lease—

17 ‘‘(I) at the time such lease is en18 tered into,

19 ‘‘(II) at the time of each extension

20 of the lease, including a failure to exer21 cise a right to terminate, and

22 ‘‘(III) at the time of any modi23 fication of the lease between the trust

24 and the taxable REIT subsidiary if the
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1 rent under such lease is effectively in2 creased pursuant to such modification.

3 With respect to subclause (III), if the tax4 able REIT subsidiary of the trust is a con5 trolled taxable REIT subsidiary of the trust,

6 the term ‘rents from real property’ shall not

7 in any event include rent under such lease

8 to the extent of the increase in such rent on

9 account of such modification.

10 ‘‘(iv) CONTROLLED TAXABLE REIT

11 SUBSIDIARY.—For purposes of clause (iii),

12 the term ‘controlled taxable REIT sub13 sidiary’ means, with respect to any real es14 tate investment trust, any taxable REIT

15 subsidiary of such trust if such trust owns

16 directly or indirectly—

17 ‘‘(I) stock possessing more than 50

18 percent of the total voting power of the

19 outstanding stock of such subsidiary,

20 or

21 ‘‘(II) stock having a value of more

22 than 50 percent of the total value of the

23 outstanding stock of such subsidiary.

24 ‘‘(v) CONTINUING QUALIFICATION

25 BASED ON THIRD PARTY ACTIONS.—If the
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1 requirements of clause (i) are met at a time

2 referred to in clause (iii), such requirements

3 shall continue to be treated as met so long

4 as there is no increase in the space leased

5 to any taxable REIT subsidiary of such

6 trust or to any person described in para7 graph (2)(B).

8 ‘‘(vi) CORRECTION PERIOD.—If there is

9 an increase referred to in clause (v) during

10 any calendar quarter with respect to any

11 property, the requirements of clause (iii)

12 shall be treated as met during the quarter

13 and the succeeding quarter if such require14 ments are met at the close of such suc15 ceeding quarter.’’.

16 SEC. 703. DELETION OF CUSTOMARY SERVICES EXCEPTION.

17 Subparagraph (B) of section 857(b)(7) (relating to re18 determined rents) is amended by striking clause (ii) and

19 by redesignating clauses (iii), (iv), (v), (vi), and (vii) as

20 clauses (ii), (iii), (iv), (v), and (vi), respectively.

21 SEC. 704. CONFORMITY WITH GENERAL HEDGING DEFINI22 TION.

23 (a) DEFINITION.—Subparagraph (G) of section

24 856(c)(5) (relating to treatment of certain hedging instru25 ments) is amended to read as follows:
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1 ‘‘(G) TREATMENT OF CERTAIN HEDGING IN2 STRUMENTS.—Except to the extent provided by

3 regulations, any income of a real estate invest4 ment trust from a hedging transaction (as de5 fined in clause (ii) or (iii) of section

6 1221(b)(2)(A)) which is clearly identified pursu7 ant to section 1221(a)(7), including gain from

8 the sale or disposition of such a transaction,

9 shall not constitute gross income under para10 graph (2) to the extent that the transaction

11 hedges any indebtedness incurred or to be in12 curred by the trust to acquire or carry real estate

13 assets.’’.

14 SEC. 705. CONFORMITY WITH REGULATED INVESTMENT

15 COMPANY RULES.

16 Clause (i) of section 857(b)(5)(A) (relating to imposi17 tion of tax in case of failure to meet certain requirements)

18 is amended by striking ‘‘90 percent’’ and inserting ‘‘95 per19 cent’’.

20 SEC. 706. PROHIBITED TRANSACTIONS PROVISIONS.

21 (a) EXPANSION OF PROHIBITED TRANSACTION SAFE

22 HARBOR.—Section 857(b)(6) (relating to income from pro23 hibited transactions) is amended by redesignating subpara24 graphs (D) and (E) as subparagraphs (E) and (F), respec-
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1 tively, and by inserting after subparagraph (C) the fol2 lowing new subparagraph:

3 ‘‘(D) CERTAIN SALES NOT TO CONSTITUTE

4 PROHIBITED TRANSACTIONS.—For purposes of

5 this part, the term ‘prohibited transaction’ does

6 not include a sale of property which is a real es7 tate asset (as defined in section 856(c)(5)(B))

8 if—

9 ‘‘(i) the trust held the property for not

10 less than 4 years in connection with the

11 trade or business of producing timber,

12 ‘‘(ii) the aggregate expenditures made

13 by the trust, or a partner of the trust, dur14 ing the 4-year period preceding the date of

15 sale which—

16 ‘‘(I) are includible in the basis of

17 the property (other than timberland

18 acquisition expenditures), and

19 ‘‘(II) are directly related to oper20 ation of the property for the produc21 tion of timber or for the preservation of

22 the property for use as timberland,

23 do not exceed 30 percent of the net selling

24 price of the property,
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1 ‘‘(iii) the aggregate expenditures made

2 by the trust, or a partner of the trust, dur3 ing the 4-year period preceding the date of

4 sale which—

5 ‘‘(I) are includible in the basis of

6 the property (other than timberland

7 acquisition expenditures), and

8 ‘‘(II) are not directly related to

9 operation of the property for the pro10 duction of timber, or for the preserva11 tion of the property for use as

12 timberland,

13 do not exceed 5 percent of the net selling

14 price of the property,

15 ‘‘(iv)(I) during the taxable year the

16 trust does not make more than 7 sales of

17 property (other than sales of foreclosure

18 property or sales to which section 1033 ap19 plies), or

20 ‘‘(II) the aggregate adjusted bases (as

21 determined for purposes of computing earn22 ings and profits) of property (other than

23 sales of foreclosure property or sales to

24 which section 1033 applies) sold during the

25 taxable year does not exceed 10 percent of
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1 the aggregate bases (as so determined) of all

2 of the assets of the trust as of the beginning

3 of the taxable year,

4 ‘‘(v) in the case that the requirement of

5 clause (iv)(I) is not satisfied, substantially

6 all of the marketing expenditures with re7 spect to the property were made through an

8 independent contractor (as defined in sec9 tion 856(d)(3)) from whom the trust itself

10 does not derive or receive any income, and

11 ‘‘(vi) the sales price of the property

12 sold by the trust to its taxable REIT sub13 sidiary is not based in whole or in part on

14 the income or profits of the subsidiary or

15 the income or profits that the subsidiary de16 rives from the sale or operation of such

17 property.’’.

18 SEC. 707. EFFECTIVE DATES.

19 (a) IN GENERAL.—Except as provided in subsection

20 (b), the amendments made by this title shall apply to tax21 able years beginning after December 31, 2000.

22 (b) SECTIONS 703 THROUGH 706.—The amendments

23 made by sections 703, 704, 705 and 706 shall apply to tax24 able years beginning after the date of the enactment of this

25 Act.
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1 Subtitle B—REIT Savings

2 Provisions

3 SEC. 711. REVISIONS TO REIT PROVISIONS.

4 (a) RULES OF APPLICATION FOR FAILURE TO SATISFY

5 SECTION 856(c)(4).—Section 856(c) (relating to definition

6 of real estate investment trust), as amended by section 701,

7 is amended by inserting after paragraph (6) the following

8 new paragraph:

9 ‘‘(7) RULES OF APPLICATION FOR FAILURE TO

10 SATISFY PARAGRAPH (4).—

11 ‘‘(A) DE MINIMIS FAILURE.—A corporation,

12 trust, or association that fails to meet the re13 quirements of paragraph (4)(B)(iii) for a par14 ticular quarter shall nevertheless be considered to

15 have satisfied the requirements of such para16 graph for such quarter if—

17 ‘‘(i) such failure is due to the owner18 ship of assets the total value of which does

19 not exceed the lesser of—

20 ‘‘(I) 1 percent of the total value of

21 the trust’s assets at the end of the quar22 ter for which such measurement is

23 done, and

24 ‘‘(II) $10,000,000, and
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1 ‘‘(ii)(I) the corporation, trust, or asso2 ciation, following the identification of such

3 failure, disposes of assets in order to meet

4 the requirements of such paragraph within

5 6 months after the last day of the quarter

6 in which the corporation, trust or associa7 tion’s identification of the failure to satisfy

8 the requirements of such paragraph oc9 curred or such other time period prescribed

10 by the Secretary and in the manner pre11 scribed by the Secretary, or

12 ‘‘(II) the requirements of such para13 graph are otherwise met within the time pe14 riod specified in subclause (I).

15 ‘‘(B) FAILURES EXCEEDING DE MINIMIS

16 AMOUNT.—A corporation, trust, or association

17 that fails to meet the requirements of paragraph

18 (4) for a particular quarter shall nevertheless be

19 considered to have satisfied the requirements of

20 such paragraph for such quarter if—

21 ‘‘(i) such failure involves the ownership

22 of assets the total value of which exceeds the

23 de minimis standard described in subpara24 graph (A)(i) at the end of the quarter for

25 which such measurement is done,
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1 ‘‘(ii) following the corporation, trust,

2 or association’s identification of the failure

3 to satisfy the requirements of such para4 graph for a particular quarter, a descrip5 tion of each asset that causes the corpora6 tion, trust, or association to fail to satisfy

7 the requirements of such paragraph at the

8 close of such quarter of any taxable year is

9 set forth in a schedule for such quarter filed

10 in accordance with regulations prescribed

11 by the Secretary,

12 ‘‘(iii) the failure to meet the require13 ments of such paragraph for a particular

14 quarter is due to reasonable cause and not

15 due to willful neglect,

16 ‘‘(iv) the corporation, trust, or associa17 tion pays a tax computed under subpara18 graph (C), and

19 ‘‘(v)(I) the corporation, trust, or asso20 ciation disposes of the assets set forth on the

21 schedule specified in clause (ii) within 6

22 months after the last day of the quarter in

23 which the corporation, trust or association’s

24 identification of the failure to satisfy the re25 quirements of such paragraph occurred or
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1 such other time period prescribed by the

2 Secretary and in the manner prescribed by

3 the Secretary, or

4 ‘‘(II) the requirements of such para5 graph are otherwise met within the time pe6 riod specified in subclause (I).

7 ‘‘(C) TAX.—For purposes of subparagraph

8 (B)(iv)—

9 ‘‘(i) TAX IMPOSED.—If a corporation,

10 trust, or association elects the application of

11 this subparagraph, there is hereby imposed

12 a tax on the failure described in subpara13 graph (B) of such corporation, trust, or as14 sociation. Such tax shall be paid by the cor15 poration, trust, or association.

16 ‘‘(ii) TAX COMPUTED.—The amount of

17 the tax imposed by clause (i) shall be the

18 greater of—

19 ‘‘(I) $50,000, or

20 ‘‘(II) the amount determined

21 (pursuant to regulations promulgated

22 by the Secretary) by multiplying the

23 net income generated by the assets de24 scribed in the schedule specified in sub25 paragraph (B)(ii) for the period speci-
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1 fied in clause (iii) by the highest rate

2 of tax specified in section 11.

3 ‘‘(iii) PERIOD.—For purposes of clause

4 (ii)(II), the period described in this clause

5 is the period beginning on the first date

6 that the failure to satisfy the requirements

7 of such paragraph (4) occurs as a result of

8 the ownership of such assets and ending on

9 the earlier of the date on which the trust

10 disposes of such assets or the end of the first

11 quarter when there is no longer a failure to

12 satisfy such paragraph (4).

13 ‘‘(iv) ADMINISTRATIVE PROVISIONS.—

14 For purposes of subtitle F, the taxes im15 posed by this subparagraph shall be treated

16 as excise taxes with respect to which the de17 ficiency procedures of such subtitle apply.’’.

18 (b) MODIFICATION OF RULES OF APPLICATION FOR

19 FAILURE TO SATISFY SECTIONS 856(c)(2) OR 856(c)(3).—

20 Paragraph (6) of section 856(c) (relating to definition of

21 real estate investment trust) is amended by striking sub22 paragraphs (A) and (B), by redesignating subparagraph

23 (C) as subparagraph (B), and by inserting before subpara24 graph (B) (as so redesignated) the following new subpara25 graph:
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1 ‘‘(A) following the corporation, trust, or as2 sociation’s identification of the failure to meet

3 the requirements of paragraph (2) or (3), or of

4 both such paragraphs, for any taxable year, a

5 description of each item of its gross income de6 scribed in such paragraphs is set forth in a

7 schedule for such taxable year filed in accordance

8 with regulations prescribed by the Secretary,

9 and’’.

10 (c) REASONABLE CAUSE EXCEPTION TO LOSS OF

11 REIT STATUS IF FAILURE TO SATISFY REQUIREMENTS.—

12 Subsection (g) of section 856 (relating to termination of

13 election) is amended—

14 (1) in paragraph (1) by inserting before the pe15 riod at the end of the first sentence the following: ‘‘un16 less paragraph (5) applies’’, and

17 (2) by adding at the end the following new para18 graph:

19 ‘‘(5) ENTITIES TO WHICH PARAGRAPH AP20 PLIES.—This paragraph applies to a corporation,

21 trust, or association—

22 ‘‘(A) which is not a real estate investment

23 trust to which the provisions of this part apply

24 for the taxable year due to one or more failures

25 to comply with one or more of the provisions of
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1 this part (other than subsection (c)(6) or (c)(7)

2 of section 856),

3 ‘‘(B) such failures are due to reasonable

4 cause and not due to willful neglect, and

5 ‘‘(C) if such corporation, trust, or associa6 tion pays (as prescribed by the Secretary in reg7 ulations and in the same manner as tax) a pen8 alty of $50,000 for each failure to satisfy a pro9 vision of this part due to reasonable cause and

10 not willful neglect.’’.

11 (d) DEDUCTION OF TAX PAID FROM AMOUNT RE12 QUIRED TO BE DISTRIBUTED.—Subparagraph (E) of sec13 tion 857(b)(2) is amended by striking ‘‘(7)’’ and inserting

14 ‘‘(7) of this subsection, section 856(c)(7)(B)(iii), and section

15 856(g)(1).’’.

16 (e) EXPANSION OF DEFICIENCY DIVIDEND PROCE17 DURE.—Subsection (e) of section 860 is amended by strik18 ing ‘‘or’’ at the end of paragraph (2), by striking the period

19 at the end of paragraph (3) and inserting ‘‘; or’’, and by

20 adding at the end the following new paragraph:

21 ‘‘(4) a statement by the taxpayer attached to its

22 amendment or supplement to a return of tax for the

23 relevant tax year.’’.
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1 (f) EFFECTIVE DATE.—The amendments made by this

2 section shall apply to taxable years beginning after date

3 of enactment.

4 TITLE VIII—EXTENSIONS OF

5 CERTAIN EXPIRING PROVISIONS

6 Subtitle A—Extensions of Expiring

7 Provisions

8 SEC. 801. PARITY IN THE APPLICATION OF CERTAIN LIMITS

9 TO MENTAL HEALTH BENEFITS.

10 (a) IN GENERAL.—Subsection (f) of section 9812 is

11 amended by striking ‘‘2003’’ and inserting ‘‘2004’’.

12 (b) EFFECTIVE DATE.—The amendment made by sub13 section (a) shall apply to plan years beginning after Decem14 ber 31, 2002.

15 SEC. 802. ALLOWANCE OF NONREFUNDABLE PERSONAL

16 CREDITS AGAINST REGULAR AND MINIMUM

17 TAX LIABILITY.

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

19 amended—

20 (1) by striking ‘‘RULE FOR 2000, 2001, 2002, AND

21 2003.—’’ and inserting ‘‘RULE FOR 2000, 2001, 2002,

22 2003, AND 2004.—’’, and

23 (2) by striking ‘‘during 2000, 2001, 2002, or

24 2003,’’ and inserting ‘‘during 2000, 2001, 2002, 2003,

25 or 2004’’.
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1 (b) CONFORMING AMENDMENTS.—

2 (1) Section 904(h) is amended by striking ‘‘dur3 ing 2000, 2001, 2002, or 2003’’ and inserting ‘‘during

4 2000, 2001, 2002, 2003, or 2004’’.

5 (2) The amendments made by sections 201(b),

6 202(f), and 618(b) of the Economic Growth and Tax

7 Relief Reconciliation Act of 2001 shall not apply to

8 taxable years beginning during 2004.

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

10 section shall apply to taxable years beginning after Decem11 ber 31, 2002.

12 SEC. 803. CREDIT FOR ELECTRICITY PRODUCED FROM CER13 TAIN RENEWABLE RESOURCES.

14 (a) IN GENERAL.—Subparagraphs (A), (B), and (C)

15 of section 45(c)(3) are each amended by striking ‘‘2004’’

16 and inserting ‘‘2005’’.

17 (b) EFFECTIVE DATE.—The amendments made by sub18 section (a) shall apply to facilities placed in service after

19 December 31, 2002.

20 SEC. 804. WORK OPPORTUNITY CREDIT.

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

22 51(c)(4) is amended by striking ‘‘2003’’ and inserting

23 ‘‘2004’’.
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1 (b) EFFECTIVE DATE.—The amendment made by sub2 section (a) shall apply to individuals who begin work for

3 the employer after December 31, 2002.

4 SEC. 805. WELFARE-TO-WORK CREDIT.

5 (a) IN GENERAL.—Subsection (f) of section 51A is

6 amended by striking ‘‘2003’’ and inserting ‘‘2004’’.

7 (b) EFFECTIVE DATE.—The amendment made by sub8 section (a) shall apply to individuals who begin work for

9 the employer after December 31, 2002.

10 SEC. 806. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLE11 TION FOR OIL AND NATURAL GAS PRODUCED

12 FROM MARGINAL PROPERTIES.

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

14 613A(c)(6) is amended by striking ‘‘2004’’ and inserting

15 ‘‘2005’’.

16 (b) EFFECTIVE DATE.—The amendment made by sub17 section (a) shall apply to taxable years beginning after De18 cember 31, 2002.

19 SEC. 807. QUALIFIED ZONE ACADEMY BONDS.

20 (a) IN GENERAL.—Paragraph (1) of section 1397E(e)

21 is amended by striking ‘‘2000, 2001, 2002, and 2003’’ and

22 inserting ‘‘2000, 2001, 2002, 2003, and 2004’’.

23 (b) EFFECTIVE DATE.—The amendment made by sub24 section (a) shall apply to obligations issued after the date

25 of the enactment of this Act.
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1 SEC. 808. COVER OVER OF TAX ON DISTILLED SPIRITS.

2 (a) IN GENERAL.—Paragraph (1) of section 7652(f) is

3 amended by striking ‘‘January 1, 2004’’ and inserting

4 ‘‘January 1, 2005’’.

5 (b) EFFECTIVE DATE.—The amendment made by sub6 section (a) shall apply to articles brought into the United

7 States after December 31, 2002.

8 SEC. 809. DEDUCTION FOR CORPORATE DONATIONS OF

9 COMPUTER TECHNOLOGY.

10 (a) EXTENSION OF DEDUCTION.—Section 170(e)(6)(G)

11 (relating to termination) is amended by striking ‘‘December

12 31, 2003’’ and inserting ‘‘December 31, 2004’’.

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

14 section shall apply to contributions made after December

15 31, 2002.

16 SEC. 810. CREDIT FOR QUALIFIED ELECTRIC VEHICLES.

17 (a) IN GENERAL.—Section 30 is amended—

18 (1) in subsection (b)(2)—

19 (A) by striking ‘‘December 31, 2003,’’ and

20 inserting ‘‘December 31, 2004,’’, and

21 (B) in subparagraphs (A), (B), and (C), by

22 striking ‘‘2004’’, ‘‘2005’’, and ‘‘2006’’, respec23 tively, and inserting ‘‘2005’’, ‘‘2006’’, and

24 ‘‘2007’’, respectively.

25 (2) in subsection (e), by striking ‘‘December 31,

26 2006’’ and inserting ‘‘December 31, 2007’’.
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1 (b) CONFORMING AMENDMENTS.—Clause (iii) of sec2 tion 280F(a)(1)(C) is amended by striking ‘‘2007’’ and in3 serting ‘‘2008’’.

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

5 section shall apply to property placed in service after De6 cember 31, 2002.

7 SEC. 811. DEDUCTION FOR CLEAN-FUEL VEHICLES AND

8 CERTAIN REFUELING PROPERTY.

9 (a) IN GENERAL.—Section 179A is amended—

10 (1) in subsection (b)(1)(B)—

11 (A) by striking ‘‘December 31, 2003,’’ and

12 inserting ‘‘December 31, 2004,’’, and

13 (B) in clauses (i), (ii), and (iii), by striking

14 ‘‘2004’’, ‘‘2005’’, and ‘‘2006’’, respectively, and

15 inserting ‘‘2005’’, ‘‘2006’’, and ‘‘2007’’, respec16 tively, and

17 (2) in subsection (f), by striking ‘‘December 31,

18 2006’’ and inserting ‘‘December 31, 2007’’.

19 (b) EFFECTIVE DATE.—The amendments made by sub20 section (a) shall apply to property placed in service after

21 December 31, 2002.
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1 SEC. 812. DEDUCTION FOR CERTAIN EXPENSES OF SCHOOL

2 TEACHERS.

3 (a) IN GENERAL.—Subparagraph (D) of section

4 62(a)(2) is amended by striking ‘‘during 2002 or 2003’’ and

5 inserting ‘‘during 2002, 2003, or 2004’’.

6 (b) EFFECTIVE DATE.—The amendment made by sub7 section (a) shall apply to taxable years beginning after De8 cember 31, 2002.

9 SEC. 813. AVAILABILITY OF MEDICAL SAVINGS ACCOUNTS.

10 (a) IN GENERAL.—Paragraphs (2) and (3)(B) of sec11 tion 220(i) (defining cut-off year) are each amended by

12 striking ‘‘2003’’ each place it appears and inserting

13 ‘‘2004’’.

14 (b) CONFORMING AMENDMENTS.—

15 (1) Paragraph (2) of section 220(j) is amended

16 by striking ‘‘1998, 1999, 2001, or 2002’’ each place it

17 appears and inserting ‘‘1998, 1999, 2001, 2002, or

18 2003’’.

19 (2) Subparagraph (A) of section 220(j)(4) is

20 amended by striking ‘‘and 2002’’ and inserting

21 ‘‘2002, and 2003’’.

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

23 section shall take effect on January 1, 2003.
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1 SEC. 814. EXPENSING OF ENVIRONMENTAL REMEDIATION

2 COSTS.

3 (a) EXTENSION OF TERMINATION DATE.—Subsection

4 (h) of section 198 is amended by striking ‘‘2003’’ and in5 serting ‘‘2004’’.

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

7 section shall apply to expenditures paid or incurred after

8 December 31, 2002.

9 TITLE IX—IMPROVING TAX EQ10 UITY FOR MILITARY PER11 SONNEL

12 SEC. 900. SHORT TITLE.

13 This title may be cited as the ‘‘Armed Forces Tax Fair14 ness Act of 2003’’.

15 SEC. 901. EXCLUSION OF GAIN FROM SALE OF A PRINCIPAL

16 RESIDENCE BY A MEMBER OF THE UNI17 FORMED SERVICES OR THE FOREIGN SERV18 ICE.

19 (a) IN GENERAL.—Subsection (d) of section 121 (relat20 ing to exclusion of gain from sale of principal residence)

21 is amended by redesignating paragraph (9) as paragraph

22 (10) and by inserting after paragraph (8) the following new

23 paragraph:

24 ‘‘(9) MEMBERS OF UNIFORMED SERVICES AND

25 FOREIGN SERVICE.—
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1 ‘‘(A) IN GENERAL.—At the election of an

2 individual with respect to a property, the run3 ning of the 5-year period described in subsections

4 (a) and (c)(1)(B) and paragraph (7) of this sub5 section with respect to such property shall be sus6 pended during any period that such individual

7 or such individual’s spouse is serving on quali8 fied official extended duty as a member of the

9 uniformed services or of the Foreign Service of

10 the United States.

11 ‘‘(B) MAXIMUM PERIOD OF SUSPENSION.—

12 The 5-year period described in subsection (a)

13 shall not be extended more than 10 years by rea14 son of subparagraph (A).

15 ‘‘(C) QUALIFIED OFFICIAL EXTENDED

16 DUTY.—For purposes of this paragraph—

17 ‘‘(i) IN GENERAL.—The term ‘qualified

18 official extended duty’ means any extended

19 duty while serving at a duty station which

20 is at least 50 miles from such property or

21 while residing under Government orders in

22 Government quarters.

23 ‘‘(ii) UNIFORMED SERVICES.—The

24 term ‘uniformed services’ has the meaning

25 given such term by section 101(a)(5) of title
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1 10, United States Code, as in effect on the

2 date of the enactment of this paragraph.

3 ‘‘(iii) FOREIGN SERVICE OF THE

4 UNITED STATES.—The term ‘member of the

5 Foreign Service of the United States’ has

6 the meaning given the term ‘member of the

7 Service’ by paragraph (1), (2), (3), (4), or

8 (5) of section 103 of the Foreign Service Act

9 of 1980, as in effect on the date of the enact10 ment of this paragraph.

11 ‘‘(iv) EXTENDED DUTY.—The term ‘ex12 tended duty’ means any period of active

13 duty pursuant to a call or order to such

14 duty for a period in excess of 90 days or for

15 an indefinite period.

16 ‘‘(D) SPECIAL RULES RELATING TO ELEC17 TION.—

18 ‘‘(i) ELECTION LIMITED TO 1 PROP19 ERTY AT A TIME.—An election under sub20 paragraph (A) with respect to any property

21 may not be made if such an election is in

22 effect with respect to any other property.

23 ‘‘(ii) REVOCATION OF ELECTION.—An

24 election under subparagraph (A) may be re25 voked at any time.’’.
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1 (b) EFFECTIVE DATE; SPECIAL RULE.—

2 (1) EFFECTIVE DATE.—The amendments made

3 by this section shall take effect as if included in the

4 amendments made by section 312 of the Taxpayer Re5 lief Act of 1997.

6 (2) WAIVER OF LIMITATIONS.—If refund or cred7 it of any overpayment of tax resulting from the

8 amendments made by this section is prevented at any

9 time before the close of the 1-year period beginning on

10 the date of the enactment of this Act by the operation

11 of any law or rule of law (including res judicata),

12 such refund or credit may nevertheless be made or al13 lowed if claim therefor is filed before the close of such

14 period.

15 SEC. 902. EXCLUSION FROM GROSS INCOME OF CERTAIN

16 DEATH GRATUITY PAYMENTS.

17 (a) IN GENERAL.—Subsection (b)(3) of section 134 (re18 lating to certain military benefits) is amended by adding

19 at the end the following new subparagraph:

20 ‘‘(C) EXCEPTION FOR DEATH GRATUITY AD21 JUSTMENTS MADE BY LAW.—Subparagraph (A)

22 shall not apply to any adjustment to the amount

23 of death gratuity payable under chapter 75 of

24 title 10, United States Code, which is pursuant
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1 to a provision of law enacted after September 9,

2 1986.’’.

3 (b) CONFORMING AMENDMENT.—Subparagraph (A) of

4 section 134(b)(3) is amended by striking ‘‘subparagraph

5 (B)’’ and inserting ‘‘subparagraphs (B) and (C)’’.

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

7 section shall apply with respect to deaths occurring after

8 September 10, 2001.

9 SEC. 903. EXCLUSION FOR AMOUNTS RECEIVED UNDER DE10 PARTMENT OF DEFENSE HOMEOWNERS AS11 SISTANCE PROGRAM.

12 (a) IN GENERAL.—Section 132(a) (relating to the ex13 clusion from gross income of certain fringe benefits) is

14 amended by striking ‘‘or’’ at the end of paragraph (6), by

15 striking the period at the end of paragraph (7) and insert16 ing ‘‘, or’’, and by adding at the end the following new

17 paragraph:

18 ‘‘(8) qualified military base realignment and clo19 sure fringe.’’.

20 (b) QUALIFIED MILITARY BASE REALIGNMENT AND

21 CLOSURE FRINGE.—Section 132 is amended by redesig22 nating subsection (n) as subsection (o) and by inserting

23 after subsection (m) the following new subsection:

24 ‘‘(n) QUALIFIED MILITARY BASE REALIGNMENT AND

25 CLOSURE FRINGE.—For purposes of this section—
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1 ‘‘(1) IN GENERAL.—The term ‘qualified military

2 base realignment and closure fringe’ means 1 or more

3 payments under the authority of section 1013 of the

4 Demonstration Cities and Metropolitan Development

5 Act of 1966 (42 U.S.C. 3374) (as in effect on the date

6 of the enactment of this subsection) to offset the ad7 verse effects on housing values as a result of a mili8 tary base realignment or closure.

9 ‘‘(2) LIMITATION.—With respect to any property,

10 such term shall not include any payment referred to

11 in paragraph (1) to the extent that the sum of all of

12 such payments related to such property exceeds the

13 maximum amount described in clause (1) of sub14 section (c) of such section (as in effect on such date).’’.

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

16 section shall apply to payments made after the date of the

17 enactment of this Act.

18 SEC. 904. EXPANSION OF COMBAT ZONE FILING RULES TO

19 CONTINGENCY OPERATIONS.

20 (a) IN GENERAL.—Section 7508(a) (relating to time

21 for performing certain acts postponed by reason of service

22 in combat zone) is amended—

23 (1) by inserting ‘‘, or when deployed outside the

24 United States away from the individual’s permanent

25 duty station while participating in an operation des-
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1 ignated by the Secretary of Defense as a contingency

2 operation (as defined in section 101(a)(13) of title 10,

3 United States Code) or which became such a contin4 gency operation by operation of law’’ after ‘‘section

5 112’’,

6 (2) by inserting in the first sentence ‘‘or at any

7 time during the period of such contingency operation’’

8 after ‘‘for purposes of such section’’,

9 (3) by inserting ‘‘or operation’’ after ‘‘such an

10 area’’, and

11 (4) by inserting ‘‘or operation’’ after ‘‘such

12 area’’.

13 (b) CONFORMING AMENDMENTS.—

14 (1) Section 7508(d) is amended by inserting ‘‘or

15 contingency operation’’ after ‘‘area’’.

16 (2) The heading for section 7508 is amended by

17 inserting ‘‘OR CONTINGENCY OPERATION’’ after

18 ‘‘COMBAT ZONE’’.

19 (3) The item relating to section 7508 in the table

20 of sections for chapter 77 is amended by inserting ‘‘or

21 contingency operation’’ after ‘‘combat zone’’.

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

23 section shall apply to any period for performing an act

24 which has not expired before the date of the enactment of

25 this Act.
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1 SEC. 905. MODIFICATION OF MEMBERSHIP REQUIREMENT

2 FOR EXEMPTION FROM TAX FOR CERTAIN

3 VETERANS’ ORGANIZATIONS.

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

5 501(c)(19) (relating to list of exempt organizations) is

6 amended by striking ‘‘or widowers’’ and inserting ‘‘, wid7 owers, ancestors, or lineal descendants’’.

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

9 section shall apply to taxable years beginning after the date

10 of the enactment of this Act.

11 SEC. 906. CLARIFICATION OF THE TREATMENT OF CERTAIN

12 DEPENDENT CARE ASSISTANCE PROGRAMS.

13 (a) IN GENERAL.—Section 134(b) (defining qualified

14 military benefit) is amended by adding at the end the fol15 lowing new paragraph:

16 ‘‘(4) CLARIFICATION OF CERTAIN BENEFITS.—

17 For purposes of paragraph (1), such term includes

18 any dependent care assistance program (as in effect

19 on the date of the enactment of this paragraph) for

20 any individual described in paragraph (1)(A).’’.

21 (b) CONFORMING AMENDMENTS.—

22 (1) Section 134(b)(3)(A), as amended by section

23 102, is amended by inserting ‘‘and paragraph (4)’’

24 after ‘‘subparagraphs (B) and (C)’’.

25 (2) Section 3121(a)(18) is amended by striking

26 ‘‘or 129’’ and inserting ‘‘, 129, or 134(b)(4)’’.
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1 (3) Section 3306(b)(13) is amended by striking

2 ‘‘or 129’’ and inserting ‘‘, 129, or 134(b)(4)’’.

3 (4) Section 3401(a)(18) is amended by striking

4 ‘‘or 129’’ and inserting ‘‘, 129, or 134(b)(4)’’.

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

6 section shall apply to taxable years beginning after Decem7 ber 31, 2002.

8 (d) NO INFERENCE.—No inference may be drawn from

9 the amendments made by this section with respect to the

10 tax treatment of any amounts under the program described

11 in section 134(b)(4) of the Internal Revenue Code of 1986

12 (as added by this section) for any taxable year beginning

13 before January 1, 2003.

14 SEC. 907. CLARIFICATION RELATING TO EXCEPTION FROM

15 ADDITIONAL TAX ON CERTAIN DISTRIBU16 TIONS FROM QUALIFIED TUITION PROGRAMS,

17 ETC. ON ACCOUNT OF ATTENDANCE AT MILI18 TARY ACADEMY.

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

20 530(d)(4) (relating to exceptions from additional tax for

21 distributions not used for educational purposes) is amended

22 by striking ‘‘or’’ at the end of clause (iii), by redesignating

23 clause (iv) as clause (v), and by inserting after clause (iii)

24 the following new clause:
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1 ‘‘(iv) made on account of the attend2 ance of the designated beneficiary at the

3 United States Military Academy, the

4 United States Naval Academy, the United

5 States Air Force Academy, the United

6 States Coast Guard Academy, or the United

7 States Merchant Marine Academy, to the

8 extent that the amount of the payment or

9 distribution does not exceed the costs of ad10 vanced education (as defined by section

11 2005(e)(3) of title 10, United States Code,

12 as in effect on the date of the enactment of

13 this section) attributable to such attendance,

14 or’’.

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

16 section shall apply to taxable years beginning after Decem17 ber 31, 2002.

18 SEC. 908. SUSPENSION OF TAX-EXEMPT STATUS OF TER19 RORIST ORGANIZATIONS.

20 (a) IN GENERAL.—Section 501 (relating to exemption

21 from tax on corporations, certain trusts, etc.) is amended

22 by redesignating subsection (p) as subsection (q) and by in23 serting after subsection (o) the following new subsection:

24 ‘‘(p) SUSPENSION OF TAX-EXEMPT STATUS OF TER25 RORIST ORGANIZATIONS.—
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1 ‘‘(1) IN GENERAL.—The exemption from tax

2 under subsection (a) with respect to any organization

3 described in paragraph (2), and the eligibility of any

4 organization described in paragraph (2) to apply for

5 recognition of exemption under subsection (a), shall

6 be suspended during the period described in para7 graph (3).

8 ‘‘(2) TERRORIST ORGANIZATIONS.—An organiza9 tion is described in this paragraph if such organiza10 tion is designated or otherwise individually

11 identified—

12 ‘‘(A) under section 212(a)(3)(B)(vi)(II) or

13 219 of the Immigration and Nationality Act as

14 a terrorist organization or foreign terrorist orga15 nization,

16 ‘‘(B) in or pursuant to an Executive order

17 which is related to terrorism and issued under

18 the authority of the International Emergency

19 Economic Powers Act or section 5 of the United

20 Nations Participation Act of 1945 for the pur21 pose of imposing on such organization an eco22 nomic or other sanction, or

23 ‘‘(C) in or pursuant to an Executive order

24 issued under the authority of any Federal law

25 if—
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1 ‘‘(i) the organization is designated or

2 otherwise individually identified in or pur3 suant to such Executive order as supporting

4 or engaging in terrorist activity (as defined

5 in section 212(a)(3)(B) of the Immigration

6 and Nationality Act) or supporting ter7 rorism (as defined in section 140(d)(2) of

8 the Foreign Relations Authorization Act,

9 Fiscal Years 1988 and 1989); and

10 ‘‘(ii) such Executive order refers to this

11 subsection.

12 ‘‘(3) PERIOD OF SUSPENSION.—With respect to

13 any organization described in paragraph (2), the pe14 riod of suspension—

15 ‘‘(A) begins on the later of—

16 ‘‘(i) the date of the first publication of

17 a designation or identification described in

18 paragraph (2) with respect to such organi19 zation, or

20 ‘‘(ii) the date of the enactment of this

21 subsection, and

22 ‘‘(B) ends on the first date that all designa23 tions and identifications described in paragraph

24 (2) with respect to such organization are re25 scinded pursuant to the law or Executive order
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1 under which such designation or identification

2 was made.

3 ‘‘(4) DENIAL OF DEDUCTION.—No deduction

4 shall be allowed under any provision of this title, in5 cluding sections 170, 545(b)(2), 556(b)(2), 642(c),

6 2055, 2106(a)(2), and 2522, with respect to any con7 tribution to an organization described in paragraph

8 (2) during the period described in paragraph (3).

9 ‘‘(5) DENIAL OF ADMINISTRATIVE OR JUDICIAL

10 CHALLENGE OF SUSPENSION OR DENIAL OF DEDUC11 TION.—Notwithstanding section 7428 or any other

12 provision of law, no organization or other person may

13 challenge a suspension under paragraph (1), a des14 ignation or identification described in paragraph (2),

15 the period of suspension described in paragraph (3),

16 or a denial of a deduction under paragraph (4) in

17 any administrative or judicial proceeding relating to

18 the Federal tax liability of such organization or other

19 person.

20 ‘‘(6) ERRONEOUS DESIGNATION.—

21 ‘‘(A) IN GENERAL.—If—

22 ‘‘(i) the tax exemption of any organi23 zation described in paragraph (2) is sus24 pended under paragraph (1),
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1 ‘‘(ii) each designation and identifica2 tion described in paragraph (2) which has

3 been made with respect to such organization

4 is determined to be erroneous pursuant to

5 the law or Executive order under which

6 such designation or identification was

7 made, and

8 ‘‘(iii) the erroneous designations and

9 identifications result in an overpayment of

10 income tax for any taxable year by such or11 ganization,

12 credit or refund (with interest) with respect to

13 such overpayment shall be made.

14 ‘‘(B) WAIVER OF LIMITATIONS.—If the cred15 it or refund of any overpayment of tax described

16 in subparagraph (A)(iii) is prevented at any

17 time by the operation of any law or rule of law

18 (including res judicata), such credit or refund

19 may nevertheless be allowed or made if the claim

20 therefor is filed before the close of the 1-year pe21 riod beginning on the date of the last determina22 tion described in subparagraph (A)(ii).

23 ‘‘(7) NOTICE OF SUSPENSIONS.—If the tax ex24 emption of any organization is suspended under this

25 subsection, the Internal Revenue Service shall update
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1 the listings of tax-exempt organizations and shall

2 publish appropriate notice to taxpayers of such sus3 pension and of the fact that contributions to such or4 ganization are not deductible during the period of

5 such suspension.’’.

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

7 section shall apply to designations made before, on, or after

8 the date of the enactment of this Act.

9 SEC. 909. ABOVE-THE-LINE DEDUCTION FOR OVERNIGHT

10 TRAVEL EXPENSES OF NATIONAL GUARD AND

11 RESERVE MEMBERS.

12 (a) DEDUCTION ALLOWED.—Section 162 (relating to

13 certain trade or business expenses) is amended by redesig14 nating subsection (p) as subsection (q) and inserting after

15 subsection (o) the following new subsection:

16 ‘‘(p) TREATMENT OF EXPENSES OF MEMBERS OF RE17 SERVE COMPONENT OF ARMED FORCES OF THE UNITED

18 STATES.—For purposes of subsection (a)(2), in the case of

19 an individual who performs services as a member of a re20 serve component of the Armed Forces of the United States

21 at any time during the taxable year, such individual shall

22 be deemed to be away from home in the pursuit of a trade

23 or business for any period during which such individual

24 is away from home in connection with such service.’’.
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1 (b) DEDUCTION ALLOWED WHETHER OR NOT TAX2 PAYER ELECTS TO ITEMIZE.—Section 62(a)(2) (relating to

3 certain trade and business deductions of employees) is

4 amended by adding at the end the following new subpara5 graph:

6 ‘‘(E) CERTAIN EXPENSES OF MEMBERS OF

7 RESERVE COMPONENTS OF THE ARMED FORCES

8 OF THE UNITED STATES.—The deductions al9 lowed by section 162 which consist of expenses,

10 determined at a rate not in excess of the rates for

11 travel expenses (including per diem in lieu of

12 subsistence) authorized for employees of agencies

13 under subchapter I of chapter 57 of title 5,

14 United States Code, paid or incurred by the tax15 payer in connection with the performance of

16 services by such taxpayer as a member of a re17 serve component of the Armed Forces of the

18 United States for any period during which such

19 individual is more than 100 miles away from

20 home in connection with such services.’’.

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

22 section shall apply to amounts paid or incurred in taxable

23 years beginning after December 31, 2002.
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1 SEC. 910. TAX RELIEF AND ASSISTANCE FOR FAMILIES OF

2 SPACE SHUTTLE COLUMBIA HEROES.

3 (a) INCOME TAX RELIEF.—

4 (1) IN GENERAL.—Subsection (d) of section 692

5 (relating to income taxes of members of Armed Forces

6 and victims of certain terrorist attacks on death) is

7 amended by adding at the end the following new

8 paragraph:

9 ‘‘(5) RELIEF WITH RESPECT TO ASTRONAUTS.—

10 The provisions of this subsection shall apply to any

11 astronaut whose death occurs in the line of duty, ex12 cept that paragraph (3)(B) shall be applied by using

13 the date of the death of the astronaut rather than Sep14 tember 11, 2001.’’.

15 (2) CONFORMING AMENDMENTS.—

16 (A) Section 5(b)(1) is amended by inserting

17 ‘‘, astronauts,’’ after ‘‘Forces’’.

18 (B) Section 6013(f)(2)(B) is amended by

19 inserting ‘‘, astronauts,’’ after ‘‘Forces’’.

20 (3) CLERICAL AMENDMENTS.—

21 (A) The heading of section 692 is amended

22 by inserting ‘‘, ASTRONAUTS,’’ after

23 ‘‘FORCES’’.

24 (B) The item relating to section 692 in the

25 table of sections for part II of subchapter J of
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1 chapter 1 is amended by inserting ‘‘, astro2 nauts,’’ after ‘‘Forces’’.

3 (4) EFFECTIVE DATE.—The amendments made

4 by this subsection shall apply with respect to any as5 tronaut whose death occurs after December 31, 2002.

6 (b) DEATH BENEFIT RELIEF.—

7 (1) IN GENERAL.—Subsection (i) of section 101

8 (relating to certain death benefits) is amended by

9 adding at the end the following new paragraph:

10 ‘‘(4) RELIEF WITH RESPECT TO ASTRONAUTS.—

11 The provisions of this subsection shall apply to any

12 astronaut whose death occurs in the line of duty.’’.

13 (2) CLERICAL AMENDMENT.—The heading for

14 subsection (i) of section 101 is amended by inserting

15 ‘‘OR ASTRONAUTS’’ after ‘‘VICTIMS’’.

16 (3) EFFECTIVE DATE.—The amendments made

17 by this subsection shall apply to amounts paid after

18 December 31, 2002, with respect to deaths occurring

19 after such date.

20 (c) ESTATE TAX RELIEF.—

21 (1) IN GENERAL.—Section 2201(b) (defining

22 qualified decedent) is amended by striking ‘‘and’’ at

23 the end of paragraph (1)(B), by striking the period

24 at the end of paragraph (2) and inserting ‘‘, and’’,
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1 and by adding at the end the following new para2 graph:

3 ‘‘(3) any astronaut whose death occurs in the

4 line of duty.’’.

5 (2) CLERICAL AMENDMENTS.—

6 (A) The heading of section 2201 is amended

7 by inserting ‘‘, DEATHS OF ASTRONAUTS,’’

8 after ‘‘FORCES’’.

9 (B) The item relating to section 2201 in the

10 table of sections for subchapter C of chapter 11

11 is amended by inserting ‘‘, deaths of astronauts,’’

12 after ‘‘Forces’’.

13 (3) EFFECTIVE DATE.—The amendments made

14 by this subsection shall apply to estates of decedents

15 dying after December 31, 2002.

16 TITLE X—SUNSET

17 SEC. 1001. SUNSET.

18 (a) IN GENERAL.—Except as otherwise provided, the

19 provisions of, and amendments made, by this Act shall not

20 apply to taxable years beginning after December 31, 2012,

21 and the Internal Revenue Code of 1986 shall be applied and

22 administered to such years as if such amendments had

23 never been enacted.
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1 (b) EXCEPTIONS.—Subsection (a) shall not apply to

2 the following provisions of, and amendments made by, this

3 Act:

4 (1) Title I (other than section 107).

5 (2) Title III (other than section 362).

Attest:

Secretary.
108TH CONGRESS

1ST SESSION H. R. 2

AMENDMENT