II 

Calendar No. 288 

109TH CONGRESS 

1ST SESSION S. 2020 

To provide for reconciliation pursuant to section 202(b) of the concurrent 

resolution on the budget for fiscal year 2006. 

IN THE SENATE OF THE UNITED STATES 

NOVEMBER 16, 2005 

Mr. GRASSLEY, from the Committee on Finance, reported the following 

original bill; which was read twice and placed on the calendar 

A BILL 

To provide for reconciliation pursuant to section 202(b) of 

the concurrent resolution on the budget for fiscal year 2006. 

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

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

4 TABLE OF CONTENTS. 

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

6 ‘‘Tax Relief Act of 2005’’. 

7 (b) AMENDMENT OF 1986 CODE.—Except as other8 wise expressly provided, whenever in this Act an amend9 ment or repeal is expressed in terms of an amendment 
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1 to, or repeal of, a section or other provision, the reference 

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

4 (c) TABLE OF CONTENTS.—The table of contents for 

5 this Act is as follows: 

Sec. 1. Short title; amendment of 1986 Code; table of contents. 

TITLE I—TAX BENEFITS FOR AREAS AFFECTED BY HURRICANES 

KATRINA, RITA, AND WILMA 

Subtitle A—Gulf Opportunity Zone Benefits 

Sec. 101. Gulf Opportunity Zone benefits. 

Sec. 102. Expansion of Hope Scholarship and Lifetime Learning Credit for students in the Gulf Opportunity Zone. 

Sec. 103. Extension of special rules for mortgage revenue bonds. 

Subtitle B—Tax Benefits Related to Hurricanes Rita and Wilma 

Sec. 111. Extension of certain emergency tax relief for Hurricane Katrina to 

Hurricanes Rita and Wilma. 

TITLE II—EXTENSION OF EXPIRING PROVISIONS 

Subtitle A—Multi-Year Extensions 

Sec. 201. Extension of increased expensing for small business. 

Sec. 202. Credit for elective deferrals and IRA contributions. 

Sec. 203. Above-the-line deduction for higher education. 

Sec. 204. Extension and modification of new markets tax credit. 

Subtitle B—One-Year Extensions 

Sec. 211. Election to deduct State and local general sales taxes. 

Sec. 212. Extension of alternative minimum tax exemption amount for individuals. 

Sec. 213. Allowance of nonrefundable personal credits against regular and alternative minimum tax liability. 

Sec. 214. Extension and modification of research credit. 

Sec. 215. Work Opportunity Tax credit and Welfare-to-Work credit. 

Sec. 216. Qualified zone academy bonds. 

Sec. 217. Deduction for corporate donations of computer technology and equipment. 

Sec. 218. Above-the-line deduction for certain expenses of elementary and secondary school teachers. 

Sec. 219. Expensing of brownfields remediation costs. 

Sec. 220. Tax incentives for investment in the District of Columbia. 

Sec. 221. Indian employment tax credit. 

Sec. 222. Accelerated depreciation for business property on Indian reservation. 

Sec. 223. Fifteen-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant improvements. 
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Subtitle C—Application of EGTRRA Sunset 

Sec. 231. Application of EGTRRA sunset to this title. 

TITLE III—PROVISIONS RELATING TO CHARITABLE DONATIONS 

Subtitle A—Charitable Giving Incentives 

Sec. 301. Charitable deduction for nonitemizers. 

Sec. 302. Tax-free distributions from individual retirement plans for charitable 

purposes. 

Sec. 303. Modification of charitable deduction for contributions of food inventory. 

Sec. 304. Basis adjustment to stock of S corporation contributing property. 

Sec. 305. Modification of charitable deduction for contributions of book inventory. 

Sec. 306. Modification of tax treatment of certain payments to controlling exempt organizations and public disclosure of information relating to unrelated business income. 

Subtitle B—Reforming Charitable Organizations 

PART I—GENERAL REFORMS

Sec. 311. Tax involvement by exempt organizations in tax shelter transactions. 

Sec. 312. Excise tax on certain acquisitions of interests in insurance contracts 

in which certain exempt organizations hold an interest. 

Sec. 313. Increase in penalty excise taxes on public charities, social welfare organizations, and private foundations. 

Sec. 314. Reform of charitable contributions of certain easements on buildings 

in registered historic districts. 

Sec. 315. Charitable contributions of taxidermy property. 

Sec. 316. Recapture of tax benefit for charitable contributions of exempt use 

property not used for an exempt use. 

Sec. 317. Limitation of deduction for charitable contributions of clothing and 

household items. 

Sec. 318. Modification of substantiation and recordkeeping requirements for 

certain charitable contributions. 

Sec. 319. Contributions of fractional interests in tangible personal property. 

Sec. 320. Provisions relating to substantial and gross overstatements of valuations of charitable deduction property. 

Sec. 321. Additional standards for credit counseling organizations. 

PART II—IMPROVED ACCOUNTABILITY OF DONOR ADVISED FUNDS

Sec. 331. Excise tax on sponsoring organizations of donor advised funds for 

failure to meet distribution requirements. 

Sec. 332. Prohibited transactions. 

Sec. 333. Treatment of charitable contribution deductions to donor advised 

funds. 

Sec. 334. Returns of, and applications for recognition by, sponsoring organizations. 

PART III—IMPROVED ACCOUNTABILITY OF SUPPORTING ORGANIZATIONS

Sec. 341. Requirements for supporting organizations. 

Sec. 342. Excise tax on supporting organizations for failure to meet distribution requirements. 
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Sec. 343. Excess benefit transactions. 

Sec. 344. Excess business holdings of supporting organizations. 

Sec. 345. Treatment of amounts paid to supporting organizations by private 

foundations. 

Sec. 346. Returns of supporting organizations. 

TITLE IV—MISCELLANEOUS PROVISIONS 

Sec. 401. Restructuring of New York Liberty Zone tax credits. 

Sec. 402. Modification to S corporation passive investment income rules. 

Sec. 403. Modification of effective date of disregard of certain capital expenditures for purposes of qualified small issue bonds. 

Sec. 404. Premiums for mortgage insurance. 

TITLE V—REVENUE OFFSET PROVISIONS 

Subtitle A—Provisions Designed to Curtail Tax Shelters 

Sec. 501. Understatement of taxpayer’s liability by income tax return preparer. 

Sec. 502. Modifications of suspension of interest and penalties where Internal 

Revenue Service fails to contact taxpayer. 

Sec. 503. Frivolous tax submissions. 

Subtitle B—Economic Substance Doctrine 

Sec. 511. Clarification of economic substance doctrine. 

Sec. 512. Penalty for understatements attributable to transactions lacking economic substance, etc. 

Sec. 513. Denial of deduction for interest on underpayments attributable to 

noneconomic substance transactions. 

Subtitle C—Improvements in Efficiency and Safeguards in Internal Revenue 

Service Collection 

Sec. 521. Waiver of user fee for installment agreements using automated withdrawals. 

Sec. 522. Termination of installment agreements. 

Sec. 523. Partial payments required with submission of offers-in-compromise. 

Subtitle D—Penalties and Fines 

Sec. 531. Increase in criminal monetary penalty limitation for the underpayment or overpayment of tax due to fraud. 

Sec. 532. Doubling of certain penalties, fines, and interest on underpayments 

related to certain offshore financial arrangements. 

Sec. 533. Denial of deduction for certain fines, penalties, and other amounts. 

Sec. 534. Denial of deduction for punitive damages. 

Sec. 535. Increase in penalty for bad checks and money orders. 

Subtitle E—Provisions to Discourage Expatriation 

Sec. 541. Tax treatment of inverted entities. 

Sec. 542. Revision of tax rules on expatriation of individuals. 

Subtitle F—Miscellaneous Provisions 

Sec. 551. Treatment of contingent payment convertible debt instruments. 
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Sec. 552. Grant of Treasury regulatory authority to address foreign tax credit 

transactions involving inappropriate separation of foreign taxes 

from related foreign income. 

Sec. 553. Repeal of special property exception to leasing provisions of the 

American Jobs Creation Act of 2004. 

Sec. 554. Application of earnings stripping rules to partners which are corporations. 

Sec. 555. Limitation of employer deduction for certain entertainment expenses. 

Sec. 556. Increase in age of minor children whose unearned income is taxed as 

if parent’s income. 

Sec. 557. Loan and redemption requirements on pooled financing requirements. 

Sec. 558. Reporting of interest on tax-exempt bonds. 

Sec. 559. Modification of credit for producing fuel from a nonconventional 

source. 

Sec. 560. Modification of individual estimated tax safe harbor. 

Sec. 561. Revaluation of LIFO inventories of large integrated oil companies. 

Sec. 562. Elimination of amortization of geological and geophysical expenditures for major integrated oil companies. 

1 TITLE I—TAX BENEFITS FOR 

2 AREAS AFFECTED BY HURRI3 CANES KATRINA, RITA, AND 

4 WILMA 

5 Subtitle A—Gulf Opportunity Zone 

6 Benefits 

7 SEC. 101. GULF OPPORTUNITY ZONE BENEFITS. 

8 (a) IN GENERAL.—Chapter 1 is amended by adding 

9 at the end the following new subchapter: 

10 ‘‘Subchapter Z—Hurricane Relief Benefits 

‘‘Sec. 1400N. Definitions. 

‘‘Sec. 1400O. Tax benefits for Gulf Opportunity Zone. 

11 ‘‘SEC. 1400N. DEFINITIONS. 

12 ‘‘For purposes of this subchapter— 

13 ‘‘(1) GULF OPPORTUNITY ZONE.—The term 

14 ‘Gulf Opportunity Zone’ or ‘GO Zone’ means that 

15 portion of the Hurricane Katrina disaster area de-
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1 termined by the President to warrant individual or 

2 individual and public assistance from the Federal 

3 Government under the Robert T. Stafford Disaster 

4 Relief and Emergency Assistance Act by reason of 

5 Hurricane Katrina. 

6 ‘‘(2) HURRICANE KATRINA DISASTER AREA.— 

7 The term ‘Hurricane Katrina disaster area’ means 

8 an area with respect to which a major disaster has 

9 been declared by the President before September 14, 

10 2005, under section 401 of such Act by reason of 

11 Hurricane Katrina. 

12 ‘‘(3) RITA GO ZONE.—The term ‘Rita GO Zone’ 

13 means that portion of the Hurricane Rita disaster 

14 area determined by the President to warrant indi15 vidual or individual and public assistance from the 

16 Federal Government under such Act by reason of 

17 Hurricane Rita. 

18 ‘‘(4) HURRICANE RITA DISASTER AREA.—The 

19 term ‘Hurricane Rita disaster area’ means an area 

20 with respect to which a major disaster has been de21 clared by the President before October 6, 2005, 

22 under section 401 of such Act by reason of Hurri23 cane Rita. 

24 ‘‘(5) WILMA GO ZONE.—The term ‘Wilma GO 

25 Zone’ means that portion of the Hurricane Wilma 
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1 disaster area determined by the President to war2 rant individual or individual and public assistance 

3 from the Federal Government under such Act by 

4 reason of Hurricane Wilma. 

5 ‘‘(6) HURRICANE WILMA DISASTER AREA.—The 

6 term ‘Hurricane Wilma disaster area’ means an area 

7 with respect to which a major disaster has been de8 clared by the President before October 25, 2005, 

9 under section 401 of such Act by reason of Hurri10 cane Wilma. 

11 ‘‘SEC. 1400O. TAX BENEFITS FOR GULF OPPORTUNITY 

12 ZONE. 

13 ‘‘(a) SPECIAL ALLOWANCE FOR CERTAIN PROPERTY

14 ACQUIRED AFTER AUGUST 27, 2005.— 

15 ‘‘(1) ADDITIONAL ALLOWANCE.—In the case of 

16 any qualified Gulf Opportunity Zone property— 

17 ‘‘(A) the depreciation deduction provided 

18 by section 167(a) for the taxable year in which 

19 such property is placed in service shall include 

20 an allowance equal to 50 percent of the ad21 justed basis of such property, and 

22 ‘‘(B) the adjusted basis of the qualified 

23 Gulf Opportunity Zone property shall be re24 duced by the amount of such deduction before 

25 computing the amount otherwise allowable as a 
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1 depreciation deduction under this chapter for 

2 such taxable year and any subsequent taxable 

3 year. 

4 ‘‘(2) QUALIFIED GULF OPPORTUNITY ZONE

5 PROPERTY.—For purposes of this subsection— 

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

7 Gulf Opportunity Zone property’ means prop8 erty— 

9 ‘‘(i)(I) which is described in section 

10 168(k)(2)(A)(i), or 

11 ‘‘(II) which is nonresidential real 

12 property or residential rental property, 

13 ‘‘(ii) substantially all of the use of 

14 which is in the Gulf Opportunity Zone and 

15 is in the active conduct of a trade or busi16 ness by the taxpayer in such Zone, 

17 ‘‘(iii) the original use of which in the 

18 Gulf Opportunity Zone commences with 

19 the taxpayer after August 27, 2005, 

20 ‘‘(iv) which is acquired by the tax21 payer by purchase (as defined in section 

22 179(d)) after August 27, 2005, but only if 

23 no written binding contract for the acquisi24 tion was in effect before August 28, 2005, 

25 and 
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1 ‘‘(v) which is placed in service by the 

2 taxpayer on or before the termination date. 

3 The term ‘termination date’ means December 

4 31, 2007 (December 31, 2008, in the case of 

5 nonresidential real property and residential 

6 rental property). 

7 ‘‘(B) EXCEPTIONS.— 

8 ‘‘(i) ALTERNATIVE DEPRECIATION

9 PROPERTY.—The term ‘qualified Gulf Op10 portunity Zone property’ shall not include 

11 any property described in section 

12 168(k)(2)(D)(i). 

13 ‘‘(ii) TAX-EXEMPT BOND-FINANCED

14 PROPERTY.—Such term shall not include 

15 any property any portion of which is fi16 nanced with the proceeds of any obligation 

17 the interest on which is exempt from tax 

18 under section 103. 

19 ‘‘(iii) QUALIFIED REVITALIZATION

20 BUILDINGS.—Such term shall not include 

21 any qualified revitalization building with 

22 respect to which the taxpayer has elected 

23 the application of paragraph (1) or (2) of 

24 section 1400I(a). 
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1 ‘‘(iv) ELECTION OUT.—For purposes 

2 of this subsection, rules similar to the rules 

3 of section 168(k)(2)(D)(iii) shall apply. 

4 ‘‘(C) SPECIAL RULES.—For purposes of 

5 this subsection, rules similar to the rules of sec6 tion 168(k)(2)(E) shall apply, except that— 

7 ‘‘(i) clause (i) thereof shall be applied 

8 by substituting ‘after August 27, 2005, 

9 and before the termination date (as de10 fined in section 1400O(a)(2))’ for ‘after 

11 September 10, 2001, and before January 

12 1, 2005’, 

13 ‘‘(ii) clauses (ii), (iii), and (iv) thereof 

14 shall be applied by substituting ‘August 

15 27, 2005’ for ‘September 10, 2001’ each 

16 place it appears, and 

17 ‘‘(iii) clause (iv) thereof shall be ap18 plied by substituting ‘qualified Gulf Oppor19 tunity Zone property’ for ‘qualified prop20 erty’. 

21 ‘‘(D) ALLOWANCE AGAINST ALTERNATIVE

22 MINIMUM TAX.—For purposes of this sub23 section, rules similar to the rules of section 

24 168(k)(2)(G) shall apply. 
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1 ‘‘(3) RECAPTURE.—For purposes of this sub2 section, rules similar to the rules under section 

3 179(d)(10) shall apply with respect to any qualified 

4 Gulf Opportunity Zone property which ceases to be 

5 qualified Gulf Opportunity Zone property. 

6 ‘‘(b) INCREASE IN EXPENSING UNDER SECTION

7 179.— 

8 ‘‘(1) IN GENERAL.—For purposes of section 

9 179— 

10 ‘‘(A) the $100,000 amount in section 

11 179(b)(1) for the taxable year shall be in12 creased by the lesser of— 

13 ‘‘(i) $100,000, or 

14 ‘‘(ii) the cost of section 179 property 

15 (as defined in section 179(d)) which is 

16 qualified Gulf Opportunity Zone property 

17 placed in service during the taxable year, 

18 and 

19 ‘‘(B) the $400,000 amount in section 

20 179(b)(2) for the taxable year shall be in21 creased by the lesser of— 

22 ‘‘(i) $600,000, or 

23 ‘‘(ii) the cost of section 179 property 

24 (as so defined) which is qualified Gulf Op-
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1 portunity Zone property placed in service 

2 during the taxable year. 

3 ‘‘(2) QUALIFIED GULF OPPORTUNITY ZONE

4 PROPERTY.—For purposes of this subsection, the 

5 term ‘qualified Gulf Opportunity Zone property’ has 

6 the meaning given such term by subsection (a)(2). 

7 ‘‘(3) COORDINATION WITH EMPOWERMENT

8 ZONES AND RENEWAL COMMUNITIES.—For purposes 

9 of sections 1397A and 1400J, qualified Gulf Oppor10 tunity Zone property shall not be treated as quali11 fied zone property or qualified renewal property for 

12 any taxable year, unless the taxpayer elects not to 

13 have this subsection apply to all such qualified Gulf 

14 Opportunity Zone property placed in service by the 

15 taxpayer during the taxable year. 

16 ‘‘(4) RECAPTURE.—Rules similar to the rules 

17 under section 179(d)(10) shall apply with respect to 

18 any qualified Gulf Opportunity Zone property which 

19 ceases to be Gulf Opportunity Zone property. 

20 ‘‘(c) TAX-EXEMPT BOND FINANCING.— 

21 ‘‘(1) IN GENERAL.—For purposes of this title, 

22 any qualified Gulf Opportunity Zone Bond shall be 

23 treated as a qualified bond. 

24 ‘‘(2) QUALIFIED GULF OPPORTUNITY ZONE

25 BOND.—For purposes of this subsection, the term 
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1 ‘qualified Gulf Opportunity Zone Bond’ means any 

2 bond issued as part of an issue if— 

3 ‘‘(A) except as provided in paragraph (4), 

4 such bond meets the applicable requirements of 

5 part IV of subchapter B of this chapter, 

6 ‘‘(B) such bond is issued by the State of 

7 Alabama, Louisiana, or Mississippi (or any po8 litical subdivision thereof), 

9 ‘‘(C) the Governor of such State designates 

10 such bond for purposes of this section, and 

11 ‘‘(D) such bond is issued after the date of 

12 the enactment of this section and before Janu13 ary 1, 2011. 

14 ‘‘(3) LIMITATION ON AGGREGATE AMOUNT OF

15 BONDS DESIGNATED.—The maximum aggregate face 

16 amount of bonds which may be designated under 

17 this subsection shall not exceed the product of 

18 $2,500 multiplied by the portion of the State popu19 lation which is in the Gulf Opportunity Zone (as de20 termined on the basis of the most recent census esti21 mate of resident population released by the Bureau 

22 of Census before August 28, 2005). 

23 ‘‘(4) SPECIAL RULES.—In applying this title to 

24 any qualified Gulf Opportunity Zone Bond, the fol25 lowing modifications shall apply: 
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1 ‘‘(A) Section 143 (relating to mortgage 

2 revenue bonds: qualified mortgage bond and 

3 qualified veterans’ mortgage bond) shall be ap4 plied— 

5 ‘‘(i) by treating any residence in the 

6 Gulf Opportunity Zone as a targeted area 

7 residence, 

8 ‘‘(ii) by applying subsection (f)(3) 

9 without regard to subparagraph (A) there10 of, and 

11 ‘‘(iii) by substituting ‘$150,000’ for 

12 ‘$15,000’ in subsection (k)(4) thereof. 

13 ‘‘(B) Section 146 (relating to volume cap) 

14 shall not apply. 

15 ‘‘(C) Section 57(a)(5) shall not apply. 

16 ‘‘(5) SEPARATE ISSUE TREATMENT OF POR17 TIONS OF AN ISSUE.—This subsection shall not 

18 apply to the portion of an issue which (if issued as 

19 a separate issue) would be treated as a qualified 

20 bond or as a bond that is not a private activity bond 

21 (determined without regard to paragraph (1)), if the 

22 issuer elects to so treat such portion. 

23 ‘‘(d) ADVANCE REFUNDINGS OF CERTAIN TAX-EX24 EMPT BONDS.— 
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1 ‘‘(1) IN GENERAL.—With respect to a bond de2 scribed in paragraph (2) issued as part of an issue 

3 90 percent (95 percent in the case of a bond de4 scribed in paragraph (2)(B)) or more of the net pro5 ceeds (as defined in section 150(a)(3)) of which were 

6 used to finance facilities located within the Gulf Op7 portunity Zone (or property which is functionally re8 lated and subordinate to facilities located within the 

9 Gulf Opportunity Zone), one additional advanced re10 funding after the date of the enactment of this sec11 tion and before January 1, 2007, shall be allowed 

12 under the applicable rules of section 149(d) if— 

13 ‘‘(A) the chief executive officer of the 

14 issuer of the bond designates the advance re15 funding bond for purposes of this subsection, 

16 and 

17 ‘‘(B) the requirements of paragraph (3) 

18 are met. 

19 ‘‘(2) BONDS DESCRIBED.—A bond is described 

20 in this paragraph if such bond was outstanding on 

21 August 27, 2005, and is— 

22 ‘‘(A) a State or local bond (as defined in 

23 section 103(c)(1)) other than a private activity 

24 bond (as defined in section 141(a)) issued by 
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1 the State of Alabama, Louisiana, or Mississippi 

2 (or any political subdivision thereof), or 

3 ‘‘(B) a qualified 501(c)(3) bond (as de4 fined in section 145(a)) issued by or on behalf 

5 of any such State or political subdivision. 

6 ‘‘(3) ADDITIONAL REQUIREMENTS.—The re7 quirements of this paragraph are met with respect 

8 to any advance refunding of a bond described in 

9 paragraph (2) if— 

10 ‘‘(A) no advance refundings of such bond 

11 would be allowed under any provision of law 

12 after August 27, 2005, 

13 ‘‘(B) the advance refunding bond is the 

14 only other outstanding bond with respect to the 

15 refunded bond, and 

16 ‘‘(C) the requirements of section 148 are 

17 met with respect to all bonds issued under this 

18 subsection. 

19 ‘‘(e) LOW-INCOME HOUSING CREDIT.— 

20 ‘‘(1) INCREASE IN STATE HOUSING CREDIT

21 CEILING.— 

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

23 State of Alabama, Louisiana, or Mississippi— 

24 ‘‘(i) the amount otherwise determined 

25 under subclause (I) of section 
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1 42(h)(3)(C)(ii) for each calendar year be2 ginning after 2005 and before 2010 shall 

3 be increased by an amount equal to 3 

4 times the dollar amount otherwise specified 

5 for such calendar year under such sub6 clause multiplied by the State population 

7 located in the Gulf Opportunity Zone (as 

8 determined on the basis of the most recent 

9 census estimate of resident population re10 leased by the Bureau of Census before Au11 gust 28, 2005), and 

12 ‘‘(ii) the unused State housing credit 

13 ceiling for such State for any calendar year 

14 under section 42(h)(3)(C)(i) shall be deter15 mined without regard to the amount of the 

16 increase determined under clause (i). 

17 ‘‘(B) ELECTIVE CARRYFORWARD OF UN18 USED INCREASED CEILING.— 

19 ‘‘(i) IN GENERAL.—If the amount de20 termined under section 42(h)(3)(C)(ii)(I), 

21 as increased under subparagraph (A)(i), 

22 for any calendar year for any State de23 scribed in subparagraph (A) exceeds the 

24 aggregate housing credit dollar amount al25 located during such calendar year by such 
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1 State, such State may elect to treat as a 

2 carryforward to the following calendar year 

3 an amount equal to lesser of— 

4 ‘‘(I) the amount of such excess, 

5 or 

6 ‘‘(II) the amount by which the 

7 amount determined under section 

8 42(h)(3)(C)(ii)(I) for such calendar 

9 year was increased under subpara10 graph (A)(i)). 

11 ‘‘(ii) USE OF CARRYFORWARD.—If 

12 any State elects a carryforward under 

13 clause (i), any housing credit dollar 

14 amount allocated by such State during the 

15 calendar year following the calendar year 

16 in which the carryforward arose shall not 

17 be considered so allocated for purposes of 

18 section 42(h)(3)(C) and section 

19 42(h)(3)(D) to the extent such housing 

20 credit dollar amount does not exceed the 

21 amount of the carryforward elected. 

22 ‘‘(2) DIFFICULT DEVELOPMENT AREA.— 

23 ‘‘(A) IN GENERAL.—For purposes of sec24 tion 42— 
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1 ‘‘(i) in the case of property placed in 

2 service during 2006, 2007, or 2008, the 

3 Gulf Opportunity Zone— 

4 ‘‘(I) shall be treated as a difficult 

5 development area designated under 

6 subclause (I) of section 

7 42(d)(5)(C)(iii), and 

8 ‘‘(II) shall not be taken into ac9 count for purposes of applying the 

10 limitation under subclause (II) of such 

11 section, and 

12 ‘‘(ii) subsection (b)(2)(B) thereof shall 

13 be applied with respect to any such prop14 erty placed in service in the Gulf Oppor15 tunity Zone by substituting ‘91 percent’ 

16 and ‘39 percent’ for ‘70 percent’ and ‘30 

17 percent’, respectively. 

18 ‘‘(B) APPLICATION.—Subparagraph (A) 

19 shall apply only to— 

20 ‘‘(i) housing credit dollar amounts al21 located during the period beginning on 

22 January 1, 2006, and ending on December 

23 31, 2008, and 

24 ‘‘(ii) buildings placed in service during 

25 such period to the extent that paragraph 
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1 (1) of section 42(h) does not apply to any 

2 building by reason of paragraph (4) there3 of, but only with respect to bonds issued 

4 after December 31, 2005. 

5 ‘‘(f) TREATMENT OF REPRESENTATIONS REGARDING

6 INCOME ELIGIBILITY FOR PURPOSES OF QUALIFIED RES7 IDENTIAL RENTAL PROJECT REQUIREMENTS.—For pur8 poses of determining if any residential rental project meets 

9 the requirements of section 142(d)(1) and if any certifi10 cation with respect to such project meets the requirements 

11 under section 142(d)(7), the operator of the project may 

12 rely on the representations of any individual applying for 

13 tenancy in such project that such individual’s income will 

14 not exceed the applicable income limits of section 

15 142(d)(1) upon commencement of the individual’s tenancy 

16 if such tenancy begins during the 6-month period begin17 ning on and after the date such individual was displaced 

18 by reason of Hurricane Katrina. 

19 ‘‘(g) APPLICATION OF NEW MARKETS TAX CREDIT

20 TO INVESTMENTS IN COMMUNITY DEVELOPMENT ENTI21 TIES SERVING GULF OPPORTUNITY ZONE.—For purposes 

22 of section 45D— 

23 ‘‘(1) a qualified community development entity 

24 shall be eligible for an allocation under subsection 

25 (f)(2) thereof of the increase in the new markets tax 
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1 credit limitation described in paragraph (2) only if 

2 a significant mission of such entity is the recovery 

3 and redevelopment of the Gulf Opportunity Zone, 

4 ‘‘(2) the new markets tax credit limitation oth5 erwise determined under subsection (f)(1) thereof 

6 shall be increased by an amount equal to— 

7 ‘‘(A) $300,000,000 for 2005 and 2006, to 

8 be allocated among qualified community devel9 opment entities to make qualified low-income 

10 community investments within the Gulf Oppor11 tunity Zone, and 

12 ‘‘(B) $400,000,000 for 2007, to be so allo13 cated, and 

14 ‘‘(3) subsection (f)(3) thereof shall be applied 

15 separately with respect to the amount of the increase 

16 under paragraph (2). 

17 ‘‘(h) TREATMENT OF NET OPERATING LOSSES AT18 TRIBUTABLE TO GULF OPPORTUNITY ZONE LOSSES.— 

19 ‘‘(1) IN GENERAL.—If a portion of any net op20 erating loss of the taxpayer for any taxable year is 

21 a qualified Gulf Opportunity Zone loss, the following 

22 rules shall apply: 

23 ‘‘(A) EXTENSION OF CARRYBACK PE24 RIOD.—Section 172(b)(1) shall be applied with 

25 respect to such portion— 
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1 ‘‘(i) by substituting ‘5 taxable years’ 

2 for ‘2 taxable years’ in subparagraph 

3 (A)(i), and 

4 ‘‘(ii) by not taking such portion into 

5 account in determining any eligible loss of 

6 the taxpayer under subparagraph (F) for 

7 the taxable year. 

8 ‘‘(B) SUSPENSION OF 90 PERCENT AMT

9 LIMITATION.—Section 56(d)(1) shall be applied 

10 by increasing the amount determined under 

11 subparagraph (A)(ii)(I) thereof by the sum of 

12 the carrybacks and carryovers of any net oper13 ating loss attributable to such portion. 

14 ‘‘(2) QUALIFIED GULF OPPORTUNITY ZONE

15 LOSS.—For purposes of paragraph (1), the term 

16 ‘qualified Gulf Opportunity Zone loss’ means the 

17 lesser of— 

18 ‘‘(A) the amount of the net operating loss 

19 for the taxable year, or 

20 ‘‘(B) the aggregate amount of the fol21 lowing deductions for such taxable year: 

22 ‘‘(i) Any deduction for any qualified 

23 Gulf Opportunity Zone casualty loss. 

24 ‘‘(ii) Any deduction for moving ex25 penses paid or incurred after August 27, 
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1 2005, and before January 1, 2008, and al2 lowable under this chapter to any taxpayer 

3 in connection with the employment of any 

4 individual— 

5 ‘‘(I) whose principal place of 

6 abode was located in the Gulf Oppor7 tunity Zone before August 28, 2005, 

8 ‘‘(II) who was unable to remain 

9 in such abode as the result of Hurri10 cane Katrina, and 

11 ‘‘(III) whose principal place of 

12 employment with the taxpayer after 

13 such expense is located in the Gulf 

14 Opportunity Zone. 

15 For purposes of this clause, the term ‘mov16 ing expenses’ has the meaning given such 

17 term by section 217(b), except that the 

18 taxpayer’s former residence and new resi19 dence may be the same residence if the ini20 tial vacating of the residence was as the 

21 result of Hurricane Katrina. 

22 ‘‘(iii) Any deduction for expenses paid 

23 or incurred after August 27, 2005, and be24 fore January 1, 2008, and allowable under 

25 this chapter to temporarily house any em-
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1 ployee of the taxpayer whose principal 

2 place of employment is in the Gulf Oppor3 tunity Zone. 

4 ‘‘(iv) Any deduction for depreciation 

5 (or amortization in lieu of depreciation) al6 lowable under this chapter with respect to 

7 any qualified Gulf Opportunity Zone prop8 erty (as defined in subsection (a)(2)) for 

9 the taxable year such property is placed in 

10 service. 

11 ‘‘(v) Any deduction for repair ex12 penses (including expenses for removal of 

13 debris) allowable under this chapter paid 

14 or incurred after August 27, 2005, and be15 fore January 1, 2008, with respect to any 

16 damage attributable to Hurricane Katrina 

17 and in connection with property which is 

18 located in the Gulf Opportunity Zone. 

19 ‘‘(3) QUALIFIED GULF OPPORTUNITY ZONE

20 CASUALTY LOSS.— 

21 ‘‘(A) IN GENERAL.—For purposes of para22 graph (2)(B)(i), the term ‘qualified Gulf Oppor23 tunity Zone casualty loss’ means any uncom24 pensated section 1231 loss (as defined in sec-
25 

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1 tion 1231(a)(3)(B)) of property located in the 

2 Gulf Opportunity Zone if— 

3 ‘‘(i) such loss is allowed as a deduc4 tion under section 165 for the taxable 

5 year, and 

6 ‘‘(ii) such loss is attributable to Hur7 ricane Katrina. 

8 ‘‘(B) REDUCTION FOR GAINS FROM INVOL9 UNTARY CONVERSION.—The amount of quali10 fied Gulf Opportunity Zone casualty loss which 

11 would (but for this subparagraph) be taken into 

12 account under subparagraph (A) for any tax13 able year shall be reduced by the amount of any 

14 gain recognized by the taxpayer for such year 

15 from the involuntary conversion by reason of 

16 Hurricane Katrina of property located in the 

17 Gulf Opportunity Zone. 

18 ‘‘(C) COORDINATION WITH GENERAL DIS19 ASTER LOSS RULES.—Subsection (j) and section 

20 165(i) shall not apply to any qualified Gulf Op21 portunity Zone casualty loss to the extent such 

22 loss is taken into account under this subsection. 

23 ‘‘(4) SPECIAL RULES.—For purposes of para24 graph (1), rules similar to the rules of paragraphs 
26 

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1 (2) and (3) of section 172(i) shall apply with respect 

2 to such portion. 

3 ‘‘(i) TREATMENT OF PUBLIC UTILITY PROPERTY

4 DISASTER LOSSES.— 

5 ‘‘(1) IN GENERAL.—Upon the election of the 

6 taxpayer, in the case of any eligible public utility 

7 property loss— 

8 ‘‘(A) section 165(i) shall be applied by sub9 stituting ‘the fifth taxable year immediately 

10 preceding’ for ‘the taxable year immediately 

11 preceding’, 

12 ‘‘(B) an application for a tentative 

13 carryback adjustment of the tax for any prior 

14 taxable year affected by the application of sub15 paragraph (A) may be made under section 

16 6411, and 

17 ‘‘(C) section 6611 shall not apply to any 

18 overpayment attributable to such loss. 

19 ‘‘(2) ELIGIBLE PUBLIC UTILITY PROPERTY

20 LOSS.—For purposes of this subsection— 

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

22 public utility property loss’ means any loss with 

23 respect to public utility property located in the 

24 Gulf Opportunity Zone and attributable to Hur25 ricane Katrina. 
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1 ‘‘(B) PUBLIC UTILITY PROPERTY.—The 

2 term ‘public utility property’ has the meaning 

3 given such term by section 168(i)(10) without 

4 regard to the matter following subparagraph 

5 (D) thereof. 

6 ‘‘(3) WAIVER OF LIMITATIONS.—If refund or 

7 credit of any overpayment of tax resulting from the 

8 application of paragraph (1) is prevented at any 

9 time before the close of the 1-year period beginning 

10 on the date of the enactment of this section by the 

11 operation of any law or rule of law (including res ju12 dicata), such refund or credit may nevertheless be 

13 made or allowed if claim therefor is filed before the 

14 close of such period. 

15 ‘‘(j) SPECIAL RULE FOR GULF OPPORTUNITY ZONE

16 PUBLIC UTILITY CASUALTY LOSSES.— 

17 ‘‘(1) IN GENERAL.—The amount described in 

18 section 172(f)(1)(A) for any taxable year shall be in19 creased by the amount of the Gulf Opportunity Zone 

20 public utility casualty loss for such year. 

21 ‘‘(2) GULF OPPORTUNITY ZONE PUBLIC UTIL22 ITY CASUALTY LOSS.—For purposes of this sub23 section, the term ‘Gulf Opportunity Zone public util24 ity casualty loss’ means any casualty loss of public 
28 

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1 utility property (as defined in section 168(i)(10)) lo2 cated in the Gulf Opportunity Zone if— 

3 ‘‘(A) such loss is allowed as a deduction 

4 under section 165 for the taxable year, 

5 ‘‘(B) such loss is attributable to Hurricane 

6 Katrina, and 

7 ‘‘(C) the taxpayer elects the application of 

8 this subsection with respect to such loss. 

9 ‘‘(3) REDUCTION FOR GAINS FROM INVOLUN10 TARY CONVERSION.—The amount of Gulf Oppor11 tunity Zone public utility casualty loss which would 

12 (but for this paragraph) be taken into account under 

13 paragraph (1) for any taxable year shall be reduced 

14 by the amount of any gain recognized by the tax15 payer for such year from the involuntary conversion 

16 by reason of Hurricane Katrina of public utility 

17 property (as so defined) located in the Gulf Oppor18 tunity Zone. 

19 ‘‘(4) COORDINATION WITH GENERAL DISASTER

20 LOSS RULES.—Subsection (h) and section 165(i) 

21 shall not apply to any Gulf Opportunity Zone public 

22 utility casualty loss to the extent such loss is taken 

23 into account under paragraph (1). 

24 ‘‘(5) ELECTION.—Any election under paragraph 

25 (2)(C) shall be made in such manner as may be pre-
29 

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1 scribed by the Secretary and shall be made by the 

2 due date (including extensions of time) for filing the 

3 taxpayer’s return for the taxable year of the loss. 

4 Such election, once made for any taxable year, shall 

5 be irrevocable for such taxable year. 

6 ‘‘(k) SPECIAL RULES FOR SMALL TIMBER PRO7 DUCERS.— 

8 ‘‘(1) INCREASED EXPENSING FOR QUALIFIED

9 TIMBER PROPERTY.—In the case of qualified timber 

10 property any portion of which is located in the Gulf 

11 Opportunity Zone, in that portion of the Rita GO 

12 Zone which is not part of the Gulf Opportunity 

13 Zone, or in the Wilma GO Zone, the limitation 

14 under subparagraph (B) of section 194(b)(1) shall 

15 be increased by the lesser of— 

16 ‘‘(A) the limitation which would (but for 

17 this subsection) apply under such subpara18 graph, or 

19 ‘‘(B) the amount of reforestation expendi20 tures (as defined in section 194(c)(3)) paid or 

21 incurred by the taxpayer with respect to such 

22 qualified timber property during the specified 

23 portion of the taxable year. 

24 ‘‘(2) 5 YEAR NOL CARRYBACK OF CERTAIN TIM25 BER LOSSES.—For purposes of determining farming 
30 

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1 loss under section 172(i), income and deductions 

2 which are allocable to the specified portion of the 

3 taxable year and which are attributable to qualified 

4 timber property any portion of which is located in 

5 the Gulf Opportunity Zone, in that portion of the 

6 Rita GO Zone which is not part of the Gulf Oppor7 tunity Zone, or in the Wilma GO Zone shall be 

8 treated as attributable to farming businesses. 

9 ‘‘(3) RULES NOT APPLICABLE TO CERTAIN EN10 TITIES.—Paragraphs (1) and (2) shall not apply to 

11 any taxpayer which— 

12 ‘‘(A) is a corporation the stock of which is 

13 publicly traded on an established securities 

14 market, or 

15 ‘‘(B) is a real estate investment trust. 

16 ‘‘(4) RULES NOT APPLICABLE TO LARGE TIM17 BER PRODUCERS.—Paragraphs (1) and (2) shall not 

18 apply with respect to any qualified timber property 

19 unless— 

20 ‘‘(A) such property was held by the tax21 payer— 

22 ‘‘(i) on August 28, 2005, in the case 

23 of qualified timber property any portion of 

24 which is located in the Gulf Opportunity 

25 Zone, 
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1 ‘‘(ii) on September 23, 2005, in the 

2 case of qualified timber property (other 

3 than property described in subclause (I)) 

4 any portion of which is located in that por5 tion of the Rita GO Zone which is not part 

6 of the Gulf Opportunity Zone, or 

7 ‘‘(iii) on October 23, 2005, in the case 

8 of qualified timber property (other than 

9 property described in subclause (I) or (II)) 

10 any portion of which is located in the 

11 Wilma GO Zone, and 

12 ‘‘(B) such taxpayer held not more than 

13 500 acres of qualified timber property on such 

14 date. 

15 ‘‘(5) DEFINITIONS.—For purposes of this sub16 section— 

17 ‘‘(A) SPECIFIED PORTION.—The term 

18 ‘specified portion’ means— 

19 ‘‘(i) in the case of qualified timber 

20 property located in the Gulf Opportunity 

21 Zone, that portion of the taxable year 

22 which is on or after August 28, 2005, and 

23 before January 1, 2007, 

24 ‘‘(ii) in the case of qualified timber 

25 property located in the Rita GO Zone and 
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1 no part of which is located in the Gulf Op2 portunity Zone, that portion of the taxable 

3 year which is on or after September 23, 

4 2005, and before January 1, 2007, and 

5 ‘‘(iii) in the case of qualified timber 

6 property located in the Wilma GO Zone, 

7 that portion of the taxable year which is on 

8 or after October 23, 2005, and before Jan9 uary 1, 2007. 

10 ‘‘(B) QUALIFIED TIMBER PROPERTY.—The 

11 term ‘qualified timber property’ has the mean12 ing given such term in section 194(c)(1). 

13 ‘‘(l) EXPENSING FOR CERTAIN DEMOLITION AND

14 CLEAN-UP COSTS.— 

15 ‘‘(1) IN GENERAL.—A taxpayer may elect to 

16 treat 50 percent of any qualified Gulf Opportunity 

17 Zone clean-up cost as an expense which is not 

18 chargeable to capital account. Any cost so treated 

19 shall be allowed as a deduction for the taxable year 

20 in which such cost is paid or incurred. 

21 ‘‘(2) GULF OPPORTUNITY ZONE CLEAN-UP

22 COST.—For purposes of this subsection, the term 

23 ‘Gulf Opportunity Zone clean-up cost’ means any 

24 amount paid or incurred during the period beginning 

25 on August 28, 2005, and ending on December 31, 
33 

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1 2007, for the removal of debris from, or the demoli2 tion of structures on, real property which is located 

3 in the Gulf Opportunity Zone and which is— 

4 ‘‘(A) held by the taxpayer for use in a 

5 trade or business or for the production of in6 come, or 

7 ‘‘(B) property described in section 

8 1221(a)(1) in the hands of the taxpayer. 

9 For purposes of the preceding sentence, amounts 

10 paid or incurred shall be taken into account only to 

11 the extent that such amount would (but for para12 graph (1)) be chargeable to capital account. 

13 ‘‘(m) EXTENSION OF EXPENSING FOR ENVIRON14 MENTAL REMEDIATION COSTS.—With respect to any 

15 qualified environmental remediation expenditure (as de16 fined in section 198(b)) paid or incurred on or after Au17 gust 28, 2005, in connection with a qualified contaminated 

18 site located in the Gulf Opportunity Zone, section 198 (re19 lating to expensing of environmental remediation costs) 

20 shall be applied— 

21 ‘‘(1) by substituting ‘December 31, 2007’ for 

22 ‘December 31, 2006’ in subsection (h) thereof, and 

23 ‘‘(2) except as provided in section 198(d)(2), by 

24 treating petroleum products (as defined in section 

25 4612(a)(3)) as a hazardous substance. 
34 

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1 ‘‘(n) GULF OPPORTUNITY ZONE.—For purposes of 

2 this section, the term ‘Gulf Opportunity Zone’ means an 

3 area— 

4 ‘‘(1) with respect to which a major disaster has 

5 been declared by the President under section 401 of 

6 the Robert T. Stafford Disaster Relief and Emer7 gency Assistance Act as a result of Hurricane 

8 Katrina, and 

9 ‘‘(2) which is determined by the President to 

10 warrant individual assistance, or individual and pub11 lic assistance, from the Federal Government under 

12 such Act.’’ 

13 (b) CLERICAL AMENDMENTS.—The table of sub14 chapters for chapter 1 is amended by adding at the end 

15 the following new item: 

‘‘SUBCHAPTER Z—HURRICANE RELIEF BENEFITS.’’. 

16 SEC. 102. EXPANSION OF HOPE SCHOLARSHIP AND LIFE17 TIME LEARNING CREDIT FOR STUDENTS IN 

18 THE GULF OPPORTUNITY ZONE. 

19 In the case of an individual who attends an eligible 

20 educational institution (as defined in section 25A(f)(2) of 

21 the Internal Revenue Code of 1986) located in the Gulf 

22 Opportunity Zone (as defined in section 1400N(1) of such 

23 Code) for any taxable year beginning during 2005 or 

24 2006— 
35 

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1 (1) in applying section 25A of the Internal Rev2 enue Code of 1986, the term ‘‘qualified tuition and 

3 related expenses’’ shall include any costs which are 

4 qualified higher education expenses (as defined in 

5 section 529(e)(3) of such Code), 

6 (2) each of the dollar amounts in effect under 

7 of subparagraphs (A) and (B) of section 25A(b)(1) 

8 of such Code shall be twice the amount otherwise in 

9 effect before the application of this subsection, and 

10 (3) section 25A(c)(1) of such Code shall be ap11 plied by substituting ‘‘40 percent’’ for ‘‘20 percent’’. 

12 SEC. 103. EXTENSION OF SPECIAL RULES FOR MORTGAGE 

13 REVENUE BONDS. 

14 Section 404(d) of the Katrina Emergency Tax Relief 

15 Act of 2005 is amended by striking ‘‘December 31, 2007’’ 

16 and inserting ‘‘December 31, 2010’’. 

17 Subtitle B—Tax Benefits Related to 

18 Hurricanes Rita and Wilma 

19 SEC. 111. EXTENSION OF CERTAIN EMERGENCY TAX RE20 LIEF FOR HURRICANE KATRINA TO HURRI21 CANES RITA AND WILMA. 

22 (a) IN GENERAL.—Subchapter Z of chapter 1, as 

23 added by this Act, is amended by adding at the end the 

24 following new sections: 
36 

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1 ‘‘SEC. 1400P. SPECIAL RULES FOR MORTGAGE REVENUE 

2 BONDS. 

3 ‘‘(a) IN GENERAL.—In the case of financing provided 

4 with respect to residences in the GO Zone, the Rita GO 

5 Zone, or the Wilma GO Zone, section 143 shall be ap6 plied— 

7 ‘‘(1) by treating any residence in the GO Zone, 

8 the Rita GO Zone, or the Wilma GO Zone as a tar9 geted area residence, 

10 ‘‘(2) by applying subsection (f)(3) without re11 gard to subparagraph (A) thereof, and 

12 ‘‘(3) by substituting ‘$150,000’ for ‘$15,000’ in 

13 subsection (k)(4) thereof. 

14 ‘‘(b) APPLICATION.—Subsection (a) shall not apply 

15 to financing provided after December 31, 2010. 

16 ‘‘SEC. . SPECIAL RULES FOR USE OF RETIREMENT FUNDS. 

17 ‘‘(a) TAX-FAVORED WITHDRAWALS FROM RETIRE18 MENT PLANS.— 

19 ‘‘(1) IN GENERAL.—Section 72(t) shall not 

20 apply to any qualified hurricane distribution. 

21 ‘‘(2) AGGREGATE DOLLAR LIMITATION.— 

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

23 subsection, the aggregate amount of distribu24 tions received by an individual which may be 

25 treated as qualified hurricane distributions for 
37 

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1 any taxable year shall not exceed the excess (if 

2 any) of— 

3 ‘‘(i) $100,000, over 

4 ‘‘(ii) the aggregate amounts treated as 

5 qualified hurricane distributions received 

6 by such individual for all prior taxable 

7 years. 

8 ‘‘(B) TREATMENT OF PLAN DISTRIBU9 TIONS.—If a distribution to an individual would 

10 (without regard to subparagraph (A)) be a 

11 qualified hurricane distribution, a plan shall not 

12 be treated as violating any requirement of this 

13 title merely because the plan treats such dis14 tribution as a qualified hurricane distribution, 

15 unless the aggregate amount of such distribu16 tions from all plans maintained by the employer 

17 (and any member of any controlled group which 

18 includes the employer) to such individual ex19 ceeds $100,000. 

20 ‘‘(C) CONTROLLED GROUP.—For purposes 

21 of subparagraph (B), the term ‘controlled 

22 group’ means any group treated as a single em23 ployer under subsection (b), (c), (m), or (o) of 

24 section 414. 

25 ‘‘(3) AMOUNT DISTRIBUTED MAY BE REPAID.— 
38 

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1 ‘‘(A) IN GENERAL.—Any individual who 

2 receives a qualified hurricane distribution may, 

3 at any time during the 3-year period beginning 

4 on the day after the date on which such dis5 tribution was received, make one or more con6 tributions in an aggregate amount not to exceed 

7 the amount of such distribution to an eligible 

8 retirement plan of which such individual is a 

9 beneficiary and to which a rollover contribution 

10 of such distribution could be made under sec11 tion 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 

12 457(e)(16), as the case may be. 

13 ‘‘(B) TREATMENT OF REPAYMENTS OF

14 DISTRIBUTIONS FROM ELIGIBLE RETIREMENT

15 PLANS OTHER THAN IRAS.—For purposes of 

16 this title, if a contribution is made pursuant to 

17 subparagraph (A) with respect to a qualified 

18 hurricane distribution from an eligible retire19 ment plan other than an individual retirement 

20 plan, then the taxpayer shall, to the extent of 

21 the amount of the contribution, be treated as 

22 having received the qualified hurricane distribu23 tion in an eligible rollover distribution (as de24 fined in section 402(c)(4)) and as having trans25 ferred the amount to the eligible retirement 
39 

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1 plan in a direct trustee to trustee transfer with2 in 60 days of the distribution. 

3 ‘‘(C) TREATMENT OF REPAYMENTS FOR

4 DISTRIBUTIONS FROM IRAS.—For purposes of 

5 this title, if a contribution is made pursuant to 

6 subparagraph (A) with respect to a qualified 

7 hurricane distribution from an individual retire8 ment plan (as defined by section 7701(a)(37)), 

9 then, to the extent of the amount of the con10 tribution, the qualified hurricane distribution 

11 shall be treated as a distribution described in 

12 section 408(d)(3) and as having been trans13 ferred to the eligible retirement plan in a direct 

14 trustee to trustee transfer within 60 days of the 

15 distribution. 

16 ‘‘(4) DEFINITIONS.—For purposes of this sub17 section— 

18 ‘‘(A) QUALIFIED HURRICANE DISTRIBU19 TION.—Except as provided in paragraph (2), 

20 the term ‘qualified hurricane distribution’ 

21 means— 

22 ‘‘(i) any distribution from an eligible 

23 retirement plan made on or after August 

24 25, 2005, and before January 1, 2007, to 

25 an individual whose principal place of 
40 

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1 abode on August 28, 2005, is located in 

2 the Hurricane Katrina disaster area and 

3 who has sustained an economic loss by rea4 son of Hurricane Katrina, 

5 ‘‘(ii) any distribution (which is not de6 scribed in clause (i)) from an eligible re7 tirement plan made on or after September 

8 23, 2005, and before January 1, 2007, to 

9 an individual whose principal place of 

10 abode on September 23, 2005, is located in 

11 the Hurricane Rita disaster area and who 

12 has sustained an economic loss by reason 

13 of Hurricane Rita, and 

14 ‘‘(iii) any distribution (which is not 

15 described in clause (i) or (ii)) from an eli16 gible retirement plan made on or after Oc17 tober 23, 2005, and before January 1, 

18 2007, to an individual whose principal 

19 place of abode on October 23, 2005, is lo20 cated in the Hurricane Wilma disaster 

21 area and who has sustained an economic 

22 loss by reason of Hurricane Wilma. 

23 ‘‘(B) ELIGIBLE RETIREMENT PLAN.—The 

24 term ‘eligible retirement plan’ shall have the 
41 

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1 meaning given such term by section 

2 402(c)(8)(B). 

3 ‘‘(5) INCOME INCLUSION SPREAD OVER 3-YEAR

4 PERIOD.— 

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

6 qualified hurricane distribution, unless the tax7 payer elects not to have this paragraph apply 

8 for any taxable year, any amount required to be 

9 included in gross income for such taxable year 

10 shall be so included ratably over the 3-taxable 

11 year period beginning with such taxable year. 

12 ‘‘(B) SPECIAL RULE.—For purposes of 

13 subparagraph (A), rules similar to the rules of 

14 subparagraph (E) of section 408A(d)(3) shall 

15 apply. 

16 ‘‘(6) SPECIAL RULES.— 

17 ‘‘(A) EXEMPTION OF DISTRIBUTIONS FROM

18 TRUSTEE TO TRUSTEE TRANSFER AND WITH19 HOLDING RULES.—For purposes of sections 

20 401(a)(31), 402(f), and 3405, qualified hurri21 cane distributions shall not be treated as eligi22 ble rollover distributions. 

23 ‘‘(B) QUALIFIED HURRICANE DISTRIBU24 TIONS TREATED AS MEETING PLAN DISTRIBU25 TION REQUIREMENTS.—For purposes this title, 
42 

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1 a qualified hurricane distribution shall be treat2 ed as meeting the requirements of sections 

3 401(k)(2)(B)(i), 403(b)(7)(A)(ii), 403(b)(11), 

4 and 457(d)(1)(A). 

5 ‘‘(b) RECONTRIBUTIONS OF WITHDRAWALS FOR

6 HOME PURCHASES.— 

7 ‘‘(1) RECONTRIBUTIONS.— 

8 ‘‘(A) IN GENERAL.—Any individual who 

9 received a qualified distribution may, during the 

10 applicable period, make one or more contribu11 tions in an aggregate amount not to exceed the 

12 amount of such qualified distribution to an eli13 gible retirement plan (as defined in section 

14 402(c)(8)(B)) of which such individual is a ben15 eficiary and to which a rollover contribution of 

16 such distribution could be made under section 

17 402(c), 403(a)(4), 403(b)(8), or 408(d)(3), as 

18 the case may be. 

19 ‘‘(B) TREATMENT OF REPAYMENTS.— 

20 Rules similar to the rules of subparagraphs (B) 

21 and (C) of subsection (a)(3) shall apply for pur22 poses of this subsection. 

23 ‘‘(2) QUALIFIED DISTRIBUTION.—For purposes 

24 of this subsection— 
43 

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

2 distribution’ means any qualified Katrina dis3 tribution, any qualified Rita distribution, and 

4 any qualified Wilma distribution. 

5 ‘‘(B) QUALIFIED KATRINA DISTRIBU6 TION.—The term ‘qualified Katrina distribu7 tion’ means any distribution— 

8 ‘‘(i) described in section 

9 401(k)(2)(B)(i)(IV), 403(b)(7)(A)(ii) (but 

10 only to the extent such distribution relates 

11 to financial hardship), 403(b)(11)(B), or 

12 72(t)(2)(F), 

13 ‘‘(ii) received after February 28, 

14 2005, and before August 29, 2005, and 

15 ‘‘(iii) which was to be used to pur16 chase or construct a principal residence in 

17 the Hurricane Katrina disaster area, but 

18 which was not so purchased or constructed 

19 on account of Hurricane Katrina. 

20 ‘‘(C) QUALIFIED RITA DISTRIBUTION.— 

21 The term ‘qualified Rita distribution’ means 

22 any distribution (other than a qualified Katrina 

23 distribution)— 

24 ‘‘(i) described in section 

25 401(k)(2)(B)(i)(IV), 403(b)(7)(A)(ii) (but 
44 

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1 only to the extent such distribution relates 

2 to financial hardship), 403(b)(11)(B), or 

3 72(t)(2)(F), 

4 ‘‘(ii) received after February 28, 

5 2005, and before September 24, 2005, and 

6 ‘‘(iii) which was to be used to pur7 chase or construct a principal residence in 

8 the Hurricane Rita disaster area, but 

9 which was not so purchased or constructed 

10 on account of Hurricane Rita. 

11 ‘‘(D) QUALIFIED WILMA DISTRIBUTION.— 

12 The term ‘qualified Wilma distribution’ means 

13 any distribution (other than a qualified Katrina 

14 distribution or a qualified Rita distribution)— 

15 ‘‘(i) described in section 

16 401(k)(2)(B)(i)(IV), 403(b)(7)(A)(ii) (but 

17 only to the extent such distribution relates 

18 to financial hardship), 403(b)(11)(B), or 

19 72(t)(2)(F), 

20 ‘‘(ii) received after February 28, 

21 2005, and before October 24, 2005, and 

22 ‘‘(iii) which was to be used to pur23 chase or construct a principal residence in 

24 the Hurricane Wilma disaster area, but 
45 

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1 which was not so purchased or constructed 

2 on account of Hurricane Wilma. 

3 ‘‘(3) APPLICABLE PERIOD.—For purposes of 

4 this subsection, the term ‘applicable period’ means— 

5 ‘‘(A) with respect to any qualified Katrina 

6 distribution, the period beginning on August 

7 25, 2005, and ending on February 28, 2006, 

8 ‘‘(B) with respect to any qualified Rita dis9 tribution, the period beginning on September 

10 23, 2005, and ending on February 28, 2006, 

11 and 

12 ‘‘(C) with respect to any qualified Wilma 

13 distribution, the period beginning on October 

14 23, 2005, and ending on February 28, 2006. 

15 ‘‘(c) LOANS FROM QUALIFIED PLANS.— 

16 ‘‘(1) INCREASE IN LIMIT ON LOANS NOT TREAT17 ED AS DISTRIBUTIONS.—In the case of any loan 

18 from a qualified employer plan (as defined under 

19 section 72(p)(4)) to a qualified individual made dur20 ing the applicable period— 

21 ‘‘(A) clause (i) of section 72(p)(2)(A) shall 

22 be applied by substituting ‘$100,000’ for 

23 ‘$50,000’, and 

24 ‘‘(B) clause (ii) of such section shall be ap25 plied by substituting ‘the present value of the 
46 

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1 nonforfeitable accrued benefit of the employee 

2 under the plan’ for ‘one-half of the present 

3 value of the nonforfeitable accrued benefit of 

4 the employee under the plan’. 

5 ‘‘(2) DELAY OF REPAYMENT.—In the case of a 

6 qualified individual with an outstanding loan on or 

7 after the qualified beginning date from a qualified 

8 employer plan (as defined in section 72(p)(4))— 

9 ‘‘(A) if the due date pursuant to subpara10 graph (B) or (C) of section 72(p)(2) for any re11 payment with respect to such loan occurs dur12 ing the period beginning on the qualified begin13 ning date and ending on December 31, 2006, 

14 such due date shall be delayed for 1 year, 

15 ‘‘(B) any subsequent repayments with re16 spect to any such loan shall be appropriately 

17 adjusted to reflect the delay in the due date 

18 under paragraph (1) and any interest accruing 

19 during such delay, and 

20 ‘‘(C) in determining the 5-year period and 

21 the term of a loan under subparagraph (B) or 

22 (C) of section 72(p)(2), the period described in 

23 subparagraph (A) shall be disregarded. 

24 ‘‘(3) QUALIFIED INDIVIDUAL.—For purposes of 

25 this subsection— 
47 

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

2 individual’ means any qualified Hurricane 

3 Katrina individual, any qualified Hurricane 

4 Rita individual, and any qualified Hurricane 

5 Wilma individual. 

6 ‘‘(B) QUALIFIED HURRICANE KATRINA IN7 DIVIDUAL.—The term ‘qualified Hurricane 

8 Katrina individual’ means an individual whose 

9 principal place of abode on August 28, 2005, is 

10 located in the Hurricane Katrina disaster area 

11 and who has sustained an economic loss by rea12 son of Hurricane Katrina. 

13 ‘‘(C) QUALIFIED HURRICANE RITA INDI14 VIDUAL.—The term ‘qualified Hurricane Rita 

15 individual’ means an individual (other than a 

16 qualified Hurricane Katrina individual) whose 

17 principal place of abode on September 23, 

18 2005, is located in the Hurricane Rita disaster 

19 area and who has sustained an economic loss by 

20 reason of Hurricane Rita. 

21 ‘‘(D) QUALIFIED HURRICANE WILMA INDI22 VIDUAL.—The term ‘qualified Hurricane Wilma 

23 individual’ means an individual (other than a 

24 qualified Hurricane Katrina individual or a 

25 qualified Hurricane Rita individual) whose prin-
48 

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1 cipal place of abode on October 23, 2005, is lo2 cated in the Hurricane Wilma disaster area and 

3 who has sustained an economic loss by reason 

4 of Hurricane Wilma. 

5 ‘‘(4) APPLICABLE PERIOD; QUALIFIED BEGIN6 NING DATE.—For purposes of this subsection— 

7 ‘‘(A) HURRICANE KATRINA.—In the case 

8 of any qualified Hurricane Katrina individual— 

9 ‘‘(i) the applicable period is the period 

10 beginning on September 24, 2005, and 

11 ending on December 31, 2006, and 

12 ‘‘(ii) the qualified beginning date is 

13 August 25, 2005. 

14 ‘‘(B) HURRICANE RITA.—In the case of 

15 any qualified Hurricane Rita individual— 

16 ‘‘(i) the applicable period is the period 

17 beginning on the date of the enactment of 

18 this subsection and ending on December 

19 31, 2006, and 

20 ‘‘(ii) the qualified beginning date is 

21 September 23, 2005. 

22 ‘‘(C) HURRICANE WILMA.—In the case of 

23 any qualified Hurricane Wilma individual— 

24 ‘‘(i) the applicable period is the period 

25 beginning on the date of the enactment of 
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1 this subsection and ending on December 

2 31, 2006, and 

3 ‘‘(ii) the qualified beginning date is 

4 October 23, 2005. 

5 ‘‘SEC. 1400R. EMPLOYMENT RELIEF. 

6 ‘‘(a) EMPLOYEE RETENTION CREDIT FOR EMPLOY7 ERS AFFECTED BY HURRICANE KATRINA.— 

8 ‘‘(1) IN GENERAL.—For purposes of section 38, 

9 in the case of an eligible employer, the Hurricane 

10 Katrina employee retention credit for any taxable 

11 year is an amount equal to 40 percent of the quali12 fied wages with respect to each eligible employee of 

13 such employer for such taxable year. For purposes 

14 of the preceding sentence, the amount of qualified 

15 wages which may be taken into account with respect 

16 to any individual shall not exceed $6,000. 

17 ‘‘(2) DEFINITIONS.—For purposes of this sub18 section— 

19 ‘‘(A) ELIGIBLE EMPLOYER.—The term ‘eli20 gible employer’ means any employer— 

21 ‘‘(i) which conducted an active trade 

22 or business on August 28, 2005, in the 

23 Gulf Opportunity Zone, and 

24 ‘‘(ii) with respect to whom the trade 

25 or business described in clause (i) is inop-
50 

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1 erable on any day after August 28, 2005, 

2 and before January 1, 2006, as a result of 

3 damage sustained by reason of Hurricane 

4 Katrina. 

5 ‘‘(B) ELIGIBLE EMPLOYEE.—The term ‘el6 igible employee’ means with respect to an eligi7 ble employer an employee whose principal place 

8 of employment on August 28, 2005, with such 

9 eligible employer was in the Gulf Opportunity 

10 Zone. 

11 ‘‘(C) QUALIFIED WAGES.—The term 

12 ‘qualified wages’ means wages (as defined in 

13 section 51(c)(1), but without regard to section 

14 3306(b)(2)(B)) paid or incurred by an eligible 

15 employer with respect to an eligible employee on 

16 any day after August 28, 2005, and before Jan17 uary 1, 2006, which occurs during the period— 

18 ‘‘(i) beginning on the date on which 

19 the trade or business described in subpara20 graph (A) first became inoperable at the 

21 principal place of employment of the em22 ployee immediately before Hurricane 

23 Katrina, and 

24 ‘‘(ii) ending on the date on which such 

25 trade or business has resumed significant 
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1 operations at such principal place of em2 ployment. 

3 Such term shall include wages paid without re4 gard to whether the employee performs no serv5 ices, performs services at a different place of 

6 employment than such principal place of em7 ployment, or performs services at such principal 

8 place of employment before significant oper9 ations have resumed. 

10 ‘‘(3) CERTAIN RULES TO APPLY.—For purposes 

11 of this subsection, rules similar to the rules of sec12 tions 51(i)(1), 52, and 280C(a) shall apply. 

13 ‘‘(4) EMPLOYEE NOT TAKEN INTO ACCOUNT

14 MORE THAN ONCE.—An employee shall not be treat15 ed as an eligible employee for purposes of this sub16 section for any period with respect to any employer 

17 if such employer is allowed a credit under section 51 

18 with respect to such employee for such period. 

19 ‘‘(b) EMPLOYEE RETENTION CREDIT FOR EMPLOY20 ERS AFFECTED BY HURRICANE RITA.— 

21 ‘‘(1) IN GENERAL.—For purposes of section 38, 

22 in the case of an eligible employer, the Hurricane 

23 Rita employee retention credit for any taxable year 

24 is an amount equal to 40 percent of the qualified 

25 wages with respect to each eligible employee of such 
52 

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1 employer for such taxable year. For purposes of the 

2 preceding sentence, the amount of qualified wages 

3 which may be taken into account with respect to any 

4 individual shall not exceed $6,000. 

5 ‘‘(2) DEFINITIONS.—For purposes of this sub6 section— 

7 ‘‘(A) ELIGIBLE EMPLOYER.—The term ‘eli8 gible employer’ means any employer— 

9 ‘‘(i) which conducted an active trade 

10 or business on September 23, 2005, in the 

11 Rita GO Zone, and 

12 ‘‘(ii) with respect to whom the trade 

13 or business described in clause (i) is inop14 erable on any day after September 23, 

15 2005, and before January 1, 2006, as a re16 sult of damage sustained by reason of 

17 Hurricane Rita. 

18 ‘‘(B) ELIGIBLE EMPLOYEE.—The term ‘el19 igible employee’ means with respect to an eligi20 ble employer an employee whose principal place 

21 of employment on September 23, 2005, with 

22 such eligible employer was in the Rita GO 

23 Zone. 

24 ‘‘(C) QUALIFIED WAGES.—The term 

25 ‘qualified wages’ means wages (as defined in 
53 

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1 section 51(c)(1), but without regard to section 

2 3306(b)(2)(B)) paid or incurred by an eligible 

3 employer with respect to an eligible employee on 

4 any day after September 23, 2005, and before 

5 January 1, 2006, which occurs during the pe6 riod— 

7 ‘‘(i) beginning on the date on which 

8 the trade or business described in subpara9 graph (A) first became inoperable at the 

10 principal place of employment of the em11 ployee immediately before Hurricane Rita, 

12 and 

13 ‘‘(ii) ending on the date on which such 

14 trade or business has resumed significant 

15 operations at such principal place of em16 ployment. 

17 Such term shall include wages paid without re18 gard to whether the employee performs no serv19 ices, performs services at a different place of 

20 employment than such principal place of em21 ployment, or performs services at such principal 

22 place of employment before significant oper23 ations have resumed. 
54 

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1 ‘‘(3) CERTAIN RULES TO APPLY.—For purposes 

2 of this subsection, rules similar to the rules of sec3 tions 51(i)(1), 52, and 280C(a) shall apply. 

4 ‘‘(4) EMPLOYEE NOT TAKEN INTO ACCOUNT

5 MORE THAN ONCE.—An employee shall not be treat6 ed as an eligible employee for purposes of this sub7 section for any period with respect to any employer 

8 if such employer is allowed a credit under subsection 

9 (a) or section 51 with respect to such employee for 

10 such period. 

11 ‘‘(c) EMPLOYEE RETENTION CREDIT FOR EMPLOY12 ERS AFFECTED BY HURRICANE WILMA.— 

13 ‘‘(1) IN GENERAL.—For purposes of section 38, 

14 in the case of an eligible employer, the Hurricane 

15 Wilma employee retention credit for any taxable year 

16 is an amount equal to 40 percent of the qualified 

17 wages with respect to each eligible employee of such 

18 employer for such taxable year. For purposes of the 

19 preceding sentence, the amount of qualified wages 

20 which may be taken into account with respect to any 

21 individual shall not exceed $6,000. 

22 ‘‘(2) DEFINITIONS.—For purposes of this sub23 section— 

24 ‘‘(A) ELIGIBLE EMPLOYER.—The term ‘eli25 gible employer’ means any employer— 
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1 ‘‘(i) which conducted an active trade 

2 or business on October 23, 2005, in the 

3 Wilma GO Zone, and 

4 ‘‘(ii) with respect to whom the trade 

5 or business described in clause (i) is inop6 erable on any day after October 23, 2005, 

7 and before January 1, 2006, as a result of 

8 damage sustained by reason of Hurricane 

9 Wilma. 

10 ‘‘(B) ELIGIBLE EMPLOYEE.—The term ‘el11 igible employee’ means with respect to an eligi12 ble employer an employee whose principal place 

13 of employment on October 23, 2005, with such 

14 eligible employer was in the Wilma GO Zone. 

15 ‘‘(C) QUALIFIED WAGES.—The term 

16 ‘qualified wages’ means wages (as defined in 

17 section 51(c)(1), but without regard to section 

18 3306(b)(2)(B)) paid or incurred by an eligible 

19 employer with respect to an eligible employee on 

20 any day after October 23, 2005, and before 

21 January 1, 2006, which occurs during the pe22 riod— 

23 ‘‘(i) beginning on the date on which 

24 the trade or business described in subpara25 graph (A) first became inoperable at the 
56 

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1 principal place of employment of the em2 ployee immediately before Hurricane 

3 Wilma, and 

4 ‘‘(ii) ending on the date on which such 

5 trade or business has resumed significant 

6 operations at such principal place of em7 ployment. 

8 Such term shall include wages paid without re9 gard to whether the employee performs no serv10 ices, performs services at a different place of 

11 employment than such principal place of em12 ployment, or performs services at such principal 

13 place of employment before significant oper14 ations have resumed. 

15 ‘‘(3) CERTAIN RULES TO APPLY.—For purposes 

16 of this subsection, rules similar to the rules of sec17 tions 51(i)(1), 52, and 280C(a) shall apply. 

18 ‘‘(4) EMPLOYEE NOT TAKEN INTO ACCOUNT

19 MORE THAN ONCE.—An employee shall not be treat20 ed as an eligible employee for purposes of this sub21 section for any period with respect to any employer 

22 if such employer is allowed a credit under subsection 

23 (a) or section 51 with respect to such employee for 

24 such period. 
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1 ‘‘SEC. 1400S. ADDITIONAL TAX RELIEF PROVISIONS. 

2 ‘‘(a) TEMPORARY SUSPENSION OF LIMITATIONS ON

3 CHARITABLE CONTRIBUTIONS.— 

4 ‘‘(1) IN GENERAL.—Except as otherwise pro5 vided in paragraph (2), section 170(b) shall not 

6 apply to qualified contributions and such contribu7 tions shall not be taken into account for purposes of 

8 applying subsections (b) and (d) of section 170 to 

9 other contributions. 

10 ‘‘(2) TREATMENT OF EXCESS CONTRIBU11 TIONS.—For purposes of section 170— 

12 ‘‘(A) INDIVIDUALS.—In the case of an in13 dividual— 

14 ‘‘(i) LIMITATION.—Any qualified con15 tribution shall be allowed only to the ex16 tent that the aggregate of such contribu17 tions does not exceed the excess of the tax18 payer’s contribution base (as defined in 

19 subparagraph (F) of section 170(b)(1)) 

20 over the amount of all other charitable 

21 contributions allowed under section 

22 170(b)(1). 

23 ‘‘(ii) CARRYOVER.—If the aggregate 

24 amount of qualified contributions made in 

25 the contribution year (within the meaning 

26 of section 170(d)(1)) exceeds the limitation 
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1 of clause (i), such excess shall be added to 

2 the excess described in the portion of sub3 paragraph (A) of such section which pre4 cedes clause (i) thereof for purposes of ap5 plying such section. 

6 ‘‘(B) CORPORATIONS.—In the case of a 

7 corporation— 

8 ‘‘(i) LIMITATION.—Any qualified con9 tribution shall be allowed only to the ex10 tent that the aggregate of such contribu11 tions does not exceed the excess of the tax12 payer’s taxable income (as determined 

13 under paragraph (2) of section 170(b)) 

14 over the amount of all other charitable 

15 contributions allowed under such para16 graph. 

17 ‘‘(ii) CARRYOVER.—Rules similar to 

18 the rules of subparagraph (A)(ii) shall 

19 apply for purposes of this subparagraph. 

20 ‘‘(3) EXCEPTION TO OVERALL LIMITATION ON

21 ITEMIZED DEDUCTIONS.—So much of any deduction 

22 allowed under section 170 as does not exceed the 

23 qualified contributions paid during the taxable year 

24 shall not be treated as an itemized deduction for 

25 purposes of section 68. 
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1 ‘‘(4) QUALIFIED CONTRIBUTIONS.— 

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

3 subsection, the term ‘qualified contribution’ 

4 means any charitable contribution (as defined 

5 in section 170(c)) if— 

6 ‘‘(i) such contribution is paid during 

7 the period beginning on August 28, 2005, 

8 and ending on December 31, 2005, in cash 

9 to an organization described in section 

10 170(b)(1)(A) (other than an organization 

11 described in section 509(a)(3)), 

12 ‘‘(ii) in the case of a contribution paid 

13 by a corporation, such contribution is for 

14 relief efforts related to Hurricane Katrina, 

15 Hurricane Rita, or Hurricane Wilma, and 

16 ‘‘(iii) the taxpayer has elected the ap17 plication of this subsection with respect to 

18 such contribution. 

19 ‘‘(B) EXCEPTION.—Such term shall not in20 clude a contribution if the contribution is for 

21 establishment of a new, or maintenance in an 

22 existing, segregated fund or account with re23 spect to which the donor (or any person ap24 pointed or designated by such donor) has, or 

25 reasonably expects to have, advisory privileges 
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1 with respect to distributions or investments by 

2 reason of the donor’s status as a donor. 

3 ‘‘(C) APPLICATION OF ELECTION TO PART4 NERSHIPS AND S CORPORATIONS.—In the case 

5 of a partnership or S corporation, the election 

6 under subparagraph (A)(iii) shall be made sepa7 rately by each partner or shareholder. 

8 ‘‘(b) SUSPENSION OF CERTAIN LIMITATIONS ON

9 PERSONAL CASUALTY LOSSES.—Paragraphs (1) and 

10 (2)(A) of section 165(h) shall not apply to losses described 

11 in section 165(c)(3)— 

12 ‘‘(1) which arise in the Hurricane Katrina dis13 aster area on or after August 25, 2005, and which 

14 are attributable to Hurricane Katrina, 

15 ‘‘(2) which arise in the Hurricane Rita disaster 

16 area on or after September 23, 2005, and which are 

17 attributable to Hurricane Rita, or 

18 ‘‘(3) which arise in the Hurricane Wilma dis19 aster area on or after October 23, 2005, and which 

20 are attributable to Hurricane Wilma. 

21 In the case of any other losses, section 165(h)(2)(A) shall 

22 be applied without regard to the losses referred to in the 

23 preceding sentence.’’. 

24 (b) CONFORMING AMENDMENTS.— 
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1 (1) Subsection (b) of section 38 is amended by 

2 striking ‘‘and’’ at the end of paragraph (25), by 

3 striking the period at the end of paragraph (26) and 

4 inserting a comma, and by adding at the end the fol5 lowing new paragraphs: 

6 ‘‘(27) the Hurricane Katrina employee reten7 tion credit determined under section 1400R(a), 

8 ‘‘(28) the Hurricane Rita employee retention 

9 credit determined under section 1400R(b), and 

10 ‘‘(29) the Hurricane Wilma employee retention 

11 credit determined under section 1400R(c).’’. 

12 (2) The table of sections for subchapter Z of 

13 chapter 1 is amended by adding at the end the fol14 lowing new items: 

‘‘Sec. 1400P. Special rules for mortgage revenue bonds. 

‘‘Sec. 1400Q. Special rules for use of retirement funds. 

‘‘Sec. 140RQ. Employment relief. 

‘‘Sec. 1400S. Additional tax relief provisions.’’. 

15 (3) The following provisions of the Katrina 

16 Emergency Tax Relief Act of 2005 are hereby re17 pealed: 

18 (A) Title I. 

19 (B) Sections 202, 301, and 402. 
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1 TITLE II—EXTENSION OF 

2 EXPIRING PROVISIONS 

3 Subtitle A—Multi-Year Extensions 

4 SEC. 201. EXTENSION OF INCREASED EXPENSING FOR 

5 SMALL BUSINESS. 

6 Section 179 is amended by striking ‘‘2008’’ each 

7 place it appears and inserting ‘‘2010’’. 

8 SEC. 202. CREDIT FOR ELECTIVE DEFERRALS AND IRA 

9 CONTRIBUTIONS. 

10 Section 25B(h) is amended by striking ‘‘2006’’ and 

11 inserting ‘‘2009’’. 

12 SEC. 203. ABOVE-THE-LINE DEDUCTION FOR HIGHER EDU13 CATION. 

14 (a) IN GENERAL.—Section 222(e) is amended by 

15 striking ‘‘2005’’and inserting ‘‘2009’’. 

16 (b) CONFORMING AMENDMENTS.—Section 

17 222(b)(2)(B) is amended— 

18 (1) by striking ‘‘a taxable year beginning in 

19 2004 or 2005’’ and inserting ‘‘any taxable year be20 ginning after 2003’’, and 

21 (2) by striking ‘‘2004 AND 2005’’ and inserting 

22 ‘‘AFTER 2003’’. 
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1 SEC. 204. EXTENSION AND MODIFICATION OF NEW MAR2 KETS TAX CREDIT. 

3 (a) EXTENSION.—Section 45D(f)(1)(D) is amended 

4 by striking ‘‘and 2007’’ and inserting ‘‘, 2007, and 2008’’. 

5 (b) REGULATIONS REGARDING NON-METROPOLITAN

6 COUNTIES.—Section 45D(i) is amended by striking ‘‘and’’ 

7 at the end of paragraph (4), by striking the period at the 

8 end of paragraph (5) and inserting ‘‘, and’’, and by adding 

9 at the end by the following new paragraph: 

10 ‘‘(6) which ensure that non-metropolitan coun11 ties receive a proportional allocation of qualified eq12 uity investments.’’. 

13 Subtitle B—One-Year Extensions 

14 SEC. 211. ELECTION TO DEDUCT STATE AND LOCAL GEN15 ERAL SALES TAXES. 

16 Section 164(b)(5)(I) is amended by striking ‘‘2006’’ 

17 and inserting ‘‘2007’’. 

18 SEC. 212. EXTENSION OF ALTERNATIVE MINIMUM TAX EX19 EMPTION AMOUNT FOR INDIVIDUALS. 

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

21 section 55(d)(1) are each amended by striking ‘‘and 2005’’ 

22 and inserting ‘‘2005, and 2006’’. 

23 (b) INFLATION ADJUSTMENT FOR 2006.—Section 

24 55(d) is amended by adding at the end the following new 

25 paragraph: 
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1 ‘‘(4) INFLATION ADJUSTMENT.—In the case of 

2 any taxable year beginning in calendar year 2006, 

3 the $58,000 and $40,250 amounts contained in sub4 paragraphs (A) and (B) of paragraph (1) shall be 

5 increased by an amount equal to— 

6 ‘‘(A) such dollar amount, multiplied by 

7 ‘‘(B) the cost-of-living adjustment deter8 mined under section 1(f)(3) for the calendar 

9 year in which the taxable year begins, deter10 mined by substituting ‘calendar year 2004’ for 

11 ‘calendar year 1992’ in subparagraph (B) 

12 thereof. 

13 Any increase determined under the preceding sen14 tence shall be rounded to the nearest multiple of 

15 $50.’’. 

16 SEC. 213. ALLOWANCE OF NONREFUNDABLE PERSONAL 

17 CREDITS AGAINST REGULAR AND ALTER18 NATIVE MINIMUM TAX LIABILITY. 

19 (a) IN GENERAL.—Paragraph (2) of section 26(a) is 

20 amended— 

21 (1) by striking ‘‘2005’’ in the heading and in22 serting ‘‘2006’’, and 

23 (2) by striking ‘‘or 2005’’ and inserting ‘‘2005, 

24 or 2006’’. 

25 (b) CONFORMING PROVISIONS.— 
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1 (1) Section 30B(g) is amended by adding at the 

2 end the following new paragraph: 

3 ‘‘(3) SPECIAL RULE FOR 2006.—For purposes of 

4 any taxable year beginning during 2006, the credit 

5 allowed under subsection (a) (after the application of 

6 paragraph (1)) shall not exceed the excess of— 

7 ‘‘(A) the sum of the regular tax liability 

8 (as defined in section 26(b)) plus the tax im9 posed by section 55, over 

10 ‘‘(B) the sum of the credits allowable 

11 under subpart A and this subpart (other than 

12 this section and section 30C).’’. 

13 (2) Section 30C(d) is amended by adding at the 

14 end the following new paragraph: 

15 ‘‘(3) SPECIAL RULE FOR 2006.—For purposes of 

16 any taxable year beginning during 2006, the credit 

17 allowed under subsection (a) (after the application of 

18 paragraph (1)) shall not exceed the excess of— 

19 ‘‘(A) the sum of the regular tax liability 

20 (as defined in section 26(b)) plus the tax im21 posed by section 55, over 

22 ‘‘(B) the sum of the credits allowable 

23 under subpart A and this subpart (other than 

24 this section).’’. 
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1 (3) Section 904(h) is amended by striking ‘‘or 

2 2005’’ and inserting ‘‘2005, or 2006’’. 

3 (4) The amendments made by sections 201(b), 

4 202(f), and 618(b) of the Economic Growth and Tax 

5 Relief Reconciliation Act of 2001 shall not apply to 

6 taxable years beginning during 2006. 

7 SEC. 214. EXTENSION AND MODIFICATION OF RESEARCH 

8 CREDIT. 

9 (a) EXTENSION.— 

10 (1) IN GENERAL.—Section 41(h)(1)(B) is 

11 amended by striking ‘‘2005’’ and inserting ‘‘2006’’. 

12 (2) CONFORMING AMENDMENT.—Section 

13 45C(b)(1)(D) is amended by striking ‘‘2005’’ and 

14 inserting ‘‘2006’’. 

15 (b) INCREASE IN RATES OF ALTERNATIVE INCRE16 MENTAL CREDIT.—Subparagraph (A) of section 41(c)(4) 

17 (relating to election of alternative incremental credit) is 

18 amended— 

19 (1) by striking ‘‘2.65 percent’’ and inserting ‘‘3 

20 percent’’, 

21 (2) by striking ‘‘3.2 percent’’ and inserting ‘‘4 

22 percent’’, and 

23 (3) by striking ‘‘3.75 percent’’ and inserting ‘‘5 

24 percent’’. 
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1 (c) ALTERNATIVE SIMPLIFIED CREDIT FOR QUALI2 FIED RESEARCH EXPENSES.— 

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

4 (relating to base amount) is amended by redesig5 nating paragraphs (5) and (6) as paragraphs (6) 

6 and (7), respectively, and by inserting after para7 graph (4) the following new paragraph: 

8 ‘‘(5) ELECTION OF ALTERNATIVE SIMPLIFIED

9 CREDIT.— 

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

11 taxpayer, the credit determined under sub12 section (a)(1) shall be equal to 12 percent of so 

13 much of the qualified research expenses for the 

14 taxable year as exceeds 50 percent of the aver15 age qualified research expenses for the 3 tax16 able years preceding the taxable year for which 

17 the credit is being determined. 

18 ‘‘(B) SPECIAL RULE IN CASE OF NO

19 QUALIFIED RESEARCH EXPENSES IN ANY OF 3

20 PRECEDING TAXABLE YEARS.— 

21 ‘‘(i) TAXPAYERS TO WHICH SUBPARA22 GRAPH APPLIES.—The credit under this 

23 paragraph shall be determined under this 

24 subparagraph if the taxpayer has no quali25 fied research expenses in any 1 of the 3 
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1 taxable years preceding the taxable year 

2 for which the credit is being determined. 

3 ‘‘(ii) CREDIT RATE.—The credit de4 termined under this subparagraph shall be 

5 equal to 6 percent of the qualified research 

6 expenses for the taxable year. 

7 ‘‘(C) ELECTION.—An election under this 

8 paragraph shall apply to the taxable year for 

9 which made and all succeeding taxable years 

10 unless revoked with the consent of the Sec11 retary. An election under this paragraph may 

12 not be made for any taxable year to which an 

13 election under paragraph (4) applies.’’. 

14 (2) COORDINATION WITH ELECTION OF ALTER15 NATIVE INCREMENTAL CREDIT.— 

16 (A) IN GENERAL.—Section 41(c)(4)(B) 

17 (relating to election) is amended by adding at 

18 the end the following: ‘‘An election under this 

19 paragraph may not be made for any taxable 

20 year to which an election under paragraph (5) 

21 applies.’’. 

22 (B) TRANSITION RULE.—In the case of an 

23 election under section 41(c)(4) of the Internal 

24 Revenue Code of 1986 which applies to the tax25 able year which includes the date of the enact-
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1 ment of this Act, such election shall be treated 

2 as revoked with the consent of the Secretary of 

3 the Treasury if the taxpayer makes an election 

4 under section 41(c)(5) of such Code (as added 

5 by subsection (a)) for such year. 

6 (d) FUNDED RESEARCH.—Subparagraph (H) of sec7 tion 41(d)(4) is amended to read as follows: 

8 ‘‘(H) FUNDED RESEARCH.— 

9 ‘‘(i) IN GENERAL.—Any funded re10 search. 

11 ‘‘(ii) FUNDED RESEARCH.—For pur12 poses of clause (i), the term ‘funded re13 search’ means any research to the extent 

14 funded by any grant, contract, or other15 wise— 

16 ‘‘(I) by another person, or 

17 ‘‘(II) by any governmental entity. 

18 ‘‘(iii) TREATMENT OF PAYMENTS

19 UNDER GOVERNMENT CONTRACTS.—For 

20 purposes of determining the amount of 

21 funding of research under any government 

22 contract, all payments under such contract 

23 shall be taken into account, including all 

24 payments under any subcontracting agree25 ment or similar contract which includes 
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1 funding for research which would be treat2 ed as funded by a governmental entity if 

3 under the prime contract. 

4 ‘‘(iv) EXCEPTION FOR GOVERNMENT

5 CONTRACTS CONTAINING NO NEW AND SIG6 NIFICANT PERFORMANCE SPECIFICA7 TIONS.— 

8 ‘‘(I) IN GENERAL.—Clause (iii) 

9 shall not apply with respect to any 

10 government contract containing no 

11 new and significant performance spec12 ifications, except if the contractor 

13 does not retain substantial rights to 

14 the research. 

15 ‘‘(II) TREATMENT OF CON16 TRACT.—For purposes of subclause 

17 (I), no contract shall be treated as 

18 having new and significant perform19 ance specifications if the contractor 

20 reasonably expects that the costs of 

21 all qualified research (including costs 

22 reasonably expected to be incurred by 

23 subcontractors and independent con24 tractors) will not exceed 10 percent of 
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1 the total costs of performing under 

2 the contract. 

3 ‘‘(III) TREATMENT AS SEPARATE

4 CONTRACTS.—For purposes of sub5 clause (II), options under a contract 

6 which may be exercised at the discre7 tion of the governmental unit shall be 

8 treated as separate contracts. 

9 ‘‘(v) INCIDENTAL RESEARCH.—Clause 

10 (iii) shall not apply to any research under11 taken by any government contractor unless 

12 the research is required to meet the con13 tract’s performance specifications.’’. 

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

15 this section shall apply to taxable years ending after De16 cember 31, 2005. 

17 SEC. 215. WORK OPPORTUNITY TAX CREDIT AND WELFARE18 TO-WORK CREDIT. 

19 (a) IN GENERAL.—Section 51(c)(4)(B) is amended 

20 by striking ‘‘2005’’ and inserting ‘‘2006’’. 

21 (b) ELIGIBILITY OF EX-FELONS DETERMINED

22 WITHOUT REGARD TO FAMILY INCOME.—Paragraph (4) 

23 of section 51(d) is amended by adding ‘‘and’’ at the end 

24 of subparagraph (A), by striking ‘‘, and’’ at the end of 
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1 subparagraph (B) and inserting a period, and by striking 

2 all that follows subparagraph (B). 

3 (c) INCREASE IN MAXIMUM AGE FOR ELIGIBILITY OF

4 FOOD STAMP RECIPIENTS.—Clause (i) of section 

5 51(d)(8)(A) is amended by striking ‘‘25’’ and inserting 

6 ‘‘40’’. 

7 (d) INCREASE IN MAXIMUM AGE FOR DESIGNATED

8 COMMUNITY RESIDENTS.— 

9 (1) IN GENERAL.—Paragraph (5) of section 

10 51(d) is amended to read as follows: 

11 ‘‘(5) DESIGNATED COMMUNITY RESIDENTS.— 

12 ‘‘(A) IN GENERAL.—The term ‘designated 

13 community resident’ means any individual who 

14 is certified by the designated local agency— 

15 ‘‘(i) as having attained age 18 but not 

16 age 40 on the hiring date, and 

17 ‘‘(ii) as having his principal place of 

18 abode within an empowerment zone, enter19 prise community, or renewal community. 

20 ‘‘(B) INDIVIDUAL MUST CONTINUE TO RE21 SIDE IN ZONE OR COMMUNITY.—In the case of 

22 a designated community resident, the term 

23 ‘qualified wages’ shall not include wages paid or 

24 incurred for services performed while the indi25 vidual’s principal place of abode is outside an 
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1 empowerment zone, enterprise community, or 

2 renewal community.’’ 

3 (2) CONFORMING AMENDMENT.—Subparagraph 

4 (D) of section 51(d)(1) is amended to read as fol5 lows: 

6 ‘‘(D) a designated community resident,’’. 

7 (e) CONSOLIDATION OF WORK OPPORTUNITY CRED8 IT WITH WELFARE-TO-WORK CREDIT.— 

9 (1) IN GENERAL.—Paragraph (1) of section 

10 51(d) is amended by striking ‘‘or’’ at the end of sub11 paragraph (G), by striking the period at the end of 

12 subparagraph (H) and inserting ‘‘, or’’, and by add13 ing at the end the following new subparagraph: 

14 ‘‘(I) a long-term family assistance recipi15 ent.’’ 

16 (2) LONG-TERM FAMILY ASSISTANCE RECIPI17 ENT.—Subsection (d) of section 51 is amended by 

18 redesignating paragraphs (10) through (12) as para19 graphs (11) through (13), respectively, and by in20 serting after paragraph (9) the following new para21 graph: 

22 ‘‘(10) LONG-TERM FAMILY ASSISTANCE RECIPI23 ENT.—The term ‘long-term family assistance recipi24 ent’ means any individual who is certified by the 

25 designated local agency— 
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1 ‘‘(A) as being a member of a family receiv2 ing assistance under a IV–A program (as de3 fined in paragraph (2)(B)) for at least the 18- 

4 month period ending on the hiring date, 

5 ‘‘(B)(i) as being a member of a family re6 ceiving such assistance for 18 months beginning 

7 after August 5, 1997, and 

8 ‘‘(ii) as having a hiring date which is not 

9 more than 2 years after the end of the earliest 

10 such 18-month period, or 

11 ‘‘(C)(i) as being a member of a family 

12 which ceased to be eligible for such assistance 

13 by reason of any limitation imposed by Federal 

14 or State law on the maximum period such as15 sistance is payable to a family, and 

16 ‘‘(ii) as having a hiring date which is not 

17 more than 2 years after the date of such ces18 sation.’’ 

19 (3) INCREASED CREDIT FOR EMPLOYMENT OF

20 LONG-TERM FAMILY ASSISTANCE RECIPIENTS.—Sec21 tion 51 is amended by inserting after subsection (d) 

22 the following new subsection: 

23 ‘‘(e) CREDIT FOR SECOND-YEAR WAGES FOR EM24 PLOYMENT OF LONG-TERM FAMILY ASSISTANCE RECIPI25 ENTS.— 
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1 ‘‘(1) IN GENERAL.—With respect to the em2 ployment of a long-term family assistance recipi3 ent— 

4 ‘‘(A) the amount of the work opportunity 

5 credit determined under this section for the tax6 able year shall include 50 percent of the quali7 fied second-year wages for such year, and 

8 ‘‘(B) in lieu of applying subsection (b)(3), 

9 the amount of the qualified first-year wages, 

10 and the amount of qualified second-year wages, 

11 which may be taken into account with respect 

12 to such a recipient shall not exceed $10,000 per 

13 year. 

14 ‘‘(2) QUALIFIED SECOND-YEAR WAGES.—For 

15 purposes of this subsection, the term ‘qualified sec16 ond-year wages’ means qualified wages— 

17 ‘‘(A) which are paid to a long-term family 

18 assistance recipient, and 

19 ‘‘(B) which are attributable to service ren20 dered during the 1-year period beginning on the 

21 day after the last day of the 1-year period with 

22 respect to such recipient determined under sub23 section (b)(2). 

24 ‘‘(3) SPECIAL RULES FOR AGRICULTURAL AND

25 RAILWAY LABOR.—If such recipient is an employee 
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1 to whom subparagraph (A) or (B) of subsection 

2 (h)(1) applies, rules similar to the rules of such sub3 paragraphs shall apply except that— 

4 ‘‘(A) such subparagraph (A) shall be ap5 plied by substituting ‘$10,000’ for ‘$6,000’, and 

6 ‘‘(B) such subparagraph (B) shall be ap7 plied by substituting ‘$833.33’ for ‘$500’.’’ 

8 (4) REPEAL OF SEPARATE WELFARE-TO-WORK

9 CREDIT.— 

10 (A) IN GENERAL.—Section 51A is hereby 

11 repealed. 

12 (B) CLERICAL AMENDMENT.—The table of 

13 sections for subpart F of part IV of subchapter 

14 A of chapter 1 is amended by striking the item 

15 relating to section 51A. 

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

17 this section shall apply to individuals who begin work for 

18 the employer after December 31, 2005. 

19 SEC. 216. QUALIFIED ZONE ACADEMY BONDS. 

20 (a) IN GENERAL.—Paragraph (1) of section 

21 1397E(e) is amended by striking ‘‘and 2005’’ and insert22 ing ‘‘2005, and 2006’’. 

23 (b) FORM OF PRIVATE BUSINESS CONTRIBUTIONS.— 

24 Section 1397E(d)(2)(B) is amended by striking ‘‘any con-
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1 tribution’’ and all that follows and inserting ‘‘any cash or 

2 cash equivalent contribution’’. 

3 (c) SPECIAL RULES RELATING TO AMORTIZATION, 

4 EXPENDITURES, ARBITRAGE, AND REPORTING.— 

5 (1) IN GENERAL.—Section 1397E is amend6 ed— 

7 (A) in subsection (d)(1), by striking ‘‘and’’ 

8 at the end of subparagraph (C)(iii), by striking 

9 the period at the end of subparagraph (D) and 

10 inserting ‘‘, and’’, and by adding at the end the 

11 following new subparagraph: 

12 ‘‘(E) the issue meets the requirements of 

13 subsections (f), (g), (h), and (i).’’, and 

14 (B) by redesignating subsections (f), (g), 

15 (h), and (i) as subsection (j), (k), (l), and (m), 

16 respectively, and by inserting after subsection 

17 (e) the following new subsections: 

18 ‘‘(f) RATABLE PRINCIPAL AMORTIZATION RE19 QUIRED.—An issue shall be treated as meeting the re20 quirements of this subsection if such issue provides for 

21 an equal amount of principal to be paid by the issuer dur22 ing each calendar year that the issue is outstanding. 

23 ‘‘(g) SPECIAL RULES RELATING TO EXPENDI24 TURES.— 
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1 ‘‘(1) IN GENERAL.—An issue shall be treated as 

2 meeting the requirements of this subsection if, as of 

3 the date of issuance, the issuer reasonably expects— 

4 ‘‘(A) at least 95 percent of the proceeds 

5 from the sale of the issue are to be spent for 

6 1 or more qualified purposes with respect to 

7 qualified zone academies within the 5-year pe8 riod beginning on the date of issuance of the 

9 qualified zone academy bond, 

10 ‘‘(B) a binding commitment with a third 

11 party to spend at least 10 percent of the pro12 ceeds from the sale of the issue will be incurred 

13 within the 6-month period beginning on the 

14 date of issuance of the qualified zone academy 

15 bond, and 

16 ‘‘(C) such purposes will be completed with 

17 due diligence and the proceeds from the sale of 

18 the issue will be spent with due diligence. 

19 ‘‘(2) EXTENSION OF PERIOD.—Upon submis20 sion of a request prior to the expiration of the period 

21 described in paragraph (1)(A), the Secretary may 

22 extend such period if the issuer establishes that the 

23 failure to satisfy the 5-year requirement is due to 

24 reasonable cause and the related purposes will con25 tinue to proceed with due diligence. 
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1 ‘‘(3) FAILURE TO SPEND REQUIRED AMOUNT

2 OF BOND PROCEEDS WITHIN 5 YEARS.—To the ex3 tent that less than 95 percent of the proceeds of 

4 such issue are expended by the close of the 5-year 

5 period beginning on the date of issuance (or if an 

6 extension has been obtained under paragraph (2), by 

7 the close of the extended period), the issuer shall re8 deem all of the nonqualified bonds within 90 days 

9 after the end of such period. For purposes of this 

10 paragraph, the amount of the nonqualified bonds re11 quired to be redeemed shall be determined in the 

12 same manner as under section 142. 

13 ‘‘(h) SPECIAL RULES RELATING TO ARBITRAGE.— 

14 An issue shall be treated as meeting the requirements of 

15 this subsection if the issuer satisfies the arbitrage require16 ments of section 148 with respect to proceeds of the issue. 

17 ‘‘(i) REPORTING.—Issuers of qualified academy zone 

18 bonds shall submit reports similar to the reports required 

19 under section 149(e).’’. 

20 (2) CONFORMING AMENDMENTS.— 

21 (A) Section 1397E(d)(3) is amended by in22 serting ‘‘without regard to the requirements of 

23 subsection (f) and’’ after ‘‘Such present value 

24 shall be determined’’. 
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1 (B) Section 54(l)(3)(B) is amended by 

2 striking ‘‘section 1397E(i)’’ and inserting ‘‘sec3 tion 1397E(l)’’. 

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

5 this section shall apply to obligations issued after Decem6 ber 31, 2005. 

7 SEC. 217. DEDUCTION FOR CORPORATE DONATIONS OF 

8 COMPUTER TECHNOLOGY AND EQUIPMENT. 

9 Section 170(e)(6)(G) is amended by striking ‘‘2005’’ 

10 and inserting ‘‘2006’’. 

11 SEC. 218. ABOVE-THE-LINE DEDUCTION FOR CERTAIN EX12 PENSES OF ELEMENTARY AND SECONDARY 

13 SCHOOL TEACHERS. 

14 Subparagraph (D) of section 62(a)(2) is amended by 

15 striking ‘‘or 2005’’ and inserting ‘‘2005, or 2006’’. 

16 SEC. 219. EXPENSING OF BROWNFIELDS REMEDIATION 

17 COSTS. 

18 (a) EXTENSION.—Subsection (h) of section 198 is 

19 amended by striking ‘‘2005’’ and inserting ‘‘2006’’. 

20 (b) EXPANSION.— 

21 (1) IN GENERAL.—Section 198(d)(1) (defining 

22 hazardous substance) is amended by striking ‘‘and’’ 

23 at the end of subparagraph (A), by striking the pe24 riod at the end of subparagraph (B) and inserting 
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1 ‘‘, and’’, and by adding at the end the following new 

2 subparagraph: 

3 ‘‘(C) any petroleum product (as defined in 

4 section 4612(a)(3)).’’. 

5 (2) EFFECTIVE DATE.—The amendments made 

6 by this subsection shall apply to expenditures paid 

7 or incurred after December 31, 2005. 

8 SEC. 220. TAX INCENTIVES FOR INVESTMENT IN THE DIS9 TRICT OF COLUMBIA. 

10 (a) DESIGNATION OF ZONE.—Subsection (f) of sec11 tion 1400 is amended by striking ‘‘2005’’ both places it 

12 appears and inserting ‘‘2006’’. 

13 (b) TAX-EXEMPT ECONOMIC DEVELOPMENT

14 BONDS.—Subsection (b) of section 1400A is amended by 

15 striking ‘‘2005’’ and inserting ‘‘2006’’. 

16 (c) ZERO PERCENT CAPITAL GAINS RATE.— 

17 (1) IN GENERAL.—Subsection (b) of section 

18 1400B is amended by striking ‘‘2006’’ each place it 

19 appears and inserting ‘‘2007’’. 

20 (2) CONFORMING AMENDMENTS.— 

21 (A) Section 1400B(e)(2) is amended— 

22 (i) by striking ‘‘2010’’ and inserting 

23 ‘‘2011’’, and 

24 (ii) by striking ‘‘2010’’ in the heading 

25 and inserting ‘‘2011’’. 
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1 (B) Section 1400B(g)(2) is amended by 

2 striking ‘‘2010’’ and inserting ‘‘2011’’. 

3 (C) Section 1400F(d) is amended by strik4 ing ‘‘2010’’ and inserting ‘‘2011’’. 

5 (d) FIRST-TIME HOMEBUYER CREDIT.—Subsection 

6 (i) of section 1400C is amended by striking ‘‘2006’’ and 

7 inserting ‘‘2007’’. 

8 SEC. 221. INDIAN EMPLOYMENT TAX CREDIT. 

9 Section 45A(f) is amended by striking ‘‘2005’’ and 

10 inserting ‘‘2006’’. 

11 SEC. 222. ACCELERATED DEPRECIATION FOR BUSINESS 

12 PROPERTY ON INDIAN RESERVATION. 

13 Section 168(j)(8) is amended by striking ‘‘2005’’ and 

14 inserting ‘‘2006’’. 

15 SEC. 223. FIFTEEN-YEAR STRAIGHT-LINE COST RECOVERY 

16 FOR QUALIFIED LEASEHOLD IMPROVEMENTS 

17 AND QUALIFIED RESTAURANT IMPROVE18 MENTS. 

19 Clauses (iv) and (v) of section 168(e)(3)(E) are each 

20 amended by striking ‘‘2006’’ and inserting ‘‘2007’’. 

21 Subtitle C—Application of 

22 EGTRRA Sunset 

23 SEC. 231. APPLICATION OF EGTRRA SUNSET TO THIS TITLE. 

24 Each amendment made by this title shall be subject 

25 to title IX of the Economic Growth and Tax Relief Rec-
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1 onciliation Act of 2001 to the same extent and in the same 

2 manner as the provision of such Act to which such amend3 ment relates. 

4 TITLE III—PROVISIONS RELAT5 ING TO CHARITABLE DONA6 TIONS 

7 Subtitle A—Charitable Giving 

8 Incentives 

9 SEC. 301. CHARITABLE DEDUCTION FOR NONITEMIZERS. 

10 (a) IN GENERAL.—Section 170 (relating to chari11 table, etc., contributions and gifts) is amended by redesig12 nating subsection (o) as subsection (p) and by inserting 

13 after subsection (n) the following new subsection: 

14 ‘‘(o) DEDUCTION FOR INDIVIDUALS NOT ITEMIZING

15 DEDUCTIONS.—In the case of an individual who does not 

16 itemize deductions for any taxable year beginning after 

17 December 31, 2005, and before January 1, 2008, there 

18 shall be taken into account as a direct charitable deduction 

19 under section 63 an amount equal to the amount allowable 

20 under subsection (a) for the taxable year for cash con21 tributions (determined without regard to any carryover).’’. 

22 (b) DIRECT CHARITABLE DEDUCTION.— 

23 (1) IN GENERAL.—Subsection (b) of section 63 

24 (defining taxable income) is amended by striking 

25 ‘‘and’’ at the end of paragraph (1), by striking the 
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1 period at the end of paragraph (2) and inserting ‘‘, 

2 and’’, and by adding at the end the following new 

3 paragraph: 

4 ‘‘(3) the direct charitable deduction.’’. 

5 (2) DEFINITION.—Section 63 is amended by re6 designating subsection (g) as subsection (h) and by 

7 inserting after subsection (f) the following new sub8 section: 

9 ‘‘(g) DIRECT CHARITABLE DEDUCTION.—For pur10 poses of this section, the term ‘direct charitable deduction’ 

11 means that portion of the amount allowable under section 

12 170(a) which is taken as a direct charitable deduction for 

13 the taxable year under section 170(o).’’. 

14 (3) CONFORMING AMENDMENT.—Subsection (d) 

15 of section 63 is amended by striking ‘‘and’’ at the 

16 end of paragraph (1), by striking the period at the 

17 end of paragraph (2) and inserting ‘‘, and’’, and by 

18 adding at the end the following new paragraph: 

19 ‘‘(3) the direct charitable deduction.’’. 

20 (c) FLOOR ON CHARITABLE CONTRIBUTIONS BY IN21 DIVIDUALS.—Section 170(a) is amended by adding at the 

22 end the following new paragraph: 

23 ‘‘(4) DOLLAR FLOOR ON CHARITABLE CON24 TRIBUTIONS BY INDIVIDUALS.—In the case of an in25 dividual, the charitable contributions of the taxpayer 
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1 for any taxable year shall be taken into account for 

2 purposes of determining the deduction under para3 graph (1) only to the extent that the aggregate of 

4 such contributions exceeds $210 ($420 in the case 

5 of a joint return).’’. 

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

7 this section shall apply to contributions made in taxable 

8 years beginning after December 31, 2005. 

9 SEC. 302. TAX-FREE DISTRIBUTIONS FROM INDIVIDUAL RE10 TIREMENT PLANS FOR CHARITABLE PUR11 POSES. 

12 (a) IN GENERAL.—Subsection (d) of section 408 (re13 lating to individual retirement accounts) is amended by 

14 adding at the end the following new paragraph: 

15 ‘‘(8) DISTRIBUTIONS FOR CHARITABLE PUR16 POSES.— 

17 ‘‘(A) IN GENERAL.—No amount shall be 

18 includible in gross income by reason of a quali19 fied charitable distribution. 

20 ‘‘(B) QUALIFIED CHARITABLE DISTRIBU21 TION.—For purposes of this paragraph, the 

22 term ‘qualified charitable distribution’ means 

23 any distribution from an individual retirement 

24 plan (other than a plan described in subsection 

25 (k) or (p) of section 408)— 
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1 ‘‘(i) which is made on or after the 

2 date that the individual for whose benefit 

3 the plan is maintained has attained age 

701 4 ⁄2, and 

5 ‘‘(ii) which is made directly by the 

6 trustee— 

7 ‘‘(I) to an organization described 

8 in section 170(c), or 

9 ‘‘(II) to a split-interest entity. 

10 A distribution shall be treated as a qualified 

11 charitable distribution only to the extent that 

12 the distribution would be includible in gross in13 come without regard to subparagraph (A) and, 

14 in the case of a distribution to a split-interest 

15 entity, only if no person holds an income inter16 est in the amounts in the split-interest entity 

17 attributable to such distribution other than one 

18 or more of the following: the individual for 

19 whose benefit such plan is maintained, the 

20 spouse of such individual, or any organization 

21 described in section 170(c). 

22 ‘‘(C) CONTRIBUTIONS MUST BE OTHER23 WISE DEDUCTIBLE.—For purposes of this para24 graph— 
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1 ‘‘(i) DIRECT CONTRIBUTIONS.—A dis2 tribution to an organization described in 

3 section 170(c) shall be treated as a quali4 fied charitable distribution only if a deduc5 tion for the entire distribution would be al6 lowable under section 170 (determined 

7 without regard to subsections (a)(4) and 

8 (b) thereof and this paragraph). 

9 ‘‘(ii) SPLIT-INTEREST GIFTS.—A dis10 tribution to a split-interest entity shall be 

11 treated as a qualified charitable distribu12 tion only if a deduction for the entire value 

13 of the interest in the distribution for the 

14 use of an organization described in section 

15 170(c) would be allowable under section 

16 170 (determined without regard to sub17 sections (a)(4) and (b) thereof and this 

18 paragraph). 

19 ‘‘(D) APPLICATION OF SECTION 72.—Not20 withstanding section 72, in determining the ex21 tent to which a distribution is a qualified chari22 table distribution, the entire amount of the dis23 tribution shall be treated as includible in gross 

24 income without regard to subparagraph (A) to 

25 the extent that such amount does not exceed 
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1 the aggregate amount which would have been so 

2 includible if all amounts distributed from all in3 dividual retirement plans were treated as 1 con4 tract under paragraph (2)(A) for purposes of 

5 determining the inclusion of such distribution 

6 under section 72. Proper adjustments shall be 

7 made in applying section 72 to other distribu8 tions in such taxable year and subsequent tax9 able years. 

10 ‘‘(E) SPECIAL RULES FOR SPLIT-INTEREST

11 ENTITIES.— 

12 ‘‘(i) CHARITABLE REMAINDER

13 TRUSTS.—Notwithstanding section 664(b), 

14 distributions made from a trust described 

15 in subparagraph (G)(i) shall be treated as 

16 ordinary income in the hands of the bene17 ficiary to whom is paid the annuity de18 scribed in section 664(d)(1)(A) or the pay19 ment described in section 664(d)(2)(A). 

20 ‘‘(ii) POOLED INCOME FUNDS.—No 

21 amount shall be includible in the gross in22 come of a pooled income fund (as defined 

23 in subparagraph (G)(ii)) by reason of a 

24 qualified charitable distribution to such 

25 fund, and all distributions from the fund 
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1 which are attributable to qualified chari2 table distributions shall be treated as ordi3 nary income to the beneficiary. 

4 ‘‘(iii) CHARITABLE GIFT ANNU5 ITIES.—Qualified charitable distributions 

6 made for a charitable gift annuity shall not 

7 be treated as an investment in the con8 tract. 

9 ‘‘(F) DENIAL OF DEDUCTION.—Qualified 

10 charitable distributions shall not be taken into 

11 account in determining the deduction under sec12 tion 170. 

13 ‘‘(G) SPLIT-INTEREST ENTITY DEFINED.— 

14 For purposes of this paragraph, the term ‘split15 interest entity’ means— 

16 ‘‘(i) a charitable remainder annuity 

17 trust or a charitable remainder unitrust 

18 (as such terms are defined in section 

19 664(d)) which must be funded exclusively 

20 by qualified charitable distributions, 

21 ‘‘(ii) a pooled income fund (as defined 

22 in section 642(c)(5)), but only if the fund 

23 accounts separately for amounts attrib24 utable to qualified charitable distributions, 

25 and 
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1 ‘‘(iii) a charitable gift annuity (as de2 fined in section 501(m)(5)).’’. 

3 (b) MODIFICATIONS RELATING TO INFORMATION RE4 TURNS BY CERTAIN TRUSTS.— 

5 (1) RETURNS.—Section 6034 (relating to re6 turns by trusts described in section 4947(a)(2) or 

7 claiming charitable deductions under section 642(c)) 

8 is amended to read as follows: 

9 ‘‘SEC. 6034. RETURNS BY CERTAIN TRUSTS. 

10 ‘‘(a) SPLIT-INTEREST TRUSTS.—Every trust de11 scribed in section 4947(a)(2) shall furnish such informa12 tion with respect to the taxable year as the Secretary may 

13 by forms or regulations require. 

14 ‘‘(b) TRUSTS CLAIMING CERTAIN CHARITABLE DE15 DUCTIONS.— 

16 ‘‘(1) IN GENERAL.—Every trust not required to 

17 file a return under subsection (a) but claiming a de18 duction under section 642(c) for the taxable year 

19 shall furnish such information with respect to such 

20 taxable year as the Secretary may by forms or regu21 lations prescribe, including— 

22 ‘‘(A) the amount of the deduction taken 

23 under section 642(c) within such year, 

24 ‘‘(B) the amount paid out within such year 

25 which represents amounts for which deductions 
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1 under section 642(c) have been taken in prior 

2 years, 

3 ‘‘(C) the amount for which such deductions 

4 have been taken in prior years but which has 

5 not been paid out at the beginning of such year, 

6 ‘‘(D) the amount paid out of principal in 

7 the current and prior years for the purposes de8 scribed in section 642(c), 

9 ‘‘(E) the total income of the trust within 

10 such year and the expenses attributable thereto, 

11 and 

12 ‘‘(F) a balance sheet showing the assets, li13 abilities, and net worth of the trust as of the 

14 beginning of such year. 

15 ‘‘(2) EXCEPTIONS.—Paragraph (1) shall not 

16 apply to a trust for any taxable year if— 

17 ‘‘(A) all the net income for such year, de18 termined under the applicable principles of the 

19 law of trusts, is required to be distributed cur20 rently to the beneficiaries, or 

21 ‘‘(B) the trust is described in section 

22 4947(a)(1).’’. 

23 (2) INCREASE IN PENALTY RELATING TO FIL24 ING OF INFORMATION RETURN BY SPLIT-INTEREST

25 TRUSTS.—Paragraph (2) of section 6652(c) (relating 
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1 to returns by exempt organizations and by certain 

2 trusts) is amended by adding at the end the fol3 lowing new subparagraph: 

4 ‘‘(C) SPLIT-INTEREST TRUSTS.—In the 

5 case of a trust which is required to file a return 

6 under section 6034(a), subparagraphs (A) and 

7 (B) of this paragraph shall not apply and para8 graph (1) shall apply in the same manner as if 

9 such return were required under section 6033, 

10 except that— 

11 ‘‘(i) the 5 percent limitation in the 

12 second sentence of paragraph (1)(A) shall 

13 not apply, 

14 ‘‘(ii) in the case of any trust with 

15 gross income in excess of $250,000, the 

16 first sentence of paragraph (1)(A) shall be 

17 applied by substituting ‘$100’ for ‘$20’, 

18 and the second sentence thereof shall be 

19 applied by substituting ‘$50,000’ for 

20 ‘$10,000’, and 

21 ‘‘(iii) the third sentence of paragraph 

22 (1)(A) shall be disregarded. 

23 In addition to any penalty imposed on the trust 

24 pursuant to this subparagraph, if the person re25 quired to file such return knowingly fails to file 
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1 the return, such penalty shall also be imposed 

2 on such person who shall be personally liable 

3 for such penalty.’’. 

4 (3) CONFIDENTIALITY OF NONCHARITABLE

5 BENEFICIARIES.—Subsection (b) of section 6104 

6 (relating to inspection of annual information re7 turns) is amended by adding at the end the fol8 lowing new sentence: ‘‘In the case of a trust which 

9 is required to file a return under section 6034(a), 

10 this subsection shall not apply to information re11 garding beneficiaries which are not organizations de12 scribed in section 170(c).’’. 

13 (c) EFFECTIVE DATES.— 

14 (1) SUBSECTION (a).—The amendment made 

15 by subsection (a) shall apply to distributions made 

16 in taxable years beginning after December 31, 2005, 

17 and before January 1, 2008. 

18 (2) SUBSECTION (b).—The amendments made 

19 by subsection (b) shall apply to returns for taxable 

20 years beginning after December 31, 2005. 

21 SEC. 303. MODIFICATION OF CHARITABLE DEDUCTION FOR 

22 CONTRIBUTIONS OF FOOD INVENTORY. 

23 (a) IN GENERAL.—Subparagraph (C) of section 

24 170(e)(3) (relating to special rule for certain contributions 

25 of inventory and other property), as added by section 305 
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1 of the Katrina Emergency Tax Relief Act of 2005, is 

2 amended to read as follows: 

3 ‘‘(C) SPECIAL RULE FOR CONTRIBUTIONS

4 OF FOOD INVENTORY.— 

5 ‘‘(i) GENERAL RULE.—In the case of 

6 a charitable contribution of food from any 

7 trade or business of the taxpayer, this 

8 paragraph shall be applied— 

9 ‘‘(I) without regard to whether 

10 the contribution is made by a C cor11 poration, and 

12 ‘‘(II) only to food that is appar13 ently wholesome food. 

14 ‘‘(ii) LIMITATION.—In the case of a 

15 taxpayer other than a C corporation, the 

16 aggregate amount of such contributions for 

17 any taxable year which may be taken into 

18 account under this section shall not exceed 

19 10 percent of the taxpayer’s aggregate net 

20 income for such taxable year from all 

21 trades or businesses from which such con22 tributions were made for such year, com23 puted without regard to this section. 

24 ‘‘(iii) LIMITATION ON REDUCTION.— 

25 In the case of any such contribution, not-
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1 withstanding subparagraph (B), the 

2 amount of the reduction determined under 

3 paragraph (1)(A) shall not exceed the 

4 amount by which the fair market value of 

5 the apparently wholesome food exceeds 

6 twice the basis of such food. 

7 ‘‘(iv) DETERMINATION OF BASIS.—If 

8 a taxpayer— 

9 ‘‘(I) does not account for inven10 tories under section 471, and 

11 ‘‘(II) is not required to capitalize 

12 indirect costs under section 263A, 

13 the taxpayer may elect, solely for purposes 

14 of subparagraph (B), to treat the basis of 

15 any apparently wholesome food as being 

16 equal to 25 percent of the fair market 

17 value of such food. 

18 ‘‘(v) DETERMINATION OF FAIR MAR19 KET VALUE.—In the case of any such con20 tribution of apparently wholesome food 

21 which, solely by reason of internal stand22 ards of the taxpayer or lack of market, 

23 cannot or will not be sold, the fair market 

24 value of such contribution shall be deter25 mined— 
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1 ‘‘(I) without regard to such inter2 nal standards or such lack of market 

3 and 

4 ‘‘(II) by taking into account the 

5 price at which the same or substan6 tially the same food items (as to both 

7 type and quality) are sold by the tax8 payer at the time of the contribution 

9 (or, if not so sold at such time, in the 

10 recent past). 

11 ‘‘(vi) APPARENTLY WHOLESOME

12 FOOD.—For purposes of this subpara13 graph, the term ‘apparently wholesome 

14 food’ has the meaning given to such term 

15 by section 22(b)(2) of the Bill Emerson 

16 Good Samaritan Food Donation Act (42 

17 U.S.C. 1791(b)(2)), as in effect on the 

18 date of the enactment of this subpara19 graph.’’. 

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

21 this section shall apply to contributions made in taxable 

22 years beginning after December 31, 2005, and before Jan23 uary 1, 2008. 
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1 SEC. 304. BASIS ADJUSTMENT TO STOCK OF S CORPORA2 TION CONTRIBUTING PROPERTY. 

3 (a) IN GENERAL.—Paragraph (2) of section 1367(a) 

4 (relating to adjustments to basis of stock of shareholders, 

5 etc.) is amended by adding at the end the following new 

6 flush sentence: 

7 ‘‘The decrease under subparagraph (B) by reason of 

8 a charitable contribution (as defined in section 

9 170(c)) of property shall be the amount equal to the 

10 shareholder’s pro rata share of the adjusted basis of 

11 such property.’’. 

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

13 this section shall apply to contributions made in taxable 

14 years beginning after December 31, 2005, and before Jan15 uary 1, 2008. 

16 SEC. 305. MODIFICATION OF CHARITABLE DEDUCTION FOR 

17 CONTRIBUTIONS OF BOOK INVENTORY. 

18 (a) IN GENERAL.—Subparagraph (D) of section 

19 170(e)(3) (relating to special rule for certain contributions 

20 of inventory and other property), as added by section 305 

21 of the Katrina Emergency Tax Relief Act of 2005, is 

22 amended to read as follows: 

23 ‘‘(D) SPECIAL RULE FOR CONTRIBUTIONS

24 OF BOOK INVENTORY FOR EDUCATIONAL PUR25 POSES.— 
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1 ‘‘(i) CONTRIBUTIONS OF BOOK INVEN2 TORY.—In determining whether a qualified 

3 book contribution is a qualified contribu4 tion, subparagraph (A) shall be applied 

5 without regard to whether— 

6 ‘‘(I) the donee is an organization 

7 described in the matter preceding 

8 clause (i) of subparagraph (A), and 

9 ‘‘(II) the property is to be used 

10 by the donee solely for the care of the 

11 ill, the needy, or infants. 

12 ‘‘(ii) AMOUNT OF REDUCTION.—Not13 withstanding subparagraph (B), the 

14 amount of the reduction determined under 

15 paragraph (1)(A) shall not exceed the 

16 amount by which the fair market value of 

17 the contributed property (as determined by 

18 the taxpayer using a bona fide published 

19 market price for such book) exceeds twice 

20 the basis of such property. 

21 ‘‘(iii) QUALIFIED BOOK CONTRIBU22 TION.—For purposes of this paragraph, 

23 the term ‘qualified book contribution’ 

24 means a charitable contribution of books, 
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1 but only if the requirements of clauses (iv) 

2 and (v) are met. 

3 ‘‘(iv) IDENTITY OF DONEE.—The re4 quirement of this clause is met if the con5 tribution is to an organization— 

6 ‘‘(I) described in subclause (I) or 

7 (III) of paragraph (6)(B)(i), or 

8 ‘‘(II) described in section 

9 501(c)(3) and exempt from tax under 

10 section 501(a) (other than a private 

11 foundation, as defined in section 

12 509(a), which is not an operating 

13 foundation, as defined in section 

14 4942(j)(3)), which is organized pri15 marily to make books available to the 

16 general public at no cost or to operate 

17 a literacy program. 

18 ‘‘(v) CERTIFICATION BY DONEE.—The 

19 requirement of this clause is met if, in ad20 dition to the certifications required by sub21 paragraph (A) (as modified by this sub22 paragraph), the donee certifies in writing 

23 that— 

24 ‘‘(I) the books are suitable, in 

25 terms of currency, content, and quan-
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1 tity, for use in the donee’s educational 

2 programs, and 

3 ‘‘(II) the donee will use the books 

4 in its educational programs. 

5 ‘‘(vi) BONA FIDE PUBLISHED MARKET

6 PRICE.—For purposes of this subpara7 graph, the term ‘bona fide published mar8 ket price’ means, with respect to any book, 

9 a price— 

10 ‘‘(I) determined using the same 

11 printing and edition, 

12 ‘‘(II) determined in the usual 

13 market in which such a book has been 

14 customarily sold by the taxpayer, and 

15 ‘‘(III) for which the taxpayer can 

16 demonstrate to the satisfaction of the 

17 Secretary that the taxpayer custom18 arily sold such books in arm’s length 

19 transactions within 7 years preceding 

20 the contribution of such a book.’’. 

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

22 this section shall apply to contributions made in taxable 

23 years beginning after December 31, 2005, and before Jan24 uary 1, 2008. 
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1 SEC. 306. MODIFICATION OF TAX TREATMENT OF CERTAIN 

2 PAYMENTS TO CONTROLLING EXEMPT ORGA3 NIZATIONS AND PUBLIC DISCLOSURE OF IN4 FORMATION RELATING TO UNRELATED BUSI5 NESS INCOME. 

6 (a) MODIFICATION OF SECTION 512(B)(13).— 

7 (1) IN GENERAL.—Paragraph (13) of section 

8 512(b) (relating to special rules for certain amounts 

9 received from controlled entities) is amended by re10 designating subparagraph (E) as subparagraph (F) 

11 and by inserting after subparagraph (D) the fol12 lowing new subparagraph: 

13 ‘‘(E) PARAGRAPH TO APPLY ONLY TO EX14 CESS PAYMENTS.— 

15 ‘‘(i) IN GENERAL.—Subparagraph (A) 

16 shall apply only to the portion of a speci17 fied payment received or accrued by the 

18 controlling organization that exceeds the 

19 amount which would have been paid or ac20 crued if such payment met the require21 ments prescribed under section 482. 

22 ‘‘(ii) ADDITION TO TAX FOR VALU23 ATION MISSTATEMENTS.—The tax imposed 

24 by this chapter on the controlling organiza25 tion shall be increased by an amount equal 

26 to 20 percent of the larger of— 
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1 ‘‘(I) such excess determined with2 out regard to any amendment or sup3 plement to a return of tax, or 

4 ‘‘(II) such excess determined 

5 with regard to all such amendments 

6 and supplements.’’. 

7 (2) EFFECTIVE DATE.— 

8 (A) IN GENERAL.—The amendment made 

9 by this subsection shall apply to payments re10 ceived or accrued after December 31, 2000. 

11 (B) PAYMENTS SUBJECT TO BINDING CON12 TRACT TRANSITION RULE.—If the amendments 

13 made by section 1041 of the Taxpayer Relief 

14 Act of 1997 did not apply to any amount re15 ceived or accrued in the first 2 taxable years 

16 beginning on or after the date of the enactment 

17 of the Taxpayer Relief Act of 1997 under any 

18 contract described in subsection (b)(2) of such 

19 section, such amendments also shall not apply 

20 to amounts received or accrued under such con21 tract before January 1, 2001. 

22 (b) PUBLIC AVAILABILITY OF UNRELATED BUSINESS

23 INCOME TAX RETURNS.— 

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

25 6104(d)(1) is amended by redesignating clauses (ii) 
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1 and (iii) as clauses (iii) and (iv), respectively, and by 

2 inserting after clause (i) the following new clause: 

3 ‘‘(ii) any annual return filed under 

4 section 6011 which relates to any tax im5 posed by section 511 (relating to imposi6 tion of tax on unrelated business income of 

7 charitable, etc., organizations) by such or8 ganization,’’. 

9 (2) EFFECTIVE DATE.—The amendments made 

10 by this subsection shall apply to returns filed after 

11 the date of the enactment of this Act. 

12 (c) CERTIFICATION OF UNRELATED BUSINESS TAX13 ABLE INCOME FOR CERTAIN ORGANIZATIONS.— 

14 (1) IN GENERAL.—Section 6011, as amended 

15 by section 311 of this Act, is amended by redesig16 nating subsection (h) as subsection (i) and by insert17 ing after subsection (g) the following new subsection: 

18 ‘‘(h) RETURNS OF CERTAIN ORGANIZATIONS RELAT19 ING TO UNRELATED BUSINESS TAXABLE INCOME.— 

20 ‘‘(1) IN GENERAL.—Every applicable exempt 

21 organization shall include with the return under sub22 section (a) for the taxable year a statement by an 

23 independent auditor or an independent counsel 

24 which meets the requirements of paragraph (2). 
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1 ‘‘(2) STATEMENT.—A statement meets the re2 quirement of this paragraph if the statement— 

3 ‘‘(A) contains a certification that— 

4 ‘‘(i) the information contained in the 

5 return— 

6 ‘‘(I) has been reviewed by the 

7 auditor or counsel, and 

8 ‘‘(II) to the best of the auditor’s 

9 or counsel’s knowledge, is accurate, 

10 and 

11 ‘‘(ii) to the best of the auditor’s or 

12 counsel’s knowledge, the allocation of ex13 penses between the unrelated trades and 

14 business of the organization and the activi15 ties related to the purpose or function con16 stituting the basis of the organization’s ex17 emption under section 501 complies with 

18 the requirements set forth by the Secretary 

19 under section 512, and 

20 ‘‘(B) indicates— 

21 ‘‘(i) whether the auditor or counsel 

22 has provided a tax opinion to the organiza23 tion regarding— 
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1 ‘‘(I) the classification of any 

2 trade or business of the organization 

3 as an unrelated trade or business, or 

4 ‘‘(II) the treatment of any in5 come as unrelated business taxable in6 come, and 

7 ‘‘(ii) a description of any material 

8 facts with respect to any such opinion. 

9 ‘‘(3) APPLICABLE EXEMPT ORGANIZATION.— 

10 For purposes of this subsection, the term ‘applicable 

11 exempt organization’ means any organization 

12 which— 

13 ‘‘(A) is described in section 501(c)(3), 

14 ‘‘(B) has— 

15 ‘‘(i) gross income and receipts of not 

16 less than $10,000,000 for the taxable year, 

17 or 

18 ‘‘(ii) gross assets of not less than 

19 $10,000,000 on the last day of the taxable 

20 year, and 

21 ‘‘(C) is subject to the tax imposed under 

22 section 511 for the taxable year.’’. 

23 (2) PENALTY.— 

24 (A) IN GENERAL.—Part I of subchapter B 

25 of chapter 68 (relating to assessable penalties), 
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1 as amended by section 316 of this Act, is 

2 amended by adding at the end the following 

3 new section: 

4 ‘‘SEC. 6720C. UNRELATED BUSINESS INCOME REQUIRE5 MENTS. 

6 ‘‘(a) IN GENERAL.—Any applicable exempt organiza7 tion (as defined in section 6011(h)(3)) which fails to file 

8 a statement required under section 6011(h) shall pay a 

penalty in an amount equal to 1 9 ⁄2 percent of the gross rev10 enue amount of such organization for the taxable year to 

11 which such statement relates. 

12 ‘‘(b) GROSS REVENUE AMOUNT.—For purposes of 

13 subsection (a), the term ‘gross revenue amount’ means, 

14 with respect to any taxable year, the gross income and 

15 receipts of the organization determined without regard to 

16 any contributions or grants received by the organization. 

17 ‘‘(c) REASONABLE CAUSE.—No penalty shall be im18 posed under this section with respect to any failure if it 

19 is shown that such failure is due to reasonable cause.’’. 

20 (B) CONFORMING AMENDMENT.—The 

21 table of sections of part I of subchapter B of 

22 chapter 68, as amended by section 316 of this 

23 Act, is amended by adding after the item relat24 ing to section 6720B the following new item: 

‘‘Sec. 6720C. Unrelated business income requirements.’’. 
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1 (3) EFFECTIVE DATE.—The amendments made 

2 by this subsection shall apply to returns for taxable 

3 years beginning after the date of the enactment of 

4 this Act. 

5 Subtitle B—Reforming Charitable 

6 Organizations 

7 PART I—GENERAL REFORMS 

8 SEC. 311. TAX INVOLVEMENT BY EXEMPT ORGANIZATIONS 

9 IN TAX SHELTER TRANSACTIONS. 

10 (a) IMPOSITION OF EXCISE TAX.— 

11 (1) IN GENERAL.—Chapter 42 (relating to pri12 vate foundations and certain other tax-exempt orga13 nizations) is amended by adding at the end the fol14 lowing new subchapter: 

15 ‘‘Subchapter F—Tax Shelter Transactions 

‘‘Sec. 4965. Excise tax on certain tax-exempt entities entering into prohibited 

tax shelter transactions. 

16 ‘‘SEC. 4965. EXCISE TAX ON CERTAIN TAX-EXEMPT ENTITIES 

17 ENTERING INTO PROHIBITED TAX SHELTER 

18 TRANSACTIONS. 

19 ‘‘(a) PARTICIPATION IN AND APPROVAL OF PROHIB20 ITED TRANSACTIONS.— 

21 ‘‘(1) TAX-EXEMPT ENTITY.— 

22 ‘‘(A) IN GENERAL.—If any tax-exempt en23 tity (other than a tax-exempt entity described 

24 in paragraph (4), (5), (6), or (7) of subsection 
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1 (c)) is a party to a prohibited tax shelter trans2 action at any time during the taxable year and 

3 knows or has reason to know such transaction 

4 is a prohibited tax shelter transaction, such en5 tity shall pay a tax for such taxable year in the 

6 amount determined under subsection (b)(1)(A). 

7 ‘‘(B) POST-TRANSACTION DETERMINA8 TION.—If any tax-exempt entity (other than a 

9 tax-exempt entity described in paragraph (4), 

10 (5), (6), or (7) of subsection (c)) is a party to 

11 a subsequently listed transaction at any time 

12 during the taxable year, such entity shall pay a 

13 tax in the amount determined under subsection 

14 (b)(1)(B). 

15 ‘‘(2) ENTITY MANAGER.—If any entity manager 

16 of a tax-exempt entity approves such entity as (or 

17 otherwise causes such entity to be) a party to a pro18 hibited tax shelter transaction at any time during 

19 the taxable year and knows or has reason to know 

20 that the transaction is a prohibited tax shelter trans21 action, such manager shall pay a tax for such tax22 able year in the amount determined under sub23 section (b)(2). 

24 ‘‘(3) REASONABLE CAUSE EXCEPTION.—No tax 

25 shall be imposed under paragraph (1)(A) or (2) if it 
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1 is shown that the participation of the tax-exempt en2 tity in the transaction was not willful and was due 

3 to reasonable cause. 

4 ‘‘(b) AMOUNT OF TAX.— 

5 ‘‘(1) ENTITY.—In the case of a tax-exempt en6 tity— 

7 ‘‘(A) IN GENERAL.—The amount of the 

8 tax imposed under subsection (a)(1)(A) on the 

9 entity with respect to a taxable year shall be 

10 the greater of— 

11 ‘‘(i) 100 percent of the entity’s net in12 come (after taking into account any tax 

13 imposed by this subtitle with respect to the 

14 prohibited tax shelter transaction) for such 

15 taxable year which is attributable to the 

16 prohibited tax shelter transaction, or 

17 ‘‘(ii) 75 percent of the proceeds re18 ceived by the entity which are attributable 

19 to the prohibited tax shelter transaction. 

20 ‘‘(B) POST-TRANSACTION DETERMINA21 TION.—The amount of the tax imposed under 

22 subsection (a)(1)(B) on the entity with respect 

23 to any taxable year shall be an amount equal to 

24 the product of— 
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1 ‘‘(i) the highest rate of tax under sec2 tion 11, and 

3 ‘‘(ii) the greater of— 

4 ‘‘(I) the entity’s net income 

5 (after taking into account any tax im6 posed by this subtitle with respect to 

7 the subsequently listed transaction) 

8 for such taxable year which is attrib9 utable to the subsequently listed 

10 transaction and which is properly allo11 cable to the period beginning on the 

12 later of the date such transaction is 

13 identified by guidance as a listed 

14 transaction by the Secretary or the 

15 first day of the taxable year, or 

16 ‘‘(II) 75 percent of the proceeds 

17 received by the entity which are at18 tributable to the subsequently listed 

19 transaction and which are properly al20 locable to the period beginning on the 

21 later of the date such transaction is 

22 identified by guidance as a listed 

23 transaction by the Secretary or the 

24 first day of the taxable year. 
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1 ‘‘(2) ENTITY MANAGER.—In the case of each 

2 entity manager to whom subsection (a)(2) applies, 

3 the amount of the tax under such subsection shall 

4 be $20,000 for each approval. 

5 ‘‘(c) TAX-EXEMPT ENTITY.—For purposes of this 

6 section, the term ‘tax-exempt entity’ means an entity 

7 which is— 

8 ‘‘(1) described in section 501(c) or 501(d), 

9 ‘‘(2) described in section 170(c) (other than an 

10 agency or instrumentality of the United States) to 

11 which paragraph (1) of this subsection does not 

12 apply, 

13 ‘‘(3) an Indian tribal government (within the 

14 meaning of section 7701(a)(40)), 

15 ‘‘(4) described in paragraph (1), (2), or (3) of 

16 section 4979(e), 

17 ‘‘(5) a program described in section 529, 

18 ‘‘(6) an eligible deferred compensation plan de19 scribed in section 457(b) which is maintained by an 

20 employer described in section 4457(e)(1)(A), or 

21 ‘‘(7) an arrangement described in section 

22 4973(a). 

23 ‘‘(d) ENTITY MANAGER.—For purposes of this sec24 tion, the term ‘entity manager’ means— 
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1 ‘‘(1) with respect to a tax-exempt entity de2 scribed in paragraph (3) or (4) of section 501(c)— 

3 ‘‘(A) in the case of an entity other than a 

4 private foundation, an organization manager 

5 (as defined in section 4958(f)(2)), and 

6 ‘‘(B) in the case of a private foundation, a 

7 foundation manager (as defined in section 

8 4946(b)), and 

9 ‘‘(2) in all other cases, the person with author10 ity or responsibility similar to that exercised by an 

11 officer, director, or trustee of an organization. 

12 ‘‘(e) PROHIBITED TAX SHELTER TRANSACTION; 

13 SUBSEQUENTLY LISTED TRANSACTION.—For purposes of 

14 this section— 

15 ‘‘(1) PROHIBITED TAX SHELTER TRANS16 ACTION.— 

17 ‘‘(A) IN GENERAL.—The term ‘prohibited 

18 tax shelter transaction’ means— 

19 ‘‘(i) any listed transaction, or 

20 ‘‘(ii) any prohibited reportable trans21 action if the tax-exempt entity knows or 

22 has reason to know that such transaction 

23 is a reportable transaction. 
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1 ‘‘(B) LISTED TRANSACTION.—The term 

2 ‘listed transaction’ has the meaning given such 

3 term by section 6707A(c)(2). 

4 ‘‘(C) PROHIBITED REPORTABLE TRANS5 ACTION.—The term ‘prohibited reportable 

6 transaction’ means any confidential transaction 

7 or any transaction with contractual protection 

8 (as defined under regulations prescribed by the 

9 Secretary) which is a reportable transaction (as 

10 defined in section 6707A(c)(1)). 

11 ‘‘(2) SUBSEQUENTLY LISTED TRANSACTION.— 

12 The term ‘subsequently listed transaction’ means 

13 any transaction to which a tax-exempt entity is a 

14 party and which is determined by the Secretary to 

15 be a listed transaction at any time after the entity 

16 has entered into the transaction. 

17 ‘‘(f) REGULATORY AUTHORITY.—The Secretary is 

18 authorized to promulgate regulations which provide guid19 ance regarding the determination of the allocation of net 

20 income of a tax-exempt entity attributable to a transaction 

21 to various periods, including before and after the listing 

22 of the transaction or the date which is 90 days after the 

23 date of the enactment of this section. 

24 ‘‘(g) COORDINATION WITH OTHER TAXES AND PEN25 ALTIES.—The tax imposed by this section is in addition 
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1 to any other tax, addition to tax, or penalty imposed under 

2 this title.’’. 

3 (2) CONFORMING AMENDMENT.—The table of 

4 subchapters of chapter 42 is amended by adding at 

5 the end the following new item: 

‘‘SUBCHAPTER F. TAX SHELTER TRANSACTIONS.’’. 

6 (b) DISCLOSURE REQUIREMENTS.— 

7 (1) DISCLOSURE BY ORGANIZATION TO THE IN8 TERNAL REVENUE SERVICE.— 

9 (A) IN GENERAL.—Section 6033(a) (relat10 ing to organizations required to file) is amended 

11 by redesignating paragraph (2) as paragraph 

12 (3), and by inserting after paragraph (1) the 

13 following new paragraph: 

14 ‘‘(2) PARTICIPATION IN CERTAIN REPORTABLE

15 TRANSACTIONS.—Every tax-exempt entity described 

16 in section 4965(c) shall file (in such form and man17 ner and at such time as determined by the Sec18 retary) a disclosure of— 

19 ‘‘(A) such entity’s participation in any pro20 hibited tax shelter transaction (as defined in 

21 section 4965(e)), and 

22 ‘‘(B) the identity of any other party par23 ticipating in such transaction which is known 

24 by such tax-exempt entity.’’. 
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1 (B) CONFORMING AMENDMENT.—Section 

2 6033(a)(1) is amended by striking ‘‘paragraph 

3 (2)’’ and inserting ‘‘paragraph (3)’’. 

4 (2) DISCLOSURE BY OTHER TAXPAYERS TO THE

5 TAX-EXEMPT ENTITY.—Section 6011 (relating to 

6 general requirement of return, statement, or list) is 

7 amended by redesignating subsection (g) as sub8 section (h) and by inserting after subsection (f) the 

9 following new subsection: 

10 ‘‘(g) DISCLOSURE OF REPORTABLE TRANSACTION TO

11 TAX-EXEMPT ENTITY.—Any taxable party to a prohibited 

12 tax shelter transaction (as defined in section 4965(e)(1)) 

13 shall by statement disclose to any tax-exempt entity (as 

14 defined in section 4965(c)) which is a party to such trans15 action that such transaction is such a prohibited tax shel16 ter transaction.’’. 

17 (c) PENALTY FOR NONDISCLOSURE.— 

18 (1) IN GENERAL.—Section 6652(c) (relating to 

19 returns by exempt organizations and by certain 

20 trusts), as amended by section 302, is amended by 

21 redesignating paragraphs (2), (3), and (4) as para22 graphs (3), (4), and (5), respectively, and by insert23 ing after paragraph (1) the following new para24 graph: 

25 ‘‘(2) DISCLOSURE UNDER SECTION 6033.— 
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1 ‘‘(A) PENALTY ON ORGANIZATIONS.—In 

2 the case of a failure to file a disclosure required 

3 under section 6033(a)(2), there shall be paid by 

4 the tax-exempt entity (the entity manager in 

5 the case of a tax-exempt entity described in 

6 paragraph (4), (5), (6), or (7) of section 

7 4965(c)) $100 for each day during which such 

8 failure continues. The maximum penalty under 

9 this subparagraph on failures with respect to 

10 any 1 disclosure shall not exceed $50,000. 

11 ‘‘(B) PERSONS.— 

12 ‘‘(i) IN GENERAL.—The Secretary 

13 may make a written demand on any tax14 exempt entity subject to penalty under 

15 subparagraph (A) specifying therein a rea16 sonable future date by which the disclosure 

17 shall be filed for purposes of this subpara18 graph. 

19 ‘‘(ii) FAILURE TO COMPLY WITH DE20 MAND.—If any person fails to comply with 

21 any demand under clause (i) on or before 

22 the date specified in such demand, there 

23 shall be paid by such person failing to so 

24 comply $100 for each day after the expira25 tion of the time specified in such demand 
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1 during which such failure continues. The 

2 maximum penalty imposed under this sub3 paragraph on all tax-exempt entities for 

4 failures with respect to any 1 disclosure 

5 shall not exceed $10,000. 

6 ‘‘(C) DEFINITIONS.—Any term used in 

7 this section which is also used in section 4965 

8 shall have the meaning given such term under 

9 section 4965.’’. 

10 (2) CONFORMING AMENDMENT.—Subparagraph 

11 (A) of section 6652(c)(1) of such Code is amended 

12 by striking ‘‘6033’’ each place it appears in the text 

13 and heading thereof and inserting ‘‘6033(a)(1)’’. 

14 (d) EFFECTIVE DATES.— 

15 (1) IN GENERAL.—Except as provided in para16 graph (2), the amendments made by this section 

17 shall apply to transactions after the date of the en18 actment of this Act, except that no tax under section 

19 4965(a) of the Internal Revenue Code of 1986 (as 

20 added by this section) shall apply with respect to in21 come that is properly allocable to any period on or 

22 before the date which is 90 days after such date of 

23 enactment. 

24 (2) DISCLOSURE.—The amendments made by 

25 subsections (b) and (c) shall apply to disclosures the 
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1 due date for which are after the date of the enact2 ment of this Act. 

3 SEC. 312. EXCISE TAX ON CERTAIN ACQUISITIONS OF IN4 TERESTS IN INSURANCE CONTRACTS IN 

5 WHICH CERTAIN EXEMPT ORGANIZATIONS 

6 HOLD AN INTEREST. 

7 (a) IMPOSITION OF TAX.— 

8 (1) IN GENERAL.—Subchapter F of chapter 42 

9 (relating to tax shelter transactions), as added by 

10 this Act, is amended by adding at the end the fol11 lowing new section: 

12 ‘‘SEC. 4966. EXCISE TAX ON ACQUISITION OF INTERESTS IN 

13 INSURANCE CONTRACTS IN WHICH CERTAIN 

14 EXEMPT ORGANIZATIONS HOLD AN INTER15 EST. 

16 ‘‘(a) IMPOSITION OF TAX.—If there is a taxable ac17 quisition of any interest in an applicable insurance con18 tract, there is hereby imposed on the person acquiring the 

19 interest a tax equal to 100 percent of the acquisition costs 

20 of the interest. 

21 ‘‘(b) TAXABLE ACQUISITION.—For purposes of this 

22 section— 

23 ‘‘(1) IN GENERAL.—The term ‘taxable acquisi24 tion’ means the acquisition of any direct or indirect 

25 interest in an applicable insurance contract by— 
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1 ‘‘(A) an applicable exempt organization, or 

2 ‘‘(B) a person other than an applicable ex3 empt organization if such interest in the hands 

4 of such person is not an interest described in 

5 clause (i), (ii), (iii), or (iv) of paragraph (2)(B). 

6 ‘‘(2) APPLICABLE INSURANCE CONTRACT.— 

7 ‘‘(A) IN GENERAL.—The term ‘applicable 

8 insurance contract’ means any life insurance, 

9 annuity, or endowment contract with respect to 

10 which both an applicable exempt organization 

11 and a person other than an applicable exempt 

12 organization have directly or indirectly held an 

13 interest in the contract (whether or not at the 

14 same time). 

15 ‘‘(B) EXCEPTIONS.—Such term shall not 

16 include a life insurance, annuity, or endowment 

17 contract if— 

18 ‘‘(i) all persons directly or indirectly 

19 holding any interest in the contract (other 

20 than applicable exempt organizations) have 

21 an insurable interest in the insured under 

22 the contract independent of any interest of 

23 an applicable exempt organization in the 

24 contract, 
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1 ‘‘(ii) the sole interest in the contract 

2 of each person other than an applicable ex3 empt organization is as a named bene4 ficiary, 

5 ‘‘(iii) the sole interest in the contract 

6 of each person other than an applicable ex7 empt organization is— 

8 ‘‘(I) as a beneficiary of a trust 

9 holding an interest in the contract, 

10 but only if the person’s designation as 

11 such beneficiary was made without 

12 consideration and solely on a purely 

13 gratuitous basis, or 

14 ‘‘(II) as a trustee who holds an 

15 interest in the contract in a fiduciary 

16 capacity solely for the benefit of appli17 cable exempt organizations or persons 

18 otherwise described in clauses (i), (ii), 

19 and (iv) or subclause (I) of this 

20 clause, or 

21 ‘‘(iv) except as provided in subpara22 graph (C), the sole interest in the contract 

23 of each person other than an applicable ex24 empt organization is as a lender with re25 spect to the contract and the contract cov-
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1 ers only 1 individual and such individual is 

2 an officer, director, or employee of the ap3 plicable exempt organization with an inter4 est in the contract. 

5 ‘‘(C) RESTRICTIONS ON EXCEPTION FOR

6 LENDERS.— 

7 ‘‘(i) NUMERICAL LIMIT.—The number 

8 of contracts that may be taken into ac9 count under subparagraph (B)(iv) with re10 spect to officers, directors, or employees of 

11 the applicable exempt organization with in12 terests in the contracts shall not exceed the 

13 greater of— 

14 ‘‘(I) the lesser of 5 percent of the 

15 total officers, directors, and employees 

16 of the organization or 20, or 

17 ‘‘(II) 5. 

18 ‘‘(ii) AGGREGATE INDEBTEDNESS.— 

19 The exception under subparagraph (B)(iv) 

20 shall apply only to the extent that the ag21 gregate amount of the indebtedness with 

22 respect to 1 or more contracts covering a 

23 single individual does not exceed $50,000. 

24 ‘‘(D) SECRETARIAL AUTHORITY.—The 

25 Secretary may exempt a contract from treat-
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1 ment as an applicable insurance contract based 

2 on specific factors, including factors such as 

3 whether the transaction is at arms length, 

4 whether economic benefits to the applicable ex5 empt organization substantially exceed the eco6 nomic benefits to all other persons with an in7 terest in the contract (determined without re8 gard to whether, or the extent to which, such 

9 organization has paid or contributed with re10 spect to the contract), and the likelihood of 

11 abuse. 

12 ‘‘(3) DEFINITION AND RULE RELATING TO AC13 QUISITION COSTS.— 

14 ‘‘(A) ACQUISITION COSTS DEFINED.—The 

15 term ‘acquisition costs’ means the direct or in16 direct costs of acquiring an interest in an appli17 cable insurance contract. Such term shall in18 clude any fees, commissions, charges, or other 

19 amounts paid in connection with the acquisi20 tion, whether or not paid to the issuer of the 

21 contract. 

22 ‘‘(B) TIMING OF PAYMENTS.—Except as 

23 provided in regulations, if acquisition costs of 

24 any acquisition are paid or incurred in more 

25 than 1 calendar year, the tax imposed by sub-
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1 section (a) with respect to the acquisition shall 

2 be imposed each time the costs are so paid or 

3 incurred. 

4 ‘‘(4) RULES RELATING TO INTERESTS.— 

5 ‘‘(A) IN GENERAL.—An interest in the 

6 contract includes any right with respect to the 

7 contract, whether as an owner, beneficiary, or 

8 otherwise. 

9 ‘‘(B) INDIRECT INTERESTS.— 

10 ‘‘(i) IN GENERAL.—Except as pro11 vided in clause (ii), an indirect interest in 

12 a contract includes an interest in an entity 

13 which directly or indirectly holds an inter14 est in the contract. 

15 ‘‘(ii) PORTFOLIO INVESTMENTS.—If 

16 an applicable exempt organization holds an 

17 interest in a contract solely because the or18 ganization holds, as part of a diversified 

19 investment strategy, a de minimis interest 

20 in an entity which directly or indirectly 

21 holds the interest in the contract, such in22 direct interest in the contract shall not be 

23 taken into account for purposes of this sec24 tion. 
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1 ‘‘(C) EXCHANGED CONTRACTS.—In the 

2 case of an exchange of an applicable insurance 

3 contract on which no gain or loss is recognized 

4 under section 1035, any interest in any of the 

5 contracts involved in the exchange shall be 

6 treated as an interest in all such contracts. 

7 ‘‘(5) INCREASE IN INTEREST.—If a person in8 creases an interest in an applicable insurance con9 tract, the increase shall be treated as a separate ac10 quisition for purposes of this section. 

11 ‘‘(6) PRIOR ACQUISITIONS.—Except as provided 

12 in regulations, if a person acquires an interest in a 

13 contract before the contract is treated as an applica14 ble insurance contract, the acquisition shall be treat15 ed as a taxable acquisition of an interest in an appli16 cable insurance contract as of the date the contract 

17 becomes an applicable insurance contract. 

18 ‘‘(c) APPLICABLE EXEMPT ORGANIZATION.—For 

19 purposes of this section, the term ‘applicable exempt orga20 nization’ means— 

21 ‘‘(1) an organization described in section 

22 170(c), 

23 ‘‘(2) an organization described in section 

24 168(h)(2)(A)(iv), or 
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1 ‘‘(3) an organization not described in paragraph 

2 (1) or (2) which is described in section 2055(a) or 

3 section 2522(a). 

4 ‘‘(d) TAX NOT TREATED AS INVESTMENT IN THE

5 CONTRACT.—For purposes of section 72, the tax imposed 

6 by this section shall not be included in investment in the 

7 contract. 

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

9 such regulations as may be necessary to carry out the pro10 visions of this section. Such regulations may include regu11 lations which— 

12 ‘‘(1) provide, for purposes of subsection (b)(6), 

13 appropriate rules for the application of this section 

14 in any case where an interest is acquired before a 

15 contract becomes an applicable insurance contract, 

16 ‘‘(2) prevent, in cases the Secretary determines 

17 appropriate, the imposition of more than one tax 

18 under this section if the same interest is acquired 

19 more than once, and 

20 ‘‘(3) are designed to prevent avoidance of the 

21 purposes of this section, including through the use 

22 of intermediaries.’’. 

23 (2) CONFORMING AMENDMENT.—The table of 

24 sections for subchapter F of chapter 42, as added by 
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1 this Act, is amended by adding at the end the fol2 lowing new item: 

‘‘Sec. 4966. Excise tax on acquisition of interests in insurance contracts 

in which certain exempt organizations hold an interest.’’. 

3 (b) REPORTING REQUIREMENTS.— 

4 (1) IN GENERAL.—Subpart B of part III of 

5 subchapter A of chapter 61 (relating to information 

6 concerning transactions with other persons), as 

7 amended by this Act, is amended by adding at the 

8 end the following new section: 

9 ‘‘SEC. 6050V. RETURNS RELATING TO APPLICABLE INSUR10 ANCE CONTRACTS IN WHICH CERTAIN EX11 EMPT ORGANIZATIONS HOLD INTERESTS. 

12 ‘‘(a) REQUIREMENTS OF REPORTING.— 

13 ‘‘(1) EXEMPT ORGANIZATIONS.—Each— 

14 ‘‘(A) applicable exempt organization which 

15 acquires (within the meaning of section 4966) 

16 an interest in any applicable insurance contract, 

17 and 

18 ‘‘(B) other person which makes an acquisi19 tion of such an interest if such acquisition is 

20 taxable under section 4966, 

21 shall make the return described in subsection (c). 

22 ‘‘(2) TRANSFERS.—If a person (including an 

23 applicable exempt organization) acquires an interest 

24 in an applicable insurance contract in an acquisition 
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1 which is taxable under section 4966 and then trans2 fers such interest to 1 or more other persons, each 

3 person acquiring all or a portion of such interest 

4 shall make the return described in subsection (c). 

5 ‘‘(b) TIME FOR MAKING RETURN.—Any organization 

6 or person required to make a return under subsection (a) 

7 shall file such return at such time as may be established 

8 by the Secretary with respect to— 

9 ‘‘(1) in the case of a person described in sub10 section (a)(1), the calendar year in which the acqui11 sition occurs, any calendar year in which acquisition 

12 costs are paid or incurred, and any other calendar 

13 years specified by the Secretary, and 

14 ‘‘(2) in the case of a person described in sub15 section (a)(2), the calendar year in which the trans16 fer occurs. 

17 ‘‘(c) FORM AND MANNER OF RETURNS.—A return 

18 is described in this subsection if such return— 

19 ‘‘(1) is in such form as the Secretary pre20 scribes, 

21 ‘‘(2) in the case of— 

22 ‘‘(A) a return required under subsection 

23 (a)(1)(A), contains the name, address, and tax24 payer identification number of the applicable 

25 exempt organization, the issuer of the applica-
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1 ble insurance contract, and any person acquir2 ing an interest in the contract if the acquisition 

3 is taxable under section 4966, 

4 ‘‘(B) a return required under subsection 

5 (a)(1)(B), contains the name, address, and tax6 payer identification number of the person ac7 quiring an interest in the applicable insurance 

8 contract if the acquisition is taxable under sec9 tion 4966, any applicable exempt organization 

10 holding an interest in the contract, and the 

11 issuer of the contract, and 

12 ‘‘(C) a return required under subsection 

13 (a)(2), contains the name, address, and tax14 payer identification number of the transferor 

15 and transferee, and 

16 ‘‘(3) contains such other information as the 

17 Secretary may prescribe. 

18 ‘‘(d) STATEMENTS TO BE FURNISHED TO PERSONS

19 WITH RESPECT TO WHOM INFORMATION IS REQUIRED.— 

20 Every person required to make a return under subsection 

21 (a) shall furnish to each person whose taxpayer identifica22 tion information is required to be included in such return 

23 under subsection (c) a written statement showing— 
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1 ‘‘(1) the name and address of the person re2 quired to make such return and the telephone num3 ber of the information contact for such person, and 

4 ‘‘(2) the taxpayer identity and other informa5 tion required to be shown on the return with respect 

6 to such person. 

7 The written statement required under the preceding sen8 tence shall be furnished on or before the date specified 

9 by the Secretary. 

10 ‘‘(e) DEFINITIONS.—For purposes of this section, 

11 any term used in this section which is also used in section 

12 4966 shall have the meaning given such term by section 

13 4966.’’. 

14 (2) PENALTIES.— 

15 (A) IN GENERAL.—Section 6724(d) is 

16 amended— 

17 (i) in paragraph (1)(B), by redesig18 nating clauses (xiii) through (xviii) as 

19 clauses (xiv) through (xix) and by inserting 

20 after clause (xii) the following new clause: 

21 ‘‘(xiii) section 6050V (relating to re22 turns relating to applicable insurance con23 tracts in which certain exempt organiza24 tions hold interests),’’, and 
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1 (ii) in paragraph (3), by striking 

2 ‘‘and’’ at the end of subparagraph (C), by 

3 striking the period at the end of subpara4 graph (D) and inserting ‘‘, and’’, and by 

5 adding at the end the following new sub6 paragraph: 

7 ‘‘(E) the statement required by subsection 

8 (d) of section 6050V (relating to returns relat9 ing to applicable insurance contracts in which 

10 certain exempt organizations hold interests).’’. 

11 (B) INTENTIONAL DISREGARD.—Section 

12 6721(e)(2) is amended by striking ‘‘or’’ at the 

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

14 the end of subparagraph (C) and inserting 

15 ‘‘or’’, and by adding at the end the following 

16 new subparagraph: 

17 ‘‘(D) in the case of a return required to be 

18 filed under section 6050V, the amount of tax 

19 imposed under section 4966 which has not been 

20 paid with respect to items required to be in21 cluded on the return, and’’. 

22 (3) CONFORMING AMENDMENT.—The table of 

23 sections for subpart B of part III of subchapter A 

24 of chapter 61, as amended by this Act, is amended 

25 by adding at the end the following new item: 
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‘‘Sec. 6050V. Returns relating to applicable insurance contracts in which 

certain exempt organizations hold interests.’’. 

1 (c) EFFECTIVE DATE.— 

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

3 this section shall apply to contracts issued after May 

4 3, 2005. 

5 (2) REPORTING OF EXISTING CONTRACTS.—In 

6 the case of any life insurance, annuity, or endow7 ment contract— 

8 (A) which was issued on or before May 3, 

9 2005, 

10 (B) with respect to which an applicable ex11 empt organization (as defined in section 4966 

12 of the Internal Revenue Code of 1986, as added 

13 by this section) holds an interest on May 3, 

14 2005, and 

15 (C) which would be treated as an applica16 ble insurance contract (as so defined) if issued 

17 after May 3, 2005, 

18 such organization shall, not later than the date 

19 which is 1 year after the date of the enactment of 

20 this Act, report to the Secretary of the Treasury 

21 with respect to such contract. Such report shall be 

22 in such form and manner, and contain such informa23 tion, as the Secretary may prescribe. The Secretary 

24 shall submit such reports, along with any rec-
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1 ommendations for legislation as the Secretary con2 siders appropriate, to the Committee on Ways and 

3 Means of the House of Representatives and to the 

4 Committee on Finance of the Senate within 6 

5 months of the date such reports are required to be 

6 filed. 

7 SEC. 313. INCREASE IN PENALTY EXCISE TAXES ON PUBLIC 

8 CHARITIES, SOCIAL WELFARE ORGANIZA9 TIONS, AND PRIVATE FOUNDATIONS. 

10 (a) TAXES ON SELF-DEALING AND EXCESS BENEFIT

11 TRANSACTIONS.— 

12 (1) IN GENERAL.—Section 4941(a) (relating to 

13 initial taxes) is amended— 

14 (A) in paragraph (1), by striking ‘‘5 per15 cent’’ and inserting ‘‘10 percent’’, and 

(B) in paragraph (2), by striking ‘‘21 16 ⁄2

17 percent’’ and inserting ‘‘5 percent’’. 

18 (2) INCREASE IN TAX IF SELF-DEALING IN19 CLUDES COMPENSATION TO DISQUALIFIED PER20 SON.—Section 4941(a)(1) is amended by adding at 

21 the end the following new sentence: ‘‘If the act of 

22 self-dealing includes acts described in subsection 

23 (d)(1)(D), ‘25 percent’ shall be substituted for ‘10 

24 percent’, except that the Secretary may abate under 

25 section 4962 (determined without regard to the ex-
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1 ception under subsection (b) thereof) not more than 

2 15 percentage points of such tax.’’. 

3 (3) INCREASED LIMITATION FOR MANAGERS ON

4 SELF-DEALING.—Section 4941(c)(2) is amended by 

5 striking ‘‘$10,000’’ each place it appears in the text 

6 and in the heading and inserting ‘‘$20,000’’. 

7 (4) INCREASED LIMITATION FOR MANAGERS ON

8 EXCESS BENEFIT TRANSACTIONS.—Section 

9 4958(d)(2) is amended by striking ‘‘$10,000’’ and 

10 inserting ‘‘$20,000’’. 

11 (b) TAXES ON FAILURE TO DISTRIBUTE INCOME.— 

12 Section 4942(a) (relating to initial tax) is amended by 

13 striking ‘‘15 percent’’ and inserting ‘‘30 percent’’. 

14 (c) TAXES ON EXCESS BUSINESS HOLDINGS.—Sec15 tion 4943(a)(1) (relating to imposition) is amended by 

16 striking ‘‘5 percent’’ and inserting ‘‘10 percent’’. 

17 (d) TAXES ON INVESTMENTS WHICH JEOPARDIZE

18 CHARITABLE PURPOSE.— 

19 (1) IN GENERAL.—Section 4944(a) (relating to 

20 initial taxes) is amended by striking ‘‘5 percent’’ 

21 both places it appears and inserting ‘‘10 percent’’. 

22 (2) INCREASED LIMITATION FOR MANAGERS.— 

23 Section 4944(d)(2) is amended— 

24 (A) by striking ‘‘$5,000,’’ and inserting 

25 ‘‘$10,000,’’, and 
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1 (B) by striking ‘‘$10,000.’’ and inserting 

2 ‘‘$20,000.’’. 

3 (e) TAXES ON TAXABLE EXPENDITURES.— 

4 (1) IN GENERAL.—Section 4945(a) (relating to 

5 initial taxes) is amended— 

6 (A) in paragraph (1), by striking ‘‘10 per7 cent’’ and inserting ‘‘20 percent’’, and 

(B) in paragraph (2), by striking ‘‘21 8 ⁄2

9 percent’’ and inserting ‘‘5 percent’’. 

10 (2) INCREASED LIMITATION FOR MANAGERS.— 

11 Section 4945(c)(2) is amended— 

12 (A) by striking ‘‘$5,000,’’ and inserting 

13 ‘‘$10,000,’’, and 

14 (B) by striking ‘‘$10,000.’’ and inserting 

15 ‘‘$20,000.’’. 

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

17 this section shall apply to taxable years beginning after 

18 the date of the enactment of this Act. 

19 SEC. 314. REFORM OF CHARITABLE CONTRIBUTIONS OF 

20 CERTAIN EASEMENTS ON BUILDINGS IN REG21 ISTERED HISTORIC DISTRICTS. 

22 (a) SPECIAL RULES WITH RESPECT TO BUILDINGS

23 IN REGISTERED HISTORIC DISTRICTS.— 

24 (1) IN GENERAL.—Paragraph (4) of section 

25 170(h) (relating to definition of conservation pur-
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1 pose) is amended by redesignating subparagraph (B) 

2 as subparagraph (C) and by inserting after subpara3 graph (A) the following new subparagraph: 

4 ‘‘(B) SPECIAL RULES WITH RESPECT TO

5 BUILDINGS IN REGISTERED HISTORIC DIS6 TRICTS.—In the case of any contribution of a 

7 qualified real property interest which is a re8 striction with respect to the exterior of a build9 ing described in subparagraph (C)(ii), such con10 tribution shall not be considered to be exclu11 sively for conservation purposes unless— 

12 ‘‘(i) such interest— 

13 ‘‘(I) includes a restriction which 

14 preserves the entire exterior of the 

15 building (including the front, sides, 

16 rear, and height of the building), and 

17 ‘‘(II) prohibits any change in the 

18 exterior of the building which is incon19 sistent with the historical character of 

20 such exterior, 

21 ‘‘(ii) the donor and donee enter into a 

22 written agreement certifying, under pen23 alty of perjury, that the donee— 

24 ‘‘(I) is a qualified organization 

25 (as defined in paragraph (3)) with a 
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1 purpose of environmental protection, 

2 land conservation, open space preser3 vation, or historic preservation, and 

4 ‘‘(II) has the resources to man5 age and enforce the restriction and a 

6 commitment to do so, and 

7 ‘‘(iii) in the case of any contribution 

8 made in a taxable year beginning after the 

9 date of the enactment of this subpara10 graph, the taxpayer includes with the tax11 payer’s return for the taxable year of the 

12 contribution— 

13 ‘‘(I) a qualified appraisal (within 

14 the meaning of subsection (f)(11)(E)) 

15 of the qualified property interest, 

16 ‘‘(II) photographs of the entire 

17 exterior of the building, and 

18 ‘‘(III) a description of all restric19 tions on the development of the build20 ing.’’. 

21 (b) DISALLOWANCE OF DEDUCTION FOR STRUC22 TURES AND LAND IN REGISTERED HISTORIC DIS23 TRICTS.—Subparagraph (C) of section 170(h)(4), as re24 designated by subsection (a), is amended— 
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1 (1) by striking ‘‘any building, structure, or land 

2 area which’’, 

3 (2) by inserting ‘‘any building, structure, or 

4 land area which’’ before ‘‘is listed’’ in clause (i), and 

5 (3) by inserting ‘‘any building which’’ before ‘‘is 

6 located’’ in clause (ii). 

7 (c) FILING FEE FOR CERTAIN CONTRIBUTIONS.— 

8 Subsection (f) of section 170 (relating to disallowance of 

9 deduction in certain cases and special rules) is amended 

10 by inserting at the end the following new paragraph: 

11 ‘‘(13) CONTRIBUTIONS OF CERTAIN INTERESTS

12 IN BUILDINGS LOCATED IN REGISTERED HISTORIC

13 DISTRICTS.— 

14 ‘‘(A) IN GENERAL.—No deduction shall be 

15 allowed with respect to any contribution de16 scribed in subparagraph (B) unless the tax17 payer includes with the return for the taxable 

18 year of the contribution a $500 filing fee. 

19 ‘‘(B) CONTRIBUTION DESCRIBED.—A con20 tribution is described in this subparagraph if 

21 such contribution is a qualified conservation 

22 contribution (as defined in subsection (h)) 

23 which is a restriction with respect to the exte24 rior of a building described in subsection 
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1 (h)(4)(C)(ii) and for which a deduction is 

2 claimed in excess of the greater of— 

3 ‘‘(i) 3 percent of the fair market value 

4 of the building (determined immediately 

5 before such contribution), or 

6 ‘‘(ii) $10,000. 

7 ‘‘(C) DEDICATION OF FEE.—Any fee col8 lected under this paragraph shall be used for 

9 the enforcement of the provisions of subsection 

10 (h).’’. 

11 (d) EFFECTIVE DATE.— 

12 (1) SPECIAL RULES FOR BUILDINGS IN REG13 ISTERED HISTORIC DISTRICTS.—The amendments 

14 made by subsection (a) shall apply to contributions 

15 made after November 15, 2005. 

16 (2) DISALLOWANCE OF DEDUCTION FOR STRUC17 TURES AND LAND.—The amendments made by sub18 section (b) shall apply to contributions made after 

19 the date of the enactment of this Act. 

20 (3) FILING FEE.—The amendment made by 

21 subsection (c) shall apply to contributions made 180 

22 days after the date of the enactment of this Act. 
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1 SEC. 315. CHARITABLE CONTRIBUTIONS OF TAXIDERMY 

2 PROPERTY. 

3 (a) IN GENERAL.—Subsection (f) of section 170, as 

4 amended by section 314 of this Act, is amended by adding 

5 at the end the following new paragraph: 

6 ‘‘(14) CONTRIBUTIONS OF TAXIDERMY PROP7 ERTY.— 

8 ‘‘(A) CONTRIBUTIONS OF MORE THAN

9 $500.—In the case of any contribution of taxi10 dermy property for which a deduction of more 

11 than $500 is claimed, no deduction shall be al12 lowed under subsection (a) unless the donor in13 cludes with the return for the taxable year in 

14 which the contribution is made a photograph of 

15 the taxidermy property and data with respect to 

16 the sales prices of similar taxidermy property. 

17 ‘‘(B) CONTRIBUTIONS OF MORE THAN

18 $5,000.—In the case of any contribution of taxi19 dermy property for which a deduction of more 

20 than $5,000 is claimed, no deduction shall be 

21 allowed under subsection (a) unless the donor— 

22 ‘‘(i) notifies the Internal Revenue 

23 Service of such deduction, and 

24 ‘‘(ii) includes with the return for the 

25 taxable year in which the contribution is 

26 made— 
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1 ‘‘(I) a statement of value from 

2 the Internal Revenue Service, or 

3 ‘‘(II) a request for a statement of 

4 value from the Internal Revenue Serv5 ice and a $500 fee. 

6 ‘‘(C) TAXIDERMY PROPERTY.—For pur7 poses of this section, the term ‘taxidermy prop8 erty’ means a mounted work of art which con9 tains any part of a dead animal.’’. 

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

11 this section shall apply to contributions made after No12 vember 15, 2005. 

13 SEC. 316. RECAPTURE OF TAX BENEFIT FOR CHARITABLE 

14 CONTRIBUTIONS OF EXEMPT USE PROPERTY 

15 NOT USED FOR AN EXEMPT USE. 

16 (a) RECAPTURE OF DEDUCTION ON CERTAIN SALES

17 OF EXEMPT USE PROPERTY.— 

18 (1) IN GENERAL.—Clause (i) of section 

19 170(e)(1)(B) (related to certain contributions of or20 dinary income and capital gain property) is amended 

21 to read as follows: 

22 ‘‘(i) of tangible personal property— 

23 ‘‘(I) if the use by the donee is 

24 unrelated to the purpose or function 

25 constituting the basis for its exemp-
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1 tion under section 501 (or, in the case 

2 of a governmental unit, to any pur3 pose or function described in sub4 section (c)), or 

5 ‘‘(II) which is applicable property 

6 (as defined in paragraph (7)(C)) 

7 which is sold, exchanged, or otherwise 

8 disposed of by the donee before the 

9 last day of the taxable year in which 

10 the contribution was made and with 

11 respect to which the donee has not 

12 made a certification in accordance 

13 with paragraph (7)(D),’’. 

14 (2) DISPOSITIONS AFTER CLOSE OF TAXABLE

15 YEAR.—Section 170(e) is amended by adding at the 

16 end the following new paragraph: 

17 ‘‘(7) RECAPTURE OF DEDUCTION ON CERTAIN

18 DISPOSITIONS OF EXEMPT USE PROPERTY.— 

19 ‘‘(A) IN GENERAL.—In the case of an ap20 plicable disposition of applicable property, there 

21 shall be included in the income of the donor of 

22 such property for the taxable year of such 

23 donor in which the applicable disposition occurs 

24 an amount equal to the excess (if any) of— 
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1 ‘‘(i) the amount of the deduction al2 lowed to the donor under this section with 

3 respect to such property, over 

4 ‘‘(ii) the donor’s basis in such prop5 erty at the time such property was contrib6 uted. 

7 ‘‘(B) APPLICABLE DISPOSITION.—For pur8 poses of this paragraph, the term ‘applicable 

9 disposition’ means any sale, exchange, or other 

10 disposition by the donee of applicable prop11 erty— 

12 ‘‘(i) after the last day of the taxable 

13 year of the donor in which such property 

14 was contributed, and 

15 ‘‘(ii) before the last day of the 3-year 

16 period beginning on the date of the con17 tribution of such property, 

18 unless the donee makes a certification in ac19 cordance with subparagraph (D). 

20 ‘‘(C) APPLICABLE PROPERTY.—For pur21 poses of this paragraph, the term ‘applicable 

22 property’ means charitable deduction property 

23 (as defined in section 6050L(a)(2)(A))— 

24 ‘‘(i) which is tangible personal prop25 erty the use of which is identified by the 
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1 donee as related to the purpose or function 

2 constituting the basis of the donee’s ex3 emption under section 501, and 

4 ‘‘(ii) for which a deduction in excess 

5 of the donor’s basis is allowed. 

6 ‘‘(D) CERTIFICATION.—A certification 

7 meets the requirements of this subparagraph if 

8 it is a written statement which is signed under 

9 penalty of perjury by an officer of the donee or10 ganization and— 

11 ‘‘(i) which— 

12 ‘‘(I) certifies that the use of the 

13 property by the donee was related to 

14 the purpose or function constituting 

15 the basis for the donee’s exemption 

16 under section 501, and 

17 ‘‘(II) describes how the property 

18 was used and how such use furthered 

19 such purpose or function, or 

20 ‘‘(ii) which— 

21 ‘‘(I) states the intended use of 

22 the property by the donee at the time 

23 of the contribution, and 
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1 ‘‘(II) certifies that such intended 

2 use has become impossible or infeasi3 ble to implement.’’. 

4 (b) REPORTING REQUIREMENTS.—Paragraph (1) of 

5 section 6050L(a) (relating to returns relating to certain 

6 dispositions of donated property) is amended— 

7 (1) by striking ‘‘2 years’’ and inserting ‘‘3 

8 years’’, and 

9 (2) by striking ‘‘and’’ at the end of subpara10 graph (D), by striking the period at the end of sub11 paragraph (E) and inserting a comma, and by in12 serting at the end the following: 

13 ‘‘(F) a description of the donee’s use of the 

14 property, and 

15 ‘‘(G) a statement indicating whether the 

16 use of the property was related to the purpose 

17 or function constituting the basis for the 

18 donee’s exemption under section 501. 

19 In any case in which the donee indicates that the 

20 use of applicable property (as defined in section 

21 170(e)(1)(C)) was related to the purpose or function 

22 constituting the basis for the exemption of the donee 

23 under section 501 under subparagraph (G), the 

24 donee shall include with the return the certification 
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1 described in section 170(e)(7)(D) if such certifi2 cation is required under section 170(e)(7).’’. 

3 (c) PENALTY.— 

4 (1) IN GENERAL.—Part I of subchapter B of 

5 chapter 68 (relating to assessable penalties) is 

6 amended by inserting after section 6720A the fol7 lowing new section: 

8 ‘‘SEC. 6720B. FRAUDULENT IDENTIFICATION OF EXEMPT 

9 USE PROPERTY. 

10 ‘‘In addition to any criminal penalty provided by law, 

11 any person who identifies applicable property (as defined 

12 in section 170(e)(7)(C)) as having a use which is related 

13 to a purpose or function constituting the basis for the 

14 donee’s exemption under section 501 and who knows that 

15 such property is not intended for such a use shall pay a 

16 penalty of $10,000.’’. 

17 (2) CLERICAL AMENDMENT.—The table of sec18 tions for part I of subchapter B of chapter 68 is 

19 amended by adding after the item relating to section 

20 6720A the following new item: 

‘‘Sec. 6720B. Fraudulent identification of exempt use property.’’. 

21 (d) EFFECTIVE DATE.— 

22 (1) RECAPTURE.—The amendments made by 

23 subsection (a) shall apply to contributions after 

24 June 1, 2006. 
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1 (2) REPORTING.—The amendments made by 

2 subsection (b) shall apply to returns filed after June 

3 1, 2006. 

4 (3) PENALTY.—The amendments made by sub5 section (c) shall apply to identifications made after 

6 the date of the enactment of this Act. 

7 SEC. 317. LIMITATION OF DEDUCTION FOR CHARITABLE 

8 CONTRIBUTIONS OF CLOTHING AND HOUSE9 HOLD ITEMS. 

10 (a) IN GENERAL.—Subsection (f) of section 170, as 

11 amended by section 315 of this Act, is amended by adding 

12 at the end the following new paragraph: 

13 ‘‘(15) CONTRIBUTIONS OF CLOTHING AND

14 HOUSEHOLD ITEMS.— 

15 ‘‘(A) IN GENERAL.—In the case of an indi16 vidual, partnership, or S corporation, the de17 duction allowed under subsection (a) for any 

18 contribution of clothing or household items with 

19 respect to which the donor has obtained a quali20 fied appraisal shall be— 

21 ‘‘(i) in the case of an item which is in 

22 good used condition or better, no more 

23 than the amount assigned to such item 

24 under subparagraph (B) for such year, 
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1 ‘‘(ii) except as provided by clause (iii), 

2 in the case of an item which is not in good 

3 used condition or better, no more than 20 

4 percent of the amount assigned to such 

5 item under subparagraph (B) for such 

6 year, and 

7 ‘‘(iii) in the case of an item which is 

8 not functional with respect to the use for 

9 which it was designed, zero. 

10 ‘‘(B) ASSIGNED VALUES.—Each year the 

11 Secretary shall publish an itemized list of cloth12 ing and household items and shall assign an 

13 amount with respect to each item on the list 

14 which represents the fair market value of such 

15 item in good used condition. 

16 ‘‘(C) EXCEPTION FOR ITEMS SOLD BY THE

17 DONEE.—Subparagraph (A) shall not apply to 

18 any contribution of clothing or household items 

19 for which a deduction of more than $500 is 

20 claimed if— 

21 ‘‘(i) the donee sells the clothing or 

22 household items before the earlier of— 

23 ‘‘(I) the due date (including ex24 tensions) for filing the return of tax 
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1 for the taxable year of the donor in 

2 which the contribution was made, or 

3 ‘‘(II) the date on which such re4 turn was filed, 

5 ‘‘(ii) the donee reports the sales price 

6 of the clothing or household items to the 

7 donor, and 

8 ‘‘(iii) the amount claimed as a deduc9 tion with respect to such clothing or house10 hold items does not exceed the amount of 

11 the sales price reported to the donor. 

12 ‘‘(D) HOUSEHOLD ITEMS.—For purposes 

13 of this paragraph— 

14 ‘‘(i) IN GENERAL.—The term ‘house15 hold items’ includes furniture, furnishings, 

16 electronics, appliances, linens, and other 

17 similar items. 

18 ‘‘(ii) EXCLUDED ITEMS.—Such term 

19 does not include— 

20 ‘‘(I) food, 

21 ‘‘(II) paintings, antiques, and 

22 other objects of art, 

23 ‘‘(III) jewelry and gems, and 

24 ‘‘(IV) collections. 
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1 ‘‘(E) SPECIAL RULE FOR PASS-THRU ENTI2 TIES.—In the case of a partnership or S cor3 poration, this paragraph shall be applied at the 

4 entity level, except that the deduction shall be 

5 denied at the partner or shareholder level.’’. 

6 (b) SUBSTANTIATION.— 

7 (1) ITEMS OF $100 OR MORE.—Subparagraph 

8 (B) of section 170(f)(8) is amended by inserting 

9 after clause (iii) the following new clause: 

10 ‘‘(iv) In the case of a contribution 

11 consisting of clothing or household items, 

12 the number of items contributed, an indi13 cation of the condition of each item, a de14 scription of the type of item contributed, 

15 and a copy of the list published under 

16 paragraph (15)(B) or an instruction on 

17 how to obtain such list.’’. 

18 (2) ITEMS OF $500 OR MORE.—Subparagraph 

19 (B) of section 170(f)(11) is amended by inserting ‘‘, 

20 the information contained in the acknowledgment re21 quired under paragraph (8) in the case of any con22 tribution of clothing or household items,’’ after ‘‘a 

23 description of such property’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to contributions made after De3 cember 31, 2006. 

4 SEC. 318. MODIFICATION OF SUBSTANTIATION AND REC5 ORDKEEPING REQUIREMENTS FOR CERTAIN 

6 CHARITABLE CONTRIBUTIONS. 

7 (a) MODIFICATION OF SUBSTANTIATION LIMITA8 TION.—Subparagraph (A) of section 170(f)(8) is amended 

9 by striking ‘‘$250’’ and inserting ‘‘$100’’. 

10 (b) RECORDKEEPING REQUIREMENT.—Subsection 

11 (f) of section 170, as amended by section 417 of this Act, 

12 is amended by adding at the end the following new para13 graph: 

14 ‘‘(16) RECORDKEEPING.—No deduction shall be 

15 allowed under subsection (a) for any contribution of 

16 a cash, check, or other monetary gift unless the 

17 donor maintains as a record of such contribution— 

18 ‘‘(A) a cancelled check, or 

19 ‘‘(B) a receipt or a letter or other written 

20 communication from the donee showing the 

21 name of the donee organization, the date of the 

22 contribution, and the amount of the contribu23 tion.’’. 

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

25 this section shall apply to contributions made in taxable 
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1 years beginning after the date of the enactment of this 

2 Act. 

3 SEC. 319. CONTRIBUTIONS OF FRACTIONAL INTERESTS IN 

4 TANGIBLE PERSONAL PROPERTY. 

5 (a) INCOME TAX.—Section 170 (relating to chari6 table, etc., contributions and gifts), as amended by section 

7 301 of this Act, is amended by redesignating subsection 

8 (p) as subsection (q) and by inserting after subsection (o) 

9 the following new subsection: 

10 ‘‘(q) SPECIAL RULES FOR FRACTIONAL GIFTS.— 

11 ‘‘(1) VALUATION OF SUBSEQUENT GIFTS.— 

12 ‘‘(A) IN GENERAL.—In the case of any ad13 ditional contribution, the fair market value of 

14 such contribution shall be determined by using 

15 the lesser of— 

16 ‘‘(i) the fair market value of the prop17 erty at the time of the initial fractional 

18 contribution, or 

19 ‘‘(ii) the fair market value of the 

20 property at the time of the additional con21 tribution. 

22 ‘‘(B) DEFINITIONS.—For purposes of this 

23 paragraph— 

24 ‘‘(i) ADDITIONAL CONTRIBUTION.— 

25 The term ‘additional contribution’ means 
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1 any charitable contribution by the taxpayer 

2 of any interest in property with respect to 

3 which the taxpayer has previously made an 

4 initial fractional contribution. 

5 ‘‘(ii) INITIAL FRACTIONAL CONTRIBU6 TION.—The term ‘initial fractional con7 tribution’ means, with respect to any tax8 payer, the first charitable contribution of 

9 an undivided portion of the taxpayer’s en10 tire interest in any tangible personal prop11 erty. 

12 ‘‘(2) RECAPTURE OF DEDUCTION IN CERTAIN

13 CASES.— 

14 ‘‘(A) IN GENERAL.—The Secretary shall 

15 provide for the recapture of an amount equal to 

16 the amount of any deduction allowed under this 

17 section (plus interest) with respect to any con18 tribution of an undivided interest of a tax19 payer’s entire interest in property in any case 

20 where such property is not in the physical pos21 session of the donee during any applicable pe22 riod for a period of time which bears substan23 tially the same ratio to 1 year as— 

24 ‘‘(i) the percentage of the undivided 

25 interest of the donee in the property (de-
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1 termined on the day after such contribu2 tion was made), bears to 

3 ‘‘(ii) 100 percent. 

4 ‘‘(B) APPLICABLE PERIOD.—For purposes 

5 of subparagraph (A), the term ‘applicable pe6 riod’ means any 1-year period which begins 

7 on— 

8 ‘‘(i) in the year of the contribution, 

9 the date of the contribution, and 

10 ‘‘(ii) in any subsequent calendar year, 

11 the date which corresponds to the date de12 scribed in clause (i). 

13 ‘‘(C) ANTI-ABUSE RULES.—The Secretary 

14 shall prescribe such regulations as necessary to 

15 prevent the avoidance of the purposes of this 

16 paragraph through the transfer of any such un17 divided interest to a third party controlled by 

18 the taxpayer.’’. 

19 (b) ESTATE TAX.—Section 2055 (relating to trans20 fers for public, charitable, and religious uses) is amended 

21 by redesignating subsection (g) as subsection (h) and by 

22 inserting after subsection (f) the following new subsection: 

23 ‘‘(g) VALUATION OF SUBSEQUENT GIFTS.— 

24 ‘‘(1) IN GENERAL.—In the case of any addi25 tional contribution, the fair market value of such 
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1 contribution shall be determined by using the lesser 

2 of— 

3 ‘‘(A) the fair market value of the property 

4 at the time of the initial fractional contribution, 

5 or 

6 ‘‘(B) the fair market value of the property 

7 at the time of the additional contribution. 

8 ‘‘(2) DEFINITIONS.—For purposes of this para9 graph— 

10 ‘‘(A) ADDITIONAL CONTRIBUTION.—The 

11 term ‘additional contribution’ means a bequest, 

12 legacy, devise, or transfer described in sub13 section (a) of any interest in a property with re14 spect to which the decedent had previously 

15 made an initial fractional contribution. 

16 ‘‘(B) INITIAL FRACTIONAL CONTRIBU17 TION.—The term ‘initial fractional contribution’ 

18 means, with respect to any decedent, any chari19 table contribution of an undivided portion of 

20 the decedent’s entire interest in any tangible 

21 personal property for which a deduction was al22 lowed under section 170.’’. 

23 (c) GIFT TAX.—Section 2522 (relating to charitable 

24 and similar gifts) is amended by redesignating subsection 
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1 (e) as subsection (f) and by inserting after subsection (d) 

2 the following new subsection: 

3 ‘‘(e) SPECIAL RULES FOR FRACTIONAL GIFTS.— 

4 ‘‘(1) VALUATION OF SUBSEQUENT GIFTS.— 

5 ‘‘(A) IN GENERAL.—In the case of any ad6 ditional contribution, the fair market value of 

7 such contribution shall be determined by using 

8 the lesser of— 

9 ‘‘(i) the fair market value of the prop10 erty at the time of the initial fractional 

11 contribution, or 

12 ‘‘(ii) the fair market value of the 

13 property at the time of the additional con14 tribution. 

15 ‘‘(B) DEFINITIONS.—For purposes of this 

16 paragraph— 

17 ‘‘(i) ADDITIONAL CONTRIBUTION.— 

18 The term ‘additional contribution’ means 

19 any gift for which a deduction is allowed 

20 under subsection (a) or (b) of any interest 

21 in a property with respect to which the 

22 donor has previously made an initial frac23 tional contribution. 

24 ‘‘(ii) INITIAL FRACTIONAL CONTRIBU25 TION.—The term ‘initial fractional con-
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1 tribution’ means, with respect to any 

2 donor, the first gift of an undivided portion 

3 of the donor’s entire interest in any tan4 gible personal property for which a deduc5 tion is allowed under subsection (a) or (b). 

6 ‘‘(2) RECAPTURE OF DEDUCTION IN CERTAIN

7 CASES.— 

8 ‘‘(A) IN GENERAL.—The Secretary shall 

9 provide for the recapture of an amount equal to 

10 the amount of any deduction allowed under this 

11 section (plus interest) with respect to any con12 tribution of an undivided interest of a donor’s 

13 entire interest in property in any case where 

14 such property is not in the physical possession 

15 of the donee during any applicable period for a 

16 period of time which bears substantially the 

17 same ratio to 1 year as— 

18 ‘‘(i) the percentage of the undivided 

19 interest of the donee in the property (de20 termined on the day after such contribu21 tion was made), bears to 

22 ‘‘(ii) 100 percent. 

23 ‘‘(B) APPLICABLE PERIOD.—For purposes 

24 of subparagraph (A), the term ‘applicable pe-
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1 riod’ means any 1-year period which begins 

2 on— 

3 ‘‘(i) in the year of the contribution, 

4 the date of the contribution, and 

5 ‘‘(ii) in any subsequent calendar year, 

6 the date which corresponds to the date de7 scribed in clause (i). 

8 ‘‘(C) ANTI-ABUSE RULES.—The Secretary 

9 shall prescribe such regulations as necessary to 

10 prevent the avoidance of the purposes of this 

11 paragraph though the transfer of any such un12 divided interest to a third party controlled by 

13 the donor.’’. 

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

15 this section shall apply to contributions, bequests, and 

16 gifts made after the date of the enactment of this Act. 

17 SEC. 320. PROVISIONS RELATING TO SUBSTANTIAL AND 

18 GROSS OVERSTATEMENTS OF VALUATIONS 

19 OF CHARITABLE DEDUCTION PROPERTY. 

20 (a) SUBSTANTIAL AND GROSS OVERSTATEMENTS OF

21 VALUATIONS OF CHARITABLE DEDUCTION PROPERTY.— 

22 (1) IN GENERAL.—Section 6662 (relating to 

23 imposition of accuracy-related penalties) is amended 

24 by adding at the end the following new subsection: 
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1 ‘‘(i) SPECIAL RULES FOR CHARITABLE DEDUCTION

2 PROPERTY.—In the case of charitable deduction property 

3 (as defined in section 6664(c)(3)(A))— 

4 ‘‘(1) the determination under subsection 

5 (e)(1)(A) as to whether there is a substantial valu6 ation misstatement under chapter 1 with respect to 

7 the value of the property shall be made by sub8 stituting ‘150 percent’ for ‘200 percent’, and 

9 ‘‘(2) the determination under subsection 

10 (h)(2)(A)(i) as to whether there is a gross valuation 

11 misstatement with respect to the value of the prop12 erty shall be made by substituting ‘200 percent’ for 

13 ‘400 percent’ and by substituting ‘150 percent’ for 

14 ‘200 percent’ in applying subsection (e)(1)(A) for 

15 purposes of such determination.’’. 

16 (2) ELIMINATION OF REASONABLE CAUSE EX17 CEPTION FOR GROSS MISSTATEMENTS.—Section 

18 6664(c)(2) (relating to reasonable cause exception 

19 for underpayments) is amended by striking ‘‘para20 graph (1) shall not apply unless’’ and inserting 

21 ‘‘paragraph (1) shall not apply. The preceding sen22 tence shall not apply to a substantial valuation over23 statement under chapter 1 if’’. 
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1 (b) PENALTY ON APPRAISERS WHOSE APPRAISALS

2 RESULT IN SUBSTANTIAL OR GROSS VALUATION

3 MISSTATEMENTS.— 

4 (1) IN GENERAL.—Part I of subchapter B of 

5 chapter 68 (relating to assessable penalties) is 

6 amended by inserting after section 6695 the fol7 lowing new section: 

8 ‘‘SEC. 6695A. SUBSTANTIAL AND GROSS VALUATION 

9 MISSTATEMENTS ATTRIBUTABLE TO INCOR10 RECT APPRAISALS. 

11 ‘‘(a) IMPOSITION OF PENALTY.—If— 

12 ‘‘(1) a person prepares an appraisal of the 

13 value of property and such person knows, or reason14 ably should have known, that the appraisal would be 

15 used in connection with a return or a claim for re16 fund, and 

17 ‘‘(2) the claimed value of the property on a re18 turn or claim for refund which is based on such ap19 praisal results in a substantial valuation 

20 misstatement under chapter 1 (within the meaning 

21 of section 6662(e)), or a gross valuation 

22 misstatement (within the meaning of section 

23 6662(h)), with respect to such property, 

24 then such person shall pay a penalty in the amount deter25 mined under subsection (b). 
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1 ‘‘(b) AMOUNT OF PENALTY.—The amount of the 

2 penalty imposed under subsection (a) on any person with 

3 respect to an appraisal shall be equal to the lesser of— 

4 ‘‘(1) the greater of— 

5 ‘‘(A) 10 percent of the amount of the un6 derpayment (as defined in section 6664(a)) at7 tributable to the misstatement described in sub8 section (a)(2), or 

9 ‘‘(B) $1,000, or 

10 ‘‘(2) 125 percent of the gross income received 

11 by the person described in subsection (a)(1) from 

12 the preparation of the appraisal. 

13 ‘‘(c) EXCEPTION.—No penalty shall be imposed 

14 under subsection (a) if the person establishes to the satis15 faction of the Secretary that the value established in the 

16 appraisal was more likely than not the proper value.’’. 

17 (2) RULES APPLICABLE TO PENALTY.—Section 

18 6696 (relating to rules applicable with respect to 

19 sections 6694 and 6695) is amended— 

20 (A) by striking ‘‘6694 and 6695’’ each 

21 place it appears in the text and heading and in22 serting ‘‘6694, 6695, and 6695A’’, and 

23 (B) by striking ‘‘6694 or 6695’’ each place 

24 it appears in the text and inserting ‘‘6694, 

25 6695, or 6695A’’. 
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1 (3) CONFORMING AMENDMENT.—The table of 

2 sections for part I of subchapter B of chapter 68 is 

3 amended by striking the item relating to section 

4 6696 and inserting the following new items: 

‘‘Sec. 6695A.. Substantial and gross valuation misstatements attributable 

to incorrect appraisals. 

‘‘Sec. 6696. Rules applicable with respect to sections 6694, 6695, and 

6695A.’’. 

5 (c) QUALIFIED APPRAISERS AND APPRAISALS.— 

6 (1) IN GENERAL.—Subparagraph (E) of section 

7 170(f)(11) is amended to read as follows: 

8 ‘‘(E) QUALIFIED APPRAISAL AND AP9 PRAISER.—For purposes of this paragraph— 

10 ‘‘(i) QUALIFIED APPRAISAL.—The 

11 term ‘qualified appraisal’ means, with re12 spect to any property, an appraisal of such 

13 property which— 

14 ‘‘(I) is treated for purposes of 

15 this paragraph as a qualified ap16 praisal under regulations or other 

17 guidance prescribed by the Secretary, 

18 and 

19 ‘‘(II) is conducted by a qualified 

20 appraiser in accordance with generally 

21 accepted appraisal standards and any 

22 regulations or other guidance pre23 scribed under subclause (I). 
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1 ‘‘(ii) QUALIFIED APPRAISER.—Except 

2 as provided in clause (iii), the term ‘quali3 fied appraiser’ means an individual who— 

4 ‘‘(I) has earned an appraisal des5 ignation from a recognized profes6 sional appraiser organization or has 

7 otherwise met minimum education 

8 and experience requirements set forth 

9 in regulations prescribed by the Sec10 retary, 

11 ‘‘(II) regularly performs apprais12 als for which the individual receives 

13 compensation, and 

14 ‘‘(III) meets such other require15 ments as may be prescribed by the 

16 Secretary in regulations or other guid17 ance. 

18 ‘‘(iii) SPECIFIC APPRAISALS.—An in19 dividual shall not be treated as a qualified 

20 appraiser with respect to any specific ap21 praisal unless— 

22 ‘‘(I) the individual demonstrates 

23 verifiable education and experience in 

24 valuing the type of property subject to 

25 the appraisal, and 
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1 ‘‘(II) the individual has not been 

2 prohibited from practicing before the 

3 Internal Revenue Service by the Sec4 retary under section 330(c) of title 

5 31, United States Code, at any time 

6 during the 3-year period ending on 

7 the date of the appraisal.’’. 

8 (2) REASONABLE CAUSE EXCEPTION.—Sub9 paragraphs (B) and (C) of section 6664(c)(3) are 

10 amended to read as follows: 

11 ‘‘(B) QUALIFIED APPRAISAL.—The term 

12 ‘qualified appraisal’ has the meaning given such 

13 term by section 170(f)(11)(E)(i). 

14 ‘‘(C) QUALIFIED APPRAISER.—The term 

15 ‘qualified appraiser’ has the meaning given such 

16 term by section 170(f)(11)(E)(ii).’’. 

17 (d) DISCIPLINARY ACTIONS AGAINST APPRAISERS.— 

18 Section 330(c) of title 31, United States Code, is amended 

19 by striking ‘‘with respect to whom a penalty has been as20 sessed under section 6701(a) of the Internal Revenue 

21 Code of 1986’’. 

22 (e) EFFECTIVE DATES.— 

23 (1) MISSTATEMENT PENALTIES.—Except as 

24 provided in paragraph (3), the amendments made by 
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1 subsection (a) shall apply to returns filed after the 

2 date of the enactment of this Act. 

3 (2) APPRAISER PROVISIONS.—Except as pro4 vided in paragraph (3), the amendments made by 

5 subsections (b), (c), and (d) shall apply to appraisals 

6 prepared with respect to returns or submissions filed 

7 after the date of the enactment of this Act. 

8 (3) SPECIAL RULE FOR CERTAIN EASE9 MENTS.—In the case of a contribution of a qualified 

10 real property interest which is a restriction with re11 spect to the exterior of a building described in sec12 tion 170(h)(4)(C)(ii) of the Internal Revenue Code 

13 of 1986, and an appraisal with respect to the con14 tribution, the amendments made by subsections (a) 

15 and (b) shall apply to returns filed after December 

16 16, 2004. 

17 SEC. 321. ADDITIONAL STANDARDS FOR CREDIT COUN18 SELING ORGANIZATIONS. 

19 (a) IN GENERAL.—Section 501 (relating to exemp20 tion from tax on corporations, certain trusts, etc.) is 

21 amended by redesignating subsection (q) as subsection (r) 

22 and by inserting after subsection (p) the following new 

23 subsection: 

24 ‘‘(q) SPECIAL RULES FOR CREDIT COUNSELING OR25 GANIZATIONS.— 
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1 ‘‘(1) IN GENERAL.—An organization with re2 spect to which the provision of credit counseling 

3 services is a substantial purpose shall not be exempt 

4 from tax under subsection (a) unless such organiza5 tion is described in paragraph (3) or (4) of sub6 section (c) and such organization is organized and 

7 operated in accordance with the following require8 ments: 

9 ‘‘(A) The organization— 

10 ‘‘(i) provides credit counseling services 

11 tailored to the specific needs and cir12 cumstances of consumers, 

13 ‘‘(ii) makes no loans to debtors and 

14 does not negotiate the making of loans on 

15 behalf of debtors, and 

16 ‘‘(iii) does not promote, or charge any 

17 separate fee for, any service for the pur18 pose of improving any consumer’s credit 

19 record, credit history, or credit rating. 

20 ‘‘(B) The organization does not refuse to 

21 provide credit counseling services to a consumer 

22 due to the inability of the consumer to pay, the 

23 ineligibility of the consumer for debt manage24 ment plan enrollment, or the unwillingness of 
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1 the consumer to enroll in a debt management 

2 plan. 

3 ‘‘(C) The organization establishes and im4 plements a fee policy which— 

5 ‘‘(i) requires that any fees charged to 

6 a consumer for services are reasonable, 

7 and 

8 ‘‘(ii) prohibits charging any fee based 

9 in whole or in part on a percentage of the 

10 consumer’s debt, the consumer’s payments 

11 to be made pursuant to a debt manage12 ment plan, or the projected or actual sav13 ings to the consumer resulting from enroll14 ing in a debt management plan. 

15 ‘‘(D) At all times the organization has a 

16 board of directors or other governing body— 

17 ‘‘(i) which is controlled by persons 

18 who represent the broad interests of the 

19 public, such as public officials acting in 

20 their capacities as such, persons having 

21 special knowledge or expertise in credit or 

22 financial education, and community lead23 ers, 

24 ‘‘(ii) not more than 20 percent of the 

25 voting power of which is vested in persons 
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1 who are employed by the organization or 

2 who will benefit financially, directly or in3 directly, from the organization’s activities 

4 (other than through the receipt of reason5 able directors’ fees or the repayment of 

6 consumer debt to creditors other than the 

7 credit counseling organization or its affili8 ates), and 

9 ‘‘(iii) not more than 49 percent of the 

10 voting power of which is vested in persons 

11 who are employed by the organization or 

12 who will benefit financially, directly or in13 directly, from the organization’s activities 

14 (other than through the receipt of reason15 able directors’ fees). 

16 ‘‘(E) The organization does not own more 

17 than 35 percent of— 

18 ‘‘(i) the total combined voting power 

19 of a corporation which is in the business of 

20 lending money, repairing credit, or pro21 viding debt management plan services, 

22 payment processing, or similar services, 

23 ‘‘(ii) the profits interest of a partner24 ship which is in the business of lending 

25 money, repairing credit, or providing debt 
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1 management plan services, payment proc2 essing, or similar services, and 

3 ‘‘(iii) the beneficial interest of a trust 

4 or estate which is in the business of lend5 ing money, repairing credit, or providing 

6 debt management plan services, payment 

7 processing, or similar services. 

8 ‘‘(F) The organization receives no amount 

9 for providing referrals to others for financial 

10 services (including debt management services) 

11 or credit counseling services to be provided to 

12 consumers, and pays no amount to others for 

13 obtaining referrals of consumers. 

14 ‘‘(2) REQUIREMENTS UNDER SUBSECTION

15 (c)(3).—In addition to the requirements under para16 graph (1), an organization with respect to which the 

17 provision of credit counseling services is a substan18 tial purpose and which is described in paragraph (3) 

19 of subsection (c) shall not be exempt from tax under 

20 subsection (a) unless such organization is organized 

21 and operated in accordance with the following re22 quirements: 

23 ‘‘(A) The organization— 

24 ‘‘(i) charges no fees (other than nomi25 nal fees) for debt management plan serv-
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1 ices or credit counseling services and 

2 waives any fees if the consumer is unable 

3 to pay such fees, and 

4 ‘‘(ii) does not solicit contributions 

5 from consumers during the initial coun6 seling process or while the consumer is re7 ceiving services from the organization. 

8 ‘‘(B) The activities of the organization re9 lated to debt management plan services (in the 

10 aggregate) do not exceed 25 percent of the total 

11 activities of the organization activities measured 

12 by any of the following: 

13 ‘‘(i) The time spent on activities. 

14 ‘‘(ii) The resources dedicated to activi15 ties. 

16 ‘‘(iii) The effort expended by the orga17 nization with respect to activities. 

18 ‘‘(iv) The sources of revenue of the or19 ganization. 

20 ‘‘(v) Any other measures prescribed 

21 by the Secretary. 

22 ‘‘(3) REQUIREMENTS UNDER SUBSECTION

23 (c)(4).—In addition to the requirements under para24 graph (1), an organization with respect to which the 

25 provision of credit counseling services is a substan-
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1 tial purpose and which is described in paragraph (4) 

2 of subsection (c) shall not be exempt from tax under 

3 subsection (a) unless such organization— 

4 ‘‘(A) is organized and operated such that 

5 it charges no fees (other than nominal fees) for 

6 credit counseling services and waives any fees if 

7 the consumer is unable to pay such fees, and 

8 ‘‘(B) notifies the Secretary, in such man9 ner as the Secretary may by regulations pre10 scribe, that it is applying for recognition as a 

11 credit counseling organization. 

12 ‘‘(4) SECRETARIAL AUTHORITY.—The Secretary 

13 may require any organization described in paragraph 

14 (1) to submit such information as the Secretary re15 quires to verify that such organization meets the re16 quirements of this section. 

17 ‘‘(5) CREDIT COUNSELING SERVICES; DEBT

18 MANAGEMENT PLAN SERVICES.—For purposes of 

19 this subsection— 

20 ‘‘(A) CREDIT COUNSELING SERVICES.— 

21 The term ‘credit counseling services’ means— 

22 ‘‘(i) the providing of educational infor23 mation to the general public on budgeting, 

24 personal finance, financial literacy, saving 
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1 and spending practices, and the sound use 

2 of consumer credit, 

3 ‘‘(ii) the assisting of individuals and 

4 families with financial problems by pro5 viding them with counseling, or 

6 ‘‘(iii) a combination of the activities 

7 described in clauses (i) and (ii). 

8 ‘‘(B) DEBT MANAGEMENT PLAN SERV9 ICES.—The term ‘debt management plan serv10 ices’ means services related to the repayment, 

11 consolidation, or restructuring of a consumer’s 

12 debt, and includes the negotiation with creditors 

13 of lower interest rates, the waiver or reduction 

14 of fees, and the marketing and processing of 

15 debt management plans.’’. 

16 (b) DEBT MANAGEMENT PLAN SERVICES TREATED

17 AS AN UNRELATED BUSINESS.—Section 513 (relating to 

18 unrelated trade or business) is amended by adding at the 

19 end the following: 

20 ‘‘(j) DEBT MANAGEMENT PLAN SERVICES.—The 

21 term ‘unrelated trade or business’ includes— 

22 ‘‘(1) the provision of debt management plan 

23 services (as defined in section 501(q)(4)(B)) by an 

24 organization described in section 501(q) to the ex25 tent such services are not substantially related to the 
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1 provision of credit counseling services (as defined in 

2 section 501(q)(4)(A)) to a consumer, and 

3 ‘‘(2) the provision of debt management plan 

4 services (as so defined) by any organization other 

5 than an organization which meets the requirements 

6 of section 501(q).’’. 

7 (c) EFFECTIVE DATE.— 

8 (1) IN GENERAL.—Except as provided in para9 graph (2), the amendments made by this section 

10 shall apply to taxable years beginning after the date 

11 of the enactment of this Act. 

12 (2) TRANSITION RULE FOR EXISTING ORGANI13 ZATIONS.—In the case of any organization described 

14 in paragraph (3) or (4) section 501(c) of the Inter15 nal Revenue Code of 1986 and with respect to which 

16 the provision of credit counseling services is a sub17 stantial purpose on the date of the enactment of this 

18 Act, the amendments made by this section shall 

19 apply to taxable years beginning after the date 

20 which is 1 year after the date of the enactment of 

21 this Act. 
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1 PART II—IMPROVED ACCOUNTABILITY OF 

2 DONOR ADVISED FUNDS 

3 SEC. 331. EXCISE TAX ON SPONSORING ORGANIZATIONS OF 

4 DONOR ADVISED FUNDS FOR FAILURE TO 

5 MEET DISTRIBUTION REQUIREMENTS. 

6 (a) IN GENERAL.—Chapter 42 (relating to private 

7 foundations and certain other tax-exempt organizations), 

8 as amended by section 311, is amended by adding at the 

9 end the following new subchapter: 

10 ‘‘Subchapter G—Donor Advised Funds 

‘‘Sec. 4967. Taxes on sponsoring organizations of donor advised funds for failure to meet distributions requirements. 

‘‘Sec. 4968. Taxes on prohibited distributions. 

‘‘Sec. 4969. Taxes on prohibited benefits. 

11 ‘‘SEC. 4967. TAXES ON SPONSORING ORGANIZATIONS OF 

12 DONOR ADVISED FUNDS FOR FAILURE TO 

13 MEET DISTRIBUTION REQUIREMENTS. 

14 ‘‘(a) INITIAL TAX.—There is hereby imposed on any 

15 sponsoring organization a tax equal to 30 percent of each 

16 of the following amounts: 

17 ‘‘(1) The organization level undistributed 

18 amount of such sponsoring organization (other than 

19 any organization subject to tax under section 4942) 

20 for any taxable year which has not been distributed 

21 before the first day of the second (or any suc22 ceeding) taxable year following such taxable year (if 

23 such first day falls within the taxable period). 
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1 ‘‘(2) The fund level undistributed amount of 

2 any donor advised fund of such sponsoring organiza3 tion for any taxable year which has not been distrib4 uted before the 121st day of the first (or any suc5 ceeding) taxable year following the applicable period 

6 (if such 121st day falls within the taxable period). 

7 ‘‘(3) The illiquid fund undistributed amount of 

8 any illiquid asset donor advised fund of such spon9 soring organization for any taxable year which has 

10 not been distributed before the 121st day of the sec11 ond (or any succeeding) taxable year following such 

12 taxable year (if such 121st day falls within the tax13 able period). 

14 ‘‘(b) ADDITIONAL TAX.—In any case in which an ini15 tial tax is imposed under subsection (a) on any amount, 

16 if any portion of such amount remains undistributed at 

17 the close of the taxable period, there is hereby imposed 

18 a tax equal to 100 percent of the amount remaining undis19 tributed at such time. 

20 ‘‘(c) ORGANIZATION LEVEL UNDISTRIBUTED

21 AMOUNT; FUND LEVEL UNDISTRIBUTED AMOUNT; IL22 LIQUID FUND UNDISTRIBUTED AMOUNT.—For purposes 

23 of this section— 

24 ‘‘(1) ORGANIZATION LEVEL UNDISTRIBUTED

25 AMOUNT.—The term ‘organization level undistrib-
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1 uted amount’ means, with respect to any sponsoring 

2 organization for any taxable year, the amount by 

3 which— 

4 ‘‘(A) the organization level distributable 

5 amount for such taxable year, exceeds 

6 ‘‘(B) the qualifying distributions made 

7 during such taxable year and designated for the 

8 purpose of reducing such amount. 

9 ‘‘(2) FUND LEVEL UNDISTRIBUTED AMOUNT.— 

10 The term ‘fund level undistributed amount’ means, 

11 with respect to any donor advised fund of a spon12 soring organization for any applicable period, the 

13 amount by which— 

14 ‘‘(A) the fund level distributable amount 

15 for such applicable period, exceeds 

16 ‘‘(B) the qualifying distributions made 

17 during such applicable period and designated 

18 for the purpose of reducing such amount. 

19 ‘‘(3) ILLIQUID FUND UNDISTRIBUTED

20 AMOUNT.— 

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

22 fund undistributed amount’ means, with respect 

23 to any illiquid asset donor advised fund of a 

24 sponsoring organization for any taxable year, 

25 the amount by which— 
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1 ‘‘(i) the illiquid fund distributable 

2 amount for such taxable year, exceeds 

3 ‘‘(ii) the qualifying distributions made 

4 during such taxable year and designated 

5 for the purpose of reducing such amount. 

6 ‘‘(B) ILLIQUID ASSET DONOR ADVISED

7 FUND.—The term ‘illiquid asset donor advised 

8 fund’ means for any taxable year a donor ad9 vised fund the value of the illiquid assets of 

10 which (as of the end of the preceding taxable 

11 year) exceeds 10 percent of the value of the 

12 total assets of such fund. 

13 ‘‘(C) ILLIQUID ASSET.—The term ‘illiquid 

14 asset’ means for any taxable year any asset 

15 other than cash and marketable securities the 

16 value of which is held for the entire taxable 

17 year as such asset or any other illiquid asset. 

18 ‘‘(d) ORGANIZATION LEVEL DISTRIBUTABLE

19 AMOUNT; FUND LEVEL DISTRIBUTABLE AMOUNT; IL20 LIQUID FUND DISTRIBUTABLE AMOUNT.—For purposes 

21 of this section— 

22 ‘‘(1) ORGANIZATION LEVEL DISTRIBUTABLE

23 AMOUNT.—The term ‘organization level distributable 

24 amount’ means, with respect to any sponsoring orga25 nization for any taxable year, an amount equal to 5 
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1 percent of the fair market value of the aggregate as2 sets of all donor advised funds maintained by such 

3 organization as determined on the last day of the 

4 preceding taxable year (other than such funds which 

5 have been in existence for less than 1 year as so de6 termined). 

7 ‘‘(2) FUND LEVEL DISTRIBUTABLE AMOUNT.— 

8 The term ‘fund level distributable amount’ means, 

9 with respect to any donor advised fund of any spon10 soring organization for any applicable 3-consecutive 

11 taxable year period, an amount equal to the greater 

12 of— 

13 ‘‘(A) $250, or 

14 ‘‘(B) 2.5 percent of the greater of— 

15 ‘‘(i) the average of the sponsoring or16 ganization’s required minimum initial con17 tribution amount for such period, or 

18 ‘‘(ii) the average of the sponsoring or19 ganization’s required minimum balance for 

20 such period, 

21 for the type of donor with respect to such donor 

22 advised fund. 

23 ‘‘(3) ILLIQUID FUND DISTRIBUTABLE

24 AMOUNT.—The term ‘illiquid fund distributable 

25 amount’ means, with respect to any illiquid asset 
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1 donor advised fund of any sponsoring organization 

2 for any taxable year, an amount equal to 5 percent 

3 of the value of the assets in such fund as determined 

4 at the end of the preceding taxable year. 

5 ‘‘(e) QUALIFYING DISTRIBUTION.—For purposes of 

6 this section— 

7 ‘‘(1) IN GENERAL.—The term ‘qualifying dis8 tribution’ means— 

9 ‘‘(A) any amount paid by the sponsoring 

10 organization from a donor advised fund to any 

11 organization described in section 170(b)(1)(A) 

12 (other than any organization described in sec13 tion 509(a)(3) or any sponsoring organization if 

14 such amount is for maintenance in a donor ad15 vised fund), and 

16 ‘‘(B) any amount set aside in such donor 

17 advised fund for purposes, and under proce18 dures similar to those, described in section 

19 4942(g)(2). 

20 Such term shall also include any amount paid during 

21 any taxable year for reasonable and necessary ad22 ministrative expenses charged to a donor advised 

23 fund by a sponsoring organization. 
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1 ‘‘(2) DISTRIBUTIONS TO SPONSORING ORGANI2 ZATIONS.—Such term shall include any distribution 

3 to a sponsoring organization. 

4 ‘‘(3) PURPOSE OF DISTRIBUTION.—Each quali5 fying distribution shall be taken into account in de6 termining whether each of the requirements of para7 graphs (1), (2), and (3) of subsection (a) are met, 

8 except that only qualifying distributions from a 

9 donor advised fund shall be taken into account in 

10 determining whether the requirements of paragraphs 

11 (2) and (3) of subsection (a) are met with respect 

12 to the fund. 

13 ‘‘(4) DESIGNATION OF TAXABLE YEAR.— 

14 ‘‘(A) IN GENERAL.—A sponsoring organi15 zation shall designate the taxable years or ap16 plicable periods with respect to which any quali17 fying distribution shall be applied for purposes 

18 of satisfying the distribution requirements of 

19 such taxable year or applicable period. 

20 ‘‘(B) CARRYOVER OF EXCESS DISTRIBU21 TION DESIGNATIONS.—If a sponsoring organi22 zation designates an amount of qualifying dis23 tributions in excess of the amount necessary to 

24 meet the distribution requirements for all tax25 able years and all applicable periods, the spon-
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1 soring organization may designate such excess 

2 as a carryover distribution which may be ap3 plied for purposes of satisfying the distribution 

4 requirements of the succeeding 5 taxable years. 

5 ‘‘(f) VALUATION RULES.—For purposes of deter6 mining the value of any asset held by a donor advised 

7 fund, the following rules shall apply: 

8 ‘‘(1) Securities for which market quotations are 

9 readily available shall be valued at fair market value 

10 determined on a monthly basis. 

11 ‘‘(2) Cash shall be determined on an average 

12 monthly basis. 

13 ‘‘(3) Any illiquid asset transferred by a donor 

14 to a sponsoring organization for maintenance in 

15 such donor advised fund shall be valued in an 

16 amount equal to the sum of— 

17 ‘‘(A) the value of such asset claimed by the 

18 donor for purposes of determining the donor’s 

19 deduction under section 170, 2055, or 2522 

20 with respect to such transfer and reported by 

21 the donor to the sponsoring organization (in 

22 any manner specified by the Secretary), and 

23 ‘‘(B) an assumed annual rate of return of 

24 5 percent of such value. 
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1 ‘‘(4) Any illiquid asset purchased by such fund 

2 shall be valued in an amount equal to— 

3 ‘‘(A) the purchase price paid for such asset 

4 by such fund, and 

5 ‘‘(B) an assumed annual rate of return of 

6 5 percent of such value. 

7 ‘‘(g) SPONSORING ORGANIZATION; DONOR ADVISED

8 FUND.—For purposes of this subchapter— 

9 ‘‘(1) SPONSORING ORGANIZATION.—The term 

10 ‘sponsoring organization’ means any organization 

11 which— 

12 ‘‘(A) is described in section 170(c) (other 

13 than in paragraph (1) thereof, and without re14 gard to paragraph (2)(A) thereof), and 

15 ‘‘(B) maintains 1 or more donor advised 

16 funds. 

17 ‘‘(2) DONOR ADVISED FUND.— 

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

19 subparagraph (B), the term ‘donor advised 

20 fund’ means a fund or account— 

21 ‘‘(i) which is separately identified by 

22 reference to contributions of a donor or do23 nors, 

24 ‘‘(ii) which is owned and controlled by 

25 a sponsoring organization, and 
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1 ‘‘(iii) with respect to which a donor or 

2 any person appointed or designated by 

3 such person) has, or reasonably expects to 

4 have, advisory privileges with respect to 

5 the distribution or investment of amounts 

6 held in such fund or account by reason of 

7 the donor’s status as a donor. 

8 ‘‘(B) EXCEPTION.—The term ‘donor ad9 vised fund’ shall not include any fund or ac10 count with respect to which a person described 

11 in subparagraph (A)(iii) advises as to which in12 dividuals receive grants for travel, study, or 

13 other similar purposes, but only if— 

14 ‘‘(i) such person’s advisory privileges 

15 are performed exclusively by such person 

16 in the person’s capacity as a member of a 

17 committee appointed by the sponsoring or18 ganization, 

19 ‘‘(ii) no combination of persons de20 scribed in subparagraph (A)(iii) (or per21 sons related to such persons) control, di22 rectly or indirectly, such committee, and 

23 ‘‘(iii) all grants from such fund or ac24 count satisfy requirements similar to those 

25 described in section 4945(g) (concerning 
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1 grants to individuals by private founda2 tions). 

3 ‘‘(C) SECRETARIAL AUTHORITY.—The Sec4 retary may exempt a fund or account from 

5 treatment as a donor advised fund which— 

6 ‘‘(i) is advised by committee not di7 rectly or indirectly controlled by the donor 

8 or advisor (and any related parties), or 

9 ‘‘(ii) will benefit a single identified or10 ganization or governmental entity or a sin11 gle identified charitable purpose. 

12 ‘‘(h) OTHER DEFINITIONS.—For purposes of this 

13 section— 

14 ‘‘(1) TAXABLE PERIOD.—The term ‘taxable pe15 riod’ means, with respect to the undistributed 

16 amount for any taxable year, the period beginning 

17 with the first day of the taxable year and ending on 

18 the earlier of— 

19 ‘‘(A) the date of mailing of a notice of defi20 ciency with respect to the tax imposed by sub21 section (a) under section 6212, or 

22 ‘‘(B) the date on which the tax imposed by 

23 subsection (a) is assessed. 

24 ‘‘(2) APPLICABLE PERIOD.—The term ‘applica25 ble period’ means, with respect to any donor advised 
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1 fund of any sponsoring organization, a 3-consecutive 

2 taxable year period determined under the following 

3 rules: 

4 ‘‘(A) The first applicable 3-consecutive tax5 able year period for any donor advised fund 

6 shall begin on the first day of the first taxable 

7 year of the sponsoring organization beginning 

8 after the date such fund has been in existence 

9 for 1 year. 

10 ‘‘(B) Any applicable 3-consecutive taxable 

11 year period after the first such period shall 

12 begin on the day after the termination of any 

13 preceding applicable 3-consecutive taxable year 

14 period with respect to such donor advised fund. 

15 ‘‘(i) REGULATIONS.—The Secretary may issue such 

16 regulations as are necessary to carry out the purposes of 

17 this section, including regulations regarding— 

18 ‘‘(1) the acceptable methods for calculating the 

19 organization level undistributed amount for spon20 soring organizations, 

21 ‘‘(2) the allowable adjustments in the deter22 mination of the value of any illiquid asset where the 

23 asset value has declined significantly after a con24 tribution to, or purchase by, the donor advised fund, 

25 and 
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1 ‘‘(3) the treatment or disregard of transactions 

2 designed to avoid the application of the illiquid asset 

3 rules, such as through exchanges of illiquid assets 

4 for other assets. 

5 ‘‘SEC. 4968. TAXES ON PROHIBITED DISTRIBUTIONS. 

6 ‘‘(a) IMPOSITION OF TAXES.— 

7 ‘‘(1) ON THE DONOR OR DONOR ADVISOR.— 

8 There is hereby imposed on the advice of any person 

9 described in section 4967(g)(2)(C) to have a spon10 soring organization of a donor advised fund make a 

11 taxable distribution from such fund a tax equal to 

12 20 percent of the amount thereof. The tax imposed 

13 by this paragraph shall be paid by such person who 

14 advised the sponsoring organization of the donor ad15 vised fund to make the distribution. 

16 ‘‘(2) ON THE FUND MANAGEMENT.—There is 

17 hereby imposed on the agreement of any fund man18 ager to the making of a distribution, knowing that 

19 it is a taxable distribution, a tax equal to 5 percent 

20 of the amount thereof, unless such agreement is not 

21 willful and is due to reasonable cause. The tax im22 posed by this paragraph shall be paid by any fund 

23 manager who agreed to the making of the distribu24 tion. 
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1 ‘‘(b) JOINT AND SEVERAL LIABILITY.—For purposes 

2 of subsection (a), if more than one person is liable under 

3 subsection (a)(1) or (a)(2) with respect to the making of 

4 a taxable distribution, all such persons shall be jointly and 

5 severally liable under such paragraph with respect to such 

6 distribution. 

7 ‘‘(c) TAXABLE DISTRIBUTION.—For purposes of this 

8 subsection, the term ‘taxable distribution’ means any dis9 tribution from a donor advised fund to any person other 

10 than the sponsoring organization’s non donor advised 

11 funds or accounts or organizations described in section 

12 170(b)(1)(A) (other than any organization described in 

13 section 509(a)(3) or any sponsoring organization if such 

14 amount is for maintenance in a donor advised fund). 

15 ‘‘(d) FUND MANAGER.—For purposes of this sub16 chapter, the term ‘fund manager’ means, with respect to 

17 any sponsoring organization of a donor advised fund— 

18 ‘‘(1) an officer, director, or trustee of such 

19 sponsoring organization (or an individual having 

20 powers or responsibilities similar to those of officers, 

21 directors, or trustees of the sponsoring organiza22 tion), and 

23 ‘‘(2) with respect to any act (or failure to act), 

24 the employees of the sponsoring organization having 
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1 authority or responsibility with respect to such act 

2 (or failure to act). 

3 ‘‘SEC. 4969. TAXES ON PROHIBITED BENEFITS. 

4 ‘‘(a) IMPOSITION OF TAXES.— 

5 ‘‘(1) ON THE DONOR, DONOR ADVISOR, OR RE6 LATED PERSON.—There is hereby imposed on the 

7 advice of any person described in subsection (c) to 

8 have a sponsoring organization of a donor advised 

9 fund make a distribution from such fund which re10 sults in such a person receiving, directly or indi11 rectly, a more than incidental benefit as a result of 

12 such distribution, a tax equal to 25 percent of the 

13 amount of such distribution. The tax imposed by 

14 this paragraph shall be paid by such person who ad15 vised the sponsoring organization of the donor ad16 vised fund to make the distribution. 

17 ‘‘(2) ON THE RECIPIENT OF THE BENEFIT.— 

18 There is hereby imposed on any person described in 

19 subsection (c) who receives a benefit described in 

20 paragraph (1), a tax equal to 25 percent of the 

21 amount of the distribution described in paragraph 

22 (1). 

23 ‘‘(3) ON THE FUND MANAGEMENT.—There is 

24 hereby imposed on the agreement of any fund man25 ager to the making of a distribution, knowing that 
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1 such distribution would confer a benefit described in 

2 paragraph (1), a tax equal to 10 percent of the 

3 amount of such distribution, unless such agreement 

4 is not willful and is due to reasonable cause. The tax 

5 imposed by this paragraph shall be paid by any fund 

6 manager who agreed to the making of the distribu7 tion. 

8 ‘‘(b) JOINT AND SEVERAL LIABILITY.—For purposes 

9 of subsection (a), if more than one person is liable under 

10 subsection (a)(1), (a)(2), or (a)(3) with respect to the 

11 making of a distribution described in subsection (a), all 

12 such persons shall be jointly and severally liable under 

13 such paragraph with respect to such distribution. 

14 ‘‘(c) DONOR, DONOR ADVISOR, OR RELATED PER15 SON.—A person is described in this subsection if such per16 son is described in section 4958(f)(1)(D) (determined 

17 without regard to any investment advisor).’’. 

18 (b) ABATEMENT OF TAXES ALLOWED.—Section 

19 4963 is amended— 

20 (1) by inserting ‘‘4967, 4968, 4969,’’ after 

21 ‘‘4958,’’ each place it appears in subsections (a) and 

22 (c), 

23 (2) by inserting ‘‘4967,’’ after ‘‘4958,’’ in sub24 section (b), 
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1 (3) in subsection (d)(2), by striking ‘‘and’’ at 

2 the end of subparagraph (B), by striking the period 

3 at the end of subparagraph (C) and inserting ‘‘, 

4 and’’, and by adding at the end the following new 

5 subparagraph: 

6 ‘‘(D) in the case of the second tier tax im7 posed by section 4967(b), reducing the amount 

8 of the undistributed amount to zero.’’, and 

9 (4) in subsection (e)(2), by redesignating sub10 paragraphs (C) and (D) as subparagraphs (E) and 

11 (F), respectively, and by inserting after subpara12 graph (B) the following new subparagraphs: 

13 ‘‘(C) in the case of section 4967(a)(1), on 

14 the first day of the taxable year for which there 

15 was a failure to distribute, 

16 ‘‘(D) in the case of paragraph (2) or (3) 

17 of section 4967(a), on the 121st day of the tax18 able year for which there was a failure to dis19 tribute,’’. 

20 (c) CONFORMING AMENDMENT.—The table of sub21 chapters of chapter 42 is amended by adding at the end 

22 the following new item: 

‘‘SUBCHAPTER G. DONOR ADVISED FUNDS.’’. 

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

24 this section shall apply to taxable years beginning after 

25 the date of the enactment of this Act. 
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1 SEC. 332. PROHIBITED TRANSACTIONS. 

2 (a) DISQUALIFIED PERSONS.— 

3 (1) IN GENERAL.—Paragraph (1) of section 

4 4958(f) is amended by striking ‘‘and’’ at the end of 

5 subparagraph (B), by striking the period at the end 

6 of subparagraph (C) and inserting ‘‘, and’’, and by 

7 adding after subparagraph (C) the following new 

8 subparagraph: 

9 ‘‘(D) any person who is described in para10 graph (7) with respect to any sponsoring orga11 nization (as defined in section 4967(g)(1)).’’. 

12 (2) DONORS, DONOR ADVISORS, AND INVEST13 MENT ADVISORS TREATED AS DISQUALIFIED PER14 SONS.—Section 4958(f) is amended by adding at the 

15 end the following new paragraph: 

16 ‘‘(7) DONORS, DONOR ADVISORS, AND INVEST17 MENT ADVISORS WITH RESPECT TO SPONSORING OR18 GANIZATIONS.—For purposes of paragraph (1)(D)— 

19 ‘‘(A) IN GENERAL.—A person is described 

20 in this paragraph if such person— 

21 ‘‘(i) is described in section 

22 4967(g)(2)(C), 

23 ‘‘(ii) is an investment advisor, 

24 ‘‘(iii) is a member of the family of an 

25 individual described in clause (i) or (ii), or 
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1 ‘‘(iv) is a 35-percent controlled entity 

2 (as defined in paragraph (3) by sub3 stituting ‘persons described in clause (i), 

4 (ii), or (iii) of paragraph (7)(A)’ for ‘per5 sons described in subparagraph (A) or (B) 

6 of paragraph (1)’ in subparagraph (A)(i) 

7 thereof). 

8 ‘‘(B) INVESTMENT ADVISOR.—The term 

9 ‘investment advisor’ means, with respect to any 

10 sponsoring organization (as defined in section 

11 4967(g)(1)), any person (other than an em12 ployee of such organization) compensated by 

13 such organization for managing the investment 

14 of, or providing investment advice with respect 

15 to, assets maintained in donor advised funds 

16 (as defined in section 4967(g)(2)) owned by 

17 such organization.’’. 

18 (3) DONORS, DONOR ADVISORS, AND INVEST19 MENT ADVISORS TREATED AS DISQUALIFIED PER20 SONS WITH RESPECT TO A SPONSORING ORGANIZA21 TION WHICH IS A PRIVATE FOUNDATION.—Section 

22 4946(a)(1) is amended by striking ‘‘and’’ at the end 

23 of subparagraph (H), by striking the period at the 

24 end of subparagraph (I) and inserting ‘‘, and’’, and 
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1 by adding at the end the following new subpara2 graph: 

3 ‘‘(J) a person described in section 

4 4958(f)(1)(D).’’. 

5 (b) CERTAIN TRANSACTIONS TREATED AS EXCESS

6 BENEFIT TRANSACTIONS.— 

7 (1) IN GENERAL.—Section 4958(c) is amended 

8 by redesignating paragraph (2) as paragraph (3) 

9 and by inserting after paragraph (1) the following 

10 new paragraph: 

11 ‘‘(2) SPECIAL RULES FOR DONOR ADVISED

12 FUNDS OWNED BY SPONSORING ORGANIZATIONS.— 

13 In the case of any donor advised fund (as defined 

14 in section 4967(g)(2)) of a sponsoring organization 

15 (as defined in section 4967(g)(1))— 

16 ‘‘(A) the term ‘excess benefit transaction’ 

17 includes any grant, loan, compensation, or other 

18 payment provided by the sponsoring organiza19 tion in connection with such fund to a person 

20 described in subsection (f)(1)(D) (determined 

21 without regard to any investment advisor) with 

22 respect to such fund, and 

23 ‘‘(B) the term ‘excess benefit’ includes, 

24 with respect to any transaction described in 
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1 subparagraph (A), the amount of any such 

2 grant, loan, compensation, or other payment. 

3 Notwithstanding the last sentence of subsection (e), 

4 a sponsoring organization shall be treated as an ap5 plicable tax-exempt organization to the extent nec6 essary to carry out this paragraph.’’. 

7 (2) SPECIAL RULE FOR CORRECTION OF TRANS8 ACTION.—Section 4958(f)(6) is amended by insert9 ing ‘‘, except that in the case of any correction of 

10 an excess benefit transaction described in subsection 

11 (c)(2), no amount repaid in a manner prescribed by 

12 the Secretary may be held in, or credited to, any 

13 donor advised fund’’ after ‘‘standards’’. 

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

15 this section shall apply to taxable years beginning after 

16 the date of the enactment of this Act. 

17 SEC. 333. TREATMENT OF CHARITABLE CONTRIBUTION DE18 DUCTIONS TO DONOR ADVISED FUNDS. 

19 (a) INCOME.—Section 170(f) (relating to disallow20 ance of deduction in certain cases and special rules), as 

21 amended by section 318 of this Act, is amended by adding 

22 at the end the following new paragraph: 

23 ‘‘(17) CONTRIBUTIONS TO DONOR ADVISED

24 FUNDS.—A deduction otherwise allowed under sub25 section (a) for any contribution to a sponsoring or-
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1 ganization (as defined in section 4967(g)(1)) to be 

2 maintained in any donor advised fund (as defined in 

3 section 4967(g)(2)) of such organization shall only 

4 be allowed if— 

5 ‘‘(A) such sponsoring organization is not 

6 described in paragraph (3), (4), or (5) of sec7 tion 170(c) or section 509(a)(3), and 

8 ‘‘(B) the taxpayer obtains a contempora9 neous written acknowledgment (determined 

10 under rules similar to the rules of paragraph 

11 (8)(C)) from the sponsoring organization that 

12 such organization has exclusive legal control 

13 over the assets contributed.’’. 

14 (b) ESTATE.—Section 2055(e) is amended by adding 

15 at the end the following new paragraph: 

16 ‘‘(5) CONTRIBUTIONS TO DONOR ADVISED

17 FUNDS.—A deduction otherwise allowed under sub18 section (a) for any contribution to a sponsoring or19 ganization (as defined in section 4967(g)(1)) to be 

20 maintained in any donor advised fund (as defined in 

21 section 4967(g)(2)) of such organization shall only 

22 be allowed if— 

23 ‘‘(A) such sponsoring organization is not 

24 described in paragraph (3) or (4) of subsection 

25 (a) or section 509(a)(3), and 
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1 ‘‘(B) the taxpayer obtains a contempora2 neous written acknowledgment (determined 

3 under rules similar to the rules of section 

4 170(f)(8)(C)) from the sponsoring organization 

5 that such organization has exclusive legal con6 trol over the assets contributed.’’. 

7 (c) GIFT.—Section 2522(c) is amended by adding at 

8 the end the following new paragraph: 

9 ‘‘(13) CONTRIBUTIONS TO DONOR ADVISED

10 FUNDS.—A deduction otherwise allowed under sub11 section (a) for any contribution to a sponsoring or12 ganization (as defined in section 4967(g)(1)) to be 

13 maintained in any donor advised fund (as defined in 

14 section 4967(g)(2)) of such organization shall only 

15 be allowed if— 

16 ‘‘(A) such sponsoring organization is not 

17 described in paragraph (3) or (4) of subsection 

18 (a) or section 509(a)(3), and 

19 ‘‘(B) the taxpayer obtains a contempora20 neous written acknowledgment (determined 

21 under rules similar to the rules of section 

22 170(f)(8)(C)) from the sponsoring organization 

23 that such organization has exclusive legal con24 trol over the assets contributed.’’. 
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1 (d) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to contributions made after the 

3 date which is 180 days after the date of the enactment 

4 of this Act. 

5 SEC. 334. RETURNS OF, AND APPLICATIONS FOR RECOGNI6 TION BY, SPONSORING ORGANIZATIONS. 

7 (a) MATTERS INCLUDED ON RETURNS.— 

8 (1) IN GENERAL.—Section 6033 is amended by 

9 redesignating subsection (h) as subsection (i) and by 

10 inserting after subsection (g) the following new sub11 section: 

12 ‘‘(h) ADDITIONAL PROVISIONS RELATING TO SPON13 SORING ORGANIZATIONS.—Every organization described 

14 in section 4967(g)(1) shall, on the return required under 

15 subsection (a) for the taxable year— 

16 ‘‘(1) list the total number of donor advised 

17 funds (as defined in section 4967(g)(2)) it owns at 

18 the end of such taxable year, 

19 ‘‘(2) indicate the aggregate value of assets held 

20 in such funds at the end of such taxable year, and 

21 ‘‘(3) indicate the aggregate contributions to and 

22 grants made from such funds during such taxable 

23 year.’’. 
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1 (2) EXTENSION OF STATUTE OF LIMITA2 TIONS.—Section 6501(c) is amended by adding at 

3 the end the following new paragraph: 

4 ‘‘(11) DONOR ADVISED FUNDS.—If a spon5 soring organization (as defined in section 

6 4967(g)(1)) fails to include on any return for any 

7 taxable year any information with respect to any 

8 donor advised fund of such organization which is re9 quired under section 6033(h) to be included with 

10 such return, the time for assessment of any tax im11 posed under subchapter G of chapter 42 with re12 spect to any distribution from such donor advised 

13 fund shall not expire before the date which is 3 

14 years after the date on which the secretary is fur15 nished the information so required.’’. 

16 (3) EFFECTIVE DATE.—The amendments made 

17 by this subsection shall apply to returns filed for 

18 taxable years ending after the date of the enactment 

19 of this Act. 

20 (b) MATTERS INCLUDED ON EXEMPT STATUS APPLI21 CATION.— 

22 (1) IN GENERAL.—Section 508 is amended by 

23 adding at the end the following new subsection: 

24 ‘‘(f) ADDITIONAL PROVISIONS RELATING TO SPON25 SORING ORGANIZATIONS.—A sponsoring organization (as 
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1 defined in section 4967(g)(1)) shall give notice to the Sec2 retary (in such manner as the Secretary may provide) 

3 whether such organization maintains or intends to main4 tain donor advised funds (as defined in section 

5 4967(g)(2)) and the manner in which such organization 

6 plans to operate such funds.’’. 

7 (2) EFFECTIVE DATE.—The amendment made 

8 by this subsection shall apply to organizations apply9 ing for tax-exempt status after the date of the enact10 ment of this Act. 

11 PART III—IMPROVED ACCOUNTABILITY OF 

12 SUPPORTING ORGANIZATIONS 

13 SEC. 341. REQUIREMENTS FOR SUPPORTING ORGANIZA14 TIONS. 

15 (a) TYPES OF SUPPORTING ORGANIZATIONS.—Sub16 paragraph (B) of section 509(a)(3) is amended to read 

17 as follows: 

18 ‘‘(B) is— 

19 ‘‘(i) operated, supervised, or controlled 

20 by one or more organizations described in 

21 paragraph (1) or (2), 

22 ‘‘(ii) supervised or controlled in con23 nection with one or more such organiza24 tions, or 
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1 ‘‘(iii) operated in connection with one 

2 or more such organizations, and’’. 

3 (b) REQUIREMENTS FOR SUPPORTING ORGANIZA4 TIONS.—Section 509 (relating to private foundation de5 fined) is amended by adding at the end the following new 

6 subsection: 

7 ‘‘(f) REQUIREMENTS FOR SUPPORTING ORGANIZA8 TIONS.— 

9 ‘‘(1) TYPE III SUPPORTING ORGANIZATIONS.— 

10 For purposes of subsection (a)(3)(B)(iii), an organi11 zation shall not be considered to be operated in con12 nection with any organization described in para13 graph (1) or (2) of subsection (a) unless such orga14 nization meets the following requirements: 

15 ‘‘(A) APPLICATION REQUIREMENT.—The 

16 organization provides to the Secretary, as a 

17 part of any notification filed under section 

18 508(a) after the date of the enactment of this 

19 subsection, a letter from each supported organi20 zation acknowledging that the supported orga21 nization has been designated by such organiza22 tion as a supported organization. 

23 ‘‘(B) RESPONSIVENESS.—For each taxable 

24 year beginning after the date of the enactment 

25 of this subsection, the organization provides to 
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1 each supported organization such information 

2 as the Secretary may require to ensure that 

3 such organization is responsive to the needs or 

4 demands of the supported organization. 

5 ‘‘(C) SUPPORTED ORGANIZATIONS.— 

6 ‘‘(i) IN GENERAL.—The organiza7 tion— 

8 ‘‘(I) is not operated in connection 

9 with more than 5 supported organiza10 tions, and 

11 ‘‘(II) is not operated in connec12 tion with any supported organization 

13 that is not organized in the United 

14 States on any date after the date 

15 which is 180 days after the date of 

16 the enactment of this subsection. 

17 ‘‘(ii) SPECIAL RULE FOR EXISTING

18 ORGANIZATIONS.—If the organization is 

19 operated in connection with more than 5 

20 supported organizations on the date of the 

21 enactment of this subsection— 

22 ‘‘(I) clause (i)(I) shall not apply, 

23 and 

24 ‘‘(II) the organization may not be 

25 operated in connection with any other 
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1 organization after such date unless 

2 the total number of supported organi3 zations is 5 or less. 

4 ‘‘(D) CONTRIBUTIONS TO DONOR ADVISED

5 FUNDS.—The organization makes no contribu6 tions to or for the use of any donor advised 

7 fund (as defined in section 4967(g)(2)). 

8 ‘‘(2) ORGANIZATIONS CONTROLLED BY DO9 NORS.— 

10 ‘‘(A) IN GENERAL.—For purposes of sub11 section (a)(3)(B), an organization shall not be 

12 considered to be— 

13 ‘‘(i) operated, supervised, or controlled 

14 by any organization described in paragraph 

15 (1) or (2) of subsection (a), or 

16 ‘‘(ii) operated in connection with any 

17 organization described in paragraph (1) or 

18 (2) of subsection (a), 

19 if such organization accepts any gift or con20 tribution from any person described in subpara21 graph (B). 

22 ‘‘(B) PERSON DESCRIBED.—A person is 

23 described in this subparagraph if such person 

24 is— 
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1 ‘‘(i) a person (other than an organiza2 tion described in paragraph (1), (2), or (4) 

3 of section 509(a)) who controls, directly or 

4 indirectly, either alone or together with 

5 persons described in clauses (ii) and (iii), 

6 the governing body of a supported organi7 zation, 

8 ‘‘(ii) a member of the family (deter9 mined under section 4958(f)(4)) of an in10 dividual described in clause (i), or 

11 ‘‘(iii) a 35-percent controlled entity 

12 (as defined in section 4958(f)(3) by sub13 stituting ‘persons described in clause (i) or 

14 (ii) of section 509(f)(2)(B)’ for ‘persons 

15 described in subparagraph (A) or (B) of 

16 paragraph (1)’ in subparagraph (A)(i) 

17 thereof). 

18 ‘‘(3) SUPPORTED ORGANIZATION.—For pur19 poses of this subsection, the term ‘supported organi20 zation’ means, with respect to an organization de21 scribed in subsection (a)(3), an organization de22 scribed in paragraph (1) or (2) of subsection (a)— 

23 ‘‘(A) for whose benefit the organization de24 scribed in subsection (a)(3) is organized and 

25 operated, or 
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1 ‘‘(B) with respect to which the organiza2 tion performs the functions of, or carries out 

3 the purposes of.’’. 

4 (c) CHARITABLE TRUSTS WHICH ARE TYPE III SUP5 PORTING ORGANIZATIONS.—For purposes of section 

6 509(a)(3)(B)(iii) of the Internal Revenue Code of 1986, 

7 an organization which is a trust shall not be considered 

8 to be operated in connection with any organization de9 scribed in paragraph (1) or (2) of section 509(a) of such 

10 Code solely because— 

11 (1) it is a charitable trust under State law, 

12 (2) the supported organization (as defined in 

13 section 509(f)(3) of such Code) is a beneficiary of 

14 such trust, and 

15 (3) the supported organization (as so defined) 

16 has the power to enforce the trust and compel an ac17 counting. 

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

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

20 of this Act. 

21 SEC. 342. EXCISE TAX ON SUPPORTING ORGANIZATIONS 

22 FOR FAILURE TO MEET DISTRIBUTION RE23 QUIREMENTS. 

24 (a) IN GENERAL.—Subchapter D of chapter 42 (re25 lating to failure by certain charitable organizations to 
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1 meet certain qualification requirements) is amended by 

2 adding at the end the following new section: 

3 ‘‘SEC. 4959. TAXES ON CERTAIN SUPPORTING ORGANIZA4 TIONS FAILING TO MEET DISTRIBUTION RE5 QUIREMENTS. 

6 ‘‘(a) INITIAL TAX.—There is hereby imposed on the 

7 undistributed income of any type III supporting organiza8 tion for any taxable year, which has not been distributed 

9 before the first day of the second (or any succeeding) tax10 able year following such taxable year (if such first day falls 

11 within the taxable period), a tax equal to 30 percent of 

12 the amount of such income remaining undistributed at the 

13 beginning of such second (or succeeding) taxable year. 

14 ‘‘(b) ADDITIONAL TAX.—In any case in which an ini15 tial tax is imposed under subsection (a) on the undistrib16 uted income of a type III supporting organization for any 

17 taxable year, if any portion of such income remains undis18 tributed at the close of the taxable period, there is hereby 

19 imposed a tax equal to 100 percent of the amount remain20 ing undistributed at such time. 

21 ‘‘(c) UNDISTRIBUTED INCOME.—For purposes of this 

22 section, the term ‘undistributed income’ means, with re23 spect to any type III supporting organization for any tax24 able year as of any time, the amount by which— 
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1 ‘‘(1) the distributable amount for such taxable 

2 year, exceeds 

3 ‘‘(2) the qualifying distributions made before 

4 such time out of such distributable amount. 

5 ‘‘(d) DISTRIBUTABLE AMOUNT.—For purposes of 

6 this section— 

7 ‘‘(1) IN GENERAL.—the term ‘distributable 

8 amount’ means, with respect to any type III sup9 porting organization for any taxable year, an 

10 amount equal to the sum of— 

11 ‘‘(A) the greater of— 

12 ‘‘(i) 85 percent of the adjusted net in13 come (as defined in section 4942(f)) of the 

14 type III supporting organization for the 

15 preceding taxable year, or 

16 ‘‘(ii) 5 percent of the fair market 

17 value of the aggregate assets of such orga18 nization (other than assets used or held to 

19 perform the functions of, or carry out the 

20 purposes of, a supported organization) on 

21 the last day of the preceding taxable year, 

22 and 

23 ‘‘(B) any amount received during the pre24 ceding taxable year which is a repayment of 

25 amounts paid by the organization in any prior 
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1 taxable year to a supported organization exclu2 sively for the benefit of such supported organi3 zation or to perform the functions of, or carry 

4 out the purposes of such supported organiza5 tion. 

6 ‘‘(2) INVESTMENT ASSETS.—For purposes of 

7 paragraph (1)(A)(ii), assets held for investment or 

8 for the operation of an unrelated trade or business 

9 shall not be considered as assets used or held to per10 form the functions of, or carry out the purposes of, 

11 a supported organization. 

12 ‘‘(e) QUALIFYING DISTRIBUTION.—For purposes of 

13 this section— 

14 ‘‘(1) IN GENERAL.—The term ‘qualifying dis15 tribution’ means amounts paid by the type III sup16 porting organization to or for the use of a supported 

17 organization. 

18 ‘‘(2) ADMINISTRATIVE AND OPERATING EX19 PENSES.—Administrative and operating expenses of 

20 a type III supporting organization shall not be treat21 ed as a qualifying distribution to a supported organi22 zation. 

23 ‘‘(f) TREATMENT OF QUALIFYING DISTRIBUTIONS.— 
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1 ‘‘(1) IN GENERAL.—Except as provided in para2 graph (2), any qualifying distribution made during 

3 a taxable year shall be treated as made— 

4 ‘‘(A) first out of the undistributed income 

5 of the immediately preceding taxable year (if 

6 the type III supporting organization was sub7 ject to the tax imposed by this section for such 

8 preceding taxable year) to the extent thereof, 

9 and 

10 ‘‘(B) second out of the undistributed in11 come for the taxable year to the extent thereof. 

12 For purposes of this paragraph, distributions shall 

13 be taken into account in the order of time in which 

14 made. 

15 ‘‘(2) CORRECTION OF DEFICIENT DISTRIBU16 TIONS FOR PRIOR TAXABLE YEARS, ETC.—In the 

17 case of any qualifying distribution which (under 

18 paragraph (1)) is not treated as made out of the un19 distributed income of the immediately preceding tax20 able year, the type III supporting organization may 

21 elect to treat any portion of such distribution as 

22 made out of the undistributed income of a des23 ignated prior taxable year. The election shall be 

24 made by the type III supporting organization at 
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1 such time and in such manner as the Secretary shall 

2 by regulations prescribe. 

3 ‘‘(g) ADJUSTMENT OF DISTRIBUTABLE AMOUNT

4 WHERE DISTRIBUTIONS DURING PRIOR YEARS HAVE

5 EXCEEDED INCOME.— 

6 ‘‘(1) IN GENERAL.—If, for the taxable years in 

7 the adjustment period for which an organization is 

8 a type III supporting organization— 

9 ‘‘(A) the aggregate qualifying distributions 

10 treated (under subsection (f)) as made out of 

11 the undistributed income for such taxable years, 

12 exceed 

13 ‘‘(B) the distributable amounts for such 

14 taxable years (determined without regard to 

15 this subsection), 

16 then, for purposes of this section (other than sub17 section (f)), the distributable amount for the taxable 

18 year shall be reduced by an amount equal to such 

19 excess. 

20 ‘‘(2) TAXABLE YEARS IN ADJUSTMENT PE21 RIOD.—For purposes of paragraph (1), with respect 

22 to any taxable year of a type III supporting organi23 zation, the taxable years in the adjustment period 

24 are the taxable years (not exceeding 5) beginning 
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1 after the date of the enactment of this section and 

2 immediately preceding the taxable year. 

3 ‘‘(h) OTHER DEFINITIONS.—For purposes of this 

4 section— 

5 ‘‘(1) TAXABLE PERIOD.—The term ‘taxable pe6 riod’ means, with respect to the undistributed in7 come for any taxable year, the period beginning with 

8 the first day of the taxable year and ending on the 

9 earlier of— 

10 ‘‘(A) the date of mailing of a notice of defi11 ciency with respect to the tax imposed by sub12 section (a) under section 6212, or 

13 ‘‘(B) the date on which the tax imposed by 

14 subsection (a) is assessed. 

15 ‘‘(2) TYPE III SUPPORTING ORGANIZATION.— 

16 The term ‘type III supporting organization’ means 

17 an organization which meets the requirements of 

18 subparagraphs (A) and (C) of section 509(a)(3) and 

19 which is operated in connection with one or more or20 ganizations described in paragraph (1) or (2) of sec21 tion 509(a). 

22 ‘‘(3) SUPPORTED ORGANIZATION.—The term 

23 ‘supported organization’ has the meaning given such 

24 term under section 509(f)(3).’’. 
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1 (b) CONFORMING AMENDMENT.—The table of sec2 tion for subchapter D of chapter 42 is amended by insert3 ing after the item relating to section 4958 the following 

4 new item: 

‘‘Sec. 4959. Taxes on certain supporting organizations failing to meet distribution requirements.’’. 

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

6 this section shall apply to taxable years beginning after 

7 the date of the enactment of this Act. 

8 SEC. 343. EXCESS BENEFIT TRANSACTIONS. 

9 (a) IN GENERAL.—Section 4958(c), as amended by 

10 section 332 of this Act, is amended by redesignating para11 graph (3) as paragraph (4) and by inserting after para12 graph (2) the following new paragraph: 

13 ‘‘(3) SPECIAL RULES FOR SUPPORTING ORGANI14 ZATIONS.— 

15 ‘‘(A) IN GENERAL.—In the case of any or16 ganization described in section 509(a)(3)— 

17 ‘‘(i) the term ‘excess benefit trans18 action’ includes— 

19 ‘‘(I) any grant, loan, compensa20 tion, or other payment provided by 

21 such organization to a person de22 scribed in subparagraph (B), and 

23 ‘‘(II) any loan provided by such 

24 organization to a disqualified person 
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1 (other than an organization described 

2 in paragraph (1), (2), or (4) of section 

3 509(a)), and 

4 ‘‘(ii) the term ‘excess benefit’ includes, 

5 with respect to any transaction described 

6 in clause (i), the amount of any such 

7 grant, loan, compensation, or other pay8 ment. 

9 ‘‘(B) PERSON DESCRIBED.—A person is 

10 described in this subparagraph if such person 

11 is— 

12 ‘‘(i) a substantial contributor to such 

13 organization, 

14 ‘‘(ii) a member of the family (deter15 mined under section 4958(f)(4)) of an in16 dividual described in clause (i), or 

17 ‘‘(iii) a 35-percent controlled entity 

18 (as defined in section 4958(f)(3) by sub19 stituting ‘persons described in clause (i) or 

20 (ii) of section 4958(c)(3)(B)’ for ‘persons 

21 described in subparagraph (A) or (B) of 

22 paragraph (1)’ in subparagraph (A)(i) 

23 thereof). 

24 ‘‘(C) SUBSTANTIAL CONTRIBUTOR.—For 

25 purposes of this paragraph— 
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1 ‘‘(i) IN GENERAL.—The term ‘sub2 stantial contributor’ means any person who 

3 contributed or bequeathed an aggregate 

4 amount of more than $5,000 to the organi5 zation, if such amount is more than 2 per6 cent of the total contributions and be7 quests received by the organization before 

8 the close of the taxable year of the organi9 zation in which the contribution or bequest 

10 is received by the organization from such 

11 person. In the case of a trust, such term 

12 also means the creator of the trust. 

13 ‘‘(ii) EXCEPTION.—Such term shall 

14 not include any organization described in 

15 paragraph (1), (2), or (4) of section 

16 509(a).’’. 

17 (b) DISQUALIFIED PERSONS.—Paragraph (1) of sec18 tion 4958(f), as amended by section 332 of this Act, is 

19 amended by striking ‘‘and’’ at the end of subparagraph 

20 (D), by striking the period at the end of subparagraph 

21 (E) and inserting ‘‘, and’’, and by adding after subpara22 graph (D) the following new subparagraph: 

23 ‘‘(E) any person who is described in sub24 paragraph (A), (B), or (C) with respect to an 

25 organization described in section 509(a)(3) 
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1 which is organized and operated exclusively for 

2 the benefit of, to perform the functions of, or 

3 to carry out the purposes of the applicable tax4 exempt organization.’’. 

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

6 this section shall apply to transactions occurring after the 

7 date of the enactment of this Act. 

8 SEC. 344. EXCESS BUSINESS HOLDINGS OF SUPPORTING 

9 ORGANIZATIONS. 

10 (a) IN GENERAL.—Section 4943 is amended by add11 ing at the end the following new subsection: 

12 ‘‘(e) APPLICATION OF TAX TO SUPPORTING ORGANI13 ZATIONS.— 

14 ‘‘(1) IN GENERAL.—For purposes of this sec15 tion, a qualified supporting organization shall be 

16 treated as a private foundation. 

17 ‘‘(2) EXCEPTION.—The Secretary may exempt 

18 any qualified supporting organization from the appli19 cation of this subsection if the Secretary determines 

20 that the excess business holdings of such organiza21 tion are consistent with the purpose or function con22 stituting the basis for its exemption under section 

23 501. 
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1 ‘‘(3) QUALIFIED SUPPORTING ORGANIZATION.— 

2 For purposes of this subsection, the term ‘qualified 

3 supporting organization’ means any— 

4 ‘‘(A) type III supporting organization (as 

5 defined in section 4959(h)(2)), or 

6 ‘‘(B) any organization which meets the re7 quirements of subparagraphs (A) and (C) of 

8 section 509(a)(3) and which is supervised or 

9 controlled in connection with or one or more or10 ganizations described in paragraph (1) or (2) of 

11 section 509(a), but only if such organization ac12 cepts any gift or contribution from any person 

13 described in section 509(f)(2)(B). 

14 ‘‘(4) DISQUALIFIED PERSON.— 

15 ‘‘(A) IN GENERAL.—In applying this sec16 tion to any organization described in section 

17 509(a)(3), the term ‘disqualified person’ means, 

18 with respect to the organization— 

19 ‘‘(i) any person who was, at any time 

20 during the 5-year period ending on date 

21 described in subsection (a)(2)(A), in a po22 sition to exercise substantial influence over 

23 the affairs of the organization, 
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1 ‘‘(ii) any member of the family (deter2 mined under section 4958(f)(4)) of an in3 dividual described in clause (i), 

4 ‘‘(iii) any 35-percent controlled entity 

5 (as defined in section 4958(f)(3) by sub6 stituting ‘persons described in clause (i) or 

7 (ii) of section 4943(e)(2)(A)’ for ‘persons 

8 described in subparagraph (A) or (B) of 

9 paragraph (1)’ in subparagraph (A)(i) 

10 thereof), 

11 ‘‘(iv) any person described in section 

12 4958(c)(3)(B)), and 

13 ‘‘(v) any organization— 

14 ‘‘(I) which is effectively con15 trolled (directly or indirectly) by the 

16 same person or persons who control 

17 the organization in question, or 

18 ‘‘(II) substantially all of the con19 tributions to which were made (di20 rectly or indirectly) by the same per21 son or persons described in subpara22 graph (B) or a member of their family 

23 (within the meaning of section 

24 4946(d)) who made (directly or indi25 rectly) substantially all of the con-
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1 tributions to the organization in ques2 tion. 

3 ‘‘(B) PERSONS DESCRIBED.—A person is 

4 described in this subparagraph if such person 

5 is— 

6 ‘‘(i) a substantial contributor to the 

7 organization (as defined in section 

8 4958(c)(3)(C)), 

9 ‘‘(ii) an officer, director, or trustee of 

10 the organization (or an individual having 

11 powers or responsibilities similar to those 

12 officers, directors, or trustees of the orga13 nization), or 

14 ‘‘(iii) an owner of more than 20 per15 cent of— 

16 ‘‘(I) the total combined voting 

17 power of a corporation, 

18 ‘‘(II) the profits interest of a 

19 partnership, or 

20 ‘‘(III) the beneficial interest of a 

21 trust or unincorporated enterprise, 

22 which is a substantial contributor (as so 

23 defined) to the organization. 

24 ‘‘(5) PRESENT HOLDINGS.—For purposes of 

25 this subsection, rules similar to the rules of para-
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1 graphs (4), (5), and (6) of subsection (c) shall apply 

2 to organizations described in section 509(a)(3), ex3 cept that— 

4 ‘‘(A) ‘the date of the enactment of this 

5 subsection’ shall be substituted for ‘May 26, 

6 1969’ each place it appears in paragraphs (4), 

7 (5), and (6), and 

8 ‘‘(B) ‘January 1, 2007’ shall be sub9 stituted for ‘January 1, 1970’ in paragraph 

10 (4)(E).’’. 

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

12 this section shall apply to taxable years beginning after 

13 the date of the enactment of this Act. 

14 SEC. 345. TREATMENT OF AMOUNTS PAID TO SUPPORTING 

15 ORGANIZATIONS BY PRIVATE FOUNDATIONS. 

16 (a) QUALIFYING DISTRIBUTIONS.—Paragraph (4) of 

17 section 4942(g) is amended to read as follows: 

18 ‘‘(4) LIMITATION ON DISTRIBUTIONS BY NON19 OPERATING PRIVATE FOUNDATIONS TO SUPPORTING

20 ORGANIZATIONS.—For purposes of this section, the 

21 term ‘qualifying distribution’ shall not include any 

22 amount paid by a private foundation which is not an 

23 operating foundation to an organization described in 

24 section 509(a)(3).’’. 

25 (b) TAXABLE EXPENDITURES.— 
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1 (1) IN GENERAL.—Subsection (d) of section 

2 4945 is amended by redesignating paragraphs (4) 

3 and (5) as paragraphs (5) and (6), respectively, and 

4 by inserting after paragraph (3) the following new 

5 paragraph: 

6 ‘‘(4) to an organization described in section 

7 509(a)(3),’’. 

8 (2) CONFORMING AMENDMENTS.— 

9 (A) Section 4945(d)(5), as redesignated by 

10 subparagraph (A), is amended— 

11 (i) by striking ‘‘a grant to an organi12 zation’’ and inserting ‘‘a grant to any 

13 other organization’’, and 

14 (ii) by striking ‘‘paragraph (1), (2), or 

15 (3) of section 509(a)’’ in subparagraph (A) 

16 and inserting ‘‘paragraph (1) or (2) of sec17 tion 509(a)’’. 

18 (B) Section 4945(f) is amended by striking 

19 ‘‘Subsection (d)(4)’’ in the last sentence thereof 

20 and inserting ‘‘Subsection (d)(5)’’. 

21 (C) Section 4945(h) is amended by strik22 ing ‘‘subsection (d)(4)’’ and inserting ‘‘sub23 section (d)(5)’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to distributions and expenditures 

3 after the date of the enactment of this Act. 

4 SEC. 346. RETURNS OF SUPPORTING ORGANIZATIONS. 

5 (a) REQUIREMENT TO FILE RETURN.—Subpara6 graph (C) of section 6033(a)(3), as redesignated by sec7 tion 411, is amended by striking clause (iv) and by redes8 ignating clauses (v) and (vi) as clauses (iv) and (v), re9 spectively. 

10 (b) MATTERS INCLUDED ON RETURNS.—Section 

11 6033, as amended by section 334 of this Act, is amended 

12 by redesignating subsection (i) as subsection (j) and by 

13 inserting after subsection (h) the following new subsection: 

14 ‘‘(i) ADDITIONAL PROVISIONS RELATING TO SUP15 PORTING ORGANIZATIONS.— 

16 ‘‘(1) IN GENERAL.—Every organization de17 scribed in section 509(a)(3) shall, on the return re18 quired under subsection (a)— 

19 ‘‘(A) list the organizations described in 

20 section 509(a)(3)(A) with respect to which such 

21 organization provides support, 

22 ‘‘(B) indicate whether the organization 

23 meets the requirements of clause (i), (ii), or (iii) 

24 of section 509(a)(3)(B), and 
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1 ‘‘(C) certify that the organization meets 

2 the requirements of section 509(a)(3)(C). 

3 ‘‘(2) TYPE III SUPPORTING ORGANIZATIONS.— 

4 Every type III supporting organization (as defined 

5 in section 4959(h)(2)) shall indicate on the return 

6 required under subsection (a) for the taxable year 

7 whether the organization has received a letter from 

8 each supported organization (as defined in section 

9 509(f)(3)) during the taxable year which— 

10 ‘‘(A) acknowledges that the supporting or11 ganization has designated such organization as 

12 a supported organization, 

13 ‘‘(B) details the type of support provided 

14 by the supporting organization, and 

15 ‘‘(C) explains how such support furthers 

16 the charitable purpose of the supported organi17 zation.’’. 

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

19 this section shall apply to returns filed for taxable years 

20 ending after the date of the enactment of this Act. 
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1 TITLE IV—MISCELLANEOUS 

2 PROVISIONS 

3 SEC. 401. RESTRUCTURING OF NEW YORK LIBERTY ZONE 

4 TAX CREDITS. 

5 (a) IN GENERAL.—Subchapter Y of chapter 1 is 

6 amended by adding at the end the following new section: 

7 ‘‘SEC. 1400M. NEW YORK LIBERTY ZONE TAX CREDITS. 

8 ‘‘(a) IN GENERAL.—There shall be allowed as a cred9 it against any taxes imposed by this title (other than by 

10 section 3111(a), section 3403, or subtitle D) paid or in11 curred by any governmental unit of the State of New York 

12 and the City of New York, New York (including any agen13 cy or instrumentality thereof) for any calendar year an 

14 amount equal to the lesser of— 

15 ‘‘(1) the total expenditures during such year by 

16 such governmental unit for qualifying projects, or 

17 ‘‘(2) the amount allocated to such governmental 

18 unit for such calendar year under subsection (b)(2). 

19 ‘‘(b) QUALIFYING PROJECT.—For purposes of this 

20 section— 

21 ‘‘(1) IN GENERAL.—The term ‘qualifying 

22 project’ means any transportation infrastructure 

23 project, including highways, mass transit systems, 

24 railroads, airports, ports, and waterways, in or con25 necting with the New York Liberty Zone (as defined 
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1 in section 1400L(h)), which is designated as a quali2 fying project under this section jointly by the Gov3 ernor of the State of New York and the Mayor of 

4 the City of New York, New York. 

5 ‘‘(2) DOLLAR LIMITATION.— 

6 ‘‘(A) IN GENERAL.—The Governor of the 

7 State of New York and the Mayor of the City 

8 of New York, New York, shall jointly allocate to 

9 a governmental unit the amount of expenditures 

10 which may be taken into account under sub11 section (a) for any calendar year in the credit 

12 period with respect to a qualifying project. 

13 ‘‘(B) AGGREGATE LIMIT.—The aggregate 

14 amount which may be allocated under subpara15 graph (A) for all calendar years in the credit 

16 period shall not exceed $2,000,000,000. 

17 ‘‘(C) ANNUAL LIMIT.—The aggregate 

18 amount which may be allocated under subpara19 graph (A) for any calendar year in the credit 

20 period shall not exceed the sum of— 

21 ‘‘(i) $200,000,000, plus 

22 ‘‘(ii) the aggregate amount authorized 

23 to be allocated under this paragraph for all 

24 preceding calendar years in the credit pe25 riod which was not so allocated. 
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1 ‘‘(D) UNALLOCATED AMOUNTS AT END OF

2 CREDIT PERIOD.—If, as of the close of the cred3 it period, the amount under subparagraph (B) 

4 exceeds the aggregate amount allocated under 

5 subparagraph (A) for all calendar years in the 

6 credit period, the Governor of the State of New 

7 York and the Mayor of the City of New York, 

8 New York, may jointly allocate for any calendar 

9 year following the credit period for expenditures 

10 with respect to qualifying projects which may 

11 be taken into account under subsection (a) an 

12 amount equal to such excess, reduced by the 

13 aggregate amount allocated under this subpara14 graph for all preceding calendar years. 

15 ‘‘(c) CARRYOVER OF UNUSED ALLOCATIONS.— 

16 ‘‘(1) IN GENERAL.—If the amount allocated 

17 under subsection (b)(2) to a governmental unit for 

18 any calendar year exceeds the total expenditures for 

19 such year by such governmental unit for qualifying 

20 projects, the allocation of such governmental unit for 

21 the succeeding calendar year shall be increased by 

22 the amount of such excess. 

23 ‘‘(2) REALLOCATION.—If a governmental unit 

24 does not use an amount allocated to it under sub25 section (b)(2) within the time prescribed by the Gov-
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1 ernor of the State of New York and the Mayor of 

2 the City of New York, New York, then such amount 

3 shall after such time be treated for purposes of sub4 section (b)(2) in the same manner as if it had never 

5 been allocated. 

6 ‘‘(d) DEFINITIONS AND SPECIAL RULES.—For pur7 poses of this section— 

8 ‘‘(1) CREDIT PERIOD.—The term ‘credit period’ 

9 means the 10-year period beginning on January 1, 

10 2006. 

11 ‘‘(2) TREATMENT OF FUNDS.—Any expenditure 

12 for a qualifying project taken into account for pur13 poses of the credit under this section shall be consid14 ered State and local funds for the purpose of any 

15 Federal program. 

16 ‘‘(e) REGULATIONS.—The Secretary may prescribe 

17 such regulations as are necessary to ensure compliance 

18 with the purposes of this section.’’. 

19 (b) TERMINATION OF CERTAIN NEW YORK LIBERTY

20 ZONE BENEFITS.— 

21 (1) SPECIAL ALLOWANCE AND EXPENSING.— 

22 Section 1400L(b)(2)(A)(v) is amended by striking 

23 ‘‘the termination date’’ and inserting ‘‘the date of 

24 the enactment of the Tax Relief Act of 2005 or the 
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1 termination date if pursuant to a binding contract in 

2 effect on such enactment date’’. 

3 (2) LEASEHOLD.—Section 1400L(c)(2)(B) is 

4 amended by striking ‘‘before January 1, 2007’’ and 

5 inserting ‘‘on or before the date of the enactment of 

6 the Tax Relief Act of 2005 or before January 1, 

7 2007, if pursuant to a binding contract in effect on 

8 such enactment date’’. 

9 (3) REPLACEMENT PERIOD.—Section 1400L(g) 

10 is amended by adding at the end the following new 

11 sentence: ‘‘The preceding sentence shall apply only 

12 to any property with respect to which an election 

13 under section 1033(a)(2) is made by the taxpayer 

14 before the date of the enactment of the Tax Relief 

15 Act of 2005.’’. 

16 (c) CONFORMING AMENDMENT.—The table of sec17 tions for subchapter Y of chapter 1 is amended by adding 

18 at the end the following new items: 

‘‘Sec. 1400M. New York Liberty Zone tax credits.’’. 

19 SEC. 402. MODIFICATION TO S CORPORATION PASSIVE IN20 VESTMENT INCOME RULES. 

21 (a) INCREASED PERCENTAGE LIMIT.—Paragraph (2) 

22 of section 1375(a) is amended by striking ‘‘25 percent’’ 

23 and inserting ‘‘60 percent’’. 

24 (b) REPEAL OF EXCESSIVE PASSIVE INCOME AS A

25 TERMINATION EVENT.— 
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1 (1) IN GENERAL.—Section 1362(d) is amended 

2 by striking paragraph (3). 

3 (2) CONFORMING AMENDMENT.—Subsection (b) 

4 of section 1375 is amended— 

5 (A) by redesignating paragraph (4) as 

6 paragraph (5), and 

7 (B) by striking paragraph (3) and insert8 ing the following: 

9 ‘‘(3) PASSIVE INVESTMENT INCOME DE10 FINED.— 

11 ‘‘(A) Except as otherwise provided in this 

12 paragraph, the term ‘passive investment in13 come’ means gross receipts derived from royal14 ties, rents, dividends, interest, annuities, and 

15 sales or exchanges of stock or securities (gross 

16 receipts from such sales or exchanges being 

17 taken into account for purposes of this section 

18 only to the extent of gains therefrom). 

19 ‘‘(B) EXCEPTION FOR INTEREST ON

20 NOTES FROM SALES OF INVENTORY.—The term 

21 ‘passive investment income’ shall not include in22 terest on any obligation acquired in the ordi23 nary course of the corporation’s trade or busi24 ness from its sale of property described in sec25 tion 1221(a)(1). 
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1 ‘‘(C) TREATMENT OF CERTAIN LENDING

2 OR FINANCE COMPANIES.—If the S corporation 

3 meets the requirements of section 542(c)(6) for 

4 the taxable year, the term ‘passive investment 

5 income’ shall not include gross receipts for the 

6 taxable year which are derived directly from the 

7 active and regular conduct of a lending or fi8 nance business (as defined in section 

9 542(d)(1)). 

10 ‘‘(D) SPECIAL RULE FOR OPTIONS AND

11 COMMODITY DEALERS.— 

12 ‘‘(i) IN GENERAL.—In the case of any 

13 options dealer or commodities dealer, pas14 sive investment income shall be determined 

15 by not taking into account any gain or loss 

16 (in the normal course of the taxpayer’s ac17 tivity of dealing in or trading section 1256 

18 contracts) from any section 1256 contract 

19 or property related to such a contract. 

20 ‘‘(ii) DEFINITIONS.—For purposes of 

21 this subparagraph— 

22 ‘‘(I) OPTIONS DEALER.—The 

23 term ‘options dealer’ has the meaning 

24 given such term by section 

25 1256(g)(8). 
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1 ‘‘(II) COMMODITIES DEALER.— 

2 The term ‘commodities dealer’ means 

3 a person who is actively engaged in 

4 trading section 1256 contracts and is 

5 registered with a domestic board of 

6 trade which is designated as a con7 tract market by the Commodities Fu8 tures Trading Commission. 

9 ‘‘(III) SECTION 1256 CON10 TRACT.—The term ‘section 1256 con11 tract’ has the meaning given to such 

12 term by section 1256(b). 

13 ‘‘(E) TREATMENT OF CERTAIN DIVI14 DENDS.—If an S corporation holds stock in a 

15 C corporation meeting the requirements of sec16 tion 1504(a)(2), the term ‘passive investment 

17 income’ shall not include dividends from such C 

18 corporation to the extent such dividends are at19 tributable to the earnings and profits of such C 

20 corporation derived from the active conduct of 

21 a trade or business. 

22 ‘‘(F) EXCEPTION FOR BANKS, ETC.—In 

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

24 a bank holding company (within the meaning of 

25 section 2(a) of the Bank Holding Company Act 
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1 of 1956 (12 U.S.C. 1841(a))), or a financial 

2 holding company (within the meaning of section 

3 2(p) of such Act), the term ‘passive investment 

4 income’ shall not include— 

5 ‘‘(i) interest income earned by such 

6 bank or company, or 

7 ‘‘(ii) dividends on assets required to 

8 be held by such bank or company, includ9 ing stock in the Federal Reserve Bank, the 

10 Federal Home Loan Bank, or the Federal 

11 Agricultural Mortgage Bank or participa12 tion certificates issued by a Federal Inter13 mediate Credit Bank. 

14 ‘‘(4) GROSS RECEIPTS FROM SALES OF CAPITAL

15 ASSETS (OTHER THAN STOCK AND SECURITIES).—In 

16 the case of dispositions of capital assets (other than 

17 stock and securities), gross receipts from such dis18 positions shall be taken into account only to the ex19 tent of the capital gain net income therefrom.’’. 

20 (c) CONFORMING AMENDMENTS.— 

21 (1) Subparagraph (J) of section 26(b)(2) is 

22 amended by striking ‘‘25 percent’’ and inserting ‘‘60 

23 percent’’. 
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1 (2) Clause (i) of section 1042(c)(4)(A) is 

2 amended by striking ‘‘section 1362(d)(3)(C)’’ and 

3 inserting ‘‘section 1375(b)(3)’’. 

4 (3) Subparagraph (B) of section 1362(f)(1) is 

5 amended by striking ‘‘or (3)’’. 

6 (4) Clause (i) of section 1375(b)(1)(A) is 

7 amended by striking ‘‘25 percent’’ and inserting ‘‘60 

8 percent’’. 

9 (5) Subsection (d) of section 1375 is amended 

10 by striking ‘‘subchapter C’’ both places it appears 

11 and inserting ‘‘accumulated’’. 

12 (6) The heading for section 1375 is amended by 

13 striking ‘‘25 PERCENT’’ and inserting ‘‘60 PER14 CENT’’. 

15 (7) The item relating to section 1375 in the 

16 table of sections for part III of subchapter S of 

17 chapter 1 is amended by striking ‘‘25 percent’’ and 

18 inserting ‘‘60 percent’’. 

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

20 this section shall apply to taxable years beginning after 

21 December 31, 2005. 
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1 SEC. 403. MODIFICATION OF EFFECTIVE DATE OF DIS2 REGARD OF CERTAIN CAPITAL EXPENDI3 TURES FOR PURPOSES OF QUALIFIED SMALL 

4 ISSUE BONDS. 

5 (a) IN GENERAL.—Section 144(a)(4)(G) is amended 

6 by striking ‘‘September 30, 2009’’ and inserting ‘‘Decem7 ber 31, 2006’’. 

8 (b) CONFORMING AMENDMENT.—Section 

9 144(a)(4)(F) is amended by striking ‘‘September 30, 

10 2009’’ and inserting ‘‘December 31, 2006’’. 

11 SEC. 404. PREMIUMS FOR MORTGAGE INSURANCE. 

12 (a) IN GENERAL.—Section 163(h)(3) (relating to 

13 qualified residence interest) is amended by adding at the 

14 end the following new subparagraph: 

15 ‘‘(E) MORTGAGE INSURANCE PREMIUMS

16 TREATED AS INTEREST.— 

17 ‘‘(i) IN GENERAL.—Premiums paid or 

18 accrued for qualified mortgage insurance 

19 by a taxpayer during the taxable year in 

20 connection with acquisition indebtedness 

21 with respect to a qualified residence of the 

22 taxpayer shall be treated for purposes of 

23 this section as interest which is qualified 

24 residence interest. 

25 ‘‘(ii) PHASEOUT.—The amount other26 wise treated as interest under clause (i) 
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1 shall be reduced (but not below zero) by 10 

2 percent of such amount for each $1,000 

3 ($500 in the case of a married individual 

4 filing a separate return) (or fraction there5 of) that the taxpayer’s adjusted gross in6 come for the taxable year exceeds 

7 $100,000 ($50,000 in the case of a mar8 ried individual filing a separate return).’’. 

9 (b) DEFINITION AND SPECIAL RULES.—Section 

10 163(h)(4) (relating to other definitions and special rules) 

11 is amended by adding at the end the following new sub12 paragraphs: 

13 ‘‘(E) QUALIFIED MORTGAGE INSUR14 ANCE.—The term ‘qualified mortgage insur15 ance’ means— 

16 ‘‘(i) mortgage insurance provided by 

17 the Veterans Administration, the Federal 

18 Housing Administration, or the Rural 

19 Housing Administration, and 

20 ‘‘(ii) private mortgage insurance (as 

21 defined by section 2 of the Homeowners 

22 Protection Act of 1998 (12 U.S.C. 4901), 

23 as in effect on the date of the enactment 

24 of this subparagraph). 
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1 ‘‘(F) SPECIAL RULES FOR PREPAID QUALI2 FIED MORTGAGE INSURANCE.—Any amount 

3 paid by the taxpayer for qualified mortgage in4 surance that is properly allocable to any mort5 gage the payment of which extends to periods 

6 that are after the close of the taxable year in 

7 which such amount is paid shall be chargeable 

8 to capital account and shall be treated as paid 

9 in such periods to which so allocated. No deduc10 tion shall be allowed for the unamortized bal11 ance of such account if such mortgage is satis12 fied before the end of its term. The preceding 

13 sentences shall not apply to amounts paid for 

14 qualified mortgage insurance provided by the 

15 Veterans Administration or the Rural Housing 

16 Administration.’’. 

17 (c) INFORMATION RETURNS RELATING TO MORT18 GAGE INSURANCE.—Section 6050H (relating to returns 

19 relating to mortgage interest received in trade or business 

20 from individuals) is amended by adding at the end the fol21 lowing new subsection: 

22 ‘‘(h) RETURNS RELATING TO MORTGAGE INSURANCE

23 PREMIUMS.— 

24 ‘‘(1) IN GENERAL.—The Secretary may pre25 scribe, by regulations, that any person who, in the 
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1 course of a trade or business, receives from any indi2 vidual premiums for mortgage insurance aggregating 

3 $600 or more for any calendar year, shall make a 

4 return with respect to each such individual. Such re5 turn shall be in such form, shall be made at such 

6 time, and shall contain such information as the Sec7 retary may prescribe. 

8 ‘‘(2) STATEMENT TO BE FURNISHED TO INDI9 VIDUALS WITH RESPECT TO WHOM INFORMATION IS

10 REQUIRED.—Every person required to make a re11 turn under paragraph (1) shall furnish to each indi12 vidual with respect to whom a return is made a writ13 ten statement showing such information as the Sec14 retary may prescribe. Such written statement shall 

15 be furnished on or before January 31 of the year 

16 following the calendar year for which the return 

17 under paragraph (1) was required to be made. 

18 ‘‘(3) SPECIAL RULES.—For purposes of this 

19 subsection— 

20 ‘‘(A) rules similar to the rules of sub21 section (c) shall apply, and 

22 ‘‘(B) the term ‘mortgage insurance’ 

23 means— 

24 ‘‘(i) mortgage insurance provided by 

25 the Veterans Administration, the Federal 
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1 Housing Administration, or the Rural 

2 Housing Administration, and 

3 ‘‘(ii) private mortgage insurance (as 

4 defined by section 2 of the Homeowners 

5 Protection Act of 1998 (12 U.S.C. 4901), 

6 as in effect on the date of the enactment 

7 of this subsection).’’. 

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

9 this section shall apply to amounts paid or accrued during 

10 the period beginning after December 31, 2006, and before 

11 January 1, 2008, and properly allocable to such period, 

12 with respect to mortgage insurance contracts issued after 

13 December 31, 2006. 

14 TITLE V—REVENUE OFFSET 

15 PROVISIONS 

16 Subtitle A—Provisions Designed to 

17 Curtail Tax Shelters 

18 SEC. 501. UNDERSTATEMENT OF TAXPAYER’S LIABILITY BY 

19 INCOME TAX RETURN PREPARER. 

20 (a) STANDARDS CONFORMED TO TAXPAYER STAND21 ARDS.—Section 6694(a) (relating to understatements due 

22 to unrealistic positions) is amended— 

23 (1) by striking ‘‘realistic possibility of being 

24 sustained on its merits’’ in paragraph (1) and in25 serting ‘‘reasonable belief that the tax treatment in 
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1 such position was more likely than not the proper 

2 treatment’’, 

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

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

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

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

7 and inserting ‘‘IMPROPER’’. 

8 (b) AMOUNT OF PENALTY.—Section 6694 is amend9 ed— 

10 (1) by striking ‘‘$250’’ in subsection (a) and in11 serting ‘‘$1,000’’, and 

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

13 inserting ‘‘$5,000’’. 

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

15 this section shall apply to documents prepared after the 

16 date of the enactment of this Act. 

17 SEC. 502. MODIFICATIONS OF SUSPENSION OF INTEREST 

18 AND PENALTIES WHERE INTERNAL REVENUE 

19 SERVICE FAILS TO CONTACT TAXPAYER. 

20 (a) EFFECTIVE DATE OF EXCEPTION FROM SUSPEN21 SION RULES FOR CERTAIN LISTED AND REPORTABLE

22 TRANSACTIONS.— 

23 (1) IN GENERAL.—Paragraph (2) of section 

24 903(d) of the American Jobs Creation Act of 2004 

25 is amended to read as follows: 
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1 ‘‘(2) EXCEPTION FOR REPORTABLE OR LISTED

2 TRANSACTIONS.— 

3 ‘‘(A) IN GENERAL.—The amendments 

4 made by subsection (c) shall apply with respect 

5 to interest accruing after October 3, 2004. 

6 ‘‘(B) SPECIAL RULE FOR CERTAIN LISTED

7 AND REPORTABLE TRANSACTIONS.— 

8 ‘‘(i) IN GENERAL.—Except as pro9 vided in clause (ii) or (iii), the amendments 

10 made by subsection (c) shall also apply 

11 with respect to interest accruing on or be12 fore October 3, 2004. 

13 ‘‘(ii) PARTICIPANTS IN SETTLEMENT

14 INITIATIVES.—Clause (i) shall not apply to 

15 any transaction if, pursuant to a published 

16 settlement initiative which is offered by the 

17 Secretary of the Treasury to a group of 

18 similarly situated taxpayers claiming bene19 fits from the transaction, the taxpayer has 

20 entered into a settlement agreement with 

21 respect to the tax liability arising in con22 nection with the transaction. 

23 ‘‘(iii) CLOSED TRANSACTIONS.— 

24 Clause (i) shall not apply to a transaction 
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1 if, as of July 29, 2005 (May 9, 2005 in 

2 the case of a listed transaction)— 

3 ‘‘(I) the assessment of all Fed4 eral income taxes for the taxable year 

5 in which the tax liability to which the 

6 interest relates arose is prevented by 

7 the operation of any law or rule of 

8 law, or 

9 ‘‘(II) a closing agreement under 

10 section 7121 has been entered into 

11 with respect to the tax liability arising 

12 in connection with the transaction.’’. 

13 (2) EFFECTIVE DATE.—The amendment made 

14 by this subsection shall take effect as if included in 

15 the provisions of the American Jobs Creation Act of 

16 2004 to which it relates. 

17 (b) TREATMENT OF AMENDED RETURNS AND

18 OTHER SIMILAR NOTICES OF ADDITIONAL TAX OWED.— 

19 (1) IN GENERAL.—Section 6404(g)(1) (relating 

20 to suspension) is amended by adding at the end the 

21 following new sentence: ‘‘If, after the return for a 

22 taxable year is filed, the taxpayer provides to the 

23 Secretary 1 or more signed written documents show24 ing that the taxpayer owes an additional amount of 

25 tax for the taxable year, clause (i) shall be applied 
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1 by substituting the date the last of the documents 

2 was provided for the date on which the return is 

3 filed.’’ 

4 (2) EFFECTIVE DATE.—The amendment made 

5 by this subsection shall apply to documents provided 

6 on or after July 29, 2005. 

7 SEC. 503. FRIVOLOUS TAX SUBMISSIONS. 

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

9 read as follows: 

10 ‘‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS. 

11 ‘‘(a) CIVIL PENALTY FOR FRIVOLOUS TAX RE12 TURNS.—A person shall pay a penalty of $5,000 if— 

13 ‘‘(1) such person files what purports to be a re14 turn of a tax imposed by this title but which— 

15 ‘‘(A) does not contain information on 

16 which the substantial correctness of the self-as17 sessment may be judged, or 

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

19 indicates that the self-assessment is substan20 tially incorrect; and 

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

22 ‘‘(A) is based on a position which the Sec23 retary has identified as frivolous under sub24 section (c), or 
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1 ‘‘(B) reflects a desire to delay or impede 

2 the administration of Federal tax laws. 

3 ‘‘(b) CIVIL PENALTY FOR SPECIFIED FRIVOLOUS

4 SUBMISSIONS.— 

5 ‘‘(1) IMPOSITION OF PENALTY.—Except as pro6 vided in paragraph (3), any person who submits a 

7 specified frivolous submission shall pay a penalty of 

8 $5,000. 

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

10 purposes of this section— 

11 ‘‘(A) SPECIFIED FRIVOLOUS SUBMIS12 SION.—The term ‘specified frivolous submis13 sion’ means a specified submission if any por14 tion of such submission— 

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

16 Secretary has identified as frivolous under 

17 subsection (c), or 

18 ‘‘(ii) reflects a desire to delay or im19 pede the administration of Federal tax 

20 laws. 

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

22 ‘specified submission’ means— 

23 ‘‘(i) a request for a hearing under— 
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1 ‘‘(I) section 6320 (relating to no2 tice and opportunity for hearing upon 

3 filing of notice of lien), or 

4 ‘‘(II) section 6330 (relating to 

5 notice and opportunity for hearing be6 fore levy), and 

7 ‘‘(ii) an application under— 

8 ‘‘(I) section 6159 (relating to 

9 agreements for payment of tax liabil10 ity in installments), 

11 ‘‘(II) section 7122 (relating to 

12 compromises), or 

13 ‘‘(III) section 7811 (relating to 

14 taxpayer assistance orders). 

15 ‘‘(3) OPPORTUNITY TO WITHDRAW SUBMIS16 SION.—If the Secretary provides a person with no17 tice that a submission is a specified frivolous sub18 mission and such person withdraws such submission 

19 within 30 days after such notice, the penalty im20 posed under paragraph (1) shall not apply with re21 spect to such submission. 

22 ‘‘(c) LISTING OF FRIVOLOUS POSITIONS.—The Sec23 retary shall prescribe (and periodically revise) a list of po24 sitions which the Secretary has identified as being frivo25 lous for purposes of this subsection. The Secretary shall 
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1 not include in such list any position that the Secretary 

2 determines meets the requirement of section 

3 6662(d)(2)(B)(ii)(II). 

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

5 reduce the amount of any penalty imposed under this sec6 tion if the Secretary determines that such reduction would 

7 promote compliance with and administration of the Fed8 eral tax laws. 

9 ‘‘(e) PENALTIES IN ADDITION TO OTHER PEN10 ALTIES.—The penalties imposed by this section shall be 

11 in addition to any other penalty provided by law.’’. 

12 (b) TREATMENT OF FRIVOLOUS REQUESTS FOR

13 HEARINGS BEFORE LEVY.— 

14 (1) FRIVOLOUS REQUESTS DISREGARDED.— 

15 Section 6330 (relating to notice and opportunity for 

16 hearing before levy) is amended by adding at the 

17 end the following new subsection: 

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

19 Notwithstanding any other provision of this section, if the 

20 Secretary determines that any portion of a request for a 

21 hearing under this section or section 6320 meets the re22 quirement of clause (i) or (ii) of section 6702(b)(2)(A), 

23 then the Secretary may treat such portion as if it were 

24 never submitted and such portion shall not be subject to 

25 any further administrative or judicial review.’’. 
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1 (2) PRECLUSION FROM RAISING FRIVOLOUS

2 ISSUES AT HEARING.—Section 6330(c)(4) is amend3 ed— 

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

5 ‘‘(A)(i)’’; 

6 (B) by striking ‘‘(B)’’ and inserting ‘‘(ii)’’; 

7 (C) by striking the period at the end of the 

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

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

10 (as so redesignated) the following: 

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

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

13 (3) STATEMENT OF GROUNDS.—Section 

14 6330(b)(1) is amended by striking ‘‘under sub15 section (a)(3)(B)’’ and inserting ‘‘in writing under 

16 subsection (a)(3)(B) and states the grounds for the 

17 requested hearing’’. 

18 (c) TREATMENT OF FRIVOLOUS REQUESTS FOR

19 HEARINGS UPON FILING OF NOTICE OF LIEN.—Section 

20 6320 is amended— 

21 (1) in subsection (b)(1), by striking ‘‘under sub22 section (a)(3)(B)’’ and inserting ‘‘in writing under 

23 subsection (a)(3)(B) and states the grounds for the 

24 requested hearing’’, and 
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1 (2) in subsection (c), by striking ‘‘and (e)’’ and 

2 inserting ‘‘(e), and (g)’’. 

3 (d) TREATMENT OF FRIVOLOUS APPLICATIONS FOR

4 OFFERS-IN-COMPROMISE AND INSTALLMENT AGREE5 MENTS.—Section 7122 is amended by adding at the end 

6 the following new subsection: 

7 ‘‘(e) FRIVOLOUS SUBMISSIONS, ETC.—Notwith8 standing any other provision of this section, if the Sec9 retary determines that any portion of an application for 

10 an offer-in-compromise or installment agreement sub11 mitted under this section or section 6159 meets the re12 quirement of clause (i) or (ii) of section 6702(b)(2)(A), 

13 then the Secretary may treat such portion as if it were 

14 never submitted and such portion shall not be subject to 

15 any further administrative or judicial review.’’. 

16 (e) CLERICAL AMENDMENT.—The table of sections 

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

18 striking the item relating to section 6702 and inserting 

19 the following new item: 

‘‘Sec. 6702. Frivolous tax submissions.’’. 

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

21 this section shall apply to submissions made and issues 

22 raised after the date on which the Secretary first pre23 scribes a list under section 6702(c) of the Internal Rev24 enue Code of 1986, as amended by subsection (a). 
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1 Subtitle B—Economic Substance 

2 Doctrine 

3 SEC. 511. 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 deter-
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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. 512. 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: 
251 

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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 im-
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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. 513. 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 Subtitle C—Improvements in Effi14 ciency and Safeguards in Inter15 nal Revenue Service Collection 

16 SEC. 521. WAIVER OF USER FEE FOR INSTALLMENT AGREE17 MENTS USING AUTOMATED WITHDRAWALS. 

18 (a) IN GENERAL.—Section 6159 (relating to agree19 ments for payment of tax liability in installments) is 

20 amended by redesignating subsection (e) as subsection (f) 

21 and by inserting after subsection (d) the following: 

22 ‘‘(e) WAIVER OF USER FEES FOR INSTALLMENT

23 AGREEMENTS USING AUTOMATED WITHDRAWALS.—In 

24 the case of a taxpayer who enters into an installment 

25 agreement in which automated installment payments are 
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1 agreed to, the Secretary shall waive the fee (if any) for 

2 entering into the installment agreement.’’. 

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

4 this section shall apply to agreements entered into on or 

5 after the date which is 180 days after the date of the en6 actment of this Act. 

7 SEC. 522. TERMINATION OF INSTALLMENT AGREEMENTS. 

8 (a) IN GENERAL.—Section 6159(b)(4) (relating to 

9 failure to pay an installment or any other tax liability 

10 when due or to provide requested financial information) 

11 is amended by striking ‘‘or’’ at the end of subparagraph 

12 (B), by redesignating subparagraph (C) as subparagraph 

13 (E), and by inserting after subparagraph (B) the fol14 lowing: 

15 ‘‘(C) to make a Federal tax deposit under 

16 section 6302 at the time such deposit is re17 quired to be made, 

18 ‘‘(D) to file a return of tax imposed under 

19 this title by its due date (including extensions), 

20 or’’. 

21 (b) CONFORMING AMENDMENT.—The heading for 

22 section 6159(b)(4) is amended by striking ‘‘FAILURE TO

23 PAY AN INSTALLMENT OR ANY OTHER TAX LIABILITY

24 WHEN DUE OR TO PROVIDE REQUESTED FINANCIAL IN25 FORMATION’’ and inserting ‘‘FAILURE TO MAKE PAY-
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1 MENTS OR DEPOSITS OR FILE RETURNS WHEN DUE OR

2 TO PROVIDE REQUESTED FINANCIAL INFORMATION’’. 

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

4 this section shall apply to failures occurring on or after 

5 the date of the enactment of this Act. 

6 SEC. 523. PARTIAL PAYMENTS REQUIRED WITH SUBMIS7 SION OF OFFERS-IN-COMPROMISE. 

8 (a) IN GENERAL.—Section 7122 (relating to com9 promises), as amended by this Act, is amended by redesig10 nating subsections (c), (d), and (e) as subsections (d), (e), 

11 and (f), respectively, and by inserting after subsection (b) 

12 the following new subsection: 

13 ‘‘(c) RULES FOR SUBMISSION OF OFFERS-IN-COM14 PROMISE.— 

15 ‘‘(1) PARTIAL PAYMENT REQUIRED WITH SUB16 MISSION.— 

17 ‘‘(A) LUMP-SUM OFFERS.— 

18 ‘‘(i) IN GENERAL.—The submission of 

19 any lump-sum offer-in-compromise shall be 

20 accompanied by the payment of 20 percent 

21 of amount of such offer. 

22 ‘‘(ii) LUMP-SUM OFFER-IN-COM23 PROMISE.—For purposes of this section, 

24 the term ‘lump-sum offer-in-compromise’ 
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1 means any offer of payments made in 5 or 

2 fewer installments. 

3 ‘‘(B) PERIODIC PAYMENT OFFERS.—The 

4 submission of any periodic payment offer-in5 compromise shall be accompanied by the pay6 ment of the amount of the first proposed in7 stallment and each proposed installment due 

8 during the period such offer is being evaluated 

9 for acceptance and has not been rejected by the 

10 Secretary. Any failure to make a payment re11 quired under the preceding sentence shall be 

12 deemed a withdrawal of the offer-in-com13 promise. 

14 ‘‘(2) RULES OF APPLICATION.— 

15 ‘‘(A) USE OF PAYMENT.—The application 

16 of any payment made under this subsection to 

17 the assessed tax or other amounts imposed 

18 under this title with respect to such tax may be 

19 specified by the taxpayer. 

20 ‘‘(B) NO USER FEE IMPOSED.—Any user 

21 fee which would otherwise be imposed under 

22 this section shall not be imposed on any offer23 in-compromise accompanied by a payment re24 quired under this subsection. 
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1 ‘‘(C) WAIVER AUTHORITY.—The Secretary 

2 may issue regulations waiving any payment re3 quired under paragraph (1) in a manner con4 sistent with the practices established in accord5 ance with the requirements under subsection 

6 (d)(3).’’. 

7 (b) ADDITIONAL RULES RELATING TO TREATMENT

8 OF OFFERS.— 

9 (1) UNPROCESSABLE OFFER IF PAYMENT RE10 QUIREMENTS ARE NOT MET.—Paragraph (3) of sec11 tion 7122(d) (relating to standards for evaluation of 

12 offers), as redesignated by subsection (a), is amend13 ed by striking ‘‘; and’’ at the end of subparagraph 

14 (A) and inserting a comma, by striking the period 

15 at the end of subparagraph (B) and inserting ‘‘, 

16 and’’, and by adding at the end the following new 

17 subparagraph: 

18 ‘‘(C) any offer-in-compromise which does 

19 not meet the requirements of subsection (c) 

20 shall be returned to the taxpayer as 

21 unprocessable.’’. 

22 (2) DEEMED ACCEPTANCE OF OFFER NOT RE23 JECTED WITHIN CERTAIN PERIOD.—Section 7122, 

24 as amended by subsection (a), is amended by adding 

25 at the end the following new subsection: 
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1 ‘‘(g) DEEMED ACCEPTANCE OF OFFER NOT RE2 JECTED WITHIN CERTAIN PERIOD.—Any offer-in-com3 promise submitted under this section shall be deemed to 

4 be accepted by the Secretary if such offer is not rejected 

5 by the Secretary before the date which is 24 months after 

6 the date of the submission of such offer (12 months for 

7 offers-in-compromise submitted after the date which is 5 

8 years after the date of the enactment of this subsection). 

9 For purposes of the preceding sentence, any period during 

10 which any tax liability which is the subject of such offer11 in-compromise is in dispute in any judicial proceeding 

12 shall not be taken in to account in determining the expira13 tion of the 24-month period (or 12-month period, if appli14 cable).’’. 

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

16 this section shall apply to offers-in-compromise submitted 

17 on and after the date which is 60 days after the date of 

18 the enactment of this Act. 

19 Subtitle D—Penalties and Fines 

20 SEC. 531. INCREASE IN CRIMINAL MONETARY PENALTY 

21 LIMITATION FOR THE UNDERPAYMENT OR 

22 OVERPAYMENT OF TAX DUE TO FRAUD. 

23 (a) IN GENERAL.—Section 7206 (relating to fraud 

24 and 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

7 FRAUD.—If any portion of any underpayment (as defined 

8 in section 6664(a)) or overpayment (as defined in section 

9 6401(a)) of tax required to be shown on a return is attrib10 utable to fraudulent action described in subsection (a), the 

11 applicable dollar amount under subsection (a) shall in no 

12 event be less than an amount equal to such portion. A 

13 rule similar to the rule under section 6663(b) shall apply 

14 for purposes of determining the portion so attributable.’’. 

15 (b) INCREASE IN PENALTIES.— 

16 (1) ATTEMPT TO EVADE OR DEFEAT TAX.— 

17 Section 7201 is amended— 

18 (A) by striking ‘‘$100,000’’ and inserting 

19 ‘‘$500,000’’, 

20 (B) by striking ‘‘$500,000’’ and inserting 

21 ‘‘$1,000,000’’, and 

22 (C) by striking ‘‘5 years’’ and inserting 

23 ‘‘10 years’’. 
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1 (2) WILLFUL FAILURE TO FILE RETURN, SUP2 PLY INFORMATION, OR PAY TAX.—Section 7203 is 

3 amended— 

4 (A) in the first sentence— 

5 (i) by striking ‘‘Any person’’ and in6 serting the following: 

7 ‘‘(a) IN GENERAL.—Any person’’, and 

8 (ii) by striking ‘‘$25,000’’ and insert9 ing ‘‘$50,000’’, 

10 (B) in the third sentence, by striking ‘‘sec11 tion’’ and inserting ‘‘subsection’’, and 

12 (C) by adding at the end the following new 

13 subsection: 

14 ‘‘(b) AGGRAVATED FAILURE TO FILE.— 

15 ‘‘(1) IN GENERAL.—In the case of any failure 

16 described in paragraph (2), the first sentence of sub17 section (a) shall be applied by substituting— 

18 ‘‘(A) ‘felony’ for ‘misdemeanor’, 

19 ‘‘(B) ‘$500,000 ($1,000,000’ for ‘$25,000 

20 ($100,000’, and 

21 ‘‘(C) ‘10 years’ for ‘1 year’. 

22 ‘‘(2) FAILURE DESCRIBED.—A failure described 

23 in this paragraph is a failure to make a return de24 scribed in subsection (a) for a period of 3 or more 
264 

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1 consecutive taxable years and the aggregated tax li2 ability for such period is at least $100,000.’’. 

3 (3) FRAUD AND FALSE STATEMENTS.—Section 

4 7206(a) (as redesignated by subsection (a)) is 

5 amended— 

6 (A) by striking ‘‘$100,000’’ and inserting 

7 ‘‘$500,000’’, 

8 (B) by striking ‘‘$500,000’’ and inserting 

9 ‘‘$1,000,000’’, and 

10 (C) by striking ‘‘3 years’’ and inserting ‘‘5 

11 years’’. 

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

13 this section shall apply to actions, and failures to act, oc14 curring after the date of the enactment of this Act. 

15 SEC. 532. DOUBLING OF CERTAIN PENALTIES, FINES, AND 

16 INTEREST ON UNDERPAYMENTS RELATED TO 

17 CERTAIN OFFSHORE FINANCIAL ARRANGE18 MENTS. 

19 (a) DETERMINATION OF PENALTY.— 

20 (1) IN GENERAL.—Notwithstanding any other 

21 provision of law, in the case of an applicable tax22 payer— 

23 (A) the determination as to whether any 

24 interest or applicable penalty is to be imposed 

25 with respect to any arrangement described in 
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1 paragraph (2), or to any underpayment of Fed2 eral income tax attributable to items arising in 

3 connection with any such arrangement, shall be 

4 made without regard to the rules of subsections 

5 (b), (c), and (d) of section 6664 of the Internal 

6 Revenue Code of 1986, and 

7 (B) if any such interest or applicable pen8 alty is imposed, the amount of such interest or 

9 penalty shall be equal to twice that determined 

10 without regard to this section. 

11 (2) APPLICABLE TAXPAYER.—For purposes of 

12 this subsection— 

13 (A) IN GENERAL.—The term ‘‘applicable 

14 taxpayer’’ means a taxpayer which— 

15 (i) has underreported its United 

16 States income tax liability with respect to 

17 any item which directly or indirectly in18 volves— 

19 (I) any financial arrangement 

20 which in any manner relies on the use 

21 of offshore payment mechanisms (in22 cluding credit, debit, or charge cards) 

23 issued by banks or other entities in 

24 foreign jurisdictions, or 
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1 (II) any offshore financial ar2 rangement (including any arrange3 ment with foreign banks, financial in4 stitutions, corporations, partnerships, 

5 trusts, or other entities), and 

6 (ii) has neither signed a closing agree7 ment pursuant to the Voluntary Offshore 

8 Compliance Initiative established by the 

9 Department of the Treasury under Rev10 enue Procedure 2003-11 nor voluntarily 

11 disclosed its participation in such arrange12 ment by notifying the Internal Revenue 

13 Service of such arrangement prior to the 

14 issue being raised by the Internal Revenue 

15 Service during an examination. 

16 (B) AUTHORITY TO WAIVE.—The Sec17 retary of the Treasury or the Secretary’s dele18 gate may waive the application of paragraph (1) 

19 to any taxpayer if the Secretary or the Sec20 retary’s delegate determines that the use of 

21 such offshore payment mechanisms is incidental 

22 to the transaction and, in addition, in the case 

23 of a trade or business, such use is conducted in 

24 the ordinary course of the type of trade or busi25 ness of the taxpayer. 
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1 (C) ISSUES RAISED.—For purposes of sub2 paragraph (A)(ii), an item shall be treated as 

3 an issue raised during an examination if the in4 dividual examining the return— 

5 (i) communicates to the taxpayer 

6 knowledge about the specific item, or 

7 (ii) has made a request to the tax8 payer for information and the taxpayer 

9 could not make a complete response to 

10 that request without giving the examiner 

11 knowledge of the specific item. 

12 (b) DEFINITIONS AND RULES.—For purposes of this 

13 section— 

14 (1) APPLICABLE PENALTY.—The term ‘‘appli15 cable penalty’’ means any penalty, addition to tax, 

16 or fine imposed under chapter 68 of the Internal 

17 Revenue Code of 1986. 

18 (2) FEES AND EXPENSES.—The Secretary of 

19 the Treasury may retain and use an amount not in 

20 excess of 25 percent of all additional interest, pen21 alties, additions to tax, and fines collected under this 

22 section to be used for enforcement and collection ac23 tivities of the Internal Revenue Service. The Sec24 retary shall keep adequate records regarding 

25 amounts so retained and used. The amount credited 
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1 as paid by any taxpayer shall be determined without 

2 regard to this paragraph. 

3 (c) REPORT BY SECRETARY.—The Secretary shall 

4 each year conduct a study and report to Congress on the 

5 implementation of this section during the preceding year, 

6 including statistics on the number of taxpayers affected 

7 by such implementation and the amount of interest and 

8 applicable penalties asserted, waived, and assessed during 

9 such preceding year. 

10 (d) EFFECTIVE DATE.—The provisions of this sec11 tion shall apply to interest, penalties, additions to tax, and 

12 fines with respect to any taxable year if, as of the date 

13 of the enactment of this Act, the assessment of any tax, 

14 penalty, or interest with respect to such taxable year is 

15 not prevented by the operation of any law or rule of law. 

16 SEC. 533. DENIAL OF DEDUCTION FOR CERTAIN FINES, 

17 PENALTIES, AND OTHER AMOUNTS. 

18 (a) IN GENERAL.—Subsection (f) of section 162 (re19 lating to trade or business expenses) is amended to read 

20 as follows: 

21 ‘‘(f) FINES, PENALTIES, AND OTHER AMOUNTS.— 

22 ‘‘(1) IN GENERAL.—Except as provided in para23 graph (2), no deduction otherwise allowable shall be 

24 allowed under this chapter for any amount paid or 

25 incurred (whether by suit, agreement, or otherwise) 
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1 to, or at the direction of, a government or entity de2 scribed in paragraph (4) in relation to the violation 

3 of any law or the investigation or inquiry by such 

4 government or entity into the potential violation of 

5 any law. 

6 ‘‘(2) EXCEPTION FOR AMOUNTS CONSTITUTING

7 RESTITUTION OR PAID TO COME INTO COMPLIANCE

8 WITH LAW.—Paragraph (1) shall not apply to any 

9 amount which— 

10 ‘‘(A) the taxpayer establishes— 

11 ‘‘(i) constitutes restitution (including 

12 remediation of property) for damage or 

13 harm caused by or which may be caused by 

14 the violation of any law or the potential 

15 violation of any law, or 

16 ‘‘(ii) is paid to come into compliance 

17 with any law which was violated or in18 volved in the investigation or inquiry, and 

19 ‘‘(B) is identified as restitution or as an 

20 amount paid to come into compliance with the 

21 law, as the case may be, in the court order or 

22 settlement agreement. 

23 Identification pursuant to subparagraph (B) alone 

24 shall not satisfy the requirement under subpara25 graph (A). This paragraph shall not apply to any 
270 

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1 amount paid or incurred as reimbursement to the 

2 government or entity for the costs of any investiga3 tion or litigation. 

4 ‘‘(3) EXCEPTION FOR AMOUNTS PAID OR IN5 CURRED AS THE RESULT OF CERTAIN COURT OR6 DERS.—Paragraph (1) shall not apply to any 

7 amount paid or incurred by order of a court in a 

8 suit in which no government or entity described in 

9 paragraph (4) is a party. 

10 ‘‘(4) CERTAIN NONGOVERNMENTAL REGU11 LATORY ENTITIES.—An entity is described in this 

12 paragraph if it is— 

13 ‘‘(A) a nongovernmental entity which exer14 cises self-regulatory powers (including imposing 

15 sanctions) in connection with a qualified board 

16 or exchange (as defined in section 1256(g)(7)), 

17 or 

18 ‘‘(B) to the extent provided in regulations, 

19 a nongovernmental entity which exercises self20 regulatory powers (including imposing sanc21 tions) as part of performing an essential gov22 ernmental function. 

23 ‘‘(5) EXCEPTION FOR TAXES DUE.—Paragraph 

24 (1) shall not apply to any amount paid or incurred 

25 as taxes due.’’. 
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1 (b) REPORTING OF DEDUCTIBLE AMOUNTS.— 

2 (1) IN GENERAL.—Subpart B of part III of 

3 subchapter A of chapter 61 is amended by inserting 

4 after section 6050T the following new section: 

5 ‘‘SEC. 6050U. INFORMATION WITH RESPECT TO CERTAIN 

6 FINES, PENALTIES, AND OTHER AMOUNTS. 

7 ‘‘(a) REQUIREMENT OF REPORTING.— 

8 ‘‘(1) IN GENERAL.—The appropriate official of 

9 any government or entity which is described in sec10 tion 162(f)(4) which is involved in a suit or agree11 ment described in paragraph (2) shall make a return 

12 in such form as determined by the Secretary setting 

13 forth— 

14 ‘‘(A) the amount required to be paid as a 

15 result of the suit or agreement to which para16 graph (1) of section 162(f) applies, 

17 ‘‘(B) any amount required to be paid as a 

18 result of the suit or agreement which con19 stitutes restitution or remediation of property, 

20 and 

21 ‘‘(C) any amount required to be paid as a 

22 result of the suit or agreement for the purpose 

23 of coming into compliance with any law which 

24 was violated or involved in the investigation or 

25 inquiry. 
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1 ‘‘(2) SUIT OR AGREEMENT DESCRIBED.— 

2 ‘‘(A) IN GENERAL.—A suit or agreement is 

3 described in this paragraph if— 

4 ‘‘(i) it is— 

5 ‘‘(I) a suit with respect to a vio6 lation of any law over which the gov7 ernment or entity has authority and 

8 with respect to which there has been 

9 a court order, or 

10 ‘‘(II) an agreement which is en11 tered into with respect to a violation 

12 of any law over which the government 

13 or entity has authority, or with re14 spect to an investigation or inquiry by 

15 the government or entity into the po16 tential violation of any law over which 

17 such government or entity has author18 ity, and 

19 ‘‘(ii) the aggregate amount involved in 

20 all court orders and agreements with re21 spect to the violation, investigation, or in22 quiry is $600 or more. 

23 ‘‘(B) ADJUSTMENT OF REPORTING

24 THRESHOLD.—The Secretary may adjust the 

25 $600 amount in subparagraph (A)(ii) as nec-
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1 essary in order to ensure the efficient adminis2 tration of the internal revenue laws. 

3 ‘‘(3) TIME OF FILING.—The return required 

4 under this subsection shall be filed not later than— 

5 ‘‘(A) 30 days after the date on which a 

6 court order is issued with respect to the suit or 

7 the date the agreement is entered into, as the 

8 case may be, or 

9 ‘‘(B) the date specified Secretary. 

10 ‘‘(b) STATEMENTS TO BE FURNISHED TO INDIVID11 UALS INVOLVED IN THE SETTLEMENT.—Every person re12 quired to make a return under subsection (a) shall furnish 

13 to each person who is a party to the suit or agreement 

14 a written statement showing— 

15 ‘‘(1) the name of the government or entity, and 

16 ‘‘(2) the information supplied to the Secretary 

17 under subsection (a)(1). 

18 The written statement required under the preceding sen19 tence shall be furnished to the person at the same time 

20 the government or entity provides the Secretary with the 

21 information required under subsection (a). 

22 ‘‘(c) APPROPRIATE OFFICIAL DEFINED.—For pur23 poses of this section, the term ‘appropriate official’ means 

24 the officer or employee having control of the suit, inves-
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1 tigation, or inquiry or the person appropriately designated 

2 for purposes of this section.’’. 

3 (2) CONFORMING AMENDMENT.—The table of 

4 sections for subpart B of part III of subchapter A 

5 of chapter 61 is amended by inserting after the item 

6 relating to section 6050T the following new item: 

‘‘Sec. 6050U. Information with respect to certain fines, penalties, and other 

amounts.’’. 

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

8 this section shall apply to amounts paid or incurred on 

9 or after the date of the enactment of this Act, except that 

10 such amendments shall not apply to amounts paid or in11 curred under any binding order or agreement entered into 

12 before such date. Such exception shall not apply to an 

13 order or agreement requiring court approval unless the ap14 proval was obtained before such date. 

15 SEC. 534. DENIAL OF DEDUCTION FOR PUNITIVE DAMAGES. 

16 (a) DISALLOWANCE OF DEDUCTION.— 

17 (1) IN GENERAL.—Section 162(g) (relating to 

18 treble damage payments under the antitrust laws) is 

19 amended— 

20 (A) by redesignating paragraphs (1) and 

21 (2) as subparagraphs (A) and (B), respectively, 

22 (B) by striking ‘‘If’’ and inserting: 

23 ‘‘(1) TREBLE DAMAGES.—If’’, and 
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1 (C) by adding at the end the following new 

2 paragraph: 

3 ‘‘(2) PUNITIVE DAMAGES.—No deduction shall 

4 be allowed under this chapter for any amount paid 

5 or incurred for punitive damages in connection with 

6 any judgment in, or settlement of, any action. This 

7 paragraph shall not apply to punitive damages de8 scribed in section 104(c).’’. 

9 (2) CONFORMING AMENDMENT.—The heading 

10 for section 162(g) is amended by inserting ‘‘OR PU11 NITIVE DAMAGES’’ after ‘‘LAWS’’. 

12 (b) INCLUSION IN INCOME OF PUNITIVE DAMAGES

13 PAID BY INSURER OR OTHERWISE.— 

14 (1) IN GENERAL.—Part II of subchapter B of 

15 chapter 1 (relating to items specifically included in 

16 gross income) is amended by adding at the end the 

17 following new section: 

18 ‘‘SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSUR19 ANCE OR OTHERWISE. 

20 ‘‘Gross income shall include any amount paid to or 

21 on behalf of a taxpayer as insurance or otherwise by rea22 son of the taxpayer’s liability (or agreement) to pay puni23 tive damages.’’. 
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1 (2) REPORTING REQUIREMENTS.—Section 6041 

2 (relating to information at source) is amended by 

3 adding at the end the following new subsection: 

4 ‘‘(f) SECTION TO APPLY TO PUNITIVE DAMAGES

5 COMPENSATION.—This section shall apply to payments by 

6 a person to or on behalf of another person as insurance 

7 or otherwise by reason of the other person’s liability (or 

8 agreement) to pay punitive damages.’’. 

9 (3) CONFORMING AMENDMENT.—The table of 

10 sections for part II of subchapter B of chapter 1 is 

11 amended by adding at the end the following new 

12 item: 

‘‘Sec. 91. Punitive damages compensated by insurance or otherwise.’’. 

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

14 this section shall apply to damages paid or incurred on 

15 or after the date of the enactment of this Act. 

16 SEC. 535. INCREASE IN PENALTY FOR BAD CHECKS AND 

17 MONEY ORDERS. 

18 (a) IN GENERAL.—Section 6657 (relating to bad 

19 checks) is amended— 

20 (1) by striking ‘‘$750’’ and inserting ‘‘$1,250’’, 

21 and 

22 (2) by striking ‘‘$15’’ and inserting ‘‘$25’’. 

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

24 this section apply to checks or money orders received after 

25 the date of the enactment of this Act. 
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1 Subtitle E—Provisions to 

2 Discourage Expatriation 

3 SEC. 541. TAX TREATMENT OF INVERTED ENTITIES. 

4 (a) IN GENERAL.—Section 7874 is amended— 

5 (1) by striking ‘‘March 4, 2003’’ in subsection 

6 (a)(2)(B)(i) and in the matter following subsection 

7 (a)(2)(B)(iii) and inserting ‘‘March 20, 2002’’, 

8 (2) by striking ‘‘at least 60 percent’’ in sub9 section (a)(2)(B)(ii) and inserting ‘‘more than 50 

10 percent’’, 

11 (3) by striking ‘‘80 percent’’ in subsection (b) 

12 and inserting ‘‘at least 80 percent’’, 

13 (4) by striking ‘‘60 percent’’ in subsection (b) 

14 and inserting ‘‘more than 50 percent’’, 

15 (5) by adding at the end of subsection (a)(2) 

16 the following new sentence: ‘‘Except as provided in 

17 regulations, an acquisition of properties of a domes18 tic corporation shall not be treated as described in 

19 subparagraph (B) if none of the corporation’s stock 

20 was readily tradeable on an established securities 

21 market at any time during the 4-year period ending 

22 on the date of the acquisition.’’, and 

23 (6) by redesignating subsection (g) as sub24 section (h) and by inserting after subsection (f) the 

25 following new subsection: 
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1 ‘‘(g) SPECIAL RULES APPLICABLE TO EXPATRIATED

2 ENTITIES.— 

3 ‘‘(1) INCREASES IN ACCURACY-RELATED PEN4 ALTIES.—In the case of any underpayment of tax of 

5 an expatriated entity— 

6 ‘‘(A) section 6662(a) shall be applied with 

7 respect to such underpayment by substituting 

8 ‘30 percent’ for ‘20 percent’, and 

9 ‘‘(B) if such underpayment is attributable 

10 to one or more gross valuation understate11 ments, the increase in the rate of penalty under 

12 section 6662(h) shall be to 50 percent rather 

13 than 40 percent. 

14 ‘‘(2) MODIFICATIONS OF LIMITATION ON INTER15 EST DEDUCTION.—In the case of an expatriated en16 tity, section 163(j) shall be applied— 

17 ‘‘(A) without regard to paragraph 

18 (2)(A)(ii) thereof, and 

19 ‘‘(B) by substituting ‘25 percent’ for ‘50 

20 percent’ each place it appears in paragraph 

21 (2)(B) thereof.’’. 

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

23 this section shall apply to taxable years ending after 

24 March 20, 2002. 
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1 SEC. 542. REVISION OF TAX RULES ON EXPATRIATION OF 

2 INDIVIDUALS. 

3 (a) IN GENERAL.—Subpart A of part II of sub4 chapter N of chapter 1 is amended by inserting after sec5 tion 877 the following new section: 

6 ‘‘SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION. 

7 ‘‘(a) GENERAL RULES.—For purposes of this sub8 title— 

9 ‘‘(1) MARK TO MARKET.—Except as provided in 

10 subsections (d) and (f), all property of a covered ex11 patriate to whom this section applies shall be treated 

12 as sold on the day before the expatriation date for 

13 its fair market value. 

14 ‘‘(2) RECOGNITION OF GAIN OR LOSS.—In the 

15 case of any sale under paragraph (1)— 

16 ‘‘(A) notwithstanding any other provision 

17 of this title, any gain arising from such sale 

18 shall be taken into account for the taxable year 

19 of the sale, and 

20 ‘‘(B) any loss arising from such sale shall 

21 be taken into account for the taxable year of 

22 the sale to the extent otherwise provided by this 

23 title, except that section 1091 shall not apply to 

24 any such loss. 

25 Proper adjustment shall be made in the amount of 

26 any gain or loss subsequently realized for gain or 
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1 loss taken into account under the preceding sen2 tence. 

3 ‘‘(3) EXCLUSION FOR CERTAIN GAIN.— 

4 ‘‘(A) IN GENERAL.—The amount which, 

5 but for this paragraph, would be includible in 

6 the gross income of any individual by reason of 

7 this section shall be reduced (but not below 

8 zero) by $600,000. For purposes of this para9 graph, allocable expatriation gain taken into ac10 count under subsection (f)(2) shall be treated in 

11 the same manner as an amount required to be 

12 includible in gross income. 

13 ‘‘(B) COST-OF-LIVING ADJUSTMENT.— 

14 ‘‘(i) IN GENERAL.—In the case of an 

15 expatriation date occurring in any calendar 

16 year after 2005, the $600,000 amount 

17 under subparagraph (A) shall be increased 

18 by an amount equal to— 

19 ‘‘(I) such dollar amount, multi20 plied by 

21 ‘‘(II) the cost-of-living adjust22 ment determined under section 1(f)(3) 

23 for such calendar year, determined by 

24 substituting ‘calendar year 2004’ for 
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1 ‘calendar year 1992’ in subparagraph 

2 (B) thereof. 

3 ‘‘(ii) ROUNDING RULES.—If any 

4 amount after adjustment under clause (i) 

5 is not a multiple of $1,000, such amount 

6 shall be rounded to the next lower multiple 

7 of $1,000. 

8 ‘‘(4) ELECTION TO CONTINUE TO BE TAXED AS

9 UNITED STATES CITIZEN.— 

10 ‘‘(A) IN GENERAL.—If a covered expatriate 

11 elects the application of this paragraph— 

12 ‘‘(i) this section (other than this para13 graph and subsection (i)) shall not apply to 

14 the expatriate, but 

15 ‘‘(ii) in the case of property to which 

16 this section would apply but for such elec17 tion, the expatriate shall be subject to tax 

18 under this title in the same manner as if 

19 the individual were a United States citizen. 

20 ‘‘(B) REQUIREMENTS.—Subparagraph (A) 

21 shall not apply to an individual unless the indi22 vidual— 

23 ‘‘(i) provides security for payment of 

24 tax in such form and manner, and in such 

25 amount, as the Secretary may require, 
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1 ‘‘(ii) consents to the waiver of any 

2 right of the individual under any treaty of 

3 the United States which would preclude as4 sessment or collection of any tax which 

5 may be imposed by reason of this para6 graph, and 

7 ‘‘(iii) complies with such other re8 quirements as the Secretary may prescribe. 

9 ‘‘(C) ELECTION.—An election under sub10 paragraph (A) shall apply to all property to 

11 which this section would apply but for the elec12 tion and, once made, shall be irrevocable. Such 

13 election shall also apply to property the basis of 

14 which is determined in whole or in part by ref15 erence to the property with respect to which the 

16 election was made. 

17 ‘‘(b) ELECTION TO DEFER TAX.— 

18 ‘‘(1) IN GENERAL.—If the taxpayer elects the 

19 application of this subsection with respect to any 

20 property treated as sold by reason of subsection (a), 

21 the payment of the additional tax attributable to 

22 such property shall be postponed until the due date 

23 of the return for the taxable year in which such 

24 property is disposed of (or, in the case of property 

25 disposed of in a transaction in which gain is not rec-
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1 ognized in whole or in part, until such other date as 

2 the Secretary may prescribe). 

3 ‘‘(2) DETERMINATION OF TAX WITH RESPECT

4 TO PROPERTY.—For purposes of paragraph (1), the 

5 additional tax attributable to any property is an 

6 amount which bears the same ratio to the additional 

7 tax imposed by this chapter for the taxable year 

8 solely by reason of subsection (a) as the gain taken 

9 into account under subsection (a) with respect to 

10 such property bears to the total gain taken into ac11 count under subsection (a) with respect to all prop12 erty to which subsection (a) applies. 

13 ‘‘(3) TERMINATION OF POSTPONEMENT.—No 

14 tax may be postponed under this subsection later 

15 than the due date for the return of tax imposed by 

16 this chapter for the taxable year which includes the 

17 date of death of the expatriate (or, if earlier, the 

18 time that the security provided with respect to the 

19 property fails to meet the requirements of paragraph 

20 (4), unless the taxpayer corrects such failure within 

21 the time specified by the Secretary). 

22 ‘‘(4) SECURITY.— 

23 ‘‘(A) IN GENERAL.—No election may be 

24 made under paragraph (1) with respect to any 
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1 property unless adequate security is provided to 

2 the Secretary with respect to such property. 

3 ‘‘(B) ADEQUATE SECURITY.—For purposes 

4 of subparagraph (A), security with respect to 

5 any property shall be treated as adequate secu6 rity if— 

7 ‘‘(i) it is a bond in an amount equal 

8 to the deferred tax amount under para9 graph (2) for the property, or 

10 ‘‘(ii) the taxpayer otherwise estab11 lishes to the satisfaction of the Secretary 

12 that the security is adequate. 

13 ‘‘(5) WAIVER OF CERTAIN RIGHTS.—No elec14 tion may be made under paragraph (1) unless the 

15 taxpayer consents to the waiver of any right under 

16 any treaty of the United States which would pre17 clude assessment or collection of any tax imposed by 

18 reason of this section. 

19 ‘‘(6) ELECTIONS.—An election under paragraph 

20 (1) shall only apply to property described in the elec21 tion and, once made, is irrevocable. An election may 

22 be made under paragraph (1) with respect to an in23 terest in a trust with respect to which gain is re24 quired to be recognized under subsection (f)(1). 
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1 ‘‘(7) INTEREST.—For purposes of section 

2 6601— 

3 ‘‘(A) the last date for the payment of tax 

4 shall be determined without regard to the elec5 tion under this subsection, and 

6 ‘‘(B) section 6621(a)(2) shall be applied by 

7 substituting ‘5 percentage points’ for ‘3 per8 centage points’ in subparagraph (B) thereof. 

9 ‘‘(c) COVERED EXPATRIATE.—For purposes of this 

10 section— 

11 ‘‘(1) IN GENERAL.—Except as provided in para12 graph (2), the term ‘covered expatriate’ means an 

13 expatriate. 

14 ‘‘(2) EXCEPTIONS.—An individual shall not be 

15 treated as a covered expatriate if— 

16 ‘‘(A) the individual— 

17 ‘‘(i) became at birth a citizen of the 

18 United States and a citizen of another 

19 country and, as of the expatriation date, 

20 continues to be a citizen of, and is taxed 

21 as a resident of, such other country, and 

22 ‘‘(ii) has not been a resident of the 

23 United States (as defined in section 

24 7701(b)(1)(A)(ii)) during the 5 taxable 
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1 years ending with the taxable year during 

2 which the expatriation date occurs, or 

3 ‘‘(B)(i) the individual’s relinquishment of 

4 United States citizenship occurs before such in5 dividual attains age 181/2, and 

6 ‘‘(ii) the individual has been a resident of 

7 the United States (as so defined) for not more 

8 than 5 taxable years before the date of relin9 quishment. 

10 ‘‘(d) EXEMPT PROPERTY; SPECIAL RULES FOR PEN11 SION PLANS.— 

12 ‘‘(1) EXEMPT PROPERTY.—This section shall 

13 not apply to the following: 

14 ‘‘(A) UNITED STATES REAL PROPERTY IN15 TERESTS.—Any United States real property in16 terest (as defined in section 897(c)(1)), other 

17 than stock of a United States real property 

18 holding corporation which does not, on the day 

19 before the expatriation date, meet the require20 ments of section 897(c)(2). 

21 ‘‘(B) SPECIFIED PROPERTY.—Any prop22 erty or interest in property not described in 

23 subparagraph (A) which the Secretary specifies 

24 in regulations. 
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1 ‘‘(2) SPECIAL RULES FOR CERTAIN RETIRE2 MENT PLANS.— 

3 ‘‘(A) IN GENERAL.—If a covered expatriate 

4 holds on the day before the expatriation date 

5 any interest in a retirement plan to which this 

6 paragraph applies— 

7 ‘‘(i) such interest shall not be treated 

8 as sold for purposes of subsection (a)(1), 

9 but 

10 ‘‘(ii) an amount equal to the present 

11 value of the expatriate’s nonforfeitable ac12 crued benefit shall be treated as having 

13 been received by such individual on such 

14 date as a distribution under the plan. 

15 ‘‘(B) TREATMENT OF SUBSEQUENT DIS16 TRIBUTIONS.—In the case of any distribution 

17 on or after the expatriation date to or on behalf 

18 of the covered expatriate from a plan from 

19 which the expatriate was treated as receiving a 

20 distribution under subparagraph (A), the 

21 amount otherwise includible in gross income by 

22 reason of the subsequent distribution shall be 

23 reduced by the excess of the amount includible 

24 in gross income under subparagraph (A) over 
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1 any portion of such amount to which this sub2 paragraph previously applied. 

3 ‘‘(C) TREATMENT OF SUBSEQUENT DIS4 TRIBUTIONS BY PLAN.—For purposes of this 

5 title, a retirement plan to which this paragraph 

6 applies, and any person acting on the plan’s be7 half, shall treat any subsequent distribution de8 scribed in subparagraph (B) in the same man9 ner as such distribution would be treated with10 out regard to this paragraph. 

11 ‘‘(D) APPLICABLE PLANS.—This para12 graph shall apply to— 

13 ‘‘(i) any qualified retirement plan (as 

14 defined in section 4974(c)), 

15 ‘‘(ii) an eligible deferred compensation 

16 plan (as defined in section 457(b)) of an 

17 eligible employer described in section 

18 457(e)(1)(A), and 

19 ‘‘(iii) to the extent provided in regula20 tions, any foreign pension plan or similar 

21 retirement arrangements or programs. 

22 ‘‘(e) DEFINITIONS.—For purposes of this section— 

23 ‘‘(1) EXPATRIATE.—The term ‘expatriate’ 

24 means— 
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1 ‘‘(A) any United States citizen who relin2 quishes citizenship, and 

3 ‘‘(B) any long-term resident of the United 

4 States who— 

5 ‘‘(i) ceases to be a lawful permanent 

6 resident of the United States (within the 

7 meaning of section 7701(b)(6)), or 

8 ‘‘(ii) commences to be treated as a 

9 resident of a foreign country under the 

10 provisions of a tax treaty between the 

11 United States and the foreign country and 

12 who does not waive the benefits of such 

13 treaty applicable to residents of the foreign 

14 country. 

15 ‘‘(2) EXPATRIATION DATE.—The term ‘expa16 triation date’ means— 

17 ‘‘(A) the date an individual relinquishes 

18 United States citizenship, or 

19 ‘‘(B) in the case of a long-term resident of 

20 the United States, the date of the event de21 scribed in clause (i) or (ii) of paragraph (1)(B). 

22 ‘‘(3) RELINQUISHMENT OF CITIZENSHIP.—A 

23 citizen shall be treated as relinquishing United 

24 States citizenship on the earliest of— 
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1 ‘‘(A) the date the individual renounces 

2 such individual’s United States nationality be3 fore a diplomatic or consular officer of the 

4 United States pursuant to paragraph (5) of sec5 tion 349(a) of the Immigration and Nationality 

6 Act (8 U.S.C. 1481(a)(5)), 

7 ‘‘(B) the date the individual furnishes to 

8 the United States Department of State a signed 

9 statement of voluntary relinquishment of 

10 United States nationality confirming the per11 formance of an act of expatriation specified in 

12 paragraph (1), (2), (3), or (4) of section 349(a) 

13 of the Immigration and Nationality Act (8 

14 U.S.C. 1481(a)(1)–(4)), 

15 ‘‘(C) the date the United States Depart16 ment of State issues to the individual a certifi17 cate of loss of nationality, or 

18 ‘‘(D) the date a court of the United States 

19 cancels a naturalized citizen’s certificate of nat20 uralization. 

21 Subparagraph (A) or (B) shall not apply to any indi22 vidual unless the renunciation or voluntary relin23 quishment is subsequently approved by the issuance 

24 to the individual of a certificate of loss of nationality 

25 by the United States Department of State. 
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1 ‘‘(4) LONG-TERM RESIDENT.—The term ‘long2 term resident’ has the meaning given to such term 

3 by section 877(e)(2). 

4 ‘‘(f) SPECIAL RULES APPLICABLE TO BENE5 FICIARIES’ INTERESTS IN TRUST.— 

6 ‘‘(1) IN GENERAL.—Except as provided in para7 graph (2), if an individual is determined under para8 graph (3) to hold an interest in a trust on the day 

9 before the expatriation date— 

10 ‘‘(A) the individual shall not be treated as 

11 having sold such interest, 

12 ‘‘(B) such interest shall be treated as a 

13 separate share in the trust, and 

14 ‘‘(C)(i) such separate share shall be treat15 ed as a separate trust consisting of the assets 

16 allocable to such share, 

17 ‘‘(ii) the separate trust shall be treated as 

18 having sold its assets on the day before the ex19 patriation date for their fair market value and 

20 as having distributed all of its assets to the in21 dividual as of such time, and 

22 ‘‘(iii) the individual shall be treated as hav23 ing recontributed the assets to the separate 

24 trust. 
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1 Subsection (a)(2) shall apply to any income, gain, or 

2 loss of the individual arising from a distribution de3 scribed in subparagraph (C)(ii). In determining the 

4 amount of such distribution, proper adjustments 

5 shall be made for liabilities of the trust allocable to 

6 an individual’s share in the trust. 

7 ‘‘(2) SPECIAL RULES FOR INTERESTS IN QUALI8 FIED TRUSTS.— 

9 ‘‘(A) IN GENERAL.—If the trust interest 

10 described in paragraph (1) is an interest in a 

11 qualified trust— 

12 ‘‘(i) paragraph (1) and subsection (a) 

13 shall not apply, and 

14 ‘‘(ii) in addition to any other tax im15 posed by this title, there is hereby imposed 

16 on each distribution with respect to such 

17 interest a tax in the amount determined 

18 under subparagraph (B). 

19 ‘‘(B) AMOUNT OF TAX.—The amount of 

20 tax under subparagraph (A)(ii) shall be equal to 

21 the lesser of— 

22 ‘‘(i) the highest rate of tax imposed by 

23 section 1(e) for the taxable year which in24 cludes the day before the expatriation date, 
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1 multiplied by the amount of the distribu2 tion, or 

3 ‘‘(ii) the balance in the deferred tax 

4 account immediately before the distribution 

5 determined without regard to any increases 

6 under subparagraph (C)(ii) after the 30th 

7 day preceding the distribution. 

8 ‘‘(C) DEFERRED TAX ACCOUNT.—For pur9 poses of subparagraph (B)(ii)— 

10 ‘‘(i) OPENING BALANCE.—The open11 ing balance in a deferred tax account with 

12 respect to any trust interest is an amount 

13 equal to the tax which would have been im14 posed on the allocable expatriation gain 

15 with respect to the trust interest if such 

16 gain had been included in gross income 

17 under subsection (a). 

18 ‘‘(ii) INCREASE FOR INTEREST.—The 

19 balance in the deferred tax account shall 

20 be increased by the amount of interest de21 termined (on the balance in the account at 

22 the time the interest accrues), for periods 

23 after the 90th day after the expatriation 

24 date, by using the rates and method appli25 cable under section 6621 for underpay-
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1 ments of tax for such periods, except that 

2 section 6621(a)(2) shall be applied by sub3 stituting ‘5 percentage points’ for ‘3 per4 centage points’ in subparagraph (B) there5 of. 

6 ‘‘(iii) DECREASE FOR TAXES PRE7 VIOUSLY PAID.—The balance in the tax de8 ferred account shall be reduced— 

9 ‘‘(I) by the amount of taxes im10 posed by subparagraph (A) on any 

11 distribution to the person holding the 

12 trust interest, and 

13 ‘‘(II) in the case of a person 

14 holding a nonvested interest, to the 

15 extent provided in regulations, by the 

16 amount of taxes imposed by subpara17 graph (A) on distributions from the 

18 trust with respect to nonvested inter19 ests not held by such person. 

20 ‘‘(D) ALLOCABLE EXPATRIATION GAIN.— 

21 For purposes of this paragraph, the allocable 

22 expatriation gain with respect to any bene23 ficiary’s interest in a trust is the amount of 

24 gain which would be allocable to such bene25 ficiary’s vested and nonvested interests in the 
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1 trust if the beneficiary held directly all assets 

2 allocable to such interests. 

3 ‘‘(E) TAX DEDUCTED AND WITHHELD.— 

4 ‘‘(i) IN GENERAL.—The tax imposed 

5 by subparagraph (A)(ii) shall be deducted 

6 and withheld by the trustees from the dis7 tribution to which it relates. 

8 ‘‘(ii) EXCEPTION WHERE FAILURE TO

9 WAIVE TREATY RIGHTS.—If an amount 

10 may not be deducted and withheld under 

11 clause (i) by reason of the distributee fail12 ing to waive any treaty right with respect 

13 to such distribution— 

14 ‘‘(I) the tax imposed by subpara15 graph (A)(ii) shall be imposed on the 

16 trust and each trustee shall be person17 ally liable for the amount of such tax, 

18 and 

19 ‘‘(II) any other beneficiary of the 

20 trust shall be entitled to recover from 

21 the distributee the amount of such tax 

22 imposed on the other beneficiary. 

23 ‘‘(F) DISPOSITION.—If a trust ceases to be 

24 a qualified trust at any time, a covered expa25 triate disposes of an interest in a qualified 
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1 trust, or a covered expatriate holding an inter2 est in a qualified trust dies, then, in lieu of the 

3 tax imposed by subparagraph (A)(ii), there is 

4 hereby imposed a tax equal to the lesser of— 

5 ‘‘(i) the tax determined under para6 graph (1) as if the day before the expatria7 tion date were the date of such cessation, 

8 disposition, or death, whichever is applica9 ble, or 

10 ‘‘(ii) the balance in the tax deferred 

11 account immediately before such date. 

12 Such tax shall be imposed on the trust and 

13 each trustee shall be personally liable for the 

14 amount of such tax and any other beneficiary 

15 of the trust shall be entitled to recover from the 

16 covered expatriate or the estate the amount of 

17 such tax imposed on the other beneficiary. 

18 ‘‘(G) DEFINITIONS AND SPECIAL RULES.— 

19 For purposes of this paragraph— 

20 ‘‘(i) QUALIFIED TRUST.—The term 

21 ‘qualified trust’ means a trust which is de22 scribed in section 7701(a)(30)(E). 

23 ‘‘(ii) VESTED INTEREST.—The term 

24 ‘vested interest’ means any interest which, 
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1 as of the day before the expatriation date, 

2 is vested in the beneficiary. 

3 ‘‘(iii) NONVESTED INTEREST.—The 

4 term ‘nonvested interest’ means, with re5 spect to any beneficiary, any interest in a 

6 trust which is not a vested interest. Such 

7 interest shall be determined by assuming 

8 the maximum exercise of discretion in 

9 favor of the beneficiary and the occurrence 

10 of all contingencies in favor of the bene11 ficiary. 

12 ‘‘(iv) ADJUSTMENTS.—The Secretary 

13 may provide for such adjustments to the 

14 bases of assets in a trust or a deferred tax 

15 account, and the timing of such adjust16 ments, in order to ensure that gain is 

17 taxed only once. 

18 ‘‘(v) COORDINATION WITH RETIRE19 MENT PLAN RULES.—This subsection shall 

20 not apply to an interest in a trust which 

21 is part of a retirement plan to which sub22 section (d)(2) applies. 

23 ‘‘(3) DETERMINATION OF BENEFICIARIES’ IN24 TEREST IN TRUST.— 
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1 ‘‘(A) DETERMINATIONS UNDER PARA2 GRAPH (1).—For purposes of paragraph (1), a 

3 beneficiary’s interest in a trust shall be based 

4 upon all relevant facts and circumstances, in5 cluding the terms of the trust instrument and 

6 any letter of wishes or similar document, histor7 ical patterns of trust distributions, and the ex8 istence of and functions performed by a trust 

9 protector or any similar adviser. 

10 ‘‘(B) OTHER DETERMINATIONS.—For pur11 poses of this section— 

12 ‘‘(i) CONSTRUCTIVE OWNERSHIP.—If 

13 a beneficiary of a trust is a corporation, 

14 partnership, trust, or estate, the share15 holders, partners, or beneficiaries shall be 

16 deemed to be the trust beneficiaries for 

17 purposes of this section. 

18 ‘‘(ii) TAXPAYER RETURN POSITION.— 

19 A taxpayer shall clearly indicate on its in20 come tax return— 

21 ‘‘(I) the methodology used to de22 termine that taxpayer’s trust interest 

23 under this section, and 

24 ‘‘(II) if the taxpayer knows (or 

25 has reason to know) that any other 
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1 beneficiary of such trust is using a 

2 different methodology to determine 

3 such beneficiary’s trust interest under 

4 this section. 

5 ‘‘(g) TERMINATION OF DEFERRALS, ETC.—In the 

6 case of any covered expatriate, notwithstanding any other 

7 provision of this title— 

8 ‘‘(1) any period during which recognition of in9 come or gain is deferred shall terminate on the day 

10 before the expatriation date, and 

11 ‘‘(2) any extension of time for payment of tax 

12 shall cease to apply on the day before the expatria13 tion date and the unpaid portion of such tax shall 

14 be due and payable at the time and in the manner 

15 prescribed by the Secretary. 

16 ‘‘(h) IMPOSITION OF TENTATIVE TAX.— 

17 ‘‘(1) IN GENERAL.—If an individual is required 

18 to include any amount in gross income under sub19 section (a) for any taxable year, there is hereby im20 posed, immediately before the expatriation date, a 

21 tax in an amount equal to the amount of tax which 

22 would be imposed if the taxable year were a short 

23 taxable year ending on the expatriation date. 
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1 ‘‘(2) DUE DATE.—The due date for any tax im2 posed by paragraph (1) shall be the 90th day after 

3 the expatriation date. 

4 ‘‘(3) TREATMENT OF TAX.—Any tax paid under 

5 paragraph (1) shall be treated as a payment of the 

6 tax imposed by this chapter for the taxable year to 

7 which subsection (a) applies. 

8 ‘‘(4) DEFERRAL OF TAX.—The provisions of 

9 subsection (b) shall apply to the tax imposed by this 

10 subsection to the extent attributable to gain includ11 ible in gross income by reason of this section. 

12 ‘‘(i) SPECIAL LIENS FOR DEFERRED TAX

13 AMOUNTS.— 

14 ‘‘(1) IMPOSITION OF LIEN.— 

15 ‘‘(A) IN GENERAL.—If a covered expatriate 

16 makes an election under subsection (a)(4) or 

17 (b) which results in the deferral of any tax im18 posed by reason of subsection (a), the deferred 

19 amount (including any interest, additional 

20 amount, addition to tax, assessable penalty, and 

21 costs attributable to the deferred amount) shall 

22 be a lien in favor of the United States on all 

23 property of the expatriate located in the United 

24 States (without regard to whether this section 

25 applies to the property). 
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1 ‘‘(B) DEFERRED AMOUNT.—For purposes 

2 of this subsection, the deferred amount is the 

3 amount of the increase in the covered expatri4 ate’s income tax which, but for the election 

5 under subsection (a)(4) or (b), would have oc6 curred by reason of this section for the taxable 

7 year including the expatriation date. 

8 ‘‘(2) PERIOD OF LIEN.—The lien imposed by 

9 this subsection shall arise on the expatriation date 

10 and continue until— 

11 ‘‘(A) the liability for tax by reason of this 

12 section is satisfied or has become unenforceable 

13 by reason of lapse of time, or 

14 ‘‘(B) it is established to the satisfaction of 

15 the Secretary that no further tax liability may 

16 arise by reason of this section. 

17 ‘‘(3) CERTAIN RULES APPLY.—The rules set 

18 forth in paragraphs (1), (3), and (4) of section 

19 6324A(d) shall apply with respect to the lien im20 posed by this subsection as if it were a lien imposed 

21 by section 6324A. 

22 ‘‘(j) REGULATIONS.—The Secretary shall prescribe 

23 such regulations as may be necessary or appropriate to 

24 carry out the purposes of this section.’’. 
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1 (b) INCLUSION IN INCOME OF GIFTS AND BEQUESTS

2 RECEIVED BY UNITED STATES CITIZENS AND RESIDENTS

3 FROM EXPATRIATES.—Section 102 (relating to gifts, etc. 

4 not included in gross income) is amended by adding at 

5 the end the following new subsection: 

6 ‘‘(d) GIFTS AND INHERITANCES FROM COVERED EX7 PATRIATES.— 

8 ‘‘(1) IN GENERAL.—Subsection (a) shall not ex9 clude from gross income the value of any property 

10 acquired by gift, bequest, devise, or inheritance from 

11 a covered expatriate after the expatriation date. For 

12 purposes of this subsection, any term used in this 

13 subsection which is also used in section 877A shall 

14 have the same meaning as when used in section 

15 877A. 

16 ‘‘(2) EXCEPTIONS FOR TRANSFERS OTHERWISE

17 SUBJECT TO ESTATE OR GIFT TAX.—Paragraph (1) 

18 shall not apply to any property if either— 

19 ‘‘(A) the gift, bequest, devise, or inherit20 ance is— 

21 ‘‘(i) shown on a timely filed return of 

22 tax imposed by chapter 12 as a taxable gift 

23 by the covered expatriate, or 

24 ‘‘(ii) included in the gross estate of 

25 the covered expatriate for purposes of 
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1 chapter 11 and shown on a timely filed re2 turn of tax imposed by chapter 11 of the 

3 estate of the covered expatriate, or 

4 ‘‘(B) no such return was timely filed but 

5 no such return would have been required to be 

6 filed even if the covered expatriate were a cit7 izen or long-term resident of the United 

8 States.’’. 

9 (c) DEFINITION OF TERMINATION OF UNITED

10 STATES CITIZENSHIP.—Section 7701(a) is amended by 

11 adding at the end the following new paragraph: 

12 ‘‘(49) TERMINATION OF UNITED STATES CITI13 ZENSHIP.— 

14 ‘‘(A) IN GENERAL.—An individual shall 

15 not cease to be treated as a United States cit16 izen before the date on which the individual’s 

17 citizenship is treated as relinquished under sec18 tion 877A(e)(3). 

19 ‘‘(B) DUAL CITIZENS.—Under regulations 

20 prescribed by the Secretary, subparagraph (A) 

21 shall not apply to an individual who became at 

22 birth a citizen of the United States and a cit23 izen of another country.’’. 

24 (d) INELIGIBILITY FOR VISA OR ADMISSION TO

25 UNITED STATES.— 
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1 (1) IN GENERAL.—Section 212(a)(10)(E) of the 

2 Immigration and Nationality Act (8 U.S.C. 

3 1182(a)(10)(E)) is amended to read as follows: 

4 ‘‘(E) FORMER CITIZENS NOT IN COMPLI5 ANCE WITH EXPATRIATION REVENUE PROVI6 SIONS.—Any alien who is a former citizen of 

7 the United States who relinquishes United 

8 States citizenship (within the meaning of sec9 tion 877A(e)(3) of the Internal Revenue Code 

10 of 1986) and who is not in compliance with sec11 tion 877A of such Code (relating to expatria12 tion) is inadmissible.’’. 

13 (2) AVAILABILITY OF INFORMATION.— 

14 (A) IN GENERAL.—Section 6103(l) (relat15 ing to disclosure of returns and return informa16 tion for purposes other than tax administration) 

17 is amended by adding at the end the following 

18 new paragraph: 

19 ‘‘(21) DISCLOSURE TO DENY VISA OR ADMIS20 SION TO CERTAIN EXPATRIATES.—Upon written re21 quest of the Attorney General or the Attorney Gen22 eral’s delegate, the Secretary shall disclose whether 

23 an individual is in compliance with section 877A 

24 (and if not in compliance, any items of noncompli25 ance) to officers and employees of the Federal agen-
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1 cy responsible for administering section 

2 212(a)(10)(E) of the Immigration and Nationality 

3 Act solely for the purpose of, and to the extent nec4 essary in, administering such section 

5 212(a)(10)(E).’’. 

6 (B) SAFEGUARDS.—Section 6103(p)(4) 

7 (relating to safeguards) is amended by striking 

8 ‘‘or (20)’’ each place it appears and inserting 

9 ‘‘(20), or (21)’’. 

10 (3) EFFECTIVE DATES.—The amendments 

11 made by this subsection shall apply to individuals 

12 who relinquish United States citizenship on or after 

13 the date of the enactment of this Act. 

14 (e) CONFORMING AMENDMENTS.— 

15 (1) Section 877 is amended by adding at the 

16 end the following new subsection: 

17 ‘‘(h) APPLICATION.—This section shall not apply to 

18 an expatriate (as defined in section 877A(e)) whose expa19 triation date (as so defined) occurs on or after the date 

20 of the enactment of this subsection.’’. 

21 (2) Section 2107 is amended by adding at the 

22 end the following new subsection: 

23 ‘‘(f) APPLICATION.—This section shall not apply to 

24 any expatriate subject to section 877A.’’. 
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1 (3) Section 2501(a)(3) is amended by adding at 

2 the end the following new subparagraph: 

3 ‘‘(C) APPLICATION.—This paragraph shall 

4 not apply to any expatriate subject to section 

5 877A.’’. 

6 (4) Section 6039G(a) is amended by inserting 

7 ‘‘or 877A’’ after ‘‘section 877(b)’’. 

8 (5) The second sentence of section 6039G(d) is 

9 amended by inserting ‘‘or who relinquishes United 

10 States citizenship (within the meaning of section 

11 877A(e)(3))’’ after ‘‘section 877(a))’’. 

12 (f) CLERICAL AMENDMENT.—The table of sections 

13 for subpart A of part II of subchapter N of chapter 1 

14 is amended by inserting after the item relating to section 

15 877 the 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 

19 shall apply to expatriates (within the meaning of 

20 section 877A(e) of the Internal Revenue Code of 

21 1986, as added by this section) whose expatriation 

22 date (as so defined) occurs on or after the date of 

23 the enactment of this Act. 

24 (2) GIFTS AND BEQUESTS.—Section 102(d) of 

25 the Internal Revenue Code of 1986 (as added by 
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1 subsection (b)) shall apply to gifts and bequests re2 ceived on or after the date of the enactment of this 

3 Act, from an individual or the estate of an individual 

4 whose expatriation date (as so defined) occurs after 

5 such date. 

6 (3) DUE DATE FOR TENTATIVE TAX.—The due 

7 date under section 877A(h)(2) of the Internal Rev8 enue Code of 1986, as added by this section, shall 

9 in no event occur before the 90th day after the date 

10 of the enactment of this Act. 

11 Subtitle F—Miscellaneous 

12 Provisions 

13 SEC. 551. TREATMENT OF CONTINGENT PAYMENT CON14 VERTIBLE DEBT INSTRUMENTS. 

15 (a) IN GENERAL.—Section 1275(d) (relating to regu16 lation authority) is amended— 

17 (1) by striking ‘‘The Secretary’’ and inserting 

18 the following: 

19 ‘‘(1) IN GENERAL.—The Secretary’’, and 

20 (2) by adding at the end the following new 

21 paragraph: 

22 ‘‘(2) TREATMENT OF CONTINGENT PAYMENT

23 CONVERTIBLE DEBT.— 

24 ‘‘(A) IN GENERAL.—In the case of a debt 

25 instrument which— 
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1 ‘‘(i) is convertible into stock of the 

2 issuing corporation, into stock or debt of a 

3 related party (within the meaning of sec4 tion 267(b) or 707(b)(1)), or into cash or 

5 other property in an amount equal to the 

6 approximate value of such stock or debt, 

7 and 

8 ‘‘(ii) provides for contingent pay9 ments, 

10 any regulations which require original issue dis11 count to be determined by reference to the com12 parable yield of a noncontingent fixed-rate debt 

13 instrument shall be applied as if the regulations 

14 require that such comparable yield be deter15 mined by reference to a noncontingent fixed16 rate debt instrument which is convertible into 

17 stock. 

18 ‘‘(B) SPECIAL RULE.—For purposes of 

19 subparagraph (A), the comparable yield shall be 

20 determined without taking into account the 

21 yield resulting from the conversion of a debt in22 strument into stock.’’. 

23 (b) CROSS REFERENCE.—Section 163(e)(6) (relating 

24 to cross references) is amended by adding at the end the 

25 following: 
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1 ‘‘For the treatment of contingent payment 

2 convertible debt, see section 1275(d)(2).’’. 

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

4 this section shall apply to debt instruments issued on or 

5 after the date of the enactment of this Act. 

6 SEC. 552. GRANT OF TREASURY REGULATORY AUTHORITY 

7 TO ADDRESS FOREIGN TAX CREDIT TRANS8 ACTIONS INVOLVING INAPPROPRIATE SEPA9 RATION OF FOREIGN TAXES FROM RELATED 

10 FOREIGN INCOME. 

11 (a) IN GENERAL.—Section 901 (relating to taxes of 

12 foreign countries and of possessions of United States) is 

13 amended by redesignating subsection (m) as subsection 

14 (n) and by inserting after subsection (l) the following new 

15 subsection: 

16 ‘‘(m) REGULATIONS.—The Secretary may prescribe 

17 regulations disallowing a credit under subsection (a) for 

18 all or a portion of any foreign tax, or allocating a foreign 

19 tax among 2 or more persons, in cases where the foreign 

20 tax is imposed on any person in respect of income of an21 other person or in other cases involving the inappropriate 

22 separation of the foreign tax from the related foreign in23 come.’’. 
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1 (b) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to transactions entered into after 

3 the date of the enactment of this Act. 

4 SEC. 553. REPEAL OF SPECIAL PROPERTY EXCEPTION TO 

5 LEASING PROVISIONS OF THE AMERICAN 

6 JOBS CREATION ACT OF 2004. 

7 (a) IN GENERAL.—Section 849(b) of the American 

8 Jobs Creation Act of 2004 is amended by striking para9 graphs (1) and (2), by redesignating paragraphs (3) and 

10 (4) as paragraphs (1) and (2), respectively. 

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

12 this section shall take effect as if included in the enact13 ment of the American Jobs Creation Act of 2004. 

14 SEC. 554. APPLICATION OF EARNINGS STRIPPING RULES 

15 TO PARTNERS WHICH ARE CORPORATIONS. 

16 (a) IN GENERAL.—Section 163(j) (relating to limita17 tion on deduction for interest on certain indebtedness) is 

18 amended by redesignating paragraph (8) as paragraph (9) 

19 and by inserting after paragraph (7) the following new 

20 paragraph: 

21 ‘‘(8) TREATMENT OF CORPORATE PARTNERS.— 

22 Except to the extent provided by regulations, in ap23 plying this subsection to a corporation which owns 

24 (directly or indirectly) an interest in a partnership— 
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1 ‘‘(A) such corporation’s distributive share 

2 of interest income paid or accrued to such part3 nership shall be treated as interest income paid 

4 or accrued to such corporation, 

5 ‘‘(B) such corporation’s distributive share 

6 of interest paid or accrued by such partnership 

7 shall be treated as interest paid or accrued by 

8 such corporation, and 

9 ‘‘(C) such corporation’s share of the liabil10 ities of such partnership shall be treated as li11 abilities of such corporation.’’. 

12 (b) ADDITIONAL REGULATORY AUTHORITY.—Section 

13 163(j)(9) (relating to regulations), as redesignated by sub14 section (a), is amended by striking ‘‘and’’ at the end of 

15 subparagraph (B), by striking the period at the end of 

16 subparagraph (C) and inserting ‘‘, and’’, and by adding 

17 at the end the following new subparagraph: 

18 ‘‘(D) regulations providing for the realloca19 tion of shares of partnership indebtedness, or 

20 distributive shares of the partnership’s interest 

21 income or interest expense, as may be appro22 priate to carry out the purposes of this sub23 section.’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to taxable years beginning on or 

3 after the date of the enactment of this Act. 

4 SEC. 555. LIMITATION OF EMPLOYER DEDUCTION FOR CER5 TAIN ENTERTAINMENT EXPENSES. 

6 (a) IN GENERAL.—Paragraph (2) of section 274(e) 

7 (relating to expenses treated as compensation) is amended 

8 to read as follows: 

9 ‘‘(2) EXPENSES TREATED AS COMPENSATION.— 

10 Expenses for goods, services, and facilities, to the 

11 extent that the expenses do not exceed the amount 

12 of the expenses which are treated by the taxpayer, 

13 with respect to the recipient of the entertainment, 

14 amusement, or recreation, as compensation to an 

15 employee on the taxpayer’s return of tax under this 

16 chapter and as wages to such employee for purposes 

17 of chapter 24 (relating to withholding of income tax 

18 at source on wages).’’. 

19 (b) PERSONS NOT EMPLOYEES.—Paragraph (9) of 

20 section 274(e) is amended by striking ‘‘to the extent that 

21 the expenses are includible in the gross income’’ and in22 serting ‘‘to the extent that the expenses do not exceed the 

23 amount of the expenses which are includible in the gross 

24 income’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to expenses incurred after the date 

3 of the enactment of this Act. 

4 SEC. 556. INCREASE IN AGE OF MINOR CHILDREN WHOSE 

5 UNEARNED INCOME IS TAXED AS IF PAR6 ENT’S INCOME. 

7 (a) IN GENERAL.—Section 1(g)(2)(A) (relating to 

8 child to whom subsection applies) is amended by striking 

9 ‘‘age 14’’ and inserting ‘‘age 18’’. 

10 (b) TREATMENT OF DISTRIBUTIONS FROM QUALI11 FIED DISABILITY TRUSTS.—Section 1(g)(4) (relating to 

12 net unearned income) is amended by adding at the end 

13 the following new subparagraph: 

14 ‘‘(C) TREATMENT OF DISTRIBUTIONS

15 FROM QUALIFIED DISABILITY TRUSTS.—For 

16 purposes of this subsection, in the case of any 

17 child who is a beneficiary of a qualified dis18 ability trust (as defined in section 

19 642(b)(2)(C)(ii)), any amount included in the 

20 income of such child under sections 652 and 

21 662 during a taxable year shall be considered 

22 earned income of such child for such taxable 

23 year.’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to taxable years beginning after 

3 December 31, 2005. 

4 SEC. 557. LOAN AND REDEMPTION REQUIREMENTS ON 

5 POOLED FINANCING REQUIREMENTS. 

6 (a) STRENGTHENED REASONABLE EXPECTATION

7 REQUIREMENT.—Subparagraph (A) of section 149(f)(2) 

8 (relating to reasonable expectation requirement) is amend9 ed to read as follows: 

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

11 this paragraph are met with respect to an issue 

12 if the issuer reasonably expects that— 

13 ‘‘(i) as of the close of the 1-year pe14 riod beginning on the date of issuance of 

15 the issue, at least 50 percent of the net 

16 proceeds of the issue (as of the close of 

17 such period) will have been used directly or 

18 indirectly to make or finance loans to ulti19 mate borrowers, and 

20 ‘‘(ii) as of the close of the 3-year pe21 riod beginning on such date of issuance, at 

22 least 95 percent of the net proceeds of the 

23 issue (as of the close of such period) will 

24 have been so used.’’. 
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1 (b) WRITTEN LOAN COMMITMENT AND REDEMPTION

2 REQUIREMENTS.—Section 149(f) (relating to treatment 

3 of certain pooled financing bonds) is amended by redesig4 nating paragraphs (4) and (5) as paragraphs (6) and (7), 

5 respectively, and by inserting after paragraph (3) the fol6 lowing new paragraphs: 

7 ‘‘(4) WRITTEN LOAN COMMITMENT REQUIRE8 MENT.— 

9 ‘‘(A) IN GENERAL.—The requirement of 

10 this paragraph is met with respect to an issue 

11 if the issuer receives prior to issuance written 

12 loan commitments identifying the ultimate po13 tential borrowers of at least 50 percent of the 

14 net proceeds of such issue. 

15 ‘‘(B) EXCEPTION.—Subparagraph (A) 

16 shall not apply with respect to any issuer which 

17 is a State (or an integral part of a State) 

18 issuing pooled financing bonds to make or fi19 nance loans to subordinate governmental units 

20 of such State or to State-created entities pro21 viding financing for water-infrastructure 

22 projects through the federally-sponsored State 

23 revolving fund program. 

24 ‘‘(5) REDEMPTION REQUIREMENT.—The re25 quirement of this paragraph is met if to the extent 
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1 that less than the percentage of the proceeds of an 

2 issue required to be used under clause (i) or (ii) of 

3 paragraph (2)(A) is used by the close of the period 

4 identified in such clause, the issuer uses an amount 

5 of proceeds equal to the excess of— 

6 ‘‘(A) the amount required to be used under 

7 such clause, over 

8 ‘‘(B) the amount actually used by the close 

9 of such period, 

10 to redeem outstanding bonds within 90 days after 

11 the end of such period.’’. 

12 (c) ELIMINATION OF DISREGARD OF POOLED BONDS

13 IN DETERMINING ELIGIBILITY FOR SMALL ISSUER EX14 CEPTION TO ARBITRAGE REBATE.—Section 

15 148(f)(4)(D)(ii) (relating to aggregation of issuers) is 

16 amended by striking subclause (II) and by redesignating 

17 subclauses (III) and (IV) as subclauses (II) and (III), re18 spectively. 

19 (d) CONFORMING AMENDMENTS.— 

20 (1) Section 149(f)(1) is amended by striking 

21 ‘‘paragraphs (2) and (3)’’ and inserting ‘‘paragraphs 

22 (2), (3), (4), and (5)’’. 

23 (2) Section 149(f)(7)(B), as redesignated by 

24 subsection (b), is amended by striking ‘‘paragraph 

25 (4)(A)’’ and inserting ‘‘paragraph (6)(A)’’. 
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1 (3) Section 54(l)(2) is amended by striking 

2 ‘‘section 149(f)(4)(A)’’ and inserting ‘‘section 

3 149(f)(6)(A)’’. 

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

5 this section shall apply to bonds issued after the date of 

6 the enactment of this Act. 

7 SEC. 558. REPORTING OF INTEREST ON TAX-EXEMPT 

8 BONDS. 

9 (a) IN GENERAL.—Section 6049(b)(2) (relating to 

10 exceptions) is amended by striking subparagraph (B) and 

11 by redesignating subparagraphs (C) and (D) as subpara12 graphs (B) and (C), respectively. 

13 (b) CONFORMING AMENDMENT.—Section 

14 6049(b)(2)(C), as redesignated by subsection (a), is 

15 amended by striking ‘‘subparagraph (C)’’ and inserting 

16 ‘‘subparagraph (B)’’. 

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

18 this section shall apply to interest earned after December 

19 31, 2005. 

20 SEC. 559. MODIFICATION OF CREDIT FOR PRODUCING 

21 FUEL FROM A NONCONVENTIONAL SOURCE. 

22 (a) TAXABLE YEARS ENDING BEFORE 2006.— 

23 (1) MODIFICATION OF PHASEOUT.— 
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1 (A) IN GENERAL.—Section 29(b)(1)(A) is 

2 amended by inserting ‘‘the calendar year pre3 ceding’’ before ‘‘the calendar year’’. 

4 (B) CONFORMING AMENDMENTS.—Section 

5 29(b)((2) is amended— 

6 (i) by striking ‘‘The’’ and inserting 

7 ‘‘With respect to any calendar year, the’’, 

8 and 

9 (ii) by striking ‘‘for the calendar year 

10 in which the sale occurs’’ and inserting 

11 ‘‘for such calendar year’’. 

12 (2) NO INFLATION ADJUSTMENT FOR THE

13 CREDIT AMOUNT IN 2005.—Section 29(b)(2), as 

14 amended by paragraph (1), is amended by adding at 

15 the end the following new sentence: ‘‘This paragraph 

16 shall not apply with respect to the $3 amount in 

17 subsection (a) for calendar year 2005 and the 

18 amount in effect under subsection (a) for sales in 

19 such calendar year shall be the amount which was 

20 in effect for sales in calendar year 2004.’’. 

21 (b) TAXABLE YEARS ENDING AFTER 2005.— 

22 (1) MODIFICATION OF PHASEOUT.— 

23 (A) IN GENERAL.—Section 45K(b)(1)(A) 

24 is amended by inserting ‘‘the calendar year pre25 ceding’’ before ‘‘the calendar year’’. 
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1 (B) CONFORMING AMENDMENTS.—Section 

2 45K(b)((2) is amended— 

3 (i) by striking ‘‘The’’ and inserting 

4 ‘‘With respect to any calendar year, the’’, 

5 and 

6 (ii) by striking ‘‘for the calendar year 

7 in which the sale occurs’’ and inserting 

8 ‘‘for such calendar year’’. 

9 (2) NO INFLATION ADJUSTMENT FOR THE

10 CREDIT AMOUNT IN 2005, 2006, AND 2007.—Section 

11 45K(b)(2), as amended by paragraph (1), is amend12 ed by adding at the end the following new sentence: 

13 ‘‘This paragraph shall not apply with respect to the 

14 $3 amount in subsection (a) for calendar years 

15 2005, 2006, and 2007 and the amount in effect 

16 under subsection (a) for sales in each such calendar 

17 year shall be the amount which was in effect for 

18 sales in calendar year 2004.’’. 

19 (3) TREATMENT OF COKE AND COKE GAS.— 

20 (A) NONAPPLICATION OF PHASEOUT.— 

21 Section 45K(g)(2) is amended by adding at the 

22 end the following new subparagraph: 

23 ‘‘(D) NONAPPLICATION OF PHASEOUT.— 

24 Subsection (b)(1) shall not apply.’’. 
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1 (B) APPLICATION OF INFLATION ADJUST2 MENT .—Section 45K(g)(2)(B) is amended by 

3 inserting ‘‘and the last sentence of subsection 

4 (b)(2) shall not apply.’’. 

5 (C) CLARIFICATION OF QUALIFYING FACIL6 ITY.—Section 45K(g)(1) is amended by insert7 ing ‘‘(other than from petroleum based prod8 ucts)’’ after ‘‘coke or coke gas’’. 

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

10 this section shall apply to fuel sold after December 31, 

11 2004. 

12 SEC. 560. MODIFICATION OF INDIVIDUAL ESTIMATED TAX 

13 SAFE HARBOR. 

14 (a) IN GENERAL.—The table contained in section 

15 6654(d)(1)(C) is amended by striking ‘‘2002 or there16 after’’ and inserting ‘‘2002, 2003, 2004, or 2005’’ and 

17 by adding at the end the following new items: 

‘‘2006 ................................................................................................. 119.5

2007 or thereafter .............................................................................. 110’’. 

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

19 this section shall apply with respect to any installment 

20 payment for taxable years beginning after December 31, 

21 2005. 

22 SEC. 561. REVALUATION OF LIFO INVENTORIES OF LARGE 

23 INTEGRATED OIL COMPANIES. 

24 (a) GENERAL RULE.—Notwithstanding any other 

25 provision of law, if a taxpayer is an applicable integrated 
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1 oil company for its last taxable year ending in calendar 

2 year 2005, the taxpayer shall— 

3 (1) increase, effective as of the close of such 

4 taxable year, the value of each historic LIFO layer 

5 of inventories of crude oil, natural gas, or any other 

6 petroleum product (within the meaning of section 

7 4611) by the layer adjustment amount, and 

8 (2) decrease its cost of goods sold for such tax9 able year by the aggregate amount of the increases 

10 under paragraph (1). 

11 If the aggregate amount of the increases under paragraph 

12 (1) exceed the taxpayer’s cost of goods sold for such tax13 able year, the taxpayer’s gross income for such taxable 

14 year shall be increased by the amount of such excess. 

15 (b) LAYER ADJUSTMENT AMOUNT.—For purposes of 

16 this section— 

17 (1) IN GENERAL.—The term ‘‘layer adjustment 

18 amount’’ means, with respect to any historic LIFO 

19 layer, the product of— 

20 (A) $18.75, and 

21 (B) the number of barrels of crude oil (or 

22 in the case of natural gas or other petroleum 

23 products, the number of barrel-of-oil equiva24 lents) represented by the layer. 
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1 (2) BARREL-OF-OIL EQUIVALENT.—The term 

2 ‘‘barrel-of-oil equivalent’’ has the meaning given 

3 such term by section 29(d)(5) (as in effect before its 

4 redesignation by the Energy Tax Incentives Act of 

5 2005). 

6 (c) APPLICATION OF REQUIREMENT.— 

7 (1) NO CHANGE IN METHOD OF ACCOUNTING.— 

8 Any adjustment required by this section shall not be 

9 treated as a change in method of accounting. 

10 (2) UNDERPAYMENTS OF ESTIMATED TAX.—No 

11 addition to the tax shall be made under section 6655 

12 of the Internal Revenue Code of 1986 (relating to 

13 failure by corporation to pay estimated tax) with re14 spect to any underpayment of an installment re15 quired to be paid with respect to the taxable year 

16 described in subsection (a) to the extent such under17 payment was created or increased by this section. 

18 (d) APPLICABLE INTEGRATED OIL COMPANY.—For 

19 purposes of this section, the term ‘‘applicable integrated 

20 oil company’’ means an integrated oil company (as defined 

21 in section 291(b)(4) of the Internal Revenue Code of 

22 1986) which had gross receipts in excess of 

23 $1,000,000,000 for its last taxable year ending during cal24 endar year 2005. For purposes of this subsection, all per25 sons treated as a single employer under subsections (a) 
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1 and (b) of section 52 of the Internal Revenue Code of 

2 1986 shall be treated as 1 person and, in the case of a 

3 short taxable year, the rule under section 448(c)(3)(B) 

4 shall apply. 

5 SEC. 562. ELIMINATION OF AMORTIZATION OF GEOLOGI6 CAL AND GEOPHYSICAL EXPENDITURES FOR 

7 MAJOR INTEGRATED OIL COMPANIES. 

8 (a) IN GENERAL.—Section 167(h) is amended by 

9 adding at the end the following new paragraph: 

10 ‘‘(5) NONAPPLICATION TO MAJOR INTEGRATED

11 OIL COMPANIES.—This subsection shall not apply 

12 with respect to any expenses paid or incurred for 

13 any taxable year by any integrated oil company (as 

14 defined in section 291(b)(4)) which has an average 

15 daily worldwide production of crude oil of at least 

16 500,000 barrels for such taxable year.’’. 

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

18 this section shall take effect as if included in the amend19 ment made by section 1329(a) of the Energy Policy Act 

20 of 2005. 
Calendar No. 288 

109TH CONGRESS 

1ST SESSION S. 2020 

A BILL 

To provide for reconciliation pursuant to section 

for fiscal year 2006. 202(b) of the concurrent resolution on the budget 

NOVEMBER 16, 2005 

Read twice and placed on the calendar