I 

111TH CONGRESS 

2D SESSION H. R. 5962 

To amend the Internal Revenue Code of 1986 to reduce the maximum 

corporate income tax rate and to offset the revenue cost by repealing 

certain corporate tax benefits. 

IN THE HOUSE OF REPRESENTATIVES 

JULY 29, 2010 

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

Committee on Ways and Means 

A BILL 

To amend the Internal Revenue Code of 1986 to reduce 

the maximum corporate income tax rate and to offset 

the revenue cost by repealing certain corporate tax benefits. 

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

5 ‘‘American Business Competitiveness Act of 2010’’. 

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment 


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

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

4 (c) TABLE OF CONTENTS.— 

Sec. 1. Short title; amendment of 1986 code. 

TITLE I—CORPORATE INCOME TAX RATE REDUCTION 

Sec. 101. Reduction in top corporate marginal rate. 

TITLE II—PROVISIONS RELATED TO FOREIGN SOURCE INCOME 

Sec. 201. Allocation of expenses and taxes on basis of repatriation of foreign 

income. 

Sec. 202. Repeal of worldwide allocation of interest. 

Sec. 203. Limitation on treaty benefits for certain deductible payments. 

TITLE III—MODIFICATION OF ACCOUNTING RULES 

Sec. 301. Repeal of last-in, first-out method of inventory. 

Sec. 302. Repeal of lower of cost or market method of inventory. 

Sec. 303. Special rule for service providers on accrual method not applicable to 

C corporations. 

TITLE IV—MODIFICATION TO EXPENSING AND DEPRECIATION 

RULES 

Sec. 401. Small business expensing provisions made permanent. 

Sec. 402. Amortization of goodwill and other intangibles. 

TITLE V—CODIFICATION OF ECONOMIC SUBSTANCE DOCTRINE 

Sec. 501. Codification of economic substance doctrine. 

TITLE VI—MODIFICATIONS TO DEDUCTIONS FOR DIVIDENDS 

RECEIVED 

Sec. 601. Modifications to deductions for dividends received. 

TITLE VII—OTHER PROVISIONS 

Sec. 701. Recognition of ordinary income on sale or exercise of stock option in 

S corporation with an ESOP. 

Sec. 702. Treatment of securities of a controlled corporation exchanged for assets in certain reorganizations. 


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1 TITLE I—CORPORATE INCOME 

2 TAX RATE REDUCTION 

3 SEC. 101. REDUCTION IN TOP CORPORATE MARGINAL 

4 RATE. 

5 (a) GENERAL RULE.—Paragraph (1) of section 11(b) 

6 (relating to amount of tax) is amended— 

7 (1) by inserting ‘‘and’’ at the end of subpara8 graph (A), 

9 (2) by striking subparagraphs (B), (C), and (D) 

10 and inserting the following: 

11 ‘‘(B) 23 percent of so much of the taxable 

12 income as exceeds $50,000.’’, and 

13 (3) by striking ‘‘$11,750’’ and all that follows 

14 and inserting ‘‘$9,500.’’. 

15 (b) PERSONAL SERVICE CORPORATIONS.—Para16 graph (2) of section 11(b) is amended by striking ‘‘35 per17 cent’’ and inserting ‘‘23 percent’’. 

18 (c) CONFORMING AMENDMENTS.— 

19 (1) Section 1201 is amended by striking ‘‘35 

20 percent’’ each place it appears and inserting ‘‘23 

21 percent’’. 

22 (2) Paragraphs (1) and (2) of section 1445(e) 

23 are each amended by striking ‘‘35 percent’’ and in24 serting ‘‘23 percent’’. 


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

2 this section shall apply to taxable years beginning after 

3 December 31, 2010, except that the amendments made 

4 by subsection (c) shall take effect on January 1, 2011. 

5 TITLE II—PROVISIONS RELATED 

6 TO FOREIGN SOURCE INCOME 

7 SEC. 201. ALLOCATION OF EXPENSES AND TAXES ON BASIS 

8 OF REPATRIATION OF FOREIGN INCOME. 

9 (a) IN GENERAL.—Part III of subchapter N of chap10 ter 1 is amended by inserting after subpart G the following 

11 new subpart: 

12 ‘‘Subpart H—Special Rules for Allocation of Foreign13 Related Deductions and Foreign Tax Credits 

‘‘Sec. 975. Deductions allocated to deferred foreign income may not offset 

United States source income. 

‘‘Sec. 976. Amount of foreign taxes computed on overall basis. 

‘‘Sec. 977. Application of subpart. 

14 ‘‘SEC. 975. DEDUCTIONS ALLOCATED TO DEFERRED FOR15 EIGN INCOME MAY NOT OFFSET UNITED 

16 STATES SOURCE INCOME. 

17 ‘‘(a) CURRENT YEAR DEDUCTIONS.—For purposes 

18 of this chapter, foreign-related deductions for any taxable 

19 year— 

20 ‘‘(1) shall be taken into account for such tax21 able year only to the extent that such deductions are 

22 allocable to currently-taxed foreign income, and 


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1 ‘‘(2) to the extent not so allowed, shall be taken 

2 into account in subsequent taxable years as provided 

3 in subsection (b). 

4 Foreign-related deductions shall be allocated to currently5 taxed foreign income in the same proportion which cur6 rently-taxed foreign income bears to the sum of currently7 taxed foreign income and deferred foreign income. 

8 ‘‘(b) DEDUCTIONS RELATED TO REPATRIATED DE9 FERRED FOREIGN INCOME.— 

10 ‘‘(1) IN GENERAL.—If there is repatriated for11 eign income for a taxable year, the portion of the 

12 previously deferred deductions allocated to the repa13 triated foreign income shall be taken into account 

14 for the taxable year as a deduction allocated to in15 come from sources outside the United States. Any 

16 such amount shall not be included in foreign-related 

17 deductions for purposes of applying subsection (a) to 

18 such taxable year. 

19 ‘‘(2) PORTION OF PREVIOUSLY DEFERRED DE20 DUCTIONS.—For purposes of paragraph (1), the por21 tion of the previously deferred deductions allocated 

22 to repatriated foreign income is— 

23 ‘‘(A) the amount which bears the same 

24 proportion to such deductions, as 


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1 ‘‘(B) the repatriated income bears to the 

2 previously deferred foreign income. 

3 ‘‘(c) DEFINITIONS AND SPECIAL RULE.—For pur4 poses of this section— 

5 ‘‘(1) FOREIGN-RELATED DEDUCTIONS.—The 

6 term ‘foreign-related deductions’ means the total 

7 amount of deductions and expenses which would be 

8 allocated or apportioned to gross income from 

9 sources without the United States for the taxable 

10 year if both the currently-taxed foreign income and 

11 deferred foreign income were taken into account. 

12 ‘‘(2) CURRENTLY-TAXED FOREIGN INCOME.— 

13 The term ‘currently-taxed foreign income’ means the 

14 amount of gross income from sources without the 

15 United States for the taxable year (determined with16 out regard to repatriated foreign income for such 

17 year). 

18 ‘‘(3) DEFERRED FOREIGN INCOME.—The term 

19 ‘deferred foreign income’ means the excess of— 

20 ‘‘(A) the amount that would be includible 

21 in gross income under subpart F of this part 

22 for the taxable year if— 

23 ‘‘(i) all controlled foreign corporations 

24 were treated as one controlled foreign cor25 poration, and 


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1 ‘‘(ii) all earnings and profits of all 

2 controlled foreign corporations were sub3 part F income (as defined in section 952), 

4 over 

5 ‘‘(B) the sum of— 

6 ‘‘(i) all dividends received during the 

7 taxable year from controlled foreign cor8 porations, plus 

9 ‘‘(ii) amounts includible in gross in10 come under section 951(a). 

11 ‘‘(4) PREVIOUSLY DEFERRED FOREIGN IN12 COME.—The term ‘previously deferred foreign in13 come’ means the aggregate amount of deferred for14 eign income for all prior taxable years to which this 

15 part applies, determined as of the beginning of the 

16 taxable year, reduced by the repatriated foreign in17 come for all such prior taxable years. 

18 ‘‘(5) REPATRIATED FOREIGN INCOME.—The 

19 term ‘repatriated foreign income’ means the amount 

20 included in gross income on account of distributions 

21 out of previously deferred foreign income. 

22 ‘‘(6) PREVIOUSLY DEFERRED DEDUCTIONS.— 

23 The term ‘previously deferred deductions’ means the 

24 aggregate amount of foreign-related deductions not 

25 taken into account under subsection (a) for all prior 


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1 taxable years (determined as of the beginning of the 

2 taxable year), reduced by any amounts taken into 

3 account under subsection (b) for such prior taxable 

4 years. 

5 ‘‘(7) TREATMENT OF CERTAIN FOREIGN

6 TAXES.— 

7 ‘‘(A) PAID BY CONTROLLED FOREIGN COR8 PORATION.—Section 78 shall not apply for pur9 poses of determining currently-taxed foreign in10 come and deferred foreign income. 

11 ‘‘(B) PAID BY TAXPAYER.—For purposes 

12 of determining currently-taxed foreign income, 

13 gross income from sources without the United 

14 States shall be reduced by the aggregate 

15 amount of taxes described in the applicable 

16 paragraph of section 901(b) which are paid by 

17 the taxpayer (without regard to sections 902 

18 and 960) during the taxable year. 

19 ‘‘(8) COORDINATION WITH SECTION 976.—In 

20 determining currently-taxed foreign income and de21 ferred foreign income, the amount of deemed foreign 

22 tax credits shall be determined with regard to sec23 tion 976. 


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1 ‘‘SEC. 976. AMOUNT OF FOREIGN TAXES COMPUTED ON 

2 OVERALL BASIS. 

3 ‘‘(a) CURRENT YEAR ALLOWANCE.—For purposes of 

4 this chapter, the amount taken into account as foreign in5 come taxes for any taxable year shall be an amount which 

6 bears the same ratio to the total foreign income taxes for 

7 that taxable year as— 

8 ‘‘(1) the currently-taxed foreign income for such 

9 taxable year, bears to 

10 ‘‘(2) the sum of the currently-taxed foreign in11 come and deferred foreign income for such year. 

12 The portion of the total foreign income taxes for any tax13 able year not taken into account under the preceding sen14 tence for a taxable year shall only be taken into account 

15 as provided in subsection (b) (and shall not be taken into 

16 account for purposes of applying sections 902 and 960). 

17 ‘‘(b) ALLOWANCE RELATED TO REPATRIATED DE18 FERRED FOREIGN INCOME.— 

19 ‘‘(1) IN GENERAL.—If there is repatriated for20 eign income for any taxable year, the portion of the 

21 previously deferred foreign income taxes paid or ac22 crued during such taxable year shall be taken into 

23 account for the taxable year as foreign taxes paid or 

24 accrued. Any such taxes so taken into account shall 

25 not be included in foreign income taxes for purposes 

26 of applying subsection (a) to such taxable year. 


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1 ‘‘(2) PORTION OF PREVIOUSLY DEFERRED FOR2 EIGN INCOME TAXES.—For purposes of paragraph 

3 (1), the portion of the previously deferred foreign in4 come taxes allocated to repatriated deferred foreign 

5 income is— 

6 ‘‘(A) the amount which bears the same 

7 proportion to such taxes, as 

8 ‘‘(B) the repatriated deferred income bears 

9 to the previously deferred foreign income. 

10 ‘‘(c) DEFINITIONS AND SPECIAL RULE.—For pur11 poses of this section— 

12 ‘‘(1) PREVIOUSLY DEFERRED FOREIGN INCOME

13 TAXES.—The term ‘previously deferred foreign in14 come taxes’ means the aggregate amount of total 

15 foreign income taxes not taken into account under 

16 subsection (a) for all prior taxable years (determined 

17 as of the beginning of the taxable year), reduced by 

18 any amounts taken into account under subsection 

19 (b) for such prior taxable years. 

20 ‘‘(2) TOTAL FOREIGN INCOME TAXES.—The 

21 term ‘total foreign income taxes’ means the sum of 

22 foreign income taxes paid or accrued during the tax23 able year (determined without regard to section 

24 904(c)) plus the increase in foreign income taxes 


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1 that would be paid or accrued during the taxable 

2 year under sections 902 and 960 if— 

3 ‘‘(A) all controlled foreign corporations 

4 were treated as one controlled foreign corpora5 tion, and 

6 ‘‘(B) all earnings and profits of all con7 trolled foreign corporations were subpart F in8 come (as defined in section 952). 

9 ‘‘(3) FOREIGN INCOME TAXES.—The term ‘for10 eign income taxes’ means any income, war profits, or 

11 excess profits taxes paid by the taxpayer to any for12 eign country or possession of the United States. 

13 ‘‘(4) CURRENTLY-TAXED FOREIGN INCOME AND

14 DEFERRED FOREIGN INCOME.—The terms ‘cur15 rently-taxed foreign income’ and ‘deferred foreign in16 come’ have the meanings given such terms by sec17 tion 975(c). 

18 ‘‘SEC. 977. APPLICATION OF SUBPART. 

19 ‘‘This subpart— 

20 ‘‘(1) shall be applied before subpart A, and 

21 ‘‘(2) shall be applied separately with respect to 

22 the categories of income specified in section 

23 904(d)(1).’’. 

24 (b) CLERICAL AMENDMENT.—The table of subparts 

25 for part III of subpart N of chapter 1 is amended by inVerDate Mar 15 2010 22:02 Jul 31, 2010 Jkt 089200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6201 E:\BILLS\H5962.IH H5962

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1 serting after the item relating to subpart G the following 

2 new item: 

‘‘SUBPART H. SPECIAL RULES FOR ALLOCATION OF FOREIGN-RELATED

DEDUCTIONS AND FOREIGN TAX CREDITS’’. 

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

4 this section shall apply to taxable years beginning after 

5 December 31, 2010. 

6 SEC. 202. REPEAL OF WORLDWIDE ALLOCATION OF INTER7 EST. 

8 (a) IN GENERAL.—Section 864 is amended by strik9 ing subsection (f) and by redesignating subsection (g) as 

10 subsection (f). 

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

12 this section shall apply to taxable years beginning after 

13 December 31, 2010. 

14 SEC. 203. LIMITATION ON TREATY BENEFITS FOR CERTAIN 

15 DEDUCTIBLE PAYMENTS. 

16 (a) IN GENERAL.—Section 894 (relating to income 

17 affected by treaty) is amended by adding at the end the 

18 following new subsection: 

19 ‘‘(d) LIMITATION ON TREATY BENEFITS FOR CER20 TAIN DEDUCTIBLE PAYMENTS.— 

21 ‘‘(1) IN GENERAL.—In the case of any deduct22 ible related-party payment, any withholding tax im23 posed under chapter 3 (and any tax imposed under 

24 subpart A or B of this part) with respect to such 


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1 payment may not be reduced under any treaty of the 

2 United States unless any such withholding tax would 

3 be reduced under a treaty of the United States if 

4 such payment were made directly to the foreign par5 ent corporation. 

6 ‘‘(2) DEDUCTIBLE RELATED-PARTY PAY7 MENT.—For purposes of this subsection, the term 

8 ‘deductible related-party payment’ means any pay9 ment made, directly or indirectly, by any person to 

10 any other person if the payment is allowable as a de11 duction under this chapter and both persons are 

12 members of the same foreign controlled group of en13 tities. 

14 ‘‘(3) FOREIGN CONTROLLED GROUP OF ENTI15 TIES.—For purposes of this subsection— 

16 ‘‘(A) IN GENERAL.—The term ‘foreign 

17 controlled group of entities’ means a controlled 

18 group of entities the common parent of which 

19 is a foreign corporation. 

20 ‘‘(B) CONTROLLED GROUP OF ENTITIES.— 

21 The term ‘controlled group of entities’ means a 

22 controlled group of corporations as defined in 

23 section 1563(a)(1), except that— 


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1 ‘‘(i) ‘more than 50 percent’ shall be 

2 substituted for ‘at least 80 percent’ each 

3 place it appears therein, and 

4 ‘‘(ii) the determination shall be made 

5 without regard to subsections (a)(4) and 

6 (b)(2) of section 1563. 

7 A partnership or any other entity (other than a 

8 corporation) shall be treated as a member of a 

9 controlled group of entities if such entity is con10 trolled (within the meaning of section 

11 954(d)(3)) by members of such group (includ12 ing any entity treated as a member of such 

13 group by reason of this sentence). 

14 ‘‘(4) FOREIGN PARENT CORPORATION.—For 

15 purposes of this subsection, the term ‘foreign parent 

16 corporation’ means, with respect to any deductible 

17 related-party payment, the common parent of the 

18 foreign controlled group of entities referred to in 

19 paragraph (3)(A). 

20 ‘‘(5) REGULATIONS.—The Secretary may pre21 scribe such regulations or other guidance as are nec22 essary or appropriate to carry out the purposes of 

23 this subsection, including regulations or other guid24 ance which provide for— 


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1 ‘‘(A) the treatment of two or more persons 

2 as members of a foreign controlled group of en3 tities if such persons would be the common par4 ent of such group if treated as one corporation, 

5 and 

6 ‘‘(B) the treatment of any member of a 

7 foreign controlled group of entities as the com8 mon parent of such group if such treatment is 

9 appropriate taking into account the economic 

10 relationships among such entities.’’. 

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

12 this section shall apply to payments made after the date 

13 of the enactment of this Act. 

14 TITLE III—MODIFICATION OF 

15 ACCOUNTING RULES 

16 SEC. 301. REPEAL OF LAST-IN, FIRST-OUT METHOD OF IN17 VENTORY. 

18 (a) IN GENERAL.—Subpart D of part II of sub19 chapter E of chapter 1 is amended by striking sections 

20 472 (relating to last-in, first-out inventories), 473 (relat21 ing to qualified liquidations of LIFO inventories), and 474 

22 (relating to simplified dollar-value LIFO method for cer23 tain small businesses). 

24 (b) CONFORMING AMENDMENTS.— 


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1 (1)(A) Section 312(n) is amended by striking 

2 paragraph (4) and by redesignating paragraphs (5) 

3 through (8) as paragraphs (4) through (7), respec4 tively. 

5 (B) Section 312(n)(7), as redesignated by sub6 paragraph (A), is amended— 

7 (i) by striking ‘‘paragraphs (4) and (6)’’ in 

8 subparagraph (A) and inserting ‘‘paragraph 

9 (5)’’, and 

10 (ii) by striking ‘‘paragraph (5)’’ in sub11 paragraph (B) and inserting ‘‘paragraph (4)’’. 

12 (C) Section 56(g)(4)(D) is amended by striking 

13 clause (iii) and by redesignating clause (iv) as clause 

14 (iii). 

15 (2) Section 1363 is amended by striking sub16 section (d). 

17 (c) EFFECTIVE DATE.— 

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

19 this section shall apply to taxable years beginning 

20 after the date of the enactment of this Act. 

21 (2) CHANGE IN METHOD OF ACCOUNTING.—In 

22 the case of any taxpayer required by the amend23 ments made by this section to change its method of 

24 accounting for its first taxable year beginning after 

25 the date of the enactment of this Act— 


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1 (A) such change shall be treated as initi2 ated by the taxpayer, 

3 (B) such change shall be treated as made 

4 with the consent of the Secretary of the Treas5 ury, and 

6 (C) if the net amount of the adjustments 

7 required to be taken into account by the tax8 payer under section 481 of the Internal Rev9 enue Code of 1986 is positive, such amount 

10 shall be taken into account over a period of 8 

11 years beginning with such first taxable year. 

12 SEC. 302. REPEAL OF LOWER OF COST OR MARKET METH13 OD OF INVENTORY. 

14 (a) IN GENERAL.—Section 471 is amended by redes15 ignating subsection (c) as subsection (d) and by inserting 

16 after subsection (b) the following new subsection: 

17 ‘‘(c) INVENTORIES TAKEN INTO ACCOUNT AT

18 COST.—A method of determining inventories shall not be 

19 treated as clearly reflecting income unless such method 

20 provides that inventories shall be taken into account at 

21 cost.’’. 

22 (b) EFFECTIVE DATE.— 

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

24 this section shall apply to taxable years beginning 

25 after the date of the enactment of this Act. 


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1 (2) CHANGE IN METHOD OF ACCOUNTING.—In 

2 the case of any taxpayer required by the amend3 ments made by this section to change its method of 

4 accounting for its first taxable year beginning after 

5 the date of the enactment of this Act— 

6 (A) such change shall be treated as initi7 ated by the taxpayer, 

8 (B) such change shall be treated as made 

9 with the consent of the Secretary of the Treas10 ury, and 

11 (C) if the net amount of the adjustments 

12 required to be taken into account by the tax13 payer under section 481 of the Internal Rev14 enue Code of 1986 is positive, such amount 

15 shall be taken into account over a period of 8 

16 years beginning with such first taxable year. 

17 SEC. 303. SPECIAL RULE FOR SERVICE PROVIDERS ON AC18 CRUAL METHOD NOT APPLICABLE TO C COR19 PORATIONS. 

20 (a) IN GENERAL.—Subparagraph (A) of section 

21 448(d)(5) is amended by inserting ‘‘(other than a C cor22 poration)’’ after ‘‘any person’’. 

23 (b) EFFECTIVE DATE.— 


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

2 this section shall apply to taxable years beginning 

3 after the date of the enactment of this Act. 

4 (2) CHANGE IN METHOD OF ACCOUNTING.—In 

5 the case of any taxpayer required by the amend6 ments made by this section to change its method of 

7 accounting for its first taxable year beginning after 

8 the date of the enactment of this Act— 

9 (A) such change shall be treated as initi10 ated by the taxpayer, 

11 (B) such change shall be treated as made 

12 with the consent of the Secretary of the Treas13 ury, and 

14 (C) if the net amount of the adjustments 

15 required to be taken into account by the tax16 payer under section 481 of the Internal Rev17 enue Code of 1986 is positive, such amount 

18 shall be taken into account over a period of 8 

19 years beginning with such first taxable year. 


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1 TITLE IV—MODIFICATION TO EX2 PENSING AND DEPRECIATION 

3 RULES 

4 SEC. 401. SMALL BUSINESS EXPENSING PROVISIONS MADE 

5 PERMANENT. 

6 (a) INCREASE IN SMALL BUSINESS EXPENSING

7 MADE PERMANENT.—Subsection (b) of section 179 is 

8 amended— 

9 (1) by striking ‘‘$25,000 ($250,000 in the case 

10 of taxable years beginning after 2007 and before 

11 2011)’’ in paragraph (1) and inserting ‘‘$250,000’’, 

12 and 

13 (2) by striking ‘‘$200,000 ($800,000 in the 

14 case of taxable years beginning after 2007 and be15 fore 2011)’’ in paragraph (2) and inserting 

16 ‘‘$800,000’’. 

17 (b) EXPENSING FOR COMPUTER SOFTWARE MADE

18 PERMANENT.—Clause (ii) of section 179(d)(1)(A) is 

19 amended by striking ‘‘and which is placed in service in 

20 a taxable year beginning after 2002 and before 2011,’’. 

21 (c) EFFECTIVE DATE.— 

22 (1) IN GENERAL.—Except as provided in para23 graph (2), the amendments made by this section 

24 shall apply to taxable years beginning after the date 

25 of the enactment of this Act. 


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1 (2) COMPUTER SOFTWARE.—The amendment 

2 made by subsection (b) shall apply to property 

3 placed in service after the date of the enactment of 

4 this Act. 

5 SEC. 402. AMORTIZATION OF GOODWILL AND OTHER IN6 TANGIBLES. 

7 (a) IN GENERAL.—Subsection (a) of section 197 (re8 lating to general rule) is amended by striking ‘‘15-year’’ 

9 and inserting ‘‘20-year’’. 

10 (b) CERTAIN INTERESTS OR RIGHTS ACQUIRED SEP11 ARATELY.—Clause (i) of section 197(e)(4)(D) is amended 

12 by striking ‘‘15 years’’ and inserting ‘‘20 years’’. 

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

14 this section shall apply to property acquired after the date 

15 of the enactment of this Act. 

16 TITLE V—CODIFICATION OF 

17 ECONOMIC SUBSTANCE DOC18 TRINE 

19 SEC. 501. CODIFICATION OF ECONOMIC SUBSTANCE DOC20 TRINE. 

21 (a) IN GENERAL.—Section 7701 is amended by re22 designating subsection (p) as subsection (q) and by insert23 ing after subsection (o) the following new subsection: 

24 ‘‘(p) CLARIFICATION OF ECONOMIC SUBSTANCE

25 DOCTRINE.— 


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1 ‘‘(1) APPLICATION OF DOCTRINE.—In the case 

2 of any transaction to which the economic substance 

3 doctrine is relevant, such transaction shall be treated 

4 as having economic substance only if— 

5 ‘‘(A) the transaction changes in a mean6 ingful way (apart from Federal income tax ef7 fects) the taxpayer’s economic position, and 

8 ‘‘(B) the taxpayer has a substantial pur9 pose (apart from Federal income tax effects) 

10 for entering into such transaction. 

11 ‘‘(2) SPECIAL RULE WHERE TAXPAYER RELIES

12 ON PROFIT POTENTIAL.— 

13 ‘‘(A) IN GENERAL.—The potential for 

14 profit of a transaction shall be taken into ac15 count in determining whether the requirements 

16 of subparagraphs (A) and (B) of paragraph (1) 

17 are met with respect to the transaction only if 

18 the present value of the reasonably expected 

19 pre-tax profit from the transaction is substan20 tial in relation to the present value of the ex21 pected net tax benefits that would be allowed if 

22 the transaction were respected. 

23 ‘‘(B) TREATMENT OF FEES AND FOREIGN

24 TAXES.—Fees and other transaction expenses 

25 and foreign taxes shall be taken into account as 


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1 expenses in determining pre-tax profit under 

2 subparagraph (A). 

3 ‘‘(3) STATE AND LOCAL TAX BENEFITS.—For 

4 purposes of paragraph (1), any State or local income 

5 tax effect which is related to a Federal income tax 

6 effect shall be treated in the same manner as a Fed7 eral income tax effect. 

8 ‘‘(4) FINANCIAL ACCOUNTING BENEFITS.—For 

9 purposes of paragraph (1)(B), achieving a financial 

10 accounting benefit shall not be taken into account as 

11 a purpose for entering into a transaction if such 

12 transaction results in a Federal income tax benefit. 

13 ‘‘(5) DEFINITIONS AND SPECIAL RULES.—For 

14 purposes of this subsection— 

15 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.— 

16 The term ‘economic substance doctrine’ means 

17 the common law doctrine under which tax bene18 fits under subtitle A with respect to a trans19 action are not allowable if the transaction does 

20 not have economic substance or lacks a business 

21 purpose. 

22 ‘‘(B) EXCEPTION FOR PERSONAL TRANS23 ACTIONS OF INDIVIDUALS.—In the case of an 

24 individual, paragraph (1) shall apply only to 

25 transactions entered into in connection with a 


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1 trade or business or an activity engaged in for 

2 the production of income. 

3 ‘‘(C) OTHER COMMON LAW DOCTRINES

4 NOT AFFECTED.—Except as specifically pro5 vided in this subsection, the provisions of this 

6 subsection shall not be construed as altering or 

7 supplanting any other rule of law, and the re8 quirements of this subsection shall be construed 

9 as being in addition to any such other rule of 

10 law. 

11 ‘‘(D) DETERMINATION OF APPLICATION OF

12 DOCTRINE NOT AFFECTED.—The determination 

13 of whether the economic substance doctrine is 

14 relevant to a transaction shall be made in the 

15 same manner as if this subsection had never 

16 been enacted. 

17 ‘‘(6) REGULATIONS.—The Secretary shall pre18 scribe such regulations as may be necessary or ap19 propriate to carry out the purposes of this sub20 section. Such regulations may include exemptions 

21 from the application of this subsection.’’. 

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

23 this section shall apply to transactions entered into after 

24 the date of the enactment of this Act. 


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1 TITLE VI—MODIFICATIONS TO 

2 DEDUCTIONS FOR DIVIDENDS 

3 RECEIVED 

4 SEC. 601. MODIFICATIONS TO DEDUCTIONS FOR DIVI5 DENDS RECEIVED. 

6 (a) GENERAL REDUCTION IN PERCENTAGE OF DE7 DUCTION.— 

8 (1) IN GENERAL.—Sections 243(a)(1), 

9 243(c)(1), 244(a)(3), 244(b)(2), 245(c)(1)(B), 

10 246(b)(3)(B), and 246A(a)(1), before amendment by 

11 subsection (c), are each amended by striking ‘‘70 

12 percent’’ and inserting ‘‘60 percent’’. 

13 (2) CONFORMING AMENDMENTS.—Paragraph 

14 (2) of section 861(a), before amendment by sub15 section (c), is amended by striking ‘‘100/70th’’ both 

16 places it appears and inserting ‘‘100/60th’’. 

17 (b) REDUCTION IN PERCENTAGE FOR 20-PERCENT

18 OWNED CORPORATIONS.— 

19 (1) IN GENERAL.—Sections 243(c)(1), 

20 245(c)(1)(B), 246(b)(3)(A), 246A(a)(1) is amended 

21 by striking ‘‘80 percent’’ and inserting ‘‘70 per22 cent’’. 

23 (2) CONFORMING AMENDMENT.—Paragraph (2) 

24 of section 861(a) is amended by striking ‘‘100/80th’’ 

25 and inserting ‘‘100/70th’’. 


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1 (c) REPEAL OF NOL EXCEPTION TO LIMITATION ON

2 AGGREGATE DEDUCTIONS; ESTABLISHMENT OF

3 CARRYFORWARD.— 

4 (1) IN GENERAL.—Paragraph (2) of section 

5 246(b) is amended to read as follows: 

6 ‘‘(2) CARRYFORWARD.—The aggregate amount 

7 of deductions disallowed under paragraph (1) for 

8 any taxable year shall be treated as an increase in 

9 the amount allowable as a deduction under section 

10 243(a)(1) for the following taxable year (subject to 

11 the application of paragraph (1) to such following 

12 taxable year).’’. 

13 (2) CONFORMING AMENDMENTS.— 

14 (A) Subsection (d) of section 172 is 

15 amended by striking paragraph (5) and by re16 designating paragraph (6) as paragraph (5). 

17 (B) Subparagraph (A) of section 172(b)(2) 

18 is amended by striking ‘‘paragraphs (1), (4), 

19 and (5)’’ and inserting ‘‘paragraphs (1) and 

20 (4)’’. 

21 (C) Paragraph (1) of section 246(b) is 

22 amended by striking ‘‘Except as provided in 

23 paragraph (2), the’’ and inserting ‘‘The’’. 


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1 (D) Paragraph (3) of section 246(b) is 

2 amended by striking ‘‘paragraph (1)’’ and in3 serting ‘‘paragraphs (1) and (2)’’. 

4 (E) Subparagraph (B) of section 805(a)(4) 

5 is amended by striking ‘‘section 1212(a)(1),’’ 

6 and all that follows and inserting ‘‘section 

7 1212(a)(1).’’. 

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

9 this section shall apply to taxable years beginning after 

10 December 31, 2008. 

11 TITLE VII—OTHER PROVISIONS 

12 SEC. 701. RECOGNITION OF ORDINARY INCOME ON SALE 

13 OR EXERCISE OF STOCK OPTION IN S COR14 PORATION WITH AN ESOP. 

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

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

18 ‘‘SEC. 409B. RECOGNITION OF ORDINARY INCOME ON SALE 

19 OR EXERCISE OF STOCK OPTION IN S COR20 PORATION WITH AN ESOP. 

21 ‘‘(a) IN GENERAL.—If an S corporation in which an 

22 employee stock ownership plan is a stockholder grants an 

23 option with respect to its stock and such option is sold 

24 or exercised, there shall be included in the gross income 

25 of the holder of such option (determined immediately beVerDate Mar 15 2010 19:39 Jul 31, 2010 Jkt 089200 PO 00000 Frm 00027 Fmt 6652 Sfmt 6201 E:\BILLS\H5962.IH H5962

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1 fore such sale or exercise) as ordinary income an amount 

2 equal to the income inclusion amount. 

3 ‘‘(b) INCOME INCLUSION AMOUNT.—For purposes of 

4 this section, the term ‘income inclusion amount’ means, 

5 with respect to the holder of any option, the excess (if 

6 any) of— 

7 ‘‘(1) the sum of the net income amounts with 

8 respect to such option for all taxable years of the S 

9 corporation ending during the taxpayer’s holding pe10 riod, over 

11 ‘‘(2) the sum of the net loss amounts with re12 spect to such option for all such taxable years. 

13 ‘‘(c) NET INCOME AND LOSS AMOUNTS.—For pur14 poses of this section, with respect to any taxable year of 

15 the S corporation— 

16 ‘‘(1) NET INCOME AMOUNT.—The term ‘net in17 come amount’ means the excess (if any) of— 

18 ‘‘(A) the pass-thru income share for such 

19 taxable year, over 

20 ‘‘(B) the pass-thru loss share for such tax21 able year. 

22 ‘‘(2) NET LOSS AMOUNT.—The term ‘net loss 

23 amount’ means the excess (if any) of the amount de24 scribed in paragraph (1)(B) over the amount de25 scribed in paragraph (1)(A). 


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1 ‘‘(d) PASS-THRU INCOME AND LOSS SHARES.—For 

2 purposes of this section, with respect to any taxable year 

3 of the S corporation— 

4 ‘‘(1) PASS-THRU INCOME SHARE.—The term 

5 ‘pass-thru income share’ means the excess (if any) 

6 of— 

7 ‘‘(A) the aggregate items of income taken 

8 into account under section 1366 by the em9 ployee stock ownership plan for such taxable 

10 year, over 

11 ‘‘(B) the aggregate items of income which 

12 would have been so taken into account if such 

13 option had been exercised upon being granted. 

14 ‘‘(2) PASS-THRU LOSS SHARE.—The term 

15 ‘pass-thru loss share’ means the excess (if any) of— 

16 ‘‘(A) the aggregate items of deduction and 

17 loss taken into account under section 1366 by 

18 the employee stock ownership plan for such tax19 able year, over 

20 ‘‘(B) the aggregate items of deduction and 

21 loss which would have been so taken into ac22 count if such option had been exercised upon 

23 being granted. 

24 ‘‘(e) INTEREST AT UNDERPAYMENT RATE.— 


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1 ‘‘(1) IN GENERAL.—In the case of any taxpayer 

2 who includes any amount in gross income for any 

3 taxable year under subsection (a), the tax imposed 

4 by this chapter on such taxpayer for such taxable 

5 year shall be increased by interest at the under6 payment rate determined under section 6621 on the 

7 underpayments that would have occurred had the 

8 net income amounts with respect to each taxable 

9 year taken into account under subsection (c) been 

10 includible in the taxpayer’s gross income for each of 

11 taxable year of the taxpayer in or with which the 

12 taxable year so taken into account ends. 

13 ‘‘(2) REDUCTION FOR PREVIOUS NET LOSS

14 AMOUNTS.—For purposes of paragraph (1), the net 

15 income amount for any taxable year shall be reduced 

16 by the excess of— 

17 ‘‘(A) the aggregate net loss amounts for 

18 taxable years taken into account under sub19 section (c) with respect to the taxpayer, over 

20 ‘‘(B) the amount of such aggregate pre21 viously taken into account under this paragraph 

22 to reduce any net income amount. 

23 ‘‘(f) OTHER DEFINITIONS AND SPECIAL RULES.— 

24 For purposes of this section— 


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1 ‘‘(1) OPTION.—The term ‘option’ includes any 

2 synthetic equity described in section 409(p)(6)(C). 

3 ‘‘(2) EFFECT OF STARTING OR TERMINATING

4 AN S CORPORATION ELECTION.—With respect to any 

5 option, a corporation which is an S corporation for 

6 any taxable year which ends while such option is 

7 outstanding shall be treated for purposes of this sec8 tion (other than subsection (d)) as an S corporation 

9 for all taxable years which end while such option is 

10 outstanding. 

11 ‘‘(3) ADJUSTMENTS TO BASIS.— 

12 ‘‘(A) INCREASE IN BASIS OF ACQUIRED

13 STOCK.—The taxpayer’s basis in any stock ac14 quired pursuant to the exercise of an option to 

15 which subsection (a) applies shall be increased 

16 by the amount included in gross income by the 

17 taxpayer under subsection (a) with respect to 

18 such option. 

19 ‘‘(B) INCREASE IN BASIS OF OPTION ON

20 SALE.—The taxpayer’s basis in any option shall 

21 be increased by the amount included in gross 

22 income by the taxpayer under subsection (a) 

23 with respect to such option.’’. 

24 (b) CONFORMING AMENDMENTS.— 


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1 (1) Section 26(b)(2) is amended by striking 

2 ‘‘and’’ at the end of subparagraph (W), by striking 

3 the period at the end of subparagraph (X) and in4 serting ‘‘, and’’, and by adding at the end the fol5 lowing new subparagraph: 

6 ‘‘(Y) subsection (e) of section 409B (relat7 ing to interest on income recognized upon exer8 cise of a stock option in an S corporation with 

9 an ESOP).’’. 

10 (2) Section 1016(a) is amended by striking 

11 ‘‘and’’ at the end of paragraph (36), by striking the 

12 period at the end of paragraph (37) and inserting ‘‘, 

13 and’’, and by adding at the end the following new 

14 paragraph: 

15 ‘‘(38) to the extent provided in section 

16 409B(f)(3).’’. 

17 (3) The table of sections for subpart A of part 

18 I of subchapter D of chapter 1 is amended by add19 ing at the end the following new item: 

‘‘Sec. 409B. Recognition of ordinary income on sale or exercise of stock option 

in S corporation with an ESOP.’’. 

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

21 this section shall apply to options granted after the date 

22 of the enactment of this Act. 


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1 SEC. 702. TREATMENT OF SECURITIES OF A CONTROLLED 

2 CORPORATION EXCHANGED FOR ASSETS IN 

3 CERTAIN REORGANIZATIONS. 

4 (a) IN GENERAL.—Section 361 (relating to non5 recognition of gain or loss to corporations; treatment of 

6 distributions) is amended by adding at the end the fol7 lowing new subsection: 

8 ‘‘(d) RECEIPT OF SECURITIES, ETC., IN EXCHANGE

9 FOR ASSETS IN CERTAIN REORGANIZATIONS.—If— 

10 ‘‘(1) property is transferred to a corporation 

11 (hereinafter in this subsection referred to as the 

12 ‘controlled corporation’) pursuant to a plan of reor13 ganization described in section 368(a)(1)(D), and 

14 ‘‘(2) pursuant to such plan of reorganization, 

15 stock or securities in the controlled corporation are 

16 distributed in a transaction which qualifies under 

17 section 355, 

18 then any securities and nonqualified preferred stock (as 

19 defined in section 351(g)(2)) of the controlled corporation 

20 shall be treated as other property for purposes of sub21 sections (a) and (b).’’. 

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

23 subsection (a) shall apply to distributions after the date 

24 of the enactment of this Act. 

Æ 


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