II 

110TH CONGRESS 

1ST SESSION S. 96 

To amend the Internal Revenue Code of 1986 to ensure a fairer and simpler 

method of taxing controlled foreign corporations of United States shareholders, to treat certain foreign corporations managed and controlled 

in the United States as domestic corporations, to codify the economic 

substance doctrine, and to eliminate the top corporate income tax rate, 

and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

JANUARY 4, 2007 

Mr. KERRY introduced the following bill; which was read twice and referred 

to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 to ensure 

a fairer and simpler method of taxing controlled foreign 

corporations of United States shareholders, to treat certain foreign corporations managed and controlled in the 

United States as domestic corporations, to codify the 

economic substance doctrine, and to eliminate the top 

corporate income tax rate, and for other purposes. 

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


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1 SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE. 

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

3 ‘‘Export Products Not Jobs Act’’. 

4 (b) AMENDMENT OF 1986 CODE.—Except as other5 wise expressly provided, whenever in this Act an amend6 ment or repeal is expressed in terms of an amendment 

7 to, or repeal of, a section or other provision, the reference 

8 shall be considered to be made to a section or other provi9 sion of the Internal Revenue Code of 1986. 

10 TITLE I—FOREIGN TAX REFORM 

11 AND SIMPLIFICATION 

12 SEC. 101. REFORM AND SIMPLIFICATION OF SUBPART F. 

13 (a) IN GENERAL.—Subpart F of part III of sub14 chapter N of chapter 1 (relating to controlled foreign cor15 porations) is amended by striking sections 952, 953, and 

16 954 and inserting the following: 

17 ‘‘SEC. 952. SUBPART F INCOME DEFINED. 

18 ‘‘(a) IN GENERAL.—For purposes of this subpart, ex19 cept as provided in this section, the term ‘subpart F in20 come’ means the gross income of the controlled foreign 

21 corporation. 

22 ‘‘(b) EXCEPTIONS FOR CERTAIN TYPES OF IN23 COME.—Subpart F income shall not include— 

24 ‘‘(1) the active home country income (as de25 fined in section 953) of the controlled foreign cor26 poration for the taxable year, or 


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1 ‘‘(2) any item of income for the taxable year 

2 from sources within the United States which is effec3 tively connected with the conduct by the controlled 

4 foreign corporation of a trade or business within the 

5 United States unless such item is exempt from tax6 ation (or is subject to a reduced rate of tax) pursu7 ant to a treaty obligation of the United States. 

8 For purposes of paragraph (2), income described in para9 graph (2) or (3) of section 921(d) shall be treated as de10 rived from sources within the United States and any ex11 emption (or reduction) with respect to the tax imposed by 

12 section 884 shall not be taken into account. 

13 ‘‘(c) LIMITATION BASED ON EARNINGS AND PROF14 ITS.— 

15 ‘‘(1) IN GENERAL.—For purposes of subsection 

16 (a), the subpart F income of any controlled foreign 

17 corporation for any taxable year shall not exceed the 

18 earnings and profits of such corporation for such 

19 taxable year. 

20 ‘‘(2) RECHARACTERIZATION IN SUBSEQUENT

21 TAXABLE YEARS.—If the subpart F income of any 

22 controlled foreign corporation for any taxable year 

23 was reduced by reason of paragraph (1), any excess 

24 of the earnings and profits of such corporation for 

25 any subsequent taxable year over the subpart F inVerDate Aug 31 2005 03:05 Jan 07, 2007 Jkt 059200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\S96.IS S96

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1 come of such foreign corporation for such taxable 

2 year shall be recharacterized as subpart F income 

3 under rules similar to the rules applicable under sec4 tion 904(f)(5). 

5 ‘‘(3) SPECIAL RULE FOR DETERMINING EARN6 INGS AND PROFITS.—For purposes of this sub7 section, earnings and profits of any controlled for8 eign corporation shall be determined without regard 

9 to paragraphs (4), (5), and (6) of section 312(n). 

10 Under regulations, the preceding sentence shall not 

11 apply to the extent it would increase earnings and 

12 profits by an amount which was previously distrib13 uted by the controlled foreign corporation. 

14 ‘‘(d) DE MINIMIS EXCEPTION.—If the subpart F in15 come of a controlled foreign corporation for any taxable 

16 year (determined without regard to this subsection and 

17 section 954(a)) is less than the lesser of— 

18 ‘‘(1) 5 percent of gross income, or 

19 ‘‘(2) $1,000,000, 

20 the subpart F income of such corporation for such taxable 

21 year shall be treated as being equal to zero. 

22 ‘‘(e) SPECIAL RULES RELATING TO BOYCOTTS, 

23 BRIBES, AND CERTAIN FOREIGN COUNTRIES.— 

24 ‘‘(1) IN GENERAL.—Subpart F income of a con25 trolled foreign corporation for any taxable year (deVerDate Aug 31 2005 03:05 Jan 07, 2007 Jkt 059200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\S96.IS S96

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1 termined without regard to this subsection) shall be 

2 increased by the sum of— 

3 ‘‘(A) the product of— 

4 ‘‘(i) the gross income of the corpora5 tion reduced by its subpart F income (as 

6 so determined), and 

7 ‘‘(ii) the international boycott factor 

8 (as determined under section 999), 

9 ‘‘(B) the sum of the amounts of any illegal 

10 bribes, kickbacks, or other payments (within the 

11 meaning of section 162(c)) paid by or on behalf 

12 of the corporation during the taxable year of 

13 the corporation directly or indirectly to an offi14 cial, employee, or agent in fact of a govern15 ment, and 

16 ‘‘(C) the gross income of such corporation 

17 which is derived from any foreign country dur18 ing any period during which section 901(j) ap19 plies to such foreign country and which is not 

20 otherwise treated as subpart F income (as so 

21 determined). 

22 ‘‘(2) SPECIAL RULE FOR ILLEGAL PAYMENTS.— 

23 The payments referred to in paragraph (1)(B) are 

24 payments which would be unlawful under the ForVerDate Aug 31 2005 03:05 Jan 07, 2007 Jkt 059200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\S96.IS S96

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1 eign Corrupt Practices Act of 1977 if the payor were 

2 a United States person. 

3 ‘‘(3) INCOME DERIVED FROM FOREIGN COUN4 TRY.—The Secretary shall prescribe such regulations 

5 as may be necessary or appropriate to carry out the 

6 purposes of paragraph (1)(C), including regulations 

7 which treat income paid through 1 or more entities 

8 as derived from a foreign country to which section 

9 901(j) applies if such income was, without regard to 

10 such entities, derived from such country. 

11 ‘‘SEC. 953. ACTIVE HOME COUNTRY INCOME. 

12 ‘‘(a) IN GENERAL.—For purposes of section 952(b), 

13 the term ‘active home country income’ means, with respect 

14 to any controlled foreign corporation, income derived from 

15 the active and regular conduct of 1 or more trades or busi16 nesses within the home country of such corporation which 

17 constitutes— 

18 ‘‘(1) qualified property income, or 

19 ‘‘(2) qualified services income. 

20 ‘‘(b) QUALIFIED PROPERTY INCOME.—For purposes 

21 of this section— 

22 ‘‘(1) IN GENERAL.—The term ‘qualified prop23 erty income’ means income derived in connection 

24 with— 


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1 ‘‘(A) the manufacture, production, growth, 

2 or extraction (in whole or in substantial part)of 

3 any personal property within the home country 

4 of the controlled foreign corporation, or 

5 ‘‘(B) the resale by the controlled foreign 

6 corporation within its home country of personal 

7 property manufactured, produced, grown, or ex8 tracted (in whole or in substantial part) within 

9 that home country. 

10 ‘‘(2) PROPERTY MUST BE USED OR CONSUMED

11 IN HOME COUNTRY.—Paragraph (1) shall only apply 

12 to income if the personal property is sold for use or 

13 consumption within the home country. 

14 ‘‘(c) QUALIFIED SERVICES INCOME.—For purposes 

15 of this section— 

16 ‘‘(1) IN GENERAL.—The term ‘qualified services 

17 income’ means income (other than qualified property 

18 income) derived in connection with the providing of 

19 services in transactions with customers which, at the 

20 time the services are provided, are located in the 

21 home country of such corporation. 

22 ‘‘(2) SERVICES MUST BE USED IN HOME COUN23 TRY.—Paragraph (1) shall only apply to income if 

24 the services— 


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1 ‘‘(A) are used or consumed in the home 

2 country of the controlled foreign corporation, or 

3 ‘‘(B) are used in the active conduct of a 

4 trade or business by the recipient and substan5 tially all of the activities in connection with the 

6 trade or business are conducted by the recipient 

7 in such home country. 

8 ‘‘(3) SPECIAL RULE FOR INSURANCE INCOME.— 

9 If income of a controlled foreign corporation— 

10 ‘‘(A) is attributable to the issuing (or rein11 suring) of an insurance or annuity contract, 

12 and 

13 ‘‘(B) would (subject to the modifications 

14 under section 954(c)(2)(B)) be taxed under 

15 subchapter L of this chapter if such income 

16 were the income of a domestic corporation, 

17 such income shall be treated as qualified services in18 come only if the contract covers only risks in connec19 tion with property in, liability arising out of activity 

20 in, or lives or health of residents of, the home coun21 try of such corporation. 

22 ‘‘(4) ANTI-ABUSE RULE.—For purposes of this 

23 subsection, there shall be disregarded any item of in24 come of a controlled foreign corporation derived in 

25 connection with any trade or business if, in the conVerDate Aug 31 2005 03:05 Jan 07, 2007 Jkt 059200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\S96.IS S96

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1 duct of the trade or business, the corporation is not 

2 engaged in regular and continuous transactions with 

3 customers which are not related persons. 

4 ‘‘(d) HOME COUNTRY.—For purposes of this section, 

5 the term ‘home country’ means, with respect to a con6 trolled foreign corporation, the country in which such cor7 poration is created or organized. 

8 ‘‘SEC. 954. OTHER RULES AND DEFINITIONS RELATING TO 

9 SUBPART F INCOME. 

10 ‘‘(a) DEDUCTIONS TO BE TAKEN INTO ACCOUNT.— 

11 For purposes of determining the subpart F income of a 

12 controlled foreign corporation for any taxable year, gross 

13 income, and any category of income described in sub14 section (b) or (c) of section 953, shall be reduced by de15 ductions (including taxes) properly allocable to such in16 come or category. The Secretary shall prescribe regula17 tions for the application of this subsection. 

18 ‘‘(b) ELECTION BY CONTROLLED FOREIGN COR19 PORATION TO BE TREATED AS DOMESTIC CORPORA20 TION.— 

21 ‘‘(1) IN GENERAL.—If— 

22 ‘‘(A) a foreign corporation is a controlled 

23 foreign corporation which makes an election to 

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1 fits to such corporation granted by the United 

2 States under any treaty, and 

3 ‘‘(B) such foreign corporation meets such 

4 requirements as the Secretary shall prescribe to 

5 ensure that the taxes imposed by this chapter 

6 on such foreign corporation are paid, 

7 such corporation shall be treated as a domestic cor8 poration for purposes of this title. 

9 ‘‘(2) PERIOD DURING WHICH ELECTION IS IN

10 EFFECT.— 

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

12 subparagraph (B), an election under paragraph 

13 (1) shall apply to the taxable year for which 

14 made and all subsequent taxable years unless 

15 revoked with the consent of the Secretary. 

16 ‘‘(B) TERMINATION.—If a corporation 

17 which made an election under paragraph (1) for 

18 any taxable year fails to meet the requirements 

19 of subparagraph (B) of paragraph (1) for any 

20 subsequent taxable year, such election shall not 

21 apply to such subsequent taxable year and all 

22 succeeding taxable years. 

23 ‘‘(3) TREATMENT OF LOSSES.—If any corpora24 tion treated as a domestic corporation under this 

25 subsection is treated as a member of an affiliated 


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1 group for purposes of chapter 6 (relating to consoli2 dated returns), any loss of such corporation shall be 

3 treated as a dual consolidated loss for purposes of 

4 section 1503(d) without regard to paragraph (2)(B) 

5 thereof. 

6 ‘‘(4) EFFECT OF ELECTION.— 

7 ‘‘(A) IN GENERAL.—For purposes of sec8 tion 367, any foreign corporation making an 

9 election under paragraph (1) shall be treated as 

10 transferring (as of the 1st day of the 1st tax11 able year to which such election applies) all of 

12 its assets to a domestic corporation in connec13 tion with an exchange to which section 354 ap14 plies. 

15 ‘‘(B) EXCEPTION FOR PRE-2008 EARNINGS

16 AND PROFIT.— 

17 ‘‘(i) IN GENERAL.—Earnings and 

18 profits of the foreign corporation accumu19 lated in taxable years beginning before 

20 January 1, 2008, shall not be included in 

21 the gross income of the persons holding 

22 stock in such corporation by reason of sub23 paragraph (A). 

24 ‘‘(ii) TREATMENT OF DISTRIBU25 TIONS.—For purposes of this title, any disVerDate Aug 31 2005 03:05 Jan 07, 2007 Jkt 059200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6201 E:\BILLS\S96.IS S96

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1 tribution made by a corporation to which 

2 an election under paragraph (1) applies 

3 out of earnings and profits accumulated in 

4 taxable years beginning before January 1, 

5 2008, shall be treated as a distribution 

6 made by a foreign corporation. 

7 ‘‘(iii) CERTAIN RULES TO CONTINUE

8 TO APPLY TO PRE-2008 EARNINGS.—The 

9 provisions specified in clause (iv) shall be 

10 applied without regard to paragraph (1), 

11 except that, in the case of a corporation to 

12 which an election under paragraph (1) ap13 plies, only earnings and profits accumu14 lated in taxable years beginning before 

15 January 1, 2008, shall be taken into ac16 count. 

17 ‘‘(iv) SPECIFIED PROVISIONS.—The 

18 provisions specified in this clause are: 

19 ‘‘(I) Section 1248 (relating to 

20 gain from certain sales or exchanges 

21 of stock in certain foreign corpora22 tions). 

23 ‘‘(II) Subpart F of part III of 

24 subchapter N to the extent such sub25 part relates to earnings invested in 


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1 United States property or amounts re2 ferred to in clause (ii) or (iii) of sec3 tion 951(a)(1)(A). 

4 ‘‘(5) EFFECT OF TERMINATION.—For purposes 

5 of section 367, if— 

6 ‘‘(A) an election is made by a corporation 

7 under paragraph (1) for any taxable year, and 

8 ‘‘(B) such election ceases to apply for any 

9 subsequent taxable year, 

10 such corporation shall be treated as a domestic cor11 poration transferring (as of the 1st day of such sub12 sequent taxable year) all of its property to a foreign 

13 corporation in connection with an exchange to which 

14 section 354 applies. 

15 ‘‘(c) SPECIAL RULE FOR CERTAIN CAPTIVE INSUR16 ANCE COMPANIES.— 

17 ‘‘(1) IN GENERAL.—Solely for purposes of ap18 plying this subpart to related person insurance in19 come— 

20 ‘‘(A) the term ‘United States shareholder’ 

21 means, with respect to any foreign corporation, 

22 a United States person (as defined in section 

23 957(c)) who owns (within the meaning of sec24 tion 958(a)) any stock of the foreign corpora25 tion, 


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1 ‘‘(B) the term ‘controlled foreign corpora2 tion’ has the meaning given to such term by 

3 section 957(a) determined by substituting ‘25 

4 percent or more’ for ‘more than 50 percent’, 

5 and 

6 ‘‘(C) the pro rata share referred to in sec7 tion 951(a)(1)(A)(i) shall be determined under 

8 paragraph (5) of this subsection. 

9 ‘‘(2) RELATED PERSON INSURANCE INCOME.— 

10 For purposes of this subsection— 

11 ‘‘(A) IN GENERAL.—The term ‘related per12 son insurance income’ means any income 

13 which— 

14 ‘‘(i) is attributable to a policy of in15 surance or reinsurance with respect to 

16 which the person (directly or indirectly) in17 sured is a United States shareholder in the 

18 foreign corporation or a related person to 

19 such a shareholder, and 

20 ‘‘(ii) would (subject to the modifica21 tions provided by subparagraph (B)) be 

22 taxed under subchapter L of this chapter 

23 if such income were the income of a do24 mestic insurance company. 


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1 ‘‘(B) SPECIAL RULES.—For purposes of 

2 subparagraph (A)— 

3 ‘‘(i) The following provisions of sub4 chapter L shall not apply: 

5 ‘‘(I) The small life insurance 

6 company deduction. 

7 ‘‘(II) Section 805(a)(5) (relating 

8 to operations loss deduction). 

9 ‘‘(III) Section 832(c)(5) (relating 

10 to certain capital losses). 

11 ‘‘(ii) The items referred to in— 

12 ‘‘(I) section 803(a)(1) (relating 

13 to gross amount of premiums and 

14 other considerations), 

15 ‘‘(II) section 803(a)(2) (relating 

16 to net decrease in reserves), 

17 ‘‘(III) section 805(a)(2) (relating 

18 to net increase in reserves), and 

19 ‘‘(IV) section 832(b)(4) (relating 

20 to premiums earned on insurance con21 tracts), 

22 shall be taken into account only to the ex23 tent they are in respect of any reinsurance 

24 or the issuing of any insurance or annuity 

25 contract described in subparagraph (A). 


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1 ‘‘(iii) Reserves for any insurance or 

2 annuity contract shall be determined in the 

3 same manner as if the controlled foreign 

4 corporation were subject to tax under sub5 chapter L, except that in applying such 

6 subchapter— 

7 ‘‘(I) the interest rate determined 

8 for the functional currency of the cor9 poration and which, except as pro10 vided by the Secretary, is calculated 

11 in the same manner as the Federal 

12 mid-term rate under section 1274(d), 

13 shall be substituted for the applicable 

14 Federal interest rate, 

15 ‘‘(II) the highest assumed inter16 est rate permitted to be used in deter17 mining foreign statement reserves 

18 shall be substituted for the prevailing 

19 State assumed interest rate, and 

20 ‘‘(III) tables for mortality and 

21 morbidity which reasonably reflect the 

22 current mortality and morbidity risks 

23 in the corporation’s home country 

24 shall be substituted for the mortality 


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1 and morbidity tables otherwise used 

2 for such subchapter. 

3 ‘‘(iv) All items of income, expenses, 

4 losses, and deductions shall be properly al5 located or apportioned under regulations 

6 prescribed by the Secretary. 

7 ‘‘(3) EXCEPTION FOR CORPORATIONS NOT

8 HELD BY INSUREDS.—Paragraph (1) shall not apply 

9 to any foreign corporation if at all times during the 

10 taxable year of such foreign corporation— 

11 ‘‘(A) less than 20 percent of the total com12 bined voting power of all classes of stock of 

13 such corporation entitled to vote, and 

14 ‘‘(B) less than 20 percent of the total 

15 value of such corporation, 

16 is owned (directly or indirectly under the principles 

17 of section 883(c)(4)) by persons who are (directly or 

18 indirectly) insured under any policy of insurance or 

19 reinsurance issued by such corporation or who are 

20 related persons to any such person. 

21 ‘‘(4) TREATMENT OF MUTUAL INSURANCE COM22 PANIES.—In the case of a mutual insurance com23 pany— 

24 ‘‘(A) this subsection shall apply, 


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1 ‘‘(B) policyholders of such company shall 

2 be treated as shareholders, and 

3 ‘‘(C) appropriate adjustments in the appli4 cation of this subpart shall be made under reg5 ulations prescribed by the Secretary. 

6 ‘‘(5) DETERMINATION OF PRO RATA SHARE.— 

7 ‘‘(A) IN GENERAL.—The pro rata share 

8 determined under this paragraph for any 

9 United States shareholder is the lesser of— 

10 ‘‘(i) the amount which would be deter11 mined under paragraph (2) of section 

12 951(a) if— 

13 ‘‘(I) only related person insur14 ance income were taken into account, 

15 ‘‘(II) stock owned (within the 

16 meaning of section 958(a)) by United 

17 States shareholders on the last day of 

18 the taxable year were the only stock 

19 in the foreign corporation, and 

20 ‘‘(III) only distributions received 

21 by United States shareholders were 

22 taken into account under subpara23 graph (B) of such paragraph (2), or 

24 ‘‘(ii) the amount which would be de25 termined under paragraph (2) of section 


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1 951(a) if the entire earnings and profits of 

2 the foreign corporation for the taxable year 

3 were subpart F income. 

4 ‘‘(B) COORDINATION WITH OTHER PROVI5 SIONS.—The Secretary shall prescribe regula6 tions providing for such modifications to the 

7 provisions of this subpart as may be necessary 

8 or appropriate by reason of subparagraph (A). 

9 ‘‘(6) RELATED PERSON.—For purposes of this 

10 subsection— 

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

12 subparagraph (B), the term ‘related person’ has 

13 the meaning given such term by subsection 

14 (d)(3). 

15 ‘‘(B) TREATMENT OF CERTAIN LIABILITY

16 INSURANCE POLICIES.—In the case of any pol17 icy of insurance covering liability arising from 

18 services performed as a director, officer, or em19 ployee of a corporation or as a partner or em20 ployee of a partnership, the person performing 

21 such services and the entity for which such 

22 services are performed shall be treated as re23 lated persons. 


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1 ‘‘(7) REGULATIONS.—The Secretary shall pre2 scribe such regulations as may be necessary to carry 

3 out the purposes of this subsection, including— 

4 ‘‘(A) regulations preventing the avoidance 

5 of this subsection through cross insurance ar6 rangements or otherwise, and 

7 ‘‘(B) regulations which may provide that a 

8 person will not be treated as a United States 

9 shareholder under paragraph (1) with respect 

10 to any foreign corporation if neither such per11 son (nor any related person to such person) is 

12 (directly or indirectly) insured under any policy 

13 of insurance or reinsurance issued by such for14 eign corporation. 

15 ‘‘(d) OTHER DEFINITIONS AND RULES.—For pur16 poses of this section— 

17 ‘‘(1) TREATMENT OF BRANCHES.—If— 

18 ‘‘(A) a controlled foreign corporation car19 ries on activities through a branch or similar 

20 establishment with a home country other than 

21 the home country of such corporation, and 

22 ‘‘(B) the carrying on of such activities in 

23 such manner has substantially the same effect 

24 as if such branch or similar establishment were 

25 a wholly owned subsidiary of such corporation, 


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1 this subpart shall, under regulations prescribed by 

2 the Secretary, be applied as if such branch or other 

3 establishment were a wholly owned subsidiary of 

4 such corporation. 

5 ‘‘(2) HOME COUNTRY.—For purposes of para6 graph (1)— 

7 ‘‘(A) IN GENERAL.—The term ‘home coun8 try’ has the meaning given such term by section 

9 953(d). 

10 ‘‘(B) BRANCH.—In the case of a branch or 

11 similar establishment, the term ‘home country’ 

12 means the foreign country in which— 

13 ‘‘(i) the principal place of business of 

14 the branch or similar establishment is lo15 cated, and 

16 ‘‘(ii) separate books and accounts are 

17 maintained. 

18 ‘‘(3) RELATED PERSON DEFINED.—For pur19 poses of this section, a person is a related person 

20 with respect to a controlled foreign corporation, if— 

21 ‘‘(A) such person is an individual, corpora22 tion, partnership, trust, or estate which con23 trols, or is controlled by, the controlled foreign 

24 corporation, or 


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1 ‘‘(B) such person is a corporation, partner2 ship, trust, or estate which is controlled by the 

3 same person or persons which control the con4 trolled foreign corporation. 

5 For purposes of the preceding sentence, control 

6 means, with respect to a corporation, the ownership, 

7 directly or indirectly, of stock possessing more than 

8 50 percent of the total voting power of all classes of 

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

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

11 trust, or estate, control means the ownership, di12 rectly or indirectly, of more than 50 percent (by 

13 value) of the beneficial interests in such partnership, 

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

15 rules similar to the rules of section 958 shall 

16 apply.’’. 

17 (b) CONFORMING AMENDMENT.—The table of sec18 tions for subpart F of part III of subchapter N of chapter 

19 1 is amended by striking the items relating to sections 

20 953 and 954 and inserting: 

‘‘Sec. 953. Active home country income. 

‘‘Sec. 954. Other rules and definitions relating to subpart F income.’’. 

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

22 this section shall apply to taxable years of controlled for23 eign corporations beginning after December 31, 2007, and 


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1 taxable years of United States shareholders with or within 

2 which such taxable years of such corporations end. 

3 SEC. 102. TREATMENT OF FOREIGN CORPORATIONS MAN4 AGED AND CONTROLLED IN THE UNITED 

5 STATES AS DOMESTIC CORPORATIONS. 

6 (a) IN GENERAL.—Section 7701(a)(4) of the Internal 

7 Revenue Code of 1986 (defining domestic) is amended to 

8 read as follows: 

9 ‘‘(4) DOMESTIC.— 

10 ‘‘(A) IN GENERAL.—The term ‘domestic’ 

11 means, when applied to a corporation or part12 nership, a corporation or partnership which is 

13 created or organized in the United States or 

14 under the law of the United States or of any 

15 State unless, in the case of a partnership, the 

16 Secretary provides otherwise by regulations. 

17 ‘‘(B) INCOME TAX EXCEPTION FOR PUB18 LICLY-TRADED CORPORATIONS MANAGED AND

19 CONTROLLED IN THE UNITED STATES.—Not20 withstanding subparagraph (A), in the case of 

21 a corporation the stock of which is regularly 

22 traded on an established securities market, if— 

23 ‘‘(i) the corporation would not other24 wise be treated as a domestic corporation 

25 for purposes of this title, but 


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1 ‘‘(ii) the management and control of 

2 the corporation occurs primarily within the 

3 United States, 

4 then, solely for purposes of chapter 1 (and any 

5 other provision of this title relating to chapter 

6 1), the corporation shall be treated as a domes7 tic corporation. 

8 ‘‘(C) MANAGEMENT AND CONTROL.—For 

9 purposes of this paragraph, the management 

10 and control of a corporation shall be treated as 

11 primarily occurring within the United States if 

12 substantially all of the executive officers and 

13 senior management of the corporation who ex14 ercise day-to-day responsibility for making deci15 sions involving strategic, financial, and oper16 ational policies of the corporation are primarily 

17 located within the United States. The Secretary 

18 may by regulations include other individuals not 

19 described in the preceding sentence in the de20 termination of whether the management and 

21 control of the corporation occurs primarily with22 in the United States if such other individuals 

23 exercise the day-to day responsibilities described 

24 in the preceding sentence.’’. 

25 (b) EFFECTIVE DATES.— 


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

2 this section shall apply to taxable years beginning on 

3 or after the date which is 2 years after the date of 

4 the enactment of this Act. 

5 (2) TRANSITION RULE FOR CORPORATIONS OR6 GANIZED IN TREATY COUNTRIES.—If— 

7 (A) a corporation is in existence on the 

8 date of the enactment of this Act, and 

9 (B) the corporation was created or orga10 nized under the laws of a foreign country with 

11 which the United States has, on such date, a 

12 comprehensive income tax treaty which the Sec13 retary of the Treasury determines is satisfac14 tory for purposes of this paragraph and which 

15 includes an exchange of information program, 

16 section 7701(a)(4)(B) of the Internal Revenue Code 

17 of 1986 (as added by the amendments made by this 

18 section) shall not apply to the corporation with re19 spect to taxable years ending in any continuous pe20 riod beginning on such date during which the cor21 poration is eligible for the benefits of such treaty (or 

22 any successor treaty with such foreign country meet23 ing the requirements of this paragraph). 


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1 TITLE II—ECONOMIC 

2 SUBSTANCE DOCTRINE 

3 SEC. 201. CLARIFICATION OF ECONOMIC SUBSTANCE DOC4 TRINE. 

5 (a) IN GENERAL.—Section 7701 is amended by re6 designating subsection (o) as subsection (p) and by insert7 ing after subsection (n) the following new subsection: 

8 ‘‘(o) CLARIFICATION OF ECONOMIC SUBSTANCE

9 DOCTRINE; ETC.— 

10 ‘‘(1) GENERAL RULES.— 

11 ‘‘(A) IN GENERAL.—In any case in which 

12 a court determines that the economic substance 

13 doctrine is relevant for purposes of this title to 

14 a transaction (or series of transactions), such 

15 transaction (or series of transactions) shall have 

16 economic substance only if the requirements of 

17 this paragraph are met. 

18 ‘‘(B) DEFINITION OF ECONOMIC SUB19 STANCE.—For purposes of subparagraph (A)— 

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

21 economic substance only if— 

22 ‘‘(I) the transaction changes in a 

23 meaningful way (apart from Federal 

24 tax effects) the taxpayer’s economic 

25 position, and 


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1 ‘‘(II) the taxpayer has a substan2 tial nontax purpose for entering into 

3 such transaction and the transaction 

4 is a reasonable means of accom5 plishing such purpose. 

6 In applying subclause (II), a purpose of 

7 achieving a financial accounting benefit 

8 shall not be taken into account in deter9 mining whether a transaction has a sub10 stantial nontax purpose if the origin of 

11 such financial accounting benefit is a re12 duction of income tax. 

13 ‘‘(ii) SPECIAL RULE WHERE TAX14 PAYER RELIES ON PROFIT POTENTIAL.—A 

15 transaction shall not be treated as having 

16 economic substance by reason of having a 

17 potential for profit unless— 

18 ‘‘(I) the present value of the rea19 sonably expected pre-tax profit from 

20 the transaction is substantial in rela21 tion to the present value of the ex22 pected net tax benefits that would be 

23 allowed if the transaction were re24 spected, and 


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1 ‘‘(II) the reasonably expected 

2 pre-tax profit from the transaction ex3 ceeds a risk-free rate of return. 

4 ‘‘(C) TREATMENT OF FEES AND FOREIGN

5 TAXES.—Fees and other transaction expenses 

6 and foreign taxes shall be taken into account as 

7 expenses in determining pre-tax profit under 

8 subparagraph (B)(ii). 

9 ‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH

10 TAX-INDIFFERENT PARTIES.— 

11 ‘‘(A) SPECIAL RULES FOR FINANCING

12 TRANSACTIONS.—The form of a transaction 

13 which is in substance the borrowing of money 

14 or the acquisition of financial capital directly or 

15 indirectly from a tax-indifferent party shall not 

16 be respected if the present value of the deduc17 tions to be claimed with respect to the trans18 action is substantially in excess of the present 

19 value of the anticipated economic returns of the 

20 person lending the money or providing the fi21 nancial capital. A public offering shall be treat22 ed as a borrowing, or an acquisition of financial 

23 capital, from a tax-indifferent party if it is rea24 sonably expected that at least 50 percent of the 


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1 offering will be placed with tax-indifferent par2 ties. 

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 

12 or shifting of basis on account of over13 stating the income or gain of the tax-indif14 ferent 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 

25 term ‘tax-indifferent party’ means any person 


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1 or entity not subject to tax imposed by subtitle 

2 A. A person shall be treated as a tax-indifferent 

3 party with respect to a transaction if the items 

4 taken into account with respect to the trans5 action have no substantial impact on such per6 son’s liability under subtitle A. 

7 ‘‘(C) EXCEPTION FOR PERSONAL TRANS8 ACTIONS OF INDIVIDUALS.—In the case of an 

9 individual, 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.—In apply14 ing paragraph (1)(B)(ii) to the lessor of tan15 gible property subject to a lease— 

16 ‘‘(i) the expected net tax benefits with 

17 respect to the leased property shall not in18 clude the benefits of— 

19 ‘‘(I) depreciation, 

20 ‘‘(II) any tax credit, or 

21 ‘‘(III) any other deduction as 

22 provided in guidance by the Secretary, 

23 and 

24 ‘‘(ii) subclause (II) of paragraph 

25 (1)(B)(ii) shall be disregarded in deterVerDate Aug 31 2005 03:05 Jan 07, 2007 Jkt 059200 PO 00000 Frm 00030 Fmt 6652 Sfmt 6201 E:\BILLS\S96.IS S96

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1 mining whether any of such benefits are al2 lowable. 

3 ‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF4 FECTED.—Except as specifically provided in this 

5 subsection, the provisions of this subsection shall not 

6 be construed as altering or supplanting any other 

7 rule of law, and the requirements of this subsection 

8 shall be construed as being in addition to any such 

9 other rule of law. 

10 ‘‘(5) REGULATIONS.—The Secretary shall pre11 scribe such regulations as may be necessary or ap12 propriate to carry out the purposes of this sub13 section. Such regulations may include exemptions 

14 from the application of this subsection.’’. 

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

16 this section shall apply to transactions entered into after 

17 the date of the enactment of this Act. 

18 SEC. 202. PENALTY FOR UNDERSTATEMENTS ATTRIB19 UTABLE TO TRANSACTIONS LACKING ECO20 NOMIC SUBSTANCE, ETC. 

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

22 amended by inserting after section 6662A the following 

23 new section: 


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1 ‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB2 UTABLE TO TRANSACTIONS LACKING ECO3 NOMIC SUBSTANCE, ETC. 

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

5 noneconomic substance transaction understatement for 

6 any taxable year, there shall be added to the tax an 

7 amount equal to 40 percent of the amount of such under8 statement. 

9 ‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED

10 TRANSACTIONS.—Subsection (a) shall be applied by sub11 stituting ‘20 percent’ for ‘40 percent’ with respect to the 

12 portion of any noneconomic substance transaction under13 statement with respect to which the relevant facts affect14 ing the tax treatment of the item are adequately disclosed 

15 in the return or a statement attached to the return. 

16 ‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UN17 DERSTATEMENT.—For purposes of this section— 

18 ‘‘(1) IN GENERAL.—The term ‘noneconomic 

19 substance transaction understatement’ means any 

20 amount which would be an understatement under 

21 section 6662A(b)(1) if section 6662A were applied 

22 by taking into account items attributable to non23 economic substance transactions rather than items 

24 to which section 6662A would apply without regard 

25 to this paragraph. 


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1 ‘‘(2) NONECONOMIC SUBSTANCE TRANS2 ACTION.—The term ‘noneconomic substance trans3 action’ means any transaction if— 

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

5 (within the meaning of section 7701(o)(1)) for 

6 the transaction giving rise to the claimed ben7 efit or the transaction was not respected under 

8 section 7701(o)(2), or 

9 ‘‘(B) the transaction fails to meet the re10 quirements of any similar rule of law. 

11 ‘‘(d) RULES APPLICABLE TO COMPROMISE OF PEN12 ALTY.— 

13 ‘‘(1) IN GENERAL.—If the 1st letter of pro14 posed deficiency which allows the taxpayer an oppor15 tunity for administrative review in the Internal Rev16 enue Service Office of Appeals has been sent with 

17 respect to a penalty to which this section applies, 

18 only the Commissioner of Internal Revenue may 

19 compromise all or any portion of such penalty. 

20 ‘‘(2) APPLICABLE RULES.—The rules of para21 graphs (2) and (3) of section 6707A(d) shall apply 

22 for purposes of paragraph (1). 

23 ‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex24 cept as otherwise provided in this part, the penalty imVerDate Aug 31 2005 03:05 Jan 07, 2007 Jkt 059200 PO 00000 Frm 00033 Fmt 6652 Sfmt 6201 E:\BILLS\S96.IS S96

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1 posed by this section shall be in addition to any other pen2 alty imposed by this title. 

3 ‘‘(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).’’. 

4 (b) COORDINATION WITH OTHER UNDERSTATE5 MENTS AND PENALTIES.— 

6 (1) The second sentence of section 

7 6662(d)(2)(A) is amended by inserting ‘‘and without 

8 regard to items with respect to which a penalty is 

9 imposed by section 6662B’’ before the period at the 

10 end. 

11 (2) Subsection (e) of section 6662A is amend12 ed— 

13 (A) in paragraph (1), by inserting ‘‘and 

14 noneconomic substance transaction understate15 ments’’ after ‘‘reportable transaction under16 statements’’ both places it appears, 

17 (B) in paragraph (2)(A), by inserting ‘‘and 

18 a noneconomic substance transaction under19 statement’’ after ‘‘reportable transaction under20 statement’’, 

21 (C) in paragraph (2)(B), by inserting 

22 ‘‘6662B or’’ before ‘‘6663’’, 


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1 (D) in paragraph (2)(C)(i), by inserting 

2 ‘‘or section 6662B’’ before the period at the 

3 end, 

4 (E) in paragraph (2)(C)(ii), by inserting 

5 ‘‘and section 6662B’’ after ‘‘This section’’, 

6 (F) in paragraph (3), by inserting ‘‘or non7 economic substance transaction understate8 ment’’ after ‘‘reportable transaction understate9 ment’’, and 

10 (G) by adding at the end the following new 

11 paragraph: 

12 ‘‘(4) NONECONOMIC SUBSTANCE TRANSACTION

13 UNDERSTATEMENT.—For purposes of this sub14 section, the term ‘noneconomic substance trans15 action understatement’ has the meaning given such 

16 term by section 6662B(c).’’. 

17 (3) Subsection (e) of section 6707A is amend18 ed— 

19 (A) by striking ‘‘or’’ at the end of subpara20 graph (B), and 

21 (B) by striking subparagraph (C) and in22 serting the following new subparagraphs: 

23 ‘‘(C) is required to pay a penalty under 

24 section 6662B with respect to any noneconomic 

25 substance transaction, or 


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1 ‘‘(D) is required to pay a penalty under 

2 section 6662(h) with respect to any transaction 

3 and would (but for section 6662A(e)(2)(C)) 

4 have been subject to penalty under section 

5 6662A at a rate prescribed under section 

6 6662A(c) or under section 6662B,’’. 

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

8 for part II of subchapter A of chapter 68 is amended by 

9 inserting after the item relating to section 6662A the fol10 lowing new item: 

‘‘Sec. 6662B. Penalty for understatements attributable to transactions lacking 

economic substance, etc.’’. 

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

12 this section shall apply to transactions entered into after 

13 the date of the enactment of this Act. 

14 SEC. 203. DENIAL OF DEDUCTION FOR INTEREST ON UN15 DERPAYMENTS ATTRIBUTABLE TO NON16 ECONOMIC SUBSTANCE TRANSACTIONS. 

17 (a) IN GENERAL.—Section 163(m) (relating to inter18 est on unpaid taxes attributable to nondisclosed reportable 

19 transactions) is amended— 

20 (1) by striking ‘‘attributable’’ and all that fol21 lows and inserting the following: ‘‘attributable to— 

22 ‘‘(1) the portion of any reportable transaction 

23 understatement (as defined in section 6662A(b)) 


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1 with respect to which the requirement of section 

2 6664(d)(2)(A) is not met, or 

3 ‘‘(2) any noneconomic substance transaction 

4 understatement (as defined in section 6662B(c)).’’, 

5 and 

6 (2) by inserting ‘‘AND NONECONOMIC SUB7 STANCE TRANSACTIONS’’ in the heading thereof 

8 after ‘‘TRANSACTIONS’’. 

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

10 this section shall apply to transactions after the date of 

11 the enactment of this Act in taxable years ending after 

12 such date. 

13 TITLE III—ELIMINATION OF 

14 HIGHEST CORPORATE MAR15 GINAL INCOME TAX RATE 

16 SEC. 301. ELIMINATION OF HIGHEST CORPORATE MAR17 GINAL INCOME TAX RATE. 

18 (a) IN GENERAL.—Section 11(b)(1) (relating to 

19 amount of tax imposed on corporations) is amended by 

20 striking subparagraphs (C) and (D) and inserting the fol21 lowing new subparagraph: 

22 ‘‘(C) 34 percent of so much of the taxable 

23 income as exceeds $75,000.’’. 


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1 (b) CERTAIN PERSONAL SERVICE CORPORATIONS.— 

2 Section 11(b)(2) is amended by striking ‘‘35 percent’’ and 

3 inserting ‘‘34 percent’’. 

4 (c) CONFORMING AMENDMENTS.— 

5 (1) Section 11(b)(1) is amended by striking the 

6 last sentence. 

7 (2) Section 1201(a) is amended— 

8 (A) by striking ‘‘35 percent’’ each place it 

9 appears and inserting ‘‘34 percent’’, and 

10 (B) by striking ‘‘last 2 sentences’’ and in11 serting ‘‘last sentence’’. 

12 (3) Paragraphs (1) and (2) of section 1445(e) 

13 are each amended by striking ‘‘35 percent’’ and in14 serting ‘‘34 percent’’. 

15 (4) Section 1561(a) is amended by striking 

16 ‘‘last 2 sentences’’ and inserting ‘‘last sentence’’. 

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

18 this section shall apply to taxable years beginning after 

19 December 31, 2007. 

Æ 


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